In the latest installment of a long-running lawsuit filed by a group of NJ homeowners, a federal district court held that homebuilder who had removed, stockpiled, and re-spread soil contaminated with pesticides from a former orchard was a PRP because these actions constituted "disposal" under CERCLA. However, the court found that the Plaintiffs had not incurred response costs because the fees generated by its consultants reviewing the workplans proposed by Woodmont were in support of litigation. Thus, the plaintiffs failed to satisfy the last element necessary to create CERCLA liability.
In Bonnieview Homeowners vs. Woodmont Builders, et al, the plaintiff sought damages from the developer and the township where the homes were located under a variety of common law such as negligence and misrepresentation, breach of contract, and statutory grounds including CERCLA, RCRA and the NJ Spill Act. Two consultants who had performed phase 1 reports for the municipality had also been brought into the lawsuit but were dismissed from the case in earlier proceedings.
This particular decision granted and denied relief on a number of motions brought by the parties. The numerous issues that were resolved are too long to address in a single post. However, this case has plenty of lessons for those who develop farmland.
Following are the undisputed facts of the case. You be the judge.
The property was used a fruit orchard from 1941 until it was abandoned some time prior to 1970. when it was purchased by a group of individuals who knew it had been previously used as an apple orchard. The orchard operations included storing fertilizer and pesticides for spraying and applying onto the trees in the orchard. The chemicals were stored in drums and other containers at the site.
During the 1970s and 1980s, a portion of the Property was used for foresting. In 1997, Woodmont Builders entered into an agreement with the owners to develop the site for the construction of single family dwellings houses, with the proceeds of the sale of which would be shared by the parties to the agreement.
In April 1998, the Montville Department of Planning & Development retained an environmental consultant (who was later named as a defendant but eventually dismissed from the lawsuit) to perform a Phase 1. The ESA stated that historical photos showed that eastern portion of the site contained rows of trees, indicating that the area may have been a tree nursery. It also identified assorted debris including tires, wood and metal debris, cement, household debris, abandoned vehicles, hot water heaters, refrigerators, and empty aboveground storage tanks and drums. The report concluded that none of the observed debris was considered hazardous but recommended when the debris was removed, the lower layers should be carefully examined.
In September 1998, the Montville Township Planning Board approved an application to construct a residential subdivision on a 30-acre portion of the Property.
In February 1999, Montville acquired an approximately 100-acre portion of the Property for use as "open space" (the "Open Space Parcel").
In May 1999, Montville then engaged another consultant (and former defendant) that did not mention any discharge of pesticide constituents or other contaminants onto the soil and did not recommend any action with respect to the alleged contaminants.
In June 2000, Woodmont acquired the remaining 30-acre portion of the Property (the "Residential Lots"). Woodmont did not perform its own Phase 1 but instead relied on the 1998 report prepared for the township and the fact that Montville's Board of Health reviewed the lots in connection with the proposed residential development.
Woodmont then removed the surface debris from the Residential Lots, removed stockpiled the soils, and then commenced construction. After the foundations for the homes were dug, and the houses erected, Woodmont took the topsoil from the stockpile and returned it to the Residential Lots to become the lawns.
The plaintiffs purchased their homes from January 2001 and October 2002. Prior to purchasing their homes, the Individual Plaintiffs had title searches performed by title insurance companies. The title reports did not mention any possibility of pesticide contamination on the Residential Lots. Advertisements published on behalf of Woodmont Properties and Associated Sales represented that the homes were built on "natural homesites" and were a "great place to raise children”. Several prospective homeowners said they were told by sales associates that the topsoil at the Residential Lots was replaced with "good soil" or "fresh topsoil.
On July 26, 2001, Montville entered into an agreement with the NJDEP to investigate and remediate the Open Space Parcel.
In March 2002, Montville retained yet another environmental consultant to conduct soil sampling on the Open Space Parcel. The August 2002 identified three Areas of Concern ("AOCs") where pesticides and other contaminants were present in concentrations that exceeded the Residential Direct Contact Soil Cleanup Criteria ("RDCSCC") of the New Jersey Department of Environmental Protection ("NJDEP"). In a letter to the township, the consultant wrote “the 25-lot residential subdivision under construction from which the open space was originally subdivided from may also have been part of the same orchard and may contain constituents elevated above the RDCSCC. The majority of constituents elevated above the RDCSCC are metals and pesticides associated with historic orchard and land use.” The consultant indicated that contaminants did not present an imminent health hazard to the public because they were not very mobile, the soil was stable and exposure was limited, and that the principal health issue would be long-term ingestion of contaminated soils or long-term inhalation of dust originating from the soils. As a result, the consultant recommended applying and obtaining a Letter of No Further Action (NFA) from the NJDEP. The consultant also suggested that the Township Board of Health involvement might be warranted time to advise the public regarding contaminated soils at the site and the adjacent subdivision. The firm also suggested that until the NJDEP issued a NFA letter, a Public Notice advising of potential hazards at the site might be warranted to limit public contact with the soils of the site.
In April 2003, Montville notified the homeowners on Bonnieview Lane that it had discovered *** and levels of insecticides on the Open Space Parcel.
In May 2003, Montville requested permission to test the Individual Plaintiffs' properties for environmental contaminants because the their properties would have been part of the contiguous land formerly operated by Bonnieview Farms. After the sampling was completed, Montville advised the homeowners that the sampling revealed the presence of ***, dieldrin, lead, or DDT and that the results had reported the results to the NJDEP.
The lawsuit was filed in September 2003. Woodmont subsequently entered into a memorandum of agreement with NJDEP to investigate and remediate the contamination
Showing posts with label EPA. Show all posts
Showing posts with label EPA. Show all posts
Tuesday, October 19, 2010
EPA Study Finds Radon Risks More Widespread Than Expected
According to a recent study by the EPA Inspector General, more people are now potentially exposed to radon gas than when Congress enacted the Indoor Radon Abatement Act of 1988 (IRAA) . The inspector general concluded that EPA either needs to consider other alternative authorities to its voluntary radon program or advise Congress that the goals of the IRAA are not achievable.
According to the report, of the 6.7 million single family homes that were constructed between 2001 and 2005, only 469,000 incorporate radon-resistant construction. And of the total 76.1 million single family homes in existence in 2005, only 2.1 million had radon-resistant construction.
