$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.

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

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

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

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

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

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

Consultants Survive Lawsuit For Negligent Investigation and Remediation of Brownfield Site

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

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

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

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

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

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

A New Jersey

Appeals Court

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

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

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

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

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

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

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

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

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

Purchaser Qualifies for BFPP Defense

In 3000 E.Imperial, LLC v Robertshaw Controls Co, 2010 U.S. Dist. LEXIS 138661 (C.D. Cal. 12/29/10), the purchaser acquired property in November 2006 that had been formerly used to manufacture aircraft and missile valves as well as furniture manufacturing. Plaintiff learned the site had been contaminated during its pre-acquisition diligence. After acquiring title, plaintiff demolished the manufacturing building which occupied 90% of the site and completed additional investigations.

A September 2007 report identified two areas of concern: AOC 1 was the location of former USTs and a former maintenance shed.  AOC 2 was the former manufacturing building and was impacted from TCE. Plaintiff drained the USTs which had residual TCE. The USTs were excavated in 2009. Plaintiff incurred approximately $1.7MM in response costs and sought reimbursement under CERCLA and the California superfund law.

Defendant argued that plaintiff did not qualify for the federal and state Bona Fide Prospective Purchaser (BFPP) Defenses failed to exercise appropriate care. In particular, the defendant asserted that plaintiff unreasonably delayed excavating the USTs until 2009.

Court said  that under the California BFPP (codified at Health & Safety Code 25395.69), "appropriate care" is defined as the performance of response actions directed by the Department of Toxic Substances (DTSC). Since the plaintiff was working under DTSC supevision, the court ruled that the plaintiff satisfied the state BFPP test.

For the CERCLA BFPP, the court noted that the plaintiff sampled the contents of the USTs in May 2007, six months after it acquired title. In September 2007, the plaintiff received its report from its consultants and then drained the USTs in October 2007, placing the contents into 20 drums that were then properly disposed. The court held that the plaintiff taken "reasonable steps" because it  emptied the USTs "soon after learning that they contained a hazardous substances". The court rejected the notion that the plaintiff acted unreasonably when it waited until 2009 to excavate the USTs, noting that there was no evidence the delay allowed additional TCE to discharge into the environment. Moreover, the defendant did not produce any evidence to suggest that plaintiff should have suspected that TCE remained in the USTs.  Indeed, when the USTs were removed, the court said, the contents consisted almost entirely of water. Accordingly, the court found that the plaintiff had satisfied the BFPP defense by taking reasonable steps to prevent further releases of hazardous substances.

This case contrasts with the Ashley II case we discussed two months ago where the purchaser failed to follow recommendations in the phase 1 to clean out sumps and floor drains. In that case, it appears there was some evidence that this failure may have allowed some contamination to migrate into sensitive wetlands and surface waters.

These two cases illustrates that courts are going to scrutinize the actions of a purchaser who is asserting a defense to see if they complied with post-acqusition continuing obligations. I suspect the courts in this process probably engage in some "monday morning quarterbacking" when evaluating the reasonableness of the purchaser's decisions. Decisions will be evaluated in the context of the totality of information known to the court at the time of the lawsuit. Facts that perhaps were not known at the time may in hindsight look like information that a purchaser should have known or considered.

In the Robertshaw Controls case, the plaintiff got lucky when it left the tanks in the ground for another two years until it was ready to develop the site since it was able to drain all of the TCE from the tanks. In Ashley II, the developer did not immediately cleanout the sumps and drains, and there was evidence that stormwater runoff was flowing into the wetlands and surface waters.

Because the BFPP is a self-implementing defense and because parties will be subject to second guessing by a judge who will have the benefit of hindsight, it is important that parties seeking to assert the defense carefully evaluate the risks posed by their sites. It might also be advisable to do the work under a state voluntary cleanup agreement to cloak the work with the presumption of reasonableness and perhaps even consistency with the NCP. Even if the state requires some additional work that a purchaser might not necessarily be REQUIRED to perform to comply with the BFPP, the greater protection that would be afforded by such work will probably be worth it in terms of peace of mind and litigation costs that are avoided.       
     

Ashley II Charleston LLC v. PCS Nitrogen-the most important CERCLA case of 2010?

