Failure to Identify Dry Wells and Review Building Dept File at Heart of Consultant Malpractice Case

Southern Wine & Spirits of New York vs. Impact Environmental Consultants, 2013 N.Y. App. Div. LEXIS 2081(App. Div.-1st Dept 3/28/13) involves a common source of contamination in Long Island and other suburban areas of New York City-dry wells and septic systems. The parties have yet to begin discovery but based on the motion papers filed so far, the lawsuit will include some interesting legal issues such as the application of the economic loss doctrine, the standard of care for non-licensed professionals and if compliance with ASTM satisfies that scope of that duty.

Because discovery has not yet started, our factual recitation is based on the pleadings and motion papers. We will also discuss the findings of the phase 1 report and the plaintiff’s expert certification. Readers can then judge for themselves if they think the plaintiff’s should prevail.

Southern Wine & Spirits of New York (“Southern”) operated a wine and alcoholic beverage storage and distribution facility at 345 Underhill Boulevard in Syosset, Long Island. Southern Wine was considering purchasing the site it was using as well as the adjacent parcels located at 313, 323 and 325 Underhill Boulevard to expand its facility.

In November 2005, Southern retained Impact Environmental Consultants, Inc (“IEC”) to perform a phase 1 on the four parcels. Pursuant to the “proposal for services” letter, Southern acknowledged receipt of the IEC standard terms and conditions. Interestingly, Southern was identified as the “client” while Commerce Bank was identified as the “user”. The bank did not execute the proposal.

The IEC phase 1 identified three 10,000-gallon closed USTs used to store gasoline and diesel for fleet fueling and 4 active USTs. IEC also stated the Property was serviced by 30 dry wells and 9 drainage structures (catch basins) that did not have any visual signs of contaminations. While the property was currently connected to the county sewer system, IEC noted that there were two on-site sanitary systems that had been abandoned in 2001.

According to IEC phase 1, a 1999 phase 1 of 313-323 Underhill Blvd reported that these parcels had been serviced by an on-site sanitary system and fuel oil USTs. The phase 1 recommended sampling of the dry wells, former septic system, the former UST as well as near the transformers and railroad tracks. The 1999 Phase II detected contaminants that were either below the regulatory levels or were determined to not have the potential to impact the groundwater quality of the subject property. Accordingly, the phase 2 concluded no further action was required.

IEC’s historical review also included a 2004 phase 1 of 345 Underhill Blvd. The 2004 phase I revealed four USTs had been used at the property and that two of the USTs had been removed from the property 1996 and 2001. The report noted that the Nassau County Department of Health did not observe the UST removals.

The IEC phase 1 indicated a review of the records of the Nassau County Department of Health (NCHD) that had been performed in connection with the January 2005 phase 1 had inspected the property and had informed IEC that no further work appeared to be required for the abandoned septic systems. However, the NCHD had told IEC in January 2005 that an inventory of the dry wells should be submitted to EPA since the stormwater dry wells were considered Class V Underground Injection Wells (UIW). IEC indicated that this inventory had been completed. It appears that IEC had filed a new request to review the NCHD files but had not received a response when it had prepared the phase 1 report.

IEC also reviewed the building department records and reported the parcels had been used for light manufacturing since 1960 and discussed various permits for the on-site sanitary systems along with installation of USTs.

Because of the historic use of the property, the absence of documentation for the closed USTs and the use of on-site sanitary leaching pools in the past, IEC recommended a phase 2 for 325-345 Underhill Boulevard parcels but not the 313-325 lots. Southern authorized the additional investigation which included a targeted GPR survey that identified the presence of one septic tank, seven parking lot storm water catch basins that discharged to a recharge basin, six storm water drywells and two leaching sanitary cesspools. Impact collected soil samples and elevated levels of contaminants in four dry wells and a former sanitary leaching. The Impact phase 2 dated January 6, 2006 recommended these structures be remediated in accordance with the NCDH requirements.

