SCHNAPF ENVIRONMENTAL  REPORT

A Monthly Newsletter Covering Recent Environmental Developments and Caselaw

March 1999												Vol. 1, Issue 4

	The Schnapf Environmental Report is a monthly 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. 

This issue contains a new feature on environmental disclosure and environmental auditing. In addition, we have added enforcement summaries to each of our regular features. 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 available from our website. 

We also offer environmental law seminars which is 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

	SEC Files Enforcement Action Against Company for Inadequate Environmental Disclosure

	The federal Securities and Exchange Commission (SEC) has become increasingly concerned that corporations are not adequately disclosing the scope of their environmental liabilities. In the past, SEC has concentrated on the discussions of environmental liabilities in the narrative portions of filings. Recently, though, the commission has begun to focus on the disclosure of contingent environmental liabilities associated with remediation costs under CERCLA and RCRA. The SEC has generally chosen to handle deficient disclosures informally by either requesting that the registrant supply additional information or provide further information in future filings. Occasionally, the commission does take formal action.

	The In Re Lee Pharmaceuticals is a recent example of a formal administrative proceeding instituted by SEC for inadequate environmental disclosure. In that proceeding, Lee Pharmaceuticals (“Lee”) which manufactured dental and cosmetic products was ordered by the California Regional Water Quality Control Board (the “Water Board”) to investigate groundwater contamination at its facility in 1987. After groundwater contamination was confirmed, the Water Board issued a cleanup order to Lee in August, 1991. Lee’s consultant estimated in 1991 that the groundwater cleanup would cost $465,000. Lee sent a letter to the Water Board indicating that it did not have sufficient resources to perform additional groundwater cleanup. When EPA learned that Lee refused to complete the groundwater investigation, the agency informed Lee that it had been identified as a PRP for the San Gabriel Valley Superfund Site. In 1992, Lee also filed a claim with its insurance carrier estimating that the cleanup costs would be approximately $700,000. In 1993, the state environmental protection agency cited Lee for a illegal discharge at its facility and the County of Los Angeles issued a notice of violation for improper storage of corroding or unsealed drums that contained hazardous wastes. In that same year, EPA conducted its own investigation and determined that groundwater contamination at the facility originated from Lee’s operations. Lee continued to inform the Water Board that it could not afford to complete its groundwater investigation while at the same time company resources were being used to reduce the debts owed to the Lee family who were the principal shareholders of the company. In 1995, Lee learned that EPA had estimated that the cleanup for the superfund site would cost approximately $35 million.

	In its 1991 Form 10-K, Lee indicated that the facility had “some potential contamination” but that the testing to date was inconclusive. The company failed to state that it had been identified as a PRP or that it had refused to perform additional groundwater investigation. The SEC determined that this statement materially understated the seriousness of the Lee’s environmental obligations.

In 1992, Lee’s Form 10-K stated that it had no information about the cleanup costs for the property and that “testing has not been completed and the extent of any contamination has not been determined.” At this point, Lee had received the $465,000 estimate and had filed its $700,00 claim with its insurance company. The company also stated that EPA had determined that the contamination was sufficiently low enough that EPA was not requiring cleanup. SEC felt these claims constituted material false statements about the company’s environmental contamination, investigation and cleanup obligations. 
	    
	In its 1993 10-K, the company continued to claim that it had complied with environmental provisions relating to protection of the environment, failed to disclose it was not complying with the cleanup order of  the Water Board, continued to deny that it had any information about its cleanup costs and failed to indicate that it had been identified as a PRP. Likewise, after the EPA investigation linked Lee’s facility to the contamination, the company repeated these statements in its 1994 Form 10-K and also stated EPA was not requiring any cleanup at that time. Even though Lee received notice of EPA’s cleanup cost estimate for the superfund site in 1995, the company stated in its 1995 Form 10-KSB and 1996 Form 10-KSB that it had no reliable information about its cleanup costs.