In the first reported case to interpret the scope of the "appropriate care" requirements of the CERCLA Bona Fide Prospective Purchaser (BFPP) defense, a  federal district court in South Carolina ruled that an entity owned by the brownfield developer Cherokee failed to qualify for the BFPP when it failed to address impacts from RECs that had been identified in a phase 1 report. Ashley II Charleston LLC v. PCS Nitrogen, 2010 U.S.Dist. LEXIS 104772 (D.S.C. 9/20/10)

The phase 1 identified sumps and conrete pads as RECs. When the developer demolished all of the above-ground structures on that parcel, it failed to clean out and fill in the sumps,  leaving them exposed to the elements which may have exacerbated these environmentl conditions.

The court was also troubled by the fact that the developer indemnified the prior owners of the site. The court said this called into question whether the developer had complied with the "no affiliation" requirement of the BFPP defense.

Also of interest was the court's observation that the phase 1 did not strictly comply with the AAI requirements in effect at the time of the acquisition but that the deviation was not significant. Therefore, the court found the developer had complied with the AAI aspect of the BFPP defense.

The facts are dense and complicated. Here are the Key findings of Court:

1. plaintiff failure to perform sampling recommended in phase 1 and failure to address RECs was failure to comply with "appropriate care" requirements. ("Doing nothing in the face of know or suspected environmental hazard" was insufficient to establish appropriate care).

2. Plaintif failure to maintain cover on site. Only added crushed rock when parcel was about to be leased, thereby allowing contamination runoff to spread contaminants.

3. Plaintiff Indemnity provided in purchase agreements coupled with urging EPA not to proceed against former landowners raised "no affiliation" question. ("Ashley efforts to discourage EPA from recovering response costs covered by the indemnification reveals just the sort of affiliation Congress intended to discourage")--DOES THIS MEAN PURCHASERS CANNOT INDEMNIFY SELLERS TO ASSERT BFPP???

4. Defendants could not assert third party/ILO defense because of earth moving/grading activities

5. Distinguished between apportionment and allocation. Harm was indivisible and incapable of apportionment but court allocated liability for purposes of contribution action.

Distressed Debt and Due Diligence

I receive calls every week from consultants asking how they can involved in the due diligence arising out of the sale of distressed loans. It is true that there are billions of dollars of distressed debt and assets, and that there are funds sitting with large piles of cash waiting to pounce on distressed loans or assets. However, the picture is much more complex than the cheerleaders and talking heads are suggesting.

First, one needs to distinguish between distressed debt and distressed assets. The latter involves the hard assets (i.e., real estate) while the former involves the paper evidencing the loans that are collateralized by the hard assets.

When only paper is being exchanged, there is very little environmental due diligence. This is because the debt is being sold at distressed prices-often 20 or 30 cents on the dollar. There may be numerous reasons why the debt may be considered distressed. For example, the seller may be forced to sell the debt because it has to raise cash because of margin calls or redemptions from investors. Similarly, the bank that is holding the note may have been taken over by the FDIC who is dumping the recover as much as the cost of the takeover as possible. Likewise, the paper may have been downgraded and  the institutional investor may be required to sell the notes because it cannot hold such low rated paper. A mezzanine lender may have found its position is worthless and is willing to sell to a more senior investor. And of course, the borrower may be in default or unable to make a balloon payment at the term of expiration of the loan.  

In many cases, the note purchasers are buying deeply discounted paper say at 30 cents on the dollar and telling the borrowers that they will forgive past due loans if the borrower can pay the rest of the loan at 60 cents on the dollar. Do the math. The investor will get a 30% return!

In other instances, the borrower is current with its payments but would be unable to refinance the loan when it expires in two or three years because of tighter underwriting requirements or because the property values have dropped so much that the borrower could not get sufficiently-sized loan to pay off the existing loan. In many cases, the purchaser steps in, buys a deeply discounted note and then collects the remaining interest until the loan terminates. The investor will then walk away from the loan with another 30% or so return.
In the foregoing examples, the investors are only interested in the short-term returns on the notes and do not care about the environmental conditions of the property....provided of course they do not impair the ability of the borrower to pay the remaining or re-negotiated loan balance.

It is primarily when the original lender or an investor will actually take title to the underlying collateral (i.e., real estate) that the environmental issues will come into focus. Thus far, the bulk of the deal flow seems to have been the sale of paper and not the hard assets.

