$35M Brownfield Project Derailed by Methane Gas

Earlier this year, I discussed the BNY Mellon v Morgan Stanley Mortgage Corp where  the defendant/mortgage originator has been sued by the CMBS trust for a $80MM shopping center loan where methane gas issues led to a default. See detailed post at: http://lschnapf.blogspot.com/2011/07/cmbs-lender-kept-in-case-over-questions.html

Now we have another case involving a $35MM development loan where a bank is a plaintiff and is seeking damages from several environmental consultants for failing to anticipate methane gas problems at the development site. In this case, the development site contained two former landfills that had been closed before the current closure requirements went into effect. The defendants filed motions to dismiss the complaint and while the court agreed to dismiss some of the claims, it allowed the negligence and CERCLA claim to proceed to discovery.

In Bancorpsouth Bank v. Environmental Operations, Inc., 2011 U.S. Dist. LEXIS 117010 (E.D. Mo. 10/11/11), the City of Hazelwood (City) requested proposals to redevelop an approximate 150-acre  blighted area known as the Robertson Development Project (Site). This area formerly contained two landfills, several auto body/salvage yards, demolished residences, a gas station, petroleum bulk storage facility and some small manufacturing concerns. The City wanted to construct a warehouse and light industrial complex.

After several years, the city received an acceptable development proposal and adopted an ordinance selecting McEagle Development LC as the developer of the Property. In November 001, Geotechnology, Inc. (Geotech) prepared a phase 1 environmental site assessment (ESA) to the County of St. Louis. Interestingly, despite the fact that a large portion of the Site consisted of what was called the Edwards Landfill (Landfill), the ESA expressly provided that an evaluation of methane gas was not included within the scope of services. The ESA identified the aforementioned former uses as RECs. However, in discussing the former landfill, the report simply stated that “The vertical and horizontal extent [of the landfill] is unknown as well as the composition of on-site materials. Deleterious materials anticipated in this area (sp) and should be a consideration to both the geotechnical design of the development as well as to the environmental cleanup. The fill may facilitate (sp) utilizing a method other than probing/boring to sample both bearing capacity and contaminants. Therefore it is recommended that after a site plan has been developed, the environmental sampling and geotechnical investigation be coordinated to take place concurrently.” Unlike the phase 1 in the Morgan Stanley case, this phase 1 did not mention the potential for methane gas or flag it as an item of concern,

In October 2002, the City and Hazelwood Commerce Redevelopment Corporation (“HCRC”) entered into a Development Agreement whereby the granted HCRC the right to acquire the Site including the parcels containing the Edwards Landfill. HCRC then assigned its acquisition rights back to the City so that it could begin the process of assembling the various parcels by way of eminent domain.

Between 2003 and 2005, HCRC retained Geotech to prepare a number of sampling reports. These reports identified nine areas of concern related to the former uses. Again, the reports did not study or evaluate the potential presence of methane.

In July 2004, the Industrial Development Authority of the City of Hazelwood submitted a brownfield application to the Missouri Department of Economic Development (“MDED”). This application was approved and the project became eligible for over $6.9MM in Brownfield Tax Credits. The tax credits were later sold to a tax credit purchaser.

In April 2005, Environmental Operations Inc (EOI) and Geotech prepared a Remedial Action Plan (RAP) where Geotech would act as the oversight consultant and EOI would perform the environmental remediation activities. Pursuant to the RAP, salvaged automobiles and larger waste would be removed and disposed of off site. Building debris from former site structures would be removed and existing site structures would be surveyed for asbestos. In addition, approximately 400,000 cubic yards of landfill material would be excavated and screened. Items between six and 12 inches were to be transported to an onsite engineered cell that was to be designed with 24- inch thick clay liner and capped by 60- inch clay cap. The fine material (less than six inches) was to be used as deep fill elsewhere at the Site. The material excavated for the engineered cap was to be used for grading elsewhere at the Project. A stormwater retention basis was to be constructed on top of the engineered cell. Upon completion of all remediation activities, a final report would be prepared and submitted to the MDNR for issuance of a no further action letter. Interestingly, the RAP did refer to the presence of volatile and semi-volatile organic compounds at the Property but did not address the potential for methane gas. The RAP was amended in February 2006 to provide for pumping and discharging trapped water from within the engineered cell area. No provision was made for the accumulation of methane gas within the cell

Meanwhile Hazelwood Commerce Center LLC (“HCC LLC”) and The Signature Bank entered into a one year $11.5MM Land Acquisition Loan Agreement in October 2005. The proceeds from this loan were to be used solely to complete the assemblage of the parcels for the Project and related expenses. HCC LLC made representations that the Site was in compliance with environmental laws and that there were no Hazardous Materials (the definition included reference to flammable substances) except as disclosed in the environmental reports and the RAP.    

In June 2006, HCC LLC and EOI entered into an Environmental Services Agreement to implement the RAP. This agreement required EOI to achieve substantial completion of the landfill remediation work, other than capping the engineered cell, within seven months, and to achieve substantial completion of the cap within twelve (12) months. All other remediation work was to be completed within fourteen (14) months which would be memorialized by a No Further Action Letter from the MDNR. The agreement also provided that EOI would obtain a Premises Pollution Liability Insurance Policy (“PPL Policy”) and a Remediation Cost Contamination Insurance Policy (“RCC Policy”) with collective coverage of up to $5MM.

In June 2006, the City and HCC LLC entered into a Remediation and Development Agreement (the “Remediation and Development Agreement”) where the City agreed to enter into a Purchase and Sale Agreement (PSA) to sell the landfill site to HCC LLC. The City was to deposit the proceeds from the sale as an initial contribution to the Remediation and Development Project Trust Indenture (the “Project Trust Indenture”). The PSA was executed the same day along with Collateral Assignment of Environmental Services Agreement and Consent of Contractor that granted Signature Bank an assignment and security interest in the Remediation and Development Agreement as well as the related agreements

With the execution of the foregoing documents, Signature Bank then entered into a $35MM Development Loan Agreement in August 2006. The purpose of the loan was to pay off the pre-existing Acquisition Agreement and to fund the activities required for the Project. However, the Development Loan proceeds were not to be used to fund the remediation which was to be financed from the sale of the tax credits and the other public financing.

In April, 2008, bubbling gas was observed rising through the detention basin constructed atop the engineered cell. EOI collected measurements for methane by placing a stainless mixing bowl directly over the bubbling area for approximately five minutes and then inserting a testing device under the mixing bowl to read the content of the “trapped” air. EOI found no methane and forwarded the test results to MDNR. EOI requested that MDNR consider the potential for methane gas generation or contamination a closed issue. However, MDNR directed EOI to install gas monitoring wells which revealed the presence of explosive levels of methane not only within proximity of the engineered cell but throughout the Site.  

The borrower eventually defaulted on its loan and the successor to Signature Bank filed its complaint. The bank alleged that because of inadequate investigation and design, dangerous levels of methane gas affect large portions of the Property, further construction and sale of lots at the Project cannot proceed pending further remediation of the methane conditions. The bank estimates the additional work to address the methane gas will exceed $10 MM

I cannot imagine how three environmental firms failed to raise methane gas as a potential issue for a project involving the redevelopment of and disturbance of an old landfill. This would have been the first issue that I would have thought they would have raised.

Class Action Lawsuit for Radon Mitigation Systems Against Developer and Engineering Firm

A New Jersey court affirmed certification of a class action involving residents of a condominium complex who alleged that radon mitigation systems were improperly installed. The defendants are the developer, the engineering firm who installed the radon systems, and the condo association that was responsible for maintaining the radon mitigation systems at the villa residences.

