SCHNAPF ENVIRONMENTAL  REPORT

A Newsletter Covering Recent Environmental Developments and Caselaw
May/June 2000							Vol. 2, Issue 3	

Editor’s Note
Welcome to the Schnapf Environmental Report. We have once again tweaked our format so that the articles are in a true newspaper column format. We hope this will make the newsletter more readable but welcome any comments that you may have on the new design or changes that you think will enhance the newsletter.
In this issue, we are adding a new section devoted exclusively to environmental insurance issues. The full list of topics covered in this issue is as follows:
•	ASTM Approves Revisions to Phase I Site Assessment Standards 
•	SEC Considering Changing Environmental Disclosure Requirements for Foreign Corporations
•	EPA Announces New Self-Audit Protocols
•	EPA Allows Facilities More Time to File Disclosures for Nitrate Compounds
•	EPA and State Agencies Provide Loans for Pollution Prevention
•	Companies Use Supplement Environmental Projects to Resolve EPCRA Violations
•	EPA Continues Enforcement Initiative Against Colleges and Universities
•	Rating Agency Issues Criteria for Using Environmental Insurance in CMBS Transactions
•	Environmental Insurance Used In Recent CMBS Transaction
•	Environmental Insurance Used To Promote Redevelopment of Former Military Bases
•	Insurer Grants Coverage for PLL Policy
•	Supreme Court Agrees to Review Clean Air Act Case
•	Court of Appeals Rejects Petitions to Reconsider NOx SIP Call
•	EPA Adds Additional Power Plants to NSR Enforcement Action
•	Northeast States Take Action to Reduce Emissions from Old Power Plants
•	States Continue to Take Actions to Reduce Greenhouse Gases Emissions
•	Canada Establishes GHG Emission Reductions Exchange
•	European Countries Taking Voluntary Actions to Reduce GHG Emissions
•	New York Enacts Law Discouraging Sale of SO2 Allowances to Out-of-State Facilities
•	Phase II SO2 Auction is Conducted
•	EPA Continues Wetlands Enforcement Actions
•	New Nationwide Permits Go Into Effect on June 7th.
•	Public Comment Period Extended for New Definition of Fill Material
•	Supreme Court to Review Migratory Bird Rule
•	EPA Proposes Stricter Arsenic Standards
•	EPA Study Reveals Elevated Levels of Lead in Drinking Water
•	UST Owner Fined $4.74 Million
•	Petroleum Marketer Fined for Violating UST Standards
•	US Brings Criminal Charges For Falsification of UST Test Results
•	Pennsylvania Enters Into 100 station UST Multi-Site Cleanup Agreement
•	Classification of Waste Can Effect Disposal Costs of Contaminated Soils
•	EPA Proposed Handbook on RCRA Groundwater Policies
•	Property Owner Uses EPA Audit Policy to Waive Lead-Based Paint Penalties
•	EPA To Perform Removal Actions at Residential Properties
•	Eleventh Circuit Upholds Secured Creditor Exemption for City
•	Landowners Resolve CERCLA Liability by Agreeing to Institutional Controls
•	EPA Announces New Brownfield Pilots
•	Two Cities Make BCRLF Awards
•	Michigan Expands Brownfield Financial Incentives
•	South Carolina Announces New Voluntary Cleanup Program
•	Connecticut DEP Proposes Rules for Groundwater Aquifers
•	Pennsylvania Announces Performance-Based Loans for Industrial Site Cleanups
•	Ohio Governor Proposes New Brownfield Funding
•	North Carolina Agrees to Multi-site MGP Voluntary Cleanup Agreement
•	North Carolina Legislature Approves Dry Cleaner Fund
•	Innovative Maine Settlement is Approved
•	New Jersey Launches Institutional Control Review Program
•	New York DEC Considering Administrative Changes to Voluntary Cleanup Program
•	Federal District Court Rules that CERCLA Recycling Exemption Applies to Pending State Cost Recovery Action
•	Second Circuit Allows CERCLA Contribution Claim to Proceed Against Investment Bank
•	Second Circuit Rules Sublessor Is Not Liable for Contamination Caused by Subtenant 

DUE DILIGENCE/ AUDITING/ DISCLOSURE/ ENFORCEMENT 

ASTM Approves Revisions to Phase I Site Assessment Standards
In our last issue, we discussed some of the proposed revisions to the ASTM 1527 and 1528 standards for Phase I Environmental Site Assessments (“ESAs”) and Transaction Screens. On April 6th, the revisions were approved. The 2000 ASTM 1527 and 1528 standards are now available from ASTM's Web site: http://www.astm.org. The standards can also be ordered by calling ASTM's customer service department at (610) 832-9585.
Commentary: One of the important changes to the ASTM 1528 standard is the requirement that the Phase I report provide sufficient documentation to allow an independent third party to recreate the process and arrive at the same conclusions. This could eliminate the need to perform duplicative site assessments for Phase I ESAs that are less than a year old.  

 SEC Considering Changing Environmental Disclosure Requirements for Foreign Corporations 
The Securities Exchange Act of 1934 requires companies whose securities are publicly-traded to file periodic reports disclosing information that would be material to investors. Financial statements filed with the Securities and Exchange Commission (“SEC”) must be accurate and must contain any material information necessary to make the required statements not misleading. SEC regulations further provide that filings that are not prepared in accordance with generally accepted accounting principles (“GAAP”) would be presumed to be misleading or inaccurate. SEC regulations also require that management disclose the material effects that compliance with federal, state and local environmental law provisions may have on the capital expenditures, earnings and competitive position of a company.
Currently, foreign companies traded on U.S. stock exchanges must comply with the SEC environmental disclosure requirements. However, the SEC is considering allowing the foreign companies to use the standards established by the London-based International Accounting Standards Committee (“IASC”) which has not established any specific environmental disclosure rules. Approximately 440 foreign companies which are listed on U.S. Stock exchanges would be affected by the change. 
Commentary: The SEC environmental reporting requirements are contained in three sections of Regulation S-K in Items 101, 103 and 303. The SEC has also issued clarifications on the environmental reporting obligations in Securities Act Release (“SAR”) 6835 and in Staff Accounting Bulletin No. 92 (SAB 92) which provided further guidance on identifying and reporting contingent environmental losses. 
The Financial Accounting Standards Board has issued standards and interpretations that provide guidance on what constitutes GAAP. The Financial Accounting Standard entitled "Accounting for Contingencies” ("FASB 5”) indicates that GAAP requires accrual of an estimated loss if information is available prior to issuing the financial statements which indicates that it is "probable" that a liability has been incurred at the date of the financial statements and the loss can be reasonably estimated.  Financial Accounting Standards Board Interpretation No. 14, entitled, "Reasonable Estimation of the Amount of a Loss” states that GAAP does not permit delaying recognizing contingent liabilities until only a single amount can be reasonably estimated.  Instead, management must disclose a range of estimated losses and accrue the minimum of the range as a loss in the financial statements.  In addition, the American Institute of Certified Public Accountants (“AICPA”) has issued a “Statement of Position 96-1 Environmental Remediation Liabilities". This document which became effective for fiscal years beginning December 15, 1996 discusses when environmental remediation liabilities should be accrued in accordance FASB 5, the types of costs that should be included in the accrual of environmental liabilities, how the liabilities should be measured and contains guidance on how environmental remediation liabilities should be displayed in financial statements and disclosure of environmental loss contingencies.  
EPA Announces New Self-Audit Protocols 
 	In 1998, EPA's Office of Compliance began developing manuals that to help businesses and organizations perform audits and take advantage of the incentives contained in the EPA Audit Policy and Small Business Audit Policy (See our prior issue for a discussion on changes to these policies). Recently, EPA released five new self-audit protocols for conducting environmental compliance audits for the following federal environmental programs: Safe Drinking Water Act, PCB/lead paint/asbestos; the Toxic Substances Control Act, Used oil and Universal Waste; and the Resource Conservation and Recovery Act (including storage tanks and Subtitle D facilities). For greater flexibility, users can custom-tailor the protocols for the specific environmental aspects associated with their facility.
Commentary: EPA has issued four self-audit protocols and plans to issue four more by December 2000. Copies of the nine protocols are available at: www.epa.gov/oeca/ccsmd/profile.html.

EPA Allows Facilities More Time to File Disclosures for Nitrate Compounds

EPA recently issued an "Opportunity to Show Cause" under the Emergency Planning and Community Right-to-Know Act (“EPCRA”) providing certain facilities with the opportunity to perform audits for nitrate compounds. The order would allow companies to correct any past noncompliance for the period from 1995-1998. In exchange for the commitment to perform the audit, companies will not be subject to additional fines for any additional reporting violations that are uncovered during the audits. EPA has agreed to reduce the penalty for the EPCRA violations to $1,000 for small businesses and $5,000 for other companies. The facilities will have up to 120 days to complete the audit, submit TRI Form R reports, and certify compliance with EPCRA Section 313 reporting requirements. In addition, EPA will provide these facilities with additional time to comply with the July 1, 2000 deadline for filing TRI reports for the 1999 reporting year for nitrate compounds. However, the facilities will have to comply with the July 1, 2000 for filing TRI reports for other chemicals.
EPA and State Agencies Provide Loans for Pollution Prevention
EPA and many state agencies are beginning to provide financial assistance for projects that demonstrate the benefits of implementing pollution prevention (“P2”) measures. Pennsylvania and Michigan are among the states that offer grants to small businesses to fund P2 projects. 
The Michigan program offers loans to small businesses to implement projects that are designed to eliminate or reduce waste through recycling or source reduction. Under the program, the Michigan Department of Environmental Quality partners with the company and its local bank to provide loans up to $0.1 million, with a maximum 5% interest rate. The loan program, which is currently funded at $5 million, is aimed at businesses with less than 100 employees. For example, a metal-finishing company recently obtained a loan of $75,000 to install systems to recover and reuse metal plating chemicals that were previously being treated and discharged to the public sewer system. 
In Pennsylvania, the pollution-prevention and energy-efficiency (“P2E2”) site assessment program helps businesses and local governments find ways to save money on energy costs, reduce waste, and prevent pollution. The program was initially only available to small businesses with less than 100 companies but the state has now expanded the program to all businesses as well as local governments.
 Grants will fund 80% of the total cost of P2E2 site assessment with a maximum of $5,000 for small businesses and up to $15,000 for local governments and businesses of any size who hold DEP permits. Environmental consultants, service providers, or others with experience conducting P2E2 or environmental assessments can be hired to perform the assessment. To assist governments and companies in finding a qualified assessor, DEP will maintain and distribute a list of assessors who have successfully completed a site-assessment-training workshop to support the grant program. 
In addition, Pennsylvania also has a Pollution Prevention Assistance Account loan program which helps small businesses install pollution-prevention equipment and become more energy efficient. Companies with less than 100 employees can apply for up to $50,000. Loans carry an interest rate of no more than 2 percent and have a maximum term of seven years. According to the state, every dollar a company invests in preventing pollution, typically $5 to $8 comes back in reduced operating costs for the business. 
Companies Use Supplemental Environmental Projects to Resolve EPCRA Violations
We have reported in prior issues that a number of companies have been able to take advantage of the EPA audit policy to settle EPCRA. Another strategy some companies have been following is to agree to perform supplemental environmental projects (“SEPs”) to resolve their liability.  
For example, EPA had determined that a New Jersey company had failed to submit toxic release inventory (“TRI”) forms for certain chemicals from 1995 to 1997. In addition, EPA determined that the company had manufactured a new chemical on three occasions from 1994 to 1996 without providing EPA with pre-manufacturing notice as required by the Toxic Substances Control Act (“TSCA”). To settle these violations, the company agreed to make approximately $150,000 in environmental improvements to its facility, pay a cash penalty of $47,245 and to purchase $20,000 worth of emergency response equipment for the local government. 
In Pennsylvania, a company recently agreed to pay a $21,000 penalty and complete a $130,500 SEP to settle claims that it had failed to timely file TRI reports on copper and nitric acid processed or used at the plant in 1995 and 1996, and lead processed there in 1995, 1996 and 1997
Commentary: A SEP is an environmentally beneficial project which a company agrees to undertake that is not required under environmental laws. In exchange for agreeing to perform a SEP, some percentage of the cost of the project may be considered as a factor in establishing the civil penalty. EPA issued a SEP guidance document in May 1998 which discusses the seven categories of SEPs, the legal guidelines for designing such projects, and the methodology for calculating penalty credits. In September 1998, EPA issued a guidance document for using SEPs to facilitate brownfield redevelopment. We will be reviewing that policy in a future issue.