In addition to knowing the nature of the deal, it is important to understand who your client is and where they are in the capital stack or layering of debt and equity since their positioning will influence the degree of tolerance about environmental concerns.  In my next post, we will take our scorecards and check what players are in the lineup for distressed sales.    

Developer Waits Too Long To File Consumer Fraud Case Agst Consultant for Failing to Identify PCB-Contaminated Concrete

During the real estate boom of the past decade, developers were hard-pressed to find aggregate for their projects. The time pressures posed by tight construction schedules, the enormous profits that contractors could make by shifting around demolition debris and of course the tendency for some aspects of the industry to be occupied by shady characters eventually conspired to expose the weaknesses of the regulatory programs governing solid waste

The poster child for the problems associated with the under-regulation of demolition  debris and fill material is the fiasco involving the deconstruction of the Ford plant in Edison, New Jersey. The lessons learned in this case will no doubt be relevant for other communities, states and developers dealing with abandoned auto plants.

The latest installment in this saga occurred last month when a federal district court reversed an earlier ruling and denied a request to add a consumer fraud case against a consultant in Ford Motor Company v Edgewood Properties, 2010 U.S. Dist. LEXIS 13086 (D.N.J. 12/10/10). In February 2004, Ford entered into a Remediation Agreement with the New Jersey Department of Environmental Protection ("NJDEP") in accordance with the requirements of the New Jersey Industrial Site Recovery Act ("ISRA").Ford contracted with MIG Alberici ("Alberici") to demolish the plant and use the concrete as on-site fill.

In November 2004, NJDEP approved a plan to demolish the plant and reuse crushed concrete at the Plant  provided that the crushed material did not contain unlawful concentrations of PCBs.However, after work began, Alberici realized that that there was more concrete than originally estimated and that  could be used at the site. As a result, Ford sought out buyers for the excess concrete. Ford and Edgewood Properties entered into a contract whereby Ford agreed to provide 50,000 cubic yards of concrete to Edgewood in exchange for Edgewood hauling it off the site. According to NJDEP requirements, concrete with PCB concentrations below 0.49 parts per million ("ppm") could be used for residential areas while concrete with concentrations between 0.50 ppm and 2 ppm could be use at commercial properties but concrete with PCB concentration above 2 ppm could not be reused for any purpose.In June 10, 2005,  Edgewood entered into a subcontract then with EQ Northeast, Inc. ("EQ"), a company that Ford used during the deconstruction Under the agreement, EQ was responsible for sampling crushed concrete. Edgewood, in turn, would then remove all crushed material that was suitable for residential use for reuse as aggregate at other residential development locations in the state. Apparently, the crushed concrete was supposed to be staged into stockpiles according to its PCB concentrations. Indeed, Edgewood later asserted in its lawsuit that in 2005 Golder Associates, Inc., Ford's environmental consultant, provided ELM, Inc., Edgewood's environmental consultant, with a memorandum that stated that only stockpiles of concrete  where the samples exhibited PCB concentrations suitable for residential use cleanup criteria were being staged for potential re-use at appropriate off-site locations while stockpiles where the samples exceeded the residential use criteria were being segregated and properly disposed off-site.

In June 2005, Edgewood discovered that the concrete that it had transported to seven residential development sites contained excessive levels of PCBs. Edgewood complained to Ford who commenced excavation and removal of the contaminated concrete from the various properties. The NJDEP then issued an administrative order ("AO") compelling Ford, Alberici and Edgewood to submit a response plan to completely excavate the sites of all contaminated material and for Edgewood to stop all construction on the contaminated properties. In 2006, Ford filed a lawsuit to recover its costs against Edgewater who, in turn, filed counter-claims against Ford as well as third-party claims against a number of parties including Golder and Arcadis, for for breach of contract, contribution,  negligent misrepresentation,and civil conspiracy.

