FHA Loan Originator Is Not liable for Failing to Test for Arsenic in Water Well

There are a line of cases where plaintiffs have tried to hold banks liable for not disclosing environmental issues known to the lender but not disclosed to the owner . Most of these cases involve foreclosure sales. However, a few involve borrowers who obtain loans to purchase property.

In Voelker v Home Office Realty,  home owners in Michigan claimed that banks involved in the FHA loan process failed to sample well water for arsenic despite knowledge that a local landfill might have impacted the drinking water supply. The plaintiffs noted that the FHA Mortgagee Letter 95-34 (July 27, 1995) requires Direct Endorsement Lenders to sample drinking water in accordance with local and state private well regulations as well as for contaminants of local concern.

The loan originator authorized retained a contractor to test the well for the usual potable water parameters. Years after buying the house, two of the plaintiffs developed cancer that they alleged was a result of exposure to arsenic in the potable water.

The trial court dismissed the claims on the grounds that alleged lender was just a loan originator and that it had no obligation to test the well water. The appeals court affirmed.

Borrowers often confuse a lender concluding that a phase 1 was acceptable from a determination that a property is "clean". The phase may identify environmental conditions that fall within a lender's risk tolerance. Indeed, during the CMBS craze, many originating banks were not concerned about environmental issues since they knew they would be selling the loans to the CMBS collective and thus were not exposed to collateral or payback risk. 

In a separate string on radon, there has been an extended exchange on why banks are not requiring radon sampling for properties located in radon zones 2 and 3 since radon is a carcinogen. This case illustrates why banks are reluctant to go go beyobd minimum environmental requirements. In this case, the plaintiff argued that the loan originator had an obligation to interpret the FHA letter to determine if additional parameters had to be tested as part of the water quality sampling. Fortunately for the loan originator, the count found it was not a "lender" for purposes of the FHA loan process and therefore had no obligation to determine what sampling was appropriate. 

Presumably, even if the loan originator could have been deemed to be a lender, it could stil have avoided liability by arguing that it relied on the expertise of the well tester to determine what parameters had to be analyzed. Of course, the FHA letter seemed to go require more than what was required under state or local drinking water regulations if there were local conditions that warranted sampling additional chemicals of concern, and the well tester might not have known about this additional FHA requirement. By ruling that the loan originator was not an FHA "lender", the court did not have to address the merits of the claims.

Court Holds Grease Discharges to Sewer Not "Pollutants" Under Insurance Policy

Phase 1 reports of commercial properties with restaurants often explain that cooking grease may be discharged into sewer systems. Phase 1 reports usually do not recommend further investigation since local sewer authorities generally do not require permits for these discharges. However, these discharges can sometimes disrupt the function of sewer systems as the following little case illustrates.

In Roinestad v. Tim Kirkpatrick d/b/a Hog's Breath Saloon & Restaurant, 2010 Colo. App. LEXIS 1508 (Oct. 14, 2010), kitchen workers at the Hog's Breath routinely poured cooking oil and grease into the sewer drain outside the bar. Over time, the grease accumulated in the sewer.

As part of a citywide sewer rehabilitation in 2003, city workers were cleaning out the sewer line near Hog's Breath using a jet hose to clear a clog of grease. When the clog broke free, two employees were overcome by hydrogen sulfide gas. The city employees then sued the restaurant alleging negligence. The restaurant , in turn, sought a defense and indemnity from its insurer. The insurer filed a declaratory judgment action in federal district court, arguing that the kitchen grease was waste and therefore fell within the pollution exclusion. The federal district court agreed, holding that kitchen waste was a pollutant as defined in the policy.

The two city employees then won judgments of $2.1 and $1.7 million respectively against Hog’s Breath and sought to garnish the restaurant's insurance policy. The insurer argued that the pollution exclusion should apply for the reasons set forth in the federal district court decision. This time, a state trial court agreed and granting summary judgment to the insurer.

Despite having been thrown two curveballs by the judicial system, the city employees persisted and apparently proved to be good two-strike hitters as the Colorado appellate court reversed the trial court, ruling that cooking oil and grease did not fall within the general definition of a contaminant.

