Lawsuit by Foreclosing Bank Agst Dry Cleaners Shows how Vapor Intrusion Expands Liability

Those of you who receive the EDR Insider probably noticed the recent report about the bank that foreclosed on a residence and then filed a lawsuit against an adjacent dry cleaner and the bank acting as trustee for the estate that leased the site to the dry cleaner. This case illustrates how vapor intrusion is fast becoming a powerful tool in environmental litigation.
In Forest Park National Bank & Trust v Ditchfield, the plaintiff bank filed a lawsuit under the citizens suit provision (section 7002) of the Resource Conservation and Recovery Act (RCRA) charging that the dry cleaner has created an imminent and substantial endangerment. The lawsuit seeks an order requiring the defendants to remediate the contamination originating from the dry cleaner.
The town of River Forest desperately wants the site remediated because it is part of a Tax Increment Finance (TIF) district that is slated for redevelopment. However, redevelopment is being held up because of the contamination.
Because the town has adopted an ordinance prohibiting use of groundwater for potable purposes, it would normally be very difficult for the plaintiff to successfully bring a RCRA 7002 action since the ordinance essentially serves to prevent exposure to contaminated groundwater. However, the existence of vapor intrusion will enhance the changes of the plaintiff surviving a motion to dismiss the case.
Like this case, there are many sites where vapor intrusion is the only completed exposure pathway because the soil is covered and the groundwater is not being used for drinking water purposes. Indeed, many sites that were remediated using risk-based cleanups and that have received NFA letters yet may continue to pose risks of vapor intrusion because that pathway was not evaluated. As a result, vapor intrusion is fast becoming a favorite tool of the plaintiffs’ bar. For this reason, consultants need to consider the VI pathway even when groundwater is not being used and should carefully review data associated with previously remediated spills before identifying a former release as an HREC.

Vapor Intrusion Class Action Lawsuit Allowed to Proceed

A federal district court is allowing a class action lawsuit filed by 200 individuals to proceed despite the fact that the responsible party has been implementing remedial measures for nearly a decade.
In Stoll v Kraft Foods Global, 2010 U.S. Dist. LEXIS 92926 (S.D.Ind. 9/6/10), releases of TCE and PCE from plant that manufactured ceramic capacitors have impacted the groundwater beneath 129 homes. In 1999, EPA issued a RCRA 3008(h) corrective order to Radio Materials Corporation (RMC). When RMC discontinued operations in 2001, its parent corporation, Kraft Foods Global (KFG), agreed to finance and implement the work under the RCRA order. As part of the corrective action measures, KFG performed a vapor intrusion assessment and agreed to install temporary vapor mitigation systems in 125 homes as interim measures.
In March 2009, the plaintiffs filed their lawsuit asserting claims for negligence, trespass, public nuisance, private nuisance, willful and wanton misconduct as well as injunctive relief under section 7002 of RCRA. The defendants argued that the court should not hear the case under the “primary jurisdiction doctrine” because the defendants were implementing measures under EPA supervision. Under this doctrine, the federal courts will consider a number of factors to determine if they should refrain from exercising authority over a case. These factors include if the relief sought is within the court’s conventional experience, if there is a potential for conflicting orders, if the agency has demonstrated diligence, if the court can fashion the relief requested and if the matter is ripe for adjudication. After weighing these factors, the the court rejected the defendant’s motion to dismiss. The court said the legal claims involved were within the common experience of the court and did not involve highly technical or scientific matters. The court also said that it was not a foregone conclusion that any relief that it awarded would necessarily conflict with the remediation that may be required by EPA. Moreover, the court noted that KFG was not the ordered party but a volunteer acting in place of RMC and therefore there was not a significant risk of a conflict with an enforceable order. On the question of whether the agency has demonstrated diligence, the court said it did not question the diligence of KFG or EPA but that these efforts are outweighed by the fact that a final remedy had not been selected and implemented after 11 years. The court also said that the doctrine cannot be used to defeat claims for monetary damages like those requested by the plaintiffs. Finally, the court said the fact that remediation was ongoing did not mean there was no longer an endangerment from the vapors.
As we have discussed previously, the presence of vapor intrusion is allowing plaintiffs to bring actions under the citizen suit provision of RCRA where previously such claims could not proceed because the plaintiffs were not using contaminated groundwater for potable purposes and not otherwise exposed to contaminated soils. Similarly, evidence of a completed vapor intrusion pathway is allowing the plaintiffs to survive motions to dismiss common law claims. Indeed, in many cases, the only completed pathway-and thus the only basis for liability- is vapor intrusion.
Finally, it is important to note that the overwhelmingly number of vapor intrusion cases involve off-site releases that are impacting the property of the plaintiffs. Consultants need to carefully exercise their professional judgment when determining if an off-site plume does not present a risk to the property being investigated. Likewise, consultants need to carefully assess if an on-site spill has the potential to impact neighboring properties. This situation frequently occurs with shopping centers that have dry cleaners enrolled in state dry cleaner funds. The vast majority of these funds prioritize sites for remediation based on impacts to DRINKING water.
Thus, just because a shopping center being evaluated during a phase 1 has a low ranking does not mean it does not present a risk to a nearby residential neighborhood. While performing phase 1 assessments on shopping centers with dry cleaner or even petroleum releases, consultants should review the data to determine the likelihood that the plume could migrate off-site while a low-ranked site in an area where public water is available waits the five or so years for a state-funded cleanup. If it is possible that the contamination could reach residences, the consultant should advise its client bank or property owner so that mitigation measures or risk transfer mechanisms could be evaluated. Otherwise, the consultant could find itself subject to a malpractice action years if the contamination impacts those off-site properties.

