SCHNAPF ENVIRONMENTAL  REPORT

A Monthly Newsletter Covering Recent Environmental Developments and Caselaw

June/July 1999								Vol. 1, Issue 6

	The Schnapf Environmental Report is a newsletter which provides updates on regulatory developments in the major environmental programs and also highlights significant federal and state environmental law decisions cases that were issued during the prior month. 

	The newsletter is published free of charge by the Schnapf Environmental Law Center which provides regulatory guidance, legal research and writing resources, litigation support and assistance with environmental issues associated with corporate, financing and real estate transactions for businesses and law firms. 

The Schnapf Environmental Report is published on a bi-monthly basis. More detailed information on the topics covered by the newsletter is available at our web site: http//: www.environmental-law.net. Back issues of the newsletter are also available from our website. 

We also offer environmental law seminars which are taught by Larry Schnapf who is an adjunct professor of environmental law at New York Law School. The seminar focuses on the environmental issues associated with business transactions. The seminar can be conducted at your office or at periodic department meetings that you might organize over the course of the year. The seminar is eligible to be approved by the Continuing Legal Education Board as an Accredited Mandatory Continuing Legal Education (“MCLE”) Program so that attendees would receive credits towards the New York State MCLE requirements. If you are interested in this seminar, please contact Larry Schnapf at LSchnapf@environmental-law.net or call him at (212) 996-5395.

Finally, if you would be interested in being added to our subscription list for our quarterly New York Brownfields Report, please let us know at LSchnapf@environmental-law.net. The New York Brownfield Report analyzes the agreement issued by the New York Department of Environmental Protection under its voluntary cleanup program and also discusses major policy changes for the program.  

ENVIRONMENTAL DISCLOSURE/AUDITING/DUE DILIGENCE

Malpractice Claim Brought Against Law Firm for Inadequate Environmental Due Diligence

	In past issues, we have emphasized the importance of performing adequate environmental due diligence in the early stages of real estate and corporate transactions. When done properly and early in a transaction, environmental due diligence can help clients identify and allocate environmental liabilities, take advantage of state and federal voluntary which provide for reduced penalties for violations that are voluntarily disclosed as well as guide clients in the design of business plans, facility expansion or developments in a way that minimizes environmental costs. 

Lawyers play a critical role in implementing a due diligence program and in making sure that the information generated during a transaction is used to bring maximum value and protection to a client. Many law firms who do not have in-house environmental law expertise often rely on environmental consultants to determine the adequacy of the due diligence or, even worse, sometimes improperly limit the scope of the diligence effort. An improperly designed due diligence program may not only result in a client incurring unexpected environmental liabilities but, as illustrated in Keywell Corporation v. Piper & Marbury, also expose a law firm to a claim for malpractice.

In that case, the defendant law firm represented the plaintiff in the acquisition of a steel-recycling facility in western New York state. The law firm retained an environmental consultant to perform an environmental audit and informed the consultant that it would only be allowed to speak to one officer of the seller about historic environmental practices. This officer who was the vice president of environmental affairs told the consultant that the seller had never engaged in any on-site disposal of hazardous wastes. The consultant relied on this representation when it developed its soil sampling plan. At the conclusion of its investigation, the consultant prepared a draft report which was revised by the defendant law firm. Several paragraphs of the consultant’s cover letter were also deleted at the request of the defendant law firm. The report was finalized and the defendant claimed that it sent the report along with a cost summary estimating that remediation costs at the site would be $4.8 million to the client who denied it received the summary. The plaintiff and defendant then had a telephone conference to review the conclusions of the report where an employee of the defendant said there were “no red flags”. A range of remediation costs were also discussed but the parties disputed the amounts that were discussed. The plaintiff claimed it was told the maximum remediation costs would be  $1 million while the employee of the defendant who participated at the meeting indicated that he did not recall discussing any specific number. 

After the closing, the plaintiff learned that trichloroethylene (“TCE”) had been routinely dumped into pits and ponds at the site and resulted in groundwater contamination that was much more widespread then originally envisioned. The plaintiff then entered into an administrative consent order with the state Department Environmental Conservation (“NYDEC”) to remediate the contamination. 

