Posted on March 23, 2016
The limited liability form of corporate organization generally offers small businesses the favorable tax treatment of a sole proprietorship or partnership, along with protection from personal liability, up to a point. That protection in Connecticut is far from bullet-proof when it comes to liability for environmental harms. Business people acquiring potentially contaminated property should ask: If I create a Limited Liability Company to take title to the property, will I be protected from personal liability for a clean-up? In Connecticut, the answer ranges from “no” to, at best, “it depends.” This is counter-intuitive to clients who believe they are protected by Connecticut’s Limited Liability Company statute which provides generally that a member of an LLC is not liable for the obligations of the LLC. See Conn. Gen. Stat. § 34-133 & 134.
The core of the conflict lies in language in the environmental statutes and case law from the state’s courts. Contrary to the tenor of the LLC enabling statutes, Connecticut’s pollution control statutes were amended in 1995 to include specifically a member of an LLC in the definition of a “person” subject to the issuance of a pollution abatement order. See Conn. Gen. Stat. § 22a-123.
In addition, the Connecticut Supreme Court in 2001 adopted the “responsible corporate officer doctrine” holding that a corporate officer whose conduct has a responsible relationship to a violation may be held liable for abatement of the violation through an order from the state environmental agency. See BEC Corp. v. Dept. of Environmental Protection.
In December, 2015, the Connecticut Appellate Court applied the responsible corporate officer doctrine to the sole member of an LLC finding her personally liable for pre-existing contamination at property acquired by the LLC which she created knowing the contamination was present. See Vorlon Holding, LLC, et al. v. Commissioner of Energy and Environmental Protection.
The risk of personal liability for owners of small businesses contemplating acquisition of environmentally challenged property increases the likelihood that these properties will become, or remain, unproductive “brownfields.” Fortunately, the legislature has created mechanisms within the last few years to provide funding for site assessments without liability attaching and tools to limit liability to potential purchasers who can meet the legislative requirements.
A more detailed discussion of the evolution of the responsible corporate officer doctrine in the federal courts and its application in Connecticut courts in environmental cases is available in an article by John R. Bashaw and Mary Mintel Miller.
Posted on November 2, 2015
According to the Daily Environment Report (subscription required), EPA is going to change the name of the Office of Solid Waste and Emergency Response to the Office of Land and Emergency Management. What a grand name; surely it is an improvement.
I don’t think that this quite rises to the level of rearranging deck chairs on the Titanic (though I certainly have clients who would not object if OSWER sank without a trace), but one does get the sense of a bureaucracy beginning the long, hard, slog of trying to figure out how to perpetuate its existence as Superfund – mercifully – begins to fade away.
It’s probably a vain hope, but mightn’t EPA determine instead how to reallocate those functions of OSWER that need to continue, but actually try to figure out a way to shrink this element of the bureaucracy, instead of repurposing it?
Posted on March 25, 2015
Those who have tried to keep up with the development of environmental law into the second decade of the 21st century will not be surprised, as others may be, by the attention now focused on reuse of soil. Uncounted millions of cubic yards of soil are moved each year in the New England region alone. Until very recently, in the absence of contamination above regulatory remediation standards, the excavation and reuse of soils was not subject to any environmental regulation at all.
Now with the pace of national economic activity rising, soil reuse is drawing the focused attention of State regulators in the northeast region and across the nation. EBC Nov 6, 2014 program. In particular, New Hampshire, Massachusetts, Connecticut and Vermont are all currently considering how to regulate soil reuse. In 2014, Massachusetts adopted a requirement for the development of a soil reuse policy by June 2015 and that effort is well underway.
While New Hampshire relies on a broad definition of “contamination,” it recognizes it lacks explicit legal authority to develop a full blown regulatory program for reuse of “mildly contaminated” soil. The current definition of contamination reaches, by its terms, any non-naturally occurring, regulated contaminant “that has the potential to adversely affect human health or the environment.” N.H. Env-Or 602.07.
