Kiddie Kollege Ruling Highlights Importance of Performing PAs in NJ Transactions

Nearly eight years after a New Jersey day care was forced to close down because of mercury contamination, the legal fallout continues.  In the latest legal salvo involving the infamous Kiddie Kollege Daycare & Preschool, Inc, (Kiddie Kollege), a New Jersey trial court ordered the current property owner who leased the contaminated building to the daycare center to reimburse the New Jersey Department of Environmental Protection (NJDEP) $2.05MM. Perhaps more significant, the court also awarded treble damages of $6.1MM against the former owner of the thermometer manufacturer.

Following is a summary of the key facts and legal proceedings involving the Kiddie Kollege case. Readers who want a more detailed discussion of the tortured history of this site can click Here.

The property had been owned by Accutherm, Inc. (Accutherm) from 1984 to 1992 and used to manufacturer mercury thermometers. When Accutherm ceased operating, it failed to comply with the Site Industrial Recovery Act (ISRA) which requires certain industrial establishments that are transferred or closed to undergo environmental investigation and remediation if required. After Accutherm ceased paying its property taxes, Franklin Township sold two tax certificates to the bank then held a mortgage on the property. Eventually, the current property owner, a real estate broker, purchased a third tax certificate from the township and acquired the prior two tax lien certificates that had been sold to the bank. The current owner then acquired title by foreclosure judgment, renovated the building and leased it to Kiddie Kollege. The daycare was shut down in July 2006 after it was learned that the building that the building that housed the daycare had previously to manufacturer mercury thermometers and had mercury vapor levels at least 27 times the regulatory limit. Approximately one-third of the children and staff members were found to have elevated levels of mercury.  

The controversy spawned the filing of class action lawsuits on behalf of children who attended Kiddie Kollege as well as employees of the daycare center, an insurance declaratory judgment action and several individual personal injury actions. In Baughman v. United States Liab. Ins. Co., 662 F. Supp. 2d 386 (D.N.J., 2009), a federal district court granted summary judgment in favor of the second set of operators of the day care center that their insurer was obligated to defend and indemnity them under the comprehensive general liability (“CGL”) policy. The insurer had argued that claims for medical monitoring were not legal damages as defined under the policy and that the pollution exclusion barred coverage. The court said that since the underlying suits all allege harm due to exposure to mercury contamination inside the Kiddie Kollege building and, the contamination did fall within the scope of “pollution”. The court went on to say the fact that some toxins might have spread beyond Kiddie Kollege did not change that fact that the underlying suits sought damages for bodily injury arising from their exposure to mercury inside Kiddie Kollege.  The court subsequently awarded attorney fees as well. Baughman v. United States Liab. Ins. Co., 723 F. Supp. 2d 741 (D.N.J. 2010)

In 2010, the property owner and daycare operators settled a class action lawsuit brought by parents for $1MM. Following a bench trial, a judge ordered that a $1.5MM trust fund be established to pay for long-term medical monitoring with the property owner and Franklin Township each required to contribute $525K, Gloucester County pay $300K and the State of New Jersey $150K. Just before the judge announced his verdict, the County had agreed to settle the lawsuit $950K. Another judge subsequently awarded $1.6MM in attorneys’ fees to plaintiffs’ lawyers. Meanwhile, the building was demolished in 2010 with the debris hauled away to an Indiana hazardous waste site.

2014 Trial Opinion

In New Jersey Department of Environmental Protection v Navillus Group, et al, No. L-1260-12 ((Super. Ct-Law. Div. – Gloucester County May 14, 2014), the court finally got around to addressing the Spill Act liability of the defendants. The court made important rulings on the Spill Act innocent purchaser defense and divisibility of liability under the Spill Act.

