Some time ago, we discussed the $14MM lawsuit filed by Lowe’s Home Centers against a consultant. Lowe’s alleged that the consultant failed to identify all areas that had been contaminated with PCBs and the store opening was delayed because of complications associated with the previously unknown PCB-contaminated soil was improperly disposed. The matter eventually settled
Another Lowe’s Home Center store development site has led to a lawsuit against a consultant, this time by an insurance company that issued an environmental insurance policy to Lowe’s Companies, Inc (Lowe’s). The complaint alleges that that the consultant failed to identify contamination associated underground storage tanks (USTs) during pre-acquisition due diligence and resulted in the plaintiff paying $1,050,103 under its insurance policy. Recently, the federal district court denied the consultant’s motion for summary judgment in Chartis Specialty Ins. Co. v. Aqua Science Engineers., 2013 U.S. Dist. LEXIS 124090 (N.D.Cal. 8/29/13).
In this case, Lowe’s was considering purchasing a 28-acre property in Concord, California for a proposed Lowe’s Home Center store. The property had a history of light industrial use including contractor equipment yards, diesel generator repair business, drilling company, automotive wrecking, wood truss manufacturer, ornamental iron fabricator and mobile home sales lot.
A phase 1 conducted by Anton Geological (Anton) in 2001 had identified a number of Recognized Environmental Conditions (RECs) including an abandoned oil-water separator, potential soil contamination from automotive wrecking operations, an above-ground storage tank (AST), areas where hazardous materials and wastes had been used by a variety of tenants and former underground storage tanks (USTs). A total of 11 underground storage tanks had been removed from the Site in the 1990s. Several of the USTs were removed without any regulatory oversight. Two USTs that had been operated by Judd Drilling were particularly notable. The USTs were removed in the early 1990s and the Regional Water Quality Control Board (the Board” ) granted closure in 1998 despite the fact that sampling detected over 1,000 parts per million (ppm) of benzene, toluene, ethylbenzene and xylene (BTEX) in soils and 15,000 ppb of diesel range total petroleum hydrocarbons (TPH-D) in groundwater.
In 2004, Aqua Sciences Engineers, Inc (AES) was retained by the Winton Jones Development Company (WJDC) to obtain regulatory closure on the RECs identified in the Anton phase 1 report to facilitate redevelopment of the property. AES identified significant petroleum contamination in one well that was located downgradient from the former Judd Drilling UST. However, no elevated levels were detected in the on-site drinking water well. Three test pits detected elevated concentrations of TPH-D, gasoline-range total petroleum hydrocarbons (TPH-G), and motor oil (TPH-MO) in the shallow soil.
In 2006, ASE excavated contaminated soils from the three test pits in the central portion of the Site known as the Winton Jones Development Parcel (WJDP) pursuant to a workplan approved by the Board. Post-excavation sampling confirmed the residual contamination was below environmental screening levels (ESL) used by the Board for commercial property. ASE originally requested that the Board issue a site-wide NFA. However, the Board responded that the sampling performed to date was limited for a size and history of site and that the Board believed additional soil and groundwater contamination was present in areas such as where the USTs had been removed without regulatory supervision. As a result, ASE then modified its request, indicating that ASE was comfortable with the issues elsewhere as the property and was simply seeking confirmation that the 2006 soil remediation was completed in accordance with the approved workplan. In response, the Board advised AES in 2007 that if the owner wanted to receive an NFA letter allowing for unrestricted land use in the future but restricting shallow groundwater use via a deed restriction, it would need to undertake a more robust and complete investigation of the environmental conditions of the entire site that could require additional remediation. However, the Board said the seller could obtain an NFA with restrictions without additional environmental investigations.
In 2008, AES submitted a Revised Workplan for Soil and Groundwater Assessment to obtain a letter from the Board indicating that the property was suitable for redevelopment. ASE investigated two additional former UST areas that ASE had not aware of when it conducted its 2006 remedial work but had learned about from its review of the Board’s files. ASE also collected samples from four areas where stained soil was observed during a site visit or had historically been used to store equipment and vehicles. ASE detected TPH-D, TPH-G and TPH-MO that did not exceed the ESLs. ASE also issued a Soil and Groundwater Assessment for an adjacent five-acre parcel where three gasoline USTs had been removed from the site in 1987 and closure had been granted by the Contra Costa County Environmental Health Department and RWQCB in April 1995. ASE did not detect any petroleum hydrocarbons in the soil or groundwater and VOCs in the groundwater were detected below the ESLs. ASE recommended that the RWQCB prepare a no further action (NFA) letter for this parcel. The report contained a section title “Report Limitations”. This section stated that “This report does not fully characterize the site for contamination resulting from unknown sources or for parameters not analyzed by the laboratory.”
Also in 2008, Lowe’s retained ASE to perform a pre-acquisition phase 1 environmental site assessment (ESA) contemporaneous with the sub-surface investigation. Lowe’s selected ASE in part because the firm had performed a number of investigations and implemented remedial measures under the under the supervision of the Board during the preceding decade for the owner/seller of the property.
