In the latest installment of a long-running lawsuit filed by a group of NJ homeowners, a federal district court held that homebuilder who had removed, stockpiled, and re-spread soil contaminated with pesticides from a former orchard was a PRP because these actions constituted "disposal" under CERCLA. However, the court found that the Plaintiffs had not incurred response costs because the fees generated by its consultants reviewing the workplans proposed by Woodmont were in support of litigation. Thus, the plaintiffs failed to satisfy the last element necessary to create CERCLA liability.
In Bonnieview Homeowners vs. Woodmont Builders, et al, the plaintiff sought damages from the developer and the township where the homes were located under a variety of common law such as negligence and misrepresentation, breach of contract, and statutory grounds including CERCLA, RCRA and the NJ Spill Act. Two consultants who had performed phase 1 reports for the municipality had also been brought into the lawsuit but were dismissed from the case in earlier proceedings.
This particular decision granted and denied relief on a number of motions brought by the parties. The numerous issues that were resolved are too long to address in a single post. However, this case has plenty of lessons for those who develop farmland.
Following are the undisputed facts of the case. You be the judge.
The property was used a fruit orchard from 1941 until it was abandoned some time prior to 1970. when it was purchased by a group of individuals who knew it had been previously used as an apple orchard. The orchard operations included storing fertilizer and pesticides for spraying and applying onto the trees in the orchard. The chemicals were stored in drums and other containers at the site.
During the 1970s and 1980s, a portion of the Property was used for foresting. In 1997, Woodmont Builders entered into an agreement with the owners to develop the site for the construction of single family dwellings houses, with the proceeds of the sale of which would be shared by the parties to the agreement.
In April 1998, the Montville Department of Planning & Development retained an environmental consultant (who was later named as a defendant but eventually dismissed from the lawsuit) to perform a Phase 1. The ESA stated that historical photos showed that eastern portion of the site contained rows of trees, indicating that the area may have been a tree nursery. It also identified assorted debris including tires, wood and metal debris, cement, household debris, abandoned vehicles, hot water heaters, refrigerators, and empty aboveground storage tanks and drums. The report concluded that none of the observed debris was considered hazardous but recommended when the debris was removed, the lower layers should be carefully examined.
In September 1998, the Montville Township Planning Board approved an application to construct a residential subdivision on a 30-acre portion of the Property.
In February 1999, Montville acquired an approximately 100-acre portion of the Property for use as "open space" (the "Open Space Parcel").
In May 1999, Montville then engaged another consultant (and former defendant) that did not mention any discharge of pesticide constituents or other contaminants onto the soil and did not recommend any action with respect to the alleged contaminants.
In June 2000, Woodmont acquired the remaining 30-acre portion of the Property (the "Residential Lots"). Woodmont did not perform its own Phase 1 but instead relied on the 1998 report prepared for the township and the fact that Montville's Board of Health reviewed the lots in connection with the proposed residential development.
Woodmont then removed the surface debris from the Residential Lots, removed stockpiled the soils, and then commenced construction. After the foundations for the homes were dug, and the houses erected, Woodmont took the topsoil from the stockpile and returned it to the Residential Lots to become the lawns.
The plaintiffs purchased their homes from January 2001 and October 2002. Prior to purchasing their homes, the Individual Plaintiffs had title searches performed by title insurance companies. The title reports did not mention any possibility of pesticide contamination on the Residential Lots. Advertisements published on behalf of Woodmont Properties and Associated Sales represented that the homes were built on "natural homesites" and were a "great place to raise children”. Several prospective homeowners said they were told by sales associates that the topsoil at the Residential Lots was replaced with "good soil" or "fresh topsoil.
On July 26, 2001, Montville entered into an agreement with the NJDEP to investigate and remediate the Open Space Parcel.
In March 2002, Montville retained yet another environmental consultant to conduct soil sampling on the Open Space Parcel. The August 2002 identified three Areas of Concern ("AOCs") where pesticides and other contaminants were present in concentrations that exceeded the Residential Direct Contact Soil Cleanup Criteria ("RDCSCC") of the New Jersey Department of Environmental Protection ("NJDEP"). In a letter to the township, the consultant wrote “the 25-lot residential subdivision under construction from which the open space was originally subdivided from may also have been part of the same orchard and may contain constituents elevated above the RDCSCC. The majority of constituents elevated above the RDCSCC are metals and pesticides associated with historic orchard and land use.” The consultant indicated that contaminants did not present an imminent health hazard to the public because they were not very mobile, the soil was stable and exposure was limited, and that the principal health issue would be long-term ingestion of contaminated soils or long-term inhalation of dust originating from the soils. As a result, the consultant recommended applying and obtaining a Letter of No Further Action (NFA) from the NJDEP. The consultant also suggested that the Township Board of Health involvement might be warranted time to advise the public regarding contaminated soils at the site and the adjacent subdivision. The firm also suggested that until the NJDEP issued a NFA letter, a Public Notice advising of potential hazards at the site might be warranted to limit public contact with the soils of the site.
In April 2003, Montville notified the homeowners on Bonnieview Lane that it had discovered *** and levels of insecticides on the Open Space Parcel.
In May 2003, Montville requested permission to test the Individual Plaintiffs' properties for environmental contaminants because the their properties would have been part of the contiguous land formerly operated by Bonnieview Farms. After the sampling was completed, Montville advised the homeowners that the sampling revealed the presence of ***, dieldrin, lead, or DDT and that the results had reported the results to the NJDEP.
The lawsuit was filed in September 2003. Woodmont subsequently entered into a memorandum of agreement with NJDEP to investigate and remediate the contamination
Tuesday, October 19, 2010
EPA Study Finds Radon Risks More Widespread Than Expected
According to a recent study by the EPA Inspector General, more people are now potentially exposed to radon gas than when Congress enacted the Indoor Radon Abatement Act of 1988 (IRAA) . The inspector general concluded that EPA either needs to consider other alternative authorities to its voluntary radon program or advise Congress that the goals of the IRAA are not achievable.
According to the report, of the 6.7 million single family homes that were constructed between 2001 and 2005, only 469,000 incorporate radon-resistant construction. And of the total 76.1 million single family homes in existence in 2005, only 2.1 million had radon-resistant construction.
While EPA sets an action level of 4 pico curies per liter (pCI/l), the report said this threshold does not represent a safe exposure level to radon. Because radon gas is a carcinogen, the study said no level of exposure is safe. Indeed, in 2005, the US Surgeon General issued a public health advisory about the risk of breathing indoor radon.
The report also indicated that high levels of radon gas have been detected in homes within all radon zones. According to EPA, the average indoor air radon concentration is 1.3 pI/l with common ranges of 5 to 50 pC/l.
While 5.1 million homes (6.7%) are estimated to have indoor gas above the action level, the study said that the remaining 71 million are not necessarily safe because they are below the action level. This is because the 4.0 pCi/l simply represents the level that EPA determined was techologically and economically feasible back in 1992. EPA estimated that the 4.0 pCi/l level could be achieved 95% of the time while a 2.0 pCI/l could only be achieved 70% of the time.
The study also found that only 282,000 of the 1.5 million homes built in radon zone 1 areas were equipped with radon-resistant construction. The report said the nation is building homes in high radon areas at a faster pace than testing and mitigation is occuring in existing homes. Thus, the population exposed to unacceptable levels of radon is growing.
Part of the problem is that the International Residential Code which has been adopted by 45 states does not require radon-resistant new construction (RRNC) features. Another issue is that disclosure of radon is is not mandated and there is great reluctance on the part of sellers and real estate agents to voluntary disclose radon issues.
The report said that both EPA and the Suregon General have recommended that ALL homes be tested below the THIRD floor for radon regardless of the radon zone because radon gas can accumulate in building structures.
According to the report, of the 6.7 million single family homes that were constructed between 2001 and 2005, only 469,000 incorporate radon-resistant construction. And of the total 76.1 million single family homes in existence in 2005, only 2.1 million had radon-resistant construction.
While EPA sets an action level of 4 pico curies per liter (pCI/l), the report said this threshold does not represent a safe exposure level to radon. Because radon gas is a carcinogen, the study said no level of exposure is safe. Indeed, in 2005, the US Surgeon General issued a public health advisory about the risk of breathing indoor radon.
The report also indicated that high levels of radon gas have been detected in homes within all radon zones. According to EPA, the average indoor air radon concentration is 1.3 pI/l with common ranges of 5 to 50 pC/l.
While 5.1 million homes (6.7%) are estimated to have indoor gas above the action level, the study said that the remaining 71 million are not necessarily safe because they are below the action level. This is because the 4.0 pCi/l simply represents the level that EPA determined was techologically and economically feasible back in 1992. EPA estimated that the 4.0 pCi/l level could be achieved 95% of the time while a 2.0 pCI/l could only be achieved 70% of the time.
The study also found that only 282,000 of the 1.5 million homes built in radon zone 1 areas were equipped with radon-resistant construction. The report said the nation is building homes in high radon areas at a faster pace than testing and mitigation is occuring in existing homes. Thus, the population exposed to unacceptable levels of radon is growing.
Part of the problem is that the International Residential Code which has been adopted by 45 states does not require radon-resistant new construction (RRNC) features. Another issue is that disclosure of radon is is not mandated and there is great reluctance on the part of sellers and real estate agents to voluntary disclose radon issues.
The report said that both EPA and the Suregon General have recommended that ALL homes be tested below the THIRD floor for radon regardless of the radon zone because radon gas can accumulate in building structures.
Home on the (Bombing) Range- Part 2
I have previously discussed a malpractice case brought against a consultant for failing to identify that a site had been part of a bombing range. The latest installment in this category of inadequate due diligence involves a lawsuit against a law firm.
In this case, a developer is seeking $10MM in damaged from a law firm for negligently performing environmental due diligence on property the plaintiff intended to develop into a residential community.
In 2006, Coves of the Highland Community Development District formed an investment group to purchase a 324-acre property in eastern Louisiana and retained McGlinchey Stafford PLLC to organize the development entity and secure $7.7 million in bond financing. Coves used the bond to pay McGlinchey and install infrastructure on the property, including streets, water lines and a sewage treatment plant, and was poised to offer residential lots for sale, the suit alleges.
In March 2009, the U.S. Army Corps of Engineers placed a notice in a local newspaper about its investigation of unexploded ordnance on the former Hammond Bombing and Gunnery Range which had been used by World War 2 bomber pilots used for bombing and gunnery practice. According to the complaint, the newspaper notice was the first inkling the investors had about the bombing range, even though the Corps had begun an investigation into the site as far back as 1995, the suit alleges.
In April 2009, the Tangipahoa Parish engineer told Coves that no further development would be permitted until the unexploded ordnance was completely cleaned up, the complaint claims. In June, the Corps had issued its final site inspection report, concluding that the Coves property was conclusively within the boundaries of the bombing range and would need further investigation. no longer able to sell lots on the property, Coves defaulted on its bonds, according to the complaint.
In this case, a developer is seeking $10MM in damaged from a law firm for negligently performing environmental due diligence on property the plaintiff intended to develop into a residential community.
In 2006, Coves of the Highland Community Development District formed an investment group to purchase a 324-acre property in eastern Louisiana and retained McGlinchey Stafford PLLC to organize the development entity and secure $7.7 million in bond financing. Coves used the bond to pay McGlinchey and install infrastructure on the property, including streets, water lines and a sewage treatment plant, and was poised to offer residential lots for sale, the suit alleges.
In March 2009, the U.S. Army Corps of Engineers placed a notice in a local newspaper about its investigation of unexploded ordnance on the former Hammond Bombing and Gunnery Range which had been used by World War 2 bomber pilots used for bombing and gunnery practice. According to the complaint, the newspaper notice was the first inkling the investors had about the bombing range, even though the Corps had begun an investigation into the site as far back as 1995, the suit alleges.
In April 2009, the Tangipahoa Parish engineer told Coves that no further development would be permitted until the unexploded ordnance was completely cleaned up, the complaint claims. In June, the Corps had issued its final site inspection report, concluding that the Coves property was conclusively within the boundaries of the bombing range and would need further investigation. no longer able to sell lots on the property, Coves defaulted on its bonds, according to the complaint.
Malpractice Claim May Proceed Against Law Firm for Inadequate Diligence
A New York state appellate court ruled that a purchaser of corporate assets may proceed with a malpractice action against a law firm that the company alleges failed to properly perform environmental due diligence.
In this case, International Electron Devices (USA) LLC retained Menter Rudin & Trivelpiece in 2004 to purchase assets and property located in Cortland, New York on an “as is” basis. In 2006, EPA ordered IED to remediate the site at a cost of $8 million.
IED filed a professional malpractice action against the law firm in October 2008, the alleging, among other things, that it failed to recommend conducting a phase 2 prior to the closing. The law firm argued that the three-year statute of limitations for such a lawsuit expired in October 2007. The trial court dismissed the action but the appeals court reversed, concluding that the plaintiff has sufficiently pled that there had been had an ongoing relationship with the defendant firm in connection with the EPA investigation as late as the fall of 2006 so that the statute of limitations had not run
In this case, International Electron Devices (USA) LLC retained Menter Rudin & Trivelpiece in 2004 to purchase assets and property located in Cortland, New York on an “as is” basis. In 2006, EPA ordered IED to remediate the site at a cost of $8 million.
IED filed a professional malpractice action against the law firm in October 2008, the alleging, among other things, that it failed to recommend conducting a phase 2 prior to the closing. The law firm argued that the three-year statute of limitations for such a lawsuit expired in October 2007. The trial court dismissed the action but the appeals court reversed, concluding that the plaintiff has sufficiently pled that there had been had an ongoing relationship with the defendant firm in connection with the EPA investigation as late as the fall of 2006 so that the statute of limitations had not run
GAO Recommends EPA Use Vapor Intrusion Pathway for Listing Superfund Sites
The Government Accountability office issued a report on the Superfund program in May that recommended that vapor intrusion should be considered when ranking sites for the federal superfund list which is formally known as the National Priorities List or NPL.
According to the report, 60 sites currently on NPL may pose potential for VI. Based on current data, an additional 37 sites would be eligible for listing based on VI. 13 sites are being addressed as part of EPA removal actions. An undetermined number of construction complete sites may pose risk of VI.
In response, EPA staff have indicated that they are considering revising the Hazardous Ranking System that is used to score sites for the NPL. Currently, the pathway is not evaluated and contaminated groundwater that is used for drinking water remains the most important factor for scoring sites.
The complete report is available at: http://www.gao.gov/new.items/d10380.pdf
NRC Cites Wal-Mart For Improperly Managing Exit Signs
The NRC issued a citation to Wal-Mart Stores Inc. for improperly transferring and disposing of thousands of exit signs containing tritium, a radioactive isotope of hydrogen. The NRC said that the company had improperly handled 15,000 signs across the country but the most of the violations occurred in so-called "agreement states" that had been delegated authority by NRC. The regulatory action announced by NRC was only for the violations that occurred in the 13 states it has jurisdiction.
The NRC said the improper transfer or disposal of the 2,979 signs and failure to appoint a responsible official were a Severity Level III violation under NRC's enforcement policy that could have resulted in a civil penalty of $369,300. However, the NRC exercised its enforcement discretion and waived the civil penalty based on Wal-Mart's cooperation and prompt corrective actions. The NRC said Wal-Mart informed the NRC in February 2008 that it had lost or could not account for a potentially large number of exit signs. The NRC and agreement state inspectors performed an inspection of Wal-Mart stores in Indiana, Michigan, Missouri, New Jersey, Delaware, Virginia, North Carolina and Ohio from December 2008 through January 2009. Wal-Mart performed an inventory of all tritium exit signs at its stores nationwide, remediated contamination from damaged signs at several stores, and subsequently replaced all tritium exit signs with exit signs that do not contain radioactive material.