EPA Continues Enforcement Initiative Against Colleges and Universities 	
In our last issue, we reported on the enforcement initiative commenced by EPA against colleges and universities. Since then, EPA has announced settlements with four more educational institutions. 
Lincoln University agreed to pay a $45,000 penalty for failing to remediate contaminated soil associated with three underground storage tanks that had been removed in 1998 and for failing to prepare and implement a spill prevention, control and countermeasure (“SPCC”) plan for three aboveground storage tanks. 
The University of Virginia also agreed to pay $33,990 in penalties to settle two complaints. The first complaint alleged that the university generated and stored hazardous waste without a permit. The hazardous wastes were generated by several laboratories and stored for disposal at various collection centers around the campus. The second complaint involved failure to develop a SPCC plan for ASTs with a combined capacity of 99,600 gallons. The tanks are located near storm drains that empty into a tributary of the James River. 
In addition, EPA entered into settlements with George Washington University for $29,460 and Villanova University for  $22,759.

ENVIRONMENTAL INSURANCE-New Section 

Rating Agency Issues Criteria for Using 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 this issue, we discuss the criteria of Fitch IBCA (“Fitch”) which was issued in 1999. 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 that may miss one or more material environmental conditions or underestimate the cost of remedial actions that are necessary to eliminate the problem. 
On the other hand, Fitch indicated that using environmental insurance without performing any environmental due diligence 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. Of course, inclusion of highly-contaminated properties in a transaction will only be significant to the extent that the trust will be unable to collect on the full extent of its losses or claims from the insurance policy. 
Because these transactional-based environmental insurance policies are relatively new and there is not yet a well-established claims payment history, Fitch indicated it would only allow the use of environmental insurance as a substitute for traditional environmental due diligence for loans with outstanding principles of $20 million or less. Loan pools in excess of $20 million would still be expected to perform environmental due diligence. 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. Readers should note that while the earlier versions of the secured creditor policies required foreclosure and the existence of a pollution condition, a number of carriers have dispensed with the foreclosure pre-requisite and now only require the borrower be in default. 

•	To ensure that sufficient information is generated about the properties, Fitch recommended that the insurer should, at a minimum, perform a regulatory database review 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 cover all of the topics included in the ASTM E-1528 Transaction Screen. 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 are in the form attached and do not have any modifications.  

•	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.
 
•	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 The PSA should allow that the insurer be replaced if its rating falls below the AA rating. 

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 insured should also include their respective successor and assigns.
•	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. Extension risk which is the risk that a policy may expire because a loan has been extended beyond the policy term should be handled in one of the following two ways: The policy could cover all permitted extensions or if an extension is being considered one year prior to the expiration of the policy, the PSA could require the special servicer to perform a Phase I site assessment. 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 should be at least 125% of the original loan balance. The per claim limit should include the following: principal balance of the defaulted loan, accrued and unpaid interest, interest on any servicer advances, any unreimbursed property protection expenses and any trust expenses associated with the filing of the claim. All losses from the date of default to the date of claims payment should be fully covered. 
•	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 a particular pool had a 60% stress default rate and 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 24% of the original collateral balance to be credit neutral. 
•	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- The premium should be paid in full at the time of the closing.
•	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. 
•	Notice- The policy should provide that that a claim may be filed within 45 days after a specifically identified officer within the special servicers organization has actual knowledge of the environmental problem. 

Fitch indicated that in most cases, the existence of a secured creditor policy would have no effect on the credit rating of a newly originated loan pool. However, for an existing pool, environment insurance may receive credit enhancement when environmental insurance is used in lieu of dated Phase I ESAs. Pools that obtain environmental insurance in addition to standard environmental due diligence may also receive credit enhancement. Small balance loans may receive better credit enhancement when environmental insurance is used as opposed to the limited due diligence that is ordinarily performed.   

Environmental Insurance Used In Recent CMBS Transaction 

A recent CMBS transaction involving 268 loans collateralized by 278 properties used  AIG Secured Creditor Impaired Property Policies. The AIG policy was used for 92 of the loans involving 89 properties. The uses of the 89 properties included office, retail, multifamily, hotel, mobile home park and self-storage. No environmental due diligence was performed in connection with these loans although 15 of the properties had Phase I ESAs within the past three years. GMAC, Solomon Brothers Realty Corp. and Greenwich Capital Financial Products originated the loan pools. The loan balances ranged from $292,000 to $3,700,000 with an average of $1,100,000. The limit of the policy was 125% of the largest loan with a policy aggregate of $30,000,000. The policy was for five years and there was no deductible. The pool was given minimal credit enhancements by S& P and Moody’s rating agencies.  Special thanks to Bill Harvard of Miller & Associates in Scottsdale, Az. for providing us with this information. 
Environmental Insurance Used To Promote Redevelopment of Former Military Bases
The Lubbock Reese Redevelopment Authority (“LRRA”) in Lubbock, Texas recently used a specialized environmental insurance policy in connection with the redevelopment of the former Reese Air Force Base. 
The insurance program was designed by ECS Underwriting and was based on the form Pollution and Remediation Legal Liability ("PARLL") insurance policy. This program includes coverage against third-party claims resulting in sudden and gradual pollution conditions, additional cleanup costs and legal defense. LRRA will also be protected from business interruption expenses including those caused by construction delays that result from known pollution conditions. The environmental insurance program will protect tenants against property damage, bodily injury and legal defense costs.
The 3,000-acre base is being developed into a new industrial and research park. The base had been contaminated as a result of releases from on-site landfills, USTs, industrial drain lines, fire-training areas, and past waste management practices. 
Aside from the former Reese Air Force Base, other former military bases that have used ECS insurance programs to promote redevelopment plans include Lowry Air Force Base in Denver, CO; Kelly Air Force Base in San Antonio, TX; Camp Pedricktown in Salem County, NJ; the Naval Ship Yard in Philadelphia, PA; Fort Sheridan in Highland Park, IL; the David Taylor Research Center in Annapolis, MD; Rio Vista Army Reserve Center in Rio Vista, CA; Watertown Arsenal in Watertown, MA; the Glenview Naval Air Station in Glenview, IL; and Orlando Naval Training Center in Orlando, FL.
AIG Environmental recently designed an insurance program for the Oz Entertainment Co. (“Oz”) which has entered into an agreement with Kansas Department of Health and Environment to remediate contamination at the former Sunflower Army Ammunition Plant. Under the terms of the agreement, federal officials will transfer title to the Sunflower base to the state through a development corporation. The corporation then would transfer the land to Oz which plans to build a theme park. The development plan also calls for a mix of residential and commercial development. 
It has been estimated that the cleanup will cost $37 million over 12 years to clean up the 9,065-acre site. AIG Environmental wrote a cost cap policy for $100 million to cover unanticipated costs and any claims against the company and a  $100 million pollution liability insurance to cover unexpected contamination. The Insurance Company of Pennsylvania wrote a $45 million surety bond a performance bond to guarantee the contractor's work and a payment bond to guarantee subcontractors get paid. The policies must be paid for before the land deal is closed. 

Insurer Grants Coverage for PLL Policy

	A major concern of environmental attorneys and their clients is whether insurance carriers will pay claims made under the new environmental insurance products that are being heavily marketed. Many clients and their attorneys remember the battles that were fought in the 1980s and early 1990s over the General Comprehensive Liability policies and are reluctant to purchase these new insurance products without some evidence that the insurers are paying claims under these policies. 
	Beginning with this issue, we are introducing a new feature where we will provide examples of how claims have been handled under these new policies. We have reached out to insurance companies and brokers for information about claims history related to these insurance policies and hope to be able to provide new examples each month. In this issue, we discuss a claim that was paid by AIG under a Pollution Legal Liability Select Policy.
	The property is a former vehicle repair shop in a mixed-use commercial/industrial neighborhood. The seller conducted a Phase I ESA which did not reveal any serious environmental issues.  However, two years later, a Phase II ESA was performed and revealed contamination levels above the state cleanup standards.  Apparently, prior to its use as an auto repair shop, the site had been used as retail fueling facility containing 12 underground storage tanks which had been previously removed. There were reports of prior releases and there was no information on the age of the USTs that had been removed.
	The seller purchased an insurance policy with limits of $10 million for each incident and an aggregate of $50 million.  The deductible was $250,000 and the premium was $264,410. The policy included on-site and off-site cleanup costs for pre-existing conditions and for non-owned properties. AIG granted coverage for remediation costs exceeding the deductible. Thus far, the remediation costs have totaled approximately $488,000. It is anticipated that there will be several additional years of groundwater monitoring at a cost of about $12,000 per year.
Commentary:   We understand that some carriers have effectively stopped writing cost cap policies by tightening their underwriting requirements because of losses they have incurred with these policies. Ironically, there is anecdotal information that it is the smaller policies where some carriers are incurring the greatest losses. As a result, we have heard that some carriers are not writing policies for less than $1 million or for cleanup costs less than $500,000. 

	