In these circumstances, New Hampshire is currently regulating on a case by case basis, limiting receiving sites to soils that do not exceed natural background levels. Solid waste regulation can be avoided by an agency waiver, or reuse can be approved with an acceptable soil management plan and soil testing protocol. The New Hampshire agency is making efforts to respond to approval requests rapidly enough to avoid frustrating market driven transactions. It recognizes, as other regulators do, that construction projects may otherwise be forced to send lightly contaminated soil to landfills, depriving the region of essential landfill capacity, while increasing construction costs for little, if any, environmental benefit. For example, both New Hampshire and Massachusetts have recognized that unreclaimed gravel pits and quarries present potential hazards and risks of their own. They can be attractive nuisances that claim the lives of those who try to use them unwisely for recreation year after year and they can become repositories for discarded materials including stolen or abandoned vehicles. In short, they can be a locus of a range of community problems, if unattended. Rather than pay to send lightly contaminated soils to landfills, a better and more beneficial use could be found.
The States considering such new programs recognize that their efforts to impose environmental regulation on such a substantial volume of previously unregulated activity could well have unintended and unnecessary adverse consequences for both small and large scale redevelopment projects just as the economy is gaining strength. It must be undertaken in a manner that will not exacerbate other very significant potential problems. They are coordinating among themselves the planning and development of such regulation and giving serious consideration to designing methods that will likely bear the simplicity and efficiency of general permits. Legislative action will no doubt be necessary to authorize these new programs.
There is little question that as economic activity continues to increase, the States must establish consistent criteria setting forth the standards to be used in determining where mildly contaminated soils generated at construction projects and other developments can be disposed of at subsurface locations. Municipalities and the regulated community need to be educated about this process and engage with the regulators to ensure that the final standards are well-understood, easily implementable, and adequately ensure the environment is protected.
Posted on March 13, 2015
Many states and the federal government have struggled with the challenge of how to adapt statutory strict liability schemes imposing clean up obligations on property owners in such a way that will enable new investors to redevelop brownfields sites without fear of litigation over previous releases.
The Connecticut General Assembly has recently provided liability relief to municipal entities to encourage them to redevelop brownfield sites by removing potential liability concerns which might otherwise arise from acquiring title to previously contaminated property.
The Connecticut legislation defines brownfields as “any abandoned or underutilized site where redevelopment, reuse or expansion has not occurred due to the presence or potential presence of pollution in the buildings, soil or groundwater that requires investigation or remediation before or in conjunction with the redevelopment, reuse or expansion of the property.”
Historically, municipalities and their affiliates, such as redevelopment agencies, were reluctant to acquire brownfields properties by foreclosing tax liens, or through arms- length transactions, because the State’s Clean Water Act imposes joint and several liability on owners of contaminated property, even if they did not own the property at the time of the releases. As such, if a municipal entity took title to contaminated property, it would run the risk of receiving an abatement order from the Department of Energy and Environmental Protection (“DEEP”) or being sued by third parties.
Under the new Municipal Brownfield Liability Relief Program, a municipality, or a qualified municipal affiliate, which qualifies for the program may take title to a brownfield property free of claims by the State or third parties for contamination existing on the property prior to the acquisition.
Assuming the property meets the definition of a brownfield under the statute, the municipality must meet four conditions to enter the program: a) that it intends to redevelop or facilitate redevelopment of the property, b) that it did not contribute to the contamination at the site, c) that it has no legal affiliation with a party responsible for the contamination, and d) that it is not under a previous obligation to remediate the property.
Another significant benefit of the new program is that it exempts a participating municipal entity from having to comply with the Connecticut Transfer Act. That Act requires a seller of certain classes of property defined as an “establishment” under the Act to make a filing with the Department of Energy and Environmental Protection. The filing requires that if there has been a release of hazardous waste at the property which has not been remediated, a party to the transaction must provide a certification that it will accept responsibility to conduct a full investigation and remediation under prevailing standards and guidelines.
