The Narrowing Safe Harbor Of CERCLA Liability Protection For Prospective Purchasers

Sunday, April 3, 2011 - 01:00


In the nine years following enactment of the Brownfields Revitalization and Environmental Restoration Act ("BRERA"), Public Law 107-118, which amended the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. ("CERCLA" or "Superfund") to encourage redevelopment of brownfields and potentially contaminated properties through CERCLA liability protections, few court rulings have addressed how those protections apply in specific cases. In the absence of court guidance, parties in transactions involving property with potential environmental concerns have come to rely on their own best judgments, guided by advice from legal counsel, as to the meaning and breadth of BRERA's liability protections. A recent ruling by the U.S. District Court for the District of South Carolina, in Ashley II of Charleston, LLC v. PC Nitrogen, Inc., et al. , Slip Op., No. 2:05-cv-2782-MBS (September 30, 2010), however, has at last weighed in on how the protections apply (or not) under particular circumstances. Ruling on several issues relating to the Amendments' "innocent landowner" and "bona fide prospective purchaser" liability exemptions, the ruling sharply limited the liability exemptions' availability, visiting CERCLA liability on parties who had purchased property in reliance on BRERA's supposed safe harbor provisions. While the extent to which other courts will follow suit remains unclear, Ashley II provides a stark reminder of the risks entailed in redeveloping potentially contaminated properties and the need for vigorous pre- and post-closing diligence and due care in addressing environmental conditions.

BRERA's Goals

When enacted, BRERA was intended to address the problem of commercial and industrial real estate markets steering investment away from urban, industrialized areas and toward less-developed suburban areas. This in turn contributed to problems of urban blight and sprawl, as many otherwise useful commercial and industrial sites were abandoned in the face of uncertainties about the scope of liability and cleanup costs associated with their development. BRERA sought to relieve this problem by clarifying the applicability of CERCLA's "innocent landowner" defense and, for the first time, by providing substantive liability relief for prospective purchasers of property with known contamination.

BRERA set out to clarify the applicability of the innocent landowner defense by, among other things, defining the "all appropriate inquiry" due diligence requirement to mean that the purchaser must (1) inquire as to the previous ownership and uses of the facility, and (2) exercise due care with respect to the contamination. (EPA subsequently provided further clarification by promulgating a regulatory standard for "all appropriate inquiry" under 40 CFR Part 301.)The statute also created for the first time a liability exemption for "bona fide prospective purchasers" ("BFPPs") who purchased property with known contamination, provided they follow the same due care requirements required of innocent landowners who subsequently learn of contamination and meet certain other prerequisites.

Left unclear by the statute and EPA's rulemaking was the extent to which a purchaser, whether an "innocent landowner" or a BFPP, is required to remediate contamination on the acquired property as part of its due care responsibilities in order to maintain its protection against liability. While BRERA specified that the purchaser must take "reasonable steps to stop a release, prevent any threatened future releases, and prevent or limit human and environmental exposure to any previously released hazardous substance," given the differences in how terms like "release" have been defined in different federal appellate jurisdictions, it was unclear whether the due care obligation extended, for example, to taking whatever measures were necessary to ensure that existing contamination did not continue to migrate on the property, or whether the inadvertent movement of contaminated soils would void the exemption. The court's ruling in Ashley II resolved these questions, at least for the litigants involved, by imposing CERCLA liability against former owners of the property at issue and a subsequent purchaser of subdivided parcels, finding that former owners did not qualify as an "innocent landowner" and the subsequent purchaser did not qualify as a BFPP.

BFPP Ruling

Citing a ruling by the U.S. Court of Appeals for the Fourth Circuit - Nurad, Inc. v. William E. Hooper & Sons Co., 966 F.2d 837, 844-46 (4th Cir. 1992) - that ongoing migration of contaminants through media (e.g., soil or groundwater) meet the definition of a separate event of "disposal" of hazardous substances, the district court in Ashley II concluded that the purchaser (Ashley II of Charleston, LLC) did not qualify for the BFPP exemption due to a likelihood of ongoing releases of hazardous substances from sumps and pads that had been used by a prior owner and which were left unprotected from rainwater after the demolition of their protective structures. Ruling that Ashley was unable to prove that no disposals of hazardous substances had occurred after its acquisition of the parcel, the court found that it was therefore unable to satisfy a requisite element of the BFPP exemption - the absence of any such disposals. While the court did not reach the issue of whether Ashley had satisfied its due care requirements, it undoubtedly would have reached the same result in addressing the analogous issue of whether Ashley had taken reasonable measures to stop any ongoing releases.

In addition to the disposal issue, the court found that Ashley did not qualify as a BFPP in any event because it had not satisfied BRERA's prerequisite of having no affiliation with a liable party. Although BRERA's "no affiliation" requirement exempts contractual relationships involving a transfer of title to the property in question, the court found that Ashley's indemnification of the parties who sold the parcels to it for any environmental liability associated with the parcels, coupled with Ashley's efforts to discourage EPA from recovering response costs covered by the indemnification, qualified as a prohibited affiliation because it "reveals just the sort of affiliation Congress intended to discourage."

