CHAPTER 9 THE LANDMAN'S ROLE IN PERFORMING A PRELIMINARY ENVIRONMENTAL AUDIT
| Jurisdiction | United States |
(Jan 1994)
THE LANDMAN'S ROLE IN PERFORMING A PRELIMINARY ENVIRONMENTAL AUDIT
E. Stephen Brown
The S.M. Stoller Corporation
Boulder, Colorado
Nancy A. Mangone
Environmental Protection Agency