The plaintiff filed a CERCLA contribution suit against the seller and also brought a common law fraud claim. A federal district court granted summary judgment against the plaintiff on the grounds that the parties had allocated the liability in the purchase agreement and release agreement but granted summary judgement to the plaintiff on the fraud claim. The Court of Appeals affirmed the dismissal of the CERCLA claim but reversed and remanded the fraud claim to the district court. The district court chose not to exercise jurisdiction over the state fraud claim which was later dismissed by a state court.

  The plaintiff then filed suit against the defendant law firm claiming that the law firm’s failure to adequately assess the environmental liabilities at the site resulted in the plaintiff incurring approximately $6 million in additional cleanup costs. The defendant law firm moved for summary judgement, arguing that the plaintiff could not establish a causal connection between its actions and the damages incurred by the plaintiff because the seller would have been unwilling to renegotiate the deal and also because additional investigation would not have likely uncovered the prior dumping practices. However, the court ruled that the plaintiff had provided sufficient evidence to create a triable issue of fact as to whether the alleged malpractice of the defendant law firm proximately caused plaintiff’s damages. 

Commentary: The environmental consulting field has become increasing competitive during the past few years. In order to maintain market share, many environmental consultants have begun offering what is referred to as “commodity-style” environmental site assessment (“ESAs”) reports for less than $2,000 per site. These reports ostensibly satisfy the ASTM standards for ESAs but in fact are usually less than comprehensive and are often written by inexperienced personnel. Lawyers should make sure the scope of work for the proposed ESA will be sufficient to identify the environmental liabilities associated with the particular transaction. 

Enforcement Action Filed Against Environmental Consultant for Failure to Timely Report Contamination 

	Environmental laws generally require owners and operators of a facility to disclose discharges of hazardous substances. Some state laws or regulations, usually those addressing leaking underground storage tanks (“USTs”), often state that “any person” with knowledge of a spill must report the discharge within a specified period of time. An issue that frequently arises is whether these reporting obligations extend to a prospective purchaser or its agents such as its environmental consultant or lawyer who become aware of contamination while performing environmental due diligence for a real estate or corporate transactions. 

	A New York administrative law ruling recently held that the state’s UST regulations impose a reporting obligation on an environmental consultant. In In re Middletown Kontokosta Associates Ltd., the respondent, who was a vice president of an environmental consulting firm, visited a site to observe the installation of soil borings near a 3,000 gallon underground storage tank by a contractor who had been hired by the landowner. The respondent had not been retained by the landowner and claimed to be present at the site at the request of a friend. The state Department of Environmental Conservation (“NYDEC”) alleged that the respondent was acting on behalf of a bank which held a mortgage on the property. 

	Based on the color and smell of the soil borings, respondent determined that the soil was probably contaminated. However, he did not collect any samples to independently confirm that the soil was contaminated. The respondent eventually informed the NYDEC of the contamination two months after the soil borings had been collected.

 	The NYDEC then filed a complaint against the respondent for failing to report the existence of the petroleum contamination as required by Part 613.8 of the NYDEC UST regulations. This section provides that “any person” with knowledge of a spill must report the incident to the NYDEC within two hours. The complaint demanded a civil penalty of $25,000. 

In its motion to dismiss the complaint, the respondent claimed it had no duty to report the contamination. An administrative law judge (“ALJ”) ruled that the phrase “any person” had to be interpreted by looking at the underlying statutory authority and all of Part 613. The ALJ found that the applicable portion of the statute focused on owners and operators of regulated facilities. The ALJ also noted that the second sentence of Part 613.8 referred to inventory records or tests which would only be in the possession of the facility owner or operator. Thus, the ALJ concluded that the phrase “any person” must be limited to owners or operators since these were the persons who were subject to the regulation. 

The NYDEC appealed the decision to the Commissioner who reversed the ALJ. The Commissioner concluded that the phrase “any person” had to be broadly construed to ensure that leaks may be detected and stopped as quickly as possible. He also found there were other statutory provisions that gave NYDEC broad authority to enact regulations to protect the waters of the state. However, because an answer to the complaint had not yet been filed and a full factual record had not been developed, the Commissioner remanded the matter back to the ALJ for further proceedings. The Commissioner instructed the ALJ to balance the chilling effect that an adverse decision would have on the relationships between environmental consultants and their clients against the need of the NYDEC for prompt disclosure of spills. He also told the ALJ to consider the harm that was caused by the failure to timely report the release, the reasons for the delay and the priority that would have been assigned to the site had it been promptly reported. Because of the cost of litigating the matter, it appears that the respondent will not seek judicial review of the ruling.

