Phase I report “reliance letters” issued by an Environmental Professional (EP) may be misunderstood and misused in the context of conducting CERCLA All Appropriate Inquiry (AAI). The term “reliance letter,” in fact, is nowhere to be found in either the Federal All Appropriate Inquiry Regulations or the related ASTM Standard E 1527-05.

Consider the following common AAI situation: A client has contracted to buy property for which a Phase I Environmental Site Assessment (Phase I ESA) report was recently prepared for the seller. To avoid the costs of obtaining a new Phase I report, the client asks whether it can use the Phase I provided by the seller to satisfy its environmental diligence obligations. The Phase I report explicitly states that it can be used and relied upon only by the contracting user for which it was prepared. The EP may be willing to issue a reliance letter to the client for a fee or occasionally at no cost. But what exactly is a reliance letter and how does it relate to the objective of compliance with AAI requirements?

Unauthorized use prohibitions and reliance letters are intended to protect EPs from potential claims by third-parties who may rely on a Phase I report prepared for another. Nevertheless, an unsophisticated third-party recipient of a reliance letter may construe such a letter as documentation of compliance with AAI requirements. A reliance letter establishes the recipient’s status as an authorized “user” primarily for purposes of the party’s legal relationship with the EP. Requesting a reliance letter to establish authorized user status is only one of several AAI issues that should be considered by third-party users of Phase I reports.

Other important questions to be considered include whether the one year/180 day regulatory shelf-life of the report has expired. Also, what independent inquiries must a third-party undertake to satisfy the AAI regulations? Third-party recipients of reliance letters may easily overlook conducting the “user” inquiries required by the AAI regulations.

The ASTM Standard further contemplates that the results of the user’s separate inquiries be provided to the EP prior to completion of the EP’s Phase I tasks (the AAI regulations are less clear). How do those provisions of the ASTM Standard apply to the third-party reliance situation? Is the third-party user obligated to accumulate the necessary user information and provide it to the EP after-the-fact? If so, how should the EP deal with any new substantive information? Also, if the results of the user inquiry are not referenced in the Phase I report, how does the third-party document that it has satisfied those obligations?

Of course, the EP may decline to issue a reliance letter or may impose costs or terms that are unacceptable. The EP may even suggest that, absent such use and reliance authorization, a new Phase I ESA must be conducted. But is that correct? The regulations set out conditions for third-party use of information contained in a Phase I report prepared for another. No requirement that the EP preparing the report issue a reliance letter is included among those conditions. The ASTM Standard specifically provides that no particular legal relationship between the EP and the user is necessary for the user to satisfy AAI obligations. With or without a reliance letter, the AAI regulations and ASTM Standard contemplate that the third-party may use the results of a report prepared for another person to partially satisfy its AAI obligations.

These questions, and perhaps others, suggest that a third-party user of a Phase I report prepared for another should be aware of the limitations of a reliance letter, if issued, and carefully consider all pertinent regulations in conducting its AAI.

Phase I Environmental Site Assessments (Phase I ESAs) are conducted: (1) to assess environmental and health risks related to the acquisition and development of real property and (2) as a critical component of establishing the Bona Fide Prospective Purchaser (BFPP) or related defenses to “owner” liability under CERCLA. A recent ACOEL posting discussed the importance of compliance with post-closing BFPP obligations. What about the adequacy of the Phase I ESA process itself?

A Phase I ESA must satisfy the requirements of “All Appropriate Inquiry” (AAI), which have been incorporated in the ASTM E 1527-05 Standard. Phase I ESAs are not, however, typically examined by environmental agencies and there is a dearth of judicial interpretation of the AAI requirements. To date, the determination of AAI compliance and BFPP status has been the province of the regulated and not the regulators.

