Becker's Iowa Environmental Law Update : Iowa Environmental Lawyer & Attorney : Charles Becker : Belin McCormick P.C. Law Firm : IA Regulatory Compliance, Site Cleanups

                                   “Be afraid. Be very afraid.”
                                                    Genna Davis in The Fly

In November of 2006, a remarkable thing happened – EPA allowed for the purchase of contaminated real estate without ownership liability. A change in the rule allowed a person buying real estate to assert the Bona Fide Prospective Purchaser Defense, the Innocent Landowner Defense or the Contiguous Property Owner Defense. The rain stopped, the clouds parted and the sun shined.

Surprisingly, EPA did not demand all that much in return. It set out concise rules about what needed to be included to conduct "all appropriate inquiry" (AAI) and permitted the use of a Phase I Environmental Site Assessments (compliant with ASTM 1527-05) to qualify for the protection. Apparently, some consultants have trouble reading.

In a recent investigation conducted by the United States EPA Office of Inspector General, a review of 35 Phase I Reports was undertaken to see if they satisfied the requirements of AAI. Low and behold, every one of them – 100% – failed. Every one of them left out something that must be addressed under the AAI protocol.

Among the findings:

• Seven reports failed to have a statement regarding data gaps;

• None of them included the Statement of Qualifications of the Environmental Professional;

• All of them left out the EP opinion statement in the Conclusion that is required;

• In the most baffling finding of all, nine were not signed by the EP.

So of the 35 reports received, none passed. Is this so devastating?  In the context of the Brownfields program that was being reviewed, maybe not.  But these Phase I reports were the same reports that we order up every day for real estate purchases.  Would it really be a problem if the Environmental Professional forgot to include one of the listed items? 

Imagine your client comes to you and says she wants to buy a site that was previously a manufacturing facility. The Phase I identifies the past use of toluene at the facility and finds evidence of a release. Your client purchases the property and undertakes all requirements necessary to satisfy the Bona Fide Prospective Purchaser Defense.  Five years later, a toluene plume, identified as originating from the site, is threatening the drinking water supply for the city of Puppyville. EPA investigates and determines that the prior owner is bankrupt. Your client, having used the site very successfully and profitably as the home office of a mortgage foreclosure company, is the only one around who might be able to pay for the clean-up. She refuses and asserts the Bona Fide Prospective Purchaser Defense.

At the summary judgment hearing, your client concedes that the only thing standing between her and clean-up liability is the fact that she conducted AAI by performing a Phase I Environmental Site Assessment prior to buying the property. EPA agrees that if the Phase I is valid, the defense would be available. However, EPA points out that the Phase I did not include the Statement of Qualifications of the Environmental Professional. As it turns out, the Environmental Professional that conducted the Phase I is the same one who received the Environmental Professional of the Year Award for the past five years, but he concedes that his office manager failed to include the Statement in this particular report.

You be the judge. Is the Puppyville drinking water supply protected or does Ms. Mortgage Foreclosure get to keep her money?

The teaching point of the OIG Report is that your client might not have the protection that was bargained for due to some pretty basic mistakes. For those who think that it is the consultant’s job to provide a Phase I ESA that is AAI compliant, you’re right. However, if the consultant is uninsured or underinsured, being right will be of little consolation to your client. And your client might very well look for someone else to blame.

As an aside, I feel compelled ask the question: What in the world prompted EPA to conduct the study in the first place? I am sure it wasn’t to confirm that if they ever needed to void a Phase I ESA in the future, they will likely be able to do so. I'm not that cynical. So why? I don’t know, but it’s why I’m afraid – very afraid.

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When it rains, it pours, and right now there’s a veritable typhoon of Superfund liability cases.

On September 30, 2009, the federal district court in Georgia ruled on several summary judgment motions in Scarlett & Associates, Inc. v. Briarcliff Center Partners, L.L.C. The primary question was whether a property management service could be liable for remedial costs under CERCLA and/or RCRA. The Court said yes to both.

The property in question was a strip mall that housed a leaking dry cleaning facility. The contamination was identified in the early to mid-1990s and a release notification was issued on June 27, 1994. Since that time, the plume has continually migrated and expanded. When the owner of the center failed to make its payments, AmSouth Bank of Florida took over operation of the center.

In September of 1995, AmSouth retained Faison and Associates to undertake certain property management services, which they did until September of 1997.

What Faison could not do:

1) Manage any tenant operations;

2) Assert control over which tenants were permitted to lease space;

3) Evict tenants; or

4) Assert control over any hazardous substances handled by a tenant.

What Faison could do:

1) Attempt to rent and renew rentals space to tenants approved by AmSouth;

2) Collect rent and maintain common areas;

3) Make repairs;

4) Pay utilities and taxes for AmSouth;

5) Ensure that the operators of the dry cleaning business complied with EPA’s reporting requirements on dry cleaning facilities covering PCE emissions, equipment monitoring and repair, and accounting of PCE consumption.

AmSouth successfully argued that its indicia of ownership was for the sole purpose of protecting its security interest, so it had no liability pursuant to the Secured Creditor Exemption under Superfund. Faison, its agent, wasn’t as lucky.

With respect to the CERCLA claim, the court found that, to be liable, Faison needed to be actually involved in the operations involving leakage or disposal of a hazardous waste. The Court found that there was evidence that Faison “played at least a minimal role in managing the dry cleaner’s operations specifically related to pollution.”  That role was that Faison had sent the dry cleaner a letter advising it of some reporting requirements (not release related) to EPA. Based on this act and Faison's general management actions, the court found that there existed a question of whether Faison had operator liability under CERCLA.

The Court then considered RCRA liability. While CERCLA is designed to address past releases, the intent of RCRA is to regulate the ongoing use of hazardous materials and to require cleanup from those operations.   That is, the party, at the time that suit is filed, must be involved in an ongoing violation of a RCRA requirement, i.e., there must be a current violation.  But, in this case, Faison had been off of the site for years prior to commencment of the suit.  So why was Faison liable under RCRA?

The Court held that the existing plume was continuously expanding and was, therefore, a “current violation.” Although the Court specifically found that Faison did not contribute to the past or present handling, storage, treatment, transportation or disposal of PCE, its management role on behalf of AmSouth was sufficient to support a finding that it was operating a hazardous waste treatment, storage and disposal facility.

Looking at the activities of the management company, the short time period of oversight, and the length of time since the company worked on the property, I believe that most would say that this is a very disturbing holding. Obviously, the “polluter pays” principle is nonexistent but, more importantly, what message is being sent? One message is that if a property manager is aware of any contamination at a site being managed, there are only two options: 1) Don’t manage the property, or 2) Have an iron-clad indemnification from your customer (and if it’s anyone other than a bank or Microsoft, good luck with that).

But what if the property manager doesn’t know about the releases?  Short answer – it doesn’t matter. In this case, the court found that there were active releases from the dry cleaner between 1995 and 1997, but there was no evidence that Faison was aware of those releases.  However, nothing in the opinion or the law requires knowledge for operator liability. All that is required is that there be a release of a hazardous substance during the manager’s watch which is still migrating (I have yet to see a plume that hasn’t migrated) and is not remediated at the time of the action (which can be years after the manager has ceased managing).

Regardless of the final outcome, I would suggest that this is bad policy.  We need property managers to be able to do their job without fear of being drawn into Superfund liability.  We are in an era where it is permissable for banks and land purchasers to be sheilded from environmental liability.  Surely we can afford similar protection to property managers.

RELATED POSTS: City Superfund Liability Goes Down the Drain

                            CERCLA Operator Liability: A Tragedy in One Act
 

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