Environmental Issues in Real Estate and Other Business Transactions
| Jurisdiction | Kansas,United States |
| Citation | Vol. 60 No. 01 Pg. 23 |
| Pages | 23 |
| Publication year | 1991 |
60 J. Kan. Bar Assn. January, 23 (1991). ENVIRONMENTAL ISSUES IN REAL ESTATE AND OTHER BUSINESS TRANSACTIONS
Vol. 60, January, 1991
Copyright 1991 by the Kansas Bar Association; David Tripp
Unknown or uncertain environmental conditions are increasingly shaping acquisitions and takeovers, from multibillion dollar leveraged buy-outs to the sale of tiny strip malls. They are killing some deals outright, sharply raising the price tags of others, and causing still others to crash later on. [FN1]
I. INTRODUCTION
Recent changes in environmental laws have dramatically affected transactions involving the sale, purchase, financing or leasing of real estate or other business assets. Lending institutions have reacted to the potential liability which may be placed on them due to their involvement in a borrower's activity by establishing stringent new guidelines and loan management practices. [FN2] The suspected presence of contaminated groundwater beneath hundreds of commercial, industrial and residential properties in the City of Wichita has reportedly resulted in the decline in property values of those properties, the inability of the owners to obtain financing for the properties, and a proposal by the City government for tax abatement for the properties to generate funds to assist in the study and possible corrective actions relating to the suspected contamination. [FN3]
As the Wall Street Journal and many other commentators have noted, real estate and other transactions in today's business climate are living or dying based upon the environmental conditions of the property or other assets. In the environmental area, radically different concepts of liability and apportionment may subject owners or operators of property to ultimate responsibility for environmental cleanup, regardless of fault or negligence.
To illustrate the significance of environmental concerns in typical real estate or other business transactions, three hypothetical fact patterns are set out below. Each has been taken from an actual case, and, in two instances, the fact patterns have been changed slightly to substitute a surrogate entity as the party involved in lieu of the actual party. However, each fact pattern could apply equally to a typical Kansas real estate transaction. The hypothetical cases are:
A. Case No. 1.
A successful farmer forms an agricultural chemicals distribution company in 1949, using the family farm as his base of operations. The father has three sons, each of whom becomes involved in the business and who help the business prosper. The father passes away in 1966, leaving half of his stock in the company to his wife, and half to his three sons. The mother passes away in 1970, leaving all her stock equally to the sons.
Two sons continue to run the business, and the third becomes a conscientious objector, drops out of the family business, and is not heard from until much later. One of the remaining two sons dies, leaving all his stock to his wife and three children. The other remaining son decides to retire from the business and makes a gift of all his stock to his children.
By 1983, the business has become unprofitable and the heirs and recipients of the gifts of stock decide to try to sell the business, but are unable to sell. However, they do lease the business to a new company which provides some rental return. Also in 1983, the Environmental Protection Agency ("EPA") discovers that there are buried pesticide residues
on the property, conducts a cleanup operation, and sues all living heirs or recipients of the gifts of stock, including the children who have not had any involvement in the business activities.
Why has EPA chosen to sue all these parties, thereby putting them to the expense of legal defense and the anxiety of being sued by the United States?
Answer - EPA says each person sued is an "owner or operator" of the facility under the definitions of the Superfund.
B. Case No. 2.
In 1979, a municipal public works director cannot obtain commercial pesticides from his regular wholesaler. The wholesaler advises that he can obtain technical grade pesticides and have the technical grade sent to a custom formulator to be blended to commercial grade standards. The public works director agrees and the transaction is completed.
Later, the custom formulator goes bankrupt. In 1990, EPA notifies the municipality of its alleged "strict liability" for almost $100,000 in study costs incurred by EPA at the custom formulator's site, and EPA demands that the municipality enter a settlement agreement requiring further studies and cleanup action, estimated to cost approximately $1 million.