The policy contained a standard pollution exclusion and the court said that the insurer had failed to show that that the hydrogen sulfide was discharged from the Hog's Breath. Instead, the court found that the plaintiffs had demonstrated that the source of the hydrogen gas was biological activity associated with breakdown of organic matter under septic conditions. Since the plaintiffs had showed that hydrogen sulfide was commonly known and prevalent in domestic wastewater collection and treatment systems, the court ruled that the insurer has failed  to sustain its burden of demonstrating that the pollution exclusion applies due to the discharge of hydrogen sulfide gas.

The court also rejected the notion that the discharge of oil and grease to the sewer system was a discharge of a pollutant. The court acknowledged that the term “contamination” had been interpreted to include “the introduction of a foreign substance that injures the usefulness of the object”,  and that some courts have held that cooking oil and grease fell within the definition of "pollutants" because  it constitute "waste. However, the court found it equally reasonable to define "contaminant" to mean a substance that combines with another to create an impure mixture. Since the term was susceptible to several meanings, the court concluded the pollution exclusion did not clearly and specifically alert the insured that coverage would be excluded when damaged results from a sewer that is clogged by cooking oil and grease which is negligently dumped.

It should be noted that fats, oils and greases (FOGs) may be considered as “pollutants” under the Clean Water Act. There are two types of FOGs that commonly appear in wastewater systems:  Petroleum-based oil and grease, and animal and vegetable-based oil and grease. The latter is difficult to regulate due to the large number of restaurants and fast-food outlets in every community. FOG from food establishments typically falls into two categories: Yellow Grease from used cooking oil and waste grease which is collected at the point of use, and grease trap waste. EPA estimates that total volume of grease trap waste and uncollected grease that enters sewerage systems range from 800 to 17,000 pounds per year per restaurant.
EPA’s general pre-treatment regulations prohibit the discharges that will interfere with the treatment process. Grease is particularly problematic because of its poor solubility in water and its tendency to separate from the liquid solution as the water cools in the sewer system. As the fatty material congeals, it can form mats that reduce or obstruct flows, coat flow meters and probes, surface of settling tanks, digesters, and even the organisms that break down the sewerage. This can reduce treatment efficiency and increase O&M costs. Because of the obstructions, FOGs can also lead to increased frequency of Combined Sewer Overflows (CSOs) and Sanitary Sewer Overflows (SSOs).  

Under EPA’s general pretreatment standards at Part 403, a sewer authority is required to adopt local limits to prevent industrial discharges that interference with the treatment process. A growing number of sewer authorities are using their authority under Part 403 or local authority to establish FOG regulatory controls. These range from implementation of best management practices known as Capacity, Management, Operations and Maintenance (CMOM) programs to numeric limits. For example, many local sewer authorities require establishments that discharge large quantities of FOGs to install a grease trap or interceptor. Interceptors are usually required for high volume restaurants (establishments operating 16 hrs/day and/or serving 500+ meals per day) and large commercial establishments such as hotels, hospitals, factories, or school kitchens. Grease traps are required for small volume (fast food or take-out restaurants with minimum dishwashing, and/or minimal seating capacity) and medium volume (establishments operating 8-16 hrs/day and/or serving 100-400 meals/day) establishments. Medium volume establishments may be required to install an interceptor depending upon the size of the establishment.

The numeric limits created by sewer authorities range from 50 mg/l to 450 mg/l with most seeming to cluster around 100 mg/l. These local FOG controls may also include periodic inspections and cleanouts. Violations may range from civil penalties, sewer surcharges and even criminal citations in some instances. For example, after New York City identified 73%  non-compliance with its grease trap ordinance for restaurants, it instituted a $1,000 per day penalty for FOG violations.

Home Builder Seeks Cost Recovery Despite No Pre-Acquisition Diligence

We all know that lender due diligence and underwriting standards were "lax" during the great real estate bubble of the past decade. However, I continue to be astounded by the indifference that developers exhibited to environmental issues since after all they were taking title to potentially contaminated land. Now that the developers have been stuck with cleanups and are unable to sell the homes, they are trying to use lawsuits to compensate for their lack of diligence.  Following is a recent example of such a case. I will discuss another interesting case in a separate post.