Another benefit of the program is that a municipal entity is not required to fully investigate and remediate the property under the State’s Remediation Standard Regulations. However, it must make good-faith efforts to minimize the risk to public health and the environment. It also must submit a plan and schedule to facilitate both redevelopment and remediation, and it must also notify DEEP of any exceedances of Significant Environmental Hazard thresholds.
The legislature authorized the program in 2013, and DEEP provided application forms for the program in September of 2013. So far the response has been discouraging, with only two municipalities entering a total of three sites in the program to date. The lack of a robust response is likely attributed to the difficulty an underfunded DEEP faces in reaching out to the state’s 169 towns.
Whether the new liability relief program will eventually encourage more municipalities to participate in redeveloping and remediating brownfield properties remains to be seen. However, along with a recently announced round of grants from the Department of Economic and Community Development of up to $7.5 million, it should at least open the door for municipalities to take a second look at unproductive properties.
Posted on May 23, 2014
Recently, Governor Cuomo and the NY State Legislative leaders struck a $140 billion budget deal for FY 2014-2015. Historically, the budget process in New York is messy (sometimes very messy), protracted (with the budget often being late, sometimes very late) and largely plays out behind-the-scenes among the “three men in the room” (Governor Cuomo, Speaker Silver and Senate Co-Leader Dean Skelos). Nevertheless, the FY 2014/2015 budget was passed on time this year and without too much background noise.
How did the environment fare you ask? That might depend on who you ask. Parks advocates were declaring victory and applauding the infusion of $92.5 million in park capital funds, (which the State Senate initially had rejected) for repairs and restoration at New York’s state parks and historic sites. This is the third year of robust capital funding for parks after several years of severe cuts in parks funding, although Park state officials had identified more than $1 billion of required park rehabilitation projects across the state. On the environmental front, notwithstanding some modest successes in the budget process, the environmental community largely believes the new budget falls short when it comes to protecting the environment, making New York more sustainable and preparing New Yorkers for the challenges of climate change. Moreover, many of the so-called advocacy successes were, in reality, merely successful efforts to beat down some pretty bad ideas.
Here are some of the highlights:
1. The Environmental Protection Fund (the “EPF”): The EPF was established in 1993 to fund environmental projects that protect the NYS environment and enhance communities, including in the areas of open space (such as purchasing land for the NYS Forest Preserve), parks, recreation, historic preservation and restoration, habitat restoration, farmland conservation and solid waste management (including upgrading of municipal sewage treatment plants). The EPF, which once stood at $255 million but suffered deep cuts during the recession when it was raided to support the State’s General Fund, was increased in the FY 2014/2015 budget to $162 million, a $9 million increase over last year’s funding level, continuing the progress toward restoring the EPF. The environmental community had sought an increase to $200 million.
2. Brownfields Clean-up Program: No consensus was reached among the Assembly, Senate and Governor during the budget process on the needed reforms to the Brownfield Clean-up Program (“BCP”) and extension of the BCP tax credits deadline. Unless the Legislature and Governor can agree on a bill before the end of the legislative session in mid-June, the program will expire at the end of 2015. Negotiations are continuing on a compromise bill and there are at least 4 competing proposals currently on the table.
3. Reauthorization of the State Superfund Program: The budget agreement did not include new funding for the State’s Superfund program. It is hoped that this issue will be taken up along with a BCP bill and funding.
4. Clean Energy: Proposals from the Assembly and Senate to divert to the General Fund up to $218 million from the New York State Energy Research and Development Authority (“NYSERDA”) budget, which supports clean energy projects, energy-related job creation and greenhouse gas emissions reduction, were defeated.
5. Pesticides: The Governor had proposed to significantly gut the Pesticide Sales and Use Reporting Law. The Senate refused to go along with the Governor’s proposals, whereas the Assembly proposed to modernize the law. No consensus was reached so the law remains in effect.
