SCHNAPF ENVIRONMENTAL  REPORT

A Newsletter Covering Recent Environmental Developments and Caselaw

October/November 1999								Vol. 1, Issue 8
									
With this issue, the Schnapf Environmental Report marks its first anniversary. We started publishing this newsletter because we felt there was a need for a publication specifically directed at environmental issues affecting corporate and real estate transactions, and brownfield redevelopment. We have been very encouraged by the response of our readers and would like to thank you for kind comments and wonderful suggestions. We are always looking for ways to improve the newsletter and welcome your ideas. 

	In this issue, we discuss developments with the new environmental insurance products and review the latest procedural rulings in some important lenders liability cases. Despite the passage of federal and state lender liability laws, banks continue to find themselves parties in CERCLA contribution actions. We also discuss a number of emission trading deals and some decisions involving the federal wetlands program. During the past few months, EPA has announced some significant policy changes with the RCRA program which will impact companies interested in buying or selling facilities that may be subject to RCRA. Finally, we review some new brownfield financing initiatives which local communities can use to investigate and remediate contaminated properties as well as the new EPA RCRA Brownfield Prevention Initiative.   

For the past year, the newsletter has been published free of charge by the Schnapf Environmental Law Center which provides regulatory guidance, legal research and writing resources, litigation support and assistance with environmental issues associated with corporate, financing and real estate transactions for businesses and law firms. As you might imagine, researching and writing the newsletter takes a considerable effort. In order to continue to publish without charge, we shifted to a bi-monthly format over the summer. However, we have reluctantly concluded that we will have to begin charging a modest subscription fee to be able to continue to devote the amount of time that is necessary to issue a quality publication. Beginning in January, we will establish a subscription fee of $75 for six issues for readers who are not clients or business associates. The subscription price will cover all of the individuals in your office so that they can all continue to receive individual copies. When the next issue is ready, you will receive an offer to subscribe through our website. We will be establishing a hardship exemption policy for non-profits, academics and organizations with special situations. Back issues of the newsletter will continue to be available from our website free of charge. More detailed information on the topics covered by the newsletter is available at our web site: http//: www.environmental-law.net. 

We also offer environmental law seminars which are taught by Larry Schnapf who is an adjunct professor of environmental law at New York Law School. The seminar focuses on the environmental issues associated with business transactions. The seminar can be conducted at your office or at periodic department meetings that you might organize over the course of the year. We anticipate that the seminar will be approved by the Continuing Legal Education Board as an Accredited Mandatory Continuing Legal Education (“MCLE”) Program in January. A course book with transactional forms is included with the seminar. The course book may be purchased separately. If you are interested in this seminar or purchasing the course book, please contact Larry Schnapf at LSchnapf@environmental-law.net or call at (212) 996-5395.

Finally, if you would be interested in being added to our subscription list for our quarterly New York Brownfields Report, please let us know at LSchnapf@environmental-law.net. The New York Brownfield Report analyzes the agreement issued by the New York Department of Environmental Protection under its voluntary cleanup program and also discusses major policy changes for the program. 

DUE DILIGENCE/LENDER LIABILITY/AUDITING/DISCLOSURE/INSURANCE 

Rating Agencies Approve Use of Environmental Insurance for Commercial Mortgage-Back Securities (CMBS)

Just as lenders may require borrowers to perform Phase I environmental site assessments (“ESAs”) on properties that are to be used as collateral for a loan, rating agencies usually require issuers of commercial mortgage-backed securities (“CMBS”) to perform environmental due diligence for properties to be included in CMBS collateral pools. If the environmental reports identify the existence of material environmental problems, the issuers may be required to ensure that the contamination is remediated prior to securitization, arrange for an escrow or security to cover the estimated remediation costs, or obtain an indemnity from a creditworthy party. The rating agencies may also make upward adjustments in the credit support levels for the loan or the collateral pool to compensate for the risk posed by the contamination. 
Recently, Moody’s Investors Service and Fitch IBCA announced that environmental insurance might be an acceptable substitute for environmental due diligence for certain kinds of loan pools. Indeed, both rating agencies have said that in some circumstances the existence of environmental insurance could raise the credit rating of the particular transaction. For example, Moody’s suggested that for conduit or small loan pools primarily consisting of multi-family, office and retail properties, the existence of an environmental insurance policy could possibly result in a credit enhancement of .05 for portfolios with at least a Aa2 rating. In some limited cases, such as small loan pools secured by older industrial properties or convenience stores that dispense gasoline, the credit rating for pools with a rating of at least Aa2 might be adjusted upward by as much as two points.
Current CMBS documentation usually precludes special servicers from foreclosing on contaminated property. In the event of a default, the trust’s options are generally to sell the mortgage note (often at a discount), assigning the mortgage back to the borrower or, alternatively, funding a cleanup by the borrower and foreclosing on the property. Even with the existence of environmental insurance, it appears that the rating agencies will continue to require Phase I ESAs for any defaulted loans prior to transferring the properties for special servicing or foreclosure. 
Note: In future issues, we will discuss the criteria that the rating agencies will use and the particular terms or conditions that must be contained in the insurance policies to allow them to be used as a substitute for due diligence and to qualify for credit enhancements for the collateral pool. We also discuss the role of environmental insurance and environmental due diligence.

