Environmental Law

How to Buy Property and Avoid the Cost of Clean-up (Maybe): Part 2

environmental clean up

environmental clean up

In my last post, I wrote about what a Bona Fide Prospective Purchaser (BFPP from now on) has to do before purchasing property in order to avoid that troublesome Superfund liability. I pointed out that pre-requisites to the property’s purchase were just step 1 and there were some post-requisite obligations that must also be taken. This post will talk about those obligations.

The law says the  BFPP must:

  • Take reasonable steps to stop any continuing release;
  • Prevent any threatened future releases;
  • Provide all legally required notifications (which may or may not be limited to environmental reporting);
  • Prevent or limit any human, environmental, or natural resource exposure to any previously released hazardous substance; and,
  • Be in compliance with land use restrictions or institutional controls in order to maintain the new defense.

So what do all those post-requisite requirements really mean?

I wish there was a hard and fast answer to the question I pose. Except for the last mandate, the steps one must take are about as clear as the Mississippi River. So, like most lawyers we need to look at what the cases say. Unfortunately, there aren’t a lot of decisions (two), but at lease we have some guidance. Any way, two district court opinions have examined the BFPP defense and what is required to maintain the defense.

The Guidance; Part I (or I like this case).

The first case, 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. Plaintiff, undertook the appropriate, pre-purchase due diligence and learned that the property was contaminated. After purchase it undertook to remediate the property. Among the issues addressed were of underground storage tanks which contained TCE; Plaintiff drained the tanks and disposed of the TCE, but did not excavate the tanks for approximately two years.

It then sued the former owners for reimbursement of its costs expended. The Defendant counterclaimed alleging the Plaintiff was a current owner and therefore, potentially liable under CERCLA. Plaintiff raised the BFPP defense. Defendants countered that Plaintiff was not entitled to assert the defense because it waited too long to remove the tanks.

The court found that because the Plaintiff removed the hazardous materials from the tanks, it had taken the requisite reasonable steps to stop any continuing releases, or future releases of the hazardous materials. Thus, Plaintiff successfully asserted its status as a BFPP.

The Guidance; Part II (or, Yikes).

A less clear decision was rendered by the district court in Ashley II of Charlseston LLC v. PCS Nitrogen, Inc. (D. South Carolina, Oct. 13, 2010), Civ. Action No. 2:05-cv-2782. There, 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 existing on the site and a debris pile as Recognized Environmental Conditions (REC from now on). The contract used to purchase the property included a provision whereby the Plaintiff agreed to indemnify the sellers from any costs associated with the site conditions; a not uncommon provision in many contracts for the sale of real estate. In addition, Plaintiff attempted to discourage EPA from asserting any claims against the sellers for the site conditions.

In an effort to protect its status as a BFPP, Plaintiff took a number of steps, including cooperating with regulatory agencies, to develop the site and to address the conditions existing at the site. It demolished the structure containing the sumps and concrete pads. In addition, it did some remediation and took steps to limit access (and therefore exposure to the conditions at the site) by members of the public. Those steps included constructing a fence and posting warning signs.

Unfortunately, even though the pad and sumps were identified as REC’s, once the structure in which they were contained was demolished, they were exposed to the elements. To make matters worse, Plaintiff failed to investigate the environmental condition of both, i.e., whether they were leaking or had any bad stuff in them. It also failed to address the debris pile, which later was found to contain hazardous substances. Finally, the alleged BFPP also let a cap on the site to deteriorate, leading to the exposure of the elements to the subsurface.

Plaintiff sued to recover the approximately $192 million dollars expended in site remediation from the defendants and claimed it was a BFPP so it had no liability for the conditions at the site. Not surprisingly, the Defendants said “au contraire,” and raised a number of issues with respect to Plaintiff’s actions at the site.

The Court agreed with the Defendants and found that some of Plaintiff’s actions prevented it from successfully asserting the BFPP defense. The post-purchase actions which the court found which resulted in the loss of the BFPP defense centered on the Plaintiff’s failure to address the REC’s, in a timely manner. The court specifically found that the failure to take any action with respect to the suspected contamination was not appropriate care. Thus, the failure to clean out and fill in the sumps, allowing the debris pile to remain untouched and un-investigated in a timely manner, and to maintain the cover which existed on the site, led the court to find that the BFPP defense was not available.  Juxtapose this court’s finding with the court in the Robertshaw Controls case regarding what was a reasonable amount of time to address conditions, though I suppose exposing the sumps to the elements and allowing the cap to deteriorate probably would cause problems for a buyer.

The case is also helpful because it provides a review of the pre-requisite obligations I wrote about in my previous post. For example, the court found that the indemnity provision of the sale contract constituted an affiliation with a liable party, thus precluding the application of the BFPP defense. This finding is particularly troublesome because most purchase contracts contain some sort of an indemnity provision. After all, the goal of a seller is to get rid of liability. Perhaps the factor which turned the court in this issue was the affirmative steps the Plaintiff took to discourage EPA from proceeding against the seller.

Defendants also cited deficiencies in the Phase I report, which resulted in a deviation from the ASTM 1527-05 standard which is to be followed in performing the pre-purchase due diligence. Thus, Defendants alleged, the deficient report should also preclude the application of the defense. The court rejected this position finding the deviations were not significant and found the act of hiring an expert and relying on the expert to properly perform the study was reasonable. It would appear then that a good faith attempt to comply with the pre-requisites is all that is needed. (This is a good thing because a recent USEPA study found all of the Phase I reports it reviewed were defective.)

Moral (what would a good story be without a moral).

The moral of the story is that when it comes to post-closing care, even though Congress has decided that it was important to relieve certain persons of potential liability under Superfund in order to encourage the redevelopment of sites that may be environmentally challenged, if nothing else is done at the site, it is really important to address identified REC’s. These cases certainly illustrate that point.

However, of equal significance is that what you do at the site will be scrutinized, second guessed and challenged, at every step in the process. So I suppose the obvious take away is that it is essential that transactions be carefully planned, with assistance from those knowledgeable of the issues so that the proper due diligence can be performed in order to avoid environmental liabilities.

Next time we will look at a few subtleties with respect to environmental issues in real estate transactions. Hopefully, we will be able to point out a few things you maybe haven’t considered. I hope this gave you something to think about.

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