The development known as Overlook at Lopatcong consists of 384 residential units comprised of 142 villas, 132 garden houses and 110 townhouses. The development is located in an area in New Jersey known as Tier 1 Area. New residential structures constructed in Tier 1 Areas must be equipped with fully functional radon resistant construction pursuant to N.J.S.A. 5-23-10. The villas were constructed so that every two units shared a common basement and a radon mitigation system. The town homes and garden homes each had their own systems.

The plaintiffs filed an eight-count complaint alleging defendants improperly designed, installed, maintained and tested the radon mitigation systems. Plaintiffs pled theories of negligence, gross negligence, trespass, nuisance, fraud, consumer fraud, and assault and battery; and sought injunctive relief, which included medical monitoring and periodic testing of radon levels in the residences. Plaintiffs subsequently moved for class certification.

To support their motion, plaintiffs submitted the certification of a former employee of the engineering firm assigned to the development, and three reports from their expert. The former employee stated that when many of the units were tested for radon before a certificate of occupancy was issued, the units were tested with doors and windows open as directed by a supervisor. He also said that one radon pump was used for multiple dwellings to save money, and many units had cracks in basement slabs because Segal would not pay for expansion joints.

The plaintiff also introduced evidence of design and construction flaws. The plaintiffs’ expert said some of the systems were designed with a drainage pipe that was connected to a sump pit to transfer negative pressure to the neighboring unit, thereby reducing radon in both basements. However, the experts said that if the sub-surface system filled with water, this would interfere with the negative pressure system to the other unit, thereby allowing radon levels to rise in the basement.

The plaintiffs also provided evidence that many homes did not have sealed sumps covers and that the absence of the sealed covers  prevented radon from being eliminated from the basements. The plaintiffs also showed that other homes had exterior exhaust pipes that terminated before reaching the roof or were located too close to upper story windows, allowing for reentry of radon through an open window.  The plaintiffs’ experts also said that all of the outside mounted fans that were inspected had holes drilled into the pipe under the fan, which caused a loss of efficiency and premature fan failure. In all the homes with unfinished basements that were inspected, none of the floor to wall joints or cracks were sealed. In the opinion of the experts, these and other deficiencies were sufficient to require that all units have radon tests performed.

In October 2010, the trial court certified a class of all current owners of units for negligence, gross negligence, nuisance and assault and battery claims. The court also certified a sub-class against the Condo Association of all current owners of villas for nuisance and trespass claims. The court also denied plaintiffs' motion to certify a class for fraud, consumer fraud, and the remedy of medical monitoring. In May, the appeals court affirmed the class certification. Casale v Segal & Morel et al. 2011 N.J. Super. Unpub. LEXIS 1228 (App. Div. 5/12/11).

Since radon mitigation systems are frequently used for vapor intrusion, this case could provide support for future vapor intrusion litigation.

Brokers Coming Into Cross-Hairs Over Environmental Disclosure

With property values continuing to plummet in the wake of the Great Recession, it is probably not surprising that brokers are increasingly finding themselves embroiled in lawsuits over scope of environmental disclosure. The risk is particularly heightened in states with Property Conditions Disclosure laws. Common issues involve mold, lead-paint, asbestos, radon, poor drinking water quality and leaking home heating tanks.

In an post earlier this year, I discussed how parties in residential transactions in the State of Washington are frequently taking the Ostrich approach when it comes to USTs and ignoring the tank condition for fear of further impacts on property value. Further complicating the issue is that in some states, home inspectors have no obligation to assess condition of heating oil USTs.

Following are some examples of recent lawsuits involving brokers and residential transactions:

Amethyst v. Marcus & Millichap Real Estate , 2011 Cal. App. Unpub. LEXIS 3641 (2nd AppDiv May 16, 2011)(compel arbitration)

Melgardejo v Evans, (8th Jud. Cir. Alachua Cty, Fl)(Complaint)(proximity to superfund site)

Blackmore v Re/Max, 2010 Ida. LEXIS 124 (Id. 2010)

Hall v. Hall, 2010 Mont. LEXIS 401 (Mt. 2010)

Commercial brokers are not subject to the Property Disclosure laws and plaintiffs have to show some contractual or other duty to be able to prevail against a commercial broker. A recent case illustrating this trend is  Movassate v Dudley Ridge Properties, 2011 U.S.Dist. LEXIS 15808 (N.D.Cal. 2/16/11) where the buyer discovered groundwater contamination after taking title to the property.

In New York, many real estate lawyers advise clients selling homes located in downstate counties not to complete the property condition disclosure statement but instead pay the $500 statutory penalty for non-compliance. The lawyers feel it is better for their clients to give the buyer the statutory $500 credit for not preparing the statement rather than risk unlimited liability for common law misrepresentation.

In many states, residential purchasers frequently do not have to retain counsel and simply rely on their brokers. In those states, brokers need to be very careful when preparing the forms.  It would probably be a good idea for brokers to develop relationships with environmental consultants

State Appeals Court Allows Claim To Proceed for Failing To Comply With Property Condition Disclosure Law

Plaintiff entered into agreement o purchase home for $296,900. Seller provided Buyer with a Residential Property Condition Disclosure Statement (PCDS) Report prior to the closing. Buyer did not receive a home inspection report until after the closing though buyer personally inspected home for two hours prior to closing. 

After the closing, the plaintiff learned of a heating oil tank that had been hidden by grass, rotted wood that had been newly painted and discovered termite damage when it removed the pool house floor. Plaintiff spent approximately $38K on repairs and then sold house for $440K for profit of approximately $150K. The plaintiff then sought its out-of-pocket expenses from defendant, claiming defendant had violated the PCDS law and had committed fraud.

On motion for directed verdict, trial court found there was a genuine issue of fact if the seller had disclosed material information that it knew was false, incomplete or misleading.  In addition, the court found the plaintiff had failed to conduct a reasonable examination of the Property and that this failure to review the inspection report violated its duty to exercise reasonable diligence. The court also found the plaintiffs had failed to prove damages because plaintiff had made profit on the sale of home.

Plaintiffs then appealed the PCDS ruling. The appeals court ruled that there were material questions about the reasonableness of plaintiff's inspection and amount of damages that should have gone to the jury.  

Plaintiff made nearly $150K when it sold house 18 months after taking title.  This case seems to fall into the piggish category.  Coake v Burt, 2010 S.C. App. LEXIS 245 (Ct. App. 12/1/10)

Consultants Survive Lawsuit For Negligent Investigation and Remediation of Brownfield Site

Buyer agreed to purchase former oil field in 1996 to develop for residential complex.  Contract included 40 pages detailing  remedial obligations of parties. Buyer had five years to complete investigate of property and inform seller of contamination. If cleanup exceeded $30MM, seller could take over cleanup. Contract also provided that after completion of sellers' corrective action plan, seller will have been deemed to have assigned to buyer any rights seller may have against contractors.

In 1996, buyer retained consultant (consultant 1) to investigate site and Huntington Beach Fire Dept approved remedy to remove lead-contaminated soils. In 1997, Seller retained a second consultant  (consultant 2) for $15K to remove 10 cyds of lead-contaminated soil. Later that year, seller advised the buyer that its costs were approaching $30MM threshold and that seller intended to take over cleanup to better manage costs. During soil excavation performed by the second consultant, additional lead-contaminated soil was discovered approximately 15 feet from prior excavation area. The seller then retained consultant 2 to excavate and dispose oil-contaminated soil.