	AIR POLLUTION DEVELOPMENTS

Supreme Court Agrees to Review Clean Air Act Case 
In May, the United States Supreme Court agreed to review a decision by the Court of Appeals for the District of Columbia which remanded new National Ambient Air Quality Standards (“NAAQS”) for ozone and particulate matter (“PM”) which EPA issued established in 1997. Equally significant, the Court also granted a cross-petition filed by the plaintiffs which requests the Court to review whether EPA must consider non-health factors such as costs when setting standards under the federal Clean Air Act (“CAA”).  
In its 1997 rule, EPA replaced the old one-hour ozone NAAQS of 0.12 parts per million (“ppm”) with an eight hour standard of 0.08 ppm.  The revised PM NAAQS added a new primary PM standard of 2.5 microns. In May 1999, a three-judge panel of the U.S. Circuit Court of Appeals for the District of Columbia ruled in American Trucking Associations vs. Browner that EPA had overstepped its authority in issuing the new standards.  The court said that EPA’s interpretation of its authority under the CAA violated the non-delegation doctrine which provides that Congress cannot delegate legislative authority to another government agency under the U.S. Constitution. The court said that under the CAA, EPA was required to establish standards that were necessary to protect human health.  Because the court found that EPA had not demonstrated how the standards would be protective of human health, the court remanded the standards back to EPA for revision in accordance the legislative direction set forth in sections 108 and 109 of the CAA. EPA then filed a petition for review by the full appeals court which was denied by a 6-5 vote in October. 
In remanding the standards back to EPA, the appellate court only required the agency to consider health-based factors. By granting the industry petition, however, the Supreme Court has dramatically expanded the scope of the case.  This action by the Supreme Court has alarmed EPA and environmentalists since it could overturn a 20 year precedent first established by the D.C. Circuit’s 1980 opinion in Lead Industries Association v. EPA (647 F.2d 1130). In that case, the court ruled that the EPA was barred from considering compliance costs when setting NAAQS. Under this line of authority, costs may be considered when establishing the specific control technology for air sources but not when promulgating the NAAQS. 
EPA Adds Additional Power Plants to NSR Enforcement Action
In our November issue, we reported on the new source review (“NSR”) litigation brought by EPA and several states. The litigation involved 17 power plants located in Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Mississippi, Ohio, Tennessee and West Virginia. These facilities pre-dated the CAA and were “grand-fathered” or exempted under the CAA from installing state-of-the art emissions controls known as “best available control technology” (“BACT”) or Lowest Achievable Emission Rate (“LAER”) for facilities located in non-attainment areas. Under the NSR program, if these plants underwent “major modifications”, they would have to be equipped with BACT or LAER if the changes result in significant net increases in six criteria pollutants. The particular emissions threshold for triggering NSR varies with the pollutant. For example, an increase in 40 tons per year (“tpy”) of NOx will trigger NSR while the threshold carbon monoxide is 100 tpy.  
EPA has asserted that the utilities engaged in major repairs and modifications that did not qualify as a routine repair, replacement or maintenance because the changes increased capacity, allowed facilities to regain lost capacity or extended the lives of the facilities. These projects included replacing large portions of the boilers that are the heart of the plants. Many of these actions cost tens of millions of dollars and took years to complete. The EPA claimed these modifications should have triggered NSR review and that the changes allowed the utilities to avoid the cost of building new plants. The defendants have claimed that the action constitutes an improper reinterpretation of EPA’s NSR rules. 
Last month, the Department of Justice (“DOJ”) added 12 additional facilities to its complaint. The additional power plants include five American Electric Power (“AEP”) facilities in Ohio, West Virginia and Virginia; two Cinergy plants in Indiana and five plants in Georgia, Mississippi, Florida and Alabama operated by Southern Company affiliates. 
At the same time that the DOJ was adding new facilities to the federal lawsuit, several states agreed to join the litigation as plaintiffs. Massachusetts, New Hampshire, and Vermont announced last month that they had joined Connecticut, New Jersey, and New York who had previously intervened in the federal lawsuit. A coalition of national and local public health and environmental organizations has filed its own lawsuit. In response to the citizen suit, AEP filed a motion to dismiss but allowed the citizen groups to intervene in the federal litigation. In its motion to dismiss, the utility has argued that none of the projects at its plants were intended to increase their generating capacity and that 85% of the alleged violations fell outside the five-year statute of limitations for CAA enforcement actions set forth in 28 U.S.C. 2642.
In addition, in response to a request for reconsideration filed by the Tennessee Valley Authority (“TVA”), EPA also issued a directive instructing the Environmental Appeals Board (“EAB”) to review the administrative order that had been issued against the TVA. EPA decided on an expedited process where the matter would go directly to EAB instead of the usual administrative process of first having an administrative law judge review the matter. Meanwhile, the TVA has asked the Eleventh Circuit Court of Appeals to review the EPA order. TVA says that it has spent more than $2.5 billion to reduce emissions from its plants and initiated a voluntary plan two years ago at a cost of $600 million to further reduce emissions. TVA also said that some of the alleged violations involved situations where the TVA was proposing to use alternative emission reductions strategies such as selective catalytic reduction technology instead of the technological solutions demanded by EPA.
In addition to expanding the number of facilities subject to the NSR lawsuit, the EPA region 4 office issued a notice of violation (“NOV”) against Duke Energy Co. (“Duke”) for allegedly failing to undergoing NSR at eight coal-fired plants. The EPA claimed that Duke improperly modified 23 boiler units at the eight plants dating back to 1977. The utility will have an opportunity to discuss the NOV. If the negotiations are unsuccessful, EPA may issue an administrative order or file a complaint against Duke. The EPA Region 3 office also issued a notice of violation to Virginia Electric and Power Co for alleged NSR violations by its Mount Storm coal-powered plant. 
Commentary: EPA has indicated that its NSR enforcement initiative is a national program and is considering issuing section 114 information requests to additional utilities sources located in the west and southwest. In addition, EPA has been issuing information requests to non-utility industrial sectors such as oil refiners, chemical manufacturers, wood products, and the pulp and paper industry. Unlike the utility NSR actions which focus on whether certain maintenance actions were “routine”, the issue in the non-utility NSR actions is whether the facilities by expanding operations or adding equipment without first going through the NSR process.

Court of Appeals Rejects Petitions to Reconsider NOx SIP Call 
Back on March 3rd, a three-judge panel of the Court of Appeals for the District of Columbia upheld a EPA plan to require 22 eastern states to reduce emissions of nitrogen oxide (NOx). The so-called EPA NOx SIP Call which was originally issued in 1998 requires sources to reduce NOx emissions by May 2003. We reported in our last issue that eight Southern and Midwestern states had filed a petition seeking en banc review by the full court. 
On June 22nd, the Circuit Court denied the petitions for rehearing in Michigan v. EPA (No.98-1497) and granted the states an additional 128 days to file revised State Implementation Plans (“SIPS”). The states were originally required to submit their revised SIPS by September 30, 1999. 

Northeast States Take Action to Reduce Emissions from Old Power Plants

 On May 10th, a coalition of utility, coal and petroleum companies from the Midwest filed a lawsuit against EPA for failing to take action against eastern states who had not filed SIPS designed to reduce ozone pollution. On May 30th, EPA entered into a consent agreement with the plaintiffs in Midwest Ozone Group v. Browner which sets a deadline for eastern states to file SIPs to reduce ozone pollution. If the eastern states fail to submit acceptable SIPs, the consent decree requires EPA to prepare Federal Implementation Plans (“FIPs”). 
While the lawsuit was being settled, a number of northeastern states were already taking steps to reduce a variety of emissions from sources located within their states. Last month, Massachusetts announced reached an agreement with five utilities to reduce emissions of nitrogen oxide and sulfur dioxide by 50 percent by 2003 as well as cuts in mercury, carbon dioxide and soot emissions by 2003. The five companies pledged to take a variety of reforms, including switching from coal to cleaner-burning natural gas and installing improved pollution controls. The six plants that are covered by the agreement had been grand fathered under the CAA because they had been built before 1970. The state Department of Environmental Protection plans to draft regulations that will ensure that the changes are carried out at the six plants. 
Not to be outdone by its sister state, Connecticut Governor John Rowland issued an executive order in May which ordered the state Department of Environmental Protection (“DEP”) to draft new regulations requiring 61 older power plants to reduce sulfur dioxide emissions by up to 50 percent and to cut nitrogen oxides by 20 to 30 percent. Under the executive order, the DEP must issue has until 2003 to write rules that would reduce.
Commentary: As NOx emissions from power plants and other stationary sources are reduced, regulatory attention will begin to shift to others sources of ozone precursors. For example, the Ozone Transport Commission (“OTC”) announced in June that its membership had agreed to a memorandum of understanding for developing strategies to reduce emissions from six major sources of ozone. The OTC plans to hold public meetings during the summer and fall and adopt final recommendations early next year. Initially, the strategy will focus on sources of volatile organic compounds (“VOCs”). The preliminary list of operations that will be targeted by the initiative includes architectural and industrial maintenance coatings, consumer products, spray painting and solvent cleaning as well as mobile equipment refinishing such as high-volume, low-pressure spray guns and enclosed spray gun-cleaning equipment. 
Another likely target will be airport and aviation operations. Airports have become a significant source of NOx and VOC emissions and it is anticipated that as airports expand to accommodate more air and vehicular traffic, these operations may become the largest source of NOx in some states by the beginning of the next decade. One proposal under consideration by the OTC will be a “cap and trade” program where an emission budget will be assigned for each airport. The emissions budget would then be allocated to all of the business conducting operations at the airport including airlines, ground equipment operators, rental car fleets and bus operators. The sources would be able to trade their emission allowances to other business operating at an airport. Some states or airport authorities may also require the use of alternative fuels or ground equipment with reduced emissions. In addition, some airports may also experiment with a differential landing fees. For example, Logan Airport in Boston is considering charging lower landing fees for aircraft which are equipped with more stringent pollution controls. The OTC is composed of the states of Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Maryland, Delaware, the northern counties of Virginia, and the District of Columbia.  

States Continue to Take Actions to Reduce Greenhouse Gases Emissions

In our last issue, we discussed that New Jersey had announced plans to reduce GHG emissions by 20.2 million metric tons by 2005. Last month, the Wisconsin Department of Natural Resources (“DNR”) was authorized to establish a registry where companies can report their GHG reductions.
 Since it is likely that baseline for determining compliance with future federal GHG-reduction requirements will use GHG emissions at the time the federal requirements become effective, companies that reduce GHG emissions prior to the establishment of federal requirements could find themselves at a disadvantage. The purpose of the registry is to minimize adverse consequence to companies who take early action to reduce GHG emissions by providing them with a mechanism to verify their voluntary reductions and therefore be able to get credit for those reductions that occurred prior to the effective date of any federal GHG reduction requirement. Massachusetts, Oregon and Connecticut are also exploring ways to provide incentives for reducing GHG emissions.
In addition, the Northeast States for Coordinated Air Usage Management (“NESCAUM”) recently proposed a model rule to OTC that would contain new emissions performance standards for several pollutants, including CO2. The rule was developed by Connecticut air officials in response to recent state legislation. Because NESCAUM is partially funded by EPA, some members of Congress became concerned that EPA was trying to evade restrictions contained in appropriation bills for fiscal years 1998, 1999 and 2000 that prohibited EPA from spending any funds to support implementation of the Kyoto Protocol. However, NESCAUM officials confirmed to members of Congress that the proposed measures were not developed using EPA money and that the impetus for the proposal was originating from the individual states. The NESCAUM action does demonstrate the extent that states are prepared to go to control GHG emissions. 
      Commentary: Many companies are trying to document the GHG reductions under section 1605(b) of the Energy Policy Act of 1992. However, a recent report issued by the General Accounting Office suggested that claims submitted under the DOE voluntary program might not qualify for more stringent programs that will be established to implement the Kyoto Protocol. Thus, their GHG reduction may not be recognized when federal GHG-reduction requirements are implemented.

Canada Establishes GHG Emission Reductions Exchange 

 	The Alberta Securities Commission recently approved KEFI-Exchange Inc. to operate Canada's first Internet-based electronic GHG emission reductions exchange. Parties will be able to buy and sell GHG emission reductions which could be applied towards an entity's individual commitment to reduce GHG emissions. The emissions will be traded using certificates representing a thousand Emissions Free Index (“KEFI”) points.  The KEFI certificates will be issued based on CO2 emissions associated with the Alberta, British Columbia and Saskatchewan electricity generation sectors. 
The KEFI-Exchange will track hourly CO2 generated by the facilities in the three provinces. The KEFI points will be based on the amount of electricity generated by a unit and the Power Pool system average emissions. A ”clean'' electricity generating facility, such as a wind turbine or hydro facility, will earn “Pull'' KEFI certificates for every MWhr that it generates electricity, while a generator operating with more emissions per MWhr than the average earns “Push'' KEFI certificates only when it is NOT operating.
Registered participants of the exchange will be able to log onto the KEFI-Exchange Internet website, using standard Internet browser software. The participants may post bids and offers and request reports. The KEFI-Exchange will electronically match and track trades, and send out invoices and payments. 
While the KEFI certificates are specifically targeted to the electricity generation sector, KEFI-Exchange Inc. plans to expand its emissions trading concept into other industrial sectors and jurisdictions. Under this system, the KEFI certificate may be converted to a CO2 equivalent contract with each KEFI certificate equal to 12 tons of CO2 emission reductions. Thus, certificate holders would be able to trade them across a broader range of industrial sectors and participate in GHG emission reduction trading initiatives worldwide.
In a recent transaction that was brokered by New York’s Natsource, a German utility traded excess CO2 emissions credits to the second largest emitter of GHG in Canada. Hamburg Electricity recently built a wind turbine to provide additional electrical power to the City of Hamburg. The wind turbine enabled the utility to reduce its CO2 emissions which it sold to Trans Alta Corporation of Calgary. The Canadian company plans to use the credits to help meet its GHG reduction obligations under the Kyoto Protocol. 

