First Test: Prospective Purchaser Defense Fails
In November of 2006, the earth shook. At that time, the EPA regulations relating to the Bona Fide Prospective Purchaser Defense (“BFPP”), became effective. The BFPP Defense, theoretically, allows the purchase of contaminated real estate without stepping into Superfund liability. Though too soon to tell, it looks like it might have just been a minor tremor.
For the first time, a court has interpreted the requirements of the BFPP Defense. In the case of Ashley II of Charleston, LLC v. PCS Nitrogen, Inc. v. Ross Development Corp. et al, the Federal District Court for South Carolina took on the issue. The facts are both complicated and, at times, confusing. The need for an $8 million dollar clean-up was identified at a fertilizer manufacturing plant. The remediation will require the removal of arsenic, lead, PAH contamination and raising the pH of the site. There were multiple parties brought into the action and the allocation made to each party is interesting reading. However, this post will focus on the liability of Ashley II, a limited liability company. Interestingly, the principals of Ashley are Cherokee Investment Partners which is a large investment fund that has dedicated $1 billion dollars to the acquisition of Brownfields properties.
As part of a multi-million dollar project, Ashley retained an environmental engineer. The project included the purchase of a part of the land that now needs remedial action. A Phase I Environmental Site Assessment was issued and, shortly thereafter, the property was purchased. The Phase I identified some sumps and stained concrete pads as Recognized Environmental Conditions (“RECs”). Ashley did not do any testing around the sumps or the concrete pads to determine if the RECs had, in fact, caused a release.
Some time thereafter, Ashley tore down some buildings on a parcel of the property which had covered sumps that previously contained hazardous substances. No testing was done around the sumps prior to removal of the buildings.
THE EIGHT ELEMENTS OF THE BFPP DEFENSE
In analyzing Ashley’s assertion of the BFPP Defense, the Court required Ashley to prove eight elements by a preponderance of the evidence.
I. NO DISPOSAL AFTER ACQUISITION
The BFPP Defense requires that there be no disposal of any hazardous substances after the acquisition of the property. Judge Seymour arrived at an interesting reading of this requirement. The Judge found that Ashley removed the outside structure of the buildings but left in place a number of sumps and pads and did not conduct soil testing under the pads. Testimony showed that, after the removal of the building, the sumps would fill with rain water which would then seep through cracks in the sumps or fill up and overflow onto the site. Based on these findings, the Court determined that disposals "likely" had occurred after the purchase of the property. More importantly, the burden of proof was held to be on Ashley. In the words of the Court: "The court concludes that Ashley did not prove that no disposals occurred on the Site after its acquisition of the Site."
II. CONDUCT OF ALL APPROPRIATE INQUIRIES
The Court noted that Ashley had an ASTM-compliant Phase I Environmental Site Assessment conducted prior to purchase. While there were some claims of non-compliance with ASTM standards, the Court found that Ashley acted reasonably and that it “properly conducted AAI.”
III. LEGALLY REQUIRED NOTICES
Next, the Court looked to see if there was a release of any hazardous substance since acquisition of the property that needed to be reported. Oddly, the Court found that Ashley satisfied this requirement because
[t]he record does not establish that any releases occurred on the Site subsequent to Ashley acquiring ownership. The Court finds that Ashley has met its burden of proving that it made all legally required notices.
IV. THE EXERCISE OF APPROPRIATE CARE
To show that it exercised appropriate care, Ashley needed to show that it took reasonable steps to: 1) stop any continuing release; 2) prevent any threatened future release; and 3) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance. Again, Ashley fell short. The Court found that Ashley’s failure to clean out and fill in the sumps, thus leaving them exposed to the elements, resulted in possible releases. Also, Ashley failed to prevent debris from accumulating on the site, did not investigate a debris pile and did not remove the pile for over a year. For these reasons, appropriate care was not shown.
V. FULL COOPERATION, ASSISTANCE IN ACCESS
The Court found that Ashley fully complied with this requirement.
VI. INSTITUTIONAL CONTROLS
The Court did not find any violation that institutional controls were needed and therefore this element was satisfied.
VII. COMPLIANCE WITH REQUESTS AND SUBPOENAS
The Court found full compliance with this requirement.
VIII. NO AFFILIATION
Under this requirement, Ashley needed to show that it was not: 1) a potentially responsible party; 2) affiliated with persons that were potentially liable for response costs at the site through: a) any direct or indirect familial relationships; b) any contractual, corporate or financial relationship; or c) the result of a reorganization of a business entity that was potentially liable. Ashley passed this test. However, Ashley's indemnification of others at the site, according to the Court, "reveals just the sort of affiliation Congress intended to discourage." Again, the Court found the BFPP Defense requirements to have been violated.
CONCLUSION
Once done with the analysis, the Court found that Ashley was, indeed, a PRP because it was the current owner of contaminated property and it did not satisfy the requirements of the BFPP Defense. That is, the Court found that a disposal occurred after Ashley acquired the site. The Court then undertook the difficult job of allocating the costs to the various parties identified in the case. The good news is that Ashley was allocated 5% of the entire costs of clean-up. The bad news is that $400,000 is still a significant amount to pay when Ashley clearly tried to follow the rules set out by EPA.
There appears to be at least three lessons to be learned from Ashley. First, courts are going to carefully scrutinize every aspect of the BFPP Defense -- and there are a lot things that can go wrong. Second, despite what you may have been told (by EPA officials or others), doing a Phase I ESA is not all that is necessary for the BFPP Defense -- RECs must be investigated and further reporting may be necessary. Finally, as we already knew, what happens after acquisition is important. Getting the defense is one thing, keeping it is another.
