SCHNAPF ENVIRONMENTAL  REPORT

A Newsletter Covering Recent Environmental Developments and Caselaw
January 2001						Vol. 3, Issue 1	

Editor’s Note

No, you have not missed an issue. We have decided to date the newsletter when it is publish instead of the period of time covered by the issue. The list of topics covered in this issue is as follows:
Page 2	Review of Key Definitions for Revised ASTM Due Diligence Standard	
Page3   EPA Threatens to Withdraw Kty. Title V Permit Authorization Over Audit Law
Page4   EPA Intensifies Inspections in Colorado
Page4   EPA Brings More Enforcement Actions Against Universities
Page5   Abandoned Mine Owned by Pension Fund May Be Added To Superfund List
Page5   Indiana Court Rules Owned Property Exclusion Does Not Bar CGL Coverage
Page5   Fitch Revises Criteria for Environmental Insurance in CMBS Transactions
Page9   Insurance Provides Credit Enhancement for CMBS Transaction
Page9   Courts Divided on Coverage for Mold
Page10 Lack of Pollution Credits Exacerbate California Power Shortage
Page11 More Utilities Settle NSR Litigation
Page11 EPA Will Establish Mercury Emission Limitations for Power Plants
Page12 Clean Air Markets Group Files Challenge to New York Anti-Trading Law
Page13 Federal Government Announces Largest CAA Settlement with Steel Manufacturer
Page13 EPA Settles Litigation Over Title V Interim Approval Deadlines
Page14 EPA Imposes $49,335 Fine for Violations of Ozone Protection Regulations
Page14 EPA Approves New Jersey Emissions Trading for Nox and VOCs
Page15 Supreme Court Invalidates Migratory Bird Rule
Page16 EPA Brings More Enforcement Actions for Filling in Wetlands
Page17 EPA Fine Cement Companies for Stormwater Violations
Page17 EPA Fines California Developers $60,000 For Stormwater Violations
Page18 Two Waste Haulers Sentenced for Improper Disposal of Grease
Page18 Funding Problems May Delay Listing of Additional Endangered Species
Page19 Owner of Former Oil Refinery to Pay $42,000 Penalty for Federal Response Plan Violations
Page19 EPA Orders Additional Cities to Control CSOs
Page20 EPA Issues Portions of Guidance on Risk-Based Corrective Action
Page20 EPA Region 6 Issues Risk-Based Corrective Action Strategy
Page21 EPA Defers PCB Treatment Standard Under LDR Phase IV Rule
Page21 District Court Rules EPA Action Does Not Constitute Overfiling
Page22 California District Court Allows UST Citizen Suit To Proceed Despite Diligent Prosecution by Site
Page23 States Report that “Pay-For-Performance” Contracts Accelerate UST Cleanups
Page23 EPA To Announce Additional USTfield Grants
Page23 EPA Fines Manhattan Dry Cleaner $34,250
Page24 IBM Launches Computer Recycling Program
Page25 Landlords Continue To Face Penalties For LBP Violations
Page25 EPA Issues New Standards for Lead In Paint, Dust and Soils
Page25 Second Circuit Reverses Decision Interpreting Effective Date of LBP Disclosure Rule
Page26 EPA Reviewing Disposal Regulations for PCB Articles
Page26 EPA Proposes to Changes To PCB Disposal Regulations For Territories
Page27 EPA Requests Natural Gas Companies To Review Replacement Practices for Mercury Equipment
Page27 Study Finds States Rarely Exercise VCP Reopeners
Page28 Congress Expands Federal Brownfield Tax Incentives
Page28 EPA Announces Second Round of RCRA Brownfield Pilots
Page29 RCRA Brownfield Site Cleanup Completed
Page29 First BCRLF Cleanups Completed
Page29 New Brownfield Assessment Demonstration Pilots
Page30 Shopping Center To Be Built On Former Superfund Site
Page30 Study Finds Majority of Brownfield Site Cleanups Financed by Private Funds
Page30 Pennsylvania Announces Brownfield Site Cleanups
Page30 Cleanup Completed at Little League Field
Page31 EPA Enters Into VCP MOA with Arkansas
Page31 EPA Enters Into Prospective Purchaser Agreements
Page32 Ombudsman to Investigate EPA Cleanup Plan for PA Site
Page33 EPA Proposes Settlement at Former Transformer Recycling Facility
Page33 Secured Creditor Allowed to Partially Foreclose on Property to Avoid Contaminated Parcel
Page33 Seller Who Indemnified Buyer May not Bring Contribution Action Against Other PRPs
Page34 Specific Allegations Linking Defendant’s Waste to Site Not Required in Complaint
DUE DILIGENCE/ AUDITING/ DISCLOSURE/ ENFORCEMENT

Pace of ESAs Eases Slightly as Economy Slows
According to the October issue of ESA Report, the number of Phase I Environmental Site Assessments (“ESAs”) performed in the third quarter of 2000 declined to 55,800 from 57,700 for the same period in 1999. The average price of ASTM-quality Phase ESAs ranged $1,700 to $2,600. 
Meanwhile, the number of ASTM Transaction Screens remained fairly consistent with 11,200 performed during the second quarter of 2000 and 10,600 for the third quarter of 2000.  The average price of ASTM Transaction Screens ranged from $500 to $1000. 
The ESA Report estimated that only one-fourth of the 800,000 commercial real estate transactions had Phase I ESAs while Transaction Screens were performed on approximately six percent of these transactions. In addition, it appeared that no environmental due diligence was performed on the 350,000 to 550,000 so-called low cap transactions valued below $1 million. 
Commentary: In an increasingly competitive lending market, financial institutions are often reluctant to require environmental due diligence on low-cap transactions even though the fees are fairly small when compared to other closing costs. Ironically, it is the small deals where environmental problems can have the greatest impact. For example, if a property is appraised at $500,000 and a lender agrees to extend financing on a 70% loan-to-value basis, the buyer will have to invest $150,000 of its own money. If the site contains a number of underground storage tanks (“USTs”) from prior operations the remediation costs could easily exceed the value of the borrower’s equity. In such a case, the borrower may not have the resources to pay for the cleanup and would probably default on the loan unless the site is eligible for a state UST fund or brownfield loan/grant program that could help pay for the cleanup costs.  
Likewise, the financial institution might be reluctant to foreclose on the property since the cleanup costs may not only be unknown but could also exceed the value of the property. Moreover, if the site poses a risk to groundwater or nearby residents, the state environmental agency will probably bring an enforcement action against the borrower/owner and possibly the lender if it forecloses on the property to compel a cleanup. If the state elects to perform the cleanup itself, it would probably commence a cost recovery action and impose a lien on the site. 
In contrast, if the same problem is discovered in a $10 million transaction, the result will be very different. Even though the borrower would have $3 million in equity tied up with the property, the cleanup costs would only represent 5% of the property value which might be less than the broker’s fee. Thus, it is unlikely that the borrower will walk away from the site.
These examples illustrate how environmental due diligence can be more crucial in small transactions. Larger transactions can absorb significant environmental problems and still remain viable while moderate environmental problems can make small transactions economic unfeasible. Yet, it is parties to these smaller transactions are the ones who often decline to perform environmental due diligence.       
EPA Threatens to Withdraw Kty. Title V Permit Authorization Over Audit Law
Nearly two dozen states have adopted audit policies that allow companies to achieve significant penalty reductions for violations that are voluntarily disclosed. Many states also provide that the disclosures may not be admissible in legal or administrative proceedings. EPA has expressed concern that state laws conferring privilege and immunity to voluntarily disclosed violations are too broad and impair the state’s ability to enforce delegated federal environmental programs. Recently, EPA took the first steps towards revoking Kentucky’s authority to administer the Title V program of the Clean Air Act (“CAA”). 
The Kentucky audit privilege and immunity law provides that an environmental audit report shall be privileged and shall not be admissible as evidence in any legal action in any civil, criminal, or administrative proceeding. The law also requires that a private hearing prior be held before an audit report may be used and that probable cause must be established before the contents of the report may be disclosed. In addition, the law provides immunity from all civil penalties if certain conditions are met.
EPA has informed Kentucky that it is concerned that the audit law may significantly impede criminal investigations and impair the state’s criminal enforcement authority. The agency said that the state must revised the law so that the privilege does not extend to criminal proceedings and must not interfere with the state’s ability to obtain information in criminal proceedings. In addition, EPA advised the state that it must retain the ability to collect penalties based on economic gain from noncompliance for the entire period of noncompliance not just the period following discovery and disclosure. 
EPA Intensifies Inspections in Colorado
When EPA authorizes a state to administer a federal environmental program, EPA delegates primary enforcement authority to the state. However, EPA reserves the right to bring its own enforcement actions if the agency believes that state is not adequating enforcing or administering the delegated program. EPA recently took such action in Colorado after the agency became concerned that the state had become lax in enforcing its RCRA program. 
In 1999, Colorado collected only $1.3M in fines for environmental violations, the lowest level in five years. In response,  EPA conducted spot-checks of Colorado companies operating at Denver International Airport who had not been inspected by Colorado for at least five years. 
As a result of the inspections, EPA fined United Airlines $68,695. John Elway AutoNation USA agreed to pay $1,000 and provided employee training after inspectors discovered an improperly stored 55-gallon drum of solvents. Ranch Manufacturing was fined $9,000 and was required to provide hazardous waste training to its employees after EPA found 10 drums of paint-related wastes stored improperly. FMH Material Handling was fined $1,000 for improperly storing a 5-gallon container of paint-related waste.
Lab Officials Jailed For Falsifying Environmental Data
The president and a lab director of a Kutztown, Pennsylvania lab were convicted of falsifying environmental testing results. The lab director was sentenced to 18 months in prison and three years of probation while the company's president was sentenced to six months house arrest and five years of probation. The corporation which has now been dissolved was sentenced to a $500,000 fine. The three defendants were also found to be jointly and individually liable for $481,073 restitution to be paid to defrauded clients. 
Federal and state investigators found that Hydro-Analysis performed fraudulent analysis of drinking water, wastewater, and soil between 1994 and 1998. The EPA is working with the company's former customers to address concerns about the effect of the suspect test data on previously approved projects.
EPA Brings More Enforcement Actions Against Universities
In past issues, we have reported that EPA has been conducting inspections of universities throughout the country and providing extensive compliance assistance activities to enhance environmental compliance at academic facilities. Since our last report, EPA filed a administrative actions against three more educational institutions. 
EPA proposed fines of up to $500,000 against Brown University for 15 violations of federal environmental laws. According to the agency, almost all the violations occurred at  laboratories and waste storage facilities located on the 143-acre campus.  The administrative complaint charges that Brown failed to properly identify and store hazardous waste, failure to prepare a SPCC plan and had discharged 60 gallons of oil in 1996 from an off-campus building on the shoreline of Narragansett Bay in Bristol. 
The EPA also entered into $1.7 million settlement  with the University of Hawaii (“UH”)for hazardous waste violations. The settlement included a $505,000 penalty and required the university to perform a $1.2 million supplemental environmental project (“SEP”) within three years. $120,000 of the penalty will be paid to the US government and $385,000 will be paid to the state. EPA charged that UH had improperly stored and labeled chemicals including flammables, corrosives, poisons, mercury and hundreds of other unknown chemicals at it main campsus and several research stations.  The SEP will include identifying and implementing pollution prevention and waste minimization projects throughout the university system as well as performing an extensive compliance audit of its facilities.  
EPA also charged that the University of the District of Columbia (“UDC”) had improperly stored approximately 13,000 pounds of used solvents, and other hazardous wastes for an extended period of time in drums in a garage basement and on a loading dock without a permit. The agency also claimed that UDC failed to comply with hazardous waste storage and management requirements, failed to prepare a hazardous waste contingency plan, did not provide hazardous waste management training and had not appointed an emergency response coordinator. In addition,  UDC allegedly did not submit annual report of its hazardous waste activities 1995 through 1999 and submitted late and incomplete response to EPA information requests. The EPA ordered the board of trustees to immediately cease storing hazardous waste at the campus and to come into compliance with all applicable hazardous waste management requirements.
Abandoned Mine Owned by Pension Fund May Be Added To Superfund List
EPA recently proposed to place the Elizabeth Mine in South Strafford, Vermont to the National Priorities List (“NPL”). The abandoned copper mine is located on approximately 1400 acres in rural Vermont. EPA estimates that there are more than 2 million tons of mine tailings on 42 acres of the property. 
Elevated levels of iron, aluminum, manganese, copper, zinc, and nickel have been detected in the nearby streams and at least one drinking water well has been found to contain metals above safe drinking water standards. The elevated levels of metals is due to acidic discharges from the mine. When rain percolates down through the tailings, sulfuric acid is produced with then caused dissolves metals in the tailings. The acidic water then flows into streams and the groundwater. 
Commentary: This abandoned mine was discovered after a foreign newspaper pension fund had acquired the site as part of a purchase of thousands of acres of forested land. The newspaper pension fund expected to be able to sell logging rights to the forested areas and did not perform any environmental due diligence because it believed it was purchasing pristine forest land. Had the purchaser performed an investigation of the area, it would have discovered that  one of the largest state mines had operated at the site in the 19th century. Indeed, there had been efforts by the local historical society to add the site to the registry of historical sites because the site still had building foundations and other evidence of the 19th century mining community. EPA will take the historical value of the site into account when determining the remedy.