Buyer claimed it had suffered $3MM in costs and sued consultant 1 for breach of consultant and negligence. Using a six-part test employed by California courts for determining if a duty exists to third parties who are not in contractual relationship with the alleged wrongdoer, the court found consultant owed no duty to buyer. The court said the first consultant had been retained by the seller and that buyer did not have right to enforce the contract as a third party beneficiary because the contract did not disclose that the seller was not the property owner. Moreover, the court said the first consultant had excavated the specific contaminated area provided in the contract and had no obligation to investigate other areas of the site. The court also noted that the buyer had the opportunity to review the work being done by the consultants and it should not be rewarded for failing to audit this work. Finally, the court said that imposing a $3MM liability on the consultant for a $15K project would not be in the public interest since such disproportionate liability would discourage consultants from engaging in such work.

This case is particularly important to purchasers, developers or lender who are relying on another party to investigate and remediate a major development site. In such instances, it is important that the "passive" party retained its own expert to actively supervise the work.

Makallon Atlanta Huntington Beach LLC v Chevron Land and Development Company, 2011 Cal. App. Unpub. LEXIS 1911 (Ct. App. 3/14/11)

Beware Those Arbitration Clauses

Transacting parties frequently provide for arbitration clauses in their agreements to resolve disputes. While these clauses can be useful they can  impair a party's ability to seek judicial relief if not carefully drafted. Such an example  was HH East Parcel, LLC v Handy & Harman, 287 Conn. 189 (2008).

In this case, the plaintiff purchased a former precious metals manufacturing facility located in Fairfield, Conn. for $8 million in December 2003. Under the purchase and sale agreement, the defendant was required to demolish all existing buildings and structures to complete remediation by December 31, 2004. The purchase agreement contained a per diem clause that required the defendant to pay the plaintiff $5000 for each day after December 31, 2004 that the defendant failed to complete the demolition and remediation as specified therein

After the defendant failed to complete the remediation by the required date, the parties entered into an environmental indemnification agreement where the defendant agreed to indemnify the plaintiff for the losses caused by the defendant's failure to complete the remediation. The indemnification agreement contained an arbitration clause that provided that any disputes between the parties regarding their respective obligations would be resolved by expedited, binding arbitration in accordance with the rules of the American Arbitration Association.

In April 2005, the plaintiff invoked the arbitration clause. At the arbitration proceeding, the defendant did not dispute its liability for breach of the purchase agreement but disputed the validity of the $5000 per Diem clause, claiming it was an unenforceable penalty. The plaintiff argued the per diem clause was a valid liquidated damage and the arbitrator agreed, finding that the damages resulting from the breach of the contract would be difficult to estimate or provide, that the parties had intended to liquidate any resulting damages, and that the amount agreed upon in the contract was not unreasonable. As a result, the arbitrator awarded the plaintiff a total of $1,670,000 in damages. The arbitrator also ordered the defendant to pay the plaintiff 6% interest on all unpaid per diem charges, and to fund and complete the demolition and remediation of the property without delay.

The defendant appealed the decision, arguing that the arbitration award violated public policy. The trial court noted that while it was required to review the award de novo, it was obligated to defer to the arbitrator’s factual findings and interpretation of the underlying contract. The court then reviewed the record to determine if the arbitrator’s findings were supported by the substantial evidence. The court concluded that the arbitrator had properly concluded that the purchase agreement contained a valid liquidated damages clause. The trial court said the arbitrator’s findings were supported by the negotiated nature of the per diem charge and the difficulties of ascertaining economic loss because of the fluctuating liens on the property and determining how long the remediation would take.

The defendant appealed, contending that the trial court improperly deferred to the arbitrator’s findings. The Connecticut Supreme Court affirmed, noting that the substantial evidence test is highly deferential and provides for a lower level of judicial scrutiny that a clearly erroneous or weight of the evidence standard of review. The court then went on to say that a clause fixing damages for a contractual breach may be a permissible liquidated damages clause when three conditions are satisfied: (1) The damage to be expected as a result of a breach was uncertain in amount or difficult to prove; the parties intended to liquidate damages in advance; and (3) the amount stipulated was reasonable so that it was not greatly disproportionate to the amount of the damage the parties envisioned would be sustained in the event of a breach of the contract.

In reviewing how arbitrator applied these principles to his factual findings, the court noted that the arbitrator had credited the testimony of the defendant's negotiator who had testified that he had initial proposed liquidated damages of $1500 during the negotiations, and then increased the amounts to $2500 before finally agreeing to $5000 with the date commencing 180 days later than the parties had originally contemplated. The arbitrator also relied on the testimony of the plaintiff's negotiator who testified that the plaintiff expected to earn $5000 per day from the property so the per diem amount was a valid proxy for damage caused by inability to use the asset acquired and the anticipated rate of return. The court also noted that the arbitrator concluded that liquidation of damages was appropriate because the party in breach retained the power to stop the damages by remediating the property.  The court said the clause was actively negotiated by sophisticated parties that had ample assistance of counsel. Finally in response to the assertion that the clause was an illegal penalty because the parties had consistently characterized it through the negotiations as a hammer or penalty, the court said it was well settled that whether a clause is a valid liquidated damage provision is a matter of the parties' intent and is not controlled by the fact that the phrase “liquidated damages” or the word “penalty” is used

Insurer of Cost Cap Policy May be Liable for Consequential Damages

In Handy & Harman v American International Group, et al, 2008 N.Y, Misc. LEXIS 7522 (Sup. Ct.-NY Cty 8/26/08), plaintiff operated a large precious metals manufacturing facility in Fairfield, Connecticut. In December 2003, plaintiff entered into an agreement to sell the property. The agreement required the plaintiff to demolish the existing structures and complete remediation within a year. In April 2004, plaintiff purchased a $2MM Cost Cap Insurance policy that had Self-Insured Retention of $4,739,030. The policy contained coverage for known contamination (Coverage K) and Unknown Pollution (Coverage L). The policy also contained coverage for third party claims with an aggregate value $10MM (Coverage A).

The policy contained an endorsement that excluded from Coverage A claims arising from Pollution Conditions that were subject of an approved Remedial Plan or that were otherwise covered under Coverages K or L but for the erosion of the SIR, exhaustion of the applicable limit of liability, or termination of coverage under Coverage K or L. However, the endorsement also provided that the exclusion did not apply to Pollution Conditions that were not related Pollution Condition which covered under Coverages K or L.

The plaintiff commenced remediation under the Remedial Action Work Plan and after it exceeded the SIR, defendant accepted coverage under Coverage K. The defendant paid the cost overruns up to the Coverage K policy limit of $2MM. In December 2004, plaintiff’s contractors discovered a previously unknown layer of materials beneath clean fill and a previously unknown underground storage tank filled with debris. The contractor also discovered contamination below a previously unknown foundation. The Connecticut Department of Environmental Protection (CTDEP) instructed the plaintiff to remediate the newly discovered contamination and plaintiff sent the CTDEP letter to defendant as notice of a Claim.

AIG claims adjuster sent a letter to plaintiff denying coverage under Coverages K and L on the ground that the coverage limits had been exhausted. One month later, the claims adjuster also denied coverage for Coverage A on the basis of the endorsement. In response, Plaintiff pointed out the defendant had overlooked the language in the endorsement that the exclusion would not apply to Pollution Conditions that were not the same or related to the contamination in the Remedial Action plan but would have been covered under Coverage K or L but for the exhaustion of the applicable limit of liability. The defendant advised plaintiff that the CTDEP letter was not a "Claim" because it did not constitute a demand. The defendant also stated that Coverage A did not apply because the pollution conditions were not unrelated to those that would have been covered under Coverages K or L.