The scenario is familiar. A transaction includes the acquisition of commercial property. The client has a general notion of AAI and the importance of the Phase I ESA to achieve BFPP status. The client usually does not know, or care to know, the specific elements of AAI. The Phase I ESA often becomes a transactional commodity to be purchased from the lowest bidder. Lawyers are content to accept the results of the bidding war, relying on the self-certification of the Environmental Professional (EP) that the assessment is compliant with the ASTM Standard. The ESA is conducted, the report issued and the transaction closed with everyone satisfied that environmental risk management has been adequately addressed. This process appears appropriate, at least when agencies or courts are not called upon to perform a more rigorous evaluation.

A February 14, 2011 report issued by the EPA Office of Inspector General (OIG) may serve as the impetus for a more cautious approach to selecting the EP in transactional and Brownfield grant matters and for more carefully evaluating Phase I reports. The OIG report documents the results of its evaluation of 35 AAI/Phase I reports generated by EPs for Brownfields Program grantees. The OIG concluded that none of the Phase I reports satisfied all of EPA’s AAI rule requirements. OIG criticized EPA for its complete reliance on EP self-certifications of compliance, its failure to establish accountability for compliant reports and the lack of procedures for reviewing reports to determine compliance with AAI requirements.

Although many of the AAI deficiencies cited by OIG were arguably very minor, the message sent was clear: Noncompliant Phase I ESAs introduce risk that the environmental conditions of a property have not been adequately assessed for the purpose of making informed property use and redevelopment decisions or for identifying risks to human health and the environment. OIG’s recommendations were equally clear - stop relying on EP self-certifications and develop a process for more careful scrutiny of AAI reports to determine actual compliance. The issues raised by the OIG report can, of course, be easily transformed into legal arguments in court where BFPP status may be in issue.

I suspect that many of us have been lulled to sleep by the self-certifications of the EP. Has the time arrived to more carefully assess the assessor and treat the Phase I ESA as a site-specific professional evaluation and not a low-bidder commodity required simply to seal the deal?

In cases of first and second impression, federal district courts in South Carolina and California have now ruled on the bona fide prospective purchase (“BFPP”) defense following its enactment in 2002 and EPA’s subsequent “all appropriate inquiries” (“AAI”) implementing regulations in 2006. In Ashley II of Charleston, L.L.C. v. PCS Nitrogen, Inc., Judge Seymour of the District of South Carolina undertook an exhaustive 55-page examination of the facts surrounding the purchase by Ashley II of several parcels from various owners. In the more succinct decision of 3000 E. Imperial, LLC, v. Robertshaw Controls Co., et al., Judge Anderson of the Central District of California addressed the divisibility of harm in connection with a purchaser’s cost recovery action against the seller under CERCLA §107(a) and also addressed the plaintiff’s BFPP status.

Ashley II

In a lengthy discussion of the history of the site, the Court examined the involvement of each of the prior owners as well as the actions of Ashley II in determining whether the harm was divisible. Ultimately, the Court determined that the harm was not divisible; however, the Court did construct a basis for allocating liability. Of particular note was the Court’s extensive analysis of the bona fide prospective purchaser status of Ashley II; but also of interest were the Court’s holdings on the issue of contractual indemnifications and release agreements.

One thing that the Court failed to give any attention to was the Consent Agreement entered into between the State of South Carolina and Ashley II. This document bears some resemblance to the State’s Brownfield non-responsible party contracts. This document attempted to establish Ashley II as a non-responsible party and afforded it contribution protection.  

Ultimately, the Court set forth an allocation of the response costs by percentage attributable to each party, with Ashley II bearing its allocation along with those for which it had indemnified.

3000 E. Imperial

The California District Court’s decision came on the heels of the Ashley II decision. Obviously, the history of the 3000 E. Imperial site was less complex. There, the Court discussed at some length the testimony of two competing experts on when the USTs in questions were likely to have resulted in a release. The Court then examined divisibility of harm in conjunction with the Burlington decision and considering the elements of § 433A of the Restatement (Second) of Torts. Ultimately, the Court concluded that the defendant’s claim for divisibility was insufficient. The Court then turned to the defendant’s counterclaim for § 107 cost recovery as a PRP. Obviously, the plaintiff had claimed that it was not a PRP by virtue of its status as a BFPP. Following a brief examination of the plaintiff’s actions following closing and a fleeting reference to “appropriate care,” the Court concluded that the plaintiff did take “reasonable steps” to prevent further releases and was entitled to BFPP status. 

