Court Allows Breach of Contract Claim Against Environmental Consultant for Inadequate Records Search to Proceed

Much of the focus of the 2021 revisions to ASTM Phase 1 Environmental Site Assessment Standard E-1527 was to clarify the custom and practice for performing historical investigations-particularly for adjoining properties. Unfortunately, for an architectural firm that dabbled in the phase 1 marketplace these clarifications came too late.

In Hathaway Homes, Phase II Limited Partnership v. Natura Architectural Consulting, LLC, 2023 U.S. Dist. LEXIS 97860 (WD Mich. 4/23/23), the plaintiff Hathaway Homes and its affordable housing developer, S.E. Clark & Associates, Inc., (collectively Hathaway) planned to build twelve low-income housing units on property in Pana, Illinois known as the Hickory site. The parcel was vacant but had previously been a part of a larger commercial greenhouse operation known as Roses Limited. The greenhouse complex which occupied several parcels from the 1920s to the early 1970s had contained 21 individual greenhouses with dirt floors and apparently included an irrigation system with buried corrugated transite panels.

Between 2019 and 2020, the defendant completed three phase 1 reports for Hathaway. At the time of the engagement, environmental services represented only 5% of Natura’s total revenues. The first phase 1 was issued as part of the environmental review process necessary to qualify for low-income housing tax credits (LIHTCs). The last two phase reports to Hathaway could qualify for the CERCLA Bona Fide Prospective Purchaser (BFPP) defense. None of the phase 1 reports found any evidence of recognized environmental conditions (RECs). In reliance on the absence of RECs in the phase 1 reports, Hathaway acquired title to the Hickory site in January 2020.

During site development activities, Hathaway’s contractor encountered buried construction debris and contaminated fill. The excavator arranged with his cousin to place some of the excavated material at an adjacent site (the “Coleman site”).

A few months later, the county Solid Waste Department received complaints about dust coming from the Hickory Property development site. County inspectors found transite boards containing asbestos at both the Hickory and Coleman properties and issued a stop work order.

The Illinois Environmental Protection Agency (IEPA) then issued a Notice of Violation. Hathaway entered into a settlement with the IEPA to address the violations at the Hickory and Coleman properties. Hathway incurred approximately $2MM in remedial costs and determined that the future costs to obtain regulatory closure rendered the project economically infeasible. With the approval of the IEPA, Hathaway ceased excavation work and capped the site. Hathaway eventually sold the Hickory parcel in August 2021.

Hathaway then filed a lawsuit against Natura to recover its costs alleging breach of contract, professional malpractice (negligence) and negligent misrepresentation. Both sides filed motions for summary judgment.

Hathaway asserted the defendant breached its contract by (1) failing to conduct sufficient research of historical documents related to properties surrounding the Hickory Property; 2) failing to review IEPA regulatory files; 3) failing to interview local regulatory officials; and 4) failing to recognize the possible use of pesticides and underground storage tanks as possible RECs in accordance with the ASTM E1527-13.

Inadequate Database Review Claim– Hathway argued that had Natura adequately  researched IEPA on-line database records, it would have learned of a 2011 enforcement action and judicial order involving  open dumping of construction-related debris on the adjoining north property. A series of IEPA investigations between 2001 and 2004 had revealed illegal dumping of a wide variety of solid wastes including transite panels, coal combustion waste, asphalt, concrete, bricks, broken glass, roofing shingles, “white” goods, metal drums and other metal waste, and general refuse. Had the defendant carefully reviewed historic records, Hathway said, the defendant would have been alerted to the possibility that the Hickory Property had the potential for waste material to be present and  should have been flagged these concerns as RECs. The defendant argued that the court order was not the kind of record that was required to be investigated pursuant to section 8 of E1527-13. The court denied Hathaway’s motion for summary judgment on this claim because there was a material factual dispute if the records reviews was sufficient to comply ASTM.