Based on the IEI reports, an affiliate of Southern acquired the property in September 2006. During construction activities to expand the warehouse, Southern encountered a drywell field under the northeast parking lot of at 345 Underhill Blvd containing 38 dry wells that had not been disclosed in IEC’s phase 1 report. Southern had to submit a drywell closure plan to the NCDOH and the investigation detected concentrations of Semi-Volatile Organic Compounds (SVOCs) and cadmium in soil/sludge exceeding applicable standards. Southern ultimately incurred $1MM to properly abandon 53 dry wells.

Southern then filed a complaint against IEC asserting two causes of action for negligence (including gross negligence) and breach of contract for failing to disclose the existence of 38 drywells and another stormwater conveyance box. Southern alleged that if IEC had identified the undisclosed drywell field, Southern would have negotiated an adjustment in the purchase price of the Property or may have declined to proceed with the transaction.

The Complaint also alleges that Impact failed to properly review public documents pertaining to the Property. Specifically, Southern contended IEC’s phase 1 referenced construction permits in the municipal building department files but to review those documents. Southern alleged that files included letters with hydraulic calculations and describing the need to install the 39 drywells as well as a 1986 survey plan depicting eight (8) manhole covers and an underground storage tank at the site. Southern also contended that the public records contained a building permit that referenced drainage system. Southern argued that these documents were reasonably ascertainable and practically reviewable by Impact. As a result, Southern asserted that IEC failed to conform with the requirements of the ASTM E1527 Phase I standard. Southern also alleged that IEC erroneously identified stormwater drywells as catch basins Southern asserted that the IEC failed to conform to ASTM E1527 when it failed to discuss and identify on the site map physically observable drop inlet grates that lead to the drywells .

The IEC standard terms and conditions (TOC) that applied to both IEC phase 1 and the phase 2 reports. The TOC contained a Limitation of Liability (LOL) clause the capped IEC’s aggregate liability for damages arising out of negligence or breach of contract to the total amount of fees paid to Impact for the project. The TOC also expressly provided that IEC would not be liable for any consequential damages. Southern had paid IEC $3500 for the phase 1 and $22,950 for the phase 2 for a total of $26,450.

Finally, the TOC contained a contractual condition precedent for Southern to bring a claim for professional negligence. This clause provided that Southern could not make a claim for professional negligence unless it first provided IEC with a written certification executed by an independent design professional, which identified each act or omission that the professional contended was a violation of the standard of care identified in the Agreements. The certification had to be provided to Impact no less than thirty days prior to the institution of any judicial proceeding.

Southern filed its Summons and Verified Complaint with the court on December 11, 2008 which was within the three year statute of limitations (SOL) for professional negligence and the six-year SOL for breach of contracts. However, Southern did not serve this complaint on the defendants. Instead, Southern filed and served an amended complaint which contained the certification on March 31, 2009. The trial court dismissed the amended complaint without prejudice in an order dated November 5, 2009 for failing to serve the expert certification prior to filing the original Complaint. Southern filed another complaint that was virtually identical to the original complaint on February 3, 2010 pursuant to the New York rules of civil practice that allows a plaintiff to file a new action within until six months after the date of dismissal. Southern then appealed the dismissal of the amended complaint, arguing that the date for purposes of the SOL should relate back to the filing date of the original complaint.

In January 2011, the appeals court affirmed dismissal of the amended complaint. Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, 915 N.Y.S.2d 541(App. Div.-1st Dept. 1/20/11). The court ruled that the “relation-back” doctrine could only be used for a valid preexisting action. Because Southern failed to submit the required certification prior to commencing its action, the court ruled that Southern could not use the relation-back doctrine to cure the defective initial complaint.

IEC then filed a motion for summary judgment seeking dismissing of Southern’s claims for negligence and gross negligence on the grounds that the claims were barred by SOL, Southern had failed to allege a duty independent from the contract, had failed to allege an injury to property and that IEC’s alleged negligence did not rise to the level of gross negligence. As part of its argument, IEC claimed the SOL should have started when it completed its site visit and not the date of its report.