In KB Homes v Rockville TBD Corp. George and Patricia Kopetsky (Kopetsky) purchased some unimproved farmland in 1989 that was adjacent to the defendant Rockville plant that manufactured airplane components. Kopetsky did not perform any environmental due diligence prior to acquiring the farm land.
As part of a 1993 asset sale, an environmental investigation determined that TCE had been discharged into the facility’s septic system located on the eastern portion of the property. In 1995, the defendant entered into the Indiana Voluntary Remediation Program of the facility and subsequently determined but the levels were below the cleanup standards. The septic system was decommissioned and the Indiana Department of Environmental Management (IDEM) issued a Certificate of Completion in 1996.  A subsequent investigation performed on the western portion of the property in 1997 and 1998 revealed a plume of TCE-contaminated groundwater that had migrated from the facility and beneath a portion of the Koetsky’s farmland.
In the meantime, the Kopetsky submitted a plat plan for a subdivision known as Cedar Park in 1998. After they received plat approval, Kopetsky entered into a lot purchase and option agreement with Dura Builders.

In the agreement, Kopetsky represented that the Cedar Park land was free of any hazardous materials and promised that he would, at each closing, execute a vendor's affidavit certifying the environmental condition of the lot The affidavits stated, in part, that the land did not contain any hazardous waste or materials, and that no disclosure statement was required to be filed pursuant to the Indiana Responsible Property Transfer Law. Kopetsky also represented to their lender that “after due investigation and inquiry, no contamination was present at the property.

In 1999, Dura Builders began purchasing lots from Kopetsky but did not perform any environmental due diligence either before executing the lot purchase agreement or actually purchasing the individual lots.  In 2002, a consultant retained by Cedar Park provided Kopetsky with groundwater monitoring results showing that a portion of the Cedar Park property was impacted with TCE-contaminated groundwater. A cleanup to non-residential standard was proposed but Kopetsky objected because since this would prevent the sale of the land for residential development.  Kopetsky continued to sell lots to Dura Builders but did not notify Dura of the contamination.

In 2004, KB Homes acquired Dura Builders. KB did not conduct environmental due diligence prior to acquiring Dura Buildings. Indeed, KB did not learn of the contaminationuntil March 2005 when KB had performed its own sampling. KB was forced to halt construction as buyers were either unable to obtain financing or walked away from their contracts. In 2007, KB filed a complaint against Rockville, Kopetsky, and Patriot Engineering for negligence, trespass, nuisance, breach of contract and constructive fraud. KB requested damages for reduction in value of its property as a result of the TCE contamination; legal and consultant fees; fees paid to maintaining the lots and homes; and interest on the capital investment made unproductive by the contamination.

The trial court granted Rockville’s motion for summary judgment and KB appealed. The Indiana Court of Appeals agreed that the KB could not bring a trespass claim because it did not have possession of the land at the time that the activity that caused the contamination had occurred.

On the nuisance claim, the appeals court said the lower court erred when it found that Rockville could have not foreseen that a release of TCE could harm an adjoining property. However, the court went on that under Indiana law, the nuisance claims could not proceed because Rockville had sold the property in 1993 and the actions that caused the contamination had occurred prior to the time KB acquired the sale.

For the negligence claim, though, the appeals court said that the trial court had erred when it granted summary judgment. The trial court had that the damages that KB sought were economic in nature and therefore were not recoverable in a negligence action. Under the economic loss doctrine, parties may not use tort law to try to evade an allocation of risk that was negotiated in a contract. However, the appeals court said that KB did not have a contractual relationship with Rockville so its negligence claim was not an attempt to circumvent a contractual limitation. KB’s claims against Kopetsky and Patriot Engineering have yet to be resolved.