The exit signs poses little threat to public health and safety. However, the NRC requires proper record-keeping and disposal of the signs because a damaged or broken sign could cause minor radioactive contamination of the immediate vicinity, requiring environmental cleanup.
As a result of the Wal-Mart experience, the NRC issued a demand for information in January to more than 60 organizations and corporations known to possess large quantities of tritium exit signs, requesting information on record-keeping and accounting of the signs.
The exit signs poses little threat to public health and safety. However, the NRC requires proper record-keeping and disposal of the signs because a damaged or broken sign could cause minor radioactive contamination of the immediate vicinity, requiring environmental cleanup.
As a result of the Wal-Mart experience, the NRC issued a demand for information in January to more than 60 organizations and corporations known to possess large quantities of tritium exit signs, requesting information on record-keeping and accounting of the signs.
School Project Delayed by LEED Controversy
During the Great Recession, construction of private and public schools and universities has been one of the few bright spots for the construction industry. Many local governments are requiring projects funded with public money to achieve certain minimum green building standards such as the LEED program established by the Untited States Green Building Council.
Perhaps not surprisingly, school projects are becoming a increasingly favorite target in green building litigation. We have always thought that school construction projects could yield construction and design litigation. However, a case in Ohio is raising the issue of whether a poor school district should be required to pay for the additional costs of attaining LEED.
Construction was delayed at the Washington-Nile School because the state-mandated LEED elements placed the new middle school building project over-budget. Attorneys working for the school are researching the equity of LEED funding for schools in Ohio. The outcome of which could also affect other school projects . See complete story at: http://www.portsmouth-dailytimes.com/view/full_story/5679641/article-Construction-Delayed-At-West-School?instance=secondary_news_left_column
Perhaps not surprisingly, school projects are becoming a increasingly favorite target in green building litigation. We have always thought that school construction projects could yield construction and design litigation. However, a case in Ohio is raising the issue of whether a poor school district should be required to pay for the additional costs of attaining LEED.
Construction was delayed at the Washington-Nile School because the state-mandated LEED elements placed the new middle school building project over-budget. Attorneys working for the school are researching the equity of LEED funding for schools in Ohio. The outcome of which could also affect other school projects . See complete story at: http://www.portsmouth-dailytimes.com/view/full_story/5679641/article-Construction-Delayed-At-West-School?instance=secondary_news_left_column
Retailers Fined for Improper Hazardous Waste Management
Lenders and prospective purchasers usually gloss over environmental compliance of retailers during environmental due diligence. However, two recent California enforcement actions illustrate how businesses that are viewed as environmentally benign can have significant environmental issues.
Last year, K-Mart Corporation agreed to pay the State of California $8.6MM in fines to resolve allegations of improper hazardous waste management. This was followed by the filing of a complaint by California Attorney General Jerry Brown against Target Corporation.
The violations alleged in the Target complaint are quite illuminating both in terms of the nature of the violations and the volume of waste involved. The state charged that approximately 180 locations mishandled "enormous volumes of hazardous materials, including but not limited to bleaches, pool chlorine and acids, pesticides, fertilizers, paints and varnishes, lamp oil and other ignitable liquids, aerosol products, oven cleaners and various cleaning agents, automoticve products and solvents, and other flammable and corrosive materials."
Most of the violations involved disposing these wastes into compactors so that they were disposed at facilities not licensed to receive such wastes. In one instance, the State alleged that 2300 pounds of flammable, toxic or corrosive wastes abd 2250 poubds of aerosol wastes were transported to a regional food bank. Other violations involved failing to comply with hazardous waste housekeeping requirements.
Most of the hazardous materials were meant to be sold to the public in the ordinary course of business. However, they became hazardous waste when they were either rendered unsalable or unusable for their intended use as a result of spillage, expiration of sell-by dates, contamination from other products, damage to containers or labels. Once rendered unsalable or unusable, these products fell within the definition of hazardous waste by being "discarded". The State is seeking injunctive relief and will no doubt demand significant penalties along the lines of the K-Mart settlement.
The violations alleged in the Target complaint are quite illuminating both in terms of the nature of the violations and the volume of waste involved. The state charged that approximately 180 locations mishandled "enormous volumes of hazardous materials, including but not limited to bleaches, pool chlorine and acids, pesticides, fertilizers, paints and varnishes, lamp oil and other ignitable liquids, aerosol products, oven cleaners and various cleaning agents, automoticve products and solvents, and other flammable and corrosive materials."
Most of the violations involved disposing these wastes into compactors so that they were disposed at facilities not licensed to receive such wastes. In one instance, the State alleged that 2300 pounds of flammable, toxic or corrosive wastes abd 2250 poubds of aerosol wastes were transported to a regional food bank. Other violations involved failing to comply with hazardous waste housekeeping requirements.
Most of the hazardous materials were meant to be sold to the public in the ordinary course of business. However, they became hazardous waste when they were either rendered unsalable or unusable for their intended use as a result of spillage, expiration of sell-by dates, contamination from other products, damage to containers or labels. Once rendered unsalable or unusable, these products fell within the definition of hazardous waste by being "discarded". The State is seeking injunctive relief and will no doubt demand significant penalties along the lines of the K-Mart settlement.
Environmental Due Diligence Lessons from Medical Malpractice Cases
The September 28th issue of the Wall Street Journal had an interesting on the leading causes medical malpractice claims and how diagnosing these claims can help avoid future mistakes. The article has some interesting statistics that are I believe are transferable to EPs.
40% of the medical malpractices cases were due to diagnostic error. Of this total, 79% of errors were due to a failure of judgment, 59% were attributable to failure of vigilance or memory and 48% were due to improper knowledge. Another leading cause of disagnostic errors was patient behavior at 46% (the amounts exceed 100% because errors can have multiple causes).
How does this apply to phase 1 reports? The ASTM E1527 is a performance-based approach that relies heavily on the environmental professional exercising its professional judgment. This might be a good approach when the bulk of EPs are highly trained individuals with extensive experience. However, this premise or approach is undermined when the commodity shops use independent "inspectors" who use fill-in-the blank template reports and do not have the experience or the training to exercise the kind of professional judgment that many environmental conditions require.
Environmental issues involve complex issues where the equivalent of a drop of a chemical in a pool can lead to unacceptable human health exposures. Yet the industry continues to be dominated by ill-prepared and undertrained persons-many of whom I would not trust to buy me coffee at Starbucks.
Of course, this leads use to the other big cause for malpractice actions-patient behavior. In the medical field, patients may not seek care in a timely manner, fail to show up for tests or follow instructions such as fasting before having blood work. In the environment field, the analogy is clients who only want to pay for $700 phase 1 reports, want EPs to make RECs “go away” or refuse to follow recommendations.
When I can, I steer clients to environmental consulting firms with employees whose professional judgment I trust. These firms usually have robust in-house training programs and stringent hiring standards. They may cost more than the commodity shops but I tell the client that they will pay less in the end since I wont have to spend unnecessary time fixing the flaws of substandard reports and they will get good advice on how to pro-actively address issues in a cost-effective manner.
40% of the medical malpractices cases were due to diagnostic error. Of this total, 79% of errors were due to a failure of judgment, 59% were attributable to failure of vigilance or memory and 48% were due to improper knowledge. Another leading cause of disagnostic errors was patient behavior at 46% (the amounts exceed 100% because errors can have multiple causes).
How does this apply to phase 1 reports? The ASTM E1527 is a performance-based approach that relies heavily on the environmental professional exercising its professional judgment. This might be a good approach when the bulk of EPs are highly trained individuals with extensive experience. However, this premise or approach is undermined when the commodity shops use independent "inspectors" who use fill-in-the blank template reports and do not have the experience or the training to exercise the kind of professional judgment that many environmental conditions require.
Environmental issues involve complex issues where the equivalent of a drop of a chemical in a pool can lead to unacceptable human health exposures. Yet the industry continues to be dominated by ill-prepared and undertrained persons-many of whom I would not trust to buy me coffee at Starbucks.
Of course, this leads use to the other big cause for malpractice actions-patient behavior. In the medical field, patients may not seek care in a timely manner, fail to show up for tests or follow instructions such as fasting before having blood work. In the environment field, the analogy is clients who only want to pay for $700 phase 1 reports, want EPs to make RECs “go away” or refuse to follow recommendations.
When I can, I steer clients to environmental consulting firms with employees whose professional judgment I trust. These firms usually have robust in-house training programs and stringent hiring standards. They may cost more than the commodity shops but I tell the client that they will pay less in the end since I wont have to spend unnecessary time fixing the flaws of substandard reports and they will get good advice on how to pro-actively address issues in a cost-effective manner.
Lender Liability and Environmental Disclosure
In Robert Hull and Point Pleasant Landco v. William Lewis (No.A-005403-07T3, App. Div.6/11/09), First Fidelity had issued a loan commitment to the plaintiff in 1993 that required receipt of an acceptable phase 1. The property had been a coin-operated laundry. The bank obtained a phase 1 that concluded that there were no obvious signs of contamination and that due to relatively small amount of dry cleaning performed at site, it was unlikely that PCE was stored in sufficient quantities or USTs to be identified as a REC. The Phase 1 report contained express language that it was for the exclusive benefit of the bank and "was not intended to be, nor should be, for the benefit of any third party, including without limitation, any owner or lessee of the Property"
After reviewing the phase 1, the bank told borrower that phase 1 results were satisfactory to meet the loan commitment but did not provide the borrower with a copy of the report. The borrower then proceeded to purchase. In 2002, borrower tried to sell the land. A prospective purchaser performed a phase 2 and discovered extensive PCE and declined to proceed with the purchase.
The borrower, now a plaintiff, filed a lawsuit against the prior owners and operators of the property was well as the bank and the consultant. The borrower/plaintiff alleged that it had relied on the bank's statement that the phase 1 was satisfactory to mean that the site was clean in proceeding to close on the property, and that the bank had a duty to advise the borrower of the specific findings of the phase 1 results and that failure was a breach of contract. Plaintiff sought reimbursement of its remediation costs.
In a ruling from the bench, the trial court granted summary judgment to the bank on grounds that there was no evidence that plaintiff had relied on the bank's satisfaction with the phase 1 report in deciding whether to purchase the property, and if it had such reliance would not have been reasonable. The court said that any "green light" by the bank might just as well been a waiver of its own requirements. The court also noted that the plaintiff's 30 day contingency period had expired two months prior to the issuance of the phase 1 report.
The appeals court affirmed, holding the issue is not whether the Bank subjectively intended the approval of the loan as an assurance that the property was free from environmental degradation, but whether the plaintiffs actually relied on this representation and whether such reliance was reasonable. The court agreed with the trial court that there was no evidence that the plaintiff had reasonably relied on the phase 1 report.
Lesson 1: This case illustrates the importance of a purchaser performing its own due diligence even if this means reviewing the phase 1 performed on behalf of the bank. A lender does not stand in the same shoes as a potential owner of property because of the secured creditor exemption. So long as a lender does not become involved in the operations of its borrower or take title through foreclosure, its liability for environmental conditions will be limited to the value of the loan. When banks held loans on their balance sheets, this potential loss was often enough to incentivize lenders to perform thorough phase 1 reports. In the era of securization, however, when the lenders would sell their loans almost immediately, lenders have been more concerned with keeping the assembly line of loan originations moving as fast as possible to maximize their fees.
The borrower, on the other hand, is going to be the owner of the property and will be first in line for any enforcement actions that may result if the land turns out to be contaminated. If the borrower is not named on the phase 1 report, it is quite likely that it will not be deemed to have engaged in an all appropriate inquiry or whatever level of due diligence may be required under a state innocent or prospective purchaser defense.
The preamble to the EPA AAI rule did state that "all appropriate inquiries investigations may be conducted by or for one person and used by another party.". But relying on a report prepared for another party may not be considered to be conducting an all appropriate inquiry under state law.
Lesson 2: Many states have statutes that require owners of property to disclose existence of contamination to prospective purchasers. Lender liability statutes in those states generally to not provide protection for common law claims or for failing to comply with the disclosure requirements. Lenders should carefully review the provisions of state lender liability laws and the scope of environmental disclosure laws as part of their loan due diligence. For example, in 2007. the Supreme Court of Missouri in Hess v. Chase Manhattan Bank (220 S.W.3d 758; 2007 Mo. LEXIS 65, 5/1/07) upheld a jury verdict finding a bank liable for common law fraud for failing to disclose the existence of an EPA investigation in a foreclosure sale. In so holding, the Court said that disclaimers in the contract did not preclude the fraud claim.
[The Bank had an obligation to disclose material information that was not discoverable through ordinary diligence and that the plaintiff could not have reasonably discovered the existence of EPA's investigation in the kind of diligence ordinarily done for real estate transactions of this kind. The bank also had failed to file the required property disclosure statement.]
Missouri had a statute compelling disclosure of any material information concerning property to be sold. But even if a state does not have a statutory disclosure law, there may be an obligation under common law to disclose the existence of contamination or the results of prior investigations. Lenders have been held liable for improper disclosure in the past under common law theories of misrepresentation. For example, For example, in 2004 a Rhode Island Superior Court jury ruled that Fleet Bank was liable for $5.14 million in damages for failing to inform purchasers of a general store that the property drinking water was contaminated (Foote v. Fleet Financial Group) .
Another example was in 1999 when a Pennsylvania state court allowed a purchaser of contaminated land to maintain a claim for negligent misrepresentation against the bank when the bank failed to advise the plaintiff that real estate appraisal did not address environmental conditions (Seats v. Hoover, 1999 U.S. Dist. LEXIS 13379, August 18, 1999).
In 1991, the Montana Supreme Court reversed a summary judgment ruling in favor of a bank and allowed the borrower to proceed with negligent misrepresentation and constructive fraud claims against its former lender because there was a question of material fact whether the bank had created a false impression about the environmental conditions of the property (Mattingly v. First Bank of Lincoln,1997 WL 668215 (Sup. Ct. Montana, Oct. 28, 1997).
In Boyle v. Boston Foundation, Inc. ,788 F. Supp. 627 (D. Mass. 1992) a bank that failed to disclose to purchasers of contaminated property the existence of notice from a state agency ordering a cleanup at the site was not held liable for misrepresentation because of a doctrine unique to the failed financial institutions taken over by the FDIC. The agency was acting as a receiver for the failed bank. The failure to disclose material information was held to constitute an "agreement" under the D'Oench doctrine and since this was an unwritten agreement, the plaintiffs could not prevail against the FDIC. It is likely that the plaintiff would have prevailed had the bank not been in receivership
It seems that at least once a year there is a case imposing liability on a bank for inadequately disclosing environmental conditions of foreclosed property that it has sold. It is not only prudent to err on the side of full disclosure in transactions, but in emerging areas such as vapor intrusion, to look back at prior disclosures to see if they could form the basis of a claim for non-disclosure. Given the volume of foreclosures we are now seeing, I would not be surprised to see more of these cases during the next year or so.