After further correspondence did not resolve the dispute, plaintiff commenced an action for breach of contract and breach of the covenant of good faith and fair dealing. On defendant’s motion to dismiss, the court dismissed the tort claim for breach of the duty of good faith but refused to dismiss the claim for consequential damages, and that the request for attorneys' fees in the prosecution of this action is dismissed. The court said the purpose of the policy was to ensure that the business conducting the remediation had the financial resources to conduct and finish the remediation if the costs exceeded the SIR and to pay third-party claims for clean-up costs. The court said the plaintiff purchased the insurance so that it could avoid financial pressure on its business for funding the remediation. Plaintiff bargained for this policy not only so that it could be paid the policy amount, but so that it also could have "the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe. Under the circumstances, the court said, it should have been foreseeable and understood by the defendant that it would have to respond in damages for damages to plaintiff's business if it breached its obligations under the contract. For example, the court pointed out, the site was being remediated for the purpose of redeveloping the site. By delaying and failing to investigate,  plaintiff contended that the site was further on the road to redevelopment and no longer open or easily inspected, resulting in further foreseeable harm in the form of increased costs and difficulty of proof. Thus, the court said the plaintiff had sufficiently pled that consequential damages were within the contemplation of the parties as a probable result of the breach of the policy.

Ct Rules Costs Eligible For Reimbursement Under Cost Cap Policy Must be Paid Prior to Termination Date

In Federal Insurance Company, v. Cherokee Ardell, LLC., et al 2011 U.S. Dist. LEXIS 32516  (D.N.J. 3/28/11), the shareholders of Ardell Industries, Inc. ("Ardell") entered into an agreement in 1989 to sell the American Razor Blade Corp. ("ARB") site to Ardell Acquisition Corporation. The contract was then assigned to American Safety Razor Company ("ASR"), a company affiliated with Ardell Holdings, Inc. The transaction triggered the requirements of what was then known as the New Jersey the Environmental Cleanup Responsibility Act ("ECRA") (n/k/a the Industrial Site Recovery Act ("ISRA"). Because the site was contaminated, Ardell entered into an Administrative Consent Order ("ACO") with the NJDEP to allow the sale to proceed.

In 1996, ASR and Ardell filed insurance claims with Federal Insurance Company ("Federal") to recover their cleanup costs. Federal subsequently entered into a Settlement Agreement and Release whereby Federal assumed responsibility for the remedial environmental cleanup of the contaminated. Federal then retained the services of Cherokee Environmental Risk Management ("CERM") to assist with the investigation and remediation of the Site. In May 1998, Federal and CERM entered into an agreement ("1998 Remediation Agreement") whereby CERM created an entity Cherokee Ardell, L.L.C. ("Cherokee") to assume responsibility for the cleanup. Pursuant to the 1998 Remediation agreement, Cherokee obtained two insurance policies from American International Specialty Lines Insurance Company ("AISLIC"). The first policy was a $2MM Cleanup Cost Cap Policy with a term of ten years and a Self-Insured Retention ("SIR") of $766,015. The second policy was a Pollution Legal Liability Select Policy (“PLL”) with a limit of $2MM per incident and aggregate limit of $5MM. Federal was named as an additional insured in both policies.

In May 2001, Cherokee notified AIG Domestic Claims, Inc. ("AIGDC") that the clean-up costs under the Cost Cap Policy were approaching the SIR. AIGDC informed Cherokee of acceptance of coverage under both policies. However, by 2006 the remediation had still not been completed. ASR notified Federal that ASR dissatisfied with the pace of the remediation project and that ASR was receiving pressure from NJDEP. ASR then sent a second letter claiming that Federal was in breach of the 1996 Settlement Agreement. Cherokee forwarded these letters to AISLIC and submitted a notice of claim under the PLL policy based on the potential ASR lawsuit. In December 2006, AISLIC accepted coverage under the PLL Policy subject to a reservation of rights.

In August  2007, ASR sent Federal a draft of a complaint, alleging breach of contract, breach of duty of good faith, and violation of the New Jersey Environmental Rights Act. Federal forwarded the draft complaint to Cherokee and AISLIC. Federal then independently settled with ASR  In October 2007, AISLIC notified Federal and Cherokee that it was withdrawing its acceptance of defense because the claims in the ASR Letters fell outside the definition of “Loss” as defined in the PLL Policy. A week later, Federal terminated the 1998 Remediation Agreement with Cherokee and retained the services of Shaw Environmental Corp. ("Shaw") to take over the remediation project.

In June 2008, Federal filed a breach of contract action against Cherokee and sought indemnification under the policies from AISLIC. Cherokee also filed a cross claim against AISLIC for indemnification. AISLIC then filed a motion for partial summary judgment claiming that it was not obligated to reimburse Federal or Cherokee under the Cost Cap Policy. Federal and Cherokee sought summary judgment on their PLL claims.

At the time of the lawsuit, AISLIC had reimbursed Cherokee a total of $594,375 under the Cost Cap Policy and had not issued reimbursements for expenses under the PLL. AISLIC argued that the $928,103 sought by the Federal and Cherokee were incurred after the Termination Date and therefore not covered. AISLIC additionally argued that Federal and/or Cherokee failed to satisfy the condition that Cleanup Costs be reported prior to the Termination Date.

In contrast, Federal and Cherokee argued that under the Cost Cap Policy, AISLIC had a "continuing duty" to indemnify for costs that were "first incurred" before the Termination Date even if the costs were expended and paid after that date. They noted that since the operative word used in Coverage A was "incurs" rather than "pays" or "expends," a precise reading of the policy meant that an insured does not have to actually pay for the costs and expenses but rather only become liable to pay for the costs during the policy term. They also argued that the Cost Cap Policy is a traditional claims-made insurance policy where the policy payment obligation is triggered by the insured's claim for coverage rather than the insured parties' payment of expenses.

The court agreed with AISLIC, ruling that that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the policy period. The court said that from a plain reading of the Coverage A language as a whole and in conjunction with the definition of the term "Loss," it was clear that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the ten-year policy period

With respect to PLL Policy, Federal and Cherokee asserted that the 2006 ASR claims gave rise to a “Loss” and additional Clean-Up Costs related to compliance with the ACO and ECRA. However, the Court found that there was a question of fact whether Federal and Cherokee were “legally obligated” by statute or governmental order to pay expenses based upon the claims brought by ASR. Instead, the Court found that the nature of costs sought by Federal appeared to arise from its contractual agreement with ASR to remediate the site and not directly from environmental laws. Thus, the court denied Federal’s cross-motion for summary judgment

Federal subsequently filed a motion for reconsideration. Following a denial of that motion, the parties settled the case.  

State Appeals Court Affirms Damage Award Against Bank for Sale of Contaminated Property

A New Jersey

Appeals Court

refused to disturb a $248,928 damage award against a bank involving a sale of contaminated property. The plaintiff had argued that the trial court had erred in calculating the damages flowing from the bank’s breach of contract.  

In Ritschel v. Spencer Savings Bank, SLA, 2011 N.J. Super. Unpub. LEXIS 1257 (May 16, 2011), Spencer Savings Bank had acquired a 2.78 acre vacant lot in 1990 in Fairfield Township. The parcel had been previously used by a general contractor and the bank had planned to construct a new corporate headquarters at the site. When the economy stalled, the bank decided not to develop the site. It is unclear what level of environmental due diligence the bank performed prior to acquiring the site. 

In January 2001, the plaintiff signed a contract to buy the land for $1.22MM. The plaintiff intended to erect a 32,000 sf commercial building that was projected to cost $3.6 million. During its due diligence, the plaintiff learned several diesel had been removed in the mid-1980s but no documentation was available. As a result,  the plaintiff performed a phase 2 which revealed elevated levels of VOCs. The phase 2 estimated that 60-90 tons of soil would have to be excavated at a cost of approximately $33K.