Appeals Court Refuses to Reconsider Trustee Ruling
	In our last issue, we reported on the Canadyne-Georgia  v. Nationsbank Bank case where the federal Court of Appeals for the Eleventh Circuit reversed a summary judgement in favor of a bank entered by the district court for the Middle District of Georgia. The appeals court remanded the case back to the district court for a determination whether the bank which held a partnership interest of a pesticide manufacturer in trust had negligently contributed to releases of hazardous substances had forfeited its CERCLA trustee liability exemption. The plaintiff had filed a $15 million contribution action against the bank and the former partnership that had operated the business (see related article below).  
	The plaintiffs filed a petition with the appeals court to reconsider en banc the standard for establishing fiduciary liability under CERCLA. The plaintiff’s petition argued that the appellate decision set too high a threshold for establishing trustee liability. The plaintiff asserted that the negligence of the other partners in the business should be imputed to the bank because the bank held a general interest in the partnership. Because the bank held the general partnership interest, the plaintiff argued the bank had unlimited liability for the partnership’s debts. In addition, the plaintiffs contended that the bank as trustee has an affirmative duty to safeguard trust property and that the bank had breached this duty by allowing arsenic discharges to take place. Finally, the plaintiffs asked the court to find that the bank was an operator of the facility. 
	On October 14th, the Court of Appeals denied the plaintiff’s request for reconsideration. The district court will now proceed with a factual inquiry to determine if the releases that took place at the facility could be attributed to the bank’s affirmative negligence.     

US Supreme Court Declines to Hear Appeal of Bank
	Back in July, we reported that the Court of Appeals for the Seventh Circuit had ruled that in Avondale Federal Savings Bank vs. Amoco, that a bank which had performed a cleanup at a former gasoline station could not use the RCRA citizen suit provision to recover its cleanup costs. The court held that section 7002 allowed plaintiffs to bring actions where the past or present handling, storage, treatment or disposal of hazardous or solid wastes was causing an imminent and substantial endangerment. The bank had begun the cleanup after filing its complaint for injunctive relief but completed the cleanup before the relief could be granted. Relying on the U.S. Supreme Court’s decision in Mehrig v. KFC Western, Inc, the court ruled the bank had no standing to bring the suit because the cleanup had eliminated the imminent and substantial endangerment. A strong dissent argued that the court had misconstrued the Mehrig holding and that the decision punished the bank for acting responsibly while rewarded the former gas station operator who had failed to properly remove underground storage tanks.
	The bank filed a petition with the Supreme Court to reverse the Seventh Circuit’s decision. However, on Oct. 4th, the Court declined to review the decision.

EPA Issue New Auditing Policy for Air Permits 
	In our April/May issue, we indicated that EPA had become increasingly concerned that businesses that were expanding or changing operations were not complying with the new source review (“NSR”) requirements of the Clean Air Act (“CAA”). Under the NSR program, businesses that install new major sources of air pollution or modify existing major sources must undergo a permit review process before using the new or modified equipment. 
	EPA’s Office of Regulatory Enforcement recently issued a new policy to encourage greater compliance with both the NSR program and the Prevention of Significant Deterioration (“PSD”) program which applies to facilities located in areas that meet the National Ambient Air Quality Standards (“NAAQS”). The new policy states that companies applying for Title V operating permits may be eligible for reduced penalties associated with the NSR or PSD programs. 
	When a company applies for a Title V permit, it normally conducts an extensive evaluation of its air emission sources and its compliance with the CAA. According to the new guidance policy, if a company decides during the audit to review prior decisions not to seek NSR or a PSD permit and the decision not to obtain the permits was made in good faith, the EPA may exercise its enforcement discretion and not seek gravity-based penalties. To take advantage of the new policy, the company would have to promptly disclose the violation and to expeditiously correct the violation prior to the issuance of the Title V permit. The company would also have to meet the other conditions of the 1995 Audit policy. The penalty mitigation would not apply to economic benefits gained by the non-compliance with the NSR program.
	The memo also indicated that the policy would specifically apply to companies that acquired facilities whose prior owners failed to comply with NSR or the PSD programs and who failed to disclose the violations to EPA. Indeed, EPA recently entered into its first agreement under the new policy with a large manufacturing company for NSR violations at 40 facilities that had been recently acquired by the company. In exchange for a reduction in penalties, the company has agreed to conduct comprehensive audits at its facilities and to disclose the violations over a three-year period. At the conclusion of the three-year period, the company will enter into a consent decree with EPA. During the three-year period, EPA has agreed not to disclose the name of the company.
Commentary: The new policy and the first settlement under the policy illustrate how pre-acquisition due diligence can be used to bring real value to a transaction. A purchaser contemplating changing operations of a business they are about to acquire should review the air permits to determine if the contemplated changes would trigger NSR or other CAA permitting requirements since those changes could not be implemented until the revised or new permits have been obtained. Moreover, the purchaser should also inquire about past expansion or modifications that may have been made to facilities. If changes were made that the purchaser believes might have been subject to the NSR or PSD programs, it could consider using the information generated during due diligence to take advantage of the new CAA self-disclosure policy.