6. Diesel Emissions Reduction Act (“DERA”): The Governor and Assembly acquiesced to the Senate’s desire to delay the deadline for compliance with New York’s DERA by one year. Accordingly, the State now has until the end of 2015 to bring the State’s fleet into compliance with the Act.
7. Mass Transit/the Metropolitan Transportation Authority: The final budget diverts $30 million in funds dedicated for mass transit to pay State debt, a disappointing loss at a time of record mass transit ridership.
Overall, one might characterize the final budget as being good for the environment mostly because of what it did not accomplish than for what ultimately was included in the FY 2014/2-15 budget.
Posted on March 5, 2014
Environmental response trusts created as a result of corporate bankruptcies demonstrate that workable mechanisms exist to protect against future environmental liability. This prompts the question: Can this concept be expanded and become an official amendment to CERCLA, or a separate Brownfields law?
The Revitalizing Auto Communities Environmental Response Trust (“RACER Trust”), the largest response trust every created, owns, manages and remediates the former holdings of General Motors. It includes 89 properties, 60 of which needed environmental remediation, with over $640 million provided to RACER Trust, nearly $500 million of that designated to address environmental liability. The RACER Trust holds the liability for onsite contamination when it sells a property as long as the new owner allows the remediation work to continue. This liability shield also travels with the land, providing security to future purchasers with regard to unexpected contamination that could otherwise cost thousands or millions of dollars. What is unique about this and other trusts, is the cooperative nature which the Trustees and the regulatory agencies have displayed in addressing contamination and remedial activities, very different than the standard contentious approach which routinely exist at sites today.
There have been several legislative proposals in the 113th Congress to provide fixes to CERCLA, the cornerstone law of environmental remediation. The proposed legislation, however, is more focused on transferring authority over clean-up of sites to the states and implementing credit for state contributions to the remediation. In its testimony to the House Energy and Commerce Committee last May, EPA’s Office of Solid Waste and Emergency Response laid out the reasons for its opposition to many of the legislative proposals. The main points of concern are over the potential delays, increased administrative and litigation costs, and conflicting clean-up authority at sites.
But instead of legislation that could result in further slowing down an already protracted process, what about creating opportunities and enticements for development of contaminated properties? Whether under the CERCLA regime, or through the Brownfields program, there are ways to create environmental liability shields that would restore these properties to useful status, providing industry and jobs for the surrounding communities. In 2007, a nascent proposal to address this issue was developed. The draft legislation called for the creation of the Recovered Property Protection and Assurance Trust or R-PAT for transfer of contaminated properties and their associated environmental liabilities to a quasi-governmental trust. The R-PAT concept would have required a current property owner to pay a significant fee in order to place the land in the trust, and then cleaned up and conveyed, liability-free, to a purchaser. For various reasons, including the quasi-governmental nature of the trust and the floundering economy, the proposal was a non-starter.
However, given the dearth of other viable proposals, perhaps it is time to re-examine the trust concept and how contaminated properties can be best put back to profitable use. If we really want to streamline CERCLA or improve the Brownfields program, then let’s talk about how to get the land back into use, how to remove the time consuming and wasteful antagonism surrounding remediation and how to provide bullet-proof shields for bona fide purchasers now and in the future.
Posted on January 23, 2014
As 2013 drew to a close, USEPA amended its All Appropriate Inquiries Rule (AAI Rule) and anticipates that purchasers and environmental professionals will “embrace” the recently published ASTM International E1527–13 "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process," commonly referred to as the “ASTM Phase I Standard.” Although the Agency had initially indicated the old flame of the ASTM E1527-05 standard was just as attractive, the final AAI Rule makes clear that USEPA considers the 2013 standard to have many new charms and recommends its use. Further, the Agency has indicated that the old standard is absolutely replaceable -- and plans a rulemaking to remove the 2005 standard, perhaps as early as this spring.
