Environmental Practice Group Newsletter. (Spring 2011)

All Appropriate Inquiries into Land Acquisitions

In January 2007, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") was amended by the Small Business Liability Relief and Brownfields Revitalization Act (“Amendments”). The Amendments created a new defense which allows a purchaser to buy contaminated property without becoming liable under CERCLA. The defense is available to purchasers of property acquired after January 11, 2002.

However, to take advantage of this new "Bona Fide Prospective Purchaser" defense (“BFPP Defense”), the purchaser is required to take specific actions prior to and after purchasing the property.

To be eligible, the purchaser may not be affiliated with any party who is potentially responsible for the contamination at the property. Most importantly, however, the owner must have taken “all appropriate inquiry” into the environmental condition of the property. Significantly, the Amendments, for the first time, define what constitutes “appropriate inquiry.

All appropriate inquiry requires that the purchaser perform a Phase I assessment which conforms with either the requirements of ASTM 1527-05, or the regulations promulgated by EPA. Because EPA has said that compliance with ASTM 1527-05 will be appropriate due diligence, most pre-purchase property reviews will likely be evaluated under ASTM 1527-05. Under the ASTM standards, a purchaser must address Recognized Environmental Conditions commonly known as RECs.

This means that a Phase I report is not a technical, perfunctory undertaking. Rather, the final report must be evaluated under ASTM 1527-05 to determine if the report is sufficient. In other words, if the Phase I does not comply with the ASTM standard (or the regulations promulgated by EPA), the purchaser will lose its BFPP Defense. Therefore, it is important that the purchaser ensure that the requirements of all appropriate inquiry are met. This requires more than just a review of the findings of the consultant.

The ASTM standard evaluates property for potential Superfund liability and petroleum contamination. It does not evaluate other potential environmental concerns which may have a significant impact on the value of the property or the viability of a transaction. Those other environmental issues include the presence of asbestos, lead paint, radon or mold. Other concerns may also exist if there are ongoing operations on the property. However, a Phase I will not evaluate requirements for air, water or hazardous waste permits or other environmental, health or safety compliance matters.

The Amendments also require compliance with post-purchase obligations. The purchaser must take reasonable steps to stop any continuing release, prevent any threatened future release and prevent or limit any human, environmental or natural resource exposure to any previously released hazardous substance. In addition, the purchaser must provide all legally required notifications (which may or may not be limited to environmental reporting) and be in compliance with land use restrictions or institutional controls to have the benefit of the BFPP Defense.

Recently, two district court opinions have examined the BFPP Defense. The first, 3000 E. Imperial, LLC, v. Robertshaw Controls Co., et al., No. CV 08-3985 PA, 2010 U.S. Dist. Lexis 138661 (C.D. Cal. Dec. 29 2010), involved a purchase of property in Lynwood, California. The purchaser undertook the appropriate, pre-purchase due diligence and learned that the property was contaminated. The purchaser then remediated the property which included draining underground storage tanks. However, the drained tanks were not excavated for two years. Plaintiffs’ failure to remove the drained tanks was held not to disqualify the purchaser from reliance on the BFPP Defense. Because the Plaintiffs removed the hazardous materials from the tanks, the court decided the purchaser had taken the requisite reasonable steps to stop any continuing or future releases of the hazardous materials.

A more problematic decision was rendered in Ashley II of Charleston LLC v. PCS Nitrogen, Inc., Civ. Action No. 2:05-cv-2782 (D. South Carolina, Oct. 13, 2010).  Plaintiff undertook a pre-purchase inquiry into the conditions of the property. The Phase I report identified sumps and concrete pads located in a structure on the site, which were characterized as a Recognized Environmental Condition. The purchase contract included a traditional provision whereby the Plaintiff agreed to indemnify the sellers from any costs associated with the site conditions.

After the purchase, the purchaser took a number of steps, in cooperation with regulatory agencies, to develop the site and to address the reported contamination, including the demolition of the structure containing the sumps and concrete pads, and the construction of a fence and the posting of signs to limit public exposure. Even though the pad and sumps were identified as RECs, once the structure in which they were contained was demolished, the purchaser failed to investigate or remediate the pad and sumps. The purchaser also failed to address a debris pile, later found to contain hazardous substances, and to maintain a site cap.

In subsequent litigation, the purchaser asserted the BFPP Defense. The court rejected the defense, finding that (1) the indemnity provision of the sale contract constituted an affiliation with a liable party thus precluding the application of the BFPP defense, and (2) the purchaser’s post-purchase failure to address the RECs in a timely manner and remediate related contamination was not appropriate care.

These cases illustrate the importance of addressing identified RECs. They also show that the eligibility under the BFPP Defense will be challenged and requires strict adherence to the pre-closing and post-closing requirements. It is essential that such transactions be carefully planned, with assistance from knowledgeable specialists, to ensure the proper due diligence is performed to comply with BFPP Defense requirements.

Left undecided is the impact of the Ashley II decision on future transactions. If the court's finding that the very act of entering into a contract which contains an indemnity provision disqualifies a purchaser from the BFPP Defense, then the purpose of the Amendments to aid in the redevelopment of Brownfield sites will be thwarted.

Missouri DNR's New Director

Governor Jay Nixon has named Sara Parker Pauley as the Director of the Missouri Department of Natural Resources. A native of Columbia, Missouri, Ms. Pauley had been a project manager for D.J. Case & Associates, a natural resources communications firm. Prior to that employment, Ms. Pauley was Executive Vice President of PrimeGen Power USA, a start-up power energy company. She previously served in the Department of Natural Resources as Deputy Director. In this capacity, she oversaw the staff and budgets of the State Historic Preservation Office, Energy Center, Technical Assistance Office and Communications Office. In addition, Ms. Pauley was chief of staff to former Missouri House Speaker Steve Gaw.

Ms. Pauley received both her law degree and her bachelor's degree in journalism from the University of Missouri - Columbia. She was an instructor at the University of Missouri's School of Natural Resources, where she taught a course in natural resource policy and administration.

Green Tips

There are a number of actions businesses can take which can help the environment and save resources. Here are a few:

  • Buy recycled office products - There are plenty of products, in addition to recycled paper. Ask you local office supply store. If they cannot help you, there are many specialty vendors who carry a wide range of recycled office products.
  • Make double-sided copies - The savings will also translate into savings in your copy paper purchases.
  • Eliminate Styrofoam coffee cups - According to the Illinois Environmental Protection Agency, a person’s use of a mug eliminates disposal of 500 cups annually.
  • Turn off lights in unoccupied rooms - motion detector switches will pay for themselves quickly with utility savings. In fact, your local power company may offset some of the costs.
  • Use plants - Indoor air quality is helped with plants like philodendrons, Boston ferns, and English ivy.
  • Purchase remanufactured or recycled toner cartridges. Most vendors now offer that option. In most cases they will take the cartridge back so nothing goes to the landfill.

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