While EPA sets an action level of 4 pico curies per liter (pCI/l), the report said this threshold does not represent a safe exposure level to radon. Because radon gas is a carcinogen, the study said no level of exposure is safe. Indeed, in 2005, the US Surgeon General issued a public health advisory about the risk of breathing indoor radon.
The report also indicated that high levels of radon gas have been detected in homes within all radon zones. According to EPA, the average indoor air radon concentration is 1.3 pI/l with common ranges of 5 to 50 pC/l.
While 5.1 million homes (6.7%) are estimated to have indoor gas above the action level, the study said that the remaining 71 million are not necessarily safe because they are below the action level. This is because the 4.0 pCi/l simply represents the level that EPA determined was techologically and economically feasible back in 1992. EPA estimated that the 4.0 pCi/l level could be achieved 95% of the time while a 2.0 pCI/l could only be achieved 70% of the time.
The study also found that only 282,000 of the 1.5 million homes built in radon zone 1 areas were equipped with radon-resistant construction. The report said the nation is building homes in high radon areas at a faster pace than testing and mitigation is occuring in existing homes. Thus, the population exposed to unacceptable levels of radon is growing.
Part of the problem is that the International Residential Code which has been adopted by 45 states does not require radon-resistant new construction (RRNC) features. Another issue is that disclosure of radon is is not mandated and there is great reluctance on the part of sellers and real estate agents to voluntary disclose radon issues.
The report said that both EPA and the Suregon General have recommended that ALL homes be tested below the THIRD floor for radon regardless of the radon zone because radon gas can accumulate in building structures.
According to the report, of the 6.7 million single family homes that were constructed between 2001 and 2005, only 469,000 incorporate radon-resistant construction. And of the total 76.1 million single family homes in existence in 2005, only 2.1 million had radon-resistant construction.
While EPA sets an action level of 4 pico curies per liter (pCI/l), the report said this threshold does not represent a safe exposure level to radon. Because radon gas is a carcinogen, the study said no level of exposure is safe. Indeed, in 2005, the US Surgeon General issued a public health advisory about the risk of breathing indoor radon.
The report also indicated that high levels of radon gas have been detected in homes within all radon zones. According to EPA, the average indoor air radon concentration is 1.3 pI/l with common ranges of 5 to 50 pC/l.
While 5.1 million homes (6.7%) are estimated to have indoor gas above the action level, the study said that the remaining 71 million are not necessarily safe because they are below the action level. This is because the 4.0 pCi/l simply represents the level that EPA determined was techologically and economically feasible back in 1992. EPA estimated that the 4.0 pCi/l level could be achieved 95% of the time while a 2.0 pCI/l could only be achieved 70% of the time.
The study also found that only 282,000 of the 1.5 million homes built in radon zone 1 areas were equipped with radon-resistant construction. The report said the nation is building homes in high radon areas at a faster pace than testing and mitigation is occuring in existing homes. Thus, the population exposed to unacceptable levels of radon is growing.
Part of the problem is that the International Residential Code which has been adopted by 45 states does not require radon-resistant new construction (RRNC) features. Another issue is that disclosure of radon is is not mandated and there is great reluctance on the part of sellers and real estate agents to voluntary disclose radon issues.
The report said that both EPA and the Suregon General have recommended that ALL homes be tested below the THIRD floor for radon regardless of the radon zone because radon gas can accumulate in building structures.
GAO Recommends EPA Use Vapor Intrusion Pathway for Listing Superfund Sites
The Government Accountability office issued a report on the Superfund program in May that recommended that vapor intrusion should be considered when ranking sites for the federal superfund list which is formally known as the National Priorities List or NPL.
According to the report, 60 sites currently on NPL may pose potential for VI. Based on current data, an additional 37 sites would be eligible for listing based on VI. 13 sites are being addressed as part of EPA removal actions. An undetermined number of construction complete sites may pose risk of VI.
In response, EPA staff have indicated that they are considering revising the Hazardous Ranking System that is used to score sites for the NPL. Currently, the pathway is not evaluated and contaminated groundwater that is used for drinking water remains the most important factor for scoring sites.
The complete report is available at: http://www.gao.gov/new.items/d10380.pdf
NRC Cites Wal-Mart For Improperly Managing Exit Signs
The NRC issued a citation to Wal-Mart Stores Inc. for improperly transferring and disposing of thousands of exit signs containing tritium, a radioactive isotope of hydrogen. The NRC said that the company had improperly handled 15,000 signs across the country but the most of the violations occurred in so-called "agreement states" that had been delegated authority by NRC. The regulatory action announced by NRC was only for the violations that occurred in the 13 states it has jurisdiction.
The NRC said the improper transfer or disposal of the 2,979 signs and failure to appoint a responsible official were a Severity Level III violation under NRC's enforcement policy that could have resulted in a civil penalty of $369,300. However, the NRC exercised its enforcement discretion and waived the civil penalty based on Wal-Mart's cooperation and prompt corrective actions. The NRC said Wal-Mart informed the NRC in February 2008 that it had lost or could not account for a potentially large number of exit signs. The NRC and agreement state inspectors performed an inspection of Wal-Mart stores in Indiana, Michigan, Missouri, New Jersey, Delaware, Virginia, North Carolina and Ohio from December 2008 through January 2009. Wal-Mart performed an inventory of all tritium exit signs at its stores nationwide, remediated contamination from damaged signs at several stores, and subsequently replaced all tritium exit signs with exit signs that do not contain radioactive material.
The exit signs poses little threat to public health and safety. However, the NRC requires proper record-keeping and disposal of the signs because a damaged or broken sign could cause minor radioactive contamination of the immediate vicinity, requiring environmental cleanup.
As a result of the Wal-Mart experience, the NRC issued a demand for information in January to more than 60 organizations and corporations known to possess large quantities of tritium exit signs, requesting information on record-keeping and accounting of the signs.
The exit signs poses little threat to public health and safety. However, the NRC requires proper record-keeping and disposal of the signs because a damaged or broken sign could cause minor radioactive contamination of the immediate vicinity, requiring environmental cleanup.