In 2010, Edgewood filed a motion to amend its complaint to add a claim against Golder for violations of the New Jersey Consumer Fraud Act (NJCFA).  To prevail in a NJCFA claim, a plaintiff must establish that the defendant engaged in "unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact . . . in connection with the sale of advertisement of any merchandise or real estate. Edgewood alleged that Golder’s memos contained knowing misrepresentations that "Edgewood would receive crushed concrete not exceeding the residential or unrestricted use criteria

Because the request to amend the complaint had occurred after the statute of limitations for filing an NJCFA claim had expired, Edgewood had to show the court that it had not unduly delayed seeking to amend its pleadings.  The court initially granted Edgewood’s motion based on representations that of its counsel that the request to amend had been based on new information that had come to its attention. Golder filed a motion for reconsideration on the basis that the court had relied on erroneous information. Golder pointed out that the information that Edgewood alleged to be new was actually contained in Golder memos that Edgewood had possessed as early as December 2006 and that Edgewood had utilized when it pled the identical claim against Ford Motor Company in 2006. The court conclude that Edgewood has failed to provide any justification for waiting two years to assert the NJCFA claim when it had all of the information in its possession at the time if filed its original action against Golder. Accordingly, the court granted the motion for reconsideration and denied Edgewood’s request to assert the NJCFA count against Golder in 2008. Edgewood has also not provided this Court

Vapor Intrusion and Old Landfills

As a child, I remember summer vacations at my uncle's cottage in the Catskill Mountains (or bungalow in the parlance of the region) where one of the fun trips was going to the local town dump where garbage was burned.

Towns across the country had local dumps  but were forced to close these "open dumps" following the passage of the 1965 Solid Waste Disposal Act which became Subtitle D of RCRA in 1976. The precise locations of the dumps were usually not recorded and with the passage of time, the lines became very blurred. Indeed, as metropolitan areas expanded, many of these once-rural towns became bedroom communities and home builders bought up what now looked like undeveloped fields for new suburban developments.

The discovery of vapor intrusion by the plaintiffs bar coupled with the economic downturn seems have resulted in an increasing number of lawsuits projects that were built on or near former landfills. A recent example involves the lawsuit in the Rochester area of New York where residents have sued former home builders and the local government over vapor intrusion eminating from an old solid waste landfill.

In Schroder v Ontario Properties, et al, the complaint alleges that a variety of hazardous materials were disposed at the Old Rochester City Landfill from the mid-1950s until it was closed in 1964 although the plaintiffs claim additional illegal dumping occurred for another decade. In 1980, the state of New York placed the landfill on the state superfund list but delisted it in 1994. In 2009, a developer sought to enroll the site into the state brownfield program but the application was initially denied. To buttress its case, the developer collected vapor intrusion samples which identified a variety of VOCs and concentrations of methane above explosive lower limit were present in the soil gas near and below homes that had been built in the 1980s. Some of the plaintiffs homes also allege that a portion of the old landfill extends beneath their residences based on the presence of waste material that was observed during advancement of the soil vapor probes.

The plaintiffs are alleging the defendants failed to take reasonable precautions with respect to the contaminants and failred to detect or disclose the presence of the contaminants to the plaintiff home owners. The plaintiffs are seeking property damages and medical monitoring and restitution of expenses to remediate the contamination. They also assert an inverse condemnation claim against the local government.   

Consultants who fail to identify the presence of a former landfill or raise concerns about potential impact of a former landfill located near a property could find themselves subject to a malpractice action. One of the leading examples was the case I discussed in the November 2007 issue of the Schnapf Environmental Law Journal (available from my website at http://www.schnapflaw.com/).

In Watco v. Pickering Environmental Consultants, Inc., 2007 Tenn. App. LEXIS 364 (Ct. App. 6/5/07), a state appeals court affirmed a ruling by a trial court granting a judgment in favor of a consultant-defendant. In this case, the plaintiff agreed in December 1994 to purchase a 169-acre tract of undeveloped wooden land from National Bank of Commerce (NBC), acting as trustee for the Norfleet Charitable Remainder Uni-Trust (Norfleet Trust),  for $880, 588. The purchase was contingent on a satisfactory phase 1 that conformed to the ASTM E1527-94. At the time of the phase 1, the land adjacent to the west was county park. The defendant completed the Phase 1 in July 1995 and provided an opinion letter to plaintiff acknowledging that the report was in connection with the sale of the property and expressly provided that the plaintiff could rely on the report. The letter went on to state that the defendant had not identified any “hazardous materials or environmental conditions” associated with current of former uses, and that no “significant environmental concerns” were identified in the surrounding areas that would represent a  “significant environmental concern” to the property.  As a result, the letter indicated that further environmental review was not recommended.