The ASE report had some curious language and suffered from the use of inconsistent terminology. In the “Findings” section, ASE concluded that the former USTs and surficial staining identified in 2004 were HRECs because of the prior remedial activities. ASE also said that the surface staining from improper handling of hazardous materials and the areas where equipment or vehicle storage each “would be considered a environmental conditions.” (The term “environmental condition” is undefined and not a term recognized by ASTM E1527-05. It is unclear if this was a typo and ASE meant to identify these conditions as RECs).
Then the report went on to say that the areas of heavy surface staining and equipment/vehicle storage were not considered “recognized environmental conditions that would that negatively impact the site” because sampling did not exceed the ESLs. The use of the phrase “that would negatively impact the site” seems to create ambiguity. Was ASE saying there are no RECs or that there are RECs that will not result in material impacts to the site? If the latter, why identify the release as a REC and not a de minimis condition (e.g., one that would not result in enforcement or cleanup obligations if brought to the attention of regulators).
ASE identified the areas where poor management of waste oils and chemicals as de minimis conditions because of the sampling.
The “Findings” section concluded with a box with bold type that seemed to contradict the aforementioned statements. The bold text stated “No recognized environmental conditions, historic environmental conditions or de minimis conditions were discovered in the course of this phase 1Environmental Site Assessment, with regard to the subject property that warrant further assessment activities.”
The “Opinion” section went on to state that “Although historical and recognized environmental conditions exist at the subject site, in our opinion, regulatory agency prepared closure letters and recent (2004, 2006 and 2008) assessment and remedial activities performed at the site render a conclusion that these afore-mentioned conditions no longer negatively impact the subject site and do not warrant any further assessment activities.”
The “Conclusions” section stated that “Based on the above-referenced information, there does not appear to be any current or former site conditions that warrant any further assessment.” This section ended with the following statement “ As discussed in Section 8.1 and 8.3, this assessment has identified historic recognized environmental conditions and de minimis conditions, which as detailed in sections 8.0 and 9.0, are not considered to negatively impact the property or warrant any further assessment activities. This assessment has revealed no evidence of evidence of recognized environmental conditions except for those conditions specifically detailed in Section 8.2; however, in our opinion, each of the recognized environmental conditions identified in Section 8.2 have been fully assessed and are not considered to negatively impact the property or warrant any further assessment activities.
Finally, in the “Recommendations” section, ASE recommended that the junk yard area where there was poor management of waste oils and chemicals be re-inspected after the vehicles were gone and that the drums and buckets containing liquid be immediately removed. ASE also recommended that stained soil be scraped and separately managed from non-stained soils.
The Board issued a letter in May 2008 confirming that the property was suitable for redevelopment and that the environmental assessments completed to date were sufficient to allow the Board to issue a No Further Action (NFA) if five identified requirements were met, including additional sampling of the eastern 5-acres, abandonment of the on-site well, recording of a deed restriction and implementation of a “Risk Management Plan to properly deal with unanticipated soil, soil gas, and groundwater issues that may arise during future construction activities. In accordance with the Board’s request, ASE conducted additional soil and groundwater sampling that did not identify any contaminants above the commercial/industrial ESLs and prepared a Soil and Groundwater Plan (SGMP) which was approved in May 2009.
Between June and August 2009, contaminated soils were encountered during grading operations for the building foundation, excavation of a temporary stormwater retention basis and construction of a bio-swale. An estimated 18,500 tons of soil were disposed off-site and moderately-contaminated soils were reused beneath parking and driveway areas on the western half of the property, and beneath the concrete pad of the building
Lowe’s provided a Notice of Loss/Notice of Claim to its carrier, Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company). Chartis paid $1,050,103 to or on behalf of Lowe’s for the cleanup costs and then filed its lawsuit.
This case illustrates the challenges of redeveloping brownfield sites or those that have historic light industrial use. Phase 2 investigations are not comprehensive site investigations and it is not unusual for previously unknown contamination to be uncovered during demolition or construction activities. Insurers who write environmental insurance policies are certainly aware that unknown contamination is often encountered when developing industrial sites. Indeed, the frequency and magnitude of unexpected cleanup costs is a reason that insurers largely stopped writing cost cap insurance.
It may be that the plaintiffs will be able to uncover evidence of negligence on the part of ASE during discovery. However, given the numerous investigations and extensive oversight by regulators, it does seem that plaintiffs are embarked on a Quixotic mission. If there was negligence in this case, it seems it was committed by the insurer/plaintiff. The correspondence between ASE and the Board clearly reflect the concerns of the regulator about potential unknown sources of contamination in areas of the property that had not been fully characterized. These materials were readily available for review by the plaintiff’s underwriters. Thus, this lawsuit seems more a case of buyer’s regret on the part of the plaintiff for not having done more thorough due diligence or perhaps ignoring the risks to chase premium dollars during a credit bubble than the negligent performance on the part of the defendant.