AIR POLLUTION DEVELOPMENTS

Consultant Liable for Asbestos Violations 

In our March issue, we reported that EPA has been continuing to vigorously enforce its asbestos regulations that have been issued under the Clean Air Act. The asbestos rules establish notification requirements and procedures that had to be followed when performing renovation or demolition of buildings having asbestos-containing materials (“ACM”). These ACM regulations were extensively revised in 1990. Owners and operators of buildings (e.g., building managers, contractors, etc.) must comply with the ACM rules when more than 260 linear feet or 160 square feet of friable ACM is to be disturbed during construction activities.

During the past year, a number of contractors as well as the building owners or managers who hired them have been convicted of criminal violations of the ACM regulations. Recently, the Environmental Appeals Board upheld a $20,000 fine that was levied against a consultant who had been hired by an Ohio school district to supervise the work of an asbestos abatement contractor. The school district had hired the consultant to develop an asbestos management plan in accordance with the Asbestos Emergency and Response Act (“AHERA”).  ACM was discovered and the consultant developed specifications for the asbestos abatement plan which provided the consultant with substantial supervisory authority over the abatement contractor. These supervisory duties included directing the number of work shifts that should be performed, discharging any of the contractor’s employees who were deemed to be incompetent or detrimental to the project as well as halting the project if it was being performed improperly. The consultant also had the responsibility of coordinating the efforts of the various contractors involved in the project and was present at the worksite on a daily basis. 

The commencement date of the project was delayed and the abatement contractor apparently failed to notify EPA of the new date. The abatement contractor also failed to adhere to AM workpractices designed to minimize releases of ACM into the air. The EPA Region 5 Office issued a complaint against both the abatement contractor and the consultant. Initially, an EPA ALJ ruled that the consultant was not an “operator” of the asbestos removal project because it did not exercise actual control over the asbestos removal. Instead, the ALJ held that the contractor was just a liaison for the school district and simply coordinated the efforts of the contractors. However, the board ruled that the ALJ had narrowly interpreted the ACM regulations. The board said that the regulations refer to person who own, operate, lease, control or supervise a “demolition or renovation operation” while the ALJ had concluded that the issue was whether the consultant exercised control over the “abatement removal.”  Since the consultant did exercise control over the overall renovation operation, the board found the consultant liable as an operator. The penalty of $20,000 amounted to the compensation that the consultant received for the project.    

Clean Air Act Impacting Road Projects and Development

Because the federal Clean Air Act regulates emissions from motor vehicles as well as from factories or commercial facilities, the law can have an impact on development projects that require vehicle access or the construction of new roads. 

Under the Clean Air Act, the EPA establishes air quality standards and the states are required to develop State Implementation Plans (“SIPs”) which contain the strategies and measures that states will use to achieve the federal air standards. In 1998, states were required to conform their transportation plans with the their SIPs to make sure that the transportation projects do not adversely impact air quality. States that failed to meet this deadline would no longer be eligible for federal financing of their highway or transportation projects. 

Many states did not meet this deadline but state and federal transportation officials were initially not concerned because EPA had issued a regulation which “grandfathered” projects that had been approved prior to the 1998 deadline. 

However, a federal court invalidated EPA’s “grandfather clause” earlier this year. As a result, nearly $2 billion in highway projects in seven major metropolitan areas are now stalled and projects in 266 other areas of the country may also effected. Developments that will attract cars and thus result in increased air emissions may not be constructed using federal money nor receive federal approval if the area does not attain federal air quality standards and the state transportation plan does not conform with its SIP 

Commentary: A Brownfield projects that is dependent on transportation projects may be jeopardized if it is located in an area with poor air quality and the state does not have an approved conformity plan. Last month, we reported on how Atlanta had salvaged a brownfield project that would have been ineligible for transportation funding by having the project qualify as for EPA’s “Project XL” program. Developers need to work closely with state air pollution and transportation officials when contemplating a brownfield development in an area that does not achieve federal air qualify standards.

