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The article below has been republished in full courtesy of Law360, written by Dan Schmitt.
In the last several decades, environmental due diligence investigations for industrial and commercial real property transactions have become commonplace. It has become obvious that the risk of not performing due diligence is, in most cases, unacceptable. The task now is to invest time and money conducting due diligence ever more wisely. To do so, a party performing due diligence must be aware of updated due diligence standards and give adequate attention to both post-acquisition obligations and development-related considerations.
'All Appropriate Inquiries'
The regulatory criteria for identifying and mitigating property-related environmental concerns during due diligence is the federal “All Appropriate Inquiry” under 40 C.F.R. Part 312. The U.S. Environmental Protection Agency's AAI references ASTM International E1527-13 as the “currently recognized industry consensus-based standard.”
The AAI implements a combination of records research, site observation and interviews of knowledgeable individuals to identify potential environmental concerns, while ASTM E1527-13 categorizes the different types of environmental concerns as follows:
Once RECs, HRECs and CRECs have been identified, the purchaser has many risk mitigation alternatives. Just by conducting the preacquisition AAI itself, the purchaser is potentially entitled to Comprehensive Environmental Response, Compensation, and Liability Act innocent purchaser defense for any environmental concerns that were not identified under a properly conducted AAI assessment. Also, the purchaser has potentially established two other CERCLA defenses with respect to contamination that was revealed by the AAI: the bona fide prospective purchaser and contiguous property owner defenses.
To maintain these liability defenses, the purchaser must take “due care” of the property following property acquisition with respect to, in particular, the identified RECs, HRECs or CRECs. The new CRECs and HRECs are particularly important because they, by definition, address post-acquisition considerations that property owners need to be aware of. It may come as a surprise to many that the due care requirement can include taking a response action, including remediation or mitigation, and complying with institutional or engineering controls.
By gaining knowledge of the physical setting and environmental baseline of the property, and thereby setting the groundwork for CERCLA defenses, additional mitigation tools become available following an AAI, including:
Most of the tools listed above are not available, or are at a minimum are much less effective, when the specific environmental concerns remain ambiguous or conceptual rather than concretely identified under a properly conducted AAI. In addition to the regulatory defenses that may be established during the process, the ability to understand and make decisions concerning environmental liabilities (prior to being subject to them as the property owner) is a key advantage of the AAI.
CERCLA’s Post-Acquisition Obligations
Establishing AAI liability protection does not end at property acquisition. The release of a hazardous substance or petroleum product at the property must be evaluated on a case-by-case basis to identify the “reasonable steps” or “due care” that may be necessary in order to qualify for the CERCLA defenses. Specifically the duty of due care for a BFPP includes, inter alia, requirements that the purchaser: (1) provide all legally required notices about the hazardous substances; (2) took steps to stop any continuing release and limit the exposure from past spills; (3) cooperate with persons conducting response actions; and (4) comply with land-use restrictions and not interfere with institutional controls.
In this regard, the CERCLA defenses are narrowly construed. A number of courts have in the past few years declined or otherwise expressed doubt as to the BFPP defense due to the claimants’ failure to demonstrate that they met their post-acquisition obligations.
In PCS Nitrogen Inc. v. Ashley II of Charleston LLC, the purchaser removed buildings but left cracked concrete slabs and sumps that could fill with rainwater, and, therefore, did not qualify for the BFPP defense. The court explained that the inquiry is whether the purchaser “took all precautions with respect to the particular waste that a similarly situated reasonable and prudent person would have taken in light of all relevant facts and circumstances,” and that the purchaser failed to take the reasonable step of capping, filling or removing the sumps.
In Voggenthaler v. Maryland Square LLC, the court expressed doubt that the party would be able to establish a BFPP defense and show it prevented further harm and limited exposure to preexisting dry cleaning contamination after it demolished a building and failed to take any steps to remove the contaminated soil or limit its spread. Similarly, in Saline River Properties LLC v. Johnson Controls Inc., the purchaser’s decision to break up concrete on its newly acquired site was found to have impeded the ongoing response actions, and this purchaser was also denied the benefit of the BFPP defense.