After reviewing the phase 1, the bank told borrower that phase 1 results were satisfactory to meet the loan commitment but did not provide the borrower with a copy of the report. The borrower then proceeded to purchase. In 2002, borrower tried to sell the land. A prospective purchaser performed a phase 2 and discovered extensive PCE and declined to proceed with the purchase.
The borrower, now a plaintiff, filed a lawsuit against the prior owners and operators of the property was well as the bank and the consultant. The borrower/plaintiff alleged that it had relied on the bank's statement that the phase 1 was satisfactory to mean that the site was clean in proceeding to close on the property, and that the bank had a duty to advise the borrower of the specific findings of the phase 1 results and that failure was a breach of contract. Plaintiff sought reimbursement of its remediation costs.
In a ruling from the bench, the trial court granted summary judgment to the bank on grounds that there was no evidence that plaintiff had relied on the bank's satisfaction with the phase 1 report in deciding whether to purchase the property, and if it had such reliance would not have been reasonable. The court said that any "green light" by the bank might just as well been a waiver of its own requirements. The court also noted that the plaintiff's 30 day contingency period had expired two months prior to the issuance of the phase 1 report.
The appeals court affirmed, holding the issue is not whether the Bank subjectively intended the approval of the loan as an assurance that the property was free from environmental degradation, but whether the plaintiffs actually relied on this representation and whether such reliance was reasonable. The court agreed with the trial court that there was no evidence that the plaintiff had reasonably relied on the phase 1 report.
Lesson 1: This case illustrates the importance of a purchaser performing its own due diligence even if this means reviewing the phase 1 performed on behalf of the bank. A lender does not stand in the same shoes as a potential owner of property because of the secured creditor exemption. So long as a lender does not become involved in the operations of its borrower or take title through foreclosure, its liability for environmental conditions will be limited to the value of the loan. When banks held loans on their balance sheets, this potential loss was often enough to incentivize lenders to perform thorough phase 1 reports. In the era of securization, however, when the lenders would sell their loans almost immediately, lenders have been more concerned with keeping the assembly line of loan originations moving as fast as possible to maximize their fees.
The borrower, on the other hand, is going to be the owner of the property and will be first in line for any enforcement actions that may result if the land turns out to be contaminated. If the borrower is not named on the phase 1 report, it is quite likely that it will not be deemed to have engaged in an all appropriate inquiry or whatever level of due diligence may be required under a state innocent or prospective purchaser defense.
The preamble to the EPA AAI rule did state that "all appropriate inquiries investigations may be conducted by or for one person and used by another party.". But relying on a report prepared for another party may not be considered to be conducting an all appropriate inquiry under state law.
Lesson 2: Many states have statutes that require owners of property to disclose existence of contamination to prospective purchasers. Lender liability statutes in those states generally to not provide protection for common law claims or for failing to comply with the disclosure requirements. Lenders should carefully review the provisions of state lender liability laws and the scope of environmental disclosure laws as part of their loan due diligence. For example, in 2007. the Supreme Court of Missouri in Hess v. Chase Manhattan Bank (220 S.W.3d 758; 2007 Mo. LEXIS 65, 5/1/07) upheld a jury verdict finding a bank liable for common law fraud for failing to disclose the existence of an EPA investigation in a foreclosure sale. In so holding, the Court said that disclaimers in the contract did not preclude the fraud claim.
[The Bank had an obligation to disclose material information that was not discoverable through ordinary diligence and that the plaintiff could not have reasonably discovered the existence of EPA's investigation in the kind of diligence ordinarily done for real estate transactions of this kind. The bank also had failed to file the required property disclosure statement.]
Missouri had a statute compelling disclosure of any material information concerning property to be sold. But even if a state does not have a statutory disclosure law, there may be an obligation under common law to disclose the existence of contamination or the results of prior investigations. Lenders have been held liable for improper disclosure in the past under common law theories of misrepresentation. For example, For example, in 2004 a Rhode Island Superior Court jury ruled that Fleet Bank was liable for $5.14 million in damages for failing to inform purchasers of a general store that the property drinking water was contaminated (Foote v. Fleet Financial Group) .
Another example was in 1999 when a Pennsylvania state court allowed a purchaser of contaminated land to maintain a claim for negligent misrepresentation against the bank when the bank failed to advise the plaintiff that real estate appraisal did not address environmental conditions (Seats v. Hoover, 1999 U.S. Dist. LEXIS 13379, August 18, 1999).
In 1991, the Montana Supreme Court reversed a summary judgment ruling in favor of a bank and allowed the borrower to proceed with negligent misrepresentation and constructive fraud claims against its former lender because there was a question of material fact whether the bank had created a false impression about the environmental conditions of the property (Mattingly v. First Bank of Lincoln,1997 WL 668215 (Sup. Ct. Montana, Oct. 28, 1997).
In Boyle v. Boston Foundation, Inc. ,788 F. Supp. 627 (D. Mass. 1992) a bank that failed to disclose to purchasers of contaminated property the existence of notice from a state agency ordering a cleanup at the site was not held liable for misrepresentation because of a doctrine unique to the failed financial institutions taken over by the FDIC. The agency was acting as a receiver for the failed bank. The failure to disclose material information was held to constitute an "agreement" under the D'Oench doctrine and since this was an unwritten agreement, the plaintiffs could not prevail against the FDIC. It is likely that the plaintiff would have prevailed had the bank not been in receivership
It seems that at least once a year there is a case imposing liability on a bank for inadequately disclosing environmental conditions of foreclosed property that it has sold. It is not only prudent to err on the side of full disclosure in transactions, but in emerging areas such as vapor intrusion, to look back at prior disclosures to see if they could form the basis of a claim for non-disclosure. Given the volume of foreclosures we are now seeing, I would not be surprised to see more of these cases during the next year or so.
Lenders Subject to Stormwater and Dust Enforcement Actions
As builders continue default on construction loans, states are increasing turning to banks to ensure that partially completed developments remain in compliance with environmental laws. We have seen enforcement actions brought against banks in California, Georgia, North Carolina with unconfirmed reports in other states.
At the heart of the problem is runoff from abandoned and foreclosed residential projects. Under the federal Clean Water Act (CWA) and state versions of that law, developers and builders are required to obtain stormwater permits and implement Storm Water Pollution Prevention Plans, Best Management Plans and or Erosion Control Measures. These requirements are the reason that construction projects have those ubiquitous black and orange silt fences.
When banks foreclose on these abandoned projects, they may perform phase 1 reports that typically do not address environmental compliance. As a result, foreclosing bank is usually of the need to maintain erosion control or the cost of correcting any violations. The CWA does not have a secured creditor exemption so banks will be considered owners or operators of these properties that are responsible for complying with the full panoply of environmental laws associated with the development. Lenders that foreclose on partially completed construction sites are finding themselves saddled with fines and penalties for unpermitted sediment runoff and costs to bring the sites into compliance.
Normally. fines can range from a few hundred dollars per day to tens or hundreds of thousands depending on the severity of the violations and length of time the properties have been in non-compliance. In addition, the violations run with the land. The costs can only quickly add up and with banks foreclosing on multiple properties, the costs can scale into the millions of dollars For example, at one site near Dawsonville, a foreclosing lender has fines in excess of #4 million for inadequate erosion controls for a site that was valued at $1.97 million in 2006. The Gainesville Bank & Trust foreclosed on the property after the builders and developers of the site were convicted mortgage fraud and abandoned the development. Consequently, some banks are taking proactive steps to minimize their liability. SunTrust Banks Inc. recently implemented a comprehensive environmental compliance program for its foreclosed and repossessed properties. The bank retained two engineering firms to oversee the properties.
Georgia recently issued new General Permits for Storm Water Discharges Associated with Construction Activity for Stand Alone projects, Infrastructure Projects and Common Developments. Existing construction projects must submit a new NOI within 60 days after the effective date of the new permits. New sites that begin construction activities after the issuance date of the Permits must submit the new NOI form at least 14 days prior to beginning construction activities. Proof of submittal of the NOI must be retained at the construction site or other readily available location. Under the revised rules, a lender or other secured creditor who acquires legal title to a construction site must file a new NOI by the earlier to occur of (1) seven days before beginning work at the construction site or (2) thirty days from acquiring legal title to the construction site.
In North Carolina, the heads of the Departments of Commerce ,and the Environment and Natural Resources (DENR) recently issued a joint memo advising banks to contact the DENR immediately upon taking control of property. The DENR will send inspectors to the site to determine its compliance and work with the lender to bring the site into compliance, re-issued expired permits and approve acceptable sedimentation controls. If remedial measures are required, the bank would be expected to enter into an administrative order. However, following the suggested protocol will help lenders minimize fines or penalties.
Meanwhile, in the arid southwest such as Arizona and parts of California, regulatory authorities are focusing on air pollution caused by dust from stalled construction projects. Lenders are being required to implement measures to reduce airborne dust.
The California Department of Toxic Substances has also warned lenders foreclosing on properties that that they properly dispose any hazardous materials at those sites. Abandoned construction projects frequently become dumping grounds and abandoned homes may contain quantities of hazardous materials that may have to be managed as hazardous waste according to the state.
In Florida, a lender foreclosed on six condos in a senior housing complex. One of the unit owners took out all appliances including the air conditioning. The condo association demanded that the foreclosing lender replace the air conditioning but refused. Months later, the entire unit became infested with mold forcing the bank to pay for a gut renovation.
Then we have the ordinances that are sprouting across the country require lenders that foreclose on homes to properly maintain them or pay to demolish the structures. For example, Cathedral City recently enacted a local ordinance requiring owners of foreclosed properties to register the property with the city. Among other requirements, the ordinance requires owners to pay a $70 annual registration fee, secure the property, keep it free of debris, landscape the front and side yards to neighborhood standards, clean or drain the pool, and hire a local property manager to inspect it weekly. The town located in what was once the red-hot housing market of Riverside County has over 2,000 foreclosed properties currently sitting vacant in this California desert community. The empty houses have been vandalized, used a meth labs or simply as bases for criminal activities. Stagnant swimming pools have created breeding grounds for mosquitoes and drowning hazards.
Earlier this week, JPMorgan Chase agreed to pay Oakland, Calif. $35,000 to settle a lawsuit accusing lenders and local agents of illegally evicting tenants under the municipal “just cause” eviction law. Under the just cause ordinance, landlords and foreclosing lenders must have a specified valid reason for evicting a tenant, such as the owner moving into the unit, and give 60 days' notice.
In Rhode Island, the legislature recently enacted the Rhode Island Foreclosed Property Upkeep Act. It requires any financial institution that purchases a foreclosed property to post a bond with the municipality for 25 percent of the property’s assessed value, to be used to correct any code violations if the owner doesn’t take care of it. If the full value of the bond is used in the upkeep of the property, the owner has 10 days to file another bond in the same amount or have the property forfeited to the municipality.
All of these emphasizes how important it is for lenders and their consultants to carefully review the conditions of properties before a foreclosure decision is made and to plan for post-foreclosure activities not only to minimize liability but also to preserve property value.
Due Care, Continuing Obligations and the CERCLA landowner defenses
There have been alot of ASTM standards issued the past few years but one of the more important ones will likely be the Continuing Obligations practice that is currently in draft form. It is important because it is critical for landowners to maintain their liability protection after they take title.
It is important for consultants, attorneys and landowners to realize that the landowner liability protections are affirmative defenses-that means the person seeking to assert the defense has the burden of proving that they qualify for the liability protection. I suspect the caselaw under the third party defense and innocent landowner defenses will serve as an example of how courts are going to interpret the scope of the reasonable steps/continuing obligations obligations. If so, the courts will narrow construe the defenses-in other words make it hard for parties to establish that they are not liable.
The decisions in U.S. v. Honeywell, 2008 U.S. Dist. LEXIS 13432 (C.D. Ca. 2/22/08) and the 2006 AMCAL v. Pacific Clay, 457 F.Supp.2d 1016. (E.D.Ca. 2006) illustrate that there is plenty of liability remaining out there for purchasers of contaminated property who move around contaminated soil. I think we would do a disservice to clients if potential users of the practice if we suggest that all they need to do is erect a fence or notify the authorities.
It should also be pointed out that some jurisdictions still hold that passive migration is disposal though a majority of courts that holds passive migration is not a release. Landowners in jurisdictions where mere migration is disposal will probably have to implement more rigorous actions to satisfy 'reasonable steps' (i.e. Stop ongoing releases) than those in jurisdictions following the majority rule.
Thus, landowners need to be very careful not to inadvertantly forfeit their liability after they take title. Obviously, the determination of what steps are 'reasonable' will be site-specific. However, we can probably make some general observations.
As part of the reasonable steps obligations, landowners have to stop continuing releases, prevent any threatened future releases and prevent or limit exposure to releases of hazardous substances. It would seem from any reading of the legislative language, history and the 1995 EPA Guidance on Contaminated Aquifers that a BFPP, ILO or CPO do not have to remediate groundwater. On the other end of the spectrum, it is also probably clear that simply erecting a fence or notifying the authorities is probably not going to satisfy the reasonable steps requirement in most cases.
The big question is what does such a party have to do about contaminated soil? I think it is fair to suggest that they would also not have to engage in long-term remedial measures such as would have to be implemented as part of a RI/FS. It would seem to me that landowners seeking certainty about whether they have implemented 'reasonable steps' should probably anticipate that they will have to perform the equivalent of removal actions or interim remedial measures such as removal of USTs, excavation of grossly contaminated soils and probably installation of vapor mitigation systems. I think source removal and eliminating the exposure pathway should be the admission price for liability relief
It is important for consultants, attorneys and landowners to realize that the landowner liability protections are affirmative defenses-that means the person seeking to assert the defense has the burden of proving that they qualify for the liability protection. I suspect the caselaw under the third party defense and innocent landowner defenses will serve as an example of how courts are going to interpret the scope of the reasonable steps/continuing obligations obligations. If so, the courts will narrow construe the defenses-in other words make it hard for parties to establish that they are not liable.
The decisions in U.S. v. Honeywell, 2008 U.S. Dist. LEXIS 13432 (C.D. Ca. 2/22/08) and the 2006 AMCAL v. Pacific Clay, 457 F.Supp.2d 1016. (E.D.Ca. 2006) illustrate that there is plenty of liability remaining out there for purchasers of contaminated property who move around contaminated soil. I think we would do a disservice to clients if potential users of the practice if we suggest that all they need to do is erect a fence or notify the authorities.
It should also be pointed out that some jurisdictions still hold that passive migration is disposal though a majority of courts that holds passive migration is not a release. Landowners in jurisdictions where mere migration is disposal will probably have to implement more rigorous actions to satisfy 'reasonable steps' (i.e. Stop ongoing releases) than those in jurisdictions following the majority rule.
Thus, landowners need to be very careful not to inadvertantly forfeit their liability after they take title. Obviously, the determination of what steps are 'reasonable' will be site-specific. However, we can probably make some general observations.
As part of the reasonable steps obligations, landowners have to stop continuing releases, prevent any threatened future releases and prevent or limit exposure to releases of hazardous substances. It would seem from any reading of the legislative language, history and the 1995 EPA Guidance on Contaminated Aquifers that a BFPP, ILO or CPO do not have to remediate groundwater. On the other end of the spectrum, it is also probably clear that simply erecting a fence or notifying the authorities is probably not going to satisfy the reasonable steps requirement in most cases.