USEPA warns that the regulated community should not be naughty. The Agency will keep an eye on the new relationship and threatens that if the regulated community doesn’t get sweet on the new standard (if it is not being “widely adopted”), then USEPA may further modify the AAI rule to explicitly require activities under the updated standard.
The Agency believes the ASTM E1527–13 improves upon the E1527–05 standard and reflects evolving best practices and the level of rigor that will afford prospective property owners necessary information when making property transaction decisions and meeting continuing obligations under the CERCLA liability protections. In particular, the new ASTM E1527–13 standard enhances the previous standard with regard to the delineation of historical releases or recognized environmental conditions at a property. It also makes important revisions to the standard practice to clarify that all appropriate inquires and Phase I environmental site assessments must include, within the scope of the investigation, an assessment of the real or potential occurrence of vapor migration and vapor releases on, at, in or to the subject property.
USEPA, perhaps inadvertently, couldn’t let go without complimenting “the ex” – and may have created some litigation issues. The Agency went out of its way to opine that the prior standard already called for identification of vapor release issues and vapor migration issues. There has been some legitimate debate on whether the ASTM E1527-05 standard was clear on that point. Some attorneys anticipate additional malpractice litigation against environmental professionals where vapor issues weren’t adequately addressed in Phase I assessments issued between 2005 and 2014 that claimed to comply with the standard.
Apologies to the Gershwins and Nat King Cole, but I expect the ASTM E1527-13 is entirely embraceable – to the extent that environmental professionals are able to follow detailed consensus standards written by a team of engineers and lawyers. Many environmental lawyers have concluded that even in late 2013, most ASTM Phase I Standard site assessments that purported to meet the ASTM standards failed to measure up.
Posted on October 24, 2013
Last year the Kentucky legislature passed a bill that was designed to make it easier for blighted property to be redeveloped. The intended targets of the legislation were old gas station sites and similar vacant properties in communities around that state. The goal of the legislation was to encourage redevelopment of these parcels by providing relief from liability under the Kentucky statutes for cleanup of releases of hazardous substances and petroleum for the new owner. The new owner must meet certain requirements and implement a property management plan so that use of the property will not interfere with the site remedy or result in increased impacts or unacceptable risks to human health and the environment. The legislation was codified at KRS 224.1-415 and the Kentucky Energy & Environment Cabinet’s Division of Waste Management was charged with development of implementing regulations.
The Division has proposed three implementing regulations that are currently out for public comment with a public hearing set for October 23rd: 401 KAR 102:005 Definitions, 401 KAR 102:010 Brownfield Redevelopment Program, and 401 KAR 102:020 Property Management Plan Requirements.
Key aspects of the proposal are:
Scope of the relief and eligibility – The program provides protection from obligations under state law to investigate, characterize and correct the impact of releases including contamination associated with petroleum storage tanks. Both current and prospective property owners can use the program.
Application procedures – The applicant must complete the Brownfield Liability Relief Eligibility Form (DEP 6056) and must certify among other things that:
• The release occurred prior to the applicant’s acquisition of the property and that the applicant made all appropriate inquiries into prior ownership and use of the property;
• The applicant, or a responsible party, gave all legally required notices;
• The applicant is in compliance with all land use restrictions and will not impede or disturb any remedial measures for the site and has complied with agency information requests;
• The applicant did not cause or contribute to the release and is not affiliated with any potentially liable party.
A property management plan and an application fee of $2,500 are also required.
The Division will review the application and advise the applicant in writing of its determination. A Notice of Eligibility is issued to applicants who do not yet hold legal title to the property. The Notice of Eligibility is effective for 180 days, with the possibility of an extension of up to a year, from the date of the all appropriate inquiry. The Notice of Eligibility is essentially a bridge to a Notice of Concurrence. The Notice of Concurrence is issued to applicants that hold legal title to the property and contains the Division’s finding that the applicant will not be liable for characterizing or correcting the effects of the releases that have resulted in contamination of the site. This relief is granted only with respect to the releases covered by the certification in the application. If new releases are discovered after the acquisition and after the issuance of a Notice of Eligibility or Notification of Concurrence, the owner may still be eligible for the statutory protections. To qualify, the owner must give timely notice and must satisfy the same certification requirements for the newly discovered release as were addressed in the initial application.
