$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.

Purchaser of Property With Old Tank Not Eligible for Reimbursement from NY Oil Spill Fund

Purchaser discovered "orphan" UST following closing and remediated contamination. When it filed an application for reimbursement from the NY Oil Spill Fund, the claim was denied on the grounds that the property owner was a "discharger" under the NY Navigation Law and therefore not eligible for reimbursement.

Property owner sought judicial review under Article 78,  asserted it was an innocent purchaser because it never used the tank and was not aware of the tank at the time of purchase.

Relying on State v Green, the court upheld the decision of the Spill Fund. The court said that the Navigation Law imposed strict liability and awareness of a tank was not a defense to liability. Moreover, the tank was deemed to be a fixture attached to the property and therefore, owner/petitioner was owner of the tank system. In Matter of Eugene Veltri, 2011 N.Y. App. Div. LEXIS 762 (App. Div-3rd Dept. 2/10/11)

Commentary: While the Oil Spill Fund can be a tool for developers of brownfield sites impacted with petroleum contamination, the Oil Spill Fund takes a broad definition of a "discharger" and that if there is a tank at the site when the developer takes title, it will be considered to be a discharger. Thus, it is essential that due diligence be used to identify historic tanks and would be prudent to have the tanks prior to taking title. 

Brownfield Developer Settles Case Over Contaminated Dust

Essex Insurance Co. v. Lueron Dixon, et al., 2010 U.S.Dist. LEXIS 98681 (S.D.Fla. 9/21/10), Dania Distribution Centre Ltd purchased a 15.5 acre site located in the City of Dania Beach in 2001 to construct a distribution center. The site had formerly been used as landfill for dredged sand and medical waste.

Pre-acquisition groundwater sampling revealed presence of  benzene, napthalene, lead, diesel and chlorinated solvents. In May 2002, the Dania defendants obtained a six-month GCL policy from Essex Insurance Company that covered the property as vacant land. Soil samples collected approximately 18 months after the purchase in November 2002 and after the expiration of the policy  detected heavy metals and asbestos. The  *** levels were below commercial standards but twice the allowable levels for residential properties.

Dania began construction activity in September 2003 after obtaining a building permit. However, despite the sampling results, Dania apparently failed to control dust. 90 Nearby residents and workers then filed a lawsuit alleging bodily injury and property damage claims.  The insurer refused to defend or participate in settlement. After the settlement, the insurer seeks declaratory judgment and Dania defendants counterclaim for breach of contract and bad faith. Federal district court grants motion for summary judgment that pollution exclusion barred covered.

My question is- who does not implement a community air monitoring plan and dust control when developing a contaminated site? To borrow from a popular commercial-"I mean, really?"

Brownfield Developer Relying on EPA Assessment Seeks Cost Recovery from PRP

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

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

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

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

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

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

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

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

Denver Brownfield Project Falls Victim to Great Recession

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

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

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

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