	AIR POLLUTION DEVELOPMENTS

Two Canadian Companies Purchase Greenhouse Gas Emission Credits from US Utilities
In one of the first trans-border emission credit trades, Niagara Mohawk Power Corp. has agreed to sell 100,000 metric tons of greenhouse gas emission reduction credits (“ERCs”) to Suncor Energy, Inc to meet an early emission reduction credit program being considered by the Canadian government. Suncor is an energy producer with tar sand as well as conventional oil exploration and refining operations in Canada.
Under the agreement which was arranged by the non-profit Environmental Resources Trust, Niagara Mohawk will transfer ERCs it has accumulated since 1990. The ERCs were achieved by optimizing plant efficiency, using less polluting fuels and increasing reliance on renewal energy sources. Niagara Mohawk expects to receive $6 million from the agreement and has committed to reinvesting at least 70% of the proceeds from the sale towards new projects to further reduce its greenhouse gas emissions. The agreement also grants Suncor an option to buy up to 10 million metric tons of greenhouse ERCs per year for a ten-year period beginning in 2001.
	Meanwhile, Ontario Power Generation Inc. (OPG) completed one of the world’s largest spot trade in greenhouse gases ERCs when it agreed purchased credits for 2.5 million metric tons of carbon dioxide from Zahren Alternative Power Corporation (ZAPCO) which produces electricity from landfill gas at 20 locations around the U.S. OPG voluntarily committed to reduce its greenhouse gas emissions at 1990 levels by the end 2000.
	In another greenhouse gas trading development, Britain has recently announced the formation of a greenhouse gas emission trading system, which supplements a tax on industrial energy consumption that starts in April 2001. Under the trading system, companies will receive tradable permits based on their annual emissions limit. Twenty-five companies have expressed interest in the program.
Commentary: ERCs can be an important tool for companies seeking to expand operations in areas that are not in attainment with the NAAQS. This is because such a facility must ordinarily offset or reduce emissions from existing air emission sources to compensate for the increased emissions associated with the expanded operations. Purchasing the ERCs obviates the need to add new pollution control equipment or make the operational changes necessary to achieve the required offsets.Alternatively, ERCs can be a source of cashflow to companies who are shutting down or downsizing operations. Since air emissions will be lower for those facilities with curtailed emissions, a company could sell its excess ERCs to raise cash.

Emission Reduction Credit Quote Now Available Online 
	Companies interested in buying or selling emission allowances for Sulfur Dioxide (“SO2”) under the Acid Rain Program of the Clean Air Act or Nitrogen Oxide (NOx) allowance under the Ozone Transport Commission may now be able to obtain quotes from an internet website.  
	The new information service is being provided by Natsource LLC, a New York-based energy broker. The information system is accessible via MoneyLine’s website. The service provides real time quotes for emission credit pricing and volume. The trades must still be executed using a broker, however.
	SO2 emission allowances have been traded for over 11 years. However, NOx trading only began recently. Under the 11 state Ozone Transport Commission, 220,000 tons of NOx may be traded through the end of 2002. Approximately, 50,000 tons of NOx have been traded thus far.

New York Approves NOx Trading Rule
	The New York State Environmental Board recently approved new NOx regulations that will establish a NOx trading program for stationary sources beginning in May 2003. The program was adopted to comply with the NOx State Implementation Plan (“SIP”) rule issued by EPA in 1998 which required 22 states to reduce NOx emissions by a total of 1.1 million tons. New York’s NOx SIP establishes an overall cap on NOx emissions for air emission sources located in the state. New York will meet this budget through NOx control programs already in place and by limiting the NOx emissions of certain major stationary sources through a NOx trading program being established under 6 NYCRR 204. 
New York's NOx Budget Trading Program is similar to the model emission trading rule EPA has established at 40 CFR 96. This trading system places a collective cap on NOx emissions from major sources and provides for the trading of allowances similar to SO2 allowance trading program. Each allowance represents the right to emit one ton of NOx. EPA believes that this market-based system approach represents a cost-effective way to restrict NOx emissions because it allows the trading of allowances among regulated emission sources located in all states which have established equivalent programs as well as any other person who establishes an account. Thus, market forces determine the most efficient allocation of this economic resource. 
The program which goes into effect in 2003 establishes a total budget for all sources of NOx of 240,123 tons for the 2007. Within this overall cap, 41,350 NOx allowances are reserved for utilities generating at least 15 megawatts (MWe) of electricity, Portland cement kiln units with maximum design heat inputs equal to or greater than 250 million BTU per hour (mmBTU/hr) and Non-electricity Generating Units with a maximum design heat input equal to or greater than 250 mmBTU/hr. Other units may opt-in to the program. The program also contains set-aside accounts which may be available for new units and sponsors of energy efficiency measures, projects generating electricity from renewable resources, and in-plant efficiency improvements. EPA will maintain the allowances through its NOx Allowance Tracking System (“NATS”).

U.S. Sues Utilities Over NSR Violations
	On November 3rd, the federal government filed suit against 17 coal-fired power plants located in five states charging that the utilities violated the CAA when making changes to their plants without complying with the NSR program. New York, New Jersey, Connecticut have joined the litigation.
	The electrical generating plants that are the subject of the litigation were older plants that had been grandfathered under the CAA and which did not have to be equipped with the emission control equipment that new air emissions sources are required to install. The government claims that when the utilities modified the plants, they should have complied with the NSR program which would have required the plants to install the pollution control equipment. As a result, the federal government asserts that the utilities have illegally emitted massive amounts of SO2 and NOx. Indeed, the federal government asserts that these plants account for 70% of the total SO2 and 30% of the NOx emissions each year. 
	The utilities contend that the changes fell within the routine maintenance, repair and replacement exception to the NSR rules. EPA has struggled to consistently interpret this exception in the past and if this current interpretation is upheld, it could dramatically expand the reach of the NSR program. 