USGBC Sued for "Deceptive Marketing Claims"

class action complaint was filed in the US District Court for the Southern District for New York. The plaintiffs includebuilding owners, taxpayers whose governments require LEED certified buildings and building design/construction professionals.
Among other allegations, it states that USGBC has mislead property owners by claiming that LEED buildings are 25% more energy efficient, improve indoor air quality and reduce CO2 emissions. The plaintiffs state that the USGBC misrepresented the results of the March 2008 New Buildings Institute Study by omitting certain material information. More specifically, the complaint states that the 5,215 buildings in EIA Commercial Buildings Energy Consumption Survey (CBECS) catalog database have construction dates that go back as far as 1920 while the LEED sample consists of buildings built or renovated after 2000. The plaintiffs say that the energy use data of the LEED buildings reflect at least in part energy savings inherent in the post-2000 building practices and materials modern lighting fixtures, cooling equipment, insulation, etc., and are not necessarily attributable to LEED elements.
The complaint also alleges that USGBC is fraudulently misleading the consumer by concealing the material importance of the fact that the NBI study compared the median energy use of the LEED buildings to the mean energy use of the CBECS buildings. The plaintiffs assert that when the mean performance for both groups are used, LEED buildings actually consumer 29% more energy than buildings in the CBECS catalog. In contrast, the plaintiffs say that on April 3, 2008, USGBC proclaimed that LEED buildings are “performing 25-30% better than non-LE.E.D.® certified buildings".
The plaintiffs also claim that USGBC is misleading the market when its says that the LEED system provides third party verification. The complaint alleges this claim is false beause LEED certification does not require any verification of the data submitted and "does not require actual energy use data at at stage" . The complaint also says LEED certification is not based on actual building performance data but instead on projected energy use and that USGBC does not have the staff or expertise to evaluate these applications. In sum, the plaintiffs charge that instead of third party verification, LEED essentially allows self-certification.
The complaint also makes specific reference to the dispute involving the Northland Pines High School in Eagle River, Wisconsin. Residents appealed the LEED Gold certification for the 28M high school after licensed engineers determined the school failed to achieve mandatory energy and atmosphere quality standards (ASHRAE 62.1-1999 and 90.1-1999). USGBC upheld the certification.
One of the interesting factoids in the complaint are LEED compliance cost estimates. According to the complaint, the minimum price for LEED certification is $2,900. Certification for a newly constructed building that is under 50,000 square feet is $2,000 for a USGBC member­ organization plus an initial $900 “registration” fee per project. Certification for a newly constructed building that is over 500,000 square feet is $20,000 for a USGBC member­ organization plus an initial $900 “registration” fee per project. Certification for a newly constructed building that is between 50,000 and 500,000 square feet is $.04 per square foot for a USGBC member-organization, plus an initial $900 “registration” fee