Why has EPA chosen to identify the municipality as responsible for the actions of a third party, who is now bankrupt?
Answer - EPA says the municipality "arranged for disposal" of hazardous waste when it entered the agreement with the custom formulator to produce commercial grade pesticides.
C. Case No. 3.
In 1975, a small businessman who occasionally helps his neighbors by performing commercial fertilizer and pesticide applications decides he needs some warehouse space for his machinery and supplies. He locates an abandoned chemical storage warehouse, but is concerned about the possibility that wastes left at the abandoned warehouse may become his responsibility. Therefore, in consultation with his lawyer, he forms a subsidiary corporation to carry out the fertilizer and pesticide business and buys the abandoned warehouse in the name of the subsidiary corporation. He cleans up trash and debris at the facility, pushes some apparently empty, abandoned barrels into a pit and operates the business.
In 1985, EPA says that groundwater near the facility is contaminated, and that EPA believes the contamination originates from the warehouse area. EPA demands that the subsidiary corporation or the businessman take responsibility for a study estimated to cost from $100,000 to $500,000. The businessman, who has been operating the subsidiary corporation on a very small margin, decides to take the subsidiary corporation into bankruptcy. Regardless, EPA sues the businessman and the subsidiary corporation, and alleges that the businessman is personally liable for over $1 million in cleanup costs.
Why should the businessman be personally responsible for environmental costs when he created a subsidiary corporation to handle the business?
Answer - Under the Superfund, an individual may be personally liable if he operates a business as an alter ego of his personal operations and is involved on a day-to-day basis in carrying out the business activities.
Because environmental concerns have become the key issue in many transactions, most real estate lawyers and those who practice environmental law have developed several approaches to understanding the significance of facts relating to environmental matters. However, the laws in this area at the federal, state, and local level often do not have precise definitions or settled case law to assist with interpretation. This article is a review of some of the more important concepts in real estate and other asset transactions, and of the art of reading and utilizing the "environmental assessment" reports prepared by environmental investigators.
II. SOURCES OF ENVIRONMENTAL LIABILITY
The primary federal environmental laws affecting property transactions are the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or "Superfund," [FN4] the Resources Conservation and Recovery Act (RCRA), [FN5] and the regulations under each. Other federal laws and regulations, including the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, and similar environmental authorities, may restrict an owner's future use of property, or fix liability on a new owner for past uses of the property. A brief summary of the key environmental issues frequently arising in real estate transactions and the statutes and definitions associated with those issues follows.
A. The Superfund Issue.
CERCLA is the primary federal statute which imposes liability on potentially responsible parties. In a nutshell, CERCLA imposes liability on "persons" for the "release" or "threat of a release" of "hazardous substances" from a "facility" into the "environment." All of these terms are defined very broadly under CERCLA.
Liability under CERCLA has been determined by the courts to be strict (without regard to fault), joint and several (any one party can be liable for all costs), and retroactive (pre-dating the statute's enactment in 1980). See, e.g., United States v. Northeastern Pharmaceutical and Chemical Company, 579 F.Supp. 823 (W.D. Mo. 1984), aff'd in part, rev'd in part, 810 F.2d 726 (8th Cir. 1986); United States v. Conservation Chemical Company, 589 F.Supp. 59 (W.D. Mo. 1984). Thus, any one party can be liable for the entire cost of the cleanup regardless of lack of fault and regardless of when the party had some connection with the facility.
Section 107(a) of CERCLA imposes this type of liability on four categories of potentially responsible parties (PRPs):
1. Present owners and operators - the present owner and operator of a facility;
2. Former owners and operators - any person who, at the time of disposal, owned or operated such facility;
3. Generators - any person who arranged for disposal or treatment, or transportation for disposal or treatment, or hazardous substances at the facility; and
4. Transporters - any person who transports hazardous substances to the facility.
The courts have broadly construed the categories of "owner and operator" and "person who arranged for disposal" to include the following persons as PRPs:
1. Leaseholders of...
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