Appeals Court Denies Challenge to NJDEP Oversight Costs

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


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


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


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


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

Home Builder Seeks Cost Recovery Despite No Pre-Acquisition Diligence

We all know that lender due diligence and underwriting standards were "lax" during the great real estate bubble of the past decade. However, I continue to be astounded by the indifference that developers exhibited to environmental issues since after all they were taking title to potentially contaminated land. Now that the developers have been stuck with cleanups and are unable to sell the homes, they are trying to use lawsuits to compensate for their lack of diligence.  Following is a recent example of such a case. I will discuss another interesting case in a separate post.

In KB Homes v Rockville TBD Corp. George and Patricia Kopetsky (Kopetsky) purchased some unimproved farmland in 1989 that was adjacent to the defendant Rockville plant that manufactured airplane components. Kopetsky did not perform any environmental due diligence prior to acquiring the farm land.
As part of a 1993 asset sale, an environmental investigation determined that TCE had been discharged into the facility’s septic system located on the eastern portion of the property. In 1995, the defendant entered into the Indiana Voluntary Remediation Program of the facility and subsequently determined but the levels were below the cleanup standards. The septic system was decommissioned and the Indiana Department of Environmental Management (IDEM) issued a Certificate of Completion in 1996.  A subsequent investigation performed on the western portion of the property in 1997 and 1998 revealed a plume of TCE-contaminated groundwater that had migrated from the facility and beneath a portion of the Koetsky’s farmland.
In the meantime, the Kopetsky submitted a plat plan for a subdivision known as Cedar Park in 1998. After they received plat approval, Kopetsky entered into a lot purchase and option agreement with Dura Builders.

In the agreement, Kopetsky represented that the Cedar Park land was free of any hazardous materials and promised that he would, at each closing, execute a vendor's affidavit certifying the environmental condition of the lot The affidavits stated, in part, that the land did not contain any hazardous waste or materials, and that no disclosure statement was required to be filed pursuant to the Indiana Responsible Property Transfer Law. Kopetsky also represented to their lender that “after due investigation and inquiry, no contamination was present at the property.

In 1999, Dura Builders began purchasing lots from Kopetsky but did not perform any environmental due diligence either before executing the lot purchase agreement or actually purchasing the individual lots.  In 2002, a consultant retained by Cedar Park provided Kopetsky with groundwater monitoring results showing that a portion of the Cedar Park property was impacted with TCE-contaminated groundwater. A cleanup to non-residential standard was proposed but Kopetsky objected because since this would prevent the sale of the land for residential development.  Kopetsky continued to sell lots to Dura Builders but did not notify Dura of the contamination.

In 2004, KB Homes acquired Dura Builders. KB did not conduct environmental due diligence prior to acquiring Dura Buildings. Indeed, KB did not learn of the contaminationuntil March 2005 when KB had performed its own sampling. KB was forced to halt construction as buyers were either unable to obtain financing or walked away from their contracts. In 2007, KB filed a complaint against Rockville, Kopetsky, and Patriot Engineering for negligence, trespass, nuisance, breach of contract and constructive fraud. KB requested damages for reduction in value of its property as a result of the TCE contamination; legal and consultant fees; fees paid to maintaining the lots and homes; and interest on the capital investment made unproductive by the contamination.

The trial court granted Rockville’s motion for summary judgment and KB appealed. The Indiana Court of Appeals agreed that the KB could not bring a trespass claim because it did not have possession of the land at the time that the activity that caused the contamination had occurred.

On the nuisance claim, the appeals court said the lower court erred when it found that Rockville could have not foreseen that a release of TCE could harm an adjoining property. However, the court went on that under Indiana law, the nuisance claims could not proceed because Rockville had sold the property in 1993 and the actions that caused the contamination had occurred prior to the time KB acquired the sale.

For the negligence claim, though, the appeals court said that the trial court had erred when it granted summary judgment. The trial court had that the damages that KB sought were economic in nature and therefore were not recoverable in a negligence action. Under the economic loss doctrine, parties may not use tort law to try to evade an allocation of risk that was negotiated in a contract. However, the appeals court said that KB did not have a contractual relationship with Rockville so its negligence claim was not an attempt to circumvent a contractual limitation. KB’s claims against Kopetsky and Patriot Engineering have yet to be resolved.

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

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

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?    

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).

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.