The big question is what does such a party have to do about contaminated soil? I think it is fair to suggest that they would also not have to engage in long-term remedial measures such as would have to be implemented as part of a RI/FS. It would seem to me that landowners seeking certainty about whether they have implemented 'reasonable steps' should probably anticipate that they will have to perform the equivalent of removal actions or interim remedial measures such as removal of USTs, excavation of grossly contaminated soils and probably installation of vapor mitigation systems. I think source removal and eliminating the exposure pathway should be the admission price for liability relief
Dirty Little (Environmental) Secrets
Nearly all state and federal environmental cleanup laws have reporting obligations. However, the circumstances and parties who have the obligation to report contamination will vary significantly. In many cases, the reporting obligations are linked to the discovery of contamination that exceeds a reportable quantity or RQ. The RQ will vary according to the particular contaminant.
At first glance, this may seem like a reasonable approach. However, when one 'digs' a little deeper, it becomes clear that the way reporting obligations are structured have actually facilitated the proliferation of brownfields and allows many sellers of corporate property to keep the presence of contamination secret. Indeed, a common provision now appearing in transactional documents is a so-called 'No Look' or 'No Hunt' clause that prevents the buyer from conducting further investigations on its property if it wants to maintain the contractual protections it obtained from the seller. In fact, it is not uncommon for environmental lawyers to spend a significant amount of time on deals negotiating and drafting what and how information about contamination is to be disclosed.
The reason for all this is because the reporting obligations are often expressed in terms of the discharge of a certain quantity of a chemical over a certain period of time such as 24 hours. Now, back in the 1970s this made alot of sense when environmental management practices were still in their infancy and the principal problem was stopping ongoing discharges of hazardous substances.
Management of hazardous substances and wastes has significantly improved over the nearly three decades since the passage of CERCLA and RCRA so that NEW discharges from a facility are no longer the most important concern. Instead, it is the legacy of historical contamination from these past practices that have had to continually confront.
Unfortunately, the reporting obligations often do not address purely historical contamination since (1) the regulations often use present tense gerunds such as spilling, discharging, releasing, disposing and (2) it is difficult to determine how much of the contamination was discharged over the relevant reporting period. In otherwords, was it a drip, drip of PCB-contaminated oil from a condensor or percolation of wastes thru an unlined lagoon over 20 years, or was there a sudden release of hazardous materials from some containment structure or container.
Another regulatory oddity is that cleanup standards and reporting obligations are not congruent so that there could be contamination above above cleanup levels that may not be reportable because the contamination occurred over a very long period of time yet for some chemicals there may be a discharge that requires reporting but does not result in any risk-based cleanup obligation.
As a result, owners and sellers of property with purely historical contamination take the position that they have no obligation to disclose the presence of the contamination even if the contamination is present in concentrations that exceed applicable cleanup standards. In the absence of a regulatory driver, the owner/seller can then contractually prohibit the buyer from disclosing the contamination unless an overburdened regulatory somehow stumbles across the contamination.
Now, some academics, government legislators and judges have expressed the view that this is really not that big a problem because the marketplace can address this issue. After all, they say, a buyer can always require a seller to disclose and cleanup a site. Of course, this ignores the practical market reality that buyers may not have the leverage to extract such concessions, may not realize they need such information or that they may even want to know.
I think the absence of reporting obligations for purely historical contamination has contributed to the creation of brownfields as owners can just abandon their properties and while the local real estate market may be aware of concerns, overtaxed regulators may have no clue about the potential contamination.
My suggestion is that we link reporting obligations to cleanup standards so that if a phase 2 discovers soil or groundwater contamination, the contamination must be reported. No more time spend on trying to figure out how much of the chemical escaped into the ground or less time for lawyers to argue over how to deal with the results of the due diligence.
I also think that all phase 2 reports should be required to be sent to a centralized state database. Just think of all the wasted time and money that goes into repeating phase 2 reports over the years. If a consultant was able to access a database and see that sampling had been collected in the past in a certain area, it could use that information to advise its client that there is no need to sample in a particular area or that the area was already sampled and recommend sampling in other areas to better delineate the contamination.
Why are we still discovering contaminated sites nearly 30 years after CERCLA? Why havent we cleaned up more sites? Why are there so many brownfield sites? I think the inadequate reporting obiligations are a bit reason.
What do you think?
At first glance, this may seem like a reasonable approach. However, when one 'digs' a little deeper, it becomes clear that the way reporting obligations are structured have actually facilitated the proliferation of brownfields and allows many sellers of corporate property to keep the presence of contamination secret. Indeed, a common provision now appearing in transactional documents is a so-called 'No Look' or 'No Hunt' clause that prevents the buyer from conducting further investigations on its property if it wants to maintain the contractual protections it obtained from the seller. In fact, it is not uncommon for environmental lawyers to spend a significant amount of time on deals negotiating and drafting what and how information about contamination is to be disclosed.
The reason for all this is because the reporting obligations are often expressed in terms of the discharge of a certain quantity of a chemical over a certain period of time such as 24 hours. Now, back in the 1970s this made alot of sense when environmental management practices were still in their infancy and the principal problem was stopping ongoing discharges of hazardous substances.
Management of hazardous substances and wastes has significantly improved over the nearly three decades since the passage of CERCLA and RCRA so that NEW discharges from a facility are no longer the most important concern. Instead, it is the legacy of historical contamination from these past practices that have had to continually confront.
Unfortunately, the reporting obligations often do not address purely historical contamination since (1) the regulations often use present tense gerunds such as spilling, discharging, releasing, disposing and (2) it is difficult to determine how much of the contamination was discharged over the relevant reporting period. In otherwords, was it a drip, drip of PCB-contaminated oil from a condensor or percolation of wastes thru an unlined lagoon over 20 years, or was there a sudden release of hazardous materials from some containment structure or container.
Another regulatory oddity is that cleanup standards and reporting obligations are not congruent so that there could be contamination above above cleanup levels that may not be reportable because the contamination occurred over a very long period of time yet for some chemicals there may be a discharge that requires reporting but does not result in any risk-based cleanup obligation.
As a result, owners and sellers of property with purely historical contamination take the position that they have no obligation to disclose the presence of the contamination even if the contamination is present in concentrations that exceed applicable cleanup standards. In the absence of a regulatory driver, the owner/seller can then contractually prohibit the buyer from disclosing the contamination unless an overburdened regulatory somehow stumbles across the contamination.
Now, some academics, government legislators and judges have expressed the view that this is really not that big a problem because the marketplace can address this issue. After all, they say, a buyer can always require a seller to disclose and cleanup a site. Of course, this ignores the practical market reality that buyers may not have the leverage to extract such concessions, may not realize they need such information or that they may even want to know.
I think the absence of reporting obligations for purely historical contamination has contributed to the creation of brownfields as owners can just abandon their properties and while the local real estate market may be aware of concerns, overtaxed regulators may have no clue about the potential contamination.
My suggestion is that we link reporting obligations to cleanup standards so that if a phase 2 discovers soil or groundwater contamination, the contamination must be reported. No more time spend on trying to figure out how much of the chemical escaped into the ground or less time for lawyers to argue over how to deal with the results of the due diligence.
I also think that all phase 2 reports should be required to be sent to a centralized state database. Just think of all the wasted time and money that goes into repeating phase 2 reports over the years. If a consultant was able to access a database and see that sampling had been collected in the past in a certain area, it could use that information to advise its client that there is no need to sample in a particular area or that the area was already sampled and recommend sampling in other areas to better delineate the contamination.
Why are we still discovering contaminated sites nearly 30 years after CERCLA? Why havent we cleaned up more sites? Why are there so many brownfield sites? I think the inadequate reporting obiligations are a bit reason.
What do you think?
Developer Liable for Spreading Contaminated Dirt
A former property owner who inadvertently spreading contaminated dirt during grading activities for a residential development nearly thirty years ago could not assert the CERCLA third-party defense and was held liable as a former owner in United States v. Honeywell, 2008 LEXIS 13432 (E.D. Cal. Feb. 22, 2008).
This is one of those harsh cases that have given CERCLA a bad name and perhaps of the situations that Congress had hoped to ameliorate when it enacted the Innocent Landowners (ILO) Defense in 1986. Had the defendant been able to get past the 'solely caused by' prong, it might have been able to demonstrate that in 1978 it would not have had any reason to know of the contamination, especially since the mine tailings had been covered with vegetation. Since the decision was at the summary judgment stage, it is unlikely that sufficient discovery had been conducted to determine if Bruner had exercised due care.
In this case, Charles Bruner purchased an undeveloped parcel known as Ray Vista in 1978. The Ray Vista Site was located adjacent to the Mesa de Oro mound of mine tailings that had been generated by the Central Eureka Mine. At the time that Bruner purchased the site, the adjacent tailing mounds were covered with vegetation. However, aerial photos showed that the tailings had been subject to extensive erosion prior to 1977 that had allowed contaminated soils to migrate onto the development site.
Following his purchase of the property, Bruner retained contractors to excavate and grade the site to facilitate construction of streets and the installation of the underground utilities. He also contracted with the City of Sutter Creek for the construction of the streets, street lighting, sanitary sewers, water distribution pipes, and other utility distribution facilities. Thereafter, he built four homes on two streets in the subdivision.
In 1995, EPA discovered that contamination from the historical mining operations at the Site had migrated to the Vista Ray residential subdivision (“Vista Ray”). EPA implemented a response action which involved excavation of the contaminated soils from all of the residential lots, placement of clean soils as well as landscaping. The federal government then commenced a cost recovery suit against Honeywell International and other responsible parties. Honeywell and the defendants ultimately agreed to pay EPA $600K along with an additional $120K in funds collected from contribution actions that had been filed against other responsible parties. The only third-party defendant that refused to settle was Bruner, and the settling parties sought $160K in response costs.
Bruner argued that he was entitled to assert the innocent purchaser defense because he did not know or have reason to know of the presence of the contamination but the court did not reach that issue because he could not the first element of the third party defense.
The innocent purchaser defense is technically part of the CERCLA third-party defense which provides that a person will not be liable if the defendant can show that the release was (1) solely caused by an act or omission of a third party (2) whom the defendant did not have any direct or indirect contractual relationship (3) that the defendant exercise due care with respect to the hazardous substances and (4) took precautions against the foreseeable acts or omissions of third. The innocent purchaser's defense is used to satisfy the second prong of the third party defense. If the defendant can show that it did not know or had no reason to know of contamination, it would be deemed to not be in a 'contractual relationship' with a person who caused the contamination.
Bruner argued that the contamination was solely due to mine operations. However, the court said the contaminated soil was spread either by Bruner's actions or those of his contractors. Distinguishing other cases were parties had been able to assert a defense based on the passive migration of the contaminants, the court said that Bruner took affirmative steps in developing his land. The court noted that he actively graded and excavated the property, that it was reasonable to expect that any contaminants in the soil would have been agitated and that it is eminently foreseeable that development of such land would result in a release of whatever hazardous substances were in the soil.
Because Bruner could not show that a third party was the 'sole' cause of the release of from the Vista Ray subdivision, the court ruled there was no need to discuss whether he exercised due care or took the proper precautions to prevent such a release. Likewise, because the court found that Bruner had actively contributed to the 'release' of the hazardous substance at the time he undertook development, the issue of whether he had 'reason to know' of the presence of a hazardous substance was irrelevant. While the court held that Bruner was liable, it determined that there were genuine issues of material fact on the amount of Bruner's equitable share of the response costs and that further discovery was required before the Bruner share of the costs could be established.
This is one of those harsh cases that have given CERCLA a bad name and perhaps of the situations that Congress had hoped to ameliorate when it enacted the Innocent Landowners (ILO) Defense in 1986. Had the defendant been able to get past the 'solely caused by' prong, it might have been able to demonstrate that in 1978 it would not have had any reason to know of the contamination, especially since the mine tailings had been covered with vegetation. Since the decision was at the summary judgment stage, it is unlikely that sufficient discovery had been conducted to determine if Bruner had exercised due care.
Foreclosing Lender Not Liable
In HICKS FAMILY LIMITED PARTNERSHIP v 1ST NATIONAL BANK OF HOWELL, 2008 Mich. App. LEXIS 1444 (7/15/08, Ct. App. Mi), a state appeals court ruled that a bank that had foreclosed on property formerly operated by a defunct paint manufacturer in 1983. Defendant bank sold the property to the predecessor of the plaintiff estate.When the defendant bank acquired the property, it was contaminated with buried drums of paint and paint thinners. . The purchase agreement provided in part that "Sellers agree to have all equipment inside and out, all stock, debris and residue removed from premises at time of closing, in compliance of E.P.A. Rules & Regulations."
Defendant bank performed remedial activities from 1983 to 1996. There was evidence that a contractor hired by the defendant had damaged a barrel during remedial activities that led to another discharge. In 1997, the defendant bank requested that the site be delisted but the state of Michigan refused. In 2004, plaintiff began developing the property and discovered several additional buried drums and additional groundwater and soil remained contaminated. In December 2004, plaintiff then sought to recovery its cleanup costs from the defendant under the state superfund law and common law claims. The trial court looked to CERCLA caselaw to determine if the plaintiff PRP had a right to bring a contribution action under the state superfund law since that right was modeled after CERCLA section 113. The trial court rules that based on the then split of authority under CERCLA, the plaintiff did not have a statutory right of contribution and also dismissed the common law claims. The common law claims were dismissed because the plaintiff failed to exercise reasonable diligence in monitoring defendant's [*28] performance of the cleanup operation. The court said that even if the plaintiff did not know the particular facts concerning the buried drums or the ruptured barrel, it had sufficient grounds for knowing no later than 1997 that defendant may not have been adequately fulfilling its alleged cleanup obligations. In the absence of evidence that plaintiff made reasonable efforts to ascertain the condition of the property, the trial court determined that it was not appropriate to apply the discovery rule in this case
The appeals court affirmed the dismissal of plaintiff's various common-law claims, but reversed the dismissal of the state superfund cost-recovery claim and remanded for further proceedings. The trial court then granted defendant's motion for summary disposition because as a PRP, plaintiff was legally barred from maintaining a cost recovery claim, and even if plaintiff could properly bring an action, the evidence established that defendant was neither an 'operator' nor an 'arranger' under the state superfund law since there was no causal nexus between defendant's alleged conduct and plaintiff's response costs.
On appeal, the court ruled that the trial court had erred when it granted defendant's motion for summary disposition because of the U.S. Supreme Court ruling in United States v Atlantic Research Corp, 127 S. Ct. 2331; 168 L. Ed. 2d 28 (2007) that PRPs could bring contribution actions.
However, the appeals court held that the defendant bank was not an 'operator' or 'generator' at the site. While the defendant bank exercised control over the site when carrying out its remedial actions, the court said that plaintff had to show that the defendant must have had authority to control the operations or decisions involving the disposal of the hazardous substance, or must have assumed responsibility or control over the disposition of the hazardous substance. Since the defendant's only connection to the site was its remedial clean-up effort, the court said this was insufficient to establish the requisite nexus required for liability as an operator.
On the arranger theory of liability, the plaintiff had introduced evidence that a contractor hired by defendant ruptured a barrel during the cleanup operations in 1984 and that this was sufficient to show that defendant disposed of a hazardous substance and was responsible for an activity causing a release. However, the court ruled that defendant could not be held liable as an arranger as it did not intend the 1984 disposal.
Comment 1:
Perhaps the bank did not comply with the foreclosure rules set forth in the state secured exemption or felt it did not act retroactively. In any event, the bank was forced to defend itself as a former landowner of the property without the extra layer of protection that is provided by the expansive state secured creditor defense.
