Ct Rules Costs Eligible For Reimbursement Under Cost Cap Policy Must be Paid Prior to Termination Date

In Federal Insurance Company, v. Cherokee Ardell, LLC., et al 2011 U.S. Dist. LEXIS 32516  (D.N.J. 3/28/11), the shareholders of Ardell Industries, Inc. ("Ardell") entered into an agreement in 1989 to sell the American Razor Blade Corp. ("ARB") site to Ardell Acquisition Corporation. The contract was then assigned to American Safety Razor Company ("ASR"), a company affiliated with Ardell Holdings, Inc. The transaction triggered the requirements of what was then known as the New Jersey the Environmental Cleanup Responsibility Act ("ECRA") (n/k/a the Industrial Site Recovery Act ("ISRA"). Because the site was contaminated, Ardell entered into an Administrative Consent Order ("ACO") with the NJDEP to allow the sale to proceed.

In 1996, ASR and Ardell filed insurance claims with Federal Insurance Company ("Federal") to recover their cleanup costs. Federal subsequently entered into a Settlement Agreement and Release whereby Federal assumed responsibility for the remedial environmental cleanup of the contaminated. Federal then retained the services of Cherokee Environmental Risk Management ("CERM") to assist with the investigation and remediation of the Site. In May 1998, Federal and CERM entered into an agreement ("1998 Remediation Agreement") whereby CERM created an entity Cherokee Ardell, L.L.C. ("Cherokee") to assume responsibility for the cleanup. Pursuant to the 1998 Remediation agreement, Cherokee obtained two insurance policies from American International Specialty Lines Insurance Company ("AISLIC"). The first policy was a $2MM Cleanup Cost Cap Policy with a term of ten years and a Self-Insured Retention ("SIR") of $766,015. The second policy was a Pollution Legal Liability Select Policy (“PLL”) with a limit of $2MM per incident and aggregate limit of $5MM. Federal was named as an additional insured in both policies.

In May 2001, Cherokee notified AIG Domestic Claims, Inc. ("AIGDC") that the clean-up costs under the Cost Cap Policy were approaching the SIR. AIGDC informed Cherokee of acceptance of coverage under both policies. However, by 2006 the remediation had still not been completed. ASR notified Federal that ASR dissatisfied with the pace of the remediation project and that ASR was receiving pressure from NJDEP. ASR then sent a second letter claiming that Federal was in breach of the 1996 Settlement Agreement. Cherokee forwarded these letters to AISLIC and submitted a notice of claim under the PLL policy based on the potential ASR lawsuit. In December 2006, AISLIC accepted coverage under the PLL Policy subject to a reservation of rights.

In August  2007, ASR sent Federal a draft of a complaint, alleging breach of contract, breach of duty of good faith, and violation of the New Jersey Environmental Rights Act. Federal forwarded the draft complaint to Cherokee and AISLIC. Federal then independently settled with ASR  In October 2007, AISLIC notified Federal and Cherokee that it was withdrawing its acceptance of defense because the claims in the ASR Letters fell outside the definition of “Loss” as defined in the PLL Policy. A week later, Federal terminated the 1998 Remediation Agreement with Cherokee and retained the services of Shaw Environmental Corp. ("Shaw") to take over the remediation project.

In June 2008, Federal filed a breach of contract action against Cherokee and sought indemnification under the policies from AISLIC. Cherokee also filed a cross claim against AISLIC for indemnification. AISLIC then filed a motion for partial summary judgment claiming that it was not obligated to reimburse Federal or Cherokee under the Cost Cap Policy. Federal and Cherokee sought summary judgment on their PLL claims.

At the time of the lawsuit, AISLIC had reimbursed Cherokee a total of $594,375 under the Cost Cap Policy and had not issued reimbursements for expenses under the PLL. AISLIC argued that the $928,103 sought by the Federal and Cherokee were incurred after the Termination Date and therefore not covered. AISLIC additionally argued that Federal and/or Cherokee failed to satisfy the condition that Cleanup Costs be reported prior to the Termination Date.