Clean Air Act Citizen Suit Not Barred By State Administrative Action
	A federal district court allowed a citizen suit to proceed against a refinery even though the defendant entered into a settlement with state environmental authorities and corrected violations.
	In Anderson v. Farmland Industries, neighbors of the refinery filed a lawsuit claiming that the defendant’s emissions violated its air permit and that offensive odors from the plant had drifted over their homes. Shortly after the suit was filed, the defendant entered into an administrative order with the state and completed a compliance schedule set forth in the settlement. The defendants argued that the administrative settlement barred the citizen suit. However, because the CAA only refers to judicial decrees and not administrative actions, the court allowed the action to proceed to a trial on the merits.
Commentary: Citizen suits are increasingly being used as predicates for filing common law claims for personal injury and property damage. The plaintiffs feel that showing violations of environmental statute will not only strengthen the factual underpinning of their cases but qualify as negligence per se or a public nuisance. As a result, it is important for purchasers of on-going operations to independently review CAA compliance during due diligence and determine if there have been any local complaints about emissions from a facility.

WATER POLLUTION/ENDANGERED SPECIES 

EPA Plans To Coordinate Requirements of the CWA and ESA
In our March issue, we reported that the EPA Clean Water Action Plan was an example of how environmental laws like the Clean Water Act (“CWA”) were going to be used not simply to halt discharges of industrial pollutants or sewage but redirect growth away from undeveloped property and to shape local land use. EPA announced another step in that direction last month when it said it planned to integrate requirements of the Clean Water Act with the Endangered Species Act (“ESA”). 
	The purpose of this policy is to make sure that discharges authorized by the CWA do not harm wildlife protected by the ESA. Under this approach, environmental agencies will not only be required to evaluate the impact of wastewater discharges on water quality but may also have to include additional permit conditions to protect aquatic wildlife and their habitats. For example, when developing pollution loadings for rivers, agencies may not only consider the pollutants normally address by water permits but also other factors such as excessive temperature. 
	The National Marine Fisheries Service plans to issue new rules that will redefine what constitute a “taking” under the ESA. Waterfront development that impairs water harboring endangered species may be deemed to be a “taking” and be required to prepare habitat conservation plans.

Appeals Courts Weakens Citizen Suit Claim
	One of the most important enforcement tools of the CWA is the citizen suit provision which allows private parties to seek injunctive relief and penalties for facilities that are not in compliance with their permits. The CWA prohibits these citizen suits when a state or the federal government is diligently prosecuting the violation. Under the 1987 Supreme Court decision in Gwaltney of Smithfield v. Chesapeake Bay Foundation, these suits may not be brought for past violations.
	Recently, the federal Court of Appeals for the Fourth Circuit narrowed the circumstances under which defendants may be forced to pay penalties or be sued under the citizen suit provision. In Friends of the Earth v. Laidlaw Environmental Services, an environmental organization sought against the defendant for discharging mercury into a river on more than 800 occasions. After notice of the suit was filed, the defendant ceased the discharges and began working with the state to come into compliance with its CWA permit. A federal district court denied the claim for injunctive relief because the company had come into compliance but fined the defendant $405,800 which was less than the $1 million that the plaintiffs estimated the defendant had gained by not complying with its permit. The court had felt that the fine together with the litigation costs were a sufficient deterrent to prevent future violations. However, the Fourth Circuit ruled that the lawsuit became moot when the defendant came into compliance with its permit. In so holding, the court relied on a 1998 U.S. Supreme Court decision in Steel Corp. v Citizens for a Better Environment where the Court held that citizens did not have standing to sue for wholly past reporting violations under the Emergency Planning and Community Right-To-Know Act (“EPCRA”). The Fourth Circuit also overturned the ruling on the grounds that the fine would not redress any injury suffered by the plaintiffs because the money was to be deposited into the U.S. Treasury. 
	This case follows another case earlier this year where a citizen suit was dismissed because the violations were covered by an administrative order.
Commentary: Although all of the major environmental statutes have citizen suit provisions, the statutes do not contain the same language establishing when a citizen suit may be barred. The CWA provides that citizen suits may not be maintained when a state is diligently prosecuting a violation. This language should be compared to that contained in the CAA where a citizen suit is barred only where if a judicial decree has been entered. 
 
Migratory Bird Rule Upheld 
	Section 404 of the Clean Water Act provides jurisdiction to the EPA and the Army Corps of Engineers (“Corps”) to regulate “navigable waters” which have been interpreted to include wetlands. A controversial part of the wetlands program has been the issue of “isolated wetlands” which are depressions such as  prairie potholes, vernal pools, playa lakes, swales, pocosins. Although they may be filled with water for only part of the year, isolated wetlands often meet the definition of jurisdictional wetlands because of the presence of hydric soils and hydrophytic vegetation. 
In 1985, the United States Supreme Court ruled in United States V. Riverside Bayview Homes, Inc. that the jurisdiction of the 404 program could extend to wetlands that were adjacent to "navigable waters" since they may play a vital role in the aquatic ecosystem even if the wetlands were not actually hydrologically connected to the navigable waters.
 	However, in Hoffman Homes V. EPA, the Seventh Circuit ruled that EPA had no authority to regulate the filling of an isolated wetland depression that was neither adjacent to nor hydrologically connected to a navigable water. The court also rejected EPA's contention that it could regulate isolated wetlands under the commerce clause. The agency argued that it did have authority to regulate isolated wetlands because they serve as important nesting and feeding sites for migratory birds. Since the birds may be harvested by hunters or viewed by bird watchers, the government contended that isolated wetlands had an impact on interstate commerce. The EPA’s position became grist for the humor mill and became known as the “reasonable bird” standard. The court was equally amused by this position and held that mere potential presence of migratory birds was insufficient since they do not engage in commerce. Until the agency could demonstrate some link to human activity, such as hunting or bird watching, it could not invoke the commerce clause. 
In Tabb Lakes, Ltd. v. U.S., the Fourth Circuit rejected potential use by migratory birds as basis for regulating isolated wetlands but the basis for the decision was that the Corps did not subject this interpretation to the requirements of the Administrative Procedures Act. 
The Corps has refused to recognize these adverse decisions outside the states governed by those circuit courts. In May, 1998, the Corps issued guidance that allowed it to assert jurisdiction over isolated wetlands in five states: Maryland, North Carolina, South Carolina, Virginia and West Virginia. Recently, the Seventh Circuit upheld the migratory bird rule in Solid Waste Agency of Northern Cook County v. Army Department. The decision affirmed a district court ruling that the Corps had jurisdiction to require the plaintiffs to obtain dredge and fill permits to fill in 17 acres of wetlands that were to be used as a site for a non-hazardous waste landfill. The site contained ponds and small lakes that had been used by over a 100 species of birds.
  	 