ENVIRONMENTAL INSURANCE

Indiana Court Rules Owned Property Exclusion Does Not Bar CGL Coverage
The Indiana Court of Appeals recently ruled in Allstate Insurance Co. v. Dana Corp.( No. 49A02-9909-CV-666) that the owned property exclusion in a comprehensive general liability (CGL”) policy did not bar coverage for contaminated ground water beneath the policyholder's property. 
In this case, the insured had purchased excess CGL policies from 1977 to 1982. The insured sought coverage after it became subject to enforcement actions and third party lawsuits because of contamination from leaking USTs and lagoons at 63 of its facilities in 19 states. When the insurer denied coverage, the insured filed a motion for summary judgement seeking reimbursement of the cleanups incurred by the insured. After the trial court found that the owned property exclusion barred coverage, the insured filed an appeal arguing that the clause did not preclude coverage for six sites where the contamination had impacted the groundwater. 
The appeals court said that the exclusion would only operate if the insured has exercised "custody or control" over the ground water.  Since the ownership of ground water under state law turned on possession and use, and the insured had not used or removed groundwater from the sites, it did not own the groundwater. The court said that merely allowing water to percolate down to the groundwater did not qualify as exercising control or possession of the groundwater. Therefore, the policyholder was entitled to coverage at those sites where it incurred costs to remediate the groundwater. 
Fitch Revises Criteria for Environmental Insurance in CMBS Transactions
Traditionally, rating agencies have required Phase I ESAs for commercial mortgage-backed securities (“CMBS”) to identify potential environmental risks associated with the portfolio of properties in transactions. The ESAs were required prior to funding the loans so that the lender/issuer could determine the actions necessary to cure or mitigate the environmental risks, establish appropriate reserves, obtain indemnities or perhaps even exclude some environmentally-impaired properties from the portfolio.  
However, CMBS originators/issuers are increasingly using secured creditor environmental insurance policies as a lower cost substitute for or supplement to traditional environmental due diligence. As a result, the rating agencies are developing criteria for these policies to assure that reliance on these policies will not impact the credit rating of a particular transaction. 
In our June issue, we reviewed the criteria of Fitch IBCA (“Fitch”). Recently, Fitch restated its critieria for environmental insurance. Following is a summary of the current Fitch statement of environmental insurance. 
Fitch indicated it has historically evaluated environmental risks using three broad criteria: 
•	The scope, timeliness and lender control over the Phase I and II Investigations
•	The quality of the consultants who performed the due diligence
•	The relative risks of the identified environmental problems and the possibility that problems may have been overlooked, inadequately characterized or that remediation costs may be undefended. 

Wnen assigning environmental risks and setting subordination levels,  Fitch said it typically examined the distribution of property types in the pools, the current tenant mix, past tenants and historical use of the land, and the likelihood that property may be contaminated from off-site sources. Fitch said the kinds of properties that are of principal concern are those that at the time of securitization have serious soil and/or groundwater contamination. Included in this category of problematic properties were those that may have been accepted into state cleanup programs or that may have received NFA letters but are not currently targeted for remediation. Fitch said that the sites of most concern are those that have the potential of extensive and expensive remediation costs, present a potential for third-party claims or  sites that may remain unremediated because current government policy does not require aggressive action. The agency reasoned in stressed market conditions, defaulted loans with evidence of real or possible contamination will suffer greater losses in value than defaulted loans without contamination.    
Fitch indicated that there were benefits and disadvantages for using environmental insurance policies in lieu of environmental due diligence. The positive benefits identified by Fitch included that the risks of known and unknown environmental conditions as well as future contamination are transferred to a highly-rated insurance company. In addition, using environmental insurance eliminates the risk that the due diligence which often consists of limited investigations known as  “commodity-style” reports may miss one or more material environmental conditions or underestimate the cost of remedial actions that are necessary to eliminate the problem. Insurance can also provide protection against changes in government standards.
On the other hand, Fitch indicated that positive aspects of environmental insurance are often offset somewhat when lenders use the policies in lieu of environmental due diligence or to limit presecuritization environmental investigations. The company explained that credit enhancement adjustments are determined by analyzing the environmental aspects of the particular loan transaction against a standard loan pool. The company noted that the only environmental information generated about the properties when insurance is used instead of environmental due diligence is limited to data base searches and a questionnaire completed by the borrower. If Phase I site assessments are eliminated, Fitch said the ability of the rating agencies to assess environmental conditions and compare a loan pool with others will be greatly reduced. The absence of environmental due diligence can also increased the likelihood that properties with environmental problems might be included in a pool and decreased the ability to address environmental problems prior to securitization. The company said is was aware that some lenders had a greater tolerance than others for making loans on contaminated properties. Lenders that permit environmental insurance to replace due diligence, the company warned, may attract borrowers who seek to finance environmentally-impaired properties. 
Fitch said that it places greater value on environmental policies that protect the lender than those which insure the borrower since they provide little protection to the trust in the event of a default and foreclosure. Fitch acknowledged that when setting subordination levels, it will take into account that a borrower’s policy can mitigate the potential cleanup liability that a loan seller may face. However, if a loan seller offers a borrower’s policy as a substitute for environmental investigation particularly where a consultant has recommended a Phase II investigation, the risk rating will be negatively impacted. 
The company said it places greatest value on those lender policies that pay off the loan balance if the event of a default. The company said that these so-called Full Loan Balance policies greatly reduce investors’ risks particularly when the loan seller purchases the policy on property with known or highly suspected problems. If the policy works as intended, Fitch explained, it virtually eliminates the possibility of losses to the trust and the liability that the trust could incur if it took title to the property.  
Fitch indicated that subordination levels have not been negatively affected when insurance has been used as a substitute for investigation where a loan seller has covered the loan pool or a subset of the pool with full loan balance policy that provided adequate coverage and the pool’s characteristics showed a reasonable distribution of property types. In fact, in cases where the loan seller completed standard environmental due diligence and purchased full loan balance policies, subordination levels were reduced. Where the loan seller performed standard due diligence, purchased a policy covering the pool of loans and also purchased individual policies for the properties, Fitch indicated that it had eliminated the standard environmental risk adjustments and awarded an environmental “credit” to the loan seller. 

Following are highlights of the key criteria contained in the Fitch policy.  
•	Fitch said the secured creditor policy should provide for full payment of the loan balance and related outstanding balances without requiring the trust to take possession of the property or provide a cleanup estimate. Upon payment of the loan obligations, the trustee will assign the mortgage to the insurer or otherwise release the lien.
•	To ensure that sufficient information is generated about the properties, Fitch recommended that the insurer should, at a minimum, perform a regulatory database review conduct searches of all local, state and federal databases and not simply rely on a questionnaire completed by the borrower since borrowers often lack knowledge about prior site activities and problems. The questionnaire should be modeled on the form established for the ASTM E-1528 Transaction Screen. It should provide information on current and historical uses of the property. In addition, the insurer should include an addendum to the policy identifying the names and addresses of properties that have been identified as having environmental problems either from the borrower questionnaire or the database search, the nature of the problem, and the costs, timeframe and steps that need to be taken to address the problems.
•	The policy should clearly cover the trust in the event of fraud or misrepresentation of the borrower.   
•	A copy of the policy should be provided to Fitch along with a detailed “plain-English” summary of the relevant terms. The issuer should also be prepared to make a representation and warranty that all policies included in the transaction have been written on the same form that Fitch reviewed without any modifications.  
•	Because these policies remain untested, Fitch remains concerned about the language of the policies. Thus, Fitch will require tight claims payment language. The policy should clearly state that the condition for payment shall only require notice of the discovery and confirmation by an engineer or consultant retained by the trust that contamination was detected above government cleanup levels or that remediation is mandated. The policy should also clearly describe the specific documentation that will be required by the insurer as evidence of the contamination, including a description of the maximum amount of evidence that the insurer would consider to satisfy the claim. 
•	To be acceptable to Fitch, the policies have to be issued by an insurer with a Fitch claims-paying rating of ‘AA’ or better. In addition, the carrier has to have experience writing other types of environmental insurance policies as well as have a positive claims-paying history. If an insurer’s financial strength rating declines significantly, Fitch warned that the related certificate’s rating may be downgraded.  
•	The pooling and servicing agreement (“PSA”) should outline the specific obligations of the servicers for loans covered by environmental insurance policies. Fitch indicated that the PSA should require performance of a Phase I ESA for any defaulted loans transferred for special servicing If the special servicer discovers that a property has an environmental problem, the PSA must require the special servicer to provide specific and timely notice to the insurer to ensure that the claim be paid rather than in engage in an analysis of the cleanup cost and foreclosure. The PSA should also specifically instruct the special servicer not to extend a loan more than two years prior to the insurance policy’s expiration date.
•	In the mortgage loan purchase agreement, the loan seller/orginator should represent and warrant which loans are covered by the policy, that the policy premium has been paid in full, that the policy is in full force and effect, that all known environmental conditions have been disclosed to the insurer and that the policy term exceeds each loan maturity date by at least five years.  
In addition to the foregoing general requirements, Fitch will require the following terms in each secured creditor policy:

•	Named Insured-The trustee should be the named insured with the master and special servicer named as additional insureds. The policy should also cover the successor and assigns of the initial insured entities and allow replacement without insurer approval.
•	Policy Period- The policy should cover the period from securitization to at least five years past the maturity date of each loan in the pool. This period is known as the tail period and is intended to provide time to work-out problem loans. Extension risk which is the risk that a policy may expire because a loan has been extended beyond the policy term should be addressed by specifically instructing the special servicer not to extend a loan beyond two years. 
Fitch also indicated that extensions could be handled in one of the following two ways: The policy could cover all permitted extensions or the PSA could require the special servicer to perform a Phase I site assessment prior to extending the loan beyond two years prior to the expiration of the policy. The extension fee would cover the cost of obtaining the Phase I ESA. No extension would be permitted if an environmental problem is identified during the ESA. 
•	Per Occurrence Limit of Liability- The loss claim limit for any property should be at least 125% of the outstanding principal balance. The per claim limit should include the following: remaining principal balance of the defaulted loan, accrued and unpaid interest through the time of payment by the insurer, interest on both principal and interest and property protection advances, any unreimbursed property protection expenses and any trust expenses associated with the filing of the claim. 
•	Aggregate Limit of Liability- Fitch said for insurance to substitute for due diligence without any negative credit effect, the aggregate limits must be sufficient to cover a reasonable number of claims of average severity and be reflective of the risks associated with the specific assets. The aggregate limit will have to be sufficient to cover a Fitch ‘AAA’ stress default scenario. The relative loss severity of the pool will depend on the types of properties and the results of the insurer’s due diligence. Because Fitch conservatively estimated that one-third to one-half of all of its defaulted loans had environmental problems, Fitch said it would apply this factor range to the total stress default rate. Thus, if Fitch concluded that 40% of those defaulted loans would have an environmental problem, the environmental insurance policy would have to have an aggregate limit of 20% of the original collateral balance (20%=50% x 40%) to be credit neutral. It should be noted that minimum coverage requirements were exceeded in all CMBS deals that Fitch rated during the past 18 months.
•	Deductible- Fitch indicated the trust should not be required to pay for any costs of the insurance since the costs of Phase I ESAs are paid by the issuers prior to loan securitization. Therefore, the policy should either not contain a deductible or the aggregate amount of the deductible should be reserved at the time of securitization.
•	Premium and Policy Termination- The premium should be paid in full at the time of the closing and the insurer should not be able to terminate the insurance.
•	Coverage Exclusions- Because exclusions erode the value of the policies, Fitch said the policies should ideally not contain any exclusions. However, it recognized that many policies contain exclusions for lead-based paint, asbestos, or radon. For any specific environmental risk that is excluded, Fitch will expect that traditional environmental due diligence will be used to close the coverage gaps or an indemnity from the issuer or loan seller with a credit rating of at least AA. 
•	Notice- The notice period should be at least 45 days and should not begin to run until a specified officer with the special servicer’s organization has actual knowledge of the environmental condition and the default. 
Commentary: Fitch did express frustration with the manner that the policies were negotiated. The company said that the policies had to be negotiated on a case-by-case basis and were resolved through a series of endorsements. It said that the issuers and rating agencies were frustrated with the time it took to negotiate the policies and given the efficiencies needed in the market, encouraged the carriers to develop a standard policy incorporating these criteria. Any changes to the standards could then be handled by endorsements that could be easily identified by both investors and the rating agencies. 
Insurance Provides Credit Enhancement for CMBS Transaction
	An environmental policy provided by AIG allowed a rating agency to lower subordination levels on a $783 million conduit transaction. AIG provided a policy that will not only pay off the balance of any defaulted loans with environmental problems but will also cover assets for which no environmental issues were uncovered prior to the transaction. As a result, Fitch reduced the subordination levels by 75 basis points (‘bp”) on AAA class bonds, 50 bp for the AA bonds and 25 bp on the BBB and BBB- tranches. S & P provided the issuers credit for 12.5 bp on all classes of bonds. The improved subordination levels will help pay for the insurance premium and allow the issuers to gain an arbitrage point.
Courts Divided on Coverage for Mold
The past few years have witnessed a dramatic increase in lawsuits for illnesses caused by exposure to contaminants including toxic molds. Several of the lawsuits have been settled for more than $10 million and have resulted in the shutdown of portable classrooms and school buildings. The presence of harmful molds has also been discovered in individual homes, high-rise apartments and office buildings. 
There are so many different types of mold  and individual reactions will vary. Some molds may be infectious while others may be toxic or allergic. Some molds are not harmful at all. Thus, it can be difficult to determine what level of exposure is harmful. There are no federal or state standards for what levels of exposure to molds presents signigficant health risks.
 Molds usually appear because of excessive moisture in a building. The moisture is often a result of construction defects  such as window leakage, failed sealant joints, inadequate or missing flashing, cracks in the siding or poorly designed HIV systems. For example, the Woodland Joint Unified School District in California expects to spend $100,000 to clean a classroom after mold was found behind the wallpaper. The cause of the mold was a warped window casement which allowed water to seep into the classroom The district will spend another $100,000 in maintenance and prevention on those classrooms this summer. Similiarly, a mold was discovered in the walls of 9 year-old dormitory at a California college that housed more than 630 students. The mold was a result of water intrusion from an unknown source. The university closed the building for repairs at the end of the spring semester and building repairs had not been completed by the start of the fall semester so the dormitory remained closed. 
Not surprisingly, insurers are seeing an increase in claims under GL policies for damages attributable to toxic mold. Courts have divided on a number of key issues.
One key definitional issue is whether toxic mold can be considered a contaminant or a pollutant? Many courts seem to be refusing to apply the contaminant exclusion in the context of indoor air quality claims.  For example, in Donaldson v. Urban Land Interests (564 N.W. 2nd 728), a Wisconsin state court held that injurious concentration of harmful substance in poorly ventilated areas was not a “pollutant”.  However, in Reliance Ins. Co. v. Moesssner (121 F 3d 895), the Court of Appeals for the Third Circuit held that an absolute pollution exclusion excluded coverage for tenant’s claim for bodily injury after inhaling lead paint fumes. 
Another dispute is whether indoor air falls may be considered  “atmosphere” and thus fall within the pollution exclusion. Many courts have held that releases of contaminants into indoor  air  are not releases into the atmosphere and that the pollution exclusion does not apply.
Another key issue is whether the release of fungal contaminants can be deemed to be  “sudden and accidental”?  Courts seem to have divided along the same lines with mold as they have with other contaminants. Some courts view the sudden and accidental exception as nothing more than a reiteration of the fortuity requirement contained in the occurrence element of an insuring agreement.  However, other courts  have limited the exception’s application to releases which are abrupt in a temporal sense. 
Commentary: Many environmental site assessments now require consultants to report on the presence of asbestos and lead-based paint. When a transaction involves office buildings, hotels, or residential buildings, it is also advisable to investigate for the presence of molds. These organisms usually appear because of excessive moisture in a building. Tthe presence of mold may also indicate that there may be serious problems with a building HVAC system

AIR POLLUTION DEVELOPMENTS

Lack of Pollution Credits Exacerbate California Power Shortage
In 1993, the California South Coast Air Quality Management District (“SCAQMD”) established its Regional Clean Air Incentives Market (“RECLAIM”) emission trading program. The RECLAIM program established caps for nitrogen oxide (“NOx”) and sulfur dioxide (“SO2”) that decline annually through 2003. Facilities may comply with their allotments by either installing pollution control equipment to reduce emissions or purchasing credits from facilities with surplus emission credits.
To meet the state’s energy crisis, many utilities have been forced to increase the output of their power plans and to operate smaller plants that are normally used only for peak periods during the summer. According to the California Independent System Operator, some utilities have now depleted their emission credits and may have to shutdown some of their power plants to avoid violating their emission limits. As the supply of RECLAIM credits has dried up, the value of the credits has soared to $80,000 per ton.
For example, independent power producer AES Corp. (“AES”) reduced output by 50% from three of its southern California power plants after the SCAQMD filed a notice of violation charging that one of the company’s plant had exceeded its Nox emission allocation. The plant exceeded its third quarter NOx allocation by 685,000 pounds and may exceed its fourth quarter allocation by 500,000 pounds. AES agreed to a $17 million settlement and to install additional pollution control equipment at three other gas-fired facilities. The settlement also provided that AES may continue to operate its plants at current levels provided the company used its cleanest units first. The company will deduct any excess emissions from next year’s allocation.
More Utilities Settle NSR Litigation
Cinergy Corp. became the latest defendant in the EPA New Source Review (“NSR”) litigation to settle. The company agreed to make $1.4 billion in improvements at ten coal burning plants operated by operating subsidiaries in Indiana and Ohio. As part of the settlement, Cinergy will pay an $8.5 million fine and perform $21.5 million in supplemental environmental projects (“SEPs”). 
EPA had claimed that that Cinergy’s operating companies had undertaken at least 38 substantial modifications over the past 15 years that resulted in increased air pollution. As part of the settlement, Cinergy will install four new SO2 scrubbers starting in 2008, upgrade existing pollution control systems, and phase in the operation of a NOx reduction technology year-round starting in 2004. The company may also shut down a number of coal-burning boilers and replace them with nine small natural gas plants in 2004. 
On the same day that the Cinergy settlement was announced, EPA and the the Department of Justice (“DOJ”) filed a lawsuit against Duke Energy, charging that utility had made modifications to eight of its coal-fired power plants for over ten years without complying with the NSR program. 
Earlier, Virginia Electric Power Company (“VEPCO”) reached a settlement with EPA and the state of New York. Under the agreement, the company agreed to reduce emissions from eight coal-burning plants in Virginia and West Virginia by 70 percent or 252,000 tons per year within 12 years. The cost of the capital improvements is expected to be approximately $1.2 billion. In addition, VEPCO agreed to pay a $5.3 million civil fine and perform $13.9 million in SEPs. 
Meanwhile, the Savannah Electric and Georgia Power received a notice of violation at its Plant Kraft in Port Wentworth, GA alleging that the company conducted modifications to three coal-fired generating units without undergoing NSR. The company claims the modifications were completed to improve employee safety, and not to increase the aging plant's life or increase its ability to produce power without additional pollution controls.
EPA Will Establish Mercury Emission Limitations for Power Plants
Under section 112(n) of the CAA, EPA was required to hazards posed by emissions of hazardous air pollutants (“HAPs”) from electric utility steam generating units. In a 1998 report, EPA concluded that coal- and oil-fired electric utility steam plants are the largest domestic source of mercury. Last month, EPA announced that it would develop emissions limitations from these plants. EPA estimates that the new rules will reduce total human-caused mercury emissions by nearly 50 percent from 1990 levels nationwide.  EPA estimates that the regulations will cost utilities $100,000 for each pound of mercury emissions eliminated and may cost the industry as much as $5 billion per year. Much of these costs will likely be borne by power plants that burn low-sulfur coal and use particulate collection devices instead of wet scrubbers as part of their air pollution control systems. Previously, EPA has imposed mercury emissions standards for municipal waste combustors, medical waste incinerators and hazardous waste combustors.
EPA’s action is simply a finding that mercury emissions limitations from these sources are appropriate and necessary and is not subject to judicial review under section 112(e)(4) of the CAA. The agency hopes to publish draft  emissions standards by December 2003 and to issue final rules by December 2004. 
Commentary: The agency will be promulgating the emissions standards under section 112(d) of the CAA which provides that the standard for existing sources cannot be less stringent (the “Floor”) than the average emissions limitation achieved by the best performing 12 percent of existing sources in the category or subcategory. When establishing emissions standards under section 112(d), EPA first establishes subcategories of sources. Factors that EPA has used in developing subcategories includes the size of the facility, type of fuel used and the plant type. Once the source category is divided into subcategories, EPA will then determines the “floor” for that subcategory and then develops the emission standard. While this approach has been used in the past to provides facilities with flexiblity, EPA can also set an emission standard that is more stringent than the floor if tighter control is technically feasible and justified. Factors that EPA considers in determining whether to set a more stringent standard include the cost of the tighter standard, the energy requirements of the standard and other non-air quality health and environmental factors. The agency also indicated that it will consider allowing sources to use emissions trading and intra-plant offsets to reduce the costs of the new standards and provide better efficiency. However, in considering such or other market-based incentives, EPA said that local impacts of mercury emissions will have to be evaluated to make sure that communities near the sources are adequately protected.     
Clean Air Markets Group Files Challenge to New York Anti-Trading Law
In our June issue, we reported on the New York State law that restricts New York-based utilities from selling SO2 emission allowances to certain other states. Recently, the Clean Air Markets Group filed a federal lawsuit to block the law arguing that it violates Title IV of the Clean Air Act and unconstitutionally burdens interstate commerce. 
The Title IV program established a nationwide cap on SO2 emissions.  Companies may emit one ton of SO2 for each allowances.  Companies that achieve emissions reductions that exceed their allowances can sell some of those allowances to other companies for whom such reductions would be cost-prohibitive.
 The New York law prohibits NY utilities from selling allowances to companies in New Jersey, Pennsylvania, Maryland, Delaware, Virginia, North Carolina, Tennessee, West Virginia, Ohio, Michigan, Illinois, Kentucky, Indiana, and Wisconsin. If a company sells allowances to facilities in those states, the company must pay the State of New York a penalty equal to the amount of the sale. 
Commentary: A recent GAO report indicated that there has been a 17% reduction in SO2 emissions since 1995 and a 25% reduction in acid rain deposition in the eastern states. The Phase I program applied to the 263 units located at 110 utility plants located in 21 eastern and midwestern states. An additional 182 units joined Phase I of the program as substitution or compensating units, bringing the total of Phase I affected units to 445. The Phase I program capped SO2 emissions at 5.7 million tons per year but the average emissions for the affected plants was only 4.6 million tons per year of SO2.  During Phase I, the cost of SO2 allowances averaged $150 per ton which is significantly below the $250-$700 range that had been predicted when the program went into effect. A report by Resources for the Future estimated that by 2005, the cost savings from using emissions trading in lieu of traditional pollution controls might amount to 37 percent.  
Of the 30.2 million allowances that had been allocated to utilities nationwide, nearly 8.7 million or 29 percent were not used. This data suggests that utilities have been banking those allowances to be used or sold to other plants that become subject to Phase II of the Acid Rain program which began earlier this year.  The banking of allowances may be a principal reason for the “over-compliance” achieved during Phase I. As more plants need to use the surplus allowances during Phase II, the price of the allowances may increase while the environmental benefits decrease. The number of regulated combustion units subject to the Phase II will increase to over 2,000. In addition, by 2010 the allowable SO2 emissions under Phase II will be capped at 8.5 million tons which will represent a 50 percent reduction from 1980 levels.
Many New York power plants have accumulated excess or surplus SO2 allowances because of emission reductions that were mandated by an earlier state law. To date, New York power plants have sold 700,000 SO2 allowances to out-of-state sources since the Acid Rain Cap and Trade program went into effect in 1995. The authors of the new legislation hope that the law will create incentives for New York utilities who have excess allowance credits to make "green" trades on the market that will not contribute to acid rain deposition in New York. The mechanism for accomplishing this goal would be imposing a restrictive covenant on the allowance much in the same way that use restrictions may be placed on real estate.
Federal Government Announces Largest CAA Settlement with Steel Manufacturer
Nucor Corporation Inc. has agreed to spend nearly $100 million to settle a environmental suit alleging it improperly emitted thousands of tons of air pollutants from steel factories in seven states. The agreement will require Nucor to undertake broad environmental improvements at eight Nucor "mini-mills"which produce steel by melting scrap metal in large electric arc furnaces, and six steel fabrication plants where final molding and painting of steel products takes place. The 14 facilities are located in Alabama, Arkansas, Indiana, Nebraska, South Carolina, Texas and Utah. 
Under the settlement, Nucor will install $85 million in state-of-the-art pollution control equipment  to limit NOx emissions from its arc furnaces and reheat furnaces. The pilot technology is expected to set a new NOx standard for the steel industry for furnaces and volatile organic compounds (“VOCs”) from paint operations. The federal government believes the settlement will reduce NOx emissions by 6,400 tons and VOC emissions by 3,000 tons over eight years. The company also will pay a $9 million civil penalty and spend another $ 4 million in SEPs. 
Commentary: In our August issue, we alerted readers that EPA had extended its NSR enforcement initiative beyond electric utilities to other industrial sectors. Unlike the coal-burning plants, these other enforcement actions do not involve improper repair or replacement but claim the facilities improperly expanded operations without undergoing NSR. Since EPA is bringing enforcement actions for changes to plants that may have occurred several decades ago, it is important that purchasers of business with CAA permits review the past changes and resulting emissions increases resulting from those changes to determine if the facilities might be vulnerable to EPA’s NSR initiative. This research should go beyond the customary regulatory records and should include purchase orders for new equipment, maintenance records, etc. Purchasers should also review current projects and pre-construction approvals. If EPA determines that a prior modification required NSR review, that finding could alter the emissions baselines for the current project. If the facility must lower its emissions threshold, the resulting difference between future and existing emissions could exceed the NSR threshold for a particular pollutant and transform the project into a “major” modification requiring NSR approval. If a facility determines that a prior change might have triggered NSR review, the facility should consider taking advantage of the EPA auditing policy established for NSR which we discussed in our November 1999 issue or the EPA Audit policy that was revised last spring
EPA Settles Litigation Over Title V Interim Approval Deadlines
	EPA and the Sierra Club have agreed to settle a lawsuit where the Sierra Club charged that EPA acted improperly when it extended interim approval of title V permitting programs for more than 80 permitting authorities..
	Under section 502(g) of the CAA, EPA had granted interim approval to a number of permitting authorities to administer the Title V permit program. Subsequently, EPA extended the interim approval of programs through a series of notices in the Federal Register. When EPA again extended the interim approval period in May for the 80 permitting programs, the Sierra Club challenged that final action in Sierra Club v. EPA (No. 00-1262 (D.C. Cir.)).
	The settlement stays the Sierra Club's challenge. However, the organization may request that the stay be lifted if EPA fails to promulgate changes by June 1, 2000 to 40 CFR 70.4(d)(2) eliminating language that could be construed to grant EPA authority to further interim approval of a title V permitting program. EPA must also notify each permitting authority by December 1, 2000 that the interim approval will be withdrawn if EPA has not approved a revised title V permit program for the area by December 1, 2001.
EPA Imposes $49,335 Fine for Violations of Ozone Protection Regulations
EPA recently filed an administrative complaint against an Indiana manufacturer and distributor of refrigerant recovery equipment for distributing refrigerant recovery equipment without proper labeling. EPA is seeking $49,335 in civil penalties. 
Commentary: The CAA extensively regulates the use of ozone-depleting substances such as chlorofluorocarbons (“CFCs”) and hydrochlorofluorocarbons (“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.
As supplies of CFC-12 decreases, the price of a cylinder of this refrigerant has risen from $550 to $750. As a result, there has been an increase in smuggling of CFCs. One of the more common methods of illegal CFC trade is to mislabel the products. The federal government is increasing its anti-smuggling efforts and also trying to encourage automobile repair industry to modify vehicle air conditioning systems so that they do not use CFC-12. Automobile air conditioners are one of the major users of CFC-12.  

