NJ Ct. Vacates NJDEP Denial of Innocent Party Grant

During the early years of New Jersey’s remediation program, challenging decisions of the New Jersey Department of Environmental Protection (NJDEP) bordered on Quixotic mission. Times have changed, though, and courts are no longer intimated by NJDEP and we have discussed a number of cases where courts have overruled the agency’s decisions. See dry cleaner case and recission of NFA letter and revocation of nfa letter

The latest example is In re Hazardous Discharge Site Remediation Fund Innocent Party Grant Application Cliflake Associates, LLC, 2013 N.J. Super. Unpub. LEXIS 1232 (App. Div. 5/22/13) where a two-judge panel vacated an administrative decision of the NJDEP denying an application for a Hazardous Discharge Site Remediation Fund Innocent Party Grant  that had been filed pursuant to the Brownfield and Contaminated Site Remediation Act (Brownfield Act).

In this case, Cliflake Associates, LP (LP) acquired an industrial property in June 1972.  The facts in the court opinion are sparse but it appears that a portion of the property may have been subsequently developed for retail use and that former heating oil tanks were removed with oversight of the NJDEP. In 1999, the partners of the LP formed Cliflake LLC (Cliflake) which acquired the assets of the LP. The LP partners became members of the Cliflake.

Shortly thereafter, Cliflake entered into a memorandum of agreement (MOA) with NJDEP to investigate the property. Again, it is unclear what prompted the MOA but it appears that previously unknown contamination may have been encountered during another phase of development. In any event, the remedial investigation discovered volatile organic compounds in the vicinity of a former warehouse and the property was identified as posing an Immediate Environmental Concern (“IEC”) in 2010 because of the potential for vapor intrusion.

With the remediation costs projected to exceed $2MM, Cliflake applied to the Hazardous Discharge Site Remediation Fund (the “Fund”) in January 2011 for an innocent party grant.  To qualify for an innocent party grant, an applicant has to show that it acquired the property prior to December 31, 1983, owned the property at the time of the application and that no discharge of hazardous substances has occurred during its ownership.

In March 2011, NJDEP issued a preliminary decision to deny the application because Cliflake did not own the property prior to December 31, 1983. Cliflake requested reconsideration on grounds that it was essentially the same entity as the LP that had acquired title in 1972. In support of its position, Cliflake relied on the definition of “change in ownership” contained in the Industrial Site Recovery Act (ISRA) regulations.

NJDEP responded that the ISRA definition was not relevant for purposes of determining eligibility for innocent party grants since the Fund was established under the Brownfield Act. Even if ISRA was applicable, NJDEP pointed out that the ISRA regulatory definition of “change in ownership” included “reorganization of a . . . limited partnership into a . . . limited liability company.” Thus, the NJDEP concluded that Cliflake and the LP were separate legal entities formed under different statutes and could not claim it was same entity that acquired the property in 1972 for the purposes of the innocent party grant.

Cliflake again requested reconsideration on grounds there had been a statutory merger with the LP that resulted in “continuous ownership of the property and continuous possession of a vested right to make an Innocent Party Grant application.” In response, NJDEP requested copies of the Certificate of Merger/Consolidation, the Agreement of Merger/Consolidation, and evidence that the agreement was approved by the members of Cliflake, LLC. When Cliflake was unable to produce the requested documents, it argued there had been a de facto merger with the LP and that as a successor to the LP, Cliflake was eligible for an innocent part grant.

In April 2012, NJDEP issued its final decision denying the application. The agency said the two entities were not the same and had failed to prove there had been a statutory merger because it failed to provide the required documentary evidence. NJDEP also rejected the de facto merger argument. In reaching this conclusion, the NJDEP said there was no evidence in the record suggesting that the parties intended a merger or that they intended Cliflake to assume all of the benefits and burdens of its predecessor. Instead, the NJDEP reasoned, it is more likely that the reason for the change to obtain the liability protections and the favorable pass-through tax benefits afforded by the limited liability company business form. NJDEP also found the certification submitted by Cliflake stating that the 1999 transaction was intended to be a merger was unpersuasive because it not a contemporaneous document. Finally, NJDEP concluded that the de facto merger doctrine was relevant only for determining corporate successor liability and not for purposes of determining if the successor could obtain a benefit due the predecessor.

On appeal, the court began its analysis by recognizing that ISRA and the Brownfield Act were distinct statutes and that ISRA definitional sections were not contained in the law creating the Brownfield Act and amending ISRA. However, court found that the two laws were part of a unified legislative strategy to address the remediation of contaminated sites. Accordingly, the court said that the ISRA definitions could be used to inform the purpose and scope of the innocent party grants.

Turning to the legislative history, the court said the grants were clearly intended to help the owners of contaminated property defray the costs of remediation if they were not responsible for the contamination. The court said the change of ownership definition of N.J.S.A. 13:1K-8 reflected the Legislature’s concern that there be a basic continuity of beneficial ownership between the two entities, retention of the prior entity’s liability by the resulting entity, and preservation of the prior entity’s available assets by the resulting entity to meet its remediation responsibilities. However, the court observed that ISRA allowed for corporate mergers, inter-corporate transfers, gifts or inheritance among family members, and other types of transfers. To the court, this suggested that the Legislature appeared to have been more concerned with the substance of ownership and continuity than the technicalities of the legal form. Indeed, the court said in a footnote that the ISRA regulatory language of N.J.A.C. 7:26B-1.4 arbitrarily excluded LLCs resulting from the reorganization of LPs.

On the statutory merger issue, the court said it was unclear from the record if Cliflake failed to produce documents showing that there was a statutory merger because there was no such statutory merger or because the records have been lost. For purposes of its decision, though, the court said it would assume that there was no statutory merger and turned to the de facto merger argument.

The court also rejected NJDEP’s argument that the de facto merger doctrine was limited to imposing impose liability and could not be used to confer benefits on a surviving entity. The court also said that while NJDEP incorrectly determined that the lack of contemporaneous documentation was conclusive by itself on the issue of a de facto merger, the absence of contemporary documents could serve as evidence in evaluating if the parties intended a merger.

Because the record was not sufficiently developed to determine if there was a de facto merger, the court vacated the NJDEP’s denial of Cliflake’s innocent party grant application and remanded the matter for an evidentiary hearing. On remand, the court said that Cliflake would have the burden of establishing that there was a de facto merger and that the change in structure did not diminish the assets available for remediation.