	In addition to the material misstatements and omissions, SEC determined that Lee failed to properly accrue and disclose its environmental costs in its financial statements. The SEC said the information available to Lee indicated that it was “probable” that a liability had been incurred and that a range of those costs should have been disclosed in the notes to its 1991-1996 financial statements. The SEC said that FASB 14 did not permit delaying recognizing a contingent liability until a single number could be reasonably estimated and that SAB 92 required recognition of a loss equal to the minimum of the range even if the upper limit of the range is uncertain. The agency also said that while the company did not know how much of the $30 million superfund cleanup it would be liable for, it should have disclosed the potential liability. The SEC also found that the company had failed to disclose the material effects that environmental compliance might have on company capital expenditures in the “Management Discussion and Analysis Sections. 

Finally, the SEC found that the company chairman, CEO and CFO were liable for willfully aiding and abetting Lee’s securities law violations. The CFO was also prohibited from appearing or practicing before the Commission as an accountant for three years. After the three year period expired, the CFO could apply for reinstatement provided that his work would have to be reviewed by an independent audit committee of his company of the firm he might be working with at the time.

Helpful Hint: Given the heightened scrutiny on environmental disclosure, it is important for counsel and corporate officers to closely review disclosure documents to make sure that narrative and financial statements are consistent. For example, if the footnotes indicate that the registrant expects to receive insurance proceeds to offset the remediation costs at a site, the MD&A should discuss this expectation and when funds are expected to be received. Since the SEC does share information with EPA, it is also essential that the SEC filings be consistent with information presented to EPA and other environmental agencies. The contents of internal environmental audits should also be reviewed to make sure that the filings conform to the information contained in those reports. If the registrant decides not to disclose a particular environmental issue, it may be prudent to prepare documentation supporting that decision.

EPA Expands TRI Reporting Obligations and Enforcement 

	Following plant explosions in Bhopal, India and Institute, West Virginia that exposed local communities to lethal clouds of poisonous gases, Congress enacted the Emergency Planning and Community Right-To-Know Act (“EPCRA”) as part of the 1986 amendments to CERCLA. The purpose of the law was to prevent catastrophic releases of EHS and also enable local emergency groups to respond to accidental releases of EHS by providing information about the types of quantities of hazardous chemicals used at facilities. Under EPCRA, EPA promulgated a list of extremely hazardous chemicals (EHS) and established threshold planning quantities (TPQ) for each EHS. Any facility that produced, used or stored any EHS above the TPQ was required to notify a state Emergency Response Commission. Facilities were also required to report releases of EHS that exceed the reportable quantity established by EPA and which were likely to result in off-site exposures. 

EPA was required to establish a national database of substances that were identified as “toxic chemicals” by section 313 of EPCRA. Businesses with Standard Industrial Codes between 20-39 that manufactured, imported, processed or otherwise used certain thresholds of section 313 toxic chemicals are required to file Toxic Release Inventory (“TRI”) forms each July 1st. The TRI threshold for manufacturing facilities is 25,000 pounds per year while the TRI threshold for non-manufacturing facilities is 10,000 pounds per year. EPA has been adding substances to the TRI list which now contains 640  individual chemicals and chemical categories. EPA has also made seven additional industrial groups subject to the TRI reporting requirement. 

	There are a number of uses that are excluded from the TRI program which can complicate compliance. Non-manufacturing operations often view EPCRA as a burdensome paperwork obligation and do not devote sufficient resources to TRI compliance. However, EPA feels EPCRA is one of its most important tools for improving environmental protection. As a result, EPA has been targeting enforcement actions to ensure accurate TRI reporting. In addition, environmental organizations are increasingly bringing suits against companies who fail to comply with their annual TRI reporting requirements. For example, the EPA recently filed complaints against a number of wireless telecommunications companies. The EPA alleged that 61 “switching centers” or wireless telephone hubs that were located in ten states and which route regional calls failed to report the presence of sulfuric acid in battery packs. The batteries were used for emergency backup power.   

EPA Audit Policy Used to Reduce Amount of EPCRA Violations

	In 1995, EPA issued its environmental auditing statement which provided that EPA would reduce civil penalties and not recommend criminal prosecutions for environmental conditions that were voluntarily reported to EPA provided nine criteria were satisfied. It was originally thought that the audit policy would used most often when reporting violations under the Clean Air Act or Clean Water Act and also to report the presence of contamination at facilities. However, EPA has been using the auditing policy to reduce potential penalties assessed under EPCRA. For example, the wireless telecommunication companies mentioned in the previous summary faced potential aggregate fines of nearly $1 million. Because the violations were voluntarily disclosed, the companies paid less than $15,000 in fines. A manufacturer of heavy vehicle instruments and gauges faced $210,000 in EPCRA violations but EPA waived the entire penalty because the company reported the violations within ten days of discovery and took immediate preventive measures. Likewise, another company was qualified for a complete waiver of $58,000 in EPCRA penalties.