Like many other states, New Jersey has enacted its own an innocent purchaser defense that requires a property owner demonstrate that it did not know and had no reason to know of discharges of hazardous  substance by performing an “all appropriate inquiry”.  However, contrary to most states, New Jersey has not adopted the federal All Appropriate Inquiries rule but instead has its own unique definition for satisfying “all appropriate inquiry.” Under N.J.S.A.  58: I 0-23.11g(d)(2), an “all  appropriate  inquiry” is defined as  “the performance of a preliminary assessment, and site investigations, if the preliminary assessment indicated that a site investigation is necessary.” 

A Preliminary Assessment, in turn, is defined at N.S.S.A. § 58:10B-1 as “the first phase in the process of identifying areas of concern and determining whether contaminants are or were present at a site or have migrated or are migrating from a site, and shall include the initial search for and evaluation of, existing site specific operational and environmental information, both current and historic, to determine if further investigation concerning the documented, alleged, suspected or latent discharge of any contaminant is required. The evaluation of historic information shall be conducted from 1932 to the present, except that the department may require the search for and evaluation of additional information relating to ownership and use of the site prior to 1932 if such information is available through diligent inquiry of the public records

In the Navillus decision, the trial court found that the Sullivan defendants could have learned of the discharge of mercury contamination by researching the historical records or if they followed their attorney’s advice and engaged an environmental professional to perform a preliminary assessment before proceeding to foreclose the tax sale certificates.  Instead, the court said the Sullivan relied on the 1996 EPA report. Though the Sullivan defendants misunderstood the report, the court said the EPA report could have been properly interpreted by an environmental lawyer and put into better context by an environmental consultant. Since the EPA report confirmed the presence of mercury at the site, the Sullivan defendants should have known about the mercury contamination and thus did not qualify for the innocent purchaser defense.

The court also found there was a basis to pierce the corporate veil of Jim Sullivan Inc because the Sullivan defendants disregarded corporate formalities and commingled corporate assets. Moreover, the individual sibling Sullivan defendants were liable as general partners of Navillus.

The court also found that the president of Accutherm was personally liable under the state Water Pollution Control Act pursuant to the responsible corporate officer doctrine. In addition, the court found that as the sole shareholder, CEO and corporate officer had sufficient control over the Accutherm operations to be personally liable as a “person in any responsible” under the Spill Act.  

We cannot conclude a discussion on the Spill Act innocent purchaser defense without reminding lenders, their borrowers, real estate lawyers and out-of-state environmental lawyers that the Spill Act innocent purchaser’s defense requires performing a pre-acquisition Preliminary Assessment and possibly a Site Investigation. The NJDEP PA technical guidance specifically states that the ASTM Phase I “is NOT an acceptable replacement for a preliminary assessment in New Jersey” Unfortunately, many lenders and borrowers are unaware that there are many differences between a PA and an ASTM E1527 phase 1 ASTM. Thus, purchasers of New Jersey properties who are concerned about potential Spill Act liability should not simply rely on a lender’s ASTM Phase 1 but either supplement the phase 1 with a PA or ordered a combined PA/ASTM Phase 1.

The purpose of the PA is to identify all current and historical potential areas of concern.  The NJDEP Preliminary Assessment Technical Guidance contains a Data Gathering Checklist that is intended to serve as a tool to ensure that all the required data gathering/diligent inquiry had been completed. Unlike AAI, for example, a PA specifically  REQUIRES review of tax records, deeds,  historical chain of title. and business directories  (such as McRae’s Industrial Directory, New Jersey Industrial Directory). The consultant is also required to assess protectiveness of prior remedial actions in contrast to the ASTM CREC which does not require EP to determine if controls are actually enforceable and if human exposure is under control. Other differences include that a PA does not have a “Reasonably Ascertainable” limitation that  allows a consultant to abandon a search for information based solely on time constraints. Instead,  the NJDEP PA technical guidance specifically states that “All efforts to contact a source of information or obtain documents/records should be fully pursued before the inspector completes the data gathering portion of the preliminary assessment.”   

Click here for a more detailed list of the significant differences between a PA and AAI/ASTM phase 1 report. We welcome input on this chart from LSRPs and others familiar with PA process. 

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