WATER POLLUTION/ENDANGERED SPECIES

EPA Brings More Enforcement Actions for Filling in Wetlands
Section 404 of the Clean Water Act (“CWA”) prohibits discharges of fill or dredged materials without a permit. Recent administrative actions illustrate that EPA is continuing to aggressively enforce its wetland rules.
 EPA is seeking $70,000 in penalties from a Nebraska company and a general partnership for backfilling a wetland in Perkins County, Neb. without a permit. Sand Livestock Systems Inc., a swine confinement construction and equipment manufacturing company, and Enterprise Partners, a Nebraska general partnership were building a swine confinement facility and lagoon in the summer of 1999 when they dug clay from a wetland to line the lagoon and backfilled the wetland with dredged or fill material. The companies have removed the fill material from the wetland and placed the wetland clay from the lagoon walls back into the wetland.
Meanwhile, two Wisconsin companies have agreed to pay for $47,500 fine and replace wetlands that were destroyed during the construction of a landfill . EPA alleged that between September and October 1998 the companies dump trucks and bulldozers to discharge about 27,000 cubic yards of clay, sand, and silt into about 1.4 acres of a shallow marsh on a farm near Raymond, WI without obtaining a permit. 
Walker Cranberry Co. also agreed to pay $9,500 filling 6 acres of wetlands in Wood County without a permit. The company has since received an After-the- Fact permit from the Corps.
EPA also fined two individuals in Jim Thorpe, Pa $27,500 each for unlawfully placing fill material into a waterway. EPA claimed that the defendants discharged fill material into approximately 200 feet of a tributary of Robertson Run during the construction of a home at 8th Street in Jim Thorpe. 
The Hotel Villa Parguera, Inc. located in Puerto Rico has agreed to pay a $5,500 penalty for filling a mangrove and tidal mud flats. The  area had been filled to expand the grounds between its conference center and the water's edge.  The Agency assessed a $5,500 penalty for this violation because the fill area was very small and the hotel promptly cooperated with EPA and removed the fill.
EPA Fine Cement Companies for Stormwater Violations
 Section 402(p) of the CWA establishes permitting requirements for stormwater discharges discharges associated with certain industrial activities. Uncontrolled storm water runoff often contains oil, grease, chemicals, oxygen-depleting nutrients, and other pollutants. The stormwater permits must include a storm water pollution prevention plan, usually including safeguards such as oil spill prevention, storage or cover of bulk materials, housekeeping practices, and employee training about environmental requirements.
Three cement companies from the District of Columbia were cited for discharging stormwater into the municipal sewer system without a permit. One company agreed to pay a $6,781 for failing to implement a stormwater pollution prevention plan required by its permit to prevent stormwater runoff contaminated with sand and fine rock dust from entering the municipal storm sewer system. The two other companies agreed to pay $4,000 for discharging stormwater from ready-mixed concrete operations into the D.C. sewer system. 
EPA Fines California Developers $60,000 For Stormwater Violations
The CWA stormwater program also established permit requirements for construction activities that disturb more than one acre of land. To obtain authorization to discharge stormwater, persons who have operational control over the construction sites must file a notice of intent and comply with certain best management practices as well as implement stormwater pollution prevention plans (“SWPPP”) that include erosion and sediment control measures, and an inspection program that ensures that these measures are maintained and improved as needed. Sediment from construction sites often ends up in streams and rivers, choking plant and animal life and filling in salmon spawning gravels.  Many pollutants such as oil and grease from various sources also bind to sediments and are then transported into waterways along with the sediment.
 Two California developers were recently fined $60,000 by EPA for releasing sediment and silt runoff into tributaries of the Sacramento River which damaged a local salmon habitat. EPA claimed that the developers had failed to implement erosion and sediment control measures at a 74-acre subdivision after project construction had been delayed several years. According to EPA, the developers left a rough graded roadway and a large cleared area without effective temporary erosion cover and minimal sediment control measures. As a result, large amounts of silt and sediment were discharged into a local creek during the winter rain season which endangered a local salmon habitat 
Commentary: EPA has been using its stormwater permitting authority to halt destruction or degradation of wetlands caused by draining or ditching activities. EPA issued its Phase I construction general permits (“CGP”) in 1992 and reauthorized them 1997 and 1998. The Phase I CGP addressed construction activities that resulted in disturbances of five or more acres of land including areas that are part of a larger common plan of development. EPA initially proposed to exclude from the stormwater program construction activities that disturbed less than five acres of land but the Court of Appeals for the Ninth Circuit ruled that this exemption was improper. The 1998 CGP also contained new conditions to ensure that the construction activities do not adversely effect endangered or threatened species listed under the Endangered Species Act as well as their critical habitats.
 On December 8, 1999, EPA promulgated its Phase II revisions to its stormwater regulations (64 FR 68721). This rule required permits for storm water discharges associated with construction site activities disturbing between one to five acres of land. Construction activity disturbing less than one acre may also require a permit if the activity is part of a larger common plan of development or sale disturbing a total of one acre or greater, or if individually designated for permit coverage by the NPDES permitting authority. NPDES permitting authorities may waive the Phase II construction activity requirements where little or no rainfall is expected during the period of construction or when analysis indicates that controls on construction site discharges are not needed to protect water quality. Waivers are not available for construction activity disturbing five acres or greater which are subject to the Phase I stormwater regulations that were promulgated on November 19, 1990 (55 FR 47990). EPA expects that the Phase II requirements for construction activity will be implemented through general permits instead of individual NPDES permits.
Two Waste Haulers Sentenced for Improper Disposal of Grease 
A Harleysville, Pa waste hauler was sentenced to six months house arrest, five years of probation, a $15,000 fine and $56,856 restitution for illegal disposal of liquid waste brought to the Valley Forge Sewer Authority in Phoenixville, Pa. 
The enforcement action is part of an on-going EPA initiative to crackdown on waste haulers who dump grease and sludge at municipal sewerage treatment plants. Restaurant grease and the petroleum sludge from wastewater used in cleaning auto repair shops can clog up the equipment at municipal sewer plants and inhibit the treatment process.
The waste hauler collected the grease and petroleum waste from customers and then directed his employees to conceal the grease and oil by diluting and blending it with other liquids, and then falisified waste disposal manifests about the true identity of the material being dumped. 
Two other individuals also received prison terms and their company was fined $25,000 and ordered to pay $9,959 in restitution to the City of Philadelphia for dumping restaurant grease waste into the sewer systems of Philadelphia, Doylestown and E. Norriton Township. The case involved the illegal disposal over four years of approximately 570,000 gallons of grease waste.
Commentary:  Even though a business might not require a CWA permit because it does not directly discharge into a waterway, the business may discharge wastewater into the local sewer system. Purchasers of restaurants and commercial businesses that are likely to generate grease and other products that can clog sewer pipes or affect the treatment process of the local sewerage plant should make sure that these issues are addressed during the due diligence period. The local sewer authority should be contacted to determine if the business is required to obtain a permit and if it is in compliance with any discharge permit or authorization. The compliance of the treatment plant should also be checked. If a sewer plant is unable to meet the conditions of its permit, it may impose pretreatment requirements on its commercial customers or impose surcharges based on the volume of wastewater discharged into the system. For large commercial businesses, these surcharges can be significant. 
Funding Problems May Delay Listing of Additional Endangered Species
The U.S. Fish and Wildlife Service has informed environmental groups it will not review any endangered species petitions during the fiscal year because of budgetary constraints. The agency indicated that most of the $7,090,000 budget allocated for listing must be used to complete court orders to designate critical habitat for species already on the endangered species list. The service has set aside $100,000 in each of its seven regions to review emergency petitions. As a result, the service will not be able to act on petitions seeking endangered species protection for over 100 plants and animals.
Owner of Former Oil Refinery to Pay $42,000 Penalty for Federal Response Plan Violations
The Commonwealth Oil Refining Company (“CORCO”) has agreed to pay $42,000 and will correct deficiencies in its Federal Response Plan (“FRP”) and Spill Prevention Control and Countermeasure (“SPCC”) plan for an inactive refinery in Penuelas, Puerto Rico. Though the refinery is no longer operating, many of the storage tanks still contain oil. As a result, CORCO is required to comply with spill prevention and response requirements of the CWA.  
Commentary: Under the CWA, any facility that stores more than 1320 gallons of oil or oil derivative in aboveground storage tanks must develop SPCC plans and must implement these plans by installing secondary containment, such as concrete structures, around storage tanks and other areas where oil could be spilled.  These plans must be certified by a professional engineer and must be reviewed at least once every three years.  These facilities must also FRPs which describe how the facility will respond to oil spills. The FRP should identify the response personnel and equipment, flow path of potential spills and vulnerable natural resources, evacuation and notification plans, and response training programs, including drills and exercises. 
A copy of the SPCC plan must be maintained at the facility if it is normally attended for at least eight hours per day. Otherwise, it must be kept at the nearest field office. The SPCC plan must be available to the EPA for on-site review and inspection during normal working hours.To ensure that facilities comply with the spill-prevention regulations, EPA periodically conducts on-site facility inspections. EPA also requires owners and operators of facilities that experience two or more oil spills within a 12-month period to submit their SPCC plans and other information to EPA for review. Recent EPA investigations are revealing large scale compliance problems, such as pipeline breaks, leaking tanks, faulty valves, overturned trucks, leaking ships, and illegal dumping.
EPA Orders Additional Cities to Control CSOs
EPA has issued administrative orders to additional cities requiring them to control their combined sewer overflow (“CSO”) discharges. CSOs are sewer systems that were designed to carry sewage and storm water in the same pipe to a sewage treatment plant. During heavy rain events, the volume of stormwater and domestic wastewater can exceed the carrying capacity of the sewer system. At such times, the combined water is directed to overflow points that discharge into waterways before reaching the sewer treatment plant, thus impairing water quality. The combined water that does reach the sewer plant is often so diluted that the plant cannot achieve its permit removal requirements. 
EPA is requiring the City of Springfield, MA to address the six highest priority CSO outfall pipes out of a total of 25 that discharge hundreds of millions of gallons of untreated sewage and stormwater into the Connecticut River and other local waterways The order also requires the city to reduce stormwater discharges to surface waters. Springfield will be allowed to take more time to explore additional options before address its remaining CSO outfalls. 
EPA is also requiring the City of Holyoke to eliminate all dry weather overflows from two CSOs into the Connecticut River. Holyoke has 15 CSOs that discharge an estimated 700 to 850 million gallons annually into the Connecticut River. EPA and Holyoke are continuing discussions on a long-term plan for addressing the remaining CSOs. 
EPA also has ordered the City of Fitchburg to eliminate all dry weather discharges from its combined sewer collection system as soon as possible and to submit a plan for eliminating future CSO discharges into the North Nashua River. The combined sewer collection system has 41 combined sewer overflow discharge points.  Seven of the CSO discharges occurred during dry weather.
Commentary: EPA recently issued a new draft guidance which discusses how to integrate water quality standards review with the 1994 CSO Control Policy. The guidance is available at http://www.epa.gov/owm/cso.htm. 