As it turned out, the county park had formerly an unlicensed municipal landfill that had operated from approximately 1955 to the mid-1970s. The land containing the unlicensed landfill had actually been owned by the Norfleet Trust and NBC had conveyed the land to the Shelby County Conservation Board pursuant to two deeds in 1980 and 1986.

During grading operations for a residential subdivision in March 2004, the plaintiff discovered garbage buried at a depth of 3 to 5 feet under approximately 30 acres of the western portion of the property. The plaintiff incurred substantial costs removing the garbage, and had to delay development while the solid waste was excavated and replaced with clean fill. The plaintiff then sought damages for professional negligence and negligent misrepresentation. The defendant filed a claim against NBC seeking indemnity under the Phase 1 contract but the court granted NBC’s motion to dismiss on the grounds that the contract provided that disputes between the parties were to be resolved through arbitration.
     
In its claim for negligent misrepresentation, the plaintiff claimed that the defendant made a false statement when it stated it had complied with ASTM E1527-94. The parties also agreed that the ASTM E1527-94 established the standard of care for the professional negligence claim. The plaintiff’s expert witness testified that the Phase 1 did not identify the former landfill, that he was able to learn about the existence of the former landfill by contacting local officials and that defendant’s failure to interview additional persons constituted a breach of its professional standard of care. The defendant’s expert testified that the defendant had reviewed the standard database records provided by Vista Environmental Information and that the landfill was not identified in any of these records. Thus, the expert concluded that the records were not reasonably ascertainable or practically reviewable. The trial court found that both experts were equally qualified, informed and credible. In its decision, the court noted the plaintiff had the burden to prove that the defendant did not conform to the applicable professional standard. Because the proof was equally balanced as to whether the defendant had a duty to conduct further interviews than those required in the ASTM E1527-94, the court found in favor of the defendant.

On appeal, the court reviewed three components of the ASTM E1527-94 that environmental consultants were required to satisfy: Records Review, site reconnaissance and interviews.The plaintiff’s expert testified that he his own record search uncovered minutes of a 1978 meeting held by the Shelby County Conservation Board where the residential landfill had been discussed. He asserted that the defendant could have easily obtained this record and therefore discovered the prior existence of the landfill. However, on cross-examination he admitted that the minutes did not precisely describe the name or location of the landfill and that the landfill had not been identified in any of the standard public records. He admitted that the defendant had reviewed all of the standard records and that the Vista system used by the defendant was an acceptable method for reviewing the standard sources of records required to be reviewed under ASTM E1527-94.

The site inspection had been performed by an intern who had been supervised by a senior member of the defendant. The inspector had noted undulating terrain that was consistent with a previously known use as a quarry and observed some construction debris on an adjacent property. The parties agreed that the construction debris observed by the intern would not have resulted in the discovery of buried garbage located on a different adjacent parcel The plaintiff’s expert admitted that the site inspection would not by itself had resulted in any evidence of an recognized environmental condition at the property or that the park had formerly been used as a dump. However, he testified that because the adjacent site was a county park, the defendant should have contacted the conservation board since that would have “probably lead to further information”.     
           
Prior to phase 1, NBC had advised the defendant that the real estate broker should be contacted for information about the prior uses of the property and other information. The plaintiff’s expert testified that the broker did not good knowledge of the uses and physical characteristics of the property and therefore could not qualify as a “key site manager” that the defendant was required to interview. Instead, the plaintiff’s expert asserted that the defendant was obligated to conduct interviews of additional persons such as the former owner or adjoining property owners. However, on cross-examination ne conceded that the ASTM E1527-94 did not require interviews of former owners of the property or adjoining landowners.

The court concluded that while the ASTM E1527-94 standard directed the consultant to make an initial inquiry of contacting a key site manager, the standard allocated to the user the task of identifying the key site contact. Since NBC designated the broker as the key site contact, it was reasonable for the defendant to infer that the broker had good knowledge of the uses and physical characteristics of the property for purposes of complying with the interview component of the standard.