The plaintiff advised the bank of the contamination who initially offered to give the plaintiff a $33k credit against the purchase price in exchange for an indemnity in favor of the bank. The plaintiff rejected this proposal and after a period of negotiation, the parties executed an amendment to the contract that was drafted by special environmental counsel retained by the bank. The amendment provided that the bank would undertake and complete the remediation of the Property at its sole cost and expense in accordance with a remedial action plan approved by the New Jersey Department at Environmental Protection (“NJDEP”) and would obtain an NFA Letter from NJDEP.  In exchange for the bank’s promise to assume responsibility for the remediation, plaintiff agreed to waive his right to terminate the Agreement.

While these negotiations were taking place, the plaintiff entered into three leases with prospective commercial tenants including a day care. While the leases were executed, they did not have a commencement date since it was unknown when the remediation would be completed, the site sold and construction completed.

Following the contract amendment, the bank retained an environmental consultant to implement the remediation.. During the pre-remedial sampling, the bank’s consultant discovered the extent of the soil contamination significantly exceeded the original estimate. The remediation cost was estimated to approach $600,000. The bank believed it was only obligated to implement the limited remediation to address the contamination originally identified by Plaintiff’s environmental consultant. However, Plaintiff believed that Defendant agreed to remediate the entire property no matter what the cost and rejected the offer to perform a limited remediation because of the proposed daycare lease.

After the plaintiff rejected the bank’s offer to complete the limited remediation, the bank’s counsel notified plaintiff it was terminating the agreement pursuant to the section of the agreement requiring the bank to deliver good and marketable title despite the fact that Plaintiff's counsel had performed a title search and no objections.

Plaintiff filed its lawsuit, alleging the bank had breached the contract when it failed to complete the remediation.  After an eight day trial, the court ruled defendant had breached the contract and initially awarded plaintiff damages of $484,671, consisting of $98,000.00 in lost profits and $386,671.00 in out-of-pocket expenses for the cost of extra rent, architects’ fees, permit fees, site plans and attorneys fees.

After a dispute arose over the calculation of the damages, the court reduced the damage award to $248,928.61, consisting of $181,876,75 in out-of-pocket expenses and $67,051.89 in prejudgment interest. The plaintiff then appealed, arguing the trial court had improperly rejected its theory of damages but the appeals court affirmed.

State Court Decision Ilustrates Dangers of Inadequately Evaluating Neighboring HRECs

The ASTM E1527 Phase 1 standard contains a term "Historic Recognized Environmental Condition" or HREC. The term was added to the standard in 2000 to provide a tool for consultants to help distinguish between properties 

where there was a release in the past that was satisfactorily remediated with sites that have historic contamination that have not been addressed. Because banks and property owners prefer that phase 1 reports not have RECs, the HREC provides a mechanism to allow the consultant to fulfill its obligations by flagging that there was a REC in the past while preventing the property from being unduly stigmatized by a release that no longer poses a risk to human health or the environment. 

Unfortunately, many consultants do not understand this term or use differing approaches for determining if a former REC can now be considered an HREC. Some EPs identify former releases that have been remediated to satisfaction of a regulator as an HREC. Others will identify a former REC as an HREC where residual contamination remains but the site has properly implemented  post-remedial institutional and engineering controls. Some EPS take the position that only "clean closure" sites may be an HREC while a narrower universe believe once a REC always a REC. 

A recent texas state case illustrates the dangers of not properly evaluating an HREC. In E-Z Mart Stores, Inc v Ronald Holland's A-Plus Transmission & Automotive, 2011 Tex. App. LEXIS 6000 (Ct. App. 8/3/11), E-Z Mart had purchased a site from Mapco in 1989 with an open spill. E-Z Mart remediated site and obtained NFA in 1998.

Meanwhile, Holland A-Plus Transmissions which owned property adjacent to the E-Z Mart site, entered into lease agreement with a cell phone provider to build and lease a cell tower. During drilling for tower, an explosion occurred due to gasoline vapors. The cell company subsequently terminated its lease and Holland was unable to loan for business expansion. Holland discovers benzene 8 times acceptable levels and sues E-Z Mart gas station. 

A series of complex lawsuits followed that resulted in jury trials.  A jury awarded Holland $550K in damages on nuisance and negligence grounds. E-Z Mart appealed. After a series of rulings, the appeals court affirmed the jury verdict in favor of Holland but ruled that the trial court had erred when it refused to allow E-Z Mart to introduce evidence of Mapco's liability.

It is unclear what level of diligence was done prior to the construction for the cell tower. Presumably, the parties believed that the Holland site could not have been impacted by the E-Z Mart site because of the NFA letter. In is unclear if a file review would have produced any evidence to suggest that the levels left behind at the E-Z Mart site could pose a risk to the Holland property. It may be that the contamination was missed during the UST remediation.

Since the late 1990s, the conventional wisdom is that petroleum contamination biodegrades and therefore does not pose a significant risk of vapor intrusion. This is another example of how that common perception may be wrong particularly in urban areas where underground conduits may serve as preferential pathways and significant pavement can reduce the amount of oxygen available for biodegradation. 

Class Action For Purchasers of Time Shares May Proceed With Mold Lawsuit

Plaintiff purchased time share units and files lawsuit against developer after resort units developed water leaks and mold. Defendant asserts that time share ownership points are not interest in property. Ct finds that while sellers of time share units retain exclusive right to specify which units would be occupied, the purchasers had exclusive possessory interest and timeshare was in nature of lease. Thus, plaintiff had pled sufficient evidence of property interest to support private nuisance and breach of implied warranty of habitability.


Ct also said plaintiff had sufficiently pled Unfair Competition Claim for purposes of motion to dismiss. The plaintiff had asserted that had defendant disclosed the water leaks and mold conditions, it would have selected different timeshare program, that failure to disclose was material misrepresentation, that defendant ignored recommendations of engineers and had continued to assess maintenance fees while not addressing the water moisture problems. Hermenegildo Martinez v The Welk Group, 2011 U.S.Dist. LEXIS 58718 (S.D.Ca. 6/2/11)

Appeals Court Denies Challenge to NJDEP Oversight Costs

North Bergen LLC purchased industrial property that was under Administrative Consent Order (ACO) between its former owner and DEP. Former owner requested that DEP terminate the ACO and allow North Bergen to proceed under ISRA remediation agreement.


NJDEP subsequently issued over two dozen oversight cost invoices to North Bergen. The company paid  $1,515 but refused to pay the outstanding balance of oversight costs on grounds that the costs were “excessive, unreasonable and duplicaye".  North Bergen filed an "oversight cost review request in July 2007. NJDEP responded that it would attempt to resolve informally instead of referring the matter for administrative review by the but a technical dispute arose leading North Bergen to submit a Technical Review Panel (TRP) request. In November 2008, the TRP advised North Bergen that no further action was needed for soils but that vapor intrusion testing and further ground water sampling was still required. North Bergen


North Bergen refused to pay five additional invoices, again alleging that the costs were excessive, unreasonable and duplicative, that NJDEP's activity description was generic and inadequate to determine the work actually performed by NJDEP, and also claimed that NJDEP's remediation approach wasted substantial NJDEP time and resources. After each objection, NJDEP offered to resolve the matter informally.


Finally, In December 2009, NJDEP advised North Bergen that if payment is not received within 30 days, the agency would have no choice but to send the invoice to a collection agency and stop work on the case. North Bergen then filed a lawsuit, arguing that that DEP's refusal to send the billing dispute to the Office of Administrative Law for a contested hearing was arbitrary, capricious and unreasonable. At the time of the lawsuit, the outstanding balance of unpaid oversight costs was $43,420.09. NJDEP countered that its December  2009 correspondence does not amount to final agency action and that North Bergen has failed to exhaust its administrative remedies.