HAZARDOUS WASTES/USTS

EPA Issues Portions of Guidance on Risk-Based Corrective Action
As part of its RCRA Cleanup Reforms, EPA recently released the first two sections of the draft Results-Based Approaches to Corrective Action.  The guidance provides an overview of five  primary and four supplemental approaches that states and facilities may use to develop risk-based cleanups. 
The five primary approaches are as follows:
Tailored-oversight approach- requires the development of an oversight plan between the project manager and the facility based on site-specific conditions such as site complexity, compliance history, and other factors. 
Holistic approach- requires project managers to look at the “big picture” when prioritizing and addressing environmental problems rather than focusing on individual units. 
Procedural-flexibility approach- enables project managers and facilities to place their primary focus on environmental results rather than process steps.. 
Performance-standards approach- The project manager and facility will establish specific scientific, technical and administrative requirements the facility must fulfill to complete corrective action. 
Targeted data-collection approach- used to support selection and implementation of appropriate responses at the facility.
The draft guidance also describes four “supplemental” approaches. The first supplemental approach is the use of presumptive remedies which are defined as “are preferred technologies for common categories of sites, based on historical patterns of remedy selection and EPA’s scientific and engineering evaluation of performance data on technology implementation.” The second supplemental involves consideration of innovative technologies that offer the potential for comparable or superior treatment performance, fewer adverse effects, and lower costs than the more conventional technologies. A third supplemental approach is to phase in corrective action at individual facilities so that the areas posing the greatest threat to human health and the environment are addressed first. The final supplemental approach involves facility-lead corrective action agreements. These consist of letters of intent from the implementing agency to the owner/operator containing broad performance standards to provide a framework for guiding corrective action at the facility.
EPA Region 6 Issues Risk-Based Corrective Action Strategy
In our August issue, we reported that EPA proposed amendments to its Corrective Action Management Unit (“CAMU”) rule. The proposed regulation (65 FR 51079) describes the types of wastes that may be managed in CAMUs, establishes minimum design standards for CAMUs as well as treatment standards for wastes placed in CAMUs, and sets forth public participation requirements for CAMU decisions. In addition, creates requirements for CAMUs used only for treatment and storage. The various EPA Region offices are taking steps to accelerate corrective action cleanups. Recently, Region 6 issued a Corrective Action Strategy to accelerate investigation and cleanup through the use of risk management at RCRA facilities. The guidance is available at http://www.epa.gov/earth1r6/6pd/rcra_c/pd-o/riskman.htm
Commentary: EPA issued its original CAMU rule on February 16, 1993 (58 FR 8658). The purpose of the rule was to provide flexibility to owners and operators of RCRA treatment, storage and disposal facilities (“TSDFs”) that are managing hazardous wastes and media containing hazardous waste during corrective action or closure activities. The CAMU rule established a category of remediation wastes such as contaminated soil generated during corrective action or closure activities that could be managed, consolidated or placed into discrete areas at a RCRA facility known as a CAMU without triggering the RCRA land disposal restriction (“LDRs”) standards and minimum technical requirements (“MTR”) for land-based units (e.g., landfills, surface impoundments, waste piles). The proposed amendments would replace the term “remediation waste” with “CAMU-eligible waste”.
	The CAMU rule is one of the key tools that EPA intends to use to accelerate the number of corrective action cleanups. EPA has established extremely ambitious goals for the RCRA corrective action program under its Government Performance and Results Act (“GPRA”). By 2005, EPA hopes to control human exposure to contamination at 95% of the 1712 RCRA priority sites and to control groundwater contamination at 70% of those sites. The agency has also established yearly interim milestones to measure its progress towards those goals.
EPA Defers PCB Treatment Standard Under LDR Phase IV Rule
In our January 2000 issue, we reported that EPA had proposed to defer the requirement that polychlorinated biphenyls (“PCBs”) be treated as an underlying hazardous constituent (“UHC”) under the 1998 Land Disposal Restriction (“LDR”) Phase IV Rule. UHCs are hazardous constituents that might be present in soils but which do not cause the soil to be a hazardous waste. 
EPA  recently announced that it has decided to temporarily defer the requirement that PCBs be treated to the UHC standard. EPA intends to restudy the issue of appropriate treatment standards for metal-contaminated soils which also contain PCBs as UHCs. Generators will still be required to treat these soils to meet LDR standards for all hazardous constituents except PCBs. In addition, generators will be required to treat PCBs if the total concentration of halogenated organic compounds in the soil equals or exceeds 1,000 parts per million.
 Commentary: The RCRA LDR program requires that generators of hazardous waste pre-treat their waste before they can be disposed on land. Prior to the LDR Phase IV rule, generators who excavated contaminated soil and sludges and wanted to dispose them on land had to treat the contaminated soil to the same LDR standards that were established for industrial process wastes. This approach discouraged the remediation of soils contaminated with organic wastes because the LDR treatment standard usually required incineration which can be a very expensive and controversial remedy. As a result, many generators chose to leave contaminated soils in place and place caps on them.
Under the LDR Phase IV Rule, EPA established soil treatment standards based on non-combustion technology to encourage the remediation of soils contaminated with hazardous wastes. For soil that contained a listed hazardous waste or exhibited a toxicity characteristic because of the presence of metals, the rule provided that generators would have to treat UHC to ten times the Universal Treatment Standard (“UTS”) for that constituent or 90 Percent reduction of the total UHC in the soil, whichever is greater. 
	After the LDR Phase IV Standards was promulgated, EPA issued its PCB Disposal Rule which allowed “bulk PCB remediation wastes” including soils contaminated with more than 50 ppm of PCBs to be disposed without treatment in a TSCA disposal facility or RCRA-approved landfill. The purpose of this rule was to promote remediation of PCB-contaminated soils.
	However, EPA received information that cleanups of soils which exhibited the toxic characteristic because of metals and had PCBs as a UHC were being seriously delayed or had stopped because of a shortage of facilities that could treat PCBs to the required UHC standard (100 ppm) without using combustion. In addition, many of these are mobile units face permitting delays at non-Superfund sites. EPA hopes that the deferral will expedite the remediation of PCB-contaminated soils.
District Court Rules EPA Action Does Not Constitute Overfiling
  	Last year, we reported that in U.S. v. Power Engineering Co (191 F.3rd 1224), the Court of Appeals for the Tenth Circuit  had upheld a district court ruling granting a preliminary injunction ordering a Colorado company to comply with the RCRA financial requirements for treatment, storage and disposal facilities (“TSDFs”) and post financial assurance of $3.5 million. 
In that case, the defendant had filed as a RCRA generator with the Colorado Department of Public Health and the Environment (“CDPHE”). The agency subsequently determined that the company had treated, stored or disposed of wastes at its facility without obtaining a TSDF permit or registering for interim status. The state agency issued an administrative compliance order requiring the defendant to comply with RCRA and to take corrective actions to address releases of hazardous wastes but did not require the defendant to post any financial assurances. When the defendant failed to comply with the order, the CDPHE issued an $1.13 million administrative penalty 
EPA then filed a motion for a preliminary injunction when the federal agency became concerned that the president and majority shareholder of the company who also owned the property was about to liquidate the company’s assets and flee the country.
The defendant tried to reduce the amount of the financial assurance to $575,000. After the district court denied the motion to modify the preliminary injunction, the defendant filed a motion for summary judgment arguing that the EPA action constituted an “overfilling” and should be dismissed based on the Eighth Circuit’s opinion in Harmon Industries Inc. v. Browner (191 F.3rd 894). 
The district court held found that EPA's action did not duplicate the state's actions because the CDPHE did not order the defendant to post financial assurances and therefore did not constitute “overfilling. The court then went on to harshly  criticize the Harmon decision. The court said that the Harmon case had misinterpreted the delegation language of RCRA when that court had said that EPA may only file an enforcement action if a state fails to take “any action”. The court noted that other sections of RCRA provide independent authority to EPA to enforce RCRA and that the citizen suit provision of RCRA demonstrated that Congress knew how to prohibit enforcement actions once other actions were taken. The court also cited to other sections of EPA’s regulations that allow the federal agency to take enforcement actions as evidence that the  “in lieu” language did not  prohibit EPA enforcement.
California District Court Allows UST Citizen Suit To Proceed Despite Diligent Prosecution by Site
	Another federal district court narrowed the scope of the RCRA provision barring the filing of claims when a state is “diligently prosecuting” a RCRA violation. In Northern California River Watch vs. Humbolt Petroleum, Inc (No. C-00-1329) the district court for the northern district of California allowed an environmental organization to bring a citizen suit under the RCRA  imminent endangerment clause of section 7002(a)(1)(B) even though the state had commenced an action under the state UST law.
	In this case, the state had filed an action charging that the defendant had failed to take corrective action to addresses releases from underground storage tanks owned or operated by the defendant in two counties.  The plaintiff then filed a citizen suit under RCRA 7002(a)(1)(A) which authorized private actions against person who are alleged to be in violation of any permit, standard, regulation, condition, requirement, prohibition or order under RCRA. The plaintiff also filed an action under 7002(a)(1)(B) which allows suits against any person who has contributed or who is contributing to the past or present handling, storage, treatment, transportation or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or to the environment.
	The court ruled that the 7002(a)(1)(A) action was barred because the state law action addressed the same violations. However, the court said that the state action did not preempt the claim under 7002(a)(1)(B) because this section involved an imminent and substantial endangerment and the state did not bring an action to abate those conditions. However, the court dismissed the  7002(a)(1)(B) claim because the plaintiff failed to satisfy the notice requirements by failing to sufficiently identify the sites that posed the imminent and substantial endangerment.        
Commentary: Because petroleum contamination is not covered by CERCLA, RCRA 7002 is a popular tool for owners with property contaminated with petroleum. Unlike CERCLA, the universe of defendants in a RCRA 7002 action is not limited to the four classes of PRPs. Moreover, plaintiffs do not have to be an innocent purchaser to seek relief under RCRA 7002. Under CERCLA, an innocent purchaser can bring a cost recovery action but a responsible party may only bring a contribution action for those cleanup costs incurred beyond its fair share.
States Report that “Pay-For-Performance” Contracts Accelerate UST Cleanups
	A number of states have adopted “pay for performance” systems under the UST programs. Preliminary reports suggest that this approach has allowed states to expedite cleanups at substantial cost savings.
Under a traditional time and materials contract, the contractor is paid for the amount of time it spends on a project as well as the materials is must purchase for the project. In addition, the state case manager often must approve each phase of the work that is done and must approve any changes to the approved workplan. 
The “pay for performance” approach requires less oversight. The environmental contractor implements tasks of an approved workplan and submits invoices when certain milestones are achieved. The contractor is usually paid a certain Percentage when the construction of the remedial system is completed and the balance is paid over time as specified cleanup goals are achieved.	
Florida, South Carolina and Utah have used “pay for performance” contracts.For example, in South Carolina a contractor is paid 45% when the remedial system is installed, another 25% when one-fourth of the contaminant mass has been removed and the balance when the site has achieved cleanup standards for six months. In Florida, a contractor receives 45% upon completing the physical construction of the remedy and receives additional payments when 50%, 75% and 100% of the contamination is remediated. The state holds back 15% of the fee for one year to assure that the cleanup goals are maintained. 
South Carolina seems to have achieved greater cost reductions than Florida probably because South Carolina required contractors to bid on projects and requires this approach for all UST cleanups. In addition, the state tries to bundle sites together so that one contract will address multiple sites. Approximately 180 UST cleanups have been implemented under this program and the average cost of those cleanups has dropped by almost 50%. Florida, does not mandate “pay for performance” contracts and negotiates each contract individually. Thus far, approximately 90 sites have been cleaned up under the “pay for performance” approach. Utah has decided to shift to a bid process for “pay for performance” beginning this year.
EPA To Announce Additional USTfield Grants
	In our last issue, we reported that EPA had awarded ten $100,000 grants to communities to help cleanup brownfield sites that have been contaminated by petroleum from leaking USTs. EPA has estimated that there might be between 100,000 to 200,000 brownfield sites that are contaminated from abandoned or closed USTs. These sites are generally ineligible for the brownfield pilot programs because petroleum is excluded from the definition of CERCLA hazardous substances. 
EPA has announced that it will award 40 more USTfield grants to communities. The agency will publish a notice of the competition in the spring and expects to award the grants by the end of the year.
Commentary:    When EPA promulgated its UST regulations in 1988, there were approximately 2.1 million USTs in existence. Approximately 1.4 million USTs have been closed since 1988. EPA believes that 85% of the 740,000 tanks currently in operation have been equipped with spill, overfill and corrosion protection. The states have estimated that 60% of existing USTs comply with the EPA leak detection requirements. All active tanks were supposed to comply with all of the UST standards by December 22, 1998.  
EPA Fines Manhattan Dry Cleaner $34,250
Since 1996, EPA's Region 2 office has offered compliance  assistance to over 400 dry cleaners in the New York City area and New  Jersey.  This assistance progarm included providing multilingual literature about environmental  regulations governing the dry cleaning industry, on-site compliance  assistance with temporary amnesty from penalties, and the issuance of Notices of  Violations that required companies to make improvements, but did not levy  penalties. 
After devoting significant resources to its dry cleaning assistance program, the Region 2 has now shifted  its priority focus to bringing formal enforcement proceedings against establishments that continue to be out of compliance. For example, the agency recently imposed a fine of $34, 250 against Splendid Enterprises Limited, a commercial dry cleaner and launderer located at 636 11th  Avenue as well as nine drop-off locations throughout Manhattan. During an August 2000 inspection, EPA found that business had improperly labeled several containers holding waste tetrachloroethylene or "Perc” which is the most commonly used chemical dry cleaning agent.  The company also stored Perc in open containers, did not conduct weekly inspections of areas where  containers were stored and shipped Perc off-premises without hazardous  waste manifests.  EPA also observed that Perc waste from one of the containers had overflowed into a sewer floor drain. Indeed, the company admitted that it routinely emptied Perc waste into the sewer floor drain which is prohibited under state and city rules. Since January 2000, the agency has issued complaints seeking a total of $317,125 from violating dry cleaners in New York and New Jersey.
Commentary: Discharges from dry cleaning operations are one of the leading causes of contamination at shopping centers. According to a recent California study, the primary source of Perc contamination from dry cleaning establishments is not illegal dumping of wastes out the back door but from Perc waste that has been discharged into the sewer system and leaked through sewer pipes under the building into the soil and groundwater. 
Industry records suggest that the average dry cleaner only stays in business for three years. Thus, when performing due diligence at shopping centers, it is critical that a prospective purchaser or lender does not limit its inquiry to current tenants but develop accurate information on prior tenants of the shopping center to determine if dry cleaning businesses may have operated at the site in the past. The further back in time a dry cleaning operated at a property, the greater the risk that the site may have impacted by Perc. 
A handful of states have enacted funds which can be used to help pay for the remediation costs associated with releases of solvents from dry cleaning operations. The scope of the programs vary in terms of the parties who are eligible to participate, the amount of the deductibles and the eligibility requirements. Some programs apply only to operators of existing dry cleaning establishments while others also extend to prospective owners of properties like shopping centers which may have been contaminated by inactive dry cleaning operations. Some programs require the operators to comply with certain dry cleaning operating standards before they may be eligible for the program. A number of programs insulate participants from liability for property damage and personal injury resulting from exposure of solvents migrating off the property.   
IBM Launches Computer Recycling Program
In our last two issues, we have discussed the environmental issues posed by the disposal of obsolete computer equipment. Recently, IBM Corp. announced that a program to help individual consumers and small business owners find ways to rid themselves of unwanted computer hardware. 
For a fee of $29.99, IBM will accept all PC parts through its IBM PC Recycling Service. The fee includes shipping costs, so consumers need only to box the equipment and send it via United Parcel Service to Envirocycle, a Hallstead, Pa., recycling firm. Consumers can sign up for IBM's program at the time of purchase or by contacting IBM.. The company will either donate usable equipment to computer-needy organizations such job training and family services centers through a nonprofit organization called Gifts in Kind International or recycle computer parts that are not worn out or outdated. 
Some computer retailers have established recycling programs but they will accept unwanted equipment only if the consumer buys new equipment. Other computer manufacturers collect outdated equipment from large customers with 20 or more used computers. In contrast, IBM will accept any brand of unwanted equipment, and no purchase of any type is required
Commentary: A recent study by the National Safety Council's Environmental Health Center estimated that 20.6 million personal computers became obsolete in the U.S. in 1998 but only 11 Percent, or 2.3 million of those PCs, were recycled. Moreover, the NSC estimates that 315 million additional computers will become outdated by 2004. 
In March, Massachusetts became the first state to ban disposal of personal disposal of computer screens, television sets and other glass picture tubes in landfills.  Many European governments require computer makers to take back their products at no cost once the equipment becomes outdated.