As a result of the Wal-Mart experience, the NRC issued a demand for information in January to more than 60 organizations and corporations known to possess large quantities of tritium exit signs, requesting information on record-keeping and accounting of the signs.
Retailers Fined for Improper Hazardous Waste Management
Lenders and prospective purchasers usually gloss over environmental compliance of retailers during environmental due diligence. However, two recent California enforcement actions illustrate how businesses that are viewed as environmentally benign can have significant environmental issues.
Last year, K-Mart Corporation agreed to pay the State of California $8.6MM in fines to resolve allegations of improper hazardous waste management. This was followed by the filing of a complaint by California Attorney General Jerry Brown against Target Corporation.
The violations alleged in the Target complaint are quite illuminating both in terms of the nature of the violations and the volume of waste involved. The state charged that approximately 180 locations mishandled "enormous volumes of hazardous materials, including but not limited to bleaches, pool chlorine and acids, pesticides, fertilizers, paints and varnishes, lamp oil and other ignitable liquids, aerosol products, oven cleaners and various cleaning agents, automoticve products and solvents, and other flammable and corrosive materials."
Most of the violations involved disposing these wastes into compactors so that they were disposed at facilities not licensed to receive such wastes. In one instance, the State alleged that 2300 pounds of flammable, toxic or corrosive wastes abd 2250 poubds of aerosol wastes were transported to a regional food bank. Other violations involved failing to comply with hazardous waste housekeeping requirements.
Most of the hazardous materials were meant to be sold to the public in the ordinary course of business. However, they became hazardous waste when they were either rendered unsalable or unusable for their intended use as a result of spillage, expiration of sell-by dates, contamination from other products, damage to containers or labels. Once rendered unsalable or unusable, these products fell within the definition of hazardous waste by being "discarded". The State is seeking injunctive relief and will no doubt demand significant penalties along the lines of the K-Mart settlement.
The violations alleged in the Target complaint are quite illuminating both in terms of the nature of the violations and the volume of waste involved. The state charged that approximately 180 locations mishandled "enormous volumes of hazardous materials, including but not limited to bleaches, pool chlorine and acids, pesticides, fertilizers, paints and varnishes, lamp oil and other ignitable liquids, aerosol products, oven cleaners and various cleaning agents, automoticve products and solvents, and other flammable and corrosive materials."
Most of the violations involved disposing these wastes into compactors so that they were disposed at facilities not licensed to receive such wastes. In one instance, the State alleged that 2300 pounds of flammable, toxic or corrosive wastes abd 2250 poubds of aerosol wastes were transported to a regional food bank. Other violations involved failing to comply with hazardous waste housekeeping requirements.
Most of the hazardous materials were meant to be sold to the public in the ordinary course of business. However, they became hazardous waste when they were either rendered unsalable or unusable for their intended use as a result of spillage, expiration of sell-by dates, contamination from other products, damage to containers or labels. Once rendered unsalable or unusable, these products fell within the definition of hazardous waste by being "discarded". The State is seeking injunctive relief and will no doubt demand significant penalties along the lines of the K-Mart settlement.
Lender Liability and Environmental Disclosure
In Robert Hull and Point Pleasant Landco v. William Lewis (No.A-005403-07T3, App. Div.6/11/09), First Fidelity had issued a loan commitment to the plaintiff in 1993 that required receipt of an acceptable phase 1. The property had been a coin-operated laundry. The bank obtained a phase 1 that concluded that there were no obvious signs of contamination and that due to relatively small amount of dry cleaning performed at site, it was unlikely that PCE was stored in sufficient quantities or USTs to be identified as a REC. The Phase 1 report contained express language that it was for the exclusive benefit of the bank and "was not intended to be, nor should be, for the benefit of any third party, including without limitation, any owner or lessee of the Property"
After reviewing the phase 1, the bank told borrower that phase 1 results were satisfactory to meet the loan commitment but did not provide the borrower with a copy of the report. The borrower then proceeded to purchase. In 2002, borrower tried to sell the land. A prospective purchaser performed a phase 2 and discovered extensive PCE and declined to proceed with the purchase.
The borrower, now a plaintiff, filed a lawsuit against the prior owners and operators of the property was well as the bank and the consultant. The borrower/plaintiff alleged that it had relied on the bank's statement that the phase 1 was satisfactory to mean that the site was clean in proceeding to close on the property, and that the bank had a duty to advise the borrower of the specific findings of the phase 1 results and that failure was a breach of contract. Plaintiff sought reimbursement of its remediation costs.
In a ruling from the bench, the trial court granted summary judgment to the bank on grounds that there was no evidence that plaintiff had relied on the bank's satisfaction with the phase 1 report in deciding whether to purchase the property, and if it had such reliance would not have been reasonable. The court said that any "green light" by the bank might just as well been a waiver of its own requirements. The court also noted that the plaintiff's 30 day contingency period had expired two months prior to the issuance of the phase 1 report.
The appeals court affirmed, holding the issue is not whether the Bank subjectively intended the approval of the loan as an assurance that the property was free from environmental degradation, but whether the plaintiffs actually relied on this representation and whether such reliance was reasonable. The court agreed with the trial court that there was no evidence that the plaintiff had reasonably relied on the phase 1 report.
Lesson 1: This case illustrates the importance of a purchaser performing its own due diligence even if this means reviewing the phase 1 performed on behalf of the bank. A lender does not stand in the same shoes as a potential owner of property because of the secured creditor exemption. So long as a lender does not become involved in the operations of its borrower or take title through foreclosure, its liability for environmental conditions will be limited to the value of the loan. When banks held loans on their balance sheets, this potential loss was often enough to incentivize lenders to perform thorough phase 1 reports. In the era of securization, however, when the lenders would sell their loans almost immediately, lenders have been more concerned with keeping the assembly line of loan originations moving as fast as possible to maximize their fees.
The borrower, on the other hand, is going to be the owner of the property and will be first in line for any enforcement actions that may result if the land turns out to be contaminated. If the borrower is not named on the phase 1 report, it is quite likely that it will not be deemed to have engaged in an all appropriate inquiry or whatever level of due diligence may be required under a state innocent or prospective purchaser defense.
The preamble to the EPA AAI rule did state that "all appropriate inquiries investigations may be conducted by or for one person and used by another party.". But relying on a report prepared for another party may not be considered to be conducting an all appropriate inquiry under state law.