EPA Focusing Wetland Enforcement on Drainage Activities
	EPA has launched an enforcement initiative that focuses on discharges associated with ditching or draining activities. The enforcement effort follows reports that destruction of wetlands has accelerated since the June 1998 decision by the federal Court of Appeals for the District of Columbia which we reported on in our February issue. 
	EPA has estimated that from June 1998 to March 1999, more than 150 miles of rivers, streams and watercourses, and nearly 30,000 acres of wetlands have been ditched, drained and/or channelized. The Association of State Wetland Managers, Inc. has also expressed concern to EPA about mounting losses of wetlands in the coastal plain of the southeast. Many of the affected sites are located near shell-fishing waters and fish nursery grounds.
	As a result, EPA, the Corps and state agencies are coordinating compliance and enforcement actions to address unauthorized discharges associated with ditching and excavation activities For example, EPA and North Carolina recently issued administrative orders to three North Carolina developers that require the restoration of wetlands and compliance with federal storm water discharge requirements. EPA and North Carolina expect to issue several similar restoration orders in the future. In addition to the restoration orders, property owners and their contractors engaging in unauthorized ditching and excavation activities will be subject to administrative, civil judicial and/or criminal penalties. 
	In another development, the Environmental Appeals Board (“EAB”) recently upheld a $90,000 fine levied against a company that installed drainage tile used to convert a 50 acre wetland to upland farmland in In Re Slinger Drainage Inc.. In that case, EPA had brought an administrative action against a drainage company which used a mechanized drainage machine to excavate soil and organic material and replace it with drainage tiles. The machine momentarily lifted soil to create a trench and fed a continuous drainage tile into the trench. During the process, half of the soil was immediately placed back into the trench while the other half was temporarily placed on the side of the trench. When the tile was in place, the machine then pushed the rest of the soil back into the trench. 
The EPA commenced an administrative action, asserting that the excavation and immediate redeposit of the material by the trenching machine required a wetlands permit because the excavated material became a regulated pollutant. The company argued it was simply draining wetlands and the redeposition of the excavated material constituted “incidental fallback” which could not be considered an “addition” of a pollutant requiring a permit. Alternatively, the company argued that the Fourth Circuit decision in U.S. v. Wilson because the action qualified as “sidecasting”. 
	An administrative law judge found that the company had discharged dredged material without a permit and that this constituted a prohibited addition of a polluntant. In upholding the ALJ ruling, the EAB said that the operation did not qualify as “incidental fallback” since 100% of the soil was redeposited. The panel said the activity was no different from mechanized earth moving operations which require a wetlands permit. 
Commentary: The kinds of ditching, draining or channelization activities that are likely to attract the attention of EPA and state regulators include: Mechanized land-clearing; Sidecasting (redeposit of material into wetlands next to a ditch); Redepositing material into streams after removal of minerals; and Unpermitted stormwater runoff from ditching activities
      
Developers Ordered to Restore Illegally Filled Wetlands 
	Two recent administrative actions illustrate that EPA is continuing to aggressively enforce its wetland rules. The agency recently ordered the Vail Ski Resort to restore wetlands that had been filled when a temporary work road was built to provide access for heavy equipment that was being used to construct an 885-acre expansion of the resort. The agency ordered the road to be closed and requested that the resort provide a plan for restoring the wetlands. While no penalty has been assessed to date, EPA is continuing to gather information to determine if civil penalties are appropriate. 
	Meanwhile, a developer who destroyed two acres of wetlands while converting an 8,400-acre cattle pasture to a vineyard and orchard was fined $1.5 million by a federal district court in California. The fine levied in Borden Ranch Partnership v. US is believed to be the largest ever assessed by a federal court for a wetland violation. The fine was higher than the $875,000 penalty that had been sought by the Department of Justice. 
	The developer used a plowing process to fill 28 swales and vernal pools without obtaining fill permits from the Corps. After the Corps issued cease and desist orders, the developer filed a lawsuit claiming that the plowing activities should be considered normal farming activities that are exempt from the wetlands program. However, the court said the exemption only applied to farming, silviculture or ranching operations but not activities that bring an area into such uses. The court said that the developer had the choice of paying the full fine or restoring four acres of wetlands in exchange for paying a reduced fine of $500,000.         