The trial court agreed and appellate division affirmed, holding that a general refusal to pay all charges did not qualify as a conforming submission. The court said that a objects to the charges as "excessive and unreasonable" and to the work description as "generic and inadequate”. The court said the record was insufficient to determine if North Bergen was lawfully assessed the oversight costs charged by NJDEP. North Bergen LLC v NJDEP, 2011 N.J.Super. Unpub. LEXIS 1868 (App. Div. 7/12/11).

Should a VEC Always Be a REC?

In a recent ASTM conference call, several consultants took the position that they could not envision a circumstances under which a “vapor encroachment condition” (VEC) identified pursuant to ASTM E2600-10 would not be a “recognized environmental condition” (REC) pursuant to ASTM E1527-05.

 

I was surprised by this statement and therefore have decided to post about this issue. I happen to think that many VECs actually could be considered “de minimis conditions” that do not rise to the level of a REC.

The term "vapor encroachment" is a term of art created by ASTM 2600. It has no basis in law or science since the regulatory driver is "vapor intrusion"- the migration of vapors into building structures.  Since a VEC has no regulatory significance, it cannot serve as a basis for creating CERCLA liability-which is the focus of the ASTM E1527 Phase 1.

All a VEC means is that there may be a vapors at the boundry of the property. A VEC determination is simply an interim step. The user can decide to ignore the VEC finding or decide to pursue the issue further to determine if it rises to the level of a REC.

A VEC without any evidence of a completed exposure pathway will not result in enforcement if brought to the attention of regulators- the ASTM definition of de minimis condition. To me, it is  akin to contaminated groundwater that has migrated onto a site where the groundwater is not being used for drinking water and the state does not pursue owners of impacted properties.

In the absence of exposures to persons in structures, there will not be CERCLA liability. The main  liability concern for vapor intrusion is toxic tort liability. In the absence of vapors migrating into structures, there will not be toxic tort liability.

To me, the E2600 process and VEC determination is a waste of a client's money. If there are solvent sites within the E1527 search radius that could present a risk of Vapor Intrusion, the EP provides value to its client by determining if there is a potential for vapor INTRUSION. This can be done from site specific information or fairly inexpensive soil gas sampling.

Some Banks Starting To Limit List of Approved Consultants

During the peak of the market bubble, the lists of approved consultants that I maintained for some of our CMBS clients exceeded a dozen pages. Often times, we would approve a consultant who was not on the list on a one-off basis if they did a phase 1 that was acceptable in scope and who had a strong relationship with the borrower. Some lender clients did not even go through the drill of preparing a list of approved consultants but simply wanted to make sure that the phase 1 reports met their SOWs.

As the CMBS market slowly revives, it appears that many banks are keeping a tight rein on the universe of consultants who can do work for them. Previously dormant shops that are starting to ramp up to originate CMBS loans are asking me for a "short list" of consulting firms. Often times, the list is around a half-dozen.   And the lenders are trying to evenly spread around the work.

Some banks are also starting to disqualify firms that heavily rely on independent contractors who are known as "1099" employees. The feeling is that firms that use a higher percentage of independent contractors may not be consistently providing quality work.

This smaller universe of consultants does make my job easier and helps promote better quality work. With firms in the on-deck circle and sitting on the bench waiting to get called up, we dont have much tolerance for firms that do not consistently meet our expectations. Even some of the phase 1 mills are starting to produce better reports.

Now if we could only get EPA to require that the site visits be conducted by EPs...........

NY Case Illustrates Why Borrowers Should Not Simply Rely on Lender Approval of Phase 1

Lenders have long played a role as “surrogate regulator” in transactions. In many cases, lenders force potential borrowers to investigate suspected contamination and frequently require remediation under state oversight. Borrowers often balk at these requests any may even retain their own independent consultants to try to convince lenders that the work is not required or necessary.

However, borrowers usually do not exhibit such independence when the lenders are ok with the site conditions. Borrowers typically believe that a site is “clean” if a bank determines that a phase 1 is acceptable. However, what many borrowers do not realize is that lenders are positioned differently than property owners from a liability standpoint and therefore may have risk tolerances that are different from those who take title to potentially contaminated property.

First, because of the secured creditor exemption under CERCLA and most state superfund laws, lenders will not be liable for remediation unless the borrower encountered financial difficulties and the bank either takes over the borrower’s operations or forecloses on the property. During the loan origination phase of a loan, borrower default seems remote to a lender since after all its willingness to lend is based on its belief that it has a viable borrower.

Second, since most lenders no longer hold loans on their books but sell the mortgages for securitization, the originating lender is not really concerned about a future default. So long as the loan has been originated in accordance with the loan procedures and underwriting that is acceptable to the trusts that sell the CMBS loans to investors, the risk of a “comeback” to the originating loan is minimal.

We have previously reported on cases where borrowers have sued banks and consultants on grounds that lender misled them by approving the phase 1 or that the consultant failed to find contamination. In the traditional lender/borrower relationship, the lender usually prevails. The few cases where lenders have been found liable for misrepresentation have been where they sold the property to the plaintiff.

A recent case in New York illustrates the differing risk tolerance of lenders and the implications for property owners. In Ridge Seneca Plaza v BP Products, et al, 2011 U.S. Dist. LEXIS 47288 (W.D.N.Y. 5/2/11), First Allied agreed to sell shopping center to Sylvan Enterprises (Sylvan) in 2000. The consultant retained by Sylvan and its counsel prepared a phase 1 that discussed a 1994 tank failure at an adjacent gas station. Because the NYSDEC database showed that the spill was closed, the consultant determined the closed spill was not a REC (it is unclear if the closed spill was flagged as an HREC). However, the consultant did not identify a second spill reported that was reported in 1999 (a year before the current transaction) when the tanks were removed. The consultant also failed to identify former dry cleaner at shopping center b/c used wrong address.

Sylvan subsequently assigned the contract to purchase the property to the plaintiff who was an affiliated entity (owned by same principals). The plaintiff closed on the shopping center in 2001.  When the plaintiff refinanced its loan in 2002, the consultant updated the phase 1 but again did not mention the former dry cleaner or the active second spill.

In 2004, the plaintiff’s principals decided to refinance so they could take some equity out of the property. However, the 2004 lender was not comfortable with the proximity of the gas station and required a phase 2. The plaintiff’s principal discussed the concept of a phase 2 with the original consultant who said a phase 2 could “open a can of worms”. The plaintiff’s principal argued to no avail with the lender that the phase 2 was unnecessary.

Apparently, the favorable loan rate outweighed the risk of the phase 2 since the borrower agreed to do the phase 2. The investigation discovered floating petroleum product on a portion of the site near the gas station and PCE contamination from the former dry cleaner.

The plaintiff then filed a contribution action against the seller of the property alleging misrepresentation and fraud as well as a breach of contract and malpractice action against the consultant. In a series of rulings, the federal district court for the northern district of New York ruled that because the plaintiff had taken title pursuant to an assignment of an "as is" agreement, it could not maintain action against the seller. In addition, the court ruled that that there was no contractual relationship between the consultant and the plaintiff (formally known as “privity of contract”), the plaintiff could not bring a breach of contract action. Moreover, the court ruled that plaintiff could not bring a malpractice action because the plaintiff had no right to rely on the report and therefore consultant owed no duty to the plaintiff. And the court also said that even if the telephone conversations between the plaintiff’s principal (who also happened to be the principal of the assignor or originally contracting party) in 2004 about the phase 2 had created some enforceable relationship between the entities, the plaintiff had waited too long to bring its lawsuit.