European Countries Taking Voluntary Actions to Reduce GHG Emissions

According to the International Energy Administration (“IEA”), many European countries are not waiting for final ratification of the Kyoto Protocol to begin reducing GHG emissions. The IEA has indicated that 11 countries have established carbon taxes. The taxes vary in amounts and the types of activity that are subject to the levies. The nations that have adopted direct taxes on CO2 emissions include Denmark, Finland, France, Italy, Norway, Netherlands, and Switzerland. Energy-related taxes which are linked to the carbon content of fuels have been established in the Czech Republic, Germany, the Netherlands and England. 18 IEA countries are planning some form of tax credits related to GHG emission reductions. For example, Canada allows credits to be applied for use of equipment which captures and flares industrial GHG. Other countries are allowing tax offsets for verifiable GHG emission reductions. In some of these countries, offsets to the taxes may be available. Information on energy policies of IEA countries is available at http://www.iea.org.
 
New York Enacts Law Discouraging Sale of SO2 Allowances to Out-of-State Facilities
Concerned that emissions from utilities located in Midwest and the South are significant contributors to acid rain in the state, the New York legislature passed a bill that would penalize New York utilities who sell SO2 allowances to coal-burning plants located in 14 states. Governor George Pataki signed the bill into law on May 24th . The law became effective on that date. The states covered by the law include Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and Wisconsin.
Under the new law, sales and trades of SO2 allowances would have to be reported to the state Public Service Commission (“PSC”). If the sale or trade is made to a utility located in one of the prohibited states, the PSC would levy a fine known as an “air pollution mitigation offset” equal to the proceeds of the transaction. The funds would then be placed into an “air pollution mitigation fund” to managed by the State Energy Research and Development Authority. Pollution sources within the state that impose a restrictive covenant on the trading or sale of their own allowances to states upwind of sensitive resource areas in New York will be exempt from the air pollution mitigation offsets. Contracts for the sale of SO2 allowances that were entered into prior to the effective date of the law will not be subject to the penalty offset and the law will not apply to the transfer of allowances between facilities located in New York or the transfer of allowances within one company in-state.
Commentary: 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 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. 
Despite the concerns expressed by the New York legislature, a recent GAO report suggests that upwind trades by New York power plants are not significant and do not substantially contribute to acid rain problems in the state. According to the GAO report, 81% of allowances used to offset SO2 emissions in the 25 states that participated in the federal Acid Rain program have come from other sources within states where the emitting source was located. The data shows that there was only 3% flow of net allowances between the regions meaning that there was extremely low shifting of total emissions from one part of the country to the other. The largest change in flow of allowances was from the MidAtlantic to the Midwest states largely because of allowance transfers from Tennessee and West Virginia to Illinois and Indiana. 
The GAO data also indicates 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, early 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. Complete information on allowance allocations and emissions can be obtained form www.epa.gov/acidrain/trading.html.
Phase 2 SO2 Auction is Conducted
The first auction of Phase II SO2 allowances were recently conducted which generated over $25 million in proceeds. 
Since the Acid Rain program sets a cap on total SO2 emissions, EPA was authorized to hold back 2.8 percent of the authorized SO2 allowances each year to ensure that there are sufficient allowances available for new units. The allowances are placed in a Special Allowance Reserve and then auctioned off each year. The auctions which began in 1993 are usually held on the last Monday of March by the Chicago Board of Trade ("CBOT"). EPA returns proceeds and unsold allowances from the auctioning of reserve allowances on a pro rata basis to those units from which EPA originally withheld allowances to create the Special Allowance Reserve. Proceeds from the sale of offered allowances are returned to private allowance holders that contributed the allowances to the auctions. In addition to allowances offered by EPA, private parties may offer allowances for sale in the auction. Privately-offered allowances are sold only after all EPA allowances are sold.
During Phase I, 150,000 allowances were available with the number increased to 250,000 allowances for Phase II. Private allowance holders such as utilities or brokers also may offer their allowances for sale at the EPA auctions, provided that the allowances are dated for use for the year they are offered, for any previous year, or for 7 years in the future.
Auctions are divided into two segments: (1) a spot allowance auction, in which allowances are sold that can be used in that same year for compliance purposes, and (2) an advance auction for the sale of allowances that will become usable for compliance 7 years after the transaction date, although they can be traded earlier.
Bidders must send sealed offers containing information on the number and type (spot or advance) of allowances desired and the purchase price to CBOT no later than 3 business days prior to the auctions. Each bid must also include a certified check or a letter of credit for the total bid cost though other forms of payment may be permitted by EPA upon public notice. 
The auctions sell allowances from the Special Allowance Reserve on the basis of bid price, starting with the highest priced bid and continuing until all allowances have been sold or the number of bids is exhausted. EPA may not set a minimum price for allowances from the Special Allowance Reserve. Private allowances are sold in ascending order, starting with the allowances for which private holders have set the lowest minimum price requirements. The private allowances are sold until the allowance supply is depleted, bids are used up, or the minimum price for the next set of offered allowances exceeds the purchase price of the next bid.
The range of bids for the spot allowance auction which are usable in 2000 was from $80 to $125 with a weighted average of $130.69. The range of bids for the 2007 advance auction was from $40.57 - $200.00 with a weighted average of $68.32. 

WATER POLLUTION/ENDANGERED SPECIES 

EPA Continues Wetlands Enforcement Actions

Section 404 of the CWA prohibits discharges of fill or dredged materials without a permit. However, the drainage of wetlands is not expressly regulated by section 404. 
In our last issue, we discussed that EPA had launched an enforcement initiative in the Southeast because of reports of significant losses of wetlands due to draining and ditching activities. These losses have occurred since the Court of Appeals for the District of Columbia overturned the so-called “Tulloch Rule.” 
EPA recently filed an administrative complaint against owners and developers of ten properties located in Tidewater, Virginia for unauthorized ditching and draining wetlands and violated stormwater runoff requirements of the CWA. Five to 45 acres of wetlands were disturbed at the sites. In another location the disturbance included 15 linear miles of wetlands.
EPA and the DOJ also reached a settlement with a landowner who was charged with illegally discharging fill material into almost 6 acres of wetlands during ditching and excavation activities, and draining approximately 325 acres of wetlands. Under the settlement, the landowner agreed to pay an $85,000 penalty and conduct a SEP that will involve the donation and preservation of approximately 100 acres of wetlands to the North Carolina Wetlands Restoration Program. The case was the first judicial settlement in EPA's new enforcement initiative to limit the unlawful destruction of wetlands in North Carolina.
An auto body repair shop in Edgewater, Md., agreed to pay a $1,250 penalty for filling in a drainage swale that had been located on its property. As part of the settlement, the company agreed to restore an area of wetlands greater than that involved in the alleged violation.
Commentary: In addition to its enforcement authority under the wetlands program, EPA is also using its authority under the stormwater control program to regulate developments that might be causing the loss of wetlands through draining activities.
Under the CWA, construction projects of five or more acres are required to obtain a permit to control and treat stormwater runoff. If the drainage from the sites impacts water quality, the EPA may use its stormwater permit authorities and other CWA authorities to restrain the development.

New Nationwide Permits Go Into Effect on June 7th.

The new activity-based permits which the Corps announced on March 10th went into effect on June 7th. 
The new permits may only be used for projects that affect one-half acre or less of wetlands. Projects that exceed that threshold will have to obtain an individual permit. Under the old nationwide permit 26, developers did not have to obtain individual permits unless their projects disturbed more than three acres of wetlands per site. 
The new permits may not be used for developments that are to be constructed within 100-year floodplains. Those projects will also have to obtain individual permits.
 The National Stone Association and the National Association of Homebuilders have filed suits challenging the new permits. 
To ensure that the new program is properly enforced, the Corps has issued a six-month moratorium on the issuance of regional permits. These are general permits that may be issued by the district offices of the Corps which contain conditions that specifically address regional conditions such as water quality or and endangered species. 
Commentary: States must certify that the general permits will not impact water quality. Many states are refusing water quality certifications for new or modified nationwide permits. When this occurs, the permit holder has to go through a state permitting process. The states can use this process to extract additional mitigation requirements or impose other more restrictive conditions on the permits.  

Public Comment Period Extended for New Definition of Fill Material 

Section 404 of the Clean Water Act provides jurisdiction to the EPA and the Army Corps of Engineers (“Corps”) to regulate the discharge of dredged or fill material into “navigable waters” which has been interpreted to include wetlands. Both agencies have promulgated their own regulations to implement the wetlands program. Since 1977, the agencies have had different definitions of what constitutes “fill material.” Both agencies published a proposed rule in the spring that would create a single definition for fill material. In May, the agencies extended the time to comment on a proposed rule to July 19, 2000. 
Currently, the Corps uses the “primary purpose test” for determining when a substance is to be regulated as “fill material”. Under 33 CFR 323.2(e), the Corps defines "fill material'' as any material used for the primary purpose of replacing an aquatic area with dry land or of changing the bottom elevation of a water body, and specifically excludes from that definition any material discharged into the water primarily to dispose of waste. The Corps rule was changed in 1977 to clarify that suspended solids in wastewater that is discharged pursuant to a NPDES permit would not trigger the permit requirements of section 404.  
In contrast, the EPA regulations examine the effect of the material. The current EPA definition of “fill material'' 40 CFR 232.2 to provides that fill material will include any pollutant which replaces a portion of the waters of the U.S. with dry land or which changes the bottom elevation of such waters, regardless of the purpose of the discharge. 
	The proposed rule would adopt the EPA effect test but specifically exclude discharges subject to EPA effluent limitation guidelines and standards issued under CWA sections 301, 304, and 306, or discharges covered by a NPDES permit. Materials excluded from the definition of “fill material’ would include wood chips, coal mining overburden, certain forms of solid waste, and material used to construct solid waste landfills.
	The rule was proposed following a decision by the Ninth Circuit Court of Appeals in Resource Investments Incorporated v. U.S. Army Corps of Engineers, 151 F.3d 1162 (9th Cir. 1998). In that case, a landfill was proposed to be located in wetlands. The Corps' Seattle District Engineer denied the application for a wetlands permit on the grounds that the landfill could contaminate an important sole source aquifer and that there was a practicable alternative for disposing of the region’s solid waste. When the permit applicant sued, a federal District Court upheld the permit denial but the Ninth Circuit reversed. The appeals court held that the layers of gravel, low permeability soil, and synthetic liner that would underlie the solid waste landfill did not constitute fill material under the Corps’ ``primary purpose'' test. The court said the primary purpose for placing these materials in the wetlands was not to change the bottom elevation of a water body or to replace aquatic area with dry land but rather to install a leachate detection and collection system for that landfill. The court did not address the fact that the material that would also be used to construct roads and berms that were part of the project.    
	The exclusion for wood chips will only apply when this material is scattered as a result of the normal use of wood cutting equipment such as chainsaws, bush hogs, and similar equipment. However, the agencies did indicate that some operators of heavy mechanized equipment place or stockpile wood chips in wetlands to create temporary roads, equipment pads, or for surfacing to facilitate operation of equipment such as trucks, backhoes, and excavation equipment. 
In addition, the agencies indicated that in some cases the regular operation of chipping equipment could result in stockpiling or mounding of chips in waters of the U.S. Because the quantity or distribution of the woodchips in those situations would have the effect of fill, the agencies said that the exclusion would not apply in those circumstances and the activity would be subject to regulation under CWA section 404.
	Coal mining overburden is often placed in the heads of valleys with a sedimentation pond located downstream of this “valley fill.'' Under the existing regulations, the EPA and Corps have usually required a wetlands permit for the placement of the coal mining overburden and coal refuse as well as the berms or dams associated with the sedimentation ponds. Under the proposed rule, discharges from coal mining activities or other solid wastes of a homogeneous nature normally resulting from a single-industry site or set of known processes which are covered by a EPA effluent guideline will not be considered “fill material” and will not be subject to section 404. This would include solid wastes in 40 CFR part 440, subpart M (placer mining), 40 CFR part 436, subpart R (phosphate mining), 40 CFR part 440, subpart E (titanium mining), 40 CFR part 436, subpart C (sand and gravel mining), 40 CFR part 423 (steam electric power generation), and 40 CFR part 435 (oil and gas extraction).
	In the proposed rule, the Corps is considering allowing the District Engineer complete discretion to refuse to process any permit application to discharge fill material that the District Engineer determines to be ``unsuitable fill material.’’ Examples of materials that might be considered unsuitable would include those that have the potential for the leaching of contaminants from the fill material into ground waters or surface waters, fill material that is too light or unstable to serve reliably for its intended purpose (e.g., bank stabilization or erosion control). In most circumstances, heterogeneous solid waste, discarded appliances, and automobile or truck bodies would qualify as unsuitable fill material. 
	The proposed rule would clarify that liners, berms, and other infrastructure that are constructed of materials such as rock, sand, gravel, clay, soil, plastics, and other materials used in conjunction with the construction of a solid waste landfill would be considered “fill material” and be regulated under section 404 of the CWA. If a landfill has received a wetlands permit, the subsequent disposal of solid waste into the landfill would not be subject to section 404 but would, of course, be required to comply with the requirements of the Resource Conservation and Recovery Act (“RCRA”). Likewise, discharges of leachate from landfills into waters of the U.S. would remain subject to CWA section 402.