Regarding section 10.5.1 of ASTM E1527-94 providing that the consultant make a reasonable attempt to interview at least one staff member of one a local fire department, health agency or local/regional office of a state agency having jurisdiction over hazardous waste disposal or other environmental matters, the defendant produced evidence that it had called and sent a follow-up letter to the state environmental agency and that the local office responded that the property was not on any known state list of sites with known or suspected releases of hazardous substances, and that none were identified within a four-mile radius. One of the defendant’s employees also testified that it had contacted the local office of the USDA Soil Conservation Service which was unaware of any environmental problems with the property. The court noted that both experts agreed that these agencies were appropriate sources of knowledgeable government officials and that these interviews technically satisfied the ASTM standard. Accordingly, the court found that the plaintiff failed to establish by a preponderance of the evidence that the defendant had provided false information when it stated it had complied with the ASTM standard and affirmed the judgment entered by the trial court dismissing the claim of negligent misrepresentation.

On the professional negligence claim, the appeals court began its analysis by stating that a standard of care is “that level of care and diligence ordinarily employed by the average firm practicing in the same area and at the same time. A ‘standard’ such as ASTM E1527 only become the ‘standard of care’ if it us embraced as the ordinary way things are done” The court also note that the ASTM standard is by definition a flexible standard so that the way it will be applied will vary between consultants in different areas and at different times. The court discussed a 2000 study by the local Association of Soil and Foundation Engineers (ASFE) indicating that 73% of phase 1 proposals evaluated stated they would conform to ASTM and that not a single report was in strict conformance to the standard.

Based on this study and the totality of both experts’ testimony, the court concluded that the standard of care and ASTM standard were not equivalent at the time of the 1995 Phase 1. As a result, the court said it would not limit its focus to the defendant’s conformance to ASTM in determining if defendant was negligent. The plaintiff’s expert testified that he had not conducted a formal study of the standard of care for Shelby County and similar communities in 1995 and that his testimony was based on his years of experience with consulting firms.

When asked if the defendant had complied with the standard of care for conducting phase 1 ESAs in Shelby County, the plaintiff’s expert simply indicated that it was his opinion that the defendant had breached the standard because they should have made some effort to find a knowledgable person to interview about the past uses of the land around the site since they knew it had been a quarry, there were “little tell-tale” signs that it had occurred right to the boundry, that there was level ground which means it had been filled and defendant needed to find a person who could discuss what was used to fill the land.

In contrast, the defendant’s expert specifically testified that he had reviewed six other environmental reportds that had been conducted in Shelby County in 1995 and that based on this review, the defendant’s report has conformed to the standard of care. He said the defendant was provided the name of a person to contact by the landowner, the contact indicated that the adjacent land had been used as a quarry, no evidence of dumping was observed during the site reconnaissance and the standard of care in effect in 1995 in Shelby County did not require the defendant to interview prior owners or adjacent owners. As a result, the court affirmed the trial court’s ruling that the plaintiff had failed to establish by a preponderance of the evidence that the defendant had breached the applicable standard of care.

This case is full of nuggets for environmental consultants, attorneys and their clients. First, although this case came to trial 20 years after the CERCLA innocent purchaser defense was enacted at a time, the case illustrates that real estate developers, lenders and attorneys should not assume that the ASTM E1527 will necessarily serve as the standard of care for the environmental consulting industry. In some cases, the local due diligence practices may vary and not rise to the level that may be required to successfully assert liability defenses. In other instances such as New Jersey, the ASTM E1527 will not satisfy the requirements of the state innocent purchaser defense. Nevertheless, the case does show how the ASTM E1527 protocol has evolved and improved over the years.  

Bank Kept In Case On Claims For Incomplete Disclosure of Environmental Issues

In Ironwood Homes v Bowen, 2010 U.S. 58750 (D.Or. 6/14/10), purchasers of farm land subsequently discovered that the property had been used as a disposal site for tannery waste.   Plaintiffs asserted a variety of federal and state law claims against a range of defendants, including two banks that had a history of involvement in the site.

One bank served as the trustee that managed the affairs of the tannery owner, while the other bank provided financing to the plaintiffs.  The lender bank reviewed an environmental report concerning the property, but misstated the conclusions contained in the report to the plaintiffs.  In particular, the bank’s employee incorrectly described the environmental risk associated with the property as “low” and also stated that the report had concluded that no further environmental investigation was warranted.

The court denied motion to dismiss by bank on claims for fraudulent concealment and reckless misrepresentation, negligent misrepresentation, and non-gratuitous negligent advice. The court also denied the lender motion to dismiss that an indemnification in loan modification agreements released plaintiffs’ claims against the bank, ruling that if plaintiffs agreed to the modifications because they had been unaware of the bank’s knowledge about the true environmental condition of the property, the release might be considered unconscionable and therefore unenforceable. 

