CERCLA investor liability: "don't ask, don't tell" won't work.

• Author: Kavanaugh, Judith S.

Prudent investors can protect themselves and still enjoy traditional benefits of real estate investments without undue risk of CERCLA liability

Just how sinful ignorance can be has become readily apparent to thousands of corporations, partners, and individuals holding real estate assets in the United States over the last decade. Historically, land has been the coin of the realm in an industrialized nation; its acquisition a valuable, virtually risk-free asset. The attractiveness of real property investment changed dramatically in 1980, when, in an attempt to avert the disastrous public health and environmental consequences of unfettered industrial growth,[1] Congress enacted Title 42, U.S.C. [subsections]9601 et seq., The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).[2] Congress made the only defenses to CERCLA liability act of God[3] or war[4]--which are rarely invoked--or proof of complete innocence in creating the hazardous condition or threat, i.e., that someone else did it and the owner/operator acted reasonably to avoid or mitigate any harm.[5]

Scope of Article

The breadth of CERCLA liability and the narrowness of available defenses have transformed once-sound investments in property interests and related business activities into high-stakes gambles, not for the weak of heart or pocketbook. Acquisition of seemingly innocuous or insulated interests in property can now mean inadvertent assumption of liability for the consequences of hazardous contamination--a liability often much greater than the value of the investment or its projected income. Numerous articles and cases analyze the new risks CERCLA presents on a transaction-by-transaction basis, such as lender liability,[6] corporate/officer/director/shareholder liability,[7] purchaser liability,[8] landlord/ten ant liability,[9] trustee/fiduciary liability,[10] partnership liability,[11] and liability related to bankruptcy transactions. 12 This article discusses CERCLA's "reasonableness" or "due care" standard, inherent in CERCLA's "innocent purchaser/landowner" defenses. It focuses on the recent decision in Redwing Carriers, Inc. v. Saraland Apartments, 94 F. 3d 1489 (11th Cir. 1996), in which the 11th Circuit provides some clarification, at least in this circuit, of the murkier aspects of CERCLA liability. General guidelines also are offered as to what may, and may not, constitute "due care" for CERCLA purposes in the context of the three fundamental categories of property investments: purchase/acquisition; ownership/use; and transfer/sale of property.[13]

CERCLA Liability

Of all the forms of innocence, mere ignorance is the least admirable.

--Sir Arthur Wing Pinero

CERCLA liability is unequivocal and broad. It applies retroactively" to impose strict, joint and several liability for indivisible damages[15] on all past and present "owner or operators" of "facilities"[16] that release or threaten the release[17] of hazardous substances"[18] into the public environment or "dispose"[19] of hazardous substances.[20] Because the term "facility" encompasses not only buildings, equipment, appurtenances, pipelines, tanks, and land features such as ponds, pits, and lagoons--but also any site or area where a hazardous substance has been placed--land ownership can thus become hazardous facility ownership or operation.[21]

The statute expressly excludes from the definition of "owner/operator" any person who "without participating in the management [of a `facility'] holds indicia of ownership primarily to protect his security interest"[22] and also facially limits the types of "contractual relationships" that confer owner/operator liability.[23] This has not hindered the courts' broad interpretation of CERCLA's language to find liability in situations where facially there was little or no activity on the part of the owner/operator with regard to a hazardous substance, but knowledge or ability to control was found.[24] The "innocent landowner/purchaser" defenses have two distinct elements. First, a purchaser who discovers a "release" or "threatened release" on property in which the owner has an interest must show that the interest was acquired after contamination;[25] or at the time of acquisition made "all appropriate inquiry" but did not discover the contamination.[26] Additionally, once the presence

or release of threatened release was known, the owner must have exercised "due care"[27] with regard to the hazardous substances, and taken "precautions" against the foreseeable acts or omissions of third parties to mitigate or prevent release of hazardous substances.[28] Although the terminology varies, the standard is the same. CERCLA imposes an absolute duty on all who own or control property interests to act reasonably to avoid release of hazardous substances and to mitigate any harm caused. Prudent investors, therefore, should educate themselves as to what will constitute reasonableness in various commercial transactions involving the acquisition of property interests.

"Appropriate Inquiry" Duty

It is better to ask some of the questions than to know all the answers.

--James Thurber

CERCLA makes passive ignorance a liability[29] and rewards informed, responsible action at even distant investor levels of involvement or interest in facilities if there is sufficient control of the facility to be on actual or constructive notice of the problem.[30] Reasonable inquiry into CERCLA issues before a property interest is acquired is essential to avoid CERCLA liability. This is true, even if what one learns destroys or makes more difficult the investment because CERCLA exculpates only the truly "innocent" purchaser.[31]

To be "innocent" in the acquisition of "facilities" under CERCLA 9601(35)(B) requires one to show affirmatively that, despite "appropriate inquiry" "consistent with good commercial or customary practices," the purchaser did not know or have reason to know of contamination or threatened release at the time of acquisition, or took the property involuntarily, as by inheritance or bequest[32] and after acquisition, fulfilled the third party defense "due care/reasonable precaution" requirements of 9607(b)(3)(a) and (b).[33] CERCLA helpfully suggests factors a court may consider in determining whether "appropriate inquiry" has been made such as the acquiring party's knowledge and expertise, the value of the property if it were not contaminated, and the reasonable availability of information flagging possible contamination.[34]

Unfortunately CERCLA does not indicate what weight should be given to each of these factors.[35] They do...