Case law addressing the innocent landowner defense imposes similar post-acquisition obligations where there are known contaminants. In Containerport Group Inc. v. American Financial Group Inc., the plaintiff was found not to be entitled to the innocent landowner defense because the plaintiff failed to “ma[k]e any attempt to remove the [known contaminants] or reduce any possible threat to others or to the environment.” The court concluded that the innocent landowner defense requires that once landowners are aware of a threat, they take some action. Accordingly, the court found that because the plaintiff had “done nothing to secure the site or made any effort to clean up the allegedly hazardous substances” since the 1993 discovery of contaminants, it was not eligible for the innocent landowner defense. See also Kerr-McGee Chem. Corp. v. Lefton Iron & Metal Co., 14 F.3d 321, 325 (7th Cir. 1994) (concluding that because the plaintiff did nothing to secure the site or make any effort to clean up hazardous substances known to exist on the property, the innocent landowner defense failed).
The innocent landowner defense has also been rejected by courts where site development activities by purchasers exacerbate the release of contaminants, even when occurring unknowingly or involuntarily. The Sixth Circuit established a particularly demanding standard in Franklin County Convention Facilities Authority v. American Premier Underwriters Inc., holding that the failure to promptly erect barriers that would have prevented contaminant migration had negated the innocent landowner defense. Similarly, in Idylwoods Associates v. Mader Capital Inc., the district court found that the mere failure to restrict access by erecting signs or hiring security personnel were factors in evaluating the due care, and held that an owner was not entitled to the innocent landowner defense when he allowed over 10 years to go without action while environmental agencies investigated the site, during which time “foreseeable weather conditions” caused the hazardous substances to migrate.
Site Development, Non-CERCLA 'Business Considerations'
Aside from liability defenses, a separate and often overlooked benefit of a thorough due diligence approach is that it can identify technical obstacles that may arise during site development and construction. An ASTM standard Phase I Environmental Site Assessment that is specifically drafted only to satisfy one of the CERLCA defenses may not be thorough enough. Other “nonscope” items, such as wetlands identification, cultural and historic resources, stormwater, threatened/endangered species, radon, asbestos, lead-based paint, waste characterization and worker safety, are not included in a standard Phase I ESA. Such obstacles, however, may create adverse delays and cost increases, or even result in litigation, if not identified early in the site development process. Parties conducting due diligence must specifically request such nonscope items for inclusion into the standard Phase I ESA, since the default goal of a standard ASTM E1527-13 Phase I ESA is to identify RECs, not to identify potential obstacles a property owner might encounter during site development.
For example, as recently reported by the Miami Herald, a large commercial development project in Miami, which was to include a proposed Wal-Mart, LAFitness, Chick-fil-A, Chili’s and approximately 900 apartments, was put on hold by the U.S. Fish and Wildlife Service because eight threatened species and two endangered plants were alleged to exist on the site, and the Tropical Audubon and North American Butterfly Association demanded an investigation into the development. While a standard ASTM Phase I may have identified observations of forested land with dense vegetation, the environmental permitting threatened and endangered species and would not fit the definition of a REC. As such, nonscope considerations would have been prudent to include in the environmental due diligence scope of work. Conclusion Performing environmental due diligence for commercial and industrial sites to obtain liability protection is not a widget to buy or a box to check. Meaningful environmental due diligence includes a thorough AAI as well as consideration of future site development and post-acquisition obligations. Failure to conduct carefully considered environmental due diligence can lead to exponential cost increases in the form of environmental obstacles and liabilities. —By Dan Schmitt and Sam Ross, CSX Transportation Inc; Aaron Getchell, AMEC PLC Dan Schmitt is counsel and Sam Ross is an environmental professional engineer in CSX Transportation's Jacksonville, Florida, office. Aaron Getchell is a certified professional geologist and a licensed professional geologist in AMEC's Tampa, Florida, office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
This article has been republished in full and is courtesy of Law360. For the latest breaking news and analysis on energy industry legal issues, visit Law360 today.