The court also rejected a state contribution claim brought by the trustee bank against the lender bank, holding that the contribution claim was barred because the trustee bank failed to allege that the lender bank “in any way ‘caused, contributed to, or exacerbated the release’ of contaminants or ‘hinder[ed] or relay[ed] entry to, investigation of, or removal or remedial action at’ the contaminated property.”

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.

Federal District Court Grants Summary Judgment to Consultant in Malpractice Action

Earlier this year, a federal district court denied a motion to dismiss filed by a consultant in Hawaii Motorsports Investments v Clayton Group Services. Because the decision involved a motion to dismiss, the court was not ruling on the merits of the case but simply if the plaintiff had alleged sufficient facts to proceed with the case.

Recently, the defendant filed a motion for summary judgment and this time, the court ruled in favor of the defendant, holding that the consultant was not liable to the purchaser of the property.  Since this parties had the opportunity to conduct discovery since the motion to dismiss, the recent opinion also contains some additional interesting facts that not only shed light on this case but provide some helpful lessons.

In this case, Hawaii Motorsports Center Limited Partners ("HMC") had leased the Hawaii Raceway Park from the Campbell Estate since 1988. HMC decided to purchase the site in 2005 for $13MM and then flip the property by way of an assignment of rights to Irongate Wilshire, LLC ("Irongate") for approximately $20 million. Irongate then retained the defendant to perform a phase 1 which identified several environmental conditions. The consultant orally advised Irongate that the remediation costs could range from $200,000 to $4 million. Irongate was concerned that the contamination could impact its ability to develop the site into individual lots. On October 25, 2005, Irongate disclosed the results of the phase 1 and the remediation estimate to one of the principals of HMC

Around the same time, Campbell advised HMC that for tax reasons, HMC could not simply assign the property but had to have an ownership interest. As a result, on October 26th, HMC and Irongate signed a letter of intent to form a joint venture to purchase the property whereby an Irongate special purpose entity would contribute $13,200,000 in the form of a letter of credit in favor of Campbell. In return for Irongate's payments, HMC would assign its interest in the property to the joint venture. Instead of receiving $7 million, HMC would receive four payments of $250K.

On October 31st, the defendant sent an email to Irongate providing its cost estimate. The defendant indicated that the $200K remediation cost was the “Likely Scenario” with  $1 to 2 Million as the “Bad Case” and $4 Million as the “Extreme Worst Case” scenario.

The joint venture arrangement was finalized on November 1st whereby Hawaii Raceway Investors, LLC  The defendant emailed a copy of its phase 1 to Irongate on November 4th and a proposal for a Phase II on November 16th. The phase 2 proposal indicated that the defendant would "perform this project under previously negotiated terms and condition by and between [BV] and HMC Irongate Hawaii Raceway Investors LLC. The reference to JV entity was in error since the previously negotiated terms and conditions had been agreed in September 2005, before the joint venture was formed.  

Irongate forwarded the phase 2 proposal to HMC on November 22nd who retained its own consultant to evaluate the proposal. HMC’s consultant concluded that the majority of recommendations were inaccurate, stating, "Having failed to complete the minimum level of research required during Phase 1, [the defendant] should have recommended further record reviews and interviews  [instead of recommending] a Phase II ESA." He said that remediation cost estimate of $200,000 to $4 million was "entirely lacking in credibility or reliability and should be considered a guess.

HMC filed a lawsuit against the consultant, claiming the firm was professional negligence,  negligent misrepresentations, tortious interference with HMC's prospective business advantage as well as slander of title. Although the consultant was retained by Irongate and the report was addressed to the buyer, the plaintiff asserted that the consultant knew the parties would use its report to negotiate the terms of their agreement. In its ruling on the motion to dismiss, the court found that the plaintiff/seller had alleged sufficient facts indicating it was an intended beneficiary of the report and that it was foreseeable that it would be damaged if the report was inaccurate. The court also found that although the report expressly provided that only Irongate could rely on the report, said it was unclear from the record created at that time if the plaintiff knew of the limitation or had reason to know if could not rely on the report.