WATER POLLUTION/ENDANGERED SPECIES 

Wetlands Inadequately Delineated on Farmlands
	One of the reasons that developers have preferred to develop farmland instead of brownfields or other industrial properties has been the perception that farms do have significant environmental problems. However, farms may be a source of groundwater contamination because of heavy pesticide use. Often times, illegal disposal of hazardous wastes have taken place on farmland (See related article in the Superfund/Brownfield section). 

	Another problem that developers may face with farmland is the presence of unknown wetlands. The Clean Water Act prohibits the discharge of dredged or fill material into wetlands without a permit. In addition, the Food Security Act of 1985 created a wetland conservation program where farmers who converted wetlands to farmland would lose their federal subsidies.

	Under a 1994 memorandum of agreement with the EPA Army Corps of Engineers, and the Fish and Wildlife Service, the United States Department of Agriculture (USDA) was given the responsibility for identifying wetlands on farmland. However, a organization of federal employees known as the “Public Employees for Environmental Responsibility” (“PEER”) have charged that the USDA failed to identify vast amounts of wetlands. PEER claims that nearly two million acres of land has been mischaracterized as non-wetland by the Natural Resources Conservation Service (“NRCS”) which is a branch of the USDA should have been classified as wetlands. PEER also claims that the misidentification rate ranges from 80% to 100% in Illinois, Indiana, Kansas, Missouri and North Carolina.

	Another concern has been the existence of “prior converted wetlands”. These are wetlands that were drained for agricultural use in the past. In 1993, EPA issued a guidance document stating that prior converted wetlands would not be considered wetlands. There is some concern that NRCS has also been improperly identifying land as prior converted wetlands. 

	In 1996, the USDA determined that the NRCS would only perform wetland certifications when requested by the landowner. Some environmental activists are concerned that the landowners are using the NRCS program to have land improperly characterized as non-wetlands when they want to sell the land or expand farming operations. 

Commentary: Developers should identify the existence of wetlands on farmland during the due diligence period to make sure that wetlands may not be inadvertently destroyed during development. If wetlands are discovered after construction has commenced, the project may have to be redesigned, wetlands mitigation may have to be performed and fill material may have to be removed (see next article), all of which could delays the completion of the project.   

Developer Ordered to Remove Fill Material

	One of the remedies available to the EPA or Corps when wetlands are improperly filled is the issuance of an order requiring the developer to remove the fill material and to restore the wetlands. Sometimes, the agencies have forced developers to dismantle structures built of former wetlands. The agencies may also require the developers to perform wetlands mitigation which involves the creation of new wetlands to replace those that were destroyed. 

	EPA’s Denver office recently issued a cease and desist order against two developers who was constructing a resort complex. The developers allegedly bulldozed dirt and rock into a creek, its tributaries and adjacent wetlands. The EPA ordered the developers to remove the fill material, perform a wetlands delineation and will face fines of $27,500 per day for each day the fill remains in place.  

HAZARDOUS WASTES/USTs

 States Beginning Enforcement of December UST Deadline

	Owners or operators were required to upgrade or close substandard underground storage tanks by December 22, 1998. Many states are now beginning to take enforcement actions for USTs that fail to comply with the new standards. Some states have been issuing orders preventing UST owners or operators from dispensing fuel until the tanks are upgraded. In New Jersey, for example, UST owners or operators who wish to upgrade or close tanks which do not meet the new standards must enter into an administrative consent order that provides for a $2,000 per month penalty for each month that each UST has been out of compliance. In addition, a number of states are bringing enforcement actions against fuel suppliers who deliver fuel to substandard USTs. 

Commentary: Approximately 40 states have established UST trust funds that may be used to help pay the costs for upgrading tanks and remediating contamination associated with leaking USTs. Many of these trust funds may also be used to satisfy the financial assurance requirements mandated by EPA. While the eligibility requirements for these funds vary, states generally require that the USTs be in compliance with UST regulations. Purchasers of facilities with USTs should make sure that they can qualify for these trust funds. In addition, when structuring an indemnity, parties to a transaction may also want to consider requiring that the party seeking indemnification to seek reimbursement from a state UST trust fund before filing an indemnification claim (See next story).     

Bankruptcy Court Prevents Disbursement of UST Funds

Many states have established UST trust funds which may be used to help owners and operators of USTs pay for contamination associated with leaking USTs. Sometimes, the UST owners/operators assign their right of reimbursement to UST contractors who are then reimbursed directly by the state fund. Who is entitled to that money when the contractor files for bankruptcy? 