Lesson 2: Many states have statutes that require owners of property to disclose existence of contamination to prospective purchasers. Lender liability statutes in those states generally to not provide protection for common law claims or for failing to comply with the disclosure requirements. Lenders should carefully review the provisions of state lender liability laws and the scope of environmental disclosure laws as part of their loan due diligence. For example, in 2007. the Supreme Court of Missouri in Hess v. Chase Manhattan Bank (220 S.W.3d 758; 2007 Mo. LEXIS 65, 5/1/07) upheld a jury verdict finding a bank liable for common law fraud for failing to disclose the existence of an EPA investigation in a foreclosure sale. In so holding, the Court said that disclaimers in the contract did not preclude the fraud claim.
[The Bank had an obligation to disclose material information that was not discoverable through ordinary diligence and that the plaintiff could not have reasonably discovered the existence of EPA's investigation in the kind of diligence ordinarily done for real estate transactions of this kind. The bank also had failed to file the required property disclosure statement.]
Missouri had a statute compelling disclosure of any material information concerning property to be sold. But even if a state does not have a statutory disclosure law, there may be an obligation under common law to disclose the existence of contamination or the results of prior investigations. Lenders have been held liable for improper disclosure in the past under common law theories of misrepresentation. For example, For example, in 2004 a Rhode Island Superior Court jury ruled that Fleet Bank was liable for $5.14 million in damages for failing to inform purchasers of a general store that the property drinking water was contaminated (Foote v. Fleet Financial Group) .
Another example was in 1999 when a Pennsylvania state court allowed a purchaser of contaminated land to maintain a claim for negligent misrepresentation against the bank when the bank failed to advise the plaintiff that real estate appraisal did not address environmental conditions (Seats v. Hoover, 1999 U.S. Dist. LEXIS 13379, August 18, 1999).
In 1991, the Montana Supreme Court reversed a summary judgment ruling in favor of a bank and allowed the borrower to proceed with negligent misrepresentation and constructive fraud claims against its former lender because there was a question of material fact whether the bank had created a false impression about the environmental conditions of the property (Mattingly v. First Bank of Lincoln,1997 WL 668215 (Sup. Ct. Montana, Oct. 28, 1997).
In Boyle v. Boston Foundation, Inc. ,788 F. Supp. 627 (D. Mass. 1992) a bank that failed to disclose to purchasers of contaminated property the existence of notice from a state agency ordering a cleanup at the site was not held liable for misrepresentation because of a doctrine unique to the failed financial institutions taken over by the FDIC. The agency was acting as a receiver for the failed bank. The failure to disclose material information was held to constitute an "agreement" under the D'Oench doctrine and since this was an unwritten agreement, the plaintiffs could not prevail against the FDIC. It is likely that the plaintiff would have prevailed had the bank not been in receivership
It seems that at least once a year there is a case imposing liability on a bank for inadequately disclosing environmental conditions of foreclosed property that it has sold. It is not only prudent to err on the side of full disclosure in transactions, but in emerging areas such as vapor intrusion, to look back at prior disclosures to see if they could form the basis of a claim for non-disclosure. Given the volume of foreclosures we are now seeing, I would not be surprised to see more of these cases during the next year or so.
After reviewing the phase 1, the bank told borrower that phase 1 results were satisfactory to meet the loan commitment but did not provide the borrower with a copy of the report. The borrower then proceeded to purchase. In 2002, borrower tried to sell the land. A prospective purchaser performed a phase 2 and discovered extensive PCE and declined to proceed with the purchase.
The borrower, now a plaintiff, filed a lawsuit against the prior owners and operators of the property was well as the bank and the consultant. The borrower/plaintiff alleged that it had relied on the bank's statement that the phase 1 was satisfactory to mean that the site was clean in proceeding to close on the property, and that the bank had a duty to advise the borrower of the specific findings of the phase 1 results and that failure was a breach of contract. Plaintiff sought reimbursement of its remediation costs.
In a ruling from the bench, the trial court granted summary judgment to the bank on grounds that there was no evidence that plaintiff had relied on the bank's satisfaction with the phase 1 report in deciding whether to purchase the property, and if it had such reliance would not have been reasonable. The court said that any "green light" by the bank might just as well been a waiver of its own requirements. The court also noted that the plaintiff's 30 day contingency period had expired two months prior to the issuance of the phase 1 report.
The appeals court affirmed, holding the issue is not whether the Bank subjectively intended the approval of the loan as an assurance that the property was free from environmental degradation, but whether the plaintiffs actually relied on this representation and whether such reliance was reasonable. The court agreed with the trial court that there was no evidence that the plaintiff had reasonably relied on the phase 1 report.
Lesson 1: This case illustrates the importance of a purchaser performing its own due diligence even if this means reviewing the phase 1 performed on behalf of the bank. A lender does not stand in the same shoes as a potential owner of property because of the secured creditor exemption. So long as a lender does not become involved in the operations of its borrower or take title through foreclosure, its liability for environmental conditions will be limited to the value of the loan. When banks held loans on their balance sheets, this potential loss was often enough to incentivize lenders to perform thorough phase 1 reports. In the era of securization, however, when the lenders would sell their loans almost immediately, lenders have been more concerned with keeping the assembly line of loan originations moving as fast as possible to maximize their fees.
The borrower, on the other hand, is going to be the owner of the property and will be first in line for any enforcement actions that may result if the land turns out to be contaminated. If the borrower is not named on the phase 1 report, it is quite likely that it will not be deemed to have engaged in an all appropriate inquiry or whatever level of due diligence may be required under a state innocent or prospective purchaser defense.
The preamble to the EPA AAI rule did state that "all appropriate inquiries investigations may be conducted by or for one person and used by another party.". But relying on a report prepared for another party may not be considered to be conducting an all appropriate inquiry under state law.