Failure to Interview Local Regulatory Officials Claim– Hathaway alleged that the defendant failed to make “reasonable attempts” to interview various officials as required by EPA’s All Appropriate Inquires (AAI) rule and section 11 of ASTM E1527-13. Interestingly, Natura’s proposal said that for record reviews “Natura is typically exhaustive in inquiry with
these resources.” It was unclear if the defendant submitted FOIA requests to the relevant agencies for the final phase 1. The defendant’s environmental professor had emailed the director of environmental health at the county health department who responded that it was unlikely the department had any records. The court found there was a question of fact if the email correspondence satisfied ASTM’s requirement that the environmental professional make a “reasonable attempt” to interview local regulatory agencies and denied the motion for summary judgment for this claim.

Failure to Identify RECs– Hathway claimed that defendant should have identified the existence of RECs because the property had been formerly part of a commercial greenhouse that had been heated with steam. Hathway argued the 2011 court order revealed the floors of the greenhouses were exposed soil and therefore the soils could have been impacted from pesticide spills. Moreover, Sanborn maps and aerial photographs included in the phase 1 reports revealed boiler rooms on the south adjacent property and near the northwest corner of the Hickory property suggesting the possibility of fuel oil underground storage tanks (USTs). Since there was no closure documentation for the suspected USTs, Hathway said the defendant should have considered the potential presence of USTs as a REC. Moreover, Hathway said the defendant should have identified the potential presence of asbestos-containing materials associated with former power plants as a REC. Because the expert reports disagreed if the potential pesticides and historic presence of underground storage tanks and boilers constituted a REC, the court denied Hathway’s motion for summary judgment.

The court granted the defendant’s motion for summary judgment  for the two tort claims based on the economic loss doctrine (ELD) which is a judicially-created limitation to prevent a party who suffers only economic damages from recovering those damages in tort. The rationale for the ELD is that contract law provides the appropriate avenue for recovery when there is no personal injury or physical injury to property. The ELD also prevents a party from seeking greater recovery in tort than would otherwise be available under the agreed-upon remedies outlined in the parties’ contract.

The ELD was originally applied for claims involving defective products but many jurisdictions have expanded the doctrine to cases involving services contracts. The court said that while the Michigan Supreme Court had not yet ruled on the applicability of the economic loss doctrine to contracts for services, it believed the Michigan Supreme Court would apply the economic loss doctrine to environmental consultant’s professional services contract for Phase I ESAs at least when the parties’ written contract includes the express damage limiting language here.

In dismissing the defendant’s motion for summary judgment on the breach of contract claim, the court noted that the parties agreed that even if Hathway prevailed on the breach of contract claim, its damages would be subject to the limitation of liability in the terms and conditions between the parties. The proposal for the 2019 phase 1 limited the defendant’s liability to its fee which was $2k. However, the subsequent proposals capped the defendant’s liability to the amount of its Errors and Omissions policy. Perhaps for these reasons, the parties recently settled this case.

Some readers may be confused about how asbestos can be a REC since asbestos is identified as a non-scope item in ASTM E1527. However, the regulatory status of asbestos depends on the circumstances. We begin with the understanding that asbestos is classified as a CERCLA hazardous substance. The 1986 amendments added CERCLA section 104(a)(3) which prohibits response actions for releases of asbestos fibers that are part of the building structure. To fall within this exclusion, the release must (1) be from a product that is part of the structure AND (2) result in exposure solely within the structure.

When a building with asbestos-containing material is demolished, the limitation no longer applies and the owner may be responsible for the costs to remediate asbestos-contaminated soils. The fact that the source of asbestos fibers was asbestos-containing building materials that had formerly been a part of a building is not relevant as the asbestos fibers are no longer confined to the interior of a building but have been released into the environment. The legal appendix to ASTM E1527  (we were the chair of the legal committee that prepared the legal appendix and the principal author) explains the circumstances when asbestos will NOT be considered a non-scope item and is required to evaluate as a potential REC during a phase 1.

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