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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In September of 2009, the federal district court for the Eastern District of California issued a ruling in Adobe Lumber, Inc. v. Hellman.  If the holding catches on, it should scare the sewage out of every city in the country.

The facts are fairly unremarkable as Superfund facts go. Between 1974 and 2001, a shopping center, owned by Adobe Lumber,  housed a dry cleaning business. A floor drain from the dry cleaners connected to the sewer system for the City of Woodland, California through a waste pipe. The dry cleaning operators used the floor drain to dispose of waste water containing perchlorethylene, which is a hazardous substance under CERCLA.  In 2001, it was determined that PCE from the dry cleaning establishment had contaminated the soils and groundwater. So far, not too surprising. 

The interesting aspect of the case is that the plaintiff chose to include the City in the lawsuit. The plaintiff''s claim against the City was that the contamination was a result of the leakage of PCE from the sewer system and that the sewer system was

especially likely to leak due to … its age, the large number of joints, grout (mortared) joints and defects in the sewer system and that the city’s management and maintenance of the sewer system was re-active, minimal, and inadequate.

In suing the City, the plaintiff sought declaratory relief and cost recovery under CERCLA as well as several other theories. The plaintiff moved for summary judgment on the CERCLA claim under the theory that the City, as the owner and operator of the sanitary sewer system, had liability for any leaking hazardous substances from those facilities. 

The court first addressed the question of whether the sewer pipes constituted a “facility” under CERCLA. The court noted that the term “facility enjoys a broad and detailed definition.” (For those who don’t read a lot of cases, this kind of language is a bad sign). The court then found that the sewer pipes can be deemed a facility because the statutory language identifies a facility as any site or area where a hazardous substance has been disposed of or comes to be located. The court could find no language to exclude the city’s sewer system, so it held that the pipe was a “facility” under CERCLA.

The court then went on to determine whether the city was an owner or operator of the facility. This one, however, was easier because there was no question but that the city owned the sewer system.

Finally, the city asserted the innocent landowner defense. The elements of that defense are that the defendant must prove that: 1) the release or threat of release of hazardous substances was caused solely by the acts of a third party, and 2) the defendant exercised due care with respect to the hazardous substances and took precautions against foreseeable third acts or omissions. The Court found that neither of the elements were satisfied.

First, the court found that the dry cleaners did not constitute the “sole” cause because the City allowed the sewer lines to degenerate to the state which allowed the releases to occur. 

Second, the court found that though the dry cleaner's conduct clearly violated state and local law, that did not render the conduct unforeseeable as a matter of law. The evidence showed that the City did not take steps to remedy the leaks in the sewer system until 2004 even though it was aware that several dry cleaners did operate in the area. The court found that it was foreseeable that the City would be aware that PCE could be illegally discharged from these facilities and the City was required to take “reasonable steps” to prevent ongoing contamination, which the City did not do until 2004. Therefore, the City was the “owner” and “operator” of a “facility” that allowed the release of a hazardous substance.

I believe it is safe to say that the City was surprised at the outcome.

There is still a long way to go and appeals to be had, but, based on the cases cited by the court, there is every reason to believe that the City will ultimately be one of those parties who gets allocated some of the response costs for this clean up. It will be interesting to see if the Burlington Northern case lets them get out for a low percentage.

The real import to this case, in my mind, is that it, once again, highlights the idea that the “polluter pays” under CERCLA is often not true. The environmental regulatory schemes under both federal and many state laws are much less concerned with who caused a hazardous release than they are with who can be easily located to pay for the clean up of a hazardous release. And while that may be expedient, it is a far cry from making the polluter pay as that phrase is understood by most people.

RELATED POSTS: The SCARLETT Letter of Operator Liability

                            CERCLA Operator Liability: A Tragedy in One Act
 

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