In contrast, Federal and Cherokee argued that under the Cost Cap Policy, AISLIC had a "continuing duty" to indemnify for costs that were "first incurred" before the Termination Date even if the costs were expended and paid after that date. They noted that since the operative word used in Coverage A was "incurs" rather than "pays" or "expends," a precise reading of the policy meant that an insured does not have to actually pay for the costs and expenses but rather only become liable to pay for the costs during the policy term. They also argued that the Cost Cap Policy is a traditional claims-made insurance policy where the policy payment obligation is triggered by the insured's claim for coverage rather than the insured parties' payment of expenses.

The court agreed with AISLIC, ruling that that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the policy period. The court said that from a plain reading of the Coverage A language as a whole and in conjunction with the definition of the term "Loss," it was clear that the Cost Cap Policy covered only those expenses which Federal and Cherokee incurred, expended, paid for and reported within the ten-year policy period

With respect to PLL Policy, Federal and Cherokee asserted that the 2006 ASR claims gave rise to a “Loss” and additional Clean-Up Costs related to compliance with the ACO and ECRA. However, the Court found that there was a question of fact whether Federal and Cherokee were “legally obligated” by statute or governmental order to pay expenses based upon the claims brought by ASR. Instead, the Court found that the nature of costs sought by Federal appeared to arise from its contractual agreement with ASR to remediate the site and not directly from environmental laws. Thus, the court denied Federal’s cross-motion for summary judgment

Federal subsequently filed a motion for reconsideration. Following a denial of that motion, the parties settled the case.  

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.

State Court Decision Ilustrates Dangers of Inadequately Evaluating Neighboring HRECs

The ASTM E1527 Phase 1 standard contains a term "Historic Recognized Environmental Condition" or HREC. The term was added to the standard in 2000 to provide a tool for consultants to help distinguish between properties 

where there was a release in the past that was satisfactorily remediated with sites that have historic contamination that have not been addressed. Because banks and property owners prefer that phase 1 reports not have RECs, the HREC provides a mechanism to allow the consultant to fulfill its obligations by flagging that there was a REC in the past while preventing the property from being unduly stigmatized by a release that no longer poses a risk to human health or the environment. 

Unfortunately, many consultants do not understand this term or use differing approaches for determining if a former REC can now be considered an HREC. Some EPs identify former releases that have been remediated to satisfaction of a regulator as an HREC. Others will identify a former REC as an HREC where residual contamination remains but the site has properly implemented  post-remedial institutional and engineering controls. Some EPS take the position that only "clean closure" sites may be an HREC while a narrower universe believe once a REC always a REC. 

A recent texas state case illustrates the dangers of not properly evaluating an HREC. In E-Z Mart Stores, Inc v Ronald Holland's A-Plus Transmission & Automotive, 2011 Tex. App. LEXIS 6000 (Ct. App. 8/3/11), E-Z Mart had purchased a site from Mapco in 1989 with an open spill. E-Z Mart remediated site and obtained NFA in 1998.

Meanwhile, Holland A-Plus Transmissions which owned property adjacent to the E-Z Mart site, entered into lease agreement with a cell phone provider to build and lease a cell tower. During drilling for tower, an explosion occurred due to gasoline vapors. The cell company subsequently terminated its lease and Holland was unable to loan for business expansion. Holland discovers benzene 8 times acceptable levels and sues E-Z Mart gas station. 

A series of complex lawsuits followed that resulted in jury trials.  A jury awarded Holland $550K in damages on nuisance and negligence grounds. E-Z Mart appealed. After a series of rulings, the appeals court affirmed the jury verdict in favor of Holland but ruled that the trial court had erred when it refused to allow E-Z Mart to introduce evidence of Mapco's liability.

It is unclear what level of diligence was done prior to the construction for the cell tower. Presumably, the parties believed that the Holland site could not have been impacted by the E-Z Mart site because of the NFA letter. In is unclear if a file review would have produced any evidence to suggest that the levels left behind at the E-Z Mart site could pose a risk to the Holland property. It may be that the contamination was missed during the UST remediation.

Since the late 1990s, the conventional wisdom is that petroleum contamination biodegrades and therefore does not pose a significant risk of vapor intrusion. This is another example of how that common perception may be wrong particularly in urban areas where underground conduits may serve as preferential pathways and significant pavement can reduce the amount of oxygen available for biodegradation. 