Comment 2
Lenders encounter their greatest risk of liability during post-foreclosure activities, and the HSBC case highlights the importance of a lender exercising extreme caution when winding down operations at a borrower’s manufacturing facilities. Under the 1996 Asset Conservation, Lender Liability Deposit Insurance Act, also known as the Lender Liability Amendments, a lender may maintain business operations, wind down operations, take measures to preserve, protect and prepare the vessel or facility for sale or disposition, and even undertake response actions under section 107(d) (l) of CERCLA so long as the lender seeks to sell or re-lease (in the case of a sale/leaseback transaction)and complies with certain foreclosure requirements.
Banks continue to find themselves subject to environmental issues because of the actions they took during workouts or following foreclosures. Many of these enforcement actionsinvolve administrative orders or lawsuits that are quietly settled by governmental agencies. These situations have typically taken place when a borrower has gone out of business and the bank takes control of the facility in order to sell off the inventory, fixtures, machinery and equipment of the borrower subject to the bank’s lien. The bank typically does not taketitle to the property because of fear that it will lose its exemption, but instead hires an auction house to conduct the sale of the property. Usually, there are barrels or drums of hazardous waste strewn about the facility and the equipment that is being auctioned off may even contain hazardous wastes. To avoid any suggestion that the bank or the auction had any control over hazardous wastes, the auction will often rope off the area where the drums or barrels are found. After theauction is conducted, the drums and barrels are then left in the abandoned facility. At somepoint, government authorities discover that there are abandoned drums at the facility and order the lender to pay for the removal of the materials.
Lenders should be aware that the definition of 'release' under CERCLA includes abandonment of drums. Thus, a lender who has taken control of a facility to conduct an auction and leaves behind drums or equipment containing hazardous wastes could be deemed to have caused a threatened release of hazardous substances. EPA has consistently taken the position that such action constitutes abandonment of hazardous wastes (when the borrower is insolvent) and creates generator liability for the lender. As a result, financial institutions should consult with environmental counsel prior to taking possession of a former borrower’s facility or conducting any auction at a manufacturing facility. It would also be advisable for lenders to retain an environmental consultant or environmental attorney to inspect the facility prior to taking control in order to evaluate the possible environmental liabilities that might be associated with the auction.
The financial institution could have its environmental consultant or attorney perform a regulatory review of the facility to minimize the possibility that the lender could incur liability for releases of hazardous substances at that treatment or disposal facility.
This case can be contrasted to the enforcement action in State of New York vs. HSBC where the bank agreed to pay $850,000 in fines and reimburse environmental agencies for response costs involving a facility that was abandoned by a borrower. In this case, HSBC extended a $4.1 million loan to Westwood Chemical Corp. After the borrower defaulted, HSBC established a lockbox and directed customers to forward payments to that account. A few months later, HSBC seized Westwood’s operating funds and asked the company to prepare a plan for an orderly shutdown. As part of this request, Westwood requested approximately $60,000 to properly dispose of hazardous materials in drums, containers and wastewater tanks as well as raw materials and work in process. HSBC refused this request and also declined to follow the recommendations of its consultants to winterize the facility. During the winter, pipes from the fire suppression system burst as well as many of the containers storing hazardous materials. The contents of the drums mixed with water when the weather warmed. At some point, the local code enforcement officer became aware of the conditions and notified the New York State Department of Environmental Conservation (NYSDEC), which then referred the matter to EPA. The bankruptcy trustee then got into the act, filing a motion under section 506(c) of the bankruptcy code seeking to subordinate the bank's lien. EPA, DEC and the town also filed administrative claims seeking reimbursement of their response costs. In the fall of 2006, HSBC arranged for the sale of the property for $3 million. Approximately $2.3 million of the sales price was used to reimburse some of the costs incurred by the regulatory agencies. In its lawsuit against HSBC, the New York Attorney General asserted that HSBC was not entitled to the secured creditor exemption because it had become involved in the management of the facility when it seized the operating funds, refused to allow money to be used to properly dispose of the hazardous materials or otherwise enable the borrower to comply with its closure obligations, and failed to properly winterize the facility when it had assumed control of the building and constructive possession of the hazardous materials. The attorney general also charged that the bank had an obligation to notify the NYSDEC of the conditions at the facility.It is interesting that the defendant did not try to assert the secured creditor exemption under the Michigan superfund law which appears to be broader than the CERCLA secured exemption . In particular, foreclosing lenders may asset the exemption if they take certain steps to dispose of the property and has taken reasonable care in maintaining and preserving the real estate and permanent fixtures; provides to the department all environmental information related to the facility that is available to the lender; has complied with any order issued by the state environmental agency and if conditions on the property pose a threat of fire or explosion or present an imminent hazard through direct contact with hazardous substances, the lender has undertaken appropriate response activities to abate the threat or hazard.
Defendant bank performed remedial activities from 1983 to 1996. There was evidence that a contractor hired by the defendant had damaged a barrel during remedial activities that led to another discharge. In 1997, the defendant bank requested that the site be delisted but the state of Michigan refused. In 2004, plaintiff began developing the property and discovered several additional buried drums and additional groundwater and soil remained contaminated. In December 2004, plaintiff then sought to recovery its cleanup costs from the defendant under the state superfund law and common law claims. The trial court looked to CERCLA caselaw to determine if the plaintiff PRP had a right to bring a contribution action under the state superfund law since that right was modeled after CERCLA section 113. The trial court rules that based on the then split of authority under CERCLA, the plaintiff did not have a statutory right of contribution and also dismissed the common law claims. The common law claims were dismissed because the plaintiff failed to exercise reasonable diligence in monitoring defendant's [*28] performance of the cleanup operation. The court said that even if the plaintiff did not know the particular facts concerning the buried drums or the ruptured barrel, it had sufficient grounds for knowing no later than 1997 that defendant may not have been adequately fulfilling its alleged cleanup obligations. In the absence of evidence that plaintiff made reasonable efforts to ascertain the condition of the property, the trial court determined that it was not appropriate to apply the discovery rule in this case
The appeals court affirmed the dismissal of plaintiff's various common-law claims, but reversed the dismissal of the state superfund cost-recovery claim and remanded for further proceedings. The trial court then granted defendant's motion for summary disposition because as a PRP, plaintiff was legally barred from maintaining a cost recovery claim, and even if plaintiff could properly bring an action, the evidence established that defendant was neither an 'operator' nor an 'arranger' under the state superfund law since there was no causal nexus between defendant's alleged conduct and plaintiff's response costs.
On appeal, the court ruled that the trial court had erred when it granted defendant's motion for summary disposition because of the U.S. Supreme Court ruling in United States v Atlantic Research Corp, 127 S. Ct. 2331; 168 L. Ed. 2d 28 (2007) that PRPs could bring contribution actions.
However, the appeals court held that the defendant bank was not an 'operator' or 'generator' at the site. While the defendant bank exercised control over the site when carrying out its remedial actions, the court said that plaintff had to show that the defendant must have had authority to control the operations or decisions involving the disposal of the hazardous substance, or must have assumed responsibility or control over the disposition of the hazardous substance. Since the defendant's only connection to the site was its remedial clean-up effort, the court said this was insufficient to establish the requisite nexus required for liability as an operator.
On the arranger theory of liability, the plaintiff had introduced evidence that a contractor hired by defendant ruptured a barrel during the cleanup operations in 1984 and that this was sufficient to show that defendant disposed of a hazardous substance and was responsible for an activity causing a release. However, the court ruled that defendant could not be held liable as an arranger as it did not intend the 1984 disposal.
Comment 1:
Perhaps the bank did not comply with the foreclosure rules set forth in the state secured exemption or felt it did not act retroactively. In any event, the bank was forced to defend itself as a former landowner of the property without the extra layer of protection that is provided by the expansive state secured creditor defense.
Comment 2
Lenders encounter their greatest risk of liability during post-foreclosure activities, and the HSBC case highlights the importance of a lender exercising extreme caution when winding down operations at a borrower’s manufacturing facilities. Under the 1996 Asset Conservation, Lender Liability Deposit Insurance Act, also known as the Lender Liability Amendments, a lender may maintain business operations, wind down operations, take measures to preserve, protect and prepare the vessel or facility for sale or disposition, and even undertake response actions under section 107(d) (l) of CERCLA so long as the lender seeks to sell or re-lease (in the case of a sale/leaseback transaction)and complies with certain foreclosure requirements.
Banks continue to find themselves subject to environmental issues because of the actions they took during workouts or following foreclosures. Many of these enforcement actionsinvolve administrative orders or lawsuits that are quietly settled by governmental agencies. These situations have typically taken place when a borrower has gone out of business and the bank takes control of the facility in order to sell off the inventory, fixtures, machinery and equipment of the borrower subject to the bank’s lien. The bank typically does not taketitle to the property because of fear that it will lose its exemption, but instead hires an auction house to conduct the sale of the property. Usually, there are barrels or drums of hazardous waste strewn about the facility and the equipment that is being auctioned off may even contain hazardous wastes. To avoid any suggestion that the bank or the auction had any control over hazardous wastes, the auction will often rope off the area where the drums or barrels are found. After theauction is conducted, the drums and barrels are then left in the abandoned facility. At somepoint, government authorities discover that there are abandoned drums at the facility and order the lender to pay for the removal of the materials.
Lenders should be aware that the definition of 'release' under CERCLA includes abandonment of drums. Thus, a lender who has taken control of a facility to conduct an auction and leaves behind drums or equipment containing hazardous wastes could be deemed to have caused a threatened release of hazardous substances. EPA has consistently taken the position that such action constitutes abandonment of hazardous wastes (when the borrower is insolvent) and creates generator liability for the lender. As a result, financial institutions should consult with environmental counsel prior to taking possession of a former borrower’s facility or conducting any auction at a manufacturing facility. It would also be advisable for lenders to retain an environmental consultant or environmental attorney to inspect the facility prior to taking control in order to evaluate the possible environmental liabilities that might be associated with the auction.
The financial institution could have its environmental consultant or attorney perform a regulatory review of the facility to minimize the possibility that the lender could incur liability for releases of hazardous substances at that treatment or disposal facility.
This case can be contrasted to the enforcement action in State of New York vs. HSBC where the bank agreed to pay $850,000 in fines and reimburse environmental agencies for response costs involving a facility that was abandoned by a borrower. In this case, HSBC extended a $4.1 million loan to Westwood Chemical Corp. After the borrower defaulted, HSBC established a lockbox and directed customers to forward payments to that account. A few months later, HSBC seized Westwood’s operating funds and asked the company to prepare a plan for an orderly shutdown. As part of this request, Westwood requested approximately $60,000 to properly dispose of hazardous materials in drums, containers and wastewater tanks as well as raw materials and work in process. HSBC refused this request and also declined to follow the recommendations of its consultants to winterize the facility. During the winter, pipes from the fire suppression system burst as well as many of the containers storing hazardous materials. The contents of the drums mixed with water when the weather warmed. At some point, the local code enforcement officer became aware of the conditions and notified the New York State Department of Environmental Conservation (NYSDEC), which then referred the matter to EPA. The bankruptcy trustee then got into the act, filing a motion under section 506(c) of the bankruptcy code seeking to subordinate the bank's lien. EPA, DEC and the town also filed administrative claims seeking reimbursement of their response costs. In the fall of 2006, HSBC arranged for the sale of the property for $3 million. Approximately $2.3 million of the sales price was used to reimburse some of the costs incurred by the regulatory agencies. In its lawsuit against HSBC, the New York Attorney General asserted that HSBC was not entitled to the secured creditor exemption because it had become involved in the management of the facility when it seized the operating funds, refused to allow money to be used to properly dispose of the hazardous materials or otherwise enable the borrower to comply with its closure obligations, and failed to properly winterize the facility when it had assumed control of the building and constructive possession of the hazardous materials. The attorney general also charged that the bank had an obligation to notify the NYSDEC of the conditions at the facility.It is interesting that the defendant did not try to assert the secured creditor exemption under the Michigan superfund law which appears to be broader than the CERCLA secured exemption . In particular, foreclosing lenders may asset the exemption if they take certain steps to dispose of the property and has taken reasonable care in maintaining and preserving the real estate and permanent fixtures; provides to the department all environmental information related to the facility that is available to the lender; has complied with any order issued by the state environmental agency and if conditions on the property pose a threat of fire or explosion or present an imminent hazard through direct contact with hazardous substances, the lender has undertaken appropriate response activities to abate the threat or hazard.
Home on the (Bombing) Range-Part 3
Well, it has happened again. Another luxury builder develops residential development on a former bombing range- this time in the Orlando area. This follows a well-publicized development in Dallas and a number of sites with manufactured housing in the south.
The common thread with all of these sites is that the bombing range were to TRAIN world war two bombers and consultants in each case determined that since the properties were ADJACENT to the bombing practice area there was little likelihood of munitions being present.
My question how can these consultants assume that all the bombs landed on the 'x'? TheY were TRAINING bombers. do you think it is likely that some of them missed their targets or accidentally dropped their loads prematurely?
Then of course there are my 'favorite' commodity shop environmental consultants who did not know the moble home parks (MHPs) were located near target fields because they only researched historical use back to the 1960s since that was when the MHPs were first developed!!
So now, the home builder in Orlando has three class action lawsuits filed against it. With the Florida real estate market already suffering the worst slump since the Great Depression, you got to believe having the local school children bringing 60 year old bombs to school for show and tell are not going to do much for the local housing prices.
The common thread with all of these sites is that the bombing range were to TRAIN world war two bombers and consultants in each case determined that since the properties were ADJACENT to the bombing practice area there was little likelihood of munitions being present.
My question how can these consultants assume that all the bombs landed on the 'x'? TheY were TRAINING bombers. do you think it is likely that some of them missed their targets or accidentally dropped their loads prematurely?
Then of course there are my 'favorite' commodity shop environmental consultants who did not know the moble home parks (MHPs) were located near target fields because they only researched historical use back to the 1960s since that was when the MHPs were first developed!!
So now, the home builder in Orlando has three class action lawsuits filed against it. With the Florida real estate market already suffering the worst slump since the Great Depression, you got to believe having the local school children bringing 60 year old bombs to school for show and tell are not going to do much for the local housing prices.
Black Swans, Dinosaurs and Environmental Due Diligence
By now, many you have probably heard about the book by Nassim Nicholas Taleb which discusses the phenomenon known as "Black Swan"- highly improbable events that have extremely important consquences. These are the outliers that reside at the extremes of the bell curve-also known as the "fat tails". They are several standard deviations from the norm. Said another way, low or small probability events can result in large impacts- much as the meteor that wiped out the dinosaurs!
All too often, risk managers focus on the high probability events reflected in the middle of the bell curve and ignore the risk at the fat tail. While Taleb shows that these black swan events occur more frequently than thought, the key takeaway message is not simply enough to ask what the probability of an event is but it is the probability coupled with the magnitude of the event that must be evaluated.
An illustration from the stock market serves as a good example. History shows that the majority of time the stock market does not move very much. Then, suddenly it makes a giant move up or down, and returns to its prior stasis. Indeed, according to studies by Professor Javier Estrada, a finance professor at IESE Business School in Barcelona who has studied the daily returns of by the Dow Jones Industrial Average dating back to 1900, if one takes away the best 10 days of that period, two-thirds of the cumulative gains produced by the DJIA in the past 109 years would disappear. On the otherhand, if an investor happened to be out of the market on the ten worst days of the Dow, the investor would have enjoyed gains triple those of the DJIA. In other words, the moments comprising 0.03% of the stock market history (10 days out of 29,694) had a disproportionate impact.