	Helpful Hint: These cases illustrate that the EPA auditing policy can be used to substantially reduce potential environmental liability when environmental violations are promptly reported and corrected. As a result, prospective purchasers of businesses and lenders may want to consider expanding pre-loan or pre-transfer due diligence to go beyond the traditional Phase I site assessment and address environmental compliance issues to take advantage of the policy. 

AIR POLLUTION DEVELOPMENTS

Warehouses Now Required to Comply With Risk Management Plans 

	This June, over 66,000 facilities are going to be required to submit risk management plans (“RMPs”) under section 112 (r) of the Clean Air Act. Many of these facilities that will be required to submit RMPs will be non-manufacturing businesses such as warehouses that do not emit air pollutants and thus are not ordinarily subject to regulation under the Clean Air Act. 

The RMPs are similar to the safety management plans required under OSHA. The plans will be designed to prevent accidental releases of hazardous substances and establish procedures for implementing emergency responses to any accidental releases. Unlike the OSHA safety plans which focus on protecting workers in the facility, the RMPs will be concerned with mitigating the off-site hazards that may be posed by accidental releases of hazardous substances.  
	
Owners or operators (e.g. lessees) of warehouses that are used to store quantities of the 140 toxic or flammable substances listed by EPA such as ammonia, chlorine and propane in excess of threshold amounts established by EPA must submit the RMPs by June 21st . The threshold quantities vary with the particular chemicals and range from 500 to 20,000 pounds. 

Seven states have established their own RMP requirements for warehouse facilities which may be stricter than the federal rule. For example, state RMP regulations may cover more substances or have lower thresholds for triggering the RMP requirements. 

Helpful Hint: Prospective purchasers or lessees sometimes do not require environmental site assessments of warehouse facilities because these facilities are often viewed as not posing significant environmental risks. Since the owner and tenants of a warehouse could be jointly liable for personal injuries or property damage resulting from explosions or accidental releases of hazardous substances from a warehouse, prospective purchasers or lessees of warehouse facilities may want to perform due diligence determine if warehouse they are considering will be subject to state or federal RMP requirements. They may want to limit themselves to occupying or owning warehouses that do not store ANY substances regulated by section 112 (r). 

Companies Fined for Improper Handling of Ozone-Depleting Substances

The Clean Air Act extensively regulates the use of ozone-depleting substances such as chlorofluorocarbons (CFCs) and hydrochlorocluorocarbons (“HCFCs”). These substances have been used in a wide variety of industrial applications such as refrigerants, propellants, degreasers and lubricants as well as numerous consumer products including air conditioning units in apartment buildings. While the manufacture of new CFCs is prohibited, businesses can continue to use CFC-dependent equipment for the useful life of the equipment. However, extreme caution must be used when servicing or repairing these older units to prevent inadvertent releases of  CFCs or HCFCs.
 
Refrigerant recovery and recycling equipment must be used when servicing units containing CFCs or HCFCs to minimize the possibility of releases of ozone-depleting substances into the atmosphere and companies must use technicians who are certified to use these recovery and recycling equipment. EPA recently fined a number of businesses including a Fortune 500 telecommunications company, for allowing ozone-depleting substances to vent into the atmosphere from leaking equipment. In addition, the EPA continues to bring criminal actions against individuals smuggling CFCs into the country or companies that improperly use banned refrigerants. 

EPA does allow the sale of “reclaimed” refrigerants. Because of the continuing demand for CFCs and HCFCs, a large market has developed for reclaimed refrigerants. As a result, many corporations who have replaced CFC-dependent equipment have stockpiled CFCs and HCFCs to sell or trade these substances to other companies, facilities, equipment manufacturers and brokers in exchange for cash, emissions allowances, goods or services. However, since EPA has adopted stringent rules for transferring reclaimed CFCs or HCFCs, some companies have run afoul of the EPA rules by selling recycled refrigerants which did not qualify as “reclaimed” refrigerant. Thus,  it is important that sellers create supporting documentation to establish that the substances qualify as reclaimed refrigerants. This documentation should include the name and location of he facility where the material was reclaimed, the methodology used to purify the material, the purity level achieved as well as the purity verification test that was used.