Lesson 2: Many states have statutes that require owners of property to disclose existence of contamination to prospective purchasers. Lender liability statutes in those states generally to not provide protection for common law claims or for failing to comply with the disclosure requirements. Lenders should carefully review the provisions of state lender liability laws and the scope of environmental disclosure laws as part of their loan due diligence. For example, in 2007. the Supreme Court of Missouri in Hess v. Chase Manhattan Bank (220 S.W.3d 758; 2007 Mo. LEXIS 65, 5/1/07) upheld a jury verdict finding a bank liable for common law fraud for failing to disclose the existence of an EPA investigation in a foreclosure sale. In so holding, the Court said that disclaimers in the contract did not preclude the fraud claim.
[The Bank had an obligation to disclose material information that was not discoverable through ordinary diligence and that the plaintiff could not have reasonably discovered the existence of EPA's investigation in the kind of diligence ordinarily done for real estate transactions of this kind. The bank also had failed to file the required property disclosure statement.]
Missouri had a statute compelling disclosure of any material information concerning property to be sold. But even if a state does not have a statutory disclosure law, there may be an obligation under common law to disclose the existence of contamination or the results of prior investigations. Lenders have been held liable for improper disclosure in the past under common law theories of misrepresentation. For example, For example, in 2004 a Rhode Island Superior Court jury ruled that Fleet Bank was liable for $5.14 million in damages for failing to inform purchasers of a general store that the property drinking water was contaminated (Foote v. Fleet Financial Group) .
Another example was in 1999 when a Pennsylvania state court allowed a purchaser of contaminated land to maintain a claim for negligent misrepresentation against the bank when the bank failed to advise the plaintiff that real estate appraisal did not address environmental conditions (Seats v. Hoover, 1999 U.S. Dist. LEXIS 13379, August 18, 1999).
In 1991, the Montana Supreme Court reversed a summary judgment ruling in favor of a bank and allowed the borrower to proceed with negligent misrepresentation and constructive fraud claims against its former lender because there was a question of material fact whether the bank had created a false impression about the environmental conditions of the property (Mattingly v. First Bank of Lincoln,1997 WL 668215 (Sup. Ct. Montana, Oct. 28, 1997).
In Boyle v. Boston Foundation, Inc. ,788 F. Supp. 627 (D. Mass. 1992) a bank that failed to disclose to purchasers of contaminated property the existence of notice from a state agency ordering a cleanup at the site was not held liable for misrepresentation because of a doctrine unique to the failed financial institutions taken over by the FDIC. The agency was acting as a receiver for the failed bank. The failure to disclose material information was held to constitute an "agreement" under the D'Oench doctrine and since this was an unwritten agreement, the plaintiffs could not prevail against the FDIC. It is likely that the plaintiff would have prevailed had the bank not been in receivership
It seems that at least once a year there is a case imposing liability on a bank for inadequately disclosing environmental conditions of foreclosed property that it has sold. It is not only prudent to err on the side of full disclosure in transactions, but in emerging areas such as vapor intrusion, to look back at prior disclosures to see if they could form the basis of a claim for non-disclosure. Given the volume of foreclosures we are now seeing, I would not be surprised to see more of these cases during the next year or so.
Lenders Subject to Stormwater and Dust Enforcement Actions
As builders continue default on construction loans, states are increasing turning to banks to ensure that partially completed developments remain in compliance with environmental laws. We have seen enforcement actions brought against banks in California, Georgia, North Carolina with unconfirmed reports in other states.
At the heart of the problem is runoff from abandoned and foreclosed residential projects. Under the federal Clean Water Act (CWA) and state versions of that law, developers and builders are required to obtain stormwater permits and implement Storm Water Pollution Prevention Plans, Best Management Plans and or Erosion Control Measures. These requirements are the reason that construction projects have those ubiquitous black and orange silt fences.
When banks foreclose on these abandoned projects, they may perform phase 1 reports that typically do not address environmental compliance. As a result, foreclosing bank is usually of the need to maintain erosion control or the cost of correcting any violations. The CWA does not have a secured creditor exemption so banks will be considered owners or operators of these properties that are responsible for complying with the full panoply of environmental laws associated with the development. Lenders that foreclose on partially completed construction sites are finding themselves saddled with fines and penalties for unpermitted sediment runoff and costs to bring the sites into compliance.
Normally. fines can range from a few hundred dollars per day to tens or hundreds of thousands depending on the severity of the violations and length of time the properties have been in non-compliance. In addition, the violations run with the land. The costs can only quickly add up and with banks foreclosing on multiple properties, the costs can scale into the millions of dollars For example, at one site near Dawsonville, a foreclosing lender has fines in excess of #4 million for inadequate erosion controls for a site that was valued at $1.97 million in 2006. The Gainesville Bank & Trust foreclosed on the property after the builders and developers of the site were convicted mortgage fraud and abandoned the development. Consequently, some banks are taking proactive steps to minimize their liability. SunTrust Banks Inc. recently implemented a comprehensive environmental compliance program for its foreclosed and repossessed properties. The bank retained two engineering firms to oversee the properties.
Georgia recently issued new General Permits for Storm Water Discharges Associated with Construction Activity for Stand Alone projects, Infrastructure Projects and Common Developments. Existing construction projects must submit a new NOI within 60 days after the effective date of the new permits. New sites that begin construction activities after the issuance date of the Permits must submit the new NOI form at least 14 days prior to beginning construction activities. Proof of submittal of the NOI must be retained at the construction site or other readily available location. Under the revised rules, a lender or other secured creditor who acquires legal title to a construction site must file a new NOI by the earlier to occur of (1) seven days before beginning work at the construction site or (2) thirty days from acquiring legal title to the construction site.
In North Carolina, the heads of the Departments of Commerce ,and the Environment and Natural Resources (DENR) recently issued a joint memo advising banks to contact the DENR immediately upon taking control of property. The DENR will send inspectors to the site to determine its compliance and work with the lender to bring the site into compliance, re-issued expired permits and approve acceptable sedimentation controls. If remedial measures are required, the bank would be expected to enter into an administrative order. However, following the suggested protocol will help lenders minimize fines or penalties.
Meanwhile, in the arid southwest such as Arizona and parts of California, regulatory authorities are focusing on air pollution caused by dust from stalled construction projects. Lenders are being required to implement measures to reduce airborne dust.
The California Department of Toxic Substances has also warned lenders foreclosing on properties that that they properly dispose any hazardous materials at those sites. Abandoned construction projects frequently become dumping grounds and abandoned homes may contain quantities of hazardous materials that may have to be managed as hazardous waste according to the state.