He also warns that attention must be given to how about the risk data is presented because human beings have difficulty perceiving risk (the caveman who took time to think about a risk posed by a saber tooth tiger may not have had the opportunity to pass along this cognitive gene but that is the subject of another book-Outlier). For example, pyschological studies done by Dan Goldtsein have shown that if a person is told a certain event is likely to occur once in 30 years, that person is more likely to take the risk than if the risk is expressed as a 3% a year occurance.
So how does this relate to environmental due diligence? Well first, we've had the Black Swan event. The meteor has hit, it has wiped out the dinosaurs and those of us surviving are like the remaining small mammals. We can't sit around and worry when things are going to get better. There are vast ecological niches that will filled since we know nature abhores a vacuum (even in economics). Our job is to find those niches and provide value to our clients.
And how do we extract value? First, as Warren Buffett says, "Beware of Geeks Bearing Formulas". Talub shows that probablistic or statistical tools can fool the users. What we experienced in the last decade that I call the "Henny Youngman" economy was the commoditization of statistical products (and in the due diligence arena, the commodization of phase 1 reports). The rating agencies developed models that did not have inputs for property values to drop. AIG did not have input for rating agency downgrades in its credit-default swap models.
We have to understand that whether we are dealing with an underground storage tank that was abandoned 30 years ago, a former world war 2 bombing training ground or a Superfund site, we do ot understand all of the risks associated with those environmental conditions. Environmental issues are extremely complex and when we are wrong, the consequences can be enormous. The rarer the event the more inverse its consequences. As Donald Rumsfield once said "stuff happens" (the "unknown unknowns). We have to respect the risk and ask what are the consequences if a black swan would occur. Then the client can choose to accept the risk or try to protect itself.
Remember, in the 1950s, the conventional wisdom was that it was ok to dispose wastewater in unlined lagoons. Many of us have built careers on the mistakes of the prior generation. We are not infallible. We may have more knowledge but we do not have all of the answers and our decision-making is still influenced by the same flaws that have plauged humans since we first walked the earth. Our generation of environmental professionals are also going to have under-estimated risk despite our vastly increased knowledge and powerful computers. Just before the economy blew up, Ben Bernanke said that we lived in an era of stability and "great moderation".
Bernanke, Greenspan and our politicians fell for what Talub refers to as the "narrative fallacy". People found comfort in charts, curves, formulae and explanations that seemed comforting and reinforced our convictions, biases and inability to properly perceive risk. However, in reality, risk in the financial system was growing expontenially. And then the meteor hit. As the old saying goes, "Garbage in, Garbage out."
I close with the following thought. For the last two decades, upwards of three-quarters of the cleanups approved by EPA have been risk-based cleanups. These cleanups were usually approved based on modeling assumptions for natural attenuation of contaminants, efficiency of engineering controls or the enforcement of institutional controls. Aside from the moral issue of leaving future generations with vast swaths of unuseable groundwater, what assumptions were built into these remedy decisions (such as vapor intrusion or greater than expected toxicity) that may turn out to be Black Swans? The universe is not as ordered as we would like to think. Life (and death) is replete with randomness that cannot be explained. Do not confuse the absence of evidence as evidence of absence...and think about low probability events.
All too often, risk managers focus on the high probability events reflected in the middle of the bell curve and ignore the risk at the fat tail. While Taleb shows that these black swan events occur more frequently than thought, the key takeaway message is not simply enough to ask what the probability of an event is but it is the probability coupled with the magnitude of the event that must be evaluated.
An illustration from the stock market serves as a good example. History shows that the majority of time the stock market does not move very much. Then, suddenly it makes a giant move up or down, and returns to its prior stasis. Indeed, according to studies by Professor Javier Estrada, a finance professor at IESE Business School in Barcelona who has studied the daily returns of by the Dow Jones Industrial Average dating back to 1900, if one takes away the best 10 days of that period, two-thirds of the cumulative gains produced by the DJIA in the past 109 years would disappear. On the otherhand, if an investor happened to be out of the market on the ten worst days of the Dow, the investor would have enjoyed gains triple those of the DJIA. In other words, the moments comprising 0.03% of the stock market history (10 days out of 29,694) had a disproportionate impact.
He also warns that attention must be given to how about the risk data is presented because human beings have difficulty perceiving risk (the caveman who took time to think about a risk posed by a saber tooth tiger may not have had the opportunity to pass along this cognitive gene but that is the subject of another book-Outlier). For example, pyschological studies done by Dan Goldtsein have shown that if a person is told a certain event is likely to occur once in 30 years, that person is more likely to take the risk than if the risk is expressed as a 3% a year occurance.
So how does this relate to environmental due diligence? Well first, we've had the Black Swan event. The meteor has hit, it has wiped out the dinosaurs and those of us surviving are like the remaining small mammals. We can't sit around and worry when things are going to get better. There are vast ecological niches that will filled since we know nature abhores a vacuum (even in economics). Our job is to find those niches and provide value to our clients.
And how do we extract value? First, as Warren Buffett says, "Beware of Geeks Bearing Formulas". Talub shows that probablistic or statistical tools can fool the users. What we experienced in the last decade that I call the "Henny Youngman" economy was the commoditization of statistical products (and in the due diligence arena, the commodization of phase 1 reports). The rating agencies developed models that did not have inputs for property values to drop. AIG did not have input for rating agency downgrades in its credit-default swap models.
We have to understand that whether we are dealing with an underground storage tank that was abandoned 30 years ago, a former world war 2 bombing training ground or a Superfund site, we do ot understand all of the risks associated with those environmental conditions. Environmental issues are extremely complex and when we are wrong, the consequences can be enormous. The rarer the event the more inverse its consequences. As Donald Rumsfield once said "stuff happens" (the "unknown unknowns). We have to respect the risk and ask what are the consequences if a black swan would occur. Then the client can choose to accept the risk or try to protect itself.
Remember, in the 1950s, the conventional wisdom was that it was ok to dispose wastewater in unlined lagoons. Many of us have built careers on the mistakes of the prior generation. We are not infallible. We may have more knowledge but we do not have all of the answers and our decision-making is still influenced by the same flaws that have plauged humans since we first walked the earth. Our generation of environmental professionals are also going to have under-estimated risk despite our vastly increased knowledge and powerful computers. Just before the economy blew up, Ben Bernanke said that we lived in an era of stability and "great moderation".
Bernanke, Greenspan and our politicians fell for what Talub refers to as the "narrative fallacy". People found comfort in charts, curves, formulae and explanations that seemed comforting and reinforced our convictions, biases and inability to properly perceive risk. However, in reality, risk in the financial system was growing expontenially. And then the meteor hit. As the old saying goes, "Garbage in, Garbage out."
I close with the following thought. For the last two decades, upwards of three-quarters of the cleanups approved by EPA have been risk-based cleanups. These cleanups were usually approved based on modeling assumptions for natural attenuation of contaminants, efficiency of engineering controls or the enforcement of institutional controls. Aside from the moral issue of leaving future generations with vast swaths of unuseable groundwater, what assumptions were built into these remedy decisions (such as vapor intrusion or greater than expected toxicity) that may turn out to be Black Swans? The universe is not as ordered as we would like to think. Life (and death) is replete with randomness that cannot be explained. Do not confuse the absence of evidence as evidence of absence...and think about low probability events.
Monday, October 18, 2010
Lender Foreclosing on Former Dry Cleaner Not LIable under Vt Law
Vermont Supreme Court held that a purchaser could rely on a negligently prepared phase 1 to assert the state innocent purchaser defense. In an earlier round of litigation, the lower court had ruled that the foreclosing bank that held title for seven months was not liable because the state had failed to prove that there had been a release during the time that the bank held title.
In State v Howe Cleaners, the property had been used as a dry cleaner from 1974-1996. The property was then conveyed to purchaser who converted it to a bakery. When the bakery failed, Granite Savings Bank and Trust (Granite) foreclosed and sold the property seven months later to a pizzeria. The sale was "as is" and before acquiring the property, the purchaser reviewed a phase 1 prepared for the bank.Sometime after taking title, an EPA inspector spoke with former employees of the dry cleaner and visited the property. When he raised some floor boards, he observed two tanks in the crawl space that had apparently been used to store PCE and that had leaked.
Vt then implemented response actions and sought cost recovery under the state Waste Management Act. The state argued that the successor to Granite, TD BankNorth, was liable as a person who owned the site at the time of a release. TD BankNorth argued it could not be liable because the state did not have any evidence that there had been a release during its ownership.
The state responded that it did not have to prove there was a new release but simply migration of an initial release.The trial court found that the CERCLA caselaw was not dispositive because liability under CERCLA was triggered by ownership at time of "disposal" whereas liability under the state Waste Management Act was linked to a "release". Moreover, the court found that the state definition of release was narrower than CERCLA and seemed to require an actual spill or discharge during ownership.Because there was a triable issue of fact if there was a release during the ownership of the bank, the court denied the bank's motion for summary judgment. The bank then sought to depose the state's expert on the timing of the release. However, the state refused to make its expert available. After several conferences with the court, the state still declined to make its staff available. As a result, the court issued a sanction prohibiting the state from introducing evidence of the timing of the release which effectively resulted in judgment for the bank.
The case illustrates the importance of understanding the scope of the state superfund or hazardous waste law as well as the extent of the secured creditor exemption. In other states, the bank could have been liable as a past owner and the failure of its consultant to identify the tanks could have exposed the bank to liability.
In State v Howe Cleaners, the property had been used as a dry cleaner from 1974-1996. The property was then conveyed to purchaser who converted it to a bakery. When the bakery failed, Granite Savings Bank and Trust (Granite) foreclosed and sold the property seven months later to a pizzeria. The sale was "as is" and before acquiring the property, the purchaser reviewed a phase 1 prepared for the bank.Sometime after taking title, an EPA inspector spoke with former employees of the dry cleaner and visited the property. When he raised some floor boards, he observed two tanks in the crawl space that had apparently been used to store PCE and that had leaked.
Vt then implemented response actions and sought cost recovery under the state Waste Management Act. The state argued that the successor to Granite, TD BankNorth, was liable as a person who owned the site at the time of a release. TD BankNorth argued it could not be liable because the state did not have any evidence that there had been a release during its ownership.
The state responded that it did not have to prove there was a new release but simply migration of an initial release.The trial court found that the CERCLA caselaw was not dispositive because liability under CERCLA was triggered by ownership at time of "disposal" whereas liability under the state Waste Management Act was linked to a "release". Moreover, the court found that the state definition of release was narrower than CERCLA and seemed to require an actual spill or discharge during ownership.Because there was a triable issue of fact if there was a release during the ownership of the bank, the court denied the bank's motion for summary judgment. The bank then sought to depose the state's expert on the timing of the release. However, the state refused to make its expert available. After several conferences with the court, the state still declined to make its staff available. As a result, the court issued a sanction prohibiting the state from introducing evidence of the timing of the release which effectively resulted in judgment for the bank.
The case illustrates the importance of understanding the scope of the state superfund or hazardous waste law as well as the extent of the secured creditor exemption. In other states, the bank could have been liable as a past owner and the failure of its consultant to identify the tanks could have exposed the bank to liability.
First Three NYC Schools Studied Reveal Excessive PCBs from Caulking
Back in January, the City of New York and the New York City School Construction Authority (SCA) reached an agreement with the EPA Region 2 Office regarding the assessment and remediation of polychlorinated biphenyls (PCB) Caulk in public school buildings.
Under the Consent Agreement and Final Order which was entered under the authority of the Toxic Substance Control Act, NYC agreed to implement a pilot study to determine the extent that PCBs may exist in caulking at five schools.
Preliminary results from the first three schools that were tested all found elevated levels of PCBs indoor air. The final results will be posted on the Board of Education website. Copies of the approved workplan and the consent order are also available at the website.
http://schools.nyc.gov/Offices/SCA/Reports/EPA/default.htm
Under the Consent Agreement and Final Order which was entered under the authority of the Toxic Substance Control Act, NYC agreed to implement a pilot study to determine the extent that PCBs may exist in caulking at five schools.
Preliminary results from the first three schools that were tested all found elevated levels of PCBs indoor air. The final results will be posted on the Board of Education website. Copies of the approved workplan and the consent order are also available at the website.
http://schools.nyc.gov/Offices/SCA/Reports/EPA/default.htm
Vapor Intrusion Becoming Game Changer for Diligence
During the 1990s, federal and state remedial programs moved away from requiring that all contaminants be removed from a site and began to implemented risk-based cleanups that focused onpotential risks resulting from exposure to contaminants in soil and groundwater for the anticipated land use. Under this approach, the soil cleanup standards adopted were developed using direct exposure to soil or impact to drinking water. If the soil was covered or groundwater was not used for drinking purposes, the remedial programs would frequently allow residual contamination to remain at the site provided adequate engineering and institutional controls were established to prevent unacceptable human exposures.
Beginning in 2002, EPA and a number of states began to grow concerned about a third pathway known as vapor intrusion which involves the migration of volatile contaminants through the soil gas into building structures. EPA and the states realized that this contaminant pathway was far more complex than previously thought and that building occupants were being exposed to unacceptable levels of contaminated vapors under scenarios that the regulators had not previously thought possible. As a result, vapor intrusion is now driving many of the remedy decisions across the country.
Not surprisingly, phase 1 environmental site assessments had not customarily looked at the potential vapor intrusion impacts but instead focuses on soil and groundwater contaminant levels. Now, as the loan cycle for properties financed in the 1995-2005 time period begins to turn over, we are starting to get a clearer picture of how much vapor intrusion is changing the environmental due diligence landscape.
Just this past week, I had three loans for commercial properties where phase 1 reports had concluded that a prior or current dry cleaner did not represent a REC. In each case, a phase 2 had been performed around the turn of the millennium that had detected levels of PCE below applicable soil cleanup standards. Subsequent phase 1 reports concluded that the low levels of PCE did not represent a REC or were de minimis because no cleanup would be required for the low levels of PCE in the soils.
However, when the properties became due for refinancing this year, what were previously low levels for soil cleanup levels now exceeded the screening levels for vapor intrusion. As a result, each of these properties either underwent a vapor intrusion assessment or implemented a vapor intrusion mitigation remedy.
These examples illustrate the importance of carefully reviewing the findings and conclusions of prior reports that were completed prior to the advent of vapor intrusion era. Consultants will need to be prepared to explain to their property owners, lenders and attorneys why further investigation may be required when one or more phase 1 reports prepared prior to the middle of this decade may have given the same properties a green or clean bill of health.
Beginning in 2002, EPA and a number of states began to grow concerned about a third pathway known as vapor intrusion which involves the migration of volatile contaminants through the soil gas into building structures. EPA and the states realized that this contaminant pathway was far more complex than previously thought and that building occupants were being exposed to unacceptable levels of contaminated vapors under scenarios that the regulators had not previously thought possible. As a result, vapor intrusion is now driving many of the remedy decisions across the country.
Not surprisingly, phase 1 environmental site assessments had not customarily looked at the potential vapor intrusion impacts but instead focuses on soil and groundwater contaminant levels. Now, as the loan cycle for properties financed in the 1995-2005 time period begins to turn over, we are starting to get a clearer picture of how much vapor intrusion is changing the environmental due diligence landscape.
