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.
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