A federal district court recently issued an injunction preventing the Kentucky Petroleum Storage Tank Environment Assurance Fund from distributing approximately $43 million in reimbursements to the creditor’s of a bankrupt environmental consulting fund. The debtor’s estate had planned to use the money to pay its creditors as part of a reorganization plan.   

Commentary:	While the decision itself is not remarkable, the controversy once again illustrates the importance of the UST trust funds.  Contracting parties should consider the existence of UST funds when allocating liability in a transaction. The state UST trust funds can act as an remediation funding source or collateralize an environmental indemnity. Purchasers acquiring property in an “as is” conditions may want to consider requesting an assignment of any reimbursement rights. Similarly, seller’s can use the existence of a solvent UST fund when determining the appropriate sales price for a property.

SUPERFUND/BROWNFIELDS

Town and Developer Not Liable as Operators of Former Septic Waste Landfill

A federal district court recently dismissed a lawsuit filed against a developer who had built homes on a former septic waste disposal site as well as the town who had previously leased the site to allow the disposal of septic wastes. 

In Delaney v. Town of Carmel (No. 96-CV-2850, 6/4/99) , the defendant Town  of Carmel leased 10 acres of land from a farm owner between 1955 to 1970. During that time, the town charged septic waste haulers $25 per year to dispose of septic waste generated by the town residents and issued permits to the waste haulers. The town paid the owner a rental fee to set aside land for the septic waste disposal and the haulers also paid the owners for each load of waste that was brought to the site. The waste was dumped into a number of trenches that had been excavated by the owner pursuant to specifications set forth by the lease agreement with the town. The owner was required to cover the deposits with clean earth and to properly close the trenches when they were filled. The town paid teat the site. A dirt road with a locked gate provided access to the disposal area. Haulers who paid the annual fee received a key from the owner to open the lock and employees of the town occasionally maintained the road and ploughed it during the winter. The Putnam County Department of Health (“PCDOH”) periodically inspected the disposal site and instructed the owners on a number of occasions to close overflowing trenches. 

In the mid-1980’s, a developer purchased 100 acres of the farm for $583,000 in 1986 and built 44 homes. The former septic disposal area was located on two of the building lots. The developer did not perform any environmental due diligence prior to acquiring the land although it did review the state list of inactive hazardous waste sites. The developer began constructing the homes in 1987. Each of the homes had their own drinking wells and septic systems. 

In 1989, the developer learned from PCDOH of the existence of the old septic waste disposal area. The PCDOH required the developer to collect groundwater samples which revealed elevated levels of chlorinated solvents and vinyl chloride. The developer provided the results to the PCDOH in 1990 and a subsequent investigation determined that there was widespread groundwater contamination. The PCDOH issued a “stop work order” and the developer agreed to construct a centralized drinking water supply for all of the homes which was completed in 1992. When the developer learned that homes could not be built on the two lots where the septic disposal area had been located, the developer stopped paying taxes on those lots. The county foreclosed upon but then tried to rescind the tax foreclosure by issuing a “correction deed”. 

The homeowners who had purchased their homes from the developer and another group of homeowners whose wells had been impacted by the groundwater contamination the brought an action under CERCLA and RCRA to compel a cleanup of the contamination as well as various common law claims.

On the CERCLA claim against the town, the court ruled that even though the town had leased the land to allow residents to dispose septic wastes, it was not liable as a CERCLA operator because the town had not exercised actual and substantial control over waste disposal activities. In addition, the court found that the town was not liable as an arranger or generator because the septic wastes were not classified as hazardous substances. Thus, the court held, the town had not intended to dispose of hazardous substances. Likewise, the court dismissed the RCRA claim against the town because the septic waste was not a hazardous waste and, therefore, the town could not have contributed to the disposal of a hazardous waste. It should be noted that RCRA section 7002 applies to persons who have contributed to the disposal not only of hazardous waste but also solid waste. Therefore, it would appear that the court’s ruling on this issue was in error.   