Just this past week, I had three loans for commercial properties where phase 1 reports had concluded that a prior or current dry cleaner did not represent a REC. In each case, a phase 2 had been performed around the turn of the millennium that had detected levels of PCE below applicable soil cleanup standards. Subsequent phase 1 reports concluded that the low levels of PCE did not represent a REC or were de minimis because no cleanup would be required for the low levels of PCE in the soils.
However, when the properties became due for refinancing this year, what were previously low levels for soil cleanup levels now exceeded the screening levels for vapor intrusion. As a result, each of these properties either underwent a vapor intrusion assessment or implemented a vapor intrusion mitigation remedy.
These examples illustrate the importance of carefully reviewing the findings and conclusions of prior reports that were completed prior to the advent of vapor intrusion era. Consultants will need to be prepared to explain to their property owners, lenders and attorneys why further investigation may be required when one or more phase 1 reports prepared prior to the middle of this decade may have given the same properties a green or clean bill of health.
EPA Considering Revising HRS to Include Vapor Intrusion Pathway
The Hazardous Ranking System (HRS) is a regulation issued by EPA for scoring sites for inclusion on the National Priorities List (NPL). Risks posed by various exposure pathways are assessed and then numerical values are assigned. Sites are evaluated that score above 28.50 on the HRS are eligible for proposal to the NPL.
The principal driver for a high score on the HRS is contamination of drinking water. Because vapor intrusion was not a regulatory concern when the HRS was revised in 1990, the vapor intrusion pathway is not one of the pathways that are evaluated when scoring a site. However, in a critical report earlier this year, the GAO suggested that the vapor pathway be evaluated when ranking sites for the NPL.
I learned today at a vapor intrusion meeting at EPA region 2 that EPA is in the evaluating revising the HRS to specifically include the vapor intrusion pathway. If this change is implemented, it could mean that sites could be listed solely on the basis of vapor intrusion. This could dramatically expand the universe of sites eligible for the NPL. For example, GAO estimated in its report that if the VI pathway was used to rank sites, possibly 20 sites in New Jersey alone could be eligible for inclusion on the NPL.
The principal driver for a high score on the HRS is contamination of drinking water. Because vapor intrusion was not a regulatory concern when the HRS was revised in 1990, the vapor intrusion pathway is not one of the pathways that are evaluated when scoring a site. However, in a critical report earlier this year, the GAO suggested that the vapor pathway be evaluated when ranking sites for the NPL.
I learned today at a vapor intrusion meeting at EPA region 2 that EPA is in the evaluating revising the HRS to specifically include the vapor intrusion pathway. If this change is implemented, it could mean that sites could be listed solely on the basis of vapor intrusion. This could dramatically expand the universe of sites eligible for the NPL. For example, GAO estimated in its report that if the VI pathway was used to rank sites, possibly 20 sites in New Jersey alone could be eligible for inclusion on the NPL.
Washington Enacts Broad Disclosure Law For Commercial Transactions
The state of Washington enacted a sweeping revision to the state disclosure law that will require sellers of commercial property to provide broad disclosures about environmental conditions at the property being conveyed.
- The law is modeled on the disclosure used for residential properties. Under form 17, the owner will have to provide the following information about contamination:
- Are there any substances, materials, or products in or on the property that may be environmental concerns, such as asbestos, formaldehyde, radon gas, lead-based paint, fuel or chemical storage tanks, or contaminated soil or water?
- Is there any soil or groundwater contamination?
- Has the property been used as a legal or illegal dumping site?
- The answers are to be based on the actual knowledge of the seller. For any “yes” answers, the seller will have to provide additional information. The disclosure does not define “contamination”
- The law contains seven exemptions from disclosure requirements, such as foreclosures, family gifts, and other less typical transactions that track prior exemptions from residential disclosure requirements
EPA Evaluating Need for Vapor Intrusion Initiative For Urban Areas
EPs and their clients often overlook the potential for soil and groundwater contamination in densely-populated urban areas where soil is covered with impermeable surfacing and groundwater since there are not completed pathways. Unless floating product is detected, the potential for vapor intrusion is often overlooked. Even when the potential for VI is evaluated, the urban environment can present extraordinary and unique challenges.The plethora of utilities and other conduits can create multiple preferred pathways that require property owners, their lenders and professional service providers to discard any assumptions about acceptable distances from presumed sources and the potential for degradation. Because of the multiple current and former sources, it can be a daunting task of identify the source of the spill that has created the potential for vapor intrusion. Without a known source, it can be difficult to fashion a remedy and many state remedial programs must identify a source before they can spend public money. In many instances, the best alternative for property owners who cannot identify a source of the vapors is just to go ahead and incur the cost of installing a vapor mitigation system to cut off potential exposures to occupants.Because of the many challenges that are unique to urban areas, EPA's region 2 office held a meeting this week with a group of stakeholders to discuss developing a urban area VI pilot program. We discussed a number of strategies that could be implemented by local governments and the stakeholders will continue to meet the rest of the year. It is possible that the work from this effort will serve as a basis for adopting similar VI strategies in other urban areas
California Appeals Court Allows Claims for Inadequate Mold Disclosure Against Broker
In this case that holds lessons for brokers, foreclosing lenders and mold inspectors, a California court ruled that a purchaser may bring claims for fraud and negligent mispresentation against a listing broker.
In Sawaya v. Coldwell Banker, the plaintiff agreed to purchase a home in Glendale, California where the listing agent and buyer’s agent was Coldwell Banker Residential Brokerage Company. The purchase agreement provided that Coldwell Banker did not guarantee the condition of the property and "strongly advised" plaintiff to have a professional inspect the property, particularly to determine if mold was present. The agreement provided that the buyer had the right to conduct inspections.The buying agent was the niece of the plaintiff. According to the court’s opinion, the plaintiff had a close relationship with her niece and relied on her to inspect the property as well as to read and understand all documents. The plaintiff’s niece assured her that she would ensure inspections were proper and thorough and that plaintiff would be "protected."When she inspected the property, plaintiff noticed "a very strong, musty odor." The listing agent later told plaintiff that she had been informed by the sellers that the source of the odor was a broken toilet, and that sellers would repair the toilet and take care of the problem." The listing agent conducted a visual investigation of the property and after observing a water stain on the bedroom ceiling, she advised plaintiff to have the property inspected by a professional inspection company. The buying agent recommended that plaintiff retain Amrow Inspection Services, Inc. (Amrow), to inspect the property. Amrow inspected the property and observed moisture stains at northeast bedroom. Amrow recommend asking the seller for further information regarding the history of the damage but did not address the presence or absence of mold.Prior to the closing, the plaintiff was given a disclosure statement which stated the sellers were unaware of any mold, flooding or drainage problem or major structural damage. Plaintiff also signed a "Mold Disclosure Agreement" provided by Coldwell Banker which stated that
"every Buyer/Lessee should have a mold test performed by an environmental professional as either a separate test or an add-on to their whole house inspection. This is especially necessary if any of the inspection reports or disclosure documents indicate that there is evidence of past or present moisture, standing water or water intrusion at the property since most mold thrives on moisture. . . . Any waiver or failure on the part of a Buyer/Lessee to complete and obtain all appropriate tests, including those for mold, is against the advice of Broker." The form went on to say that by signing, the buyer/plaintiff agreed Coldwell Banker would have no further responsibility regarding the possibility of mold contamination of the property or any resulting injury. Moreover, the form contained a disclaimer that that "[n]othing any sales agent may say to [her] can change this Agreement or the advice contained [in it]."
The day before the final walk-through inspection, the plaintiff signed a "Receipt for Reports and Contingency Removal," acknowledging she had completed all inspections and reviewed all reports, and assumed any expense for repairs or corrections. At the final walk-through, plaintiff also signed a "Verification of Property Condition" where she agreed to hold harmless the broker and brokerage employees from any liability and damages arising out of the contractual obligations of the Buyer and Seller concerning the condition of the Property."
After the closing plaintiff removed wallpaper as part of her remodeling and discovered mold in the master bathroom as well as mold-related damage in the kitchen. She hired an inspector who discovered that the moisture originated from inside the wall from the unit above and from the exterior walls in the rear of the unit. After she moved in, plaintiff discovered additional water intrusion and the presence of toxic mold in wall cavities that rendered the residence is uninhabitable. Plaintiff was forced to vacate the home due to health problems resulting from mold exposure.
Plaintiff then filed suit, asserting claims of fraudulent concealment, negligent misrepresentation, failure to inspect and disclose, and breach of contract against Coldwell Banker. Plaintiff also sued her homeowners association, the seller, a former seller, and one of the inspectors, alleging the latter parties failed to disclose the home's structural damages.
In July 2008, Coldwell Banker moved for summary judgment, denying that it concealed any facts or made misrepresentations and asserting that plaintiff did not or could not rely on any representations In support of the motion. The trial court granted summary judgment to Coldwell Banker and plaintiff appealed.
On its claim for fraudulent concealment and negligent misrepresentation, the plaintiff said that Coldwell Banker had actual knowledge of certain material facts that it knew were unknown or beyond the reach of Plaintiff. These alleged material facts were that the broker knew there was improper drainage away from the exterior walls of the unit due to the placement of exterior planters causing pooling of water, that damage to the exterior wall allowed water intrusion, and that there was no effective moisture barrier along the exterior walls outside of the walls and windows of the affected rooms. Plaintiff alleged that Coldwell Banker failed to disclose these facts and intentionally or negligently misrepresented the condition of the property
The court began its analysis by stating that mere silence alone did not constitute fraudulent concealment absent a fiduciary or confidential relationship between the parties, or special circumstances that would equitably estop a person from relying on its silence or inaction, and which were sufficient to create a positive duty to speak or act. The court then explained that even absent a duty to speak, one who undertakes to speak must not suppress facts that materially qualify those stated.
Turning to the facts, the court noted that the listing broker had told plaintiff that the source of the musty odor was a broken toilet and that the sellers would "take care of the problem." The court said that listing agent should have been aware that a musty odor, water stains on the ceiling, and a leak from a broken toilet strongly suggested a mold problem. However, instead of informing plaintiff about the potential serious toxic mold problem, the court said the listing agent told the plaintiff that the sellers' repair of the broken toilet would "take care of the problem” even though fixing a leak only addresses the water problem and does not abate the mold problem. Thus, the court found there was a triable issue of fact if the listing agent lacked “reasonable ground” for believing her statement that sellers' repair of the broken toilet would take care of the problem was true. Thus, the court found she had made a negligent misrepresentation.
By the same token, the court held there was a triable issue of fact exists as to whether the listing agent fraudulently concealed a material fact from plaintiff by misleading her into thinking that repairing the toilet would take care of the problem manifested by the musty odor, water-stained ceiling, and leaking toilet.
The rejected Coldwell Banker's reliance on the "Mold Disclosure Agreement. The court noted that this form was among 40 to 50 pages of documents that plaintiff had to sign and that the plaintiff was told these were standard documents used in every real estate transaction that she should simply sign. The court said that even assuming plaintiff read and understood the "Mold Disclosure Agreement," her claim was that she was deceived by Coldwell Banker when the listing agent told her that the sellers "would take care of the problem." The court said this was an affirmative act by the listing agent that was designed to persuade plaintiff that she did not have to be concerned about the musty odor and therefore prevented Coldwell Banker from hiding behind the "Mold Disclosure Agreement."
On the breach of oontract claim, the court said that an "as is" provision in a real property sale contract is ineffective to relieve a seller and a broker of either affirmative or negative fraud such as where the seller or his agent misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer's reach and affecting the value or desirability of the property. The court also pointed out under the state Civil Code, brokers had a statutory obligation to disclose to a prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal. Because the broker was aware of a musty odor, water stains on a ceiling and a broken toilet, the court ruled that the broker breached its duty when it told the plaintiff that the repair of the broken toilet will "take care of the problem." Moreover, the problem was not addressed and as a result plaintiff bought a property that she could not live in due to the presence of toxic mold.
This case illustrates how making inaccurate statements where the speaker has no obligation can lead to liability. This can be particularly important for banks who may not be fully aware of conditions at a foreclosed property.
In Sawaya v. Coldwell Banker, the plaintiff agreed to purchase a home in Glendale, California where the listing agent and buyer’s agent was Coldwell Banker Residential Brokerage Company. The purchase agreement provided that Coldwell Banker did not guarantee the condition of the property and "strongly advised" plaintiff to have a professional inspect the property, particularly to determine if mold was present. The agreement provided that the buyer had the right to conduct inspections.The buying agent was the niece of the plaintiff. According to the court’s opinion, the plaintiff had a close relationship with her niece and relied on her to inspect the property as well as to read and understand all documents. The plaintiff’s niece assured her that she would ensure inspections were proper and thorough and that plaintiff would be "protected."When she inspected the property, plaintiff noticed "a very strong, musty odor." The listing agent later told plaintiff that she had been informed by the sellers that the source of the odor was a broken toilet, and that sellers would repair the toilet and take care of the problem." The listing agent conducted a visual investigation of the property and after observing a water stain on the bedroom ceiling, she advised plaintiff to have the property inspected by a professional inspection company. The buying agent recommended that plaintiff retain Amrow Inspection Services, Inc. (Amrow), to inspect the property. Amrow inspected the property and observed moisture stains at northeast bedroom. Amrow recommend asking the seller for further information regarding the history of the damage but did not address the presence or absence of mold.Prior to the closing, the plaintiff was given a disclosure statement which stated the sellers were unaware of any mold, flooding or drainage problem or major structural damage. Plaintiff also signed a "Mold Disclosure Agreement" provided by Coldwell Banker which stated that
"every Buyer/Lessee should have a mold test performed by an environmental professional as either a separate test or an add-on to their whole house inspection. This is especially necessary if any of the inspection reports or disclosure documents indicate that there is evidence of past or present moisture, standing water or water intrusion at the property since most mold thrives on moisture. . . . Any waiver or failure on the part of a Buyer/Lessee to complete and obtain all appropriate tests, including those for mold, is against the advice of Broker." The form went on to say that by signing, the buyer/plaintiff agreed Coldwell Banker would have no further responsibility regarding the possibility of mold contamination of the property or any resulting injury. Moreover, the form contained a disclaimer that that "[n]othing any sales agent may say to [her] can change this Agreement or the advice contained [in it]."
The day before the final walk-through inspection, the plaintiff signed a "Receipt for Reports and Contingency Removal," acknowledging she had completed all inspections and reviewed all reports, and assumed any expense for repairs or corrections. At the final walk-through, plaintiff also signed a "Verification of Property Condition" where she agreed to hold harmless the broker and brokerage employees from any liability and damages arising out of the contractual obligations of the Buyer and Seller concerning the condition of the Property."
After the closing plaintiff removed wallpaper as part of her remodeling and discovered mold in the master bathroom as well as mold-related damage in the kitchen. She hired an inspector who discovered that the moisture originated from inside the wall from the unit above and from the exterior walls in the rear of the unit. After she moved in, plaintiff discovered additional water intrusion and the presence of toxic mold in wall cavities that rendered the residence is uninhabitable. Plaintiff was forced to vacate the home due to health problems resulting from mold exposure.
Plaintiff then filed suit, asserting claims of fraudulent concealment, negligent misrepresentation, failure to inspect and disclose, and breach of contract against Coldwell Banker. Plaintiff also sued her homeowners association, the seller, a former seller, and one of the inspectors, alleging the latter parties failed to disclose the home's structural damages.