Helpful Hint: One of the leading causes of CFC and HCFC emissions is disposal of Freon-containing appliances such as refrigerators and air conditioners located in apartments buildings and offices. The Freon can escape when the appliance is placed into compacting trucks or crushed when buried at landfills. Businesses that arrange for solid waste pickups or municipalities that operate sanitation departments and landfills need to make sure that proper procedures are followed to prevent inadvertent releases of CFCs or HCFCs. The EPA recently filed an action against New York City seeking $50 million in fines because of releases of Freon resulting from improper disposal of appliance. 

EPA Continuing to Enforce Asbestos Violations

In 1973, EPA issued regulations under the Clean Air Act establishing 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. 

Examples: EPA has been continuing to vigorously enforcing its ACM regulations and 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. For example, three individuals were recently sentenced to jail terms when they hired a dozen men from a homeless shelter to remove 9,000 feet of ACM without giving the workers ACM workpractice training. The President of a ship salvage company was also sentenced to five years in prison for failing to notify the EPA of proposed ACM activity, failing to comply with ACM workpractices when removing ACM and improperly disposing of the ACM. 

WATER POLLUTION/ENDANGERED SPECIES 

New Initiatives Intended to Limit Suburban Sprawl

	Earlier this month, the federal government formally declared nine species of wild salmon to be endangered which will force the states of Oregon and Washington under the Endangered Species Act (“ESA”) to take actions to protect the habitat of the endangered salmon species. If the states fail to take appropriate action, the federal government will be required to take steps that could bring development to a halt. In addition, local governments and individuals could be subject to criminal penalties.  

This action combined with the Clinton Administration’s recent Clean Water Action Plan represents nothing short of a paradigm shift towards environmental protection. These measures are a foreshadowing of how environmental laws like the Clean Water Act (“CWA”) may be used not simply to halt discharges of industrial pollutants or sewage but redirect growth away from undeveloped property and to shape local land use. 

Under its Clean Water Action Plan, the Clinton Administration not only plans to implement stricter standards for improving water quality for individual streams and rivers but also to impose requirements to restore or protect vast ecosystems and watersheds. To comply with the ESA and CWA initiatives, federal and state environmental authorities will have to impose tighter permit requirements on existing dischargers to achieve water quality standards but also institute tough restrictions on construction near streams or businesses that contribute to contaminated runoff. Additional measures may include acquiring land around sensitive watersheds waterways, restoring wetlands, halting the use of fertilizers and pesticides, and even dismantling dams that have been used to supply hydroelectric power. 

This expanded use of the ESA and CWA to control growth will not be limited to the Northwest. Environmental organizations who advocate the use of “smart growth” are hoping to use the recent action as a model to force the federal government to take control growth in other ecosystems across the country including the Catskill region of New York. Indeed, the EPA Region 1 office which is responsible for New England says it will oppose projects that contribute to suburban sprawl and will require mitigation measures to offset environmental impacts cause by development. Earlier this year, the state of Georgia created a regional transportation board for the Atlanta metropolitan area will have authority to veto construction of new malls in congested areas by refusing to issue permits required to tie into existing roadways.  

These new initiatives are a major concern to development groups who argue that old Clinton campaign slogan of “Putting People First” has been replaced by “Putting Salmon First.” The trade groups assert that the new policies will not only raise taxes and damage local economies but also fail to meet the housing needs of the areas. Many local government groups also do not want the federal government dictating to local governments how they should manage their growth. During the past 25 years, the federal government has been embroiled in highly controversial efforts to preserve wetlands and to protect the habitat of the spotted owl. The battle over implementation of environmental measures to control growth will likely dwarf those earlier epic struggles. 