Brownfield Developer Relying on EPA Assessment Seeks Cost Recovery from PRP

In Shenandoah LLC v. Green Mountain Power, David Shlansky entered into a Purchase and Sale Agreement with Green Mountain Power Corp. (GMP) in June 2003 to acquire the Haviland Shade Roller Mill for $150K. GMP and its predecessors had owned the property since 1926 but had leased it to predecessors of Goodrich Corporation beginning in 1942 who manufactured airplane parts.
In the purchase agreement, GMP made a number of representations and warranties including that (1) it had not received any written notices of alleged violations of federal, state or local laws regarding the property, and (2) that to its actual knowledge “but without inspection”, there were no hazardous wastes or toxic materials located at the property whose generation, disposal or storage would have been regulated. The representations were to survive one year.

Shlansky was also given a 60 day inspection period to determine if the environmental conditions of the property were satisfactory including but not limited to hazardous materials in the buildings, groundwater and soils. If the inspection revealed conditions that were unsatisfactory to Shlansky, the agreement provided that Shlansky could terminate the agreement upon five days written notice. Shlansky reportedly asked the GMP facilities manager if GMP had performed any environmental assessments of the site. Allegedly, the facilities manager told Shlansky that an environmental assessment had been performed, that no contamination had been discovered other than some asbestos pipe wrap, that the report was prepared by a competent consultant but that it was the policy of GMP not to disclose such reports “to preserve the privilege of such reports”.  Shlansky subsequently entered into an addendum to the agreement where the parties acknowledged that all contingencies that would entitle the buyer to terminate the agreement had been waived or satisfied..

In July 2004, Shlansky entered into an assignment agreement with Shenandoah whereby the Shenandoah acquired Shlansky’s rights to acquire the site. After Shenandoah obtained the required local permits for the proposed redevelopment project, it contacted the Addison County Regional Planning Commission who had obtained a grant from EPA to perform brownfield assessment grants. The Commission entered into an agreement with ATC to perform a phase 1 of the site. The phase 1 was completed in November 2007-three years after Shenandoah acquired title to the site. The phase 1 recommended additional investigation of staining on wooden flooring and other areas that could have been impacted from historical uses. The phase 2 which was also funded by the Commission and approved by EPA’s brownfield grant program was completed in September 2008. The phase 2 identified elevated levels of PCBs in the main building and an annex along with SVOCs, TCE in soil gas and diesel range organics in the soils. ATC recommended that the PCB-contaminated wood flooring be removed, a soil management plan be implemented during construction activities and that vapor mitigation system be installed along with a vapor barrier as engineered controls.
In an exchange of letters beginning in December 2008, Shenandoah LLC (Shenandoah) sent a letter to GMP requesting that GMP accept responsibility for the costs to remove all hazardous building materials from the property. The letter claimed that GMP was a responsible party under CERCLA and that Shenandoah was relieved from liability under the 2002 brownfield amendments to CERCLA. GMP responded that the presence of hazardous materials in building materials did not trigger CERCLA liability and that to the extent there was a release into the environment, Shenandoah was not relieved of liability because it had not performed an appropriate inquiry prior to acquisition. Moreover, as assignee of Shlansky, GMP said that Shenandoah had waived its inspection rights under the agreement and therefore GMP had no obligation under the agreement to remedy the environmental conditions at the site. Shenandoah then filed a seven-count complaint seeking, among other things, a declaratory judgment that GMP is liable under CERCLA along with breach of contract, negligent misrepresentation and fraud counts.

This case has lots of yummy kernels. The copy of the agreement that was attached to complaint has handwritten notes in the margins of the inspection paragraph indicating that “we did rely, we relied on their reps”. If true, this was a classic blunder by the purchaser. Environmental representations and warranties should never be used in lieu of environmental due diligence. The proper role of representations and warranties is to help the purchaser narrow the issues that need to be investigated. Here, with a facility that had been used since 1926 for a variety of industrial purposes, reliance on written representations and any alleged oral representations of the facility manager was just plain foolish. This is just another example of a purchaser being penny wise and pound foolish by trying to avoid the rather minimal costs of a phase 1 and phase 2.