Property Management Plan (PMP) requirements – Under the proposal, the PMP must describe the intended use of the property, provide all available information about the known releases, areas of potential releases, a description of all controls or remedial actions that are in place or proposed for the site and a schedule to periodically inspect and report to the agency that the controls remain in place and effective. The plan must be certified by a licensed professional engineer or geologist. Amendment of the plan is required if it is found to be inadequate.
Concluding thoughts - The program should have a positive impact on redevelopment of long vacant gas station and similar sites throughout the state. The liability protection from state obligations is significant and may provide solace to otherwise reluctant lenders. However, ease of implementation of the application process and approval of PMPs will be critical to actual success. As always, the devil is in the details.
Posted on March 29, 2013
At the time when Superfund was flexing its muscle and impacting the ability of successful completion of property transfers, most states developed some form of voluntary cleanup program or “VCP”. Those programs were supposed to allow for rapid and effective assessment and remediation, and furnish liability releases or covenants with liability protection. Sounded good huh?
And how many of our clients have a small collection of such sites that they volunteered to assess and address with the sweet promise of walking away, and quickly? Some used the voluntary cleanup program as a risk allocation tool in property transfers. Others wanted the promised release or covenant in order to obtain an environmentally worry-free, and thus more valuable, property that was theirs to sell.
Some states have had the fortitude to reform their voluntary cleanup programs by privatizing the process. In those states licensed professionals determine whether property investigations and remediation are necessary and when they are complete. They then issue some form of certification that leads to a covenant not to sue or a release. [See "New Jersey Follows Massachusetts into the World of Licensed Environmental Consultants and Privatized Cleanup Oversight", David Farer ,July 9, 2009].
In other states the agencies have not overcome their dependence on the fees generated by voluntary cleanup programs, utilizing those fees to pay the salaries of agency personnel engaged in the oversight of voluntary cleanup activities. In these states "voluntary" really means "hooked and can't get out." Let's look at a familiar ballad - best read while listening to Eric Clapton's Voodoo Chile (Live from Madison Square Garden):
Well on the day I signed up
For the Voluntary Cleanup Plan
Well I was promised fast and efficient
Get you out of a jam
It gives you certainty and freedom
And you'll be able to transfer worry free
Lord I'm a VCP chump
Oh Lord, I'm a VCP chump
Well I had a grain elevator
With a little dab of carbon tet
Oh Yeah, just a little dab
In the shallow soil
VCP had me test it
Oh, just a little dab at low levels
Lord I'm a VCP chump
Oh Lord, I'm a VCP chump
And I said I am finished
But VCP said not so fast
So I started on the groundwater
Even though it was 200 feet down
Yeah I started drilling
And haven't hit bottom yet
Now it's 10 years later
From the time I began
Yeah, it's 10 years later
And I haven't found that carbon tet yet
But I 'm gonna keep goin
Cause I'm in the money so deep
My heirs and assigns ask me
Say – what's goin on?
I have to tell them
My sad, sad song
Lord I'm a VCP chump
Oh Lord, I'm a VCP chump
So, most ballads eventually come to an end. How can we continue VCP reform in states where the VCP Bluesy Ballad still is being sung?
Posted on March 14, 2013
In December 2012, EPA issued revised enforcement guidance to assist agency personnel in exercising enforcement discretion regarding the treatment of tenants under Superfund’s bona fide prospective purchaser (BFPP) defense. This guidance expands some of the protections provided by the prior, 2009 guidance. Though recognizing that “[l]easehold interests play an important role in facilitating the cleanup and reuse of contaminated properties,” the agency chose a relatively ineffectual tool for addressing prospective tenant liability and encouraging re-use of Brownfield properties. The agency could have better encouraged Brownfield development by providing tenants with guidance on how to avoid Superfund liability in the first place.