Developer Who Did No Dilgence Turns to Litigation To Recover Damages For Contaminated Property

Back in August, I reported on the busted construction loan in Pennsylvania where a lender failed to require any environmental due diligence for property that was impacted by an off-site plume and the development now consists of unsold homes. http://www.linkedin.com/groupItem?view=&gid=41433&type=member&item=27076689&qid=1d2084d5-846e-4f45-9c12-825885e6b1ad&goback=%2Egna_41433
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 Enjoins Part of Albuquerque Green Building Law

Back in 2009, I discussed the lawsuit filed by three trade organizations challenging a green building code adopted by the City of Albuquerque in 2007. In that case, Air Condition, Heating and Refrigeration Institute (AHRI) v City of Albuquergue, the court granted a preliminary injunction preventing the city from implementing its new code. Now, the court has issued a permanent injunction for part of the code. The Albuquerque Energy Conservation Code establishes standards for buildings that are designed to achieve certain energy efficiency goals. Volume 1 applies to commercial and multi-family buildings and volume 2 to one- and two-family detached dwellings and townhouses. The plaintiffs in this case represented manufacturers, distributors and installers of various heating, ventilation, air conditioning products equipment and water heaters. They argued that the Code was pre-empted by federal law. Volume 1 established two performance-based and one presciptive approach to achieve compliance: Buildings that satisfy LEED silver or higher and a performance-based approach where the building HVAC systems and equipment achieve 30% more energy efficiency that ASHRAE 90.1-1999 . The prescriptive compliance path requires use of products that are more efficiency efficient than the minimum federal efficiency standards. The court ruled that the prescriptive provisions of volume 1 were pre-empted by 42 U.S.C. 6316(b)(2)(A). However, the court denied without prejudice the portion of the motion that sought a declaration that the performance-based approachs were pre-empted by federal law. Turning to Volume 2, the court concluded the presciptive complianve path was pre-empted for the same reasons as volume 1. However, the court noted there was an exception from pre-emption for state or local building codes for new construction concerning energy efficiency or energy use of products subject to federal standards where the code meets seven specified requirements (42 U.S.C. 6297(f)(3). The plaintiffs argued that the LEED Silver and Build Green New Mexico compliance path did not comply with the building code exception to the pre-emption. Because the plaintiffs did not adequately brief how the building code did not satisfy any of the seven requirements, the court said the plaintiffs had not met their burden for obtaining a permanent injunction as a matter of law. Thus, the court denied that portion of the motion. This decision came on the heels of the lawsuit filed by the Building Industry Association of Washington seeking to enjoin certain amendments to the Washington State Energy Code that require homes to have HVAC, plumbing, or water heating equipment having efficiency exceeding the federal standards. The plaintiffs assert that the revisions slated to take effect July 1 are preempted by the National Appliance Energy Conservation Act of 1987 and the Energy Policy Act of 1992. Combined with the class action suit filed against USGBC last week, it looks like green building law has reached the level of maturity where we will start seeing lots more lawsuits.

Kiddie Kollege Ct Rules Tax Lien Purchaser Cannot Void Title

The saga continued this week when a New Jersey Appeals Court reversed a trial court ruling that the property owner who had acquired title to the contaminated site through purchase of tax lien could void title. Following is a summary of the case. For an interesting view of the insurance implications of this case by my friend Ed Greene on his blog, see:http://commonground.edrnet.com/posts/b791ce4583.