Last week, EPA’s Office of Solid Waste and Emergency Response announced release of its Community Engagement Implementation Plan. Who could be against community engagement? It’s as American as apple pie. It’s environmental justice. It’s community input into decisions that affect the community. It’s transparency and open decision-making.

Call me a curmudgeon, but I’m against it. Study after study shows that, in terms of the actual risks posed by Superfund sites, we devote too many of our environmental protection dollars to Superfund sites, when we should be focusing on air and water. Why do we keep doing this? Because the community demands it. As Peter Sandman has noted, perceptions of risk are driven only partly by the actual hazard posed. To a significant degree, those perceptions are more driven by outrage over the situation. In some circumstances, what Sandman calls outrage management makes sense, but I’m skeptical that EPA’s community engagement initiative is really about outrage management.

In any case, here’s the public policy question of the day. Does it really make sense to spend scarce environmental protection resources, not to reduce risk, but to reduce outrage?

It has always amused me how many people are involved with Brownfields work as compared to how few projects have been completed. It is tough to make the economics work on a Brownfield development in the best of times. Thanks to clean energy rules and incentives this may be changing.

Brownfields and clean energy have several synergies. Brownfields are often in industrial corridors, with great infrastructure and proximity to electrical grids. Biomass projects in particular need access to efficient transportation networks in order to move large volumes of material. Clean energy projects such as solar, wind and biomass plants work well with risk based remediation and institutional controls required for cost effective risk management at a Brownfields sites.

Add to these synergies a vast array of incentives, mandatory quotas and grants for clean energy and we just may have a path to economic viability for some Brownfields projects. EPA has a task force known as ER3 to help facilitate such projects. Keep your eye on a project in Charlotte, North Carolina known as ReVenture Park which seems destined to put wind energy, wastewater treatment and a biomass plant on a large, complex CERCLA/RCRA site.

Arguably the most significant moderation of CERCLA’s harsh “owner” liability scheme occurred in 2002 through the enactment of the “Brownfields Amendments.” Included in those amendments was the creation of new liability protection for “Bona Fide Prospective Purchasers” (“BFPP”) who acquire ownership of a facility after January 11, 2002.

A relatively straightforward roadmap for prospective purchasers to achieve BFPP status is set out in the Brownfields Amendments and the subsequently-promulgated All Appropriate Inquiry rule. The extent to which tenants might obtain protection from possible “owner” liability has, however, always been far less certain.

The potential applicability of this liability defense to tenants is currently limited to a short parenthetical in CERCLA §101(40). Specifically, a “tenant of a person” that achieves BFPP status shares the liability protections of the property purchaser. Although this “derivative” BFPP status established by the Brownfields Amendments helped clarify the reach of the liability defense with respect to tenants, a number of questions remained unanswered. For example, what happens if the property owner loses its BFPP status through non-compliance with the statutory requirements? Also, does the language of the amendment as it relates to tenants preclude a tenant from independently achieving BFPP status?

Earlier this year, EPA’s Office of Enforcement and Compliance Assurance issued an Enforcement Discretion Guidance (“Guidance”) that addresses the applicability of the BFPP definition to tenants. That Guidance clarifies how EPA intends to exercise its enforcement discretion with respect to tenants “on a site-by-site” basis. In essence, the Guidance provides:

• Tenants with “derivative” BFPP status will lose that status if the property owner ceases to be a BFPP for non-compliance with one or more of the statutory requirements. Nevertheless, EPA may exercise its enforcement discretion and not pursue the tenant under an owner liability theory if the tenant satisfies certain conditions, including not having disposed of hazardous substances on the property and fully cooperating with EPA in its response actions.
• Tenants whose lease documents establish sufficient “indicia of ownership” and who satisfy all requirements of CERCLA §101(40)(A)-(H) and 107(r) may be deemed to have independently achieved BFPP status and thus possibly avoid an enforcement action under CERCLA’s owner liability provisions. Indicia of ownership include the term of the lease, the range of permitted property uses by the tenant, reserved rights on the property by the owner, etc.