Under Superfund, a tenant's status and activities may give rise to "owner or operator" liability -- for the costs of investigating and remediating a contaminated site and for natural resource damages. The guidance does not flesh out the contours of tenant liability as an owner or operator, but instead assumes that tenant liability exists and explains how the BFPP defense under section 107(r) of Superfund might then be available.
To take advantage of the BFPP defense, an owner or operator of contaminated property must satisfy three statutory prerequisites. It must show: (1) it conducted all appropriate inquiry or AAI, e.g., by having conducted a phase I environmental assessment; (2) it has no affiliation with a potentially responsible party or PRP; and (3) it is satisfying specified continuing obligations, including, among other things, complying with applicable regulatory requirements and not impeding remedial actions.
In brief, the December 2012 guidance confirms that a tenant may receive protection as a BFPP derivatively from its landlord if the landlord conducted AAI, provided that all disposal occurred prior to the landlord’s acquisition of the property and the tenant satisfies the continuing obligations requirement. It also expands EPA's use of enforcement discretion for a tenant who relied upon its landlord for the BFPP defense to include situations in which the landlord loses the BFPP defense, provided the tenant meets the requirements of the BFPP defense other than having performed AAI. In addition, it makes clear that a lease will not disqualify a tenant from the BFPP defense for failure to have satisfied the "no affiliation" prerequisite. Furthermore, it confirms that EPA will use its enforcement discretion for a tenant who independently meets the BFPP prerequisites, including having performed AAI prior to execution of the lease.
The new guidance notes the obvious: all bets are off if the tenant itself engages in an activity that independently creates liability, e.g., by creating or exacerbating contamination. It also notes that, except as otherwise provided, the tenant itself must satisfy the BFPP prerequisites.
The agency explains that it generally will not proactively make determinations as to the availability of the BFPP defense in connection with any particular transaction, e.g., by issuing a comfort letter, though there may be limited circumstances where it might do so. And, of course, the agency’s exercise of prosecutorial discretion provides no comfort where the Superfund claim is brought by a third party, though the agency’s guidance may be persuasive to the court in which the claim is brought.
The problem with the BFPP defense is that it’s a defense, which must be asserted in response to a Superfund claim, and the tenant has burden of proof. Moreover, as far as defenses go, it’s not even the best. The third party defense, which doesn’t require AAI, generally should be available as long as the lease does not relate to the act or omission giving rise to the contamination. See “The Third Party and Transaction-Related Defenses,” J. Civins, M. Mendoza, and C. Fernandez, ABA-SEER Environmental Litigation and Toxic Torts Committee Newsletter, July 2005.
More significantly, as EPA recognizes, “the mere execution of a lease does not necessarily make a tenant liable as an owner or operator,” and the agency and the regulated community would have been better served had the agency issued guidance establishing safe harbors for tenants. A tenant’s first line of defense to Superfund liability should not be a defense, BFPP or other, but rather should be an assertion that it is not a Superfund owner or operator, placing the burden of proof on the plaintiff rather than on the tenant. And case law provides a good basis for EPA issuance of such guidance.
Arguably, a tenant should not be liable and have need of a defense as an owner unless it virtually stands in the shoes of its owner, e.g., by entering into a 99-year lease or by subleasing the property to one who contaminates it. Similarly, a tenant should not be liable as an operator, unless its action caused or exacerbated contamination. Regardless of whether case law adequately fleshes out the contours of a tenant’s owner or operator liability under Superfund, it would have been more useful for the agency to have issued guidance with respect to such liability rather than on the BFPP defense.
Posted on January 23, 2012
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.
Posted on July 19, 2011
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?
Posted on March 11, 2011
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.
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.
Posted on May 26, 2010
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?
Posted on May 7, 2010
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.
Posted on December 18, 2009
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.
Posted on October 19, 2009
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.
Posted on February 27, 2009
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.