In Florida, a lender foreclosed on six condos in a senior housing complex. One of the unit owners took out all appliances including the air conditioning. The condo association demanded that the foreclosing lender replace the air conditioning but refused. Months later, the entire unit became infested with mold forcing the bank to pay for a gut renovation.
Then we have the ordinances that are sprouting across the country require lenders that foreclose on homes to properly maintain them or pay to demolish the structures. For example, Cathedral City recently enacted a local ordinance requiring owners of foreclosed properties to register the property with the city. Among other requirements, the ordinance requires owners to pay a $70 annual registration fee, secure the property, keep it free of debris, landscape the front and side yards to neighborhood standards, clean or drain the pool, and hire a local property manager to inspect it weekly. The town located in what was once the red-hot housing market of Riverside County has over 2,000 foreclosed properties currently sitting vacant in this California desert community. The empty houses have been vandalized, used a meth labs or simply as bases for criminal activities. Stagnant swimming pools have created breeding grounds for mosquitoes and drowning hazards.
Earlier this week, JPMorgan Chase agreed to pay Oakland, Calif. $35,000 to settle a lawsuit accusing lenders and local agents of illegally evicting tenants under the municipal “just cause” eviction law. Under the just cause ordinance, landlords and foreclosing lenders must have a specified valid reason for evicting a tenant, such as the owner moving into the unit, and give 60 days' notice.
In Rhode Island, the legislature recently enacted the Rhode Island Foreclosed Property Upkeep Act. It requires any financial institution that purchases a foreclosed property to post a bond with the municipality for 25 percent of the property’s assessed value, to be used to correct any code violations if the owner doesn’t take care of it. If the full value of the bond is used in the upkeep of the property, the owner has 10 days to file another bond in the same amount or have the property forfeited to the municipality.
All of these emphasizes how important it is for lenders and their consultants to carefully review the conditions of properties before a foreclosure decision is made and to plan for post-foreclosure activities not only to minimize liability but also to preserve property value.
Due Care, Continuing Obligations and the CERCLA landowner defenses
There have been alot of ASTM standards issued the past few years but one of the more important ones will likely be the Continuing Obligations practice that is currently in draft form. It is important because it is critical for landowners to maintain their liability protection after they take title.
It is important for consultants, attorneys and landowners to realize that the landowner liability protections are affirmative defenses-that means the person seeking to assert the defense has the burden of proving that they qualify for the liability protection. I suspect the caselaw under the third party defense and innocent landowner defenses will serve as an example of how courts are going to interpret the scope of the reasonable steps/continuing obligations obligations. If so, the courts will narrow construe the defenses-in other words make it hard for parties to establish that they are not liable.
The decisions in U.S. v. Honeywell, 2008 U.S. Dist. LEXIS 13432 (C.D. Ca. 2/22/08) and the 2006 AMCAL v. Pacific Clay, 457 F.Supp.2d 1016. (E.D.Ca. 2006) illustrate that there is plenty of liability remaining out there for purchasers of contaminated property who move around contaminated soil. I think we would do a disservice to clients if potential users of the practice if we suggest that all they need to do is erect a fence or notify the authorities.
It should also be pointed out that some jurisdictions still hold that passive migration is disposal though a majority of courts that holds passive migration is not a release. Landowners in jurisdictions where mere migration is disposal will probably have to implement more rigorous actions to satisfy 'reasonable steps' (i.e. Stop ongoing releases) than those in jurisdictions following the majority rule.
Thus, landowners need to be very careful not to inadvertantly forfeit their liability after they take title. Obviously, the determination of what steps are 'reasonable' will be site-specific. However, we can probably make some general observations.
As part of the reasonable steps obligations, landowners have to stop continuing releases, prevent any threatened future releases and prevent or limit exposure to releases of hazardous substances. It would seem from any reading of the legislative language, history and the 1995 EPA Guidance on Contaminated Aquifers that a BFPP, ILO or CPO do not have to remediate groundwater. On the other end of the spectrum, it is also probably clear that simply erecting a fence or notifying the authorities is probably not going to satisfy the reasonable steps requirement in most cases.
The big question is what does such a party have to do about contaminated soil? I think it is fair to suggest that they would also not have to engage in long-term remedial measures such as would have to be implemented as part of a RI/FS. It would seem to me that landowners seeking certainty about whether they have implemented 'reasonable steps' should probably anticipate that they will have to perform the equivalent of removal actions or interim remedial measures such as removal of USTs, excavation of grossly contaminated soils and probably installation of vapor mitigation systems. I think source removal and eliminating the exposure pathway should be the admission price for liability relief
It is important for consultants, attorneys and landowners to realize that the landowner liability protections are affirmative defenses-that means the person seeking to assert the defense has the burden of proving that they qualify for the liability protection. I suspect the caselaw under the third party defense and innocent landowner defenses will serve as an example of how courts are going to interpret the scope of the reasonable steps/continuing obligations obligations. If so, the courts will narrow construe the defenses-in other words make it hard for parties to establish that they are not liable.
The decisions in U.S. v. Honeywell, 2008 U.S. Dist. LEXIS 13432 (C.D. Ca. 2/22/08) and the 2006 AMCAL v. Pacific Clay, 457 F.Supp.2d 1016. (E.D.Ca. 2006) illustrate that there is plenty of liability remaining out there for purchasers of contaminated property who move around contaminated soil. I think we would do a disservice to clients if potential users of the practice if we suggest that all they need to do is erect a fence or notify the authorities.
It should also be pointed out that some jurisdictions still hold that passive migration is disposal though a majority of courts that holds passive migration is not a release. Landowners in jurisdictions where mere migration is disposal will probably have to implement more rigorous actions to satisfy 'reasonable steps' (i.e. Stop ongoing releases) than those in jurisdictions following the majority rule.
Thus, landowners need to be very careful not to inadvertantly forfeit their liability after they take title. Obviously, the determination of what steps are 'reasonable' will be site-specific. However, we can probably make some general observations.