HAZARDOUS WASTES/USTS

EPA Withdraws Corrective Action Rule 
RCRA authorizes EPA to require RCRA-regulated facilities to perform corrective action to remediate soil and groundwater contamination. The cleanup procedures used in the RCRA corrective action program are similar to those used by EPA in the Superfund program. However, the RCRA corrective action program potentially covers a much larger universe of facilities. It has been estimated that over 5000 sites may become subject to the RCRA corrective action program.
	In 1990, EPA proposed regulations governing how cleanups would be performed under the RCRA corrective action program. However, the proposed rule that was to have been published as Subpart S of the RCRA regulations was criticized for being process-oriented which resulted in time-consuming and costly cleanups. Indeed, a 1997 GAO report, only 5 percent of the 1300 high priority sites had been cleaned up and only 8 percent of the total corrective action facilities had been cleaned up. 
	33 states have received permission from EPA to administer their own corrective action programs and many of these programs use more flexible approaches than originally proposed in Subpart S. As part of its RCRA Cleanup Reform Initiative, EPA announced earlier this year that it would not issue final corrective action regulations. Last month, the agency officially withdrew all but two parts of the proposed 1990 rule. The retained parts are the corrective action management rule (“CAMU”) which was promulgated in 1993, the definition of “facility” and the portion of the rule clarifying responsibility for corrective action when facilities are transferred.  
In place of the proposed subchapter S rule, EPA will be issuing new guidance documents that will emphasize results over process, establish clearer cleanup goals, maximize procedural flexibility for achieving those goals and also promote the use of risk-based cleanups that take into account the dangers posed by the contamination rather than relying on inflexible cleanup goals. EPA is also considering allowing states to use their voluntary cleanup programs which have streamlined cleanup procedures to administer RCRA corrective actions (see related article on the RCRA Brownfields Prevention Initiative.)  
	
Stigma Attaching to RCRA Priority Corrective Actions  
Back in February, EPA announced the criteria it would use for the corrective action program to satisfy the Government Performance and Results Act (“GPRA”). The EPA GPRA goals are to control human exposure to contamination at 95% of the RCRA priority sites and to control groundwater contamination at 70% of those sites by 2005. EPA has established yearly interim milestones to assure achievement for these ambitious goals. Under the GPRA program, the control of human exposure indicator is achieved when there are no unacceptable risks to humans of releases at RCRA facilities subject to corrective action. The control of groundwater migration indicator is attained when movement of groundwater at or from the facility boundary (which may be within or beyond the property line) is stabilized.
During the summer, EPA sent notices to owners of sites that were included on its GPRA list of high priority sites. Inclusion on the list has cast a pall on many sites. Even though many of these sites were already undergoing RCRA corrective action and contamination had already been identified at most of the sites, prospective purchasers and their lenders have been scared away from many of these properties. They are concerned that high priority list will become another federal Superfund list.
EPA is aware of the stigma that is attaching to many of the GPRA sites. The agency is emphasing that the GPRA list is simply a tool for it to measure the RCRA program and does not represent any change in the status of the sites on the list. EPA is considering issuing RCRA comfort letters and prospective purchaser agreements to lenders and prospective purchaser to help minimize their liability concerns (see related article on the RCRA Brownfield Prevention Initiative.) 

Proposed EPA Hazardous Waste Identification Rule Could Spur Brownfield Redevelopment 
	The EPA recently proposed a new Hazardous Waste Identification Rule (“HWIR”) for determining what materials will be considered hazardous wastes for purposes of complying with the Subtitle “C” regulations. Subtitle “C” creates a cradle-to-grave management system for facilities that generate, transport, store, treat or dispose of hazardous waste. 
Under the proposal, EPA plans to retain its mixed waste rule which provides that when a hazardous waste is mixed with a non-hazardous waste, the resulting mixture will be considered a hazardous waste even if it does not exhibit a hazardous waste characteristic. This rule is designed to prevent companies from trying to escape the Subtitle “C” program by diluting their waste until they no longer exhibit one of the four hazardous waste characteristics. 
The EPA also proposes to keep its derived-from rule. This rule provides that residual waste that is a result of the treatment of a listed hazardous waste will still be considered a hazardous waste even though it no longer exhibits the hazardous waste characteristic that caused the source material from being listed as a hazardous waste. 
One of the more significant changes contained in the proposed HWIR is EPA’s plan to revise its land disposal restrictions (“LDR”). Currently, the LDR provides that hazardous wastes that are disposed on land must be treated using specific technology or achieve a certain concentration of hazardous constituents in the waste or residual after treatment. Under the proposal, EPA would like to replace the technology-based treatment standard with risk-based standards. Adoption of a risk-based approach for the LDR could help eliminate one of the primary obstacles to redeveloping RCRA-regulated brownfields (see related article on the RCRA Brownfield Prevention Initiative).
Observation: Wastes that are not subject to the Subtitle “C” hazardous waste program may be disposed in solid waste facilities that are subject to the Subtitle “D” program. Many wastes that are exempt from the Subtitle “C” program may still pose significant risks to the environment if improperly handled or if they are sent to a facility that does not conform to the Subtitle “D” standards (liner, groundwater monitoring, etc). In addition, Subtitle C does not require generators to actually test their wastes to determine if they are hazardous waste but simply allow generators to use their knowledge of the materials when evaluating if the wastes should be considered hazardous wastes. As result, wastes that should be classified as hazardous wastes may end up in the Subtitle D waste stream. Accordingly, when conducting environmental due diligence of businesses generating any kind of waste, purchasers should verify that the waste has been properly classified, identify the non-hazardous waste disposal facilities that have received wastes from the business and then determine the compliance history of those facilities as well as if they have impacted the environment. 