Likewise, the plaintiff obviously did not understand the requirements of the CERCLA bona fide purchaser and innocent landowner defenses when it neglected to perform a phase 1 prior to taking title to the property. And even when it proceeded to have a phase 1 performed three years later, it had the work done by a consultant retained and paid for by the regional commission. While the preamble to the AAI rule indicated that local governments could conduct all appropriate inquiries for a third party, all aspects of the AAI rule must be satisfied. Without the benefit of a pre-acquisition phase 1, Shenandoah could not satisfy a number of AAI requirements including the relationship of the purchase price to the fair market value, any specialized knowledge of the purchaser at the time of purchase, the presence of environmental liens as well as commonly known and reasonably ascertainable information .

Despite the language in the three paragraphs in the preamble to the final AAI rule allowing all appropriate inquiries to be done by one party and transferred to another, it remains good practice for persons seeking to assert one of the CERCLA landowner liability protections to conduct their own AAI investigation, especially where the transferee is going to redevelop the property. Environmental due diligence involves a series of complicated tradeoffs and a person who does not intend to be the ultimate developer of a site may have very different risk tolerances than the person who is going to be moving dirt, incur remedial risk and long-term obligations associated with the property.

Information gathered by local governments as part of brownfield assessment grants can certainly be used in subsequent phase 1 reports and can be helpful in refining the issues associated with a particular site. However, the person who seeks to claim the liability protection should perform its own AAI-compliant report.

Based on the reps and warranties in the contract as well as the narrative in the complaint, it appears that Shenandoah may have anticipated that the only environmental risks at the property would be lead-based paint and asbestos. Perhaps Shenandoah was only focused on these building interior issues. In any event, the agreement contained what is known as a “big boy” clause which states that there were no other covenants, promises, agreements, conditions or understandings, oral or written, except as herein set forth.” In the absence of fraud, courts tend to uphold “big boy” clauses especially when coupled with a statement that the agreement embodies the entire agreement and understandings between the parties. It is very difficult to prove a fraud case. As pled, the facts in this case do not paint the kind of sympathetic picture that might lead a court to conclude that the plaintiff was victimized by the seller. It will be interesting how the court handles this case. In the meantime, the best option for the plaintiff might be to go back to the brownfield grantee and try to apply for a brownfield cleanup loan.

Denver Brownfield Project Falls Victim to Great Recession

One of the nation’s more prominent brownfield redevelopment projects has fallen victim to the Great Recession. The 50-acre Gates Rubber Factory site in downtown Denver was going to be redeveloped into a $1 billion mixed-use and transit-oriented complex that would have been the city’s largest project since the redevelopment of the old Stapleton airport. Now, the lender holding the defaulted mortgage on the site is willing to sell it for 1/3 of its original amount.

The property was part of a 50-acre site that was occupied by Gates Rubber from 1911 to 1996 when the company was sold to Tomkins PLC for about $1.1 billion. In 2001, Cherokee purchased the site for $26 mil­lion with the hope of remediating the site and then flipping it to a developer.  In 2006, Cherokee entered into a partnership with Chicago-based Joseph Freed and Associates, who agreed to buy 24 acres of the site for approximately $45 million. Freed planned to construct 1,500 residential units, 565,000 square feet of retail space and 200,000 square feet of office space. However, the deal fell through after the real estate market collapsed. In 2007, Cherokee was able to sell a small portion of the site to Trammell Crow who constructed a 475- unit apart­ment building.

After Cherokee was unable to obtain financing to continue the remediation of the 24-acre parcel, it defaulted on its $28 million loan. Wells Fargo is now looking to sell the loan to a “loan-to-own” buyer who might be able to finance a more modest project such as a big box retail or 600-unit multi-family project. The loan is expected to fetch as little as $ 8 million. In the meantime, Gates has taken back title to a 16-acre parcel that is likely significantly contaminated.  

The original project have been approved for $126 million in public financing for infrastructure improvements and demolition, including  $85 million in tax-increment financing (TIF) arranged through the Denver Urban Renewal Authority. However, the public financing was contingent on the two properties being developed together. A buyer seeking to develop only the 24-acre site may need to re-apply for the tax credits.

