Continuing to Struggle with CERCLA liability, the 7th Circuit Holds that a Phase 2 ESA Satisfies AAI

The Court of Appeals for the 7th Circuit has long struggled with interpreting the scope of CERCLA liability, often issuing poorly-reasoned and inconsistent decisions. This trend continued with its recent opinion in Von Duprin vs Moran Electric Service, Inc., et al,  2021 U.S. App. LEXIS 26726 (7th Cir. 9/3/2021) where the court issued a number of questionable rulings involving the CERCLA Bona Fide Prospective Purchaser (BFPP) liability protection.

In its first ruling, which we discussed in our prior post, the court adopted an exceedingly stringent interpretation of the EPA All Appropriate Inquires (AAI) regulation, finding that the defendants Major Tool and Machine, Inc.  and Major Holdings (collectively “Major Defendants”) had failed to comply with AAI because a phase 1 report did not contain the required Environmental Professional (EP) certification.  This highly-formalistic more was reminiscent of the medieval court rulings that I have to review with my Real Property Law Class students than that of a modern judiciary.

AAI is a performance based standard and the report authors certified that the report complied with the requirements of AAI. Somehow they forgot to add the EP certification but all the court needed to do was to accept an affidavit from the report author that it was an EP when it issued  the report.

In the second ruling, the court did a complete 180- degree turn, and adopted an expansive view of AAI and found that a phase 2 satisfied AAI without even discussing how the report satisfied the ten AAI criteria.

As we previously discussed, this case involved four adjacent properties that had contributed to a three-quarter mile groundwater plume of chlorinated solvents that had migrated under residential properties and posed a risk of vapor intrusion. The plaintiff sought cost recovery and contribution from the owner and operators of the three nearby sites, including the Major Defendants.

The Major Defendants leased a parcel known as the Moran site in 2003 and then exercised an option to purchase the site in October 2005. The Major Defendants did not perform a phase 1 prior to taking possession or taking title. Instead, they conducted a limited Phase II Site Investigation in December 2004, 10 months before Major acquired title.

The Major Defendants argued they were BFPPs and therefore could not be liable for the cleanup. For support the Major Defendants cited a sentence from an obscure 2005 district court case from South Carolina, R.E. Goodson Constr. Co. v. Int’l Paper Co., 2006 U.S. Dist. LEXIS 39850 (D.S.C. 6/16.2005).

In the Goodson Case, the plaintiff had purchased approximately 392 acres of forestland in 1999-2000 that was formerly used for aerial bombing and aerial strafing practice during world war 2. Goodson did not perform a phase 1 environmental site assessment prior to acquiring title.  During development activities, the plaintiff encountered unexploded ordinance and then sought cost recovery from the United States and the prior owner who had sold Goodson the parcel. The United States filed a counterclaim asserting that Goodson was a responsible party. Goodson argued it had qualified for the innocent purchaser defense because it had performed an appropriate inquiry into the “previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards”.

The particular issue before the Goodson court was if the interim AAI standards established by the 2002 CERCLA amendments could be applied retroactively. The 2002 legislation stated that until EPA issued its AAI regulations, ASTM E1527-97 “shall satisfy” AAI for transaction occurring on or after May 31, 1997.

On a motion for summary judgement, the court said the language of the statute suggested that ASTM E1527-97 was not the exclusive method for satisfying AAI but was simply a safe harbor. The court determined that the 2002 amendments which altered the requirements for asserting the innocent purchaser defense did not apply retroactively so that the version of the innocent landowner defense that was in effect when the plaintiff acquired title.

Give kudos to counsel for the Major Defendants for creative lawyering and hoodwinking two courts. Both the district court for the eastern district of Wisconsin and the 7th Circuit bought the argument without analyzing if the phase 2 report actually complied with the applicable statutory criteria.

First, it should be noted that the courts ignored the fact  that the phase 2 was performed AFTER the Major Defendants took possession of the Moran site pursuant to a 2003 lease and that the Phase II report was more than 180 days old when  the Major Defendants acquired titled.

More importantly,  phase 2 did not satisfy the interim AAI criteria. The Phase II report simply consisted of seven soil samples and three groundwater samples.  It recommended “removal and disposal of all underground storage tanks and associated contaminated soils at the Site in accordance with all applicable IDEM regulation which the Major Defendants apparently implemented. However, the phase 2 did not satisfy the following interim AAI criteria:

  • no interviews with past or present owners, operators or occupants;
  • no results of searches for cleanup liens;
  • no results of review of government records; and
  • no visual inspection of the facility and adjoining properties.

Incredibly, the  court failed to mention that the phase 2 did not contain the Environmental Professional certification whose absence was fatal in the courts initial ruling. Nevertheless, the district court found and the appeals court affirmed that Congress did not intend to make a Phase I Environmental Site Assessment the exclusive means by which a purchaser could satisfy the BFPP defense’s all appropriate inquiries standard.

The irony is that had the district court or even the 7th Circuit done a little research, they would have learned that following a bench trial, the court ruled that Goodson was  not an innocent purchaser defense because it had only failed to perform any Phase I Environmental Site Assessment but also because one of its principals were aware that the area had been a bombing range and had actually discovered unexploded ordinance while doing unrelated road work on the site prior to acquiring title.  R.E. Goodson Constr. Co. v. Int’l Paper Co., 2006 U.S. Dist. LEXIS 91342 (D.S.C. 12/15/06).

On remand, perhaps the plaintiffs will be able to help the court place the Goodson decision in its  proper context so that it corrects its error. Maybe EPA will intervene to preserve the vitality of the AAI rule . In any event, the next time the 7th Circuit judges select their next group of law clerks, maybe they will choose at least one law student who has taken an environmental law course and understands CERCLA.

In our next post, we will discuss how the 7th Circuit erred when it rejected the district court ruling that the harm was divisible and therefore the defendants should not be jointly liable.




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