A federal district court sitting in Kentucky recently considered the “due care” obligations of a party seeking protection under the “innocent landowner” defense in the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§9601 et seq., in 500 Associates, Inc. v. Vermont American Corporation, Civil Action No. 3:96cv-847-S, 2011 WL 482881 (W.D. Ky., Feb. 7, 2011). The case is important for purchasers and developers of distressed properties, licensed remediation specialists, environmental consultants preparing Phase I reports, lending institutions requesting or relying upon Phase I reports, and anyone involved in brownfields transactions and illustrates lessons to be learned from a developer’s failure to exercise due care. While the case involved the “innocent landowner” defense which pre-dates the bona fide prospective purchaser (BFPP) and contiguous property owner defenses made available in the Small Business Liability Relief and Brownfields Revitalization Act of 2002, Pub. L. No. 107-118, commonly known as the 2002 Brownfields Amendments to CERCLA, U.S. EPA has stated in its Common Elements Guidance that CERCLA “due care” cases are a “reference point” for determining what constitutes “reasonable steps” as part of the continuing obligations of a BFPP and a contiguous property owner. Id. at 11. To learn what happened to the developer who relied upon a cursory environmental audit, failed to review available public records, declined to investigate further by undertaking sampling despite its knowledge of contamination, failed to take precautions when demolishing buildings on a former manufacturing site, failed to report the results of three environmental audits to the state environmental agency, and repeatedly failed to take any remedial action, continue reading this article.
500 Associates involved the cleanup of a former saw-and-tool manufacturing facility that had generated various hazardous wastes associated with its electroplating and heat treatment operations. A group of commercial real estate developers entered into a contract to purchase the property. The developers hired an environmental consultant who performed an environmental audit. The audit consisted of an on-site inspection, a review of records of operations and permits, and a discussion with the defendant-manufacturer’s health and safety inspector. The audit found chromium contamination and confirmed that the manufacturer was registered with the Kentucky environmental agency as a large quantity hazardous waste generator producing an average of 65,470 gallons of waste water per day. The manufacturer’s safety inspector acknowledged only one spill of 100 gallons of nickel but denied any other releases of hazardous substances. The audit concluded that the manufacturer had adequately decontaminated the plating and waste treatment areas. Although the developer knew that chromium contamination was present and that the manufacturer had used other hazardous materials at the site, soil samples were not taken and the auditor did not recommend further testing. Nor did the auditor review available public records concerning the property. A review of available public records would have revealed that the manufacturer had in fact released untreated waste water and hazardous substances on numerous occasions during its ownership.
Relying upon this “cursory” environmental “audit,” the developer purchased the manufacturing site. The developer then demolished a portion of a building in the area of the former electroplating and waste treatment operations and, in demolishing the building, moved concrete and exposed soil. The developer “took no precautions” in removing the floor, roof, and walls of the building and left the material under the concrete floor and pits formerly associated with manufacturing operations exposed to the elements although the developer knew that “there was at least one hazardous substance, chromium, on the property.”
That same year, the developer entered into an agreement to sell the property to an advertising agency. The advertising agency hired its own consultant to conduct an environmental audit which included a review of public records and sampling of soil and groundwater. This audit disclosed the presence of various contaminants in the soil and groundwater, and the advertising agency’s consultant recommended further investigation. Analytic results from further investigation by the advertising agency’s consultant confirmed the presence of hazardous substances and included soil samples revealing contamination below the concrete floors that the developer had demolished.
The advertising agency provided the results of its environmental audit to the developer. The developer retained yet another environmental consultant to conduct soil samples. The results of those soil and gas samples confirmed hazardous substances, but this environmental consultant concluded that the source was another property.
The developer failed to report the results of any of any of the three audits to the Kentucky environmental agency and failed to take any remedial action. The advertising agency withdrew from the purchase agreement.
The Kentucky environmental agency began a four-year investigation and subsequently filed an enforcement action against both the manufacturer and the developer. While the state environmental enforcement action was proceeding, the developer filed a cost-recovery action under CERCLA against the manufacturer in federal district court in Kentucky. The manufacturer moved for dismissal. Meanwhile, the Kentucky environmental agency adopted the hearing officer’s report in the enforcement action finding both the manufacturer and the developer jointly and severally liable for the releases and imposed civil penalties against both. The hearing officer did find that the developer was less culpable than the manufacturer, noting that the developer made a minimal effort to secure the property from further harm or release by installing fencing and a security system and had cooperated during the state investigation. Various appeals in the Kentucky state courts followed.