Federal District Court Grants Summary Judgment to Consultant in Malpractice Action

Earlier this year, a federal district court denied a motion to dismiss filed by a consultant in Hawaii Motorsports Investments v Clayton Group Services. Because the decision involved a motion to dismiss, the court was not ruling on the merits of the case but simply if the plaintiff had alleged sufficient facts to proceed with the case.

Recently, the defendant filed a motion for summary judgment and this time, the court ruled in favor of the defendant, holding that the consultant was not liable to the purchaser of the property.  Since this parties had the opportunity to conduct discovery since the motion to dismiss, the recent opinion also contains some additional interesting facts that not only shed light on this case but provide some helpful lessons.

In this case, Hawaii Motorsports Center Limited Partners ("HMC") had leased the Hawaii Raceway Park from the Campbell Estate since 1988. HMC decided to purchase the site in 2005 for $13MM and then flip the property by way of an assignment of rights to Irongate Wilshire, LLC ("Irongate") for approximately $20 million. Irongate then retained the defendant to perform a phase 1 which identified several environmental conditions. The consultant orally advised Irongate that the remediation costs could range from $200,000 to $4 million. Irongate was concerned that the contamination could impact its ability to develop the site into individual lots. On October 25, 2005, Irongate disclosed the results of the phase 1 and the remediation estimate to one of the principals of HMC

Around the same time, Campbell advised HMC that for tax reasons, HMC could not simply assign the property but had to have an ownership interest. As a result, on October 26th, HMC and Irongate signed a letter of intent to form a joint venture to purchase the property whereby an Irongate special purpose entity would contribute $13,200,000 in the form of a letter of credit in favor of Campbell. In return for Irongate's payments, HMC would assign its interest in the property to the joint venture. Instead of receiving $7 million, HMC would receive four payments of $250K.

On October 31st, the defendant sent an email to Irongate providing its cost estimate. The defendant indicated that the $200K remediation cost was the “Likely Scenario” with  $1 to 2 Million as the “Bad Case” and $4 Million as the “Extreme Worst Case” scenario.

The joint venture arrangement was finalized on November 1st whereby Hawaii Raceway Investors, LLC  The defendant emailed a copy of its phase 1 to Irongate on November 4th and a proposal for a Phase II on November 16th. The phase 2 proposal indicated that the defendant would "perform this project under previously negotiated terms and condition by and between [BV] and HMC Irongate Hawaii Raceway Investors LLC. The reference to JV entity was in error since the previously negotiated terms and conditions had been agreed in September 2005, before the joint venture was formed.  

Irongate forwarded the phase 2 proposal to HMC on November 22nd who retained its own consultant to evaluate the proposal. HMC’s consultant concluded that the majority of recommendations were inaccurate, stating, "Having failed to complete the minimum level of research required during Phase 1, [the defendant] should have recommended further record reviews and interviews  [instead of recommending] a Phase II ESA." He said that remediation cost estimate of $200,000 to $4 million was "entirely lacking in credibility or reliability and should be considered a guess.

HMC filed a lawsuit against the consultant, claiming the firm was professional negligence,  negligent misrepresentations, tortious interference with HMC's prospective business advantage as well as slander of title. Although the consultant was retained by Irongate and the report was addressed to the buyer, the plaintiff asserted that the consultant knew the parties would use its report to negotiate the terms of their agreement. In its ruling on the motion to dismiss, the court found that the plaintiff/seller had alleged sufficient facts indicating it was an intended beneficiary of the report and that it was foreseeable that it would be damaged if the report was inaccurate. The court also found that although the report expressly provided that only Irongate could rely on the report, said it was unclear from the record created at that time if the plaintiff knew of the limitation or had reason to know if could not rely on the report.

The defendant sought summary judgment on all counts. On the professional negligence claim, HMC argued that the defendant owed a duty arising from the "special relationship" between an environmental consultant and a party that may have seen the environmental report prepared by the environmental consultant. The court said the factors in had to consider in determining if a duty included if there was a special relationship existed between the parties, if the harm was foreseeable, the degree of certainty that the injured party suffered injury, the closeness of the connection between the defendants' conduct and the injury suffered, the moral blame attached to the defendants, the policy of preventing harm, the extent of the burden to the defendants and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved.