 

In this case, Accutherm had manufactured laboratory-grade thermometers from 1984 and 1992. Because of increasing environmental requirements, Accutherm ceased operations in 1992 without performing a cleanup of the mercury contamination even though it was required to do so under the New Jersey Industrial Site Recover Act (ISRA).. In 1994, Accutherm filed a bankruptcy petition and stopped paying real estate taxes. Franklin Township then sold two tax sale certificates in separate transactions to a bank who declined to foreclose on the certificates because of potential environmental issues that were flagged by the bank’s counsel. In 1999, Franklin Township sold a third tax sale certificate for the property to plaintiff Navillus, which subsequently also acquired the first two certificates by assignment from the bank. Navillus is a partnership consisting of members of the Sullivan family.

 The tax sale certificates contained the following disclaimer: “Purchasers are herewith advised, pursuant to N.J.S.A. 13:1K-6, THAT INDUSTRIAL PROPERTY MAY BE SUBJECT TO THE "Environmental Clean Up Responsibility Act," the "Spill Compensation and Control Act" or the "Water Pollution Control Act”

 Navillus subsequently obtained a final tax foreclosure judgment which vested title to Navillus. After entry of this judgment, Navillus conveyed title to plaintiff James Sullivan, Inc. (JSI), a corporation owned by James Sullivan, Jr., for the nominal sum of one dollar.

 In late 2003, JSI leased the property to "Kiddie Kollege" for $2000 per month. On May 4, 2006, the DEP sent a letter to JSI, which stated that "several environment issues exist at the [Accutherm] site," including the presence of mercury at levels above DEP limits, and asked JSI to provide the DEP "with documentation which outlines what measures, if any, have been undertaken to remediate these environmental concerns." JSI then hired an environmental consulting firm to conduct tests of air quality on the site, which revealed mercury vapor concentrations far in excess of the DEP's limits. Immediately thereafter, the daycare center was closed.

 

In August  2006, JSI signed an administrative consent order agreeing to remediate the site in accordance with the NJ Spill Compensation and Control Act (Spill Act) However, JSI subsequently refused to perform any remediation

 

Numerous lawsuits followed against Kiddie Kollege, JSI, Navillus, and Franklin Township alleging that the children who attended the daycare center and its employees suffered personal injuries as a result of their exposure to mercury within the facility.

 

Navillus and JSI then sought to void the judgment in the tax foreclosure action so that title would revert back Franklin Township. The township filed a counterclaim that the final judgment in the tax foreclosure action had vested title to the property to Navillus and extinguished the interest of prior title holders. The NJDEP also moved to dismiss the complaint on the ground that plaintiffs' action was a preemptive attempt to avoid possible liability under the Spill Act.

 

The trial court ruled that the plaintiffs were entitled to vacate the judgment in the tax foreclosure action based on a provision of ISRA under which the failure of a transferor of an industrial site to remediate environmental contamination before the transfer is grounds for voiding the transaction.

 

However, the appeals court reversed and vacated the trial court ruling. The appeals court noted that the plaintiff property owners did not seek that relief until more than five years after entry of the tax foreclosure judgment, which was far beyond the three-month limit established by the Tax Sale law.

 

The court also ruled that ISRA obligations were first triggered when the Accuterm closed its operations and not based solely the sale of the tax sale certificate. Consequently, the court held, there was no basis under ISRA or treating a tax foreclosure judgment as a "transfer or sale" that triggered ISRA for purposes of exercising the transaction voiding remedy. The court held that the Tax Sale Law was the exclusive grounds upon which a tax foreclosure judgment may be vacated. The court also noted that the Tax Sale Law places "the risk of facts discovered after the tax sale which have an impact on the value of the property" on the purchaser of the tax sale certificate. NAVILLUS GROUP v. ACCUTHERM INCORPORATED, Nos. A-4754-08T1, A-0568-09T1 (app. Div-8/11/11)

 

This continuing litigation in this case reinforces the need for tax lien purchasers to perform thorough due diligence prior to closing on a tax lien sale. Here, the plaintiffs had misunderstood the meaning of an EPA letter that could have been properly interpreted by an environmental lawyer and perhaps put into better context by an environmental consultant.

 

Another important tax lien case is U.S. v Capital Tax from the federal district court of the northern district of illinois. I have posted the most recent decision on this case on my "Environmental Issues in Business Transactions" linked in page.