Extended Deadline for UST Closure Expires This Month
	On December 22, 1998, owners and operators of existing underground storage tanks (“USTs”) were required to upgrade or close USTs that did not comply with the EPA UST performance standards. To comply with the new standards, USTs had to be equipped with spill containment, overfill protection, release detection and corrosion protection. Many UST owners or operators delayed complying with the upgrade or closure deadline by placing their USTs into temporary closure. Under the federal UST regulations, USTs may be temporarily taken out-of-service for up to a year without undergoing closure. UST owners or operators who placed their USTs into temporary closure last year will have to file notices of permanent closure by December 22, 1999 or upgrade their tanks. If the owners or operators elect to permanently close their USTs, the tanks will have to be removed except in very limited circumstances and any contamination associated with the USTs will have remediate.
Note: In our next issue, we will discuss the MTBE controversy. 

SUPERFUND/BROWNFIELDS

CERCLA Amended to Provide Liability Exemption for Scrap Recyclers
On November 29th, President Clinton signed an omnibus appropriation bill, which exempts certain recyclers from CERCLA liability. The bill adds a new section 127 to CERCLA amendment. This new section creates a new category of “arrangers for recycling” who will not be considered generators for purposes of CERCLA liability. The exemption will apply to processors of scrap metal, glass, plastic, textiles, rubber (excluding whole tires), paper and spent lead-acid or nickel-cadmium batteries. The recycling exemption does not apply to mills or other facilities that reclaim recycled materials. The exemption is retroactive but will not apply to processors of scrap materials that have already entered into consent decree settlements with EPA.  Estimates of the cost of the exemption vary. However, some trade organizations claim the exemption will shift as much as $700 million in cleanup costs to other PRPs. 

EPA Reverses Remedy Containing Engineering Control
Since the mid-1990s, institutional or engineering controls (e.g., impermeable caps, deed restrictions, drinking water prohibitions) have been playing an increasingly crucial role in cleanups. Unlike traditional cleanups where health-risks are addressed by either treating contaminants on-site or removing them to a treatment or disposal facility, remedies using engineering and institutional rely on legal and physical barriers such as impermeable caps that physically separate people and environmental receptors from contact with contaminants. Because cleanups relying partially or wholly on engineering or institutional controls may not require groundwater treatment or may allow higher levels of residual contamination to remain in soils, these cleanups may be less expensive and be completed much faster. 
This shift towards relying on engineering and institutional controls has been criticized by some government regulators and environmental organizations. They are concerned that there has been insufficient debate over what types of properties and land use controls are appropriate to protect the public from the risks of residual contamination as well as the long-term effectiveness of institutional controls. Unlike permanent remedies, land use controls need to be monitored to ensure their effectiveness. 
These concerns were recently illustrated in the Overland Park section of Denver. In 1992, EPA approved a remedy that involved mixing 50,000 cubic yards of radium-contaminated soil with fly ash and concrete. This mixture was buried and capped to prevent rain from percolating through the waste and contaminating the groundwater. The remedy cost the prior site operator $25 million. However, residents became concerned that the remedy would not prevent the escape of radon gas nor prevent the waste from contaminating drinking water supplies. After meeting with the community and its congressional representatives, EPA agreed to re-evaluate the remedy. The agency decided to excavate and remove the waste. EPA estimates that it will take two years and another $15-$25 million to complete the work. 
Commentary: In a transaction, it is important to identify who will have responsibility for maintaining engineering controls and for paying for future operations and maintenance costs, or an additional cleanup that may be required in the event the remedy fails. If the buyer assumes responsibility, the seller may want the buyer to establish some form of financial assurance to ensure funding for additional work that may have to be done so that the seller does not become liable for the additional work 

Congress Extends Brownfield Tax Credits
In 1997, Congress enacted a brownfield tax credit that allowed brownfield developers to expense cleanup costs associated with brownfields located in empowerment zones or low-income census tracts. The credit which allowed the developers to take the tax credit in the year the cleanup expenses were incurred rather than over the life of the project was slated to expire at the end of 2000. Tax legislation recently signed into law by President Clinton extends the brownfield tax credit to the end of 2001. 

EPA Announces RCRA Brownfield Prevention Initiative 
The federal definition of brownfield includes former industrial or commercial properties that have been abandoned, under-utilized or idled because of the presence of contamination or the perception that the sites are contaminated. Until recently, the focus of the federal brownfield program has been to spur the reuse of abandoned properties.
However, EPA is now turning its attention to the thousands of properties of properties that have owners or operators that may be under-utilized or have been warehoused by their corporate owners. Many of these properties may have areas that were used in the past to store, dispose or treat hazardous wastes but are not currently subject to RCRA. Because the RCRA definition of facility applies to all contiguous parcels under the same owner, an owner of a 100 acre site that leased a five acre parcel to a RCRA regulated operation or where a RCRA-regulated unit may have been operated in the past could find the entire site subject to corrective action. EPA is concerned that owners of these sites may want to upgrade the use of these properties, convert the property to more valuable uses or perhaps sell off portions of large site for potential redevelopment but are afraid that redevelopment on parts of the facilities that are not currently regulated by RCRA might trigger time-consuming and costly RCRA corrective action or closure requirements.
As a result, the EPA recently announced its Brownfield Prevention Initiative which it hopes will explore a number of innovative approaches to achieve faster and more efficient cleanups while minimize the possibility that RCRA may be impeding the redevelopment of under-utilized or idled sites. Some of  the flexible tools that EPA will use include waivers of LDR minimum technology requirements to allow use of risk-based cleanups, relying on performance goals for investigations and cleanups such as creation of an institutional controls, issuing permits for discrete areas of contamination so that a corrective action in a particular area will not trigger a facility-wide corrective action cleanup or post-closure permit, encouraging the use of state VCP programs with their streamlines cleanup procedures and risk-based cleanups particularly for facilities classified as generators as well as issuing RCRA comfort letters and prospective purchaser agreements. EPA will also be soliciting proposals for its RCRA Brownfield pilot program to help identify RCRA barriers that impede the beneficial reuse/redevelopment of brownfields and experiment with innovative approaches to eliminate these impediments.     