The court found that HMC had not established any facts to support a special relationship between it and the defendant. The court said there had not been any no contract between HMC and the defendant, that HMC was not an intended third-party beneficiary of the contract between the defendant and Irongate, and that there was simply no evidence that the defendant intended the report, information in it, or its estimates as to remediation to be given to HMC.

Likewise, the court found that HMC had not established any facts showing the harm foreseeable. The court noted that after HMC obtained the right to buy the Campbell Estate's property, HMC had many months to find financing and hire a consultant to prepare an environmental assessment. Moreover, since HMC was the lessee on the property for nearly 20 years, the court said HMC had ample opportunity to discover the condition of the property. Under those circumstances, the court held that HMC had no reason to be affected by inaccurate information about environmental conditions on the property, and that the defendant could not have foreseen any such impact on HMC.

As to the degree of certainty that HMC suffered harm and the closeness of the conduct and the injury suffered, the court concluded that it was, at best, unclear whether HMC suffered any injury because of the defendant’s allegedly faulty information. While HMC claimed it was injured because Irongate reduced the price it was willing to pay for the property, the court noted that Irongate initially offered to pay HMC $7 million for the property under the express condition that Irongate could withdraw from that offer at any time. Additionally, the court said, change in price flowed from the change in the structure of the deal to a as a joint venture.

Regarding the moral blame and policy factors, the court said there was no evidence that the defendant’s actions were immoral or blameworthy, or that imposing a duty would prevent any harm. In contrast, the court said that HMC could have easily countered any adverse report by hiring its own environmental consultant. Indeed, the court suggested that if HMC lacked independent knowledge of the status of the property it had occupied for so long, it would have prudent to commission its own report.

Finally, with respect to the consequences to the community of imposing a duty to exercise care and any resulting liability for the risk involved, this court concluded that imposing such a duty would create additional burdens for the community. The court said that if a consultant could he held liable to a third party that the consultant never intended to benefit, then  that consultant will surely increase the cost of any assessment to cover the risk and the likely cost of greater insurance

On the claim for negligent misrepresentation, the court began its analysis by noting that Hawaii courts have  limited the scope of liability for negligent misrepresentation to person that a defendant intended to benefit or knew the recipient intended to transmitted the information to another person. On the first factor, the court said there was simply no evidence that the defendant intended to benefit HMC. The court said there was  no evidence that the defendant ever intended to transmit its report directly to HMC since the defendant gave its report to Irongate only after Irongate and HMC had decided to form a joint venture and had agreed on the reduced price. There is also no evidence that HMC saw BV's draft summary of the report, dated November 3, 2005, before the formation of the joint venture or that HMC ever saw the report prior to the formation of the JV.

Turning to whether the defendant could be liable to HMC based on any knowledge that Irongate intended to supply the results of the phase 1 and the cost estimates to HMC, the court noted that during the time Irongate was negotiating with HMC and finalizing the acquisition, the defendant did contact HMC to conduct a site inspection of the property and likely anticipated that its conclusions would be transmitted to HMC. However, the court found there was no evidence that the defendant knew or had reason to expect that Irongate or anyone else intended to benefit HMC by sharing the report or the cost estimates with HMC.  

Even if there were evidence creating a factual question if the defendant knew that Irongate would transmit information to HMC for HMC's benefit, the court said HMC could not prevail on its negligent misrepresentation because there is no evidence that HMC reasonably relied on any such information since HMC’s own testimony was that its officials thought all along that the conclusions were false or inaccurate. To the extent HMC asserted that it relied on defendant’s, the court went on, such reliance was unreasonable. Moreover, the court said, HMC knew about   the environmental condition of the property or could have hired its own consultant. Finally, the court found there was no evidence that HMC relied on BV's environmental findings and estimates before agreeing to form a joint venture with Irongate. Instead, HMC agreed to the joint venture because it could potentially profit from the deal, and because it had to finalize its deal to preserve the option of buying the property from Campbell Estate.