TOXIC SUBSTANCES

Landlords continue to face penalties for LBP Violations
In prior issues, we have reported that EPA is continuing to uncover widespread non-compliance with the 1996 lead-based paint (“LBP”) disclosure rule. EPA discovered over 400 violations after examining leasing, rental and sales contracts in just one state. As a result, EPA regional offices have stepped-up their enforcement of the LBP rules.  
For example, the EPA Region 7 fined a Missouri landlord $11,000 for failing to disclose information to tenants about LBP hazards in houses built prior to 1978.
	The former owner of a 149 unit apartment complex in Colorado Springs agreed to pay $18,975 for failing to notify a former tenant with four children under six years old of the presence of LBP when the family rented an apartment in 1997. The owner sold the apartment complex in April 2000.
EPA Issues New Standards for Lead in Paint, Dust and Soils
In the latest phase of its effort to reduce hazards posed by lead, EPA issued stringent standards for identifying dangerous levels of lead in paint, dust and soil. Under the new standards, lead will be considered a hazard if more than 40 micrograms of lead dust per square foot is present on floors or 250 micrograms of lead dust per square foot is present on interior window sills. For outdoor areas, concentrations of lead above 400 parts per million (“ppm”) in bare soil in children's play areas or an average of 1200 ppm for bare soil in the rest of the yard will constitute a lead hazard that needs to be abated.
The new standards will also apply to the LBP disclosure and renovation rules. Landlords, home owners, school and playground administrators, childcare providers and others will be able to use the new standards to determine if the presence of lead in homes, yards, or play areas poses a risk to children or occupants. Consultants and risk assessors can also use the new standards to assist property owners in deciding how to address LBP problems such as abatement, covering or removing soil or professional cleaning of lead dust. The new lead hazard standards will also serve as general guidance for other EPA programs engaged in toxic waste cleanups.
Second Circuit Reverses Decision Interpreting Effective Date of LBP Disclosure Rule
	In our January issue, we reported that a federal court for the Northern District of New York had ruled that the effective date of the LBP disclosure requirements was not the September 6, 1996 date specified in the EPA LBP rule but instead was the October 25, 1995 date in the statute that EPA was supposed to promulgate its rule. As a result, the court found that a tenant who leased an apartment on October 28, 1995 could maintain an action for injuries suffered by the plaintiff’s son as a result of ingesting LBP in the apartment. 
	The landlord appealed the decision and the Second Circuit reversed the lower decision in Sweet v. Sheahan (2000 WL 1827527, 12/13/00). The court acknowledged that the EPA did not meet the Congressional deadline but concluded that Congress intended for EPA and not the statute to impose duties on landlords provided for in the law.  Consequently, the statute did not impose a duty on the landlord and the EPA was free to decide not to impose the regulations retroactively.
EPA Reviewing Disposal Regulations for PCB Articles
	Household electronic equipment with dielectric fluids PCBs containing polychlorinated biphenyls (“PCBs”) now make up 1%-2% of the nation's waste stream. Because of a concern that this equipment could be impacting groundwater, EPA is considering revising its PCB disposal regulations. 
For example, the South Carolina Department of Health and Environmental Control (“DHEC”) has been concerned that a landfill in Richland County which has been accepting household electronic equipment might be contaminated with lead and PCBs. The county was ordered to stop burying electronic equipment in the landfill and to investigate the extent of any groundwater contamination. 
EPA Proposes to Clarify PCB Importation Regulations From Territories
	EPA has proposed to allow PCB waste that was present in US territories and possessions at the time of the PCB ban and that remained in those areas since that date may be stored and disposed of in any facility in the United States that meets the requirements of 40 CFR part 761, subpart D. The purpose of this proposal is to ensure that all United States PCB waste be subject to uniform requirements under section 6(e) TSCA and its implementing regulations.
The change would also apply to PCBs that were present in the territories and possessions at the time TSCA ban took effect but were not designated as waste until after that date and remained within the jurisdiction of the United States. Finally, EPA has proposed to allow PCBs or PCB wastes that were transferred from an area in the United States that is outside the territories and possessions but was moved to a territory or possession after January 1, 1979 and then never left these areas to be stored and disposed of in any subpart D facility in the United States. EPA would not consider such movements to fall within the import prohibition of TSCA section 6(e).
	This proposed rule would apply to PCB waste that is present in the territories and possessions as the result of conduct that was legal at the time it occurred (for example, PCB materials that were brought to the territories before the effective date of the TSCA ban) and that has been subject to regulation under TSCA throughout its lifespan. The proposed rule would also include PCB equipment that was lawfully used in one of the States, was transferred to a territory or possession for continued lawful use, reached the end of its useful life and then became subject to disposal while in the territory or possession.    
	This proposed rule would not allow disposal in the United States of PCBs transported to the territories and possessions from foreign countries after the effective date of the ban on manufacture in TSCA section 6(e)(3). EPA indicated it did not want the territories and possessions to become a conduit to the United States for PCB waste generated in other countries.    
Commentary: Since January 1, 1979, EPA has banned the manufacture, use, distribution and processing of PCBs and has promulgated comprehensive regulations covering the use, labeling, storage, repair and disposal of equipment containing PCBs. In general, the PCB Ban does not apply to equipment with dielectric fluids containing less than 50 parts per million (“ppm”) of PCBs.
	During environmental compliance audits or environmental site assessments performed in connection with a corporate or real estate transaction, it is not uncommon to find transformers without any PCB labeling or identifying information such as the manufacturer's nameplate.  Usually, these transformers have not been tested for PCBs.  Under such circumstances, there is often considerable confusion over whether such transformers should be assumed to be free of PCBs. The EPA policy has been that in the absence of any PCB markings, identifying information or PCB test results, such transformers should be regulated as PCB Transformers.  Under the PCB Ban Rule, a transformer may only be considered a Non-PCB Transformer if its dielectric fluid has been tested or otherwise verified to contain less than 50 ppm of PCBs. There has also been some confusion as to whether the definition of PCB-Contaminated Electrical Equipment (containing between 50-500 ppm of PCBs) allows unmarked oil-filled transformers to be classified as PCB-Contaminated Transformers.  EPA has clarified that any oil-filled transformer whose PCB content is unknown must be assumed to be a PCB Transformer. However, if the transformer is known to contain mineral oil, the agency policy is to consider the transformer to be a PCB-Contaminated Transformer.
EPA Requests Additional Natural Gas Companies To Review Replacement Practices for Mercury-containing Equipment.
In our last issue, we reported that natural gas distribution companies serving Detroit and Chicago have agreed to inspect thousands of homes that may have been contaminated with mercury that spilled when the utilities replaced gas pressure regulators. The spills are believed to have occurred in the 1960s when utilities replaced older gas meter regulators that contained mercury. During this procedure, workers accidentally spilled small amounts of liquid mercury.
Now, five more natural gas distribution companies in Illinois and Michigan have disclosed more than 900 incidents of mercury spills in homes and businesses associated with replacement of the regulators. As a result, EPA has asked 188 natural gas utility companies located in IL, IN, MI, MN, OH, and WI to re-examine their mercury handling practices for  older mercury-containing regulator equipment and manometers (larger gas-flow regulators primarily used in commercial buildings) that have been or will be replaced. 
Commentary: As a result of the widespread spills detected in these two metropolitan areas, it would be advisable to add mercury to the list of substances such as asbestos, lead-based paint and radon that should be routinely investigated when purchasing homes and commercial buildings. 
 