HAZARDOUS WASTES

Small Businesses Can Face Large Penalties

	The generation and disposal of hazardous waste is often viewed as a problem of large, multi-national corporations. However, hundreds of thousands of small business generate or handle hazardous wastes that must be managed in accordance with RCRA. Complying with RCRA complex waste management regulations and extensive record-keeping requirements can be a daunting task for a large corporation with a staff of environmental specialists and can be overwhelming to smaller businesses. These small companies often lack the resources to hire full-time environmental professionals. Instead, they usually are forced to designate an existing employee without sufficient environmental training to be responsible for environmental compliance in addition to their other corporate duties. Frequently, small businesses mishandle wastes because they did not realize the materials were classified as hazardous wastes. Nevertheless, such non-compliance can result in significant civil and criminal penalties. Indeed, small business owners have been have accounted for a substantial portion of recent criminal enforcement actions. 

	Under the Small Business Regulatory Enforcement Fairness Act (“SBREFA”), is required to take a number of actions to reduce the burden of environmental regulations on small businesses. Towards that end, EPA has established a number of compliance assistance centers to help small businesses better understand their environmental obligations. These centers are particularly important because under the its “Final Policy on Compliance Incentives for Small Businesses”, EPA has announced that it will eliminate civil penalties for small businesses who have made good faith to efforts to comply with environmental laws and promptly corrects the problem. One way for a small business to satisfy this test is if participated in the on-site assistance programs established by EPA sought  has made a good faith. In addition, under the EPA’s “Enforcement Response Policy”, small businesses that detect violations of the Clean Air Act will have 90 days to receive compliance assistance and possibly another 90 days to correct the violations.   

Finally, the agency also established the Office of the Small Business Ombudsman (“SBO”)which is designed to facilitate communication between small businesses and EPA. The SBO receives now receives over 1,000 calls a month from businesses ranging from dry cleaners, automotive repair, photo finishers, metal finishing companies, pesticide formulators, muffler installers, service stations, chicken farms, poultry processors, paint stores, hospitals and drug stores. Small Businesses can also register complaints about enforcement actions with the SBO or the Small Business Regulatory Fairness Board.

	EPA has developed a small business environmental home page at http://www.smallbiz-enviroweb.org. 

Low Threshold of Knowledge for Criminal Liability Under RCRA

	Criminal enforcement is becoming a significant component of environmental enforcement. There has been a dramatic increase in environment crime resources at federal and state levels, and many states have establish special environmental crime units. Not surprisingly, there was a record number of in indictments, convictions, penalties and prison sentences in 1998.

At the same time that the complexity of environmental laws are increasing, courts are continuing to reduce the burden that prosecutors must meet to obtain convictions. Usually, the government has to prove that a person acted with the specific intent to violate the law. However, many courts are now allowing the government to prove that the defend had the requisite knowledge by simply showing that the defendant knew or understood its actions. To obtain a conviction under RCRA, prosecutors do not have to establish that the defendant knew that materials that were transported, used, treated, stored or disposed were regulated as hazardous wastes or that a permit was needed to store or disposed of these materials. Instead, the government simply has to demonstrate that the defendant knew the waste materials had the potential to be harmful to others. 

The target of the government’s enforcement actions is also changing. Criminal prosecutions are increasingly focusing on individuals rather than corporations. Indeed, it is often the policy of the federal Department of Justice frequently to target high-level corporate officers as well as the corporation.   	

Example: 	In U.S. v. Rojas, the owner of a storage company was sentenced to four years probation and ordered to pay $100,000 for improper storage of hazardous wastes. A client of the storage company abandoned 37 drums of industrial wastes. The drums were stored at the premises for several years before the storage company owner attempted to hire an undercover police officer to dispose of the drums “as cheaply as possible.” The state of Florida tested the drums and nine of them contained hazardous wastes. Even though the owner did not know that some of the drums contained hazardous wastes, he was still convicted for knowingly storing hazardous wastes. 
			
	Helpful Hint:   Given the increased criminal enforcement, companies should consider perform thorough environmental compliance audits to take advantage of the EPA audit policy which permits reduced penalties for violations that are voluntarily disclosed. Compliance issues should also be investigated as part of pre-acquisition environmental due diligence since once a transaction has been completed, the purchaser could become criminally liable for violations that continue after the closing.   		 
	