As part of the reasonable steps obligations, landowners have to stop continuing releases, prevent any threatened future releases and prevent or limit exposure to releases of hazardous substances. It would seem from any reading of the legislative language, history and the 1995 EPA Guidance on Contaminated Aquifers that a BFPP, ILO or CPO do not have to remediate groundwater. On the other end of the spectrum, it is also probably clear that simply erecting a fence or notifying the authorities is probably not going to satisfy the reasonable steps requirement in most cases.
The big question is what does such a party have to do about contaminated soil? I think it is fair to suggest that they would also not have to engage in long-term remedial measures such as would have to be implemented as part of a RI/FS. It would seem to me that landowners seeking certainty about whether they have implemented 'reasonable steps' should probably anticipate that they will have to perform the equivalent of removal actions or interim remedial measures such as removal of USTs, excavation of grossly contaminated soils and probably installation of vapor mitigation systems. I think source removal and eliminating the exposure pathway should be the admission price for liability relief
Dirty Little (Environmental) Secrets
Nearly all state and federal environmental cleanup laws have reporting obligations. However, the circumstances and parties who have the obligation to report contamination will vary significantly. In many cases, the reporting obligations are linked to the discovery of contamination that exceeds a reportable quantity or RQ. The RQ will vary according to the particular contaminant.
At first glance, this may seem like a reasonable approach. However, when one 'digs' a little deeper, it becomes clear that the way reporting obligations are structured have actually facilitated the proliferation of brownfields and allows many sellers of corporate property to keep the presence of contamination secret. Indeed, a common provision now appearing in transactional documents is a so-called 'No Look' or 'No Hunt' clause that prevents the buyer from conducting further investigations on its property if it wants to maintain the contractual protections it obtained from the seller. In fact, it is not uncommon for environmental lawyers to spend a significant amount of time on deals negotiating and drafting what and how information about contamination is to be disclosed.
The reason for all this is because the reporting obligations are often expressed in terms of the discharge of a certain quantity of a chemical over a certain period of time such as 24 hours. Now, back in the 1970s this made alot of sense when environmental management practices were still in their infancy and the principal problem was stopping ongoing discharges of hazardous substances.
Management of hazardous substances and wastes has significantly improved over the nearly three decades since the passage of CERCLA and RCRA so that NEW discharges from a facility are no longer the most important concern. Instead, it is the legacy of historical contamination from these past practices that have had to continually confront.
Unfortunately, the reporting obligations often do not address purely historical contamination since (1) the regulations often use present tense gerunds such as spilling, discharging, releasing, disposing and (2) it is difficult to determine how much of the contamination was discharged over the relevant reporting period. In otherwords, was it a drip, drip of PCB-contaminated oil from a condensor or percolation of wastes thru an unlined lagoon over 20 years, or was there a sudden release of hazardous materials from some containment structure or container.
Another regulatory oddity is that cleanup standards and reporting obligations are not congruent so that there could be contamination above above cleanup levels that may not be reportable because the contamination occurred over a very long period of time yet for some chemicals there may be a discharge that requires reporting but does not result in any risk-based cleanup obligation.
As a result, owners and sellers of property with purely historical contamination take the position that they have no obligation to disclose the presence of the contamination even if the contamination is present in concentrations that exceed applicable cleanup standards. In the absence of a regulatory driver, the owner/seller can then contractually prohibit the buyer from disclosing the contamination unless an overburdened regulatory somehow stumbles across the contamination.
Now, some academics, government legislators and judges have expressed the view that this is really not that big a problem because the marketplace can address this issue. After all, they say, a buyer can always require a seller to disclose and cleanup a site. Of course, this ignores the practical market reality that buyers may not have the leverage to extract such concessions, may not realize they need such information or that they may even want to know.
I think the absence of reporting obligations for purely historical contamination has contributed to the creation of brownfields as owners can just abandon their properties and while the local real estate market may be aware of concerns, overtaxed regulators may have no clue about the potential contamination.
My suggestion is that we link reporting obligations to cleanup standards so that if a phase 2 discovers soil or groundwater contamination, the contamination must be reported. No more time spend on trying to figure out how much of the chemical escaped into the ground or less time for lawyers to argue over how to deal with the results of the due diligence.
I also think that all phase 2 reports should be required to be sent to a centralized state database. Just think of all the wasted time and money that goes into repeating phase 2 reports over the years. If a consultant was able to access a database and see that sampling had been collected in the past in a certain area, it could use that information to advise its client that there is no need to sample in a particular area or that the area was already sampled and recommend sampling in other areas to better delineate the contamination.
Why are we still discovering contaminated sites nearly 30 years after CERCLA? Why havent we cleaned up more sites? Why are there so many brownfield sites? I think the inadequate reporting obiligations are a bit reason.
What do you think?
At first glance, this may seem like a reasonable approach. However, when one 'digs' a little deeper, it becomes clear that the way reporting obligations are structured have actually facilitated the proliferation of brownfields and allows many sellers of corporate property to keep the presence of contamination secret. Indeed, a common provision now appearing in transactional documents is a so-called 'No Look' or 'No Hunt' clause that prevents the buyer from conducting further investigations on its property if it wants to maintain the contractual protections it obtained from the seller. In fact, it is not uncommon for environmental lawyers to spend a significant amount of time on deals negotiating and drafting what and how information about contamination is to be disclosed.
The reason for all this is because the reporting obligations are often expressed in terms of the discharge of a certain quantity of a chemical over a certain period of time such as 24 hours. Now, back in the 1970s this made alot of sense when environmental management practices were still in their infancy and the principal problem was stopping ongoing discharges of hazardous substances.
Management of hazardous substances and wastes has significantly improved over the nearly three decades since the passage of CERCLA and RCRA so that NEW discharges from a facility are no longer the most important concern. Instead, it is the legacy of historical contamination from these past practices that have had to continually confront.
Unfortunately, the reporting obligations often do not address purely historical contamination since (1) the regulations often use present tense gerunds such as spilling, discharging, releasing, disposing and (2) it is difficult to determine how much of the contamination was discharged over the relevant reporting period. In otherwords, was it a drip, drip of PCB-contaminated oil from a condensor or percolation of wastes thru an unlined lagoon over 20 years, or was there a sudden release of hazardous materials from some containment structure or container.
Another regulatory oddity is that cleanup standards and reporting obligations are not congruent so that there could be contamination above above cleanup levels that may not be reportable because the contamination occurred over a very long period of time yet for some chemicals there may be a discharge that requires reporting but does not result in any risk-based cleanup obligation.