Supreme Court to Review Migratory Bird Rule 
In our November issue, we reported that the Seventh Circuit Court of Appeals upheld the so-called “migratory bird rule” in Solid Waste Agency of Northern Cook County v. Army Department. 
In that case, the appeals court affirmed a district court ruling that the Corps had jurisdiction to require the plaintiffs to obtain dredge and fill permits to fill in 17 acres of wetlands that were to be used as a site for a non-hazardous waste landfill. The site contained ponds and small lakes that had been used by over a 100 species of birds. 
Under the migratory bird rule, the government has stated that it can regulate the filling of isolated wetlands like prairie potholes, vernal pools, playa lakes, swales, pocosins which are usually filled with water only for a part of the year. Landowners have argued that EPA cannot assert jurisdiction over isolated wetlands because they are neither adjacent to nor hydrologically connected to a navigable water. The federal government has argued that it can regulate isolated wetlands under the commerce clause because these wetlands serve as important nesting and feeding sites for migratory birds. Since the birds may be harvested by hunters or viewed by bird watchers, the government has contended that isolated wetlands had an impact on interstate commerce. 
The federal government’s position has been pejoratively referred to as the “reasonable bird” standard and was rejected by the Seventh Circuit in Hoffman Homes V. EPA which held that mere potential presence of migratory birds was an basis for the government to assert jurisdiction because the birds did not engage in interstate commerce. Until the agency could demonstrate some link to human activity, such as hunting or bird watching, the court said the EPA could not invoke the commerce clause. In a footnote, the court suggested that if it adopted the government’s argument, a bird landing on a puddle in the middle of a highway would presumably allow EPA to regulate the puddle.
 	However, the government has refused to recognize these adverse decisions outside the states governed by those circuit courts. In May 1998, the Corps issued guidance that allowed it to assert jurisdiction over isolated wetlands in five states: Maryland, North Carolina, South Carolina, Virginia and West Virginia. 
After the Seventh Circuit upheld the migratory bird rule in Solid Waste Agency of Northern Cook County v. Army Department, the plaintiff asked the Supreme Court to review the decision. The plaintiff asserted that the Seventh Circuit’s decision conflicted with the Fourth Circuit’s 1997 ruling in U.S. v. Wilson that the Corps did not have authority to assert jurisdiction over isolated wetlands. On May 22nd, the Supreme Court granted the petition and agreed to hear the case.
Commentary: Since 1995, the Supreme Court has struck down or restricted 25 federal laws on federalism or separation of powers grounds. By agreeing to hear this case as well as the American Trucking case (discussed in the Air Section of our newsletter), the Supreme Court may have the opportunity to significantly alter the power of the federal government to regulate environmental matters.
EPA Proposes Stricter Arsenic Standards
On May 24th, EPA proposed to reduce its current arsenic drinking water standard from 50 parts per billion (“ppb”) to 5 ppb. The proposed change would apply to all public water systems (“PWS”) which serve an estimated 254 million people. EPA has estimated that about 6600 PWS have water that would exceed the proposed standard. The rule would not apply to private drinking water systems. 
Arsenic is often found in ground water due to the natural weathering of rocks and soils.  In 1999, the National Academy of Sciences (“NAS”) concluded that the current EPA arsenic standard did not meet EPA’s goal for protecting public health and recommended that EPA reduce the standard to ten ppm. The NAS study estimated that one of every 100 people who consumed water that met the current EPA arsenic standard would develop cancer. However, there is some concern over the veracity of those conclusions since they were based on studies conducted in Taiwan, Chile and Argentina. 
Recently, the United States Geological Survey (“USGS”) collected samples from over 19.000 wells that were used for public and private drinking water, irrigation, industrial purposes and research. The USGS found that ten percent of the samples exceeded the 10 ppb levels proposed by the NAS.  
EPA has estimated that the costs for large water systems to comply with the proposed standards would average about $28 per household while the cost to smaller systems would be around $85 per household. EPA hopes to finalize the rule by the statutory deadline of January 1, 2001. EPA also asked for comments on setting the new arsenic level at 10 or 20 ppb. 
Commentary:     The 1996 amendments to the SDWA broadened the definition of ``public water system'' to not only include systems providing water for human consumption through pipes but also water delivered by “constructed conveyances'' such as such as irrigation canals. 
Under the new definition, a PWS is a system that delivers water for human consumption through pipes or other constructed conveyances through at least fifteen service connections or to at least twenty-five individuals daily for at least 60 days per year. EPA has interpreted the term “human consumption” to include drinking, bathing, showering, cooking, dishwashing, and maintaining oral hygiene. Specifically excluded from this definition is water that is used solely for toilet flushing and/or outside irrigation. 
The SDWA requires water suppliers to determine which users are using water for human consumption and to make results of mandated water monitoring sampling and other water quality information available to those users.  PWS were supposed to have prepared “ Consumer Confidence Reports” by October 19, 1999. EPA commenced enforcement actions in all regions against PWS who have failed to comply with the deadline. For example, EPA recently issued warning letter to 58 PWS in New England and approximately 400 PWS in New York instructing the PWS to prepare and submit Consumer Confidence Reports by July 1, 2000. 
Homeowners with private wells, and other types of small public water supplies, such as highway rest stops, are not subject to the SDWA. Approximately 23 million people in the U.S. obtain water from their own private drinking water supplies. Most of these supplies are drawn from groundwater through wells, but some households also use water from streams or cisterns. 
Purchasers of homes with private wells may want to have the water supply tested for arsenic. The standard potable drinking water test generally costs around $20 but only tests for a limited number of parameters such as iron, ph and bacteria. Homeowner should consider testing for other contaminants such as pesticides or organic chemicals but this test is much more expensive and range from several hundred to several thousand dollars. 
EPA Study Reveals Elevated Levels of Lead in Drinking Water
According to a recent EPA report, drinking water in six cities with populations over 200,000 exceeds the 15 parts per billion (“ppb”) action level established by EPA for lead. 
A common source of lead contamination in drinking water comes from lead that may be present in plumbing systems of homes or apartments. When water rests in pipes and faucets for several hours or longer, the lead can leach into the water. Section 300g-6 of the SDWA prohibited the use of any pipe, plumbing fittings or fixtures, solder or flux containing lead to repair or install a public water system or any plumbing in any residential or non-residential facility providing water for human consumption after June 19, 1986. In addition, the SDWA prohibited businesses selling plumbing supplies to sell solder or flux that is lead free after August 6, 1996. Moreover, after that date the SDWA prohibited any person from introducing into commerce any solder or flux containing lead unless a label was attached to the solder or flux stating that it is illegal to use the solder or flux to install or repair plumbing providing water for human consumption. HUD was also prohibited from insuring or guaranteeing any mortgages for newly constructed residential property containing a potable water supply unless the water system contains lead-free pipe, solder and flux. 
Commentary:  Purchasers of homes built before 1986 should not rely on drinking water sampling results from public water supply providers but also have water samples taken from the faucets in the homes to ensure that the water supply in the particular home does not have elevated levels of lead.