The plaintiffs also argued that the developer should be liable as a former owner of the property. Although the developer had not actually disposed the septic wastes on the property, the plaintiffs claimed that the wastes had migrated into the groundwater during the developer’s ownership. Therefore, the plaintiffs argued, the developer was liable as an owner at the time of disposal. Following a 1997 Second Circuit opinion, the court rejected the notion that the notion that passive migration constituted “disposal” under CERCLA. Accordingly, the court concluded that the developer could not be liable as an person who owned the land at the time of disposal.

Even if the developer could be liable as a past owner, the court said the developer would be entitled to assert the third party defense. This affirmative defense provides that a defendant may not be liable if the release of hazardous substances was caused solely by a third person, the defendant did not have a contractual relationship with that third person, the defendant exercised due care with respect to the release and took precautions against the foreseeable acts of third persons. While the septic wastes were clearly disposed by third parties who had no relationship to the developer, it was unclear how the developer could have been shown that it exercised due care towards the  contamination. The court was influenced by the fact that the developer conducted an investigation when it learned of the contamination and also constructed the public water supply. However, another court could have found that the developer did not exercise due care by failing to perform adequate due diligence and discover the contamination prior to acquiring the property. 

Commentary: This case hinged on the definition of disposal. While this court held that disposal required some physical act by the defendant, other jurisdictions have held that the mere migration of previously deposited hazardous substances constitutes disposal. In those jurisdictions, a prior owner who did not dispose of wastes at a site but held title while previously deposited wastes percolated into the groundwater could be considered an “owner at the time of disposal” and liable for remediating the release.

This case is also a classic illustration of the importance of doing due diligence on farmland. Sometimes, farmers generate extra income by allowing portions of their land to be treated with industrial or residential sludges that are not regulated as hazardous wastes but which may contain hazardous substances. While sludges that are applied to land generally must now be approved, this practice was not well regulated in the past. A developer who is considering purchasing farmland should inquire into the past uses of the land. As part of this effort, local officials who may be familiar with local land uses should be interviewed and aerial photography which could show disturbed or excavated soil that may be indicative of past landfilling activities. 

	
 ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS 

Federal Circuit Rules That Contamination Does Not Affect Marketability of Title

Can a purchaser rescind a purchase agreement on the grounds that contamination constitutes an encumbrance to title? The Court of Appeals for the Tenth Circuit ruled in Country World Casinos Inc. v. Tommyknocker Casino Corp.(No. 98-1342, 6/23/99) that while environmental contamination may reduce the value of property, it does not prevent the transfer of title. 

In this case,  the defendant’s parent, New Allied Development Company (“NADC”) acquired title to property located in Black Hawk, Colorado in 1990 to build a casino. NADC entered into a consent agreement with EPA in 1992 to remediate contaminated soil. NADC then transferred title to the defendant. To avoid the filing of mechanic lien’s on the property, the defendant and NADC executed a promissory note in the amount of $475,000 which was secured by the property. In 1993, NADC and the defendant agreed to sell the land to the plaintiff for $11, 492,500 which was to be paid as follows: $600,000 cash at closing, a $3,450 promissory note and 2,250 shares of the plaintiff. The contract provided that the plaintiff’s obligation to close was subject to the condition that no “materially adverse environmental problems” were discovered prior to closing or that the cost of the proposed cleanup work would not materially exceed the $200,000 to $250,000 estimate..

At the time title was transferred, the defendant had not performed the cleanup required under the 1992 EPA consent agreement. The defendant arranged to have the remediation performed after the closing and the plaintiff agreed to reimburse the defendant for $650,000 in remediation costs because the plaintiff was concerned that the defendant lacked the resources to pay for the cleanup. 

The defendant and NADC were supposed to payoff the original promissory note after certain payments were made by the plaintiff. When the defendant failed to have the promissory note satisfied, the plaintiff withheld certain payments under its promissory note. The defendant then initiated foreclosure proceedings and the plaintiff file a chapter 11 bankruptcy petition. The plaintiff sought a ruling that it was not required to make the installment payments on the note and also sought an offset for the remediation costs on the grounds that the contamination was an encumbrance to title.  The bankruptcy court found that the plaintiff was entitled to withhold the installment payments but denied the offset claim. The district court affirmed and the parties appealed.