In July 2008, Coldwell Banker moved for summary judgment, denying that it concealed any facts or made misrepresentations and asserting that plaintiff did not or could not rely on any representations In support of the motion. The trial court granted summary judgment to Coldwell Banker and plaintiff appealed.
On its claim for fraudulent concealment and negligent misrepresentation, the plaintiff said that Coldwell Banker had actual knowledge of certain material facts that it knew were unknown or beyond the reach of Plaintiff. These alleged material facts were that the broker knew there was improper drainage away from the exterior walls of the unit due to the placement of exterior planters causing pooling of water, that damage to the exterior wall allowed water intrusion, and that there was no effective moisture barrier along the exterior walls outside of the walls and windows of the affected rooms. Plaintiff alleged that Coldwell Banker failed to disclose these facts and intentionally or negligently misrepresented the condition of the property
The court began its analysis by stating that mere silence alone did not constitute fraudulent concealment absent a fiduciary or confidential relationship between the parties, or special circumstances that would equitably estop a person from relying on its silence or inaction, and which were sufficient to create a positive duty to speak or act. The court then explained that even absent a duty to speak, one who undertakes to speak must not suppress facts that materially qualify those stated.
Turning to the facts, the court noted that the listing broker had told plaintiff that the source of the musty odor was a broken toilet and that the sellers would "take care of the problem." The court said that listing agent should have been aware that a musty odor, water stains on the ceiling, and a leak from a broken toilet strongly suggested a mold problem. However, instead of informing plaintiff about the potential serious toxic mold problem, the court said the listing agent told the plaintiff that the sellers' repair of the broken toilet would "take care of the problem” even though fixing a leak only addresses the water problem and does not abate the mold problem. Thus, the court found there was a triable issue of fact if the listing agent lacked “reasonable ground” for believing her statement that sellers' repair of the broken toilet would take care of the problem was true. Thus, the court found she had made a negligent misrepresentation.
By the same token, the court held there was a triable issue of fact exists as to whether the listing agent fraudulently concealed a material fact from plaintiff by misleading her into thinking that repairing the toilet would take care of the problem manifested by the musty odor, water-stained ceiling, and leaking toilet.
The rejected Coldwell Banker's reliance on the "Mold Disclosure Agreement. The court noted that this form was among 40 to 50 pages of documents that plaintiff had to sign and that the plaintiff was told these were standard documents used in every real estate transaction that she should simply sign. The court said that even assuming plaintiff read and understood the "Mold Disclosure Agreement," her claim was that she was deceived by Coldwell Banker when the listing agent told her that the sellers "would take care of the problem." The court said this was an affirmative act by the listing agent that was designed to persuade plaintiff that she did not have to be concerned about the musty odor and therefore prevented Coldwell Banker from hiding behind the "Mold Disclosure Agreement."
On the breach of oontract claim, the court said that an "as is" provision in a real property sale contract is ineffective to relieve a seller and a broker of either affirmative or negative fraud such as where the seller or his agent misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer's reach and affecting the value or desirability of the property. The court also pointed out under the state Civil Code, brokers had a statutory obligation to disclose to a prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal. Because the broker was aware of a musty odor, water stains on a ceiling and a broken toilet, the court ruled that the broker breached its duty when it told the plaintiff that the repair of the broken toilet will "take care of the problem." Moreover, the problem was not addressed and as a result plaintiff bought a property that she could not live in due to the presence of toxic mold.
This case illustrates how making inaccurate statements where the speaker has no obligation can lead to liability. This can be particularly important for banks who may not be fully aware of conditions at a foreclosed property.
What are Historic Recognized Environmental Conditions (HRECs)
When E1527 was revised in 2000, a new term was added- Historic Recognized Environmental Condition or HREC. The current definition which appears at 3.2.39 is as follows:
" 3.2.39 historical recognized environmental condition— an environmental condition which in the past would have been considered a recognized environmental condition, but which may or may not be considered a recognized environmental condition currently. The final decision rests with the environmental professional and will be influenced by the current impact of the historical recognized environmental condition on the property. If a past release of any hazardous substances or petroleum products has occurred in connection with the property and has been remediated, with such remediation accepted by the responsible regulatory agency (for example, as evidenced by the issuance of a no further action letter or equivalent), this condition shall be considered an historical recognized environmental condition and included in the findings section of the Phase I Environmental Site Assessment report. The environmental professional shall provide an opinion of the current impact on the property of this historical recognized environmental condition in the opinion section of the report. If this historical recognized environmental condition is determined to be a recognized environmental condition at the time the Phase I Environmental Site Assessment is conducted, the condition shall be identified as such and listed in the conclusions section of the report."
This term was meant to apply to releases that had been remediated in the past so that no further work had to be done. The thinking that identifying this prior release as a REC would not only correctly reflect the current conditions of the property but could also unduly complicate transactions.
The HREC term is a potentially valuable tool, especially in this era of risk-based cleanups where engineering/institutional controls are being used in a majority of remedies and need to be maintained to ensure that a cleanup remains protective of human health. Despite the importance and value of this tool, the EP community has used a variety of approaches when dealing with remediated releases. Some have identified the former release as an HREC, some continue to identify it has a REC with an explanation why it does not pose a risk to the site (sort of like pleading guilty with an explanation) and others do not identify the former releases as a REC and explain in the findings section why the former release is not a REC.
This disparate approach is partially due to the fact there is a lot of confusion with the EP community precise circumstances of when a former release can be an HREC. As a result, the ASTM E50 committee has appointed a task group to look at this issue as part of the five year review of ASTM E1527.
There was considerable discussion and heavy email traffic on the HREC issue on exactly what was an HREC and how much work an EP should do to be able to conclude that a former release was an HREC. It also appears that there has been considerable variation in the level of review or effort performed by consultants in determining if a previously remediated release should be an HREC. Some suggested that this was a difficult task to price and preferred that the HREC term be either deleted from E1527 or made a follow-up issue. Others suggested that an HREC was not really part of AAI since it was more about exercising the post-acquisition “continuing obligations/appropriate care” responsibilities that are necessary for maintaining CERCLA liability defenses. There has also been uncertainty about how to deal with “self-directed cleanups” or those done by landowners without any oversight by regulatory agencies.
Regarding the role of HRECs and AAI, I have pointed out that courts have overwhelmingly held that parties that do not identify releases during their due diligence have not performed an “appropriate inquiry” that satisfies the CERCLA landowner protections. Certainly, a landowner who thought a release was remediated only to discover after closing that more work needs to be done would be in the same shoe.
Moreover, EPA referenced historical cleanups in its preambles to the AAI regulation. In the preamble to the final rule, EPA said that the PRIMARY objectives of AAI included " current and past corrective actions and response actions undertaken to address past and ongoing releases of hazardous substances". In the preamble to the proposed rule, EPA said the scope of the inquiries was to "identify releases and threatened releases of hazardous substances which cause or threaten to cause the incurrance of response costs"
The task force has seemed to coalesce on a revised definition of an HREC that will identify minimum steps that an EP must follow to identify a remediated release as an HREC. The level of effort will depend on whether the cleanup was done under regulatory oversight or if the cleanup was self-directed.
For cleanups that resulted in formal closure/NFA letter from a regulatory agency, the EP would need to verify that the property remains in compliance with any engineering or institutional controls (AULs in ASTM terminology). If the EP is aware that the user intends to use the property for a different purpose (e.g., a brownfields redevelopment project where a former industrial site is being redeveloped into mixed use or residential), and where there is likely to be the need to conduct additional investigation or remediation, that HREC now becomes a REC.
For self-directed cleanups, the EP would have review the date/information to verify that the concentrations in the soil and groundwater that were used to establish that the self-directed cleanup was consistent with the applicable standards were in fact correct (e.g., if the maximum allowable concentration for the contaminant of concern in gw was 5 ppb, then the EP would verify that the reported concentrations were in fact below that maximum allowable concentration). Many self-directed cleanups are nothing more than removing visibly contaminated soils and then paving the site to build a big box. If the EP is not provided with sufficient data to verify that the work was done in accordance with applicable requirements, then the prior work would not qualify as an HREC.
Under AAI, the EP has to identify AULs in effect for the property. For a cleanup with AULs to be considered an HREC, it would seem that the EP would need to confirm that any institutional control required by the NFA determination to be recorded was in fact filed (e.g., property only to be used for commercial purposes or no use of gw). If an engineered cap was required to be maintained, then the EP would verify that the cap was in fact being maintained. If an active venting system was supposed to have been installed, the EP would verify that it was in fact installed and operating.
As many EPs no doubt suspect, most users/clients only look at the executive summary or conclusions of the phase 1 report mainly because they do not understand environmental issues. The HREC term can actually help protect EPs by drawing attention to the former release. Without that term, the EP would have to identify a remediate release as a REC thereby creating potential stigma to the property and unnecessarily upsetting a client. If the EP decided not to identify the REC because it was remediated and it turns out that there is a reopener triggered, then the EP could find itself subject to malpractice or breach of contract claim for failing to flag the condition. The HREC is helpful for both the user and the EP.
Finally, the HREC designation helps a client support the liability defenses under CERCLA since the user can now know how to use due care to be able to maintain a third party defense or appropriate care to maintain of the other landowner liability protections. The HREC term enables skilled EPs to provide value to their client. By requiring EPs to seek this specific information as part of the HREC determination, this will help those EPs who are being thorough and thereby perhaps have to charge more to do a diligent job. The extra work associated with this task will also have the benefit of weeding out the rogue elements in this industry who want to charge $700 for phase 1 reports and not have to exercise any professional judgment.
What do you think?
" 3.2.39 historical recognized environmental condition— an environmental condition which in the past would have been considered a recognized environmental condition, but which may or may not be considered a recognized environmental condition currently. The final decision rests with the environmental professional and will be influenced by the current impact of the historical recognized environmental condition on the property. If a past release of any hazardous substances or petroleum products has occurred in connection with the property and has been remediated, with such remediation accepted by the responsible regulatory agency (for example, as evidenced by the issuance of a no further action letter or equivalent), this condition shall be considered an historical recognized environmental condition and included in the findings section of the Phase I Environmental Site Assessment report. The environmental professional shall provide an opinion of the current impact on the property of this historical recognized environmental condition in the opinion section of the report. If this historical recognized environmental condition is determined to be a recognized environmental condition at the time the Phase I Environmental Site Assessment is conducted, the condition shall be identified as such and listed in the conclusions section of the report."
This term was meant to apply to releases that had been remediated in the past so that no further work had to be done. The thinking that identifying this prior release as a REC would not only correctly reflect the current conditions of the property but could also unduly complicate transactions.
The HREC term is a potentially valuable tool, especially in this era of risk-based cleanups where engineering/institutional controls are being used in a majority of remedies and need to be maintained to ensure that a cleanup remains protective of human health. Despite the importance and value of this tool, the EP community has used a variety of approaches when dealing with remediated releases. Some have identified the former release as an HREC, some continue to identify it has a REC with an explanation why it does not pose a risk to the site (sort of like pleading guilty with an explanation) and others do not identify the former releases as a REC and explain in the findings section why the former release is not a REC.
This disparate approach is partially due to the fact there is a lot of confusion with the EP community precise circumstances of when a former release can be an HREC. As a result, the ASTM E50 committee has appointed a task group to look at this issue as part of the five year review of ASTM E1527.
There was considerable discussion and heavy email traffic on the HREC issue on exactly what was an HREC and how much work an EP should do to be able to conclude that a former release was an HREC. It also appears that there has been considerable variation in the level of review or effort performed by consultants in determining if a previously remediated release should be an HREC. Some suggested that this was a difficult task to price and preferred that the HREC term be either deleted from E1527 or made a follow-up issue. Others suggested that an HREC was not really part of AAI since it was more about exercising the post-acquisition “continuing obligations/appropriate care” responsibilities that are necessary for maintaining CERCLA liability defenses. There has also been uncertainty about how to deal with “self-directed cleanups” or those done by landowners without any oversight by regulatory agencies.
Regarding the role of HRECs and AAI, I have pointed out that courts have overwhelmingly held that parties that do not identify releases during their due diligence have not performed an “appropriate inquiry” that satisfies the CERCLA landowner protections. Certainly, a landowner who thought a release was remediated only to discover after closing that more work needs to be done would be in the same shoe.
Moreover, EPA referenced historical cleanups in its preambles to the AAI regulation. In the preamble to the final rule, EPA said that the PRIMARY objectives of AAI included " current and past corrective actions and response actions undertaken to address past and ongoing releases of hazardous substances". In the preamble to the proposed rule, EPA said the scope of the inquiries was to "identify releases and threatened releases of hazardous substances which cause or threaten to cause the incurrance of response costs"
The task force has seemed to coalesce on a revised definition of an HREC that will identify minimum steps that an EP must follow to identify a remediated release as an HREC. The level of effort will depend on whether the cleanup was done under regulatory oversight or if the cleanup was self-directed.
For cleanups that resulted in formal closure/NFA letter from a regulatory agency, the EP would need to verify that the property remains in compliance with any engineering or institutional controls (AULs in ASTM terminology). If the EP is aware that the user intends to use the property for a different purpose (e.g., a brownfields redevelopment project where a former industrial site is being redeveloped into mixed use or residential), and where there is likely to be the need to conduct additional investigation or remediation, that HREC now becomes a REC.
For self-directed cleanups, the EP would have review the date/information to verify that the concentrations in the soil and groundwater that were used to establish that the self-directed cleanup was consistent with the applicable standards were in fact correct (e.g., if the maximum allowable concentration for the contaminant of concern in gw was 5 ppb, then the EP would verify that the reported concentrations were in fact below that maximum allowable concentration). Many self-directed cleanups are nothing more than removing visibly contaminated soils and then paving the site to build a big box. If the EP is not provided with sufficient data to verify that the work was done in accordance with applicable requirements, then the prior work would not qualify as an HREC.
Under AAI, the EP has to identify AULs in effect for the property. For a cleanup with AULs to be considered an HREC, it would seem that the EP would need to confirm that any institutional control required by the NFA determination to be recorded was in fact filed (e.g., property only to be used for commercial purposes or no use of gw). If an engineered cap was required to be maintained, then the EP would verify that the cap was in fact being maintained. If an active venting system was supposed to have been installed, the EP would verify that it was in fact installed and operating.
As many EPs no doubt suspect, most users/clients only look at the executive summary or conclusions of the phase 1 report mainly because they do not understand environmental issues. The HREC term can actually help protect EPs by drawing attention to the former release. Without that term, the EP would have to identify a remediate release as a REC thereby creating potential stigma to the property and unnecessarily upsetting a client. If the EP decided not to identify the REC because it was remediated and it turns out that there is a reopener triggered, then the EP could find itself subject to malpractice or breach of contract claim for failing to flag the condition. The HREC is helpful for both the user and the EP.
Finally, the HREC designation helps a client support the liability defenses under CERCLA since the user can now know how to use due care to be able to maintain a third party defense or appropriate care to maintain of the other landowner liability protections. The HREC term enables skilled EPs to provide value to their client. By requiring EPs to seek this specific information as part of the HREC determination, this will help those EPs who are being thorough and thereby perhaps have to charge more to do a diligent job. The extra work associated with this task will also have the benefit of weeding out the rogue elements in this industry who want to charge $700 for phase 1 reports and not have to exercise any professional judgment.
What do you think?
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