EPA Announces New Brownfield Grants 
Under the Brownfield Assessment Demonstration Pilot (“BADP”) program, EPA has issued 307 grants to local communities that can be used to help identify and assess the extent of contamination at a brownfield site. The BADP grants were originally in the amount of $200,000. However, EPA announced that supplemental grants for up to $150,000 might be available to BADP recipients who were awarded BADP grants prior to September 30, 1998. EPA also announced that it will award an additional 50 BADP grants of up to $200,000 in April 2000. The deadline for submitting applications for this new round of BADP grants is February 16, 2000.
In addition to the $200,000 BADP grants, EPA also announced that it will be awarding grants of $50,000 for brownfields that will be used to create parks, playgrounds, trails, gardens, habitat restoration as well as to preserve open space. 
Finally, EPA announced that it would award an additional 70 grants in March 2000 under the Brownfield Cleanup Revolving Loan Fund (“BCRLF”) program. The grants, which may be funded up to $500,000, may be used to remediate contamination at sites that received BADP grants. The deadline for submitting proposals for this round of BCRLF grants is February 7, 2000.  
Note: In future issues, we will discuss the financial assistance programs established by various federal agencies to stimulate the redevelopment of brownfields. 

EPA Announces New Pilots for the Superfund Redevelopment Initiative
The EPA Brownfield program has been directed to sites that are not on the federal National Priorities List. This past July, the EPA launched its Superfund Redevelopment Initiative where the agency agreed to provide financial and technical assistance to ten communities to help them develop reuse plans for NPL sites. On December 10th, the EPA announced that it will be issuing 40 additional pilots. The deadline for submitting applications for the next round of pilots is March 10,2000. 
The $100,000 in financial assistance and services are to be used to help eligible political subdivisions perform reuse assessments, planning, facilitation and public outreach to determine the future land use of the site before a remedy is selected. The reuse alternatives can include economic reuse such as for commercial, industrial or residential redevelopment; recreational reuse such as golf course, parks and ballfields; and ecological reuse such as the preservation of wildlife habitats or wetlands. 
EPA intends to first offer potentially responsible parties (PRPs) the opportunity to finance or provide services to local governments or communities with the eligible activities. If EPA provides the funding, local governments will be offered several types of program assistance, including funds through cooperative agreements, the availability of personnel under the Intergovernmental Personnel Act ("IPA"), and access to facilitation services.
To help communities identify appropriate future uses for their NPL sites, EPA will be issuing reuse design guides which discuss the kinds of reuse projects that have been used at NPL sites as well as the technical considerations that must be addressed. The first two guides for recreational sports fields and parking lot reuse will be available in the spring.
Commentary: Communities that have been the most successful in redeveloping their brownfields have usually engaged in extensive pre-planning including drafting redevelopment plans, changing zoning and lining up state and federal financial resources. Developers are attracted to sites that no only have good economic potential but also where the potential regulatory landmines have been addressed and a development roadmap has been defined. Programs like the Superfund Redevelopment Initiative can help communities establish the right environment for brownfield redevelopment.

 ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS 

Dissolved Partnership May be Sued for Contribution 
Rule 17(1) of the Federal Rules of Civil Procedure provides that the ability of corporations to sue or be sued is determined by state corporate dissolution laws which generally allow corporation to be sued for a set number of years following its dissolution. The Ninth Circuit and several district courts have held that dissolved courts cannot be sued under CERCLA but other courts have ruled that if a corporation still controls assets, the corporation is simply "dead" and still capable of being sued. There is general agreement that if the assets have been distributed, the dissolved corporation is "dead and buried" and is no longer in existence. Therefore, it is no longer a "person' who is subject to CERCLA 
However, in Canadyne-Georgia Corp. v. Cleveland, the federal district court for the middle district of Georgia recently allowed a CERCLA contribution action to proceed against a dissolved partnership that had been dissolved and its assets distributed over 25 years ago. In that case, the Woolfolk Chemical Works limited partnership operated an arsenic pesticide plant from 1921 to 1972 when the partnership sold its assets to the plaintiff’s predecessor. After expending $15 million during the past ten years and facing millions more in cleanup costs in the future, the plaintiff filed a contribution action against the partnership and partners. In allowing the action to proceed, the court said that Congress did not limit CERCLA liability to entities that were in existence at the time of the lawsuit and held that CERCLA pre-empted state dissolution laws.
Tax Deed Not Contractual Relationship
	To successfully assert the CERCLA third party defense, a defendant must establish that the release was cause solely by the act or omission of a third party with whom it did not have a contractual relationship. CERCLA defines a "contractual relationship" to include "land contracts, deeds or other instruments transferring title or possession."  Courts have broadly construed the meaning of this term so that it encompasses nearly every contractual arrangement between potential defendants. However, a federal district court in Illinois recently ruled in Continental Title Co. v. Peoples Gas & Light Co., that a tax deed did not create a contractual relationship between the prior owner and the purchaser of the tax deed. As a result, a title company which had acquired title to contaminated property through a tax deed was allowed to assert the third party defense. 

The information contained in this newsletter is not offered for the purposes of providing legal advice or establishing a client/attorney relationship. Environmental issues are highly complex and fact-specific and you should consult an environmental attorney for assistance with your environmental issues.

Copyright (c) 1999 by Lawrence Schnapf