The plaintiff contended that the contamination constituted an “encumbrance” for the purposes of the covenant against encumbrances in a warranty deed. The plaintiff relied on a state decision which defined an encumbrance within the meaning of the covenant as a right or interest in the land which diminishes the value of, but is not inconsistent with the ability to convey, fee title. That state court went on to say that an encumbrance included “any burden resting not only on the title to the real estate, but on the real estate itself which tends to lessen the value or interfere with its free enjoyment.”. 

However, the appellate court said that the overwhelming weight of authority was that environmental contamination did not constitute an encumbrance on title. The court distinguished the state case that had been relied upon by the plaintiff, noting that the seller in that case had specifically warranted in the deed that there had not been any contamination. In this case, the court went on there was not any such warranty. Moreover, the court said that the conditions set forth in the acquisition agreement gave the plaintiff the right to back out of the contract and did not apply to excess cleanup costs that occurred after the closing. 

Commentary: When allocating environmental liability in a transaction, it is important that the parties clearly specify the conditions that may trigger an indemnity or allow a party to walk away from a deal. Often times, a due diligence provision may simply state that the purchaser may terminate a contract if the environmental site assessment identifies an “adverse condition” or “material adverse condition” without containing an objective mechanism for determining if that condition had occurred. Then, when the buyer claims that such a condition exists and demands the return of its deposit, the seller will dispute that the buyer is entitled to terminate the contract. The parties then usually have to resort to litigation to resolve the issue.

Owner of Brownfield Site May Proceed with Injunction to Prevent City From Condemning Site Because Redevelopment Plan Would Increase Cleanup Costs

	One of the more popular regulatory reforms that have been adopted by the EPA and many state environmental agencies has been the use of risk-based cleanups. Under this approach, the cleanup standard is based on the actual risks posed by the site. Most states adopting a risk-based approach have established residential and non-residential cleanup standards. Sites that are used for non-residential purposes are allowed to leave  higher quantities of residual contamination in the land provided that certain steps are taken to prevent exposure to the remaining contamination. This is usually accomplished by using  engineering controls such as impermeable caps. The owner/operator of the site is then required to impose institutional controls which are legal mechanisms such as deed restrictions that prevent future occupiers or owners of the land from using the areas where the residual contamination remains. The risk-based approach can result in less expensive cleanups. However, if the land use changes or the institutional or engineering controls fail, additional cleanup may be required.

	In Carpenter Technology Corporation v. City of Bridgeport (99-7284, June 16, 1999), the Second Circuit permitted a landowner who has agreed to implement a cleanup providing for institutional controls to proceed with a preliminary injunction against a city which wanted to redevelop the site into a shipyard. In this case, the plaintiff operated a steel plant located on a 47.5 acre parcel of waterfront property in Bridgeport, Connecticut. In 1992, the plaintiff entered into a voluntary cleanup agreement with the state Department of Environmental Protection (“CDEP”). Under the remediation agreement, the plaintiff agreed to file a restrictive covenant that would prohibit itself and future landowners from disturbing an 11 acre plume of solidified fuel oil. After remediation was completed in 1997, the CDEP determined that the site no longer posed a substantial threat and the federal EPA agreed not to place the site on the federal Superfund list. 

While the remediation was underway, the City of Bridgeport and its Port Authority (collectively the “Defendants”) decided to redevelop the waterfront. In July, 1998, the Defendants adopted a resolution authorizing purchase by condemnation of the plaintiff’s site. Meanwhile, a month earlier, the plaintiff had entered into an agreement with a prospective purchaser of the site who planned to build a retail shopping and entertainment complex. The purchaser agreed to abide by the restrictive covenant and to indemnify the plaintiff for any future environmental costs resulting from the redevelopment of the site. In an effort to persuade the defendants not to proceed with the condemnation proceeding, the plaintiff offered to give the defendants 12 acres. However, the defendants rejected the offer in November, 1998, informed the plaintiff that they would proceed with the condemnation and also told him that they would pursue him for any remediation costs that exceeded the defendant’s valuation of the property. In January, 1999, the defendants offered to purchase the property for $2.5 million which the plaintiff felt was well below the fair market value of the site and rejected the offer. When the defendants commenced a condemnation proceeding later that month, the plaintiff filed an action in state court to review the amount of the compensation and then removed the action to federal district court. The plaintiff sought a preliminary and permanent injunction preventing transfer of title or alternatively, a declaratory judgement that the defendants or any other future landowner would be responsible for remediation costs associated with redevelopment. 