HAZARDOUS WASTES/USTS

UST Owner Fined $4.74 Million 
A former owner and operator of a gas station in upstate New York was fined $4,746,500 by a federal district court for failing to comply with a cleanup order issued by the EPA under RCRA section 7003. The fine is the largest ever imposed after a trial for a violation of an EPA RCRA 7003 order
In U.S. v. Oliver Hill, the defendant had operated a service station on the Onondaga Nation Reservation from 1984 until April 1993. When he closed the station, Hill did not comply with the UST closure requirements. Shortly thereafter, a resident living near the gas station fainted from gasoline fumes while digging a well on his property.  In response to the complaint, the state Department of Environmental Conservation (“NYDEC”) collected water samples from the resident’s drinking well which revealed the presence of benzene, toluene, xylene and ethyl benzene (“BTEX”) at levels that were 10,000 times the federal drinking water standard. Based on the sampling results, NYDEC estimated that 10,000 gallons of gasoline had been released into the soil and groundwater from Hill's facility.  
A subsequent investigation by NYDEC revealed that pipe fittings associated with the USTs were very loose, that the soil beneath the piping was saturated with gasoline, that a one foot layer of gasoline was floating on the aquifer and that a zone of contaminated water was migrating towards the residences near the former station. NYDEC retained a contractor to remove the floating product and also supplied bottled water to affected homes.  
The state agency then asked Hill to assume the costs of the cleanup but he denied responsibility for the release.  EPA then issued a RCRA 7003 order in March 1995 advising Hill that the release from former gasoline station constituted an imminent and substantial endangerment. The order required Hill to post warning signs, assess the integrity of the USTs and associated piping, commence repair or permanently closure of the UST system and perform a complete investigation and cleanup of the contaminated soils and groundwater. 
When Hill failed to comply with the order, EPA brought a summary judgment action to enforce the order. In opposing the summary judgment, Hill produced an affidavit of a resident asserting that a NYDEC representative had told him that low levels of Benzene at the bottom of the wells suggested that gasoline was old and predated Hill’s occupancy. The affidavit also claimed that the NYDEC representative had told him that the agency wanted to investigate a nearby junkyard to determine if it was a source of the gasoline contamination but that the Onondaga Council of Chiefs had refused to let NYDEC take the samples. However, the judge ruled that Hill could not rely on the affidavit to raise material questions of fact because the affidavit contained inadmissible hearsay statements. 
After granting EPA’s motion, the court then conducted a hearing to determine the amount of the penalty to be assessed. Because the court found that Hill had no good faith defense for failing to comply with the order and that he had obtained substantial economic benefits by refusing to implement the order or assist in the cleanup, the court assessed the maximum statutory penalty 
Commentary: Under RCRA 7002(a)(1)(B), a civil action may be brought against any person “who has contributed or 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 the environment.”  While RCRA 7002 has become a popular tool for owners with property contaminated with petroleum, courts have not consistently interpreted what constitutes an “imminent and substantial endangerment”. Some courts have held that the mere presence of contaminants in the soil or groundwater satisfied the “imminent and substantial endangerment” requirement while others have required that the levels exceed state cleanup levels. 
For example, in Two Rivers Terminal v. Chevron (No. CV-97-1595, M.D.Pa., 3/27/00), a federal district court found no threat of imminent harm because the state had never issued a cleanup order, the contaminant concentrations were decreasing in accordance with the proposed natural attenuation remedy and there was no risk to drinking water since the groundwater’s high iron content rendered it unsuitable for drinking water. Readers should review last issue for more information on the scope of RCRA 7002.
Petroleum Marketer Fined for Violating UST Standards
The EPA Region 10 office recently imposed a fine of $736,061 on a petroleum marketer for 35 violations of the UST regulations. The fine was the largest penalty levied by EPA in the northwest. EPA found that Goodman Oil had failed to comply with the December 1998 deadline for upgrading USTs located in nine stations in Idaho. The fines ranged $20,338 to $177,894. 
Commentary: Because the federal UST program has been designed to be primarily administered and enforced by state environmental authorities, EPA regional offices have limited resources for brining UST enforcement actions. The federal Leaking Underground Storage Tank (“LUST”) Fund provides financial assistance to states to administer and enforce their UST programs. Occasionally, though, EPA has commenced UST enforcement initiatives when requested by a state or when an owner or operator of USTs appears to have engaged in a pattern of widespread non-compliance at multiple facilities.
US Brings Criminal Charges For Falsification of UST Test Results 
One of the requirements of the UST program is that owners and operators of USTs must perform tests to ensure that their tanks are not leaking. Recently, a federal grant jury indicted 10 individuals on charges that they had falsified the results of UST tests over 100 times in seven states. The individuals allegedly failed to conduct tests in accordance with UST testing protocols and wired or mailed the false results to the owners or operators of the USTs. The 10 indicted individuals face a maximum penalty of five years in prison, a fine of $250,000 or both.
Commentary: This case is part of a national initiative focusing on criminal activities related to the federal UST program. This case together with the convictions discussed in our last issue involving falsified asbestos abatement activities illustrate the importance of thoroughly investigating the background and qualifications of environmental contractors.  Prospective clients should verify that the contractor has been certified, request references and ensure that the contractor has adequate insurance since the owner or operator of the USTs can be held strictly liable for violations of law caused by their contractors. 
Pennsylvania Enters Into 100 station UST Multi-Site Cleanup Agreement
The Pennsylvania Department of Environmental Protection (“DEP”) recently entered into a consent agreement with Sunoco Inc. in which the company agreed to investigate and cleanup fuel releases at 100 of its gas station sites across Southwestern Pennsylvania. 
The site investigations and cleanups will be performed under a regional multi-state agreement and will apply cleanup standards and procedures established under the state Land Recycling Act. If contamination is found in groundwater supplies, Sunoco will also be required to provide an alternate water supply. 
The multi-site agreement established the procedures and standards that are to be used for all of the sites and allows Sunoco to determine the priority of the site investigations and cleanups so long as the work is completed within the timeframes set forth in the agreement. DEP and Sunoco reviewed records of gasoline stations in nine counties where releases occurred and classified the sites into high, medium and low priority for review and cleanup. Assessments at high priority sites are to be completed within six months, while medium priority sites be reviewed within 16 months and low priority within 24 months. 
Classification of Waste Can Effect Disposal Costs of Contaminated Soils
One factor that influences the cost for remediation projects is whether contaminated soil would be considered a "Hazardous" and "Non-Hazardous" waste. This determination can be complicated especially when solvents are involved. To prevent unanticipated cost overruns or unnecessary disposal costs, it is important for property owners or operators to review the assumptions used by consultants when determining cost estimates.
One mistake that is often made is determining whether contaminated soil should be classified as a hazardous waste is by focusing solely on the concentrations of the contaminant present in the soil. Under RCRA, a substance may be a hazardous waste if it is “listed” or if it exhibits one of the four RCRA hazardous waste characteristics. The listed hazardous wastes are classified as F, K, U or P wastes. The waste codes are usually tied to a particular type of operation and presence of one or more compounds. If the soil contaminant is from a known source which would make the contaminant a listed waste, the soil will be considered hazardous regardless of concentration.  
In contrast, when the waste is not listed as a hazardous waste or the source of a contaminant is unknown, the concentration of the waste may then play a role in determining if it will be designated as a hazardous waste. To do so, the waste would have to be tested using the Toxic Characteristic Leaching Procedure (“TCLP”). If the waste passes the TCLP test, it could then be treated as a non-hazardous waste. 
Another factor adding to the disposal costs is the level of treatment that must be applied to the contaminant. The RCRA Land Disposal Restriction (“LDR”) program requires that generators of hazardous waste pre-treat their waste before they can be disposed on land. Prior to the 1998 LDR Phase IV rule, generators who excavated contaminated soil 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. Under the LDR Phase IV Rule, when soil contains a listed hazardous waste or exhibited a toxicity characteristic because of the presence of metals, generators must treat the underlying hazardous constituents (“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. UHCs are hazardous constituents that might be present in soils at levels ten times the UTS for the constituent but which do not cause the soil to be a hazardous waste. 
EPA Proposes Handbook on RCRA Groundwater Policies
As part of its RCRA Cleanup Reforms, EPA recently issued a proposed “Handbook on Groundwater Policies For Corrective Action”. The draft handbook discusses how EPA’s current groundwater policies may be used at facilities undergoing corrective action to promote faster and more flexible cleanups. A principal tool that the handbook uses to promote flexibility is to allow current and reasonably expected future groundwater use to be taken into account when developing facility-specific groundwater cleanup objectives and the schedule for attaining those groundwater cleanup levels.  
EPA hopes that the handbook will help regulators and facility owners or operators manage site investigations and cleanups, manage resources and reduce time-consuming uncertainties. The handbook is designed for facilities that received hazardous waste after July 26, 1982 and may be used for corrective actions implemented under RCRA permits, corrective action orders or voluntary cleanups such as the RCRA Brownfield Initiative. EPA estimates that 6400 RCRA facilities may be subject to corrective action.
Currently, 33 states and territories have been authorized to implement the RCRA corrective action program through their own hazardous waste programs. EPA expects the authorized states to have the primary responsibility for implementing corrective action.
Topics included in the handbook include:
•	Groundwater Use Designation
•	Short-Term Protectiveness Goals
•	Final Remediation Goals
•	Groundwater Cleanup Objectives
•	Groundwater Cleanup Levels
•	Point of Compliance
•	Remediation Time Frames
•	Source Control
•	Monitored Natural Attenuation
•	Technical Impracticability
•	Performance Monitoring
•	Injection of Contaminated Groundwater
•	Completing Groundwater Remedies

The comment period for the draft handbook ended on July 2nd. We will discuss the handbook in more detail in a future issue after it is published in final form.
 Commentary: The handbook provides guidance on how EPA intends to exercise its discretion in implementing RCRA corrective action and does not impose any legally-binding requirements on EPA, states or the regulated community. EPA cannot compel authorized states to adopt or otherwise follow the handbook.  

TOXIC SUBSTANCES

Property Owner Uses EPA Audit Policy to Waive Lead-Based Paint Penalties
EPA recently agreed to waive more than $1 million in potential penalties against a Washington D.C. landlord and property management company for violations of the Residential Lead-Based Paint Hazard Reduction Act. 
In October 1999, the owner and property management company voluntarily disclosed to EPA that they failed to comply with the disclosure requirements for lease transactions during a three-year period. The companies made the disclosure after tests indicated lead-based paint was present in parts of the garage and elevator frames and doors. In December 1999, the companies disclosed this information to all residential tenants. Under the agreement, the companies have agreed to abate and/or eliminate lead-based paint in the apartments.
The landlord and management company of the property each could have been liable for civil penalties of about $584,000. However, EPA determined the companies qualified for favorable treatment under the agency's "audit policy" which encourages self-policing and voluntary reporting of violations. Because the violations did not result in significant harm to public health or the environment and the companies had not gained any economic benefit from the violations, EPA agreed to a complete penalty waiver. 
EPA To Perform Removal Actions at Residential Properties
One of the concerns about using institutional controls to limit exposure to contamination is that property uses may have changed over the years and current use may not accurately reflect the dangers posed at a site. Two examples illustrate this point. 
In College Grove, Tennessee, EPA agreed to conduct a removal action to excavate battery chips that were placed in driveways, around barns and other areas as fill material before construction of a residential neighborhood. Sampling of some properties indicated elevated levels of lead in the soil. EPA estimates that it will take approximately 1 to two weeks to cleanup each residential property and that the removal action will cost approximately $3,000,000 when it is completed in June 2001.
Meanwhile, EPA is removing tens of thousands of pounds of lead-contaminated soil at a housing complex in Richmond where the Pullman Palace Car Company operated a 22-acre rail car maintenance yard. The maintenance operations included the use of lead based filler material to repair dented rail cars and sandblasting paints that commonly contained lead. The operations left behind high levels of lead-contaminated dirt. Soil samples collected at the 12-acre apartment complex revealed lead concentrations as high as 9,710 parts. The EPA's cleanup level is 400 parts per million of lead in residential soil.  EPA has estimated that 510 people live in the apartment complex, and 40 to 50 children attend the on- site daycare center regularly. 
EPA will remove the top two feet of soil. It is estimated that a total of 60,000 cubic yards of soil will be excavated and backfilled. A liner will also be installed to discourage further digging. The cleanup is expected to cost more than $1.2 million, and is slated for completion in late July. 

SUPERFUND/BROWNFIELDS

  
Eleventh Circuit Upholds Secured Creditor Exemption for City
Last summer, we reported that a federal district court had ruled that the CERCLA secured creditor exemption applied to a municipality that had acquired title to property to facilitate development of  an industrial park. On May 25th, the 11th Circuit Court of Appeals upheld the district court ruling. 
In Monarch Tile Inc. v. City of Florence (11th Cir., No. 99-11372, 5/25/00), the city of Florence, Ala., issued industrial development bonds in 1952 to finance the purchase of a property and leased the site to a ceramic tile manufacturer. The rent payments were used to repay the bonds. 
The tenant went bankrupt in 1973 and the plaintiff then leased the facility from the city until 1988 when it purchased the property. After it was discovered that the site and neighboring watershed had been contaminated with zinc, lead, barium, and cadmium from the tile operations, EPA ordered the plaintiff to clean up the site. The plaintiff then filed a contribution action against the city under CERCLA Section 113, charging Florence was liable as a prior owner of the facility. 
The city responded that it was exempt from liability under the CERCLA secured creditor exemption which excludes from the definition of owner any person " who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility." Relying heavily on the Ninth Circuit’s 1990 decision in In re Bergsoe Metal Corp (910 F.2d 668), the district court granted summary judgment in favor of the city. 
On appeal, Monarch tried to distinguish Bergsoe on the grounds that the city had not “held” a security interest but “gave” one to the bond trustee and that the 1996 amendments to the secured creditor exemption had changed the definition of what constitutes a security interest. However, the 11th Circuit noted that Bergsoe had ruled that a party who held bare title and then devoted lease revenue to pay off development bonds did qualify for the secured creditor exemption. 
The Monarch appeals court then ruled that while the 1996 amendments had redefined the term "security interest," there was nothing in the new definition to suggest that Congress did not intend the definition to apply to the type of security interest addressed in this case. In fact, the court suggested that the new broad language referring to "…any other right accruing to a person to secure the repayment of money… or any other obligation" clearly encompassed the activity at issue in the case. 
Monarch also tried to rely on a federal bankruptcy case to claim that the financial documentation should be treated as a lease and not a mortgage. However, the 11th Circuit held that the bankruptcy case had been governed by state law and that the CERCLA secured creditor exemption clearly included both leases and mortgages within the definition of a “security interest.” 
The court also rejected Monarch’s argument that because state law only authorized the city to purchase property for a public purpose, the city could not hold title for the purpose of protecting a security interest. The court said that governments never acquire property for the purpose of protecting a security interest but to further some public interest. Once the public purpose has been met, the court continued, a government might retain title or some other indicia of ownership for the duration of the lease to ensure that the bonds are repaid. As a result, the court said that the fact that a government’s initial motivation for purchasing land was to further economic development will not preclude it from later qualifying for the secured creditor exemption if it holds indicia of ownership primarily to protect its security interest in the property.