SUPERFUND/BROWNFIELDS

Study Finds States Rarely Exercise VCP Reopeners
	One of the advantages of state voluntary cleanup programs (“VCPs”) is that property owners or operators may obtain No Further Action (“NFA”) or Closure Letters from state agencies when cleanups have been completed. These documents were developed partially to encourage lenders to provide financing to redevelop contaminated property. 
However, because these letters often contain a list of conditions known as reopeners in which the state may require the property owner or operator to perform additional work, financial institutions often remain concerned about the possibility of a loan default or impaired collateral value. Some lenders have refused to provide loans to sites because of the possibility that a state agency may reopen a cleanup. 
	Recently, EPA commissioned a study to evaluate how often states have exercised reopeners under their VCPs. The report “Quantifying Long Term Environmental Regulatory Risk for Brownfields: Are Reopeners Really an Issue?” was written by Robert Simons of Cleveland State University and John Pendergrass of the Environmental Law Institute. The report found only 11 instances out of 8,412 cleanups performed in 42 states where reopeners were exercised. The results are only preliminary because it did not include data from California, Massachusetts and Wisconsin. In addition, the authors suggested that the number of reopeners might rise if the cleanups under the state superfund and UST programs were included. The final report will include those programs.
Commentary:	The study found that the most common reopeners contained in NFA or closure letters were for fraud, failure to file deed restrictions, failure to monitor or maintain institutional controls, change in land use and previously unknown contamination 
	The report found that there were four basic types of closure or NFA letters. Two of the surveyed states issued NFA letters under an administrative program but had no statutory authority to issue the document. 33 states issued NFA or closure letters that were authorized by statute. The third category was NFA or closure letters that also contained a covenant not to sue (“CNTS”). Approximately half of the state programs surveyed offered CNTS. The final category identified by the report was where the states had entered into a Memorandum of Agreement with the EPA where the EPA agreed to not to reopen cleanups deemed to be completed by the state agency. 
	New Jersey issued almost a third of all of the closure letters issued by the states that were surveyed but had a below average reopener rate even though the state has an aggressive program for monitoring the effectiveness of engineering and institutional controls. However, outside its VCP, the reopener rate for New Jersey’s engineering and institutional control enforcement program is 3%-5%. 
	The study also concluded that reopener rates should be expected to change over time as increased development pressure and natural conditions cause engineering controls to deteriorate. The report also suggested that additional research should be conducted on the financial impacts of the reopeners. 
	   Congress Expands Federal Brownfield Tax Incentives
 	Under the Brownfield Tax Incentive, developers of eligible brownfields may deduct or expense the cleanup costs associated with brownfield development in the year the costs were incurred rather than adding the costs onto the value of the property and recovering the costs when the property is sold. Congress enacted the tax incentive in 1997, it hoped that it would leverage $6 billion in private brownfield investments and spur the cleanup of 14, 000 brownfield sites. 
Unfortunately, the usefulness of the brownfield tax incentive has been limited because it was restricted to sites located in Empowerment Zones, Enterprise Communities,  census tracts where 20% of the population was below the poverty level or in census tracts with less than 2,000 people where 75% or more of the land was zoned for commercial or industrial use and one or more adjacent census tracts had a poverty rate of 20% or more. As a result, Congress passed legislation on Dec. 15 that expanded the definition of contaminated industrial and commercial properties eligible for the special tax treatment. Under the new legislation, eligible brownfield sites will include any site that contains, or potentially contains a hazardous substance that is certified by the appropriate state environmental agency. Suburban sites will also be eligible for the favorable tax treatment. The new law extends the expiration date for incurring eligible remediation costs from December 31, 2001 to January 1, 2004. The legislation was included as a provision in the final omnibus appropriations bill (H.R. 4577) for fiscal 2001.
RCRA Brownfield Site Cleanup Completed
General Motors Corporation recently completed a RCRA corrective action at an abandoned 650-acre site. The cleanup was part of a $1 billion redevelopment project site which now contains the GM Truck Product Center and a world-class business park. The site is the 500th high priority facility to satisfy the GPRA environmental indicator goals established by EPA. The site  under its GRPA two environmental goals under the RCRA Corrective Action program.
First BCRLF Cleanups Completed
A former National Guard Armory in Las Vegas became the first site that was cleaned up under the EPA Brownfields Cleanup Revolving Loan Fund (“BCRLF”) Pilot Program. The 3.6-acre parcel had been used for vehicle maintenance, chemical and supply storage, and general operations from 1948 to 1997. The city made a $50,000 BCRLF to the Las Vegas Redevelopment Agency which was used to remove more than 600 cubic yards of soil contaminated with hazardous waste and petroleum hydrocarbons. The site will be redeveloped into a community center, cultural center, retail stores, and a small business incubator. 
	 EPA also announced the completion of a cleanup at a BCRLF site in the Stamford, Connecticut. Harley Davidson borrowed $160,000 from the $750,000 BCRLF to remove 3,000 tons of soil contaminated with PCBs, lead, arsenic and other metals. A Harley Davidson dealership will relocate to the half-acre site. 
EPA Announces New Demonstration Pilots
EPA announced that it will award 35 new brownfield assessment demonstration pilots (“BADP”) of $200,00 by April 2001. The application deadline for the new BADPs is January 12.  Thus far, EPA has funded 362 BADPs. 
In addition, applicants may apply for an additional $50,000 in supplemental assistance that may be used to assess the contamination at a site or sites whose intended end-use is for "green space" purposes. The eligible end uses for these supplemental grants will include parks, playgrounds, hiking trails, trails, gardens, habitat restoration, open space, and/or greenspace preservation. 
EPA also announced that it expects to make up to ten supplemental grants for BADPs that were awarded on or before September 30, 1999. The applicants may apply for up to $150,000. The application deadline for the supplemental BADP is January 8th.
Shopping Center To Be Built On Former Superfund Site
A new shopping center will be constructed on the former Operating Industries Inc. (“OII”) landfill located in Monterey Park, California. Industrial and municipal wastes were disposed at the 190-acre OII from 1948 to 1984. The shopping center will be built on the 45 acre north parcel of the OII landfill. The cleanup of the south parcel has not yet been completed. 
Study Finds Majority of Brownfield Site Cleanups Financed by Private Funds
A study performed by the National Brownfield Association (“NBA”) has found that the majority of the approximately 1,000 brownfields sites remediated to date have been funded primarily by private equity funds and large banks. The study also indicated that the brownfield redevelopment projects are two to three times more profitable than typical real estate transactions because developers were able to purchase the properties relatively inexpensively and then sell them at prevailing market rates. NBA also said that banks were becoming less cautious about financing brownfield projects because of various state brownfield financing programs such as tax increment financing, loan guarantee programs, and reimbursement programs as well as growing experience of developers with brownfields remediation.
Pennsylvania Announces Brownfield Site Cleanups
The Pennsylvania Department of Environmental Protection (“DEP”) announced that brownfield cleanup had been completed at the former USX Homestead Works in Munhall, Allegheny County.  Damascus Tube Company will use the site for the new location of its steel tubing manufacturing operations. 
Damascus purchased the site from Georgia-Pacific in 1998 and remediated a 30 acre portion of the site used by USX as open-hearth furnaces, ingot mold handling and a rolling mill. More than 150 cubic yards of soil contaminated with arsenic and lead was excavated and a cap consisting of pavement and a soil-slag cover was used to cover less contaminated soils. A building at the site also was sealed with epoxy to prevent further contamination. 
The DEP also announced that Transit America Inc. had completed a cleanup of a former Budd Co. site in Philadelphia and Montgomery counties. Budd  had used the 214-acre to manufacture World War II cargo aircraft as well as and trains and automotive parts. The facility has been closed since 1987.  Transit America removed 1,640 cubic yards of contaminated soil, installed over 80 monitoring and extraction wells to treat groundwater, and constructed soil vapor extraction systems at several contaminated areas. A golf course will be constructed on the site. 
DEP also expects a cleanup to be completed shortly at a 20-acre site in Lebanon by GEESI, a subsidiary of General Electric Co. The site had been used to manufacturer whistling buoys for the US Coast Guard and as a textile knitting mill. In the 1960s, GEESI designed and manufactured various types of air pollution control equipment like smoke stack scrubbers, precipitators and filters.
GEESI removed six underground storage tanks and piping, and also excavated 1200 tons of soil contaminated with petroleum and PCB. A cornerstone of the plan was to refurbish five building structures that dated back to the 1920s. 
Cleanup Completed at Little League Field
EPA recently announced that a cleanup had been completed at a community park and Little league field located in Boonton, New Jersey community park and little league ball field. The cleanup of the three acre site cost  $15.8 million
The  property had been used from the 1920s to the 1950s as a landfill for wastes from the manufacture of household cleaning products and industrial uses. During the mid 1960s, the town covered the former industrial site with soil and turned it into a recreational facility. However,  strong hydrogen sulfide odors began to be emitted from the ground.  In 1969, the town constructed an odor abatement system but the remedy did not correct the problem and the facility was shut down in 1982.  EPA cleanup involved removing 85,000 tons of waste and injecting cement dust into the buried waste to partially solidify the wastes. 
EPA Enters Into VCP MOA with Arkansas
EPA has entered into a MOA with the Arkansas Department of Environmental Quality which will allow developers to redevelop brownfield sites without fear of federal enforcement actions. Arkansas enacted brownfield legislation in 1997 but only ten properties have undergone cleanup under the program. Arkansas officials hope that the MOA will increase the pace of brownfield redevelopment.
EPA Enters Into Prospective Purchaser Agreements
	EPA has proposed to enter into a prospective purchaser agreement (“PPA”) for the Leavenworth Auto Parts Site in Kansas. Under the PPA, the purchaser will pay EPA $1,000 and provide access to the EPA to perform response actions under EPA oversight. The purchaser also agreed to a deed restriction prohibiting the property from being used for residential purposes, as a day-care center, or as a playground. 
	Under a PPA for the Metcoa Radiation Superfund Site in Pennsylvania, purchaser intends to acquire 21.74 acres located in Pulaski, Lawrence County, Pennsylvania. The site is currently is owned by the Lawrence County Industrial Development Authority ("LCIDA"). The Purchaser is required to cooperate with and provide access to EPA for any response activities on the Property. The property will also be subject to use restrictions. The president of the limited liability corporation acquiring the property has served as a member of its Board of Directors of the LCIDA since approximately 1976 and has been a Vice-Chair of the Board since 1979.
Between 1976 and 1983, the Metallurgical Corporation of America (“METCOA”) or the Pesses Company conducted metal reclamation operations at the Site.  Pre-processed and processed scrap materials were stored directly on the ground or placed in drums at the Site. These activities resulted in releases of hazardous substances into the environment
	The Nuclear Regulatory Commission (“NRC'') and Pennsylvania conducted a variety of response actions at the Site since 1985. In 1997, EPA entered a Consent Decree with 187 parties, requiring them to conduct certain response actions to clean up the Site.  On September 23, 1999, the NRC authorized the release of the Site’s building and land for unrestricted use and EPA determined earlier this year that the cleanup was satisfactorily completed. 
	For the PPA involving the Fischer & Porter Superfund Site in Warminster Township, Pennsylvania, Blue Marlin plans to acquire 8.4 acres of undeveloped land currently owned by Coroad Associates II, L.P. to build an 80,000 office, manufacturing and warehouse facility of approximately 80,000 square feet. . In exchange for a covenant not to sue, Blue Marlin has agreed to make a $15,000 payment, provide access to EPA and record a deed notice disclosing the nature of the contamination and remedy as well as the existence of the consent decree that required implementation of the remedy.  Blue Marlin plans to lease the site to a  manufacturer of specialized equipment for law enforcement and fire department vehicles.  The partners of Blue Marlin hold a majority interest in the tenant
The Fischer & Porter Company  sold the 35 acre facility to Coroad Associates, L.P. (“Coroad”) in 1997 which then sold a portion of the facility property consisting of a tract of 11.395 acres of undeveloped land to Coroad II in 1988. The remaining portion of the Fischer & Porter Facility consists of approximately 24 improved acres which Coroad leases to a successor of Fischer & Porter.  
The groundwater beneath the site has been contaminated with trichloroethene (“TCE”) and perchloroethene (“PCE”) from former degreasing operations conducted at the site.  After the site was placed on the NPL, Fischer & Porter implemented a groundwater remedy in 1984.  In 1992, a EPA “Five-Year Review” determined that more investigations into the source area were necessary and a focused Remedial Investigation and Feasibility Study (“RI/FS”) was performed. The suspected source of the contamination is the highly contaminated subsurface aquifer beneath the 24 acres that are not a part of the PPA transaction. EPA issued a second ROD in 1998 which required long-term operation and maintenance (“O& M”)of the 1984 pump and treat groundwater system. The O & M  has been implemented by a successor to Fischer & Porter. 
	EPA announced a PPA with Treeline Garden City Plaza, LLC  who will be purchasing a parcel of land located within the Old Roosevelt Field Contaminated Groundwater Area Superfund Site in Garden City New York. Treeline will make a payment of $400,000 in exchange for a covenant not to sue.
In one of the more interesting settlements, EPA has entered into a PPA with the Nature Conservancy which will be purchasing the Palmyra Atoll in the North Pacific Ocean.. The purchaser plans to acquire the island as a nature preserve and will manage it to protect its conservation values. EPA will provide a covenant not to sue in exchange for a payment of $ 10,000. The Property has been privately-owned since 1922 but was used as a base for troop transport by the U.S. Navy from 1940 to 1952.  The Navy built runways, docks, barracks, sea walls, roads, a hospital, numerous other facilities and installed dozens of underground storage tanks to store fuel for operations. Approximately 6,000 people resided at the property during this period. Afterwards, other federal agencies used the property including the Civil Aeronautics Administration which leased the island from 1947 to 1950  and the U.S. Coast Guard which maintained a facility at Palmyra until the late 1960s.  The U.S. Department of Defense has conducted response actions at the island but residual wastes and hazardous substances remain there.
Palmyra Atoll is an area of great natural significance and unique biological diversity.  It is the only unpopulated ‘wet’ atoll left in the tropical Pacific.  The atoll supports 29 bird species and the threatened green turtle, contains one of the largest remaining undisturbed stands of Pisonia beach forest in the Pacific, a robust population of the rare coconut crab which is the world’s largest land invertebrate, and 125 species of stony corals which is three times the coral species in Hawaii and the Caribbean basin and five times the number found in the Florida Keys.
Ombudsman to Investigate EPA Cleanup Plan for PA Site
A federal ombudsman has been appointed to review a remedial plan selected by EPA  at the Mariol Battery site in Throop, Pennsylvania. EPA  had approved a cleanup plan to entomb more than 500,000 tons of lead contaminated soils under a 10 acre clay and cement cap.  The site is adjacent to homes, a playground and the Lackawanna River. More than 100 million automobile batteries were broken apart on the from 1963- to 1981 44 acre site to recover their lead plates. Operations involved battery crushing, lead reclamation, and on-site disposal of spent battery casings. The ground at the site became contaminated with lead. Lead in dust and in on-site soils was carried off-site by winds. Storm water runoff carried lead contaminated soil into adjacent waterways including the Lackawanna River. 
EPA originally proposed to excavate contaminated soil at the site and dispose the contaminated soil off-site. EPA estimated the cost of the remedy would have cost the former battery operator $85 million. However, there was a concern that the excavation and off-site disposal could result in dispersion of three tons of lead in the air. As a result, when EPA announced the final remedy last month, the agency decided to allow most of the contaminated soil to be excavated and consolidated under a on-site cap. In addition, the top five feet of soil and waste will be treated to create a stabilized layer beneath the cap. Any waste materials that does not fit beneath the cap will be removed for off-site disposal. Institutional controls in the form of land use restrictions, title notices, and proprietary controls will also be created to ensure the integrity of the cap. EPA will also require an inspection and maintenance program to monitor the long-term effectiveness of the entire cleanup plan The agency's estimated the cost of the new remedy would be between $14 million to $24 million. EPA estimated that only 400 to 1,100 pounds of lead would become airborne by the proposed remedy. In addition, EPA indicated that the capping remedy could be completed in seven months while the off-site disposal approach would have taken three years to complete. 
Commentary: The ombudsman selected for this site was also involved in the Denver site that we reported on last year where a massive concrete and fly ash cap had been constructed to cover radioactive wastes. EPA eventually agreed to change the remedy and to break up the cap and remove the wastes to an off-site hazardous waste disposal facility.
EPA Proposes Settlement at Former Transformer Recycling Facility
EPA has proposed a de minimis settlement with former customers of the PCB Treatment Inc. Superfund Site located in  Kansas City, Missouri and  Kansas City, Kansas. The settlors had arranged for disposal of transformers, capacitors, oil, materials, or equipment contaminated with PCBs.   Under the settlement, parties who sent electrical equipment containing PCBs weighing between 630 and 2,760 pounds (in allocated weight) will pay costs based on their volumetric share of capacitor weight compared to all capacitor weight with an additional premium of 100%. EPA will recover $66,000 from the settlement and will seek to recover the balance of its $1.3 million from other potentially responsible parties at the Site.