Class Action For Purchasers of Time Shares May Proceed With Mold Lawsuit

Plaintiff purchased time share units and files lawsuit against developer after resort units developed water leaks and mold. Defendant asserts that time share ownership points are not interest in property. Ct finds that while sellers of time share units retain exclusive right to specify which units would be occupied, the purchasers had exclusive possessory interest and timeshare was in nature of lease. Thus, plaintiff had pled sufficient evidence of property interest to support private nuisance and breach of implied warranty of habitability.


Ct also said plaintiff had sufficiently pled Unfair Competition Claim for purposes of motion to dismiss. The plaintiff had asserted that had defendant disclosed the water leaks and mold conditions, it would have selected different timeshare program, that failure to disclose was material misrepresentation, that defendant ignored recommendations of engineers and had continued to assess maintenance fees while not addressing the water moisture problems. Hermenegildo Martinez v The Welk Group, 2011 U.S.Dist. LEXIS 58718 (S.D.Ca. 6/2/11)

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).

Should a VEC Always Be a REC?

In a recent ASTM conference call, several consultants took the position that they could not envision a circumstances under which a “vapor encroachment condition” (VEC) identified pursuant to ASTM E2600-10 would not be a “recognized environmental condition” (REC) pursuant to ASTM E1527-05.

 

I was surprised by this statement and therefore have decided to post about this issue. I happen to think that many VECs actually could be considered “de minimis conditions” that do not rise to the level of a REC.

The term "vapor encroachment" is a term of art created by ASTM 2600. It has no basis in law or science since the regulatory driver is "vapor intrusion"- the migration of vapors into building structures.  Since a VEC has no regulatory significance, it cannot serve as a basis for creating CERCLA liability-which is the focus of the ASTM E1527 Phase 1.

All a VEC means is that there may be a vapors at the boundry of the property. A VEC determination is simply an interim step. The user can decide to ignore the VEC finding or decide to pursue the issue further to determine if it rises to the level of a REC.

A VEC without any evidence of a completed exposure pathway will not result in enforcement if brought to the attention of regulators- the ASTM definition of de minimis condition. To me, it is  akin to contaminated groundwater that has migrated onto a site where the groundwater is not being used for drinking water and the state does not pursue owners of impacted properties.

In the absence of exposures to persons in structures, there will not be CERCLA liability. The main  liability concern for vapor intrusion is toxic tort liability. In the absence of vapors migrating into structures, there will not be toxic tort liability.

To me, the E2600 process and VEC determination is a waste of a client's money. If there are solvent sites within the E1527 search radius that could present a risk of Vapor Intrusion, the EP provides value to its client by determining if there is a potential for vapor INTRUSION. This can be done from site specific information or fairly inexpensive soil gas sampling.

Some Banks Starting To Limit List of Approved Consultants

During the peak of the market bubble, the lists of approved consultants that I maintained for some of our CMBS clients exceeded a dozen pages. Often times, we would approve a consultant who was not on the list on a one-off basis if they did a phase 1 that was acceptable in scope and who had a strong relationship with the borrower. Some lender clients did not even go through the drill of preparing a list of approved consultants but simply wanted to make sure that the phase 1 reports met their SOWs.

As the CMBS market slowly revives, it appears that many banks are keeping a tight rein on the universe of consultants who can do work for them. Previously dormant shops that are starting to ramp up to originate CMBS loans are asking me for a "short list" of consulting firms. Often times, the list is around a half-dozen.   And the lenders are trying to evenly spread around the work.

Some banks are also starting to disqualify firms that heavily rely on independent contractors who are known as "1099" employees. The feeling is that firms that use a higher percentage of independent contractors may not be consistently providing quality work.

This smaller universe of consultants does make my job easier and helps promote better quality work. With firms in the on-deck circle and sitting on the bench waiting to get called up, we dont have much tolerance for firms that do not consistently meet our expectations. Even some of the phase 1 mills are starting to produce better reports.

Now if we could only get EPA to require that the site visits be conducted by EPs...........