The defendant sought summary judgment on all counts. On the professional negligence claim, HMC argued that the defendant owed a duty arising from the "special relationship" between an environmental consultant and a party that may have seen the environmental report prepared by the environmental consultant. The court said the factors in had to consider in determining if a duty included if there was a special relationship existed between the parties, if the harm was foreseeable, the degree of certainty that the injured party suffered injury, the closeness of the connection between the defendants' conduct and the injury suffered, the moral blame attached to the defendants, the policy of preventing harm, the extent of the burden to the defendants and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved.

The court found that HMC had not established any facts to support a special relationship between it and the defendant. The court said there had not been any no contract between HMC and the defendant, that HMC was not an intended third-party beneficiary of the contract between the defendant and Irongate, and that there was simply no evidence that the defendant intended the report, information in it, or its estimates as to remediation to be given to HMC.

Likewise, the court found that HMC had not established any facts showing the harm foreseeable. The court noted that after HMC obtained the right to buy the Campbell Estate's property, HMC had many months to find financing and hire a consultant to prepare an environmental assessment. Moreover, since HMC was the lessee on the property for nearly 20 years, the court said HMC had ample opportunity to discover the condition of the property. Under those circumstances, the court held that HMC had no reason to be affected by inaccurate information about environmental conditions on the property, and that the defendant could not have foreseen any such impact on HMC.

As to the degree of certainty that HMC suffered harm and the closeness of the conduct and the injury suffered, the court concluded that it was, at best, unclear whether HMC suffered any injury because of the defendant’s allegedly faulty information. While HMC claimed it was injured because Irongate reduced the price it was willing to pay for the property, the court noted that Irongate initially offered to pay HMC $7 million for the property under the express condition that Irongate could withdraw from that offer at any time. Additionally, the court said, change in price flowed from the change in the structure of the deal to a as a joint venture.

Regarding the moral blame and policy factors, the court said there was no evidence that the defendant’s actions were immoral or blameworthy, or that imposing a duty would prevent any harm. In contrast, the court said that HMC could have easily countered any adverse report by hiring its own environmental consultant. Indeed, the court suggested that if HMC lacked independent knowledge of the status of the property it had occupied for so long, it would have prudent to commission its own report.

Finally, with respect to the consequences to the community of imposing a duty to exercise care and any resulting liability for the risk involved, this court concluded that imposing such a duty would create additional burdens for the community. The court said that if a consultant could he held liable to a third party that the consultant never intended to benefit, then  that consultant will surely increase the cost of any assessment to cover the risk and the likely cost of greater insurance

On the claim for negligent misrepresentation, the court began its analysis by noting that Hawaii courts have  limited the scope of liability for negligent misrepresentation to person that a defendant intended to benefit or knew the recipient intended to transmitted the information to another person. On the first factor, the court said there was simply no evidence that the defendant intended to benefit HMC. The court said there was  no evidence that the defendant ever intended to transmit its report directly to HMC since the defendant gave its report to Irongate only after Irongate and HMC had decided to form a joint venture and had agreed on the reduced price. There is also no evidence that HMC saw BV's draft summary of the report, dated November 3, 2005, before the formation of the joint venture or that HMC ever saw the report prior to the formation of the JV.

Turning to whether the defendant could be liable to HMC based on any knowledge that Irongate intended to supply the results of the phase 1 and the cost estimates to HMC, the court noted that during the time Irongate was negotiating with HMC and finalizing the acquisition, the defendant did contact HMC to conduct a site inspection of the property and likely anticipated that its conclusions would be transmitted to HMC. However, the court found there was no evidence that the defendant knew or had reason to expect that Irongate or anyone else intended to benefit HMC by sharing the report or the cost estimates with HMC.  

Even if there were evidence creating a factual question if the defendant knew that Irongate would transmit information to HMC for HMC's benefit, the court said HMC could not prevail on its negligent misrepresentation because there is no evidence that HMC reasonably relied on any such information since HMC’s own testimony was that its officials thought all along that the conclusions were false or inaccurate. To the extent HMC asserted that it relied on defendant’s, the court went on, such reliance was unreasonable. Moreover, the court said, HMC knew about   the environmental condition of the property or could have hired its own consultant. Finally, the court found there was no evidence that HMC relied on BV's environmental findings and estimates before agreeing to form a joint venture with Irongate. Instead, HMC agreed to the joint venture because it could potentially profit from the deal, and because it had to finalize its deal to preserve the option of buying the property from Campbell Estate.