	The district court dismissed the motion for a preliminary injunction on the grounds that the plaintiff had failed to show that it would suffer irreparable harm in the absence of such relief and concluded that the motion for declaratory relief was not ripe and “speculative”. Specifically, the District Court concluded that the following contingencies would have to occur before the plaintiff could be harmed: 1) the superior court clerk would have to issue a Certificate of Taking; 2) the defendants or a third party transferee would have to implement a development or remediation plan that would disturb the environmental status quo; 3) the CDEP or EPA would have to determine that additional environmental remediation was required at the site; 4) the appropriate state or federal environmental agency would have to seek to recover the cost of the environmental remediation from the plaintiff. 
However, the Second Circuit found that the district court’s decision was based on an erroneous interpretation of liability under CERCLA since private parties can proceed under CERCLA without having to wait for government intervention. Since the third and fourth contingencies listed by the District Court were not pre-conditions for CERCLA liability, the Second Circuit remanded the question of ripeness and the issue of injunctive relief back to the District Court for further factual findings and reconsideration.

Commentary: When drafting institutional controls such as deed restrictions, parties should clearly indicate who will be monitoring the effectiveness of the controls and who may enforcing the controls. Often times, sellers will assume that the local government will ensure that the use restrictions are maintained. However, since the restrictions are usually filed with the county clerk, municipalities often are not aware that the restrictions are in place and those that have knowledge of the restrictions may lack the expertise or resources to ensure compliance. Because such controls may have to stay in place long after a seller has transferred title to property, sellers often require that a purchaser agree to become liable for any future cleanups that may be required if the land use changes or the engineering controls are not adequately maintained. Indeed, some states require prospective purchasers to maintain institutional controls in order to preserve their innocent landowner’s defense. (Readers who want to learn more about using institutional controls in brownfield redevelopment should visit our web site).   

	Purchaser Not Liable as Successor Corporation

	The general rule in most American jurisdictions is that a corporation which acquires the assets of another company is not liable for the actions of its predecessor. Over the years, the courts have developed four exceptions to the general rule of non-liability for asset purchasers.  The purpose of these exceptions is to make sure that corporations do not evade their liabilities or to prevent corporate evasion of liability or debt through the use of corporate formalities.

	In defining what constitutes a successor corporation, courts have traditionally looked to state law since corporations are creatures of state corporate law. However, because courts tend to strictly construe these exceptions, many courts have developed a federal common law approach to determining successor liability where a federal statute such as CERCLA is involved to ensure uniform enforcement across the country. The federal test, know as the “continuity of enterprise theory” is less stringent than the four traditional exceptions which have generally required a high degree of continuity in management, personnel and stockholders.

	As a result, one of the key threshold issues in any successor liability case is which law shall be used to determine liability. The choice of law is often the single most important issue in a case. A recent decision in the Sixth Circuit illustrates this point. 

In IBC Manufacturing Co. v. Velsicol Chemical Corp. (No. 97-5340, 7/1/99), Chemwood Corp. operated a wood preservative blending site until 1976 when it ceased operations at the site. In 1979, the IBC acquired Chemwood as a subsidiary. In 1993, the EPA issued an order to remediate the former Chemwood site. Chemwood initially agreed to participate in the cleanup but when its assets became depleted, IBC sought a declaratory ruling that it was not liable for the response costs at the site. Relying on state successor liability law, a federal district court ruled that none of the exceptions to non-liability applied to the plaintiff and therefore, the plaintiff was not liable under CERCLA. The Sixth Circuit affirmed the ruling.

Commentary: Had the courts used the “Continuity of Enterprise Theory” it is quite possible that the plaintiff in this case would have been found liable as a successor corporation. This case highlights the importance of including formerly owned or operated facilities when doing environmental due diligence in a corporate acquisition. Purchasers who only focused on the currently owned or operated facilities may, after the closing,  find themselves saddled with liability for cleanup costs at previously unknown sites. By making an effort to identify formerly owned or operated sites during the due diligence period, purchasers will be in a better position to effectively negotiate responsibility for all environmental liabilities associated with a business.   

The information contained in this newsletter is not offered for the purposes of providing legal advice or establishing a client/attorney relationship. Environmental issues are highly complex and fact-specific and you should consult an environmental attorney for assistance with your environmental issues.