A column in today's NY Times discussing the book "The Deal from Hell" provides further examples of this situation. The article says the book illustrates a "breathtaking level of cynicism and self-dealing" by a particular investment bank, and excerpts some of the emails of bank analysts. My favorite excerpt is the following:

"There is wide speculation that [Tribune] might  have so much debt that all assets arent gonna cover the debt in case of (knock knock) you know what. Well, that's what we are saying, too. But we're doing this 'cause its enough to cover our bank debt: our (here I mean JPM's) business strategy for TRB but probably not only limited to TRB is "hit and run'"  

Borrowers should remember this the next time their lender says the phase 1 is ok. The borrower should independently determine if the phase 1 is acceptable to its needs. Remember that a borrower may be liable as the property owner while a lender who does not exercise control over the property or take title will be able to stand behind the secured creditor exemption.

Appeals Court Affirms Class Action Certification for Defective Radon Systems

A New Jersey court affirmed certification of a class action involving residents of a condominium complex who alleged that radon mitigation systems were improperly installed. The defendants are the developer,  the engineering firm who installed the radon systems, and the condo association which was responsible for maintaining the radon mitigation systems at the villa residences.

The development known as Overlook at Lopatcong consists of 384 residential units comprised of 142 villas, 132 garden houses and 110 townhouses. The development is located in an area in New Jersey known as Tier 1 Area  which requires new residential structures to be equipped with fully functional radon resistent construction pursuant to N.J.S.A. 5-23-10. The villas were constructed so that every two units shared a common basement and a radon mitigation system. The townhomes and garden homes each had their own systems.

The plaintiffs filed an eight-count complaint alleging defendants improperly designed, installed, maintained and tested the radon mitigation systems. Plaintiffs pled theories of negligence, gross negligence, trespass, nuisance, fraud, consumer fraud, and assault and battery; and sought injunctive relief, which included medical monitoring and periodic testing of radon levels in the residences. Plaintiffs subsequently moved for class certification.

To support their motion, plaintiffs submitted the certification of a  former  employee of the engineering firm assigned to the development, and three reports from their expert. The former  employee averred that when many of the units were tested for radon before a certificate of occupancy was issued, the units were tested with doors and windows open as directed by a RAdata employee. He also said  that one radon pump was used for multiple dwellings to save money, and many units had cracks in basement slabs because Segal would not pay for expansion joints.

The plaintiffs experts Some of the systems use the drainage pipe to the sump pit to transfer negative pressure to the neighboring unit, thereby reducing radon in both basements, but if the sub-drainage pipe fills with water, negative pressure to one unit is cut off allowing radon levels to rise in the basement. In many homes the sump covers were unsealed, which keeps radon from being eliminated from the basement. In other systems, exterior exhaust pipes terminated before reaching the roof and were thus too close to upper story windows, which can result in the reentry of radon through an open window.  All of the  [*5] outside mounted fans that were inspected had holes drilled into the pipe under the fan, which causes a loss of efficiency and premature fan failure. In all the homes with unfinished basements that were inspected, no floor to wall joints or cracks were sealed. In the expert's opinion, these and other deficiencies were sufficient to require that all units have radon tests performed.

In October 2010, the trial court  certified a class of all current owners of units  for negligence, gross negligence, nuisance and assault and battery claims. The court also certified a sub-class against the Condo Association of all current owners of villas for nuisance and trespass claims. The court also denied plaintiffs' motion to certify a class for fraud, consumer fraud, and the remedy of medical monitoring. In May, the appeals court affirmed the class certification. Casale v Segal & Morel et al. 2011 N.J. Super. Unpub. LEXIS 1228 (App. Div. 5/12/11).

Since radon mitigation systems are frequently used for vapor intrusion, this case could provide support for future vapor intrusion litigation.   

CMBS Lender Kept In Case Over Questions About Environmental Disclosure

The federal district court for the Southern District of New York denied a motion to dismiss filed by Morgan Stanley Mortgage Capital, Inc (MSMC)that it failed to adequately disclose environmental conditions at a shopping center and should not be required to buy back the $81MM loan. This case has some yummy nuggets.

In this case, MSMC originated a $81MM loan to City View LLC to finance the acquisition of a shopping center in December 2006. The shopping center had been constructed on a former landfill, was required to monitor methane gas and had been subject to a number of notices of violations. In 2006, Walmart which was the largest tenant of the shopping center and occupied nearly 29% of the net square footage began complaining about methane gas. Just before the loan was closed, Wal-Mart issued a Notice of Default accusing the seller of failing to manage the methane gas and alleging that methane gas levels had reached dangerous levels.  The seller of the property and Wal-Mart then entered into a series of letter agreements where seller agreed to address the methane problem. The seller and borrower also entered into a Walmart Indemnity Agreement where the borrower agreed to assume the obligations to cure the methane problem. On the day of the closing, Wal-Mart also sent the defendant an estoppel certificate identifying the methane problem and setting forth the landlord's obligations to cure the problem. Eventually, Wal-Mart terminated its lease in 2009 and the borrower defaulted on its debt service payments.

The phase 1 had not identified any RECs. However, it had identified methane as an "item of concern". It has also disclosed that the shopping center had been constructed on a landfill, that it was required to monitor methane and that there had been notices of violations that would require at least $100K to repair.
Meanwhile,  MSMC sold the loan in May 2007 to an affiliate entity pursuant to a Mortgage Loan Purchase Agreement (MLPA). The loan was then deposited into a Morgan Stanley CMBS Trust pursuant to a pooling and servicing agreement (PSA) with the plaintiff named as Trustee.

The MLPA contained an environmental warranty that an environmental assessment had been performed and that the MSMC had no knowledge of any material and adverse environmental conditions or circumstances affecting the property that was not disclosed in the report. MSMC also warranted that there were no material defaults.

The plaintiff through the special servicer filed a complaint seeking to require MSMC to re-purchase the loan. The complaint alleged that MSMC knew the loan was in default and failed to disclose it, and also failed to disclose the adverse environmental conditions affecting the property.  Interestingly, Phase 1 did not flag methane as a REC but as an "item of environmental condition". In a motion to dismiss, MSMC asserted that it had disclosed all of the environmental risks associated with the property including that the property had been built on a landfill, required monitoring for methane, was under the supervision of the Ohio EPA and an escrow of $100K had been established tp resolve outstanding environmental violations.

However, the court disagreed, noting that the phase 1 said its purpose was to identify Recognized Environmental Conditions (RECs),  the report did not identify any RECs and characterized methane as an "item of concern". The court said that an "item of environmental concern" was not congruent with a REC, and there was a material dispute if the phase 1 had disclosed the existence of a material environmental threat.  Bank of New York Mellon Trust Company et al v. Morgan Stanley Mortgage Capital Inc., 11-0505 (S.D.N.Y. 6/27/11)

CERCLA Workplace Exclusion Does Not Bar EPA Cost Recovery Action

Defendant argued EPA had no authority to perform removal action involving plating lines where the release results in exposure exclusively within a workplace. Section 9601(22)(A) excludes from the statutory definition of release "any release which results in exposure to persons solely within a workplace, with respect to a claim which such persons may assert against the employer of such persons". 

The court ruled that Saporito could not benefit from this exclusion because this case did not involve a claim by a person against their employer. The court also rejected argument that the "consumer product in consumer use" exception in the definition of "facility" did not apply to electroplating business. US v Saporito, 2011 U.S.Dist. LEXIS 66456 (N.D.Ill. 6/22/11)

Many consultants and clients have mistakenly believed that vapor intrusion is not covered in the standard phase 1 scope of work because of workplace exclusion. In do doing, they have ignored the second half of the clause that limits the exclusion to circumstances where a person has made a claim against its employer.  . As a result, the potential for vapor intrusion has frequently not been evaluated.