SUPERFUND/BROWNFIELDS

Federal Circuit Court Invalidates Placing Site on the Federal Superfund List

	The National Priorities List (“NPL”) is the federal list of the nation’s most severely contaminated sites. Most sites are placed on the NPL using the Hazardous Ranking System (“HRS”) which is a scoring system that assesses the relative risks posed by the site. examines the pathways of exposure. EPA develops the HRS score by performing a site inspection, examining the pathways of exposure (e.g. groundwater, soil) and assigning a score to each pathway using a mathematical formula. The individual pathway scores are then combined using another formula to develop a total HRS score for the site. Those sites that score above 28.50 out of a possible 100 are eligible for inclusion on the NPL. Property owners or other responsible parties can influence a site’s HRS score by taking actions that reduce the dangers posed by the site. Increasing numbers of responsible parties are challenging the methodology used by EPA at a particular site in an effort to prevent a site from being placed on the NPL.

	Under the Omnibus Consolidated Rescissions and Appropriations Act of 1996, Congress added another hurdle that EPA must overcome to place a site on the NPL. Under the law, EPA may not use funds to list a site unless the agency received a written request by the Governor of the state where the site is located asking that the site been included on the NPL. A property owner recently challenged a proposed listing of a property in California and the United States Court of Appeals for the District of Columbia invalidated the proposed listing of the site because the Governor had not requested the listing. The state environmental agency had sent a letter on behalf of the Governor agreeing that the site should be listed but because the letter did not come from the Governor.  

	Lesson: States with active brownfield programs may not want to have sites placed on the NPL because of the stigma associated with such sites. Thus, developers may want to take advantage of the 1996 provision and work with the state government officials to defer placing a site on the NPL to allow development to proceed forward.

EPA Barred By Statute of Limitations from Recovering Cleanup Costs

	There are two types of cleanups that may be performed under CERCLA: Removal actions and Remedial Actions. A Removal action is a interim, temporary measure such as drum removal that stabilize or contain contaminants. Remedial Actions are long-term, permanent steps that permanently eliminate the risk posed by a site. 

Often, it is difficult to distinguish between a removal action and a remedial action. Sometimes, EPA may take a series of interim actions over a period of years and then seek recovery of the money it expended on the cleanup. However, there are different statute of limitations for removal and remedial actions. EPA must bring an action to recover costs associated with a removal action within three years of completing a removal action while it has six years following the commencement of construction activities for bringing a cost recovery action for a remedial action.

Recently, a federal district court in Massachusetts prevented EPA from recovering its removal costs because the statute of limitations had lapsed. In that case, EPA incurred close to $800,000 in response costs. The agency left behind some drums, handed the keys for the property to the state DEP and entered a notation in the site records that the matter was closed. One year later, vandals broke into the site and dispersed several of the drums. EPA then returned to the site to remove the drums and expended another $50,000. Three years later, it filed a cost recovery action on the grounds that the work performed at the site was one continuous removal action. Since CERCLA limits the duration of removal actions to 12 months and the case had been marked “closed’, the court ruled that there were two separate removal actions and EPA was barred from recovering its costs associated with the first cleanup.

EPA Prevented from Ordering PRP to Cleanup Site

It is often the policy of the EPA to identify a few “deep-pocket” PRPs at a site and issue a unilateral order under section 106 compelling them to perform a response action. Most of the time, the recipients of the order have to go through the expense of identifying new PRPs associated with the site who were not subject to the EPA order and then file contribution actions against them to get the newly identified parties to share with the cleanup costs. However, sometimes EPA has agreed to issue a supplemental 106 order to newly identified parties requiring them to cooperate and participate with the PRPs who have agreed to perform the cleanup.

This policy of issuing “participation and cooperation” can be a powerful inducement to get parties to share the costs of a cleanup. However, a federal district court in Pennsylvania recently ruled in U.S. v. Occidental Chemical Corp. that EPA cannot issue these supplemental 106 orders when the agency has obtained a settlement with a PRP who has agreed to fully remediate the site. The court said EPA may pursue other PRPs only when it has obtained “less than complete relief” from the settling PRPs. The court said EPA should preserve its scarce resources for sites where no cleanup is being performed and let the PRPs performing the cleanup pursue private contribution claims against the other parties. EPA will be appealing the decision to the Third Circuit.    

 ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS 

Allocating Liability Between Landlord and Tenant

	Courts are authorized under section 113(f) of CERCLA to employ equitable factors for allocating liability among PRPs in contribution actions. When allocating liability among landlords and tenants, courts have looked to the contractual provisions in leases, the acquiescence by the owner of the tenant’s operations or manner of operations, the degree of involvement by the parties and the benefits received by the parties. Because these cases are fact-intensive, it is difficult to glean a pattern from the landlord-tenant contribution cases. However, it would appear that landlord’s are rarely able to completely be absolved of any responsibility for contamination even when the tenant caused the release. Passive landlord’s have generally been held accountable for 10%-25% of response costs. 

Example: In Carter-Jones Lumber Co. v. Dixie Distributing Co., the plaintiff leased property to Top Dollar Liquidators. The tenant subsequently purchased used transformers containing PCB fluids which it stored in a trailer on the property. The transformers leaked and the landlord incurred $3 million in cleanup costs. A federal district court found the seller of the transformers liable on the grounds that it arranged for the disposal of the transformers but also found the landlord/plaintiff liable for 20% of the cleanup costs because it failed to exercise due care in selecting its tenant and ensuring that it complied with environmental laws. This case highlights the importance of having leases clearly allocate environmental liabilities of the parties and also paying close attention to the kinds of operations that a tenant may be conducting on its leasehold.

Landlord Criminally Liable for Waste Left by Tenant

When a business vacates a property and leaves behind hazardous materials such as drummed hazardous wastes or plating bath solutions, environmental officials will often look to the landlord, lender or other deep pocket associated with the site. If these parties fail to take action to eliminate the potential danger, these parties may not find themselves saddled with cleanup costs but may also face criminal penalties for improperly managing hazardous wastes. 

Example: In Ohio v. Schachner, a landlord was given a two year suspended sentence and fined $25,000 for failing to dispose of hazardous wastes left by its tenant. In that case, the tenant was a painter who left 19 barrels of waste. Three years later, state environmental officials requested the landlord to test and properly dispose of the waste materials. The landlord refused and told the officials to pursue the tenant. The state environmental agency then tested the barrels and determined that they contained hazardous wastes. After the landlord refused to comply with an order to remove the materials, the state disposed of the barrels and brought a criminal enforcement action against the landlord. 

“As Is” clause transfers Liability for Leaking UST

Under the doctrine of caveat emptor, the risk of loss passed with the transfer of title and a seller would not be liable to the buyer for any harm or defects in property that was sold in an “as is” condition. Over the years, courts have fashioned exceptions to this venerable principle such as imposing an obligation on seller’s to disclose latent defects that it knew or should have known could present an unreasonable risk of harm to persons on the premise under circumstances when the buyer was not likely to discover the defect. 

Many courts have held that “as is” contract cannot be used to transfer CERCLA liability. In these decisions, the courts have ruled that the “as is” clause will simply bar a claim for breach of warranty and not preclude a CERCLA contribution action although the existence of the “as is” clause could be a factor in allocating the amount of liability.
     
There is often a different result when dealing with petroleum contamination associated with leaking underground storage tanks (“USTs”). Because petroleum is not covered by CERCLA, plaintiffs seeking reimbursement of cleanup costs either have to proceed under state UST laws or state common law. Many of these cases involve plaintiff-franchisees who purchased property from major oil companies under “as is” contracts that also released the seller from future liability. Most of these decisions deny recovery. (Readers should review the prior issue that discussed where an oil company was held liable to a former franchisee on grounds that it “controlled” the operations of the service station). 

Example: Earlier this year, an Indiana appeals court ruled that “as is” contract relieved a seller of liability in Western Ohio Pizza, Inc. v. Clark Oil & Refining Corp. In that case, the plaintiff purchased the property to build a restaurant. The contract stated that the buyer was taking the property in an “as is” condition and disclosed the presence of the USTs. The offer of purchase provided that the seller was not expressly or impliedly warranting the condition or fitness of the property. One year later, contamination was discovered and the plaintiff sought recovery under the state UST law. The trial court ruled that the plaintiff had assumed responsibility and that it was barred from bringing a cost recovery action under the state UST law because the law only allowed such actions for cleanups performed pursuant to an order from the state environmental authority. On appeal, the plaintiff tried to argue that the CERCLA line of “as is” cases should control but the appeals court said that state contract law would govern the release and transfer if liability.

The information contained in this newsletter is not offered for the purposes of either 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.