Landowners Resolve CERCLA Liability by Agreeing to Institutional Controls 
A group of landowners recently entered into a consent decree with EPA and the Massachusetts Department of Environmental Protection (“DEP”) to resolve their potential liability at the Nyanza Chemical Waste Dump Superfund Site in Ashland, MA. 
One group of landowners had to reimburse EPA and DEP $375,000 in past response costs while the second group of landowners did not have to make any payments. In exchange for obtaining a release from liability, the landowners recorded land use restrictions on their parcels. These restrictions will prohibit the following activities: 1) groundwater extraction, consumption, or utilization; 2) soil excavation; 3) construction of buildings; 4) residential, daycare, school, recreational, or agricultural use; and/or 5) interference with the remedy. EPA/DEP may, however, allow landowners to engage in prohibited activities if they provide appropriate plans and technical analyses demonstrating that their proposed activities will not result in an unacceptable risk to human health or the environment. Certain minor activities outside the landfill area, such as surface paving/re-paving, landscaping, installing fences, or other small excavation projects, are not prohibited and would not require prior government approval. The landowners may be subject to a fine of $1,000 for each day of each violation of a restriction.
 EPA Announces New Brownfield Pilots
Earlier this spring, EPA awarded 56 Brownfield Assessment Pilot Grants totaling over $12 million. This round of pilots may be used to help communities assess the environmental contamination at brownfield sites as well as to evaluate the creation or preservation of parks, playgrounds, trails, gardens, habitat restoration, and open space on brownfield sites.
EPA also announced that it had approved 30 Brownfield Cleanup Revolving Loan Fund pilots totaling $20 million. Communities may use these grants to establish revolving loan funds to provide businesses with low-interest loans to leverage funds for the cleanup and redevelopment of brownfields. 
In addition, EPA announced that 16 communities would receive job-training grants, approximating $200,000 each. The grants will be used by communities to target low-income individuals, minority residents who are unemployed, displaced workers, or Welfare-to-Work recipients living in neighborhoods impacted by brownfields. The training programs usually consist of an introduction to brownfields, health and safety training for hazardous waste workers, preliminary assessment and sampling procedures, remedial technology selection and training in the use of innovative assessment and cleanup technologies. Hands-on training and field experiences in numerous topic areas often supplement classroom training. Many of the pilots will place students in career development internships and provide placement support. The goal of the program is allow individuals who participate in the program to pursue careers associated with environmental remediation.
Two Cities Make BCRLF Awards
  	Last summer, we reported that a Connecticut city had made the first loan to a developer under the EPA Brownfield Cleanup Revolving Loan Fund (“BCRLF”) pilot program. Recently, two more cities announced they had reached agreements to make BCRLF loans.  
The City of Shreveport, La. recently made a $400,000 BCRLF loan that will be used to remove hazardous substances from a property that will be used for a new 300,000 square foot Convention Center that is expected to create and sustain over 1,000 jobs for the community.  
The city of Trenton, N.J. has also announced its first BCRLF loan of $275,000.  The loan will be used on a 6.5-acre property that the city had acquired through foreclosure in 1997. The money will be used to excavate, remove and cap contaminated soil at a 6.5-acre property that had been used for industrial purposes dating back to the 1800s.  A lumber company plans to use the site for facility expansion following the cleanup.
Michigan Expands Brownfield Financial Incentives
On June 6th, Michigan Gov. John Engler signed a legislative package that expanded tax incentives and eligibility for tax credits for brownfield sites. One of the laws increases the single business tax credits which was currently limited to $1 million. For brownfield redevelopment projects costing $10 million or less, the single business tax credit will remain at $1 million. However, projects costing from $10 million to $300 million will be eligible for tax credits ranging from $1 million to $30 million. The legislation also expands the definition of activities eligible for tax credits to include asbestos abatement, infrastructure improvements, demolition, and site preparation. In addition, the law expands the types of properties eligible for the tax credits, adding blighted or functionally obsolete properties to contaminated properties. 
Another newly enacted law will allow certain communities to establish obsolete property rehabilitation districts. Owners of eligible brownfield properties located in those districts may have their property tax fixed for up to 12 years. 
South Carolina Announces New Voluntary Cleanup Program
South Carolina Governor Jim Hodges signed a brownfield bill on May 1st which creates a state new voluntary cleanup program for brownfield sites.  The legislation also provides brownfield developers with liability protection in exchange for a commitment to clean up the property. 
Connecticut DEP Proposes Rules for Groundwater Aquifers
To promote the redevelopment of brownfield sites, some states like Connecticut have revised their groundwater classifications so that aquifers that will not be used for drinking purposes do not have to be remediated to drinking water standards. To further ensure that drinking water aquifers will not be impacted by this approach, the Connecticut Department of Environmental Protection (“DEP”) recently proposing rules that would restrict land use over groundwater aquifers. 
Under the proposed rule, municipalities would be required to identify aquifer protection areas on zoning maps and adopt protective regulations for them. Existing businesses using or generating hazardous substances, hazardous wastes, bulk pesticides, or petroleum products located over the aquifer protection areas would be required to register with a municipality and implement pollution prevention-related activities. New businesses in those categories could be barred from construction in these aquifer protection areas, and existing businesses could be prohibited from expanding into these areas. Businesses expected to be affected by the proposed rules will include chemical manufacturing industries, gasoline stations, vehicle repair shops, and dry cleaners. DEP estimated that 2% of the land area in Connecticut would be covered by the proposed rule.
Pennsylvania Announces Performance-Based Loans for Industrial Site Cleanups 
Pennsylvania Governor Tom Ridge recently signed a bill establishing performance-based loans to businesses and communities to remediate contaminated properties. 
Under the new law, the Department of Community and Economic Development will issue loans through the Industrial Sites Cleanup Fund which may be used not only to remediate brownfield sites but to cleanup sites with non-hazardous waste. Money collected from the loans will be deposited in the fund. Loans will be awarded based on eligibility standards and performance measures established by the Department of Environmental Protection. Loans may only be provided to recipients who did not cause or contribute to the contamination or who did not dump the non-hazardous waste, and who have agreed to voluntarily remediate the contamination. The performance-based loans will be forgiven and converted to grants if recipients meet the requirements of the loan agreement. The new law also provides that grants for conducting environmental assessments of industrial sites may be awarded to boroughs that qualify to be chartered cities under the Third Class City Code.
An example of how the program works was the recent $3.2 million grant made to Recycling Technologies International LLC ("RTI") of Adams County, PA. RTI will use the loan to expand its operations which uses materials transported from Pennsylvania tire-shredding companies to produce clean granules that are resold to manufacturers of rubberized flooring, automotive parts and other products. The loan will become a grant if RTI processes over 120 million pounds of shredded tire materials within eight years. As a condition for receiving the loan, RTI will give priority to accepting shredded tire materials obtained from DEP's priority tire sites and from cleanups by the Department of Conservation and Natural Resources and Pennsylvania Cleanways.
Ohio Governor Proposes New Brownfield Funding 
Ohio's Governor Taft recently proposed $200 million in new bonds to fund brownfield redevelopment projects. The proposed funding would have to be approved by voters in November. 
In addition, Ohio is considering changes to its Voluntary Action Program (“OVAP”). Although the OVAP provides liability relief to volunteers, the state does not have a memorandum of understanding (“MOU”) with the EPA. When Ohio applied for an MOU earlier this year, the state was told it would have to revise its OVAP program to provide for more stringent cleanup standards, enhanced public participation and disclosure, and improved risk assessment procedures. 
North Carolina Agrees to Multi-site MGP Voluntary Cleanup Agreement  
The North Carolina Department of Environment and Natural Resources (“DENR”) recently reached an agreement with the North Carolina Manufacturer Gas Plant Group (“NCMGP”) to investigate and clean up 27 abandoned coal gas plant (“MGPs”) sites scattered across the state. NCMGP is comprised of North Carolina utilities and cities.   
Under the agreement, the volunteers will provide the DENR with direct funding of $425,000 to hire staff who will work exclusively on the MGP sites covered by the agreement. NCMGP members must complete assessments and necessary remediation at the covered MGP sites within three years. If any member is unable to complete the work in three years, those members can renew the agreement, and provide additional funds for continued oversight. The DENR has agreed to prioritize cleanup operations in order to concentrate on sites with the highest environmental threats. According to industry officials, the multi-site agreement will result in significant savings in time of costs and expedite site cleanups. 
NCMGP members include Duke Power, Carolina Power and Light, Public Service Co. of North Carolina, NUI North Carolina Gas, Piedmont Natural Gas, Greenville's Utilities Commission, and the cities of Rocky Mount and Wilson. 
North Carolina Legislature Approves Dry Cleaner Fund
The North Carolina General Assembly has approved legislation to establish a dry-cleaning solvent cleanup fund. The fund will be financed by raising state sales taxes on chlorine-based dry-cleaning solvents and hydrocarbon-based solvents. The legislation would also allow the state to hire contractors to assist in the clean up of contaminated sites.
Innovative Maine Settlement is Approved
An agreement where a brownfield redeveloper agreed to assume the liability of generators at the Portland-Bangor Waste Oil ("PBWO") Superfund site in Wells, ME was recently approved by a federal district. 
Under the terms of the consent decree, TRC Environmental Solutions (“TRC”) of Windsor, Ct. will receive approximately $14 million from PRPs, including $6 million from federal agencies, in exchange for a release from liability and an indemnity. TRC is also required to use its best efforts to collect $2.5 million from non-settling parties. 
The federal government was responsible for one-third of the cleanup costs at the site with the vast majority of the 2900 PRPs qualifying as de minimis PRPs. Work on the cleanup is expected to begin in 2001 and is expected to be completed within two years. TRC obtained a $30 million environmental insurance policy from AIG Environmental and an $11 million construction performance bond.
Commentary:  The TRC model could serve as an example for similar arrangements at large Superfund sites in the future as a means to reduce remediation and litigation costs. A copy of the agreement will be posted soon on our website.
New Jersey Launches Institutional Control Review Program
The New Jersey Department of Environmental Protection (“NJDEP”) has estimated that approximately 320 sites that have received no further action letters (“NFAs”) have engineering and institutional controls in place. The NJDEP recently implemented a review program to ensure that these controls remain effective.
Because of the growing reliance on institutional controls, the NJDEP has announced that it will inspect each site that has recorded a deed notice on a regular schedule to ensure that the approved controls are being maintained and remain effective. An inspection report will be sent to the person responsible for maintaining and enforcing the controls. If the controls are not being adequately maintained, a notice of violation will be sent to that person. Sites where controls have not been properly maintained will be inspected more frequently.
In addition, the NJDEP is requiring persons responsible for maintaining the controls to submit bi-annual certifications documenting the site conditions. The certification must contain a statement that the engineering and institutional controls were inspected, that they are being properly maintained and that they remain protective of human health and the environment.
Finally, the NJDEP has established a central repository which identifies all sites where deed notices have been filed.
Commentary: When drafting institutional controls, many parties fail to identify who will be responsible for enforcing the controls. Often, the parties assume that the local government will ensure that the controls will not be violated. However, most local governments lack the resources and expertise to enforce the controls. In a survey conducted by Resources for the Future, nearly all of the local governments indicated that they do not conduct regular inspections of controls. Two-thirds of the respondents indicated that it could take two years before they might become aware of a violation of an institutional or engineering control. The survey also indicated that the most common way that local governments learned about such violations was through citizen complaints. 
	A good example of this recently occurred in Camden, New Jersey where a site owner was required to maintain a cap over contaminated soil. The site owner decided to expand its operations and the construction activities on the site damaged the cap. A recycled concrete aggregate had been placed over the breached cap but runoff from this area was entering a storm drain and flowing into a tidal creek. It was not until a local citizen informed NJDEP that the agency became aware of the problem. The NJDEP notified the property owner who was required to enter into a new agreement with the NJDEP which contained a future redevelopment schedule for the site. The owner was also required to install a temporary impermeable liner to reduce infiltration over the disturbed area, and add silt fencing, filter fabric and crushed stone to control runoff.
New York DEC Considering Administrative Changes to Voluntary Cleanup Program
	In the wake of the state legislature’s failure to once again enact comprehensive brownfield legislation, the New York Department of Environmental Conservation (“DEC”) is considering making administrative changes to the state VCP which will are intended to increase the number of sites that go through the program.
	The DEC is considering changing the form VCP agreement to one that does not undergo negotiation. In addition, the agency is considering issuing a new technical guidance document which would resemble the approach followed in New Jersey by setting forth the technical requirements for all remediation programs. It is hoped that this would expedite the remediation process and avoid the current site-specific approach. A draft model VCP agreement and draft technical guidance document is currently under review and may be available after the summer. 
Federal District Court Rules that CERCLA Recycling Exemption Applies to Pending State Cost Recovery Action
The Superfund Recycling Equity Act (“SREA”) which Congress passed on November 29, 1999 exempts parties recycling certain listed materials containing hazardous materials from liability. However, SREA expressly provides that the exemption would not affect any judicial proceedings instituted by the United States prior to the enactment of the amendments. 
In California DTSC v. Interstate Non-Ferrous Corp., the district court for the eastern district of California ruled that SREA applies retrospectively to pending state cost recovery actions. The court said SREA simply clarified that recyclers were not liable under CERCLA and did not alter the liability scheme of CERCLA.  If the law had changed the pre-existing liability scheme, the court would have had to determine if Congress had clearly expressed an intent to have the law apply retroactively. However, the court said the legislative history indicated that Congress had intended the exemption to only apply retrospectively to administrative and judicial actions.
   
 ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS 

Second Circuit Allows CERCLA Contribution Claim to Proceed Against Investment Bank
	In exchange for providing financing to a company, hedge funds and institutional investors often receive stock or high interest subordinated notes or other debt instruments. Because these financial instrument usually do did not usually convey a controlling interest in a company, the investors are generally not concerned about the possibility that they could become liable under CERCLA. As a result, they often do not perform environmental due diligence.
While it is true that CERCLA liability has not been imposed on a party solely based on stock ownership, the CERCLA liability net is still quite wide. A recent decision by the Court of Appeals for the Second Circuit illustrates how an investment bank which simply held stock in a reorganized company can be drawn into a CERCLA contribution action. 
In In Re Duplan Corp et al v. Esso Virgin Islands. Inc., Duplan Corporation (“Duplan) filed a petition for reorganization under the old Bankruptcy Act in 1976. Six years before the bankruptcy filing, Duplan had acquired Laga Industries, Ltd. (“Laga”), a textile manufacturer located in the Virgin Islands. In 1979, the District Court for the Southern District of New York allowed the reorganization trustee to sell the Laga facility located in Tutu, St. Thomas. In 1981, the reorganization plan was confirmed. Pursuant to the confirmation order, Laga was dissolved and Duplan was renamed Panex Industries, Inc. (“Panex”). The creditors of Duplan were given cash and shares in Panex in partial satisfaction of their claims. One of the creditors who received share in Duplan/Panex was Goldman, Sachs & Co. 
The confirmation order also permanently enjoined all creditors from asserting, continuing or commencing any claims against Duplan which arose prior to the filing of the bankruptcy petition. However, the permanent injunction did not apply to administrative claims arising after the filing of the petition and before the confirmation plan was approved. Duplan/Panex expressly assumed such claims. In 1983, the district court issued a Final Decree discharging the debts of Duplan/Panex and barring persons with claims against Duplan/Panex from commencing or pursuing lawsuits against the company or any party with an interest in Duplan/Panex. 
In September 1984, Panex sold off its major operating subsidiaries and the shareholders voted to dissolve the company. A certificate of dissolution was filed in April 1985. Over $64 million in proceeds were then distributed to Duplan/Panex shareholders including over $9 million to Goldman Sachs. In September 1985, a liquidating trust in the amount of $6 million was created to cover any contingent liabilities of the company. The proxy statement for the liquidating trust which was provided to all shareholders expressly indicated that if the funds in the trust were insufficient to cover the company’s liabilities each shareholder could be liable for any unpaid liabilities up to the amount of the distribution they received from the liquidation of the company. After no significant claims surfaced, the trust distributed another $4.5 million to the former shareholders in July 1987, leaving approximately $1.1 million remaining in the trust.
In 1987, EPA discovered that property adjacent to the former Laga facility was contaminated with a variety of hazardous substances. In 1988, EPA performed a removal action and notified a number of oil companies that they had been identified as PRPs for the site. In 1989, property owners and lessees whose wells were contaminated filed a lawsuit against the PRPs seeking damages. In 1992, the PRPs brought a $20 million CERCLA contribution claim as well as RCRA and common law claims against Duplan/Panex and its former officers and directors (the “Laga Defendants”) claiming that Laga was responsible for the PCE that had been detected in the groundwater. 
A series of complicated rulings followed. The Laga Defendants filed a motion in the federal district court for the Virgin Islands arguing that they could not be sued under the Delaware dissolution statute and that the bankruptcy proceeding had discharged the claims. The court ruled that the common law claims were barred by the state dissolution statute but refused to dismiss the CERCLA claims because CERCLA pre-empted the state dissolution statute. The court further held that because CERCLA was enacted in 1980, the CERCLA claims were not discharged. 
After the PRPs obtained an injunction from the court preventing the trustee from winding up the trust, the Third Circuit reversed the injunction and instructed the district court to dismiss the CERCLA claims because they were time-barrred by the state dissolution statute. 
Unable to proceed against the Laga Defendants, the PRPs then filed a CERCLA contribution action against the Trust and the shareholder-distributees. The district court held that under Delaware law, the liquidating trust was in essence a continuation of the dissolved corporation for the purpose of resolving claims by and against the dissolved corporation. The court also refused to grant the defendant’s motion that the PRPs could not proceed against the shareholders who had received liquidating distributions from the corporation and distributions from the assets of the liquidating trust. The court also issued an injunction preventing the trustee from disbursing any additional assets of the trust to pay off remaining debts of the corporation or from filing a motion in the Delaware Chancery Court to terminate the trust since this could effectively terminate the CERCLA and other environmental claims. 
In 1996, Goldman filed a motion with the bankruptcy court to enforce the injunction prohibiting lawsuits against those having interests in Duplan/Panex. However, the bankruptcy court ruled that the discharge only applied to claims that had arose prior to the filing of the petition. Since CERCLA had been enacted after the date that the petition had been filed and after the bar date for filing proofs of claim, the court held that the CERCLA claims were not discharged. The bankruptcy court ruling was affirmed by the district court in 1999 and by the Second Circuit last month.
    The Second Circuit indicated for a bankruptcy claim to be valid, the claimant must have a right of payment and that right must arise prior to the filing of the petition. The court said that a claim would be deemed to have arisen pre-petition if some legal relationship had been in existence between the debtor and creditor before the petition was filed. The court further noted that all of the elements comprising that legal obligation had to be satisfied prior to the filing of the bankruptcy petition.
The court then found that CERCLA created a new scheme of liability. Even though the conduct leading to the CERCLA liability may have taken place prior to the bankruptcy petition, the court ruled that the CERCLA statutory claims could not have arisen until the statute had been passed in 1980. Assuming that those claims arose on the date CERCLA was enacted, the court said the CERCLA claims could be considered administrative claims which the reorganized corporation had expressly assumed and agreed to pay. However, the court specifically indicated it was not determining that the claims arose at that time and before the issuance of the confirming order. 
The court did bar the RCRA 7002 actions because EPA had satisfied the diligently prosecution requirement.  On the common law claims, the court found that the bankruptcy court had not determined when those claims arose. As a result, the court remanded the CERCLA and common law to the district court for further consideration.
Commentary:   It is important to remember that the CERCLA secured creditor only protects lenders when they have indicia of ownership primarily to protect a security interest. A secured creditor can still generate profits such as interest and fees without forfeiting its immunity from liability so long as the lenders primary purpose was to protect its security interest.  The exemption did not apply in this case where the bank had an investment interest in the company. 
Second Circuit Rules Sublessor Is Not Liable for Contamination Caused by Subtenant
	One of the more hotly-contested issues in CERCLA is the allocation of cleanup liability between landlords and tenants.
	As a current owner, a landlord is strictly liable for contamination at the site even if the contamination pre-dated its ownership. Of course, the landlord could bring a contribution action against other PRPs. The liability of a past owner is somewhat narrower than a current owner since a past owner is liable only if it owned the land at the time of disposal. Some courts have blurred this distinction by holding that passive migration of previously- deposited contaminants constitutes “disposal”. Thus, in some states, a former owner who did not actively dispose of hazardous substances but merely owned the land while the contaminants migrated away from their source could be strictly liable under CERCLA.
	Tenants,on the otherhand, may be liable as operators. CERCLA operator liability is predicated on whether a party has control of a site. A difficult question arises when a tenant may have the right to use all of a parcel but does not use a portion of the site which may have been contaminated by a prior operator or owner. 
	To get around the operator issue,some plaintiffs have argued that tenants should be considered owners for purposes of CERCLA liability. Those cases that have followed this approach have usually involved long-term, triple-net leases where the tenant effectively steps into the shoes of the owner.
	Last month, the Second Circuit had an opportunity to explore the contours of CERCLA liability for tenants in Commander Oil Corp.  v. Barlo Equipment Corp. In that case, the plaintiff leased a parcel with office and warehouse space to defendant Barlo in 1964 and rented an adjacent parcel to another tenant, Palsey Solvents and Chemicals, in 1969. Several years later, Commander Oil consolidated the leases by leasing both parcels to Barlo who, in turn, subleased the adjacent lot to Palsey. Barlo was responsible for maintenance and paying taxes on both lots and made a small profit from the sublease arrangement.
	In 1981, contamination was discovered at the Palsey parcel. Palsey drained tanks located at the property, removed solvents it had stored on the property and vacated the premises.
	In 1995, EPA filed a cost recover action against Commander Oil and other responsible parties. After Commander Oil entered into an consent decree with EPA to implement a cleanup and reimburse the agency for its past and future costs, the company filed a contribution action against Barlo and Palsey who was no longer financially viable. 
In 1997, the federal district court for the eastern district of New York ruled that Barlo could be considered an owner of the Palsey lot because of its “authority and control” over the site and allocated Barlo share of liability for the site at 25%.
On appeal, the Second Circuit acknowledged that many courts have held that control was a sufficient to impose liability on lessees or sublessees. However, the court said that in the Second Circuit, owner and operator liability are treated separately, and that site control was an insufficient basis for imposing owner liability.Instead, the court said there must be additional indicia of ownership. The court then mentioned a non-exclusive list of factors the could evidence such indicia of ownership. They included if there was a long-term lease where the owner/lessor had no right to determine how the property is to be used, if the lease could not be terminated by the owner/lessor prior to its expiration, if the lessee had the right to sublet without first obtaining the consent of the owner, if the lessee was responsible for paying taxes, assessments and maintenance, and whether the lessee was responsible for making structural and other repairs. While Barlo did have some of these attributes of ownerships over the Palsey lot, the court found that Barlo “lacked most of the bundle of rights that comes with ownership of property.” Accordingly, the court ruled that Barlo could not be liable as an owner under CERCLA. 
Commentary: In dicta, the court suggested that a lessee’s concern about environmental hazards at a site is usually limited to whether the property was adequate for the tenant’s purposes and if there were environmental conditions which would impair the tenant’s ability to operate the site.  This understates the potential environmental concerns of tenants. Once a tenant takes possession of a property, it will be considered an operator and might be held responsible for pre-existing contamination as an operator by virtue of its control over the property. Some states now provide for an “innocent tenant defense” but generally require tenants to conduct some sort of pre-possession due diligence. In addition, some state laws provide that if a tenant fails to maintain institutional controls at a site, it could lose its innocent landowner or tenant defense.  Accordingly, it is important for tenants to perform environmental due diligence before taking possession of a site so that they understand what the environmental conditions are and can allocate liability for those conditions in the lease.  

   

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