As a result, owners and sellers of property with purely historical contamination take the position that they have no obligation to disclose the presence of the contamination even if the contamination is present in concentrations that exceed applicable cleanup standards. In the absence of a regulatory driver, the owner/seller can then contractually prohibit the buyer from disclosing the contamination unless an overburdened regulatory somehow stumbles across the contamination.
Now, some academics, government legislators and judges have expressed the view that this is really not that big a problem because the marketplace can address this issue. After all, they say, a buyer can always require a seller to disclose and cleanup a site. Of course, this ignores the practical market reality that buyers may not have the leverage to extract such concessions, may not realize they need such information or that they may even want to know.
I think the absence of reporting obligations for purely historical contamination has contributed to the creation of brownfields as owners can just abandon their properties and while the local real estate market may be aware of concerns, overtaxed regulators may have no clue about the potential contamination.
My suggestion is that we link reporting obligations to cleanup standards so that if a phase 2 discovers soil or groundwater contamination, the contamination must be reported. No more time spend on trying to figure out how much of the chemical escaped into the ground or less time for lawyers to argue over how to deal with the results of the due diligence.
I also think that all phase 2 reports should be required to be sent to a centralized state database. Just think of all the wasted time and money that goes into repeating phase 2 reports over the years. If a consultant was able to access a database and see that sampling had been collected in the past in a certain area, it could use that information to advise its client that there is no need to sample in a particular area or that the area was already sampled and recommend sampling in other areas to better delineate the contamination.
Why are we still discovering contaminated sites nearly 30 years after CERCLA? Why havent we cleaned up more sites? Why are there so many brownfield sites? I think the inadequate reporting obiligations are a bit reason.
What do you think?
Developer Liable for Spreading Contaminated Dirt
A former property owner who inadvertently spreading contaminated dirt during grading activities for a residential development nearly thirty years ago could not assert the CERCLA third-party defense and was held liable as a former owner in United States v. Honeywell, 2008 LEXIS 13432 (E.D. Cal. Feb. 22, 2008).
This is one of those harsh cases that have given CERCLA a bad name and perhaps of the situations that Congress had hoped to ameliorate when it enacted the Innocent Landowners (ILO) Defense in 1986. Had the defendant been able to get past the 'solely caused by' prong, it might have been able to demonstrate that in 1978 it would not have had any reason to know of the contamination, especially since the mine tailings had been covered with vegetation. Since the decision was at the summary judgment stage, it is unlikely that sufficient discovery had been conducted to determine if Bruner had exercised due care.
In this case, Charles Bruner purchased an undeveloped parcel known as Ray Vista in 1978. The Ray Vista Site was located adjacent to the Mesa de Oro mound of mine tailings that had been generated by the Central Eureka Mine. At the time that Bruner purchased the site, the adjacent tailing mounds were covered with vegetation. However, aerial photos showed that the tailings had been subject to extensive erosion prior to 1977 that had allowed contaminated soils to migrate onto the development site.
Following his purchase of the property, Bruner retained contractors to excavate and grade the site to facilitate construction of streets and the installation of the underground utilities. He also contracted with the City of Sutter Creek for the construction of the streets, street lighting, sanitary sewers, water distribution pipes, and other utility distribution facilities. Thereafter, he built four homes on two streets in the subdivision.
In 1995, EPA discovered that contamination from the historical mining operations at the Site had migrated to the Vista Ray residential subdivision (“Vista Ray”). EPA implemented a response action which involved excavation of the contaminated soils from all of the residential lots, placement of clean soils as well as landscaping. The federal government then commenced a cost recovery suit against Honeywell International and other responsible parties. Honeywell and the defendants ultimately agreed to pay EPA $600K along with an additional $120K in funds collected from contribution actions that had been filed against other responsible parties. The only third-party defendant that refused to settle was Bruner, and the settling parties sought $160K in response costs.
Bruner argued that he was entitled to assert the innocent purchaser defense because he did not know or have reason to know of the presence of the contamination but the court did not reach that issue because he could not the first element of the third party defense.
The innocent purchaser defense is technically part of the CERCLA third-party defense which provides that a person will not be liable if the defendant can show that the release was (1) solely caused by an act or omission of a third party (2) whom the defendant did not have any direct or indirect contractual relationship (3) that the defendant exercise due care with respect to the hazardous substances and (4) took precautions against the foreseeable acts or omissions of third. The innocent purchaser's defense is used to satisfy the second prong of the third party defense. If the defendant can show that it did not know or had no reason to know of contamination, it would be deemed to not be in a 'contractual relationship' with a person who caused the contamination.
Bruner argued that the contamination was solely due to mine operations. However, the court said the contaminated soil was spread either by Bruner's actions or those of his contractors. Distinguishing other cases were parties had been able to assert a defense based on the passive migration of the contaminants, the court said that Bruner took affirmative steps in developing his land. The court noted that he actively graded and excavated the property, that it was reasonable to expect that any contaminants in the soil would have been agitated and that it is eminently foreseeable that development of such land would result in a release of whatever hazardous substances were in the soil.
Because Bruner could not show that a third party was the 'sole' cause of the release of from the Vista Ray subdivision, the court ruled there was no need to discuss whether he exercised due care or took the proper precautions to prevent such a release. Likewise, because the court found that Bruner had actively contributed to the 'release' of the hazardous substance at the time he undertook development, the issue of whether he had 'reason to know' of the presence of a hazardous substance was irrelevant. While the court held that Bruner was liable, it determined that there were genuine issues of material fact on the amount of Bruner's equitable share of the response costs and that further discovery was required before the Bruner share of the costs could be established.
This is one of those harsh cases that have given CERCLA a bad name and perhaps of the situations that Congress had hoped to ameliorate when it enacted the Innocent Landowners (ILO) Defense in 1986. Had the defendant been able to get past the 'solely caused by' prong, it might have been able to demonstrate that in 1978 it would not have had any reason to know of the contamination, especially since the mine tailings had been covered with vegetation. Since the decision was at the summary judgment stage, it is unlikely that sufficient discovery had been conducted to determine if Bruner had exercised due care.
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