   
ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS

Secured Creditor Allowed to Partially Foreclose on Property to Avoid Contaminated Parcel
The Vermont Supreme Court ruled that a mortgage holder may selectively foreclose on a group of parcels but not take title to a parcel listed on the NPL. 
In Pownal Development Corp. v. Pownal Tanning Company, Inc.( No. 98-577, 11/17/00), a tanning company had disposed its wastewater into on-site lagoons from 1962 to 1982. After the state obtained a judgment lien on the parcel of the facility known as the Mill Lot to secure its response costs, the tannery obtained financing from the First National Bank of Boston in 1984. The bank took back mortgages on nine noncontiguous parcels of forested land comprising 834 acres and the Mill Lot. In 1995, the plaintiff bought the mortgage note at a substantial discount and commenced foreclosure proceedings on all of the parcels except the Mill Lot. The plaintiff also named the Vermont Agency of Natural Resources as a defendant parcel because it held a subordinate lien on the Mill Lot.
The trial court ruled that the plaintiff could proceed with the partial foreclosure but the state appealed, arguing that partial foreclosure was inequitable and precluded under common law. The state Supreme Court affirmed the trial court’s decision. The court said that the equitable doctrine of marshalling provided that when a mortgage was secured by several parcels, a mortgagee could first foreclose on parcels that did not have junior encumbrances. The court also said if the plaintiff was required to take all of the parcels, it was quite possible that all of the property would remain in legal limbo and could not be leased or sold. Such a result, the court reasoned, would violate the law’s venerable policy of the free alienability of land.
Seller Who Indemnified Buyer May not Bring Contribution Action Against Other PRPs 
A federal court for the northern district of Alabama ruled in  Southdown v. Allen (No. CV-96-J-3300-S) that a seller of a hazardous waste recycling facility who agreed to indemnify the buyer and clean up the site waived any right to bring a contribution action against the former owner and customers of the facility. 
In 1990, the plaintiff purchased the stock of Allworth, Inc which operated the facility from Leslie Allen. The plaintiff subsequently discovered the facility was contaminated and entered into a remediation agreement when it sold the company in 1995 to Nortru, Inc. The agreement provided that the seller would remediate the contamination “at its sole expense” and also agreed to indemnify Allworth and Nortru for any environmental claims. The stock purchase agreement also contained a non-compete covenant where the seller acknowledged that a portion of the value of the stock was attributable to the “business relationships between the companies and key customers of the companies, and the willingness of the seller to refrain from pursuing its relationships with those customers”     
In 1996, the plaintiff filed a CERCLA contribution action against Allen when then filed a third-party against Allworth and Nortru. The plaintiff then named 41 former and current Allworth customers. These third-party defendants then filed a fourth-party claim against an additional 139 former and current customers of Allworth. Nortru filed a partial motion for summary judgment which was joined by the customer defendants seeking a ruling that the plaintiff’s contributions actions were barred by the remediation agreement. 
The district court held that the plaintiff had agreed to assume all liability in the remediation agreement. and therefore it had "explicitly waived" any CERCLA contribution rights it may have had. Moreover, the court said that the seller’s contribution action against the customers was incompatible with the language of the stock purchase agreement seeking to protect Allworth’s customer relationships. 
Commentary: We did not see any “explicit” language in the contract that waived the seller’s right to bring a CERCLA contribution action against non-contractual parties such as the facility customers who could be CERCLA PRPs. The contract law of many states often requires some showing that the contract put the indemnitor on notice about the types of liabilities that were being transferred To give effect to pre-CERCLA indemnities, courts usually look for broad language that shows the parties intended to include CERCLA-like liability. 
This case illustrates the importance of clarifying how non-contractual remedies are being allocated by parties in a transaction. Many parties now specifically provide in their contracts that the rights set forth in the contract are the sole and exclusive rights of the parties and that they waive any common law or other statutory rights they might have to contribution or indemnity. 
Specific Allegations Linking Defendant’s Waste to Site Not Required in Complaint
A district court for the middle district of North Carolina  ruled that a plaintiff in a CERCLA contribution action is not required to identify the particular hazardous substance for which each defendant is allegedly responsible to survive a motion to dismiss. In  Crown Cork & Seal Co. v. CBS Corp. (No. 1:99-869)  the plaintiff’s complaint simply listed hazardous substances found at each defendant’s site but did not contain an allegation of the waste sent by the defendant to the site. The court said that while it would have been better to list the hazardous substance for which each defendant allegedly was responsible, the pleadings were sufficient enough to withstand a motion to dismiss. 

Copyright (c) 2000 by Lawrence Schnapf. The Schnapf Environmental Report is a bi-monthly newsletter which provides updates on regulatory developments and highlights significant federal and state environmental law decisions affecting corporate and real estate transactions, and brownfield redevelopment. The newsletter is published by Law Professor Lawrence P. Schnapf, 55 E.87th Street, #8B, New York, New York 10128. Telephone: (212) 996-5395. Fax: (503) 213-9314. E-Mail: LSchnapf@environmental-law.net. Subscription rate for the Schnapf Environmental Report is $75 for one year (six issues) or $20 per issue. We also offer a seminar  “Environmental Problems in Business Transactions” which has been approved by the New York Continuing Legal Education Board as an Accredited Mandatory Continuing Legal Education (“MCLE”) Program. A course book with transactional forms is included with the seminar. The course book may be purchased separately. The seminar can be conducted at your office or at periodic department meetings that you might organize over the course of the year. If you are interested in this seminar or purchasing the course book, please contact Lawrence Schnapf. 
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