EPA’s Guidance is a welcome clarification of how the agency intends to enforce CERCLA’s owner liability provisions in these situations. However, the Guidance goes beyond the derivative status language in the Brownfields Amendments in its discussion of potential limitations on tenant “owner” liability. The problem is that a guidance is just that. It offers none of the statutory certainty that prospective purchasers now enjoy under CERCLA.

Because of the importance of tenant-operated properties to the economy in general and to the development of Brownfields property in particular, I would submit that tenants should be afforded the same clarity and certainty with respect to potential liability under CERCLA as those who acquire title to the property. As the Brownfield Amendments are largely self-implementing, that clarity and certainty is likely to be achieved only through further amendments to the liability provisions of CERCLA.

Late last week, Elliott Gilberg, Acting Director of EPA’s Office of Site Remediation Enforcement (OSRE) issued an Interim Policy on Managing the Duration of Remedial Design/Remedial Action Negotiations. Members of the regulated community may not be surprised by the contents of the memo, but they certainly will not be pleased. In brief, the memorandum fundamentally makes two points:

EPA wants to shorten the duration of RD/RA negotiation

EPA is going to use the heavy hammer of unilateral administrative orders, or UAOs, to keep PRPs’ feet to the fire and ensure that negotiations move quickly.

PRPs will likely agree that shortening the duration of negotiations would be a good outcome in the abstract – but achieving it by greater use of UAOs? I don’t think so.

I can only wonder if EPA has even considered the impact of the Burlington Northern decision here. Is this a perverse reaction from EPA? A metaphorical throwing down the gauntlet to PRPs? It certainly feels that way.

I have a different suggestion, if EPA truly wants to shorten negotiations. First, acknowledge Burlington Northern and compromise on the merits in those great majority of cases where there are legitimate divisibility arguments. Second, stop acting like the last bastion of command and control regulation. Set cleanup standards and then, to the maximum extent permitted by existing law, let PRPs clean up to those standards, without micromanaging every detail of the cleanup process.

Among the priorities under the $787.5 billion American Recovery and Reinvestment Act of 2009 is repairing, rebuilding, and constructing the nation’s water infrastructure. Approximately $6 billion will augment the EPA’s clean water and drinking water state revolving funds, of which approximately $221 million will be disbursed to the Commonwealth of Pennsylvania’s Infrastructure Investment Authority (PennVest). The governing board of PennVest is appointed by Governor Rendell, and I have been serving as its chair for the past six years.

PennVest administers the approximately $300 million annual allotment of Clean Water and Drinking Water funds previously supplied by EPA on a matching basis with Pennsylvania. These funds will now be augmented by the $212 million in stimulus funds. The Clean Water Fund addresses waste water infrastructure. The fund also addresses brownfields (with its protection of water quality) and storm water, whereas the Drinking Water Fund is strictly for water supply and distribution. At least 50 percent of the funding must be in the form of grants.

With the current emphasis on sustainability, alternative energy, greenhouse gas emission reduction and the need for more stringent control over stormwater run-off, the allocation of stimulus funds by PennVest will focus on innovative green technology, including particularly, controlling stormwater and remediating brownfields (at least 20 percent of the stimulus funding must be used for “green infrastructure”.)

Although the final disbursement of the economic stimulus funding will be affected by various regulations, the awarding of grants and loans will likely be on the same timetable as in the past with an emphasis on “shovel ready” projects. Funding agreements must be entered into and contracts for the full amount signed within a year.  The ultimate goal is to immediately increase the amount of jobs needed to construct the infrastructural repair, rebuilding and construction.