$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.