Nearly twenty years after the developer contracted to purchase the site, the Kentucky Court of Appeals issued a final decision in the enforcement action, finding substantial evidence to uphold the hearing officer’s determination that the developer failed to exercise “due care” in the management of its property. 500 Associates, Inc. v. Natural Resources and Environmental Protection Cabinet, 204 S.W.3d 121 (Ky. App. 2006). The Kentucky Court of Appeals found that the developer was not entitled to the benefit of an “innocent purchaser” defense because there was evidence that its initial investigation of the property had been inadequate, that it failed to exercise due care when it demolished structures on the site, and that it took no action to abate the problem once it knew of contamination on the property. The Kentucky Court of Appeals affirmed the hearing officer’s determination that “[t]o reward [the developer’s] lack of diligence with a liability exemption would be directly contrary to the policy of CERCLA, which ‘does not sanction willful or negligent blindness.’” Id. at 138. Two years later, the Kentucky environmental agency issued a final cleanup order determining that the manufacturer was 100% responsible for characterizing and remediating the release of contaminants.
In the cost-recovery action pending in the federal district court in Kentucky, the court held that the developer could not recover its costs from the manufacturer because the costs could not be shown to have furthered the cleanup of the property. The court held that the developer could not identify a “release” or “threatened release” by the manufacturer which created an imminent threat to which the developer responded. Relying on the record in the state environmental enforcement proceedings, the district court said that the developer was a contributor to the contamination by its “(1) failure to exercise due care in evaluating the risks of contamination on this industrial property; (2) careless demolition of structures on the property; (3) exposure of materials and structures to the elements; (4) and failure to report or otherwise address the need for cleanup when contamination became known.” 2011 WL 482881 *5 (citing 500 Associates, 204 S.W.2d at 139). The court said that the developer’s costs for fencing, installation of the security system, and investigation of environmental contamination were not incurred to further the cleanup of the property but instead were incurred for the developer’s own business purposes or for the purpose of attempting to convince the state environmental agency that it had no liability for the releases.
In concluding that the developer could not recover its costs, the district court agreed with the hearing officer that CERCLA “does not sanction willful or negligent blindness.” 2011 Westlaw 482881 *6 (quoting United States v. Monsanto Co. 858 F.2d 160, 169 (4th Cir. 1988)). The district court summarized the evidence supporting the hearing officer’s conclusion that despite its knowledge of the contamination, the developer did nothing to respond or remediate the problem:
The hearing officer’s report reflects [the developer’s] unreasonable reliance upon a cursory environmental audit when it purchased the property. This audit did, in fact, inform [the developer] that hazardous materials had been handled on the site by [the manufacturer] and that there was at least one hazardous substance, chromium, on the property. [The developer] chose, unwisely, to rely on its auditor and do nothing further to investigate. It claims to have had no knowledge of any spills and therefore took no precautions when demolishing buildings in the area of [the manufacturer’s] former electroplating and waste water treatment operations. When preparing to sell the property, it learned from the potential buyer’s auditor that there was contamination found in samples taken from the area where [the developer] had removed concrete floors. [The developer] claims to have contacted [the manufacturer] who again denied that there had been any spills or releases, and [the developer] performed no further investigation nor did it report the discovery to the [Kentucky environmental agency]. In light of its findings, the auditor performed a second assessment of the property. When [the developer] was informed that the tests confirmed the presence of various inorganic constituents and volatile organic compounds, [the developer’s] response was to hire another consulting firm to conduct soil samples. When this analysis also confirmed the findings, the potential buyer withdrew from the purchase agreement. Again, [the developer] did not remediate nor did it report on the contamination. The hearing officer found that from 1994 to 1998 both [the manufacturer and the developer] steadfastly refused to conduct remedial work, necessitating the commencement of the environmental enforcement. 500 Associates, 2011 WL 482881 *6.
Because the developer’s costs did nothing to further the cleanup, the district court granted the manufacturer’s motion for dismissal and denied the developer’s motion for summary judgment. Id. *7. While the developer escaped responsibility for characterizing and remediating the site, the developer was civilly fined and denied recovery of its costs associated with its environmental investigation of the site. Further, the developer incurred environmental consulting fees and/or attorney fees from the time it contracted to purchase the site in 1986 until the district court rendered its decision twenty-five years later in 2011. The developer also suffered inconvenience in defending an enforcement action and prosecuting a cost-recovery action during this lengthy period. The developer’s failure to exercise due care on the front end probably ended up costing the developer more in the end.
This article was authored by Gale Lea Rubrecht, Jackson Kelly PLLC. For more information on the author, see here.