This clause is actually a relic from a bill that had been considered by the US House of Representatives prior to the passage of CERCLA. That bill would have provided a remedy for personal injury due to exposure to hazardous substances. The workplace exclusion was intended to prevent a double recovery by precluding recovery where the worker had filed a workers compensation claim. The remedy for personal injuries was deleted from CERCLA during the last minute negotiations but the workplace exclusion was inadvertabtly left  in legislation that became  CERCLA

MASS DEP Fines Foreclosing Bank For Not Reporting Oil Leak

The Massachusetts Department of Environmental Protection has assessed
a $4,000 penalty to the Southbridge Savings Bank for failing to notify the
agency within 72 hours about a leak from a home heating oil tank.

After foreclosing on the property, the bank discovered the oil tank in the
basement had been leaking onto the dirt floor for a period of time. The bank
retained a consultant to remove contaminated soil and install monitoring
wells since the tank was within 500 feet of a drinking water well.

The fine was minimal but the bank could have discovered the leak if it had done
diligence PRIOR to foreclosure. Moreover, if the tank has indeed impacted the
groundwater, the bank could now find itself in the cross-hairs of the DEP. Had
the sampling been done before foreclosure, the bank could have made a better
risk informed decision whether the potential cleanup costs exceeded the value
of the defaulted loan.

Class Action for Vapor Intrusion Allowed to Proceed

A federal district court is allowing a class action lawsuit filed by 200 individuals to proceed despite the fact that the responsible party has been implementing remedial measures for nearly a decade.

 In Stoll v Kraft Foods Global, 2010 U.S. Dist. LEXIS 92926 (S.D.Ind. 9/6/10), releases of TCE and PCE from plant that manufactured ceramic capacitors have impacted the groundwater beneath 129 homes. In 1999, EPA issued a RCRA 3008(h) corrective order to Radio Materials Corporation (RMC). When RMC discontinued operations in 2001, its parent corporation, Kraft Foods Global (KFG), agreed to finance and implement the work under the RCRA order. As part of the corrective action measures, KFG performed a vapor intrusion assessment and agreed to install temporary vapor mitigation systems in 125 homes as interim measures.

In March 2009, the plaintiffs filed their lawsuit asserting claims for negligence, trespass, public nuisance, private nuisance, willful and wanton misconduct as well as injunctive relief under section 7002 of RCRA. The defendants argued that the court should not hear the case under the “primary jurisdiction doctrine” because the defendants were implementing measures under EPA supervision. Under this doctrine, the federal courts will consider a number of factors to determine if they should refrain from exercising authority over a case. These factors include if the relief sought is within the court’s conventional experience, if there is a potential for conflicting orders, if the agency has demonstrated diligence, if the court can fashion the relief requested and if the matter is ripe for adjudication.

After weighing these factors, the the court rejected the defendant’s motion to dismiss. The court said the legal claims involved were within the common experience of the court and did not involve highly technical or scientific matters. The court also said that it was not a foregone conclusion that any relief that it awarded would necessarily conflict with the remediation that may be required by EPA. Moreover, the court noted that KFG was not the ordered party but a volunteer acting in place of RMC and therefore there was not a significant risk of a conflict with an enforceable order. On the question of whether the agency has demonstrated diligence, the court said it did not question the diligence of KFG or EPA but that these efforts are outweighed by the fact that a final remedy had not been selected and implemented after 11 years. The court also said that the doctrine cannot be used to defeat claims for monetary damages like those requested by the plaintiffs. Finally, the court said the fact that remediation was ongoing did not mean there was no  longer an endangerment from the vapors.

 As we have discussed previously, the presence of vapor intrusion is allowing plaintiffs to bring actions under the citizen suit provision of RCRA  where previously such claims could not proceed because the plaintiffs were not using contaminated groundwater for potable purposes and not otherwise exposed to contaminated soils. Similarly, evidence of a completed vapor intrusion pathway is allowing the plaintiffs to survive motions to dismiss common law claims. Indeed, in many cases, the only completed pathway-and thus the only basis for liability- is vapor intrusion.

 Finally, it is important to note that the overwhelmingly number of vapor intrusion cases involve off-site releases that are impacting the property of the plaintiffs. Consultants need to carefully exercise their professional judgment when determining if an off-site plume does not present  a risk to the property being investigated. Likewise, consultants need to carefully assess if an on-site spill has the potential to impact neighboring properties. This situation frequently occurs with shopping centers that have dry cleaners enrolled in state dry cleaner funds. The vast majority of these funds prioritize sites for remediation based on impacts to DRINKING water.

 Thus, just because a shopping center being evaluated during a phase 1 has a low ranking does not mean it does not present a risk to a nearby residential neighborhood. While performing phase 1 assessments on shopping centers with dry cleaner or even petroleum releases, consultants should review the data to determine the likelihood that the plume could migrate off-site while a low-ranked site in an area where public water is available waits the five or so years for a state-funded cleanup. If it is possible that the contamination could reach residences, the consultant should advise its client bank or property owner so that mitigation measures or risk transfer mechanisms could be evaluated. Otherwise, the consultant could find itself subject to a malpractice action years if the contamination impacts those off-site properties.

District Court Finds Broker May Be Liable for Non-Disclosure of Environmental Issues

In September 5, 2008, plaintiff Dona May Willoughby purchased a single-family home from defendants Paul Northam and Lynn Immell. The sellers took title to the home after their mother died and had rented the home from 2003-2008. The broker, Deborah Hileman, was the first cousin of the sellers.

When the home was rented, the tenants complained to Hileman about elevated levels of nitrates in the drinking water as well as water intrusion and mold in the basement. In 2007, the Worcester County Department of Environmental Programs (WCDEP) subsequently advised Hileman that a treatment system on the kitchen faucet should address the issue but that but that "the well owner must notify any future owner or tenant that the water is considered potable only through the treatment system”.

In response to a nuisance complaint with the Worcester County Department of Development Review and Permitting (WCDDRP), an inspector visited the home. The WCDDRP then sent a letter to Northam, Immell and Hileman identifying  four defects with the Property (1) high level of nitrates in the water, (2) peeling lead paint, (3) black mold growth around the windows and on the wall, and (4) asbestos siding and insulation. Since the home was now vacant, the letter required the defects to be corrected before renting the home.  

When the property was listed for sale, Hileman prepared a disclosure statement on behalf of the sellers as required by Maryland law. The disclosure statement did not mention asbestos, mold, or potability issues as to the Property. Hileman later testified that the information was not disclosed because she viewed that information as "unreliable".

After the closing, plaintiff Willougby rented the home to the plaintiff Lawleys- her daughter and son-in-law.  The Lawleys subsequently vacated the premises because of mold and associated health issues. According to the complaint, when the Lawleys vacated the home, there was six to seven feet of water in the basement.

The plaintiffs filed a lawsuit against the sellers and Hileman alleging, inter alia,  negligence, fraud, negligent misrepresentation, rescission, and unjust enrichment. Hileman filed a motion for summary judgment solely for the claims asserted by the Lawleys. On the negligence and fraud claims, Hileman argued that it owed no duty to the Lawleys because they were not parties to the contract. However, the court found that the state Business Occupations and Professions Article ("Bus. Occ. & Prof.") and the Code of Maryland Administrative Regulations  created a duty on licensed real estate brokers had a duty to protect the public against fraud, misrepresentation, or unethical practices in the real estate field.

As a result, the court ruled that Hileman owed a duty to disclose to the Lawleys material defects of which they had actual knowledge, even though the Lawleys were not the actual purchasers. Moreover, the court noted that Ms. Hileman interacted solely with the Lawleys, knew that the Lawleys were the ones who intended to occupy the premises and that the Lawleys had been given power of attorney to execute the sale documents. Accordingly, the court denied Hileman’s motion for summary judgment. Lawley v Northam, 2011 U.S. Dist. LEXIS 37690 (D.Md. 5/9/11).