In its April 2012 opinion, the trial court denied defendant’s motion to dismiss the negligence claim. Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, No. 650083/2010 (Sup. Ct.-New York, 4/13/12). The court held that the SOL for the negligence claim began to run on the date of the report since IEC’s obligations included issuing a report. The court also ruled that the savings clause of the New York rules of civil procedure automatically extending the SOL by six months applied since the action was dismissed due to a procedural flaw and from a ruling on the merits of the case.

The court also found that IEC owed a legal duty to Southern independent of its contractual relationship, holding that while New York did not recognize a cause of action for negligent performance of contract, professionals could be independently subject to tort liability for failure to exercise reasonable care. The court also said that the economic loss rule was not applicable to cases involving failure to perform a professional duty.

IEC argued it could not be liable for professional malpractice because its employees were not professionals since that they were not licensed and did not require special training to perform phase 1 reports. The court rejected this notion, relying on a prior decision that held that environmental consultants could be subject to malpractice claims because the nature of the work had a significant public interest and the breach of those duties could have dramatic consequences. As further support, the court pointed out that IEC’s TOC provided its services would be “rendered in accordance with prevailing professional standards…” and “… will be conducted in a manner consistent with the level of care and skill standard to the industry under similar conditions.” Based on the contractual language, the court said IEC implicitly recognized that it was bound to exercise “prevailing professional standards.” The court found that Southern had clearly relied on IEC’s environmental expertise to discover existing problems on the Property. Given such reliance on this expertise as well as the potential dangers and the public interest involved in environmental contamination, the court ruled it was appropriate that IEC be held to the standard of professionals in this matter.

On the application of the LOL, the court said that while a contractual provision absolving a party from its own negligence or limiting its liability was generally enforceable, New York  public policy forbid a party to insulate itself from damages caused by “grossly negligent conduct.” IEC urged the court to find that the failure to report the existence of the drywells did not constitute gross negligence as a matter of law. However, the court said that a jury could reasonably infer that Impact misrepresented to plaintiffs that it had examined the relevant records, when in fact, it had not done so. Accordingly, the court held that was an issue of fact if IEC was grossly negligent in failing to perform its obligations under the Phase I Agreement that prevented granting of summary judgment. Finally, the court did dismiss claims against affiliates of IEC since they were not parties to the agreement with Southern as well as claims asserted by affiliates of Southern that also were not parties to the agreement.

The appellate division unanimously affirmed the 2012 ruling in its entirety. Now that the preliminary rulings are out of the way, the parties will commence discovery.

There appear to be a handful of interesting issues that remain to be resolved. One is if an environmental professional with ordinary skill and training should have discovered the presence of the 38 dry wells particularly given how often these structures are responsible for contamination in Long Island.

A related question is if IEC failed to conform to the professional standard of care for environmental professionals by failing to review the building department files that would have revealed the presence of the 38 dry wells. The duty to perform file reviews was a much debated issue during the recent round of discussions for reauthorization of E1527 standard. The E50 task force chose to clarify the language so that the environmental professional has to provide an explanation when it does not perform a file review. Of course, local custom can influence the standard of care and it may turn out that Southern might be able to introduce evidence showing that an environmental consultant should have reviewed the building records where a property with manufacturing past and was only recently connected to the public sewer. Then again, IEC did obtain a letter from the NCDOH indicating that no further action was required for the abandoned on-site sanitary systems.

Unless new information is developed, the LOL issue seems to be an easier question. Remember that to defeat the LOL, Southern would have to show that IEC was grossly negligent. Reading between the lines, it appears that the court was looking for something more than simply failing to discover the dry wells to support a claim of gross negligence such as a misrepresentation. While IEC’s agreement did state that IEC would review appropriate records, the phase 1 indicated that IEC had reviewed the standard NCDOH files in January 2005 but had not received a response from the NCDOH or building department. Presumably, this statement coupled with the fact that the records still need to be commercial available and practicably reviewable suggests that Southern might have heavy lifting convincing a court to ignore the LOL. Southern might end up with a Pyrrhic victory where the court finds that IEC was negligent but upholds the LOL.