Innocent Landowner Rulings

The Ashley II court did reach the due care issue in determining whether prior owners of the overall property (which included Ashley's parcel) qualified for the "innocent landowner" defense. Although it found that the former owners ("Holcombe and Fair") had established one of the elements of the "innocent landowner" exemption - that they did not know and had no reason to know that the property was contaminated at the time they purchased it - the court said they nonetheless failed to exercise due care with respect to the contamination. Upon leasing out particular parcels of the property, Holcombe and Fair had performed the environmentally beneficial task of placing protective ground cover on the soils that served to prevent air dispersion or human contact with the contaminants in the underlying soils. However, the court found that in order to comply with their due care responsibilities, Holcombe and Fair should have capped the entire site from the beginning of its period of ownership, rather than wait until the individual parcels were leased out. The court also found additional grounds for concluding that Holcomb and Fair did not exercise due care, noting that they had constructed stormwater detention ponds at the site without first submitting a plan to South Carolina regulatory authorities showing how they would control surface water runoff and then failed to maintain the detention ponds.

The court also ruled that Holcombe and Fair failed to establish that they were innocent landowners in the first instance because, like Ashley, they could not prove that they did not cause any "disposals" of hazardous substances on the property during their period of ownership. As evidence to the contrary, the court noted that Holcombe and Fair had constructed a street extension and extended water and sewer lines through contaminated soils. These actions, the court said, "agitated the soil," thereby causing new releases of hazardous substances. (The court cited the 2008 California district court case, United States v. Honeywell International, Inc. , 542 F. Supp. 2d 1188, 1200 (E.D. Cal. 2008)).

Lessons Learned

Since it represents one of the first cases of its kind, Ashley II provide some of the first judicial guidance on how BRERA's liability exemptions should be applied under particular circumstances. As such, some of the lessons that may be drawn from the case include:

Environmental due diligence investigations should include a determination of whether any known contamination (or contamination discovered after closing) is susceptible to ongoing releases. The Fourth Circuit's "passive disposal" ruling in Nurad has not been followed in other federal circuits, and some federal circuit courts of appeal have ruled, to the contrary, that ongoing migration of contamination involving previously released hazardous substances does not constitute an event of "release" or "disposal." See Carson Harbor Village, Ltd. v. Unocal Corp. , 270 F.3d 863 (9th Cir. 2001) (passive migration is not "disposal"); United States v. 150 Acres of Land , 204 F.3d 698, 705-06 (6th Cir. 2000) ("disposal" requires active human conduct); ABB Indus. Sys. Inc. v. Prime Technology, Inc ., 120 F.3d 351, 357-59 (2d Cir. 1997); United States v. CDMG Realty Co. , 96 F.3d 706, 713-18 (3d Cir. 1996). Consequently, it remains an open question whether courts outside the Fourth Circuit would adopt a similar approach to the court's requirement in Ashley II that a purchaser must affirmatively prove the absence of any ongoing releases of contaminants, especially in cases where the only "release" may consist of migrating substances through media. However, Ashley II makes clear the need for purchasers seeking protected status under BRERA to not only determine whether a property contains any "recognized environmental conditions" - as required under EPA's "all appropriate inquiry" standard - but also that there are no conditions on the property that could result in an ongoing release from a structure like a sump or a concrete pad.

In addition, while Ashley II does not directly address the question of whether a BFPP (or innocent landowner after contamination is discovered post-closing) must perform extensive remedial activities to stop contamination from leaching through soil or groundwater, given the Ashley II court's focus on the potential for human exposure through airborne contaminants and surface soils, purchasers who encounter contamination should, at a minimum, undertake measures (including fencing or temporary covering) as necessary to prevent human exposures, off-site migration, or migration of contaminants via airborne pathways. In addition, appropriate measures should be undertaken to maintain compliance with applicable regulatory requirements, good housekeeping practices, and cooperation with regulatory authorities.

Areas slated for earth-moving activities should be accorded heightened scrutiny in diligence investigations. To the extent that other courts adopt the approach taken in Ashley II , parties who exacerbate existing contamination in soils by spreading them during site preparation and grading activities will not be accorded protected status as innocent landowners regardless of whether the contamination at issue was reasonably knowable prior to purchase or not. This holding, effectively a rule of strict liability for soil movement (and presumably any other activities that "agitate" contamination and relocate it from one area to another), makes discovery of surficial contamination that could be disturbed in site preparation or grading operations a priority in order to maintain the innocent purchaser exemption.

Purchaser indemnities should be avoided where possible. While not the usual course, purchaser indemnities of sellers for environmental liabilities are sometimes employed in exchange for a significant purchase price reduction. In such cases, in order to avoid the imposition of CERCLA liability due to the "non-affiliate" requirement for protected BFPP status, purchasers should explore alternative contractual or third-party liability transfer mechanisms as a means of accomplishing the same goal as between the seller and purchaser. For example, environmental insurance, guaranteed remediation contracts or other third-party contractual vehicles may be viable options to remove any potential taint of the purchaser as having any type of affiliation with the seller.

Steven L. Humphreys is a Special Counsel with Kelley Drye & Warren LLP's environmental practice group. He specializes in environmental issues that arise with corporate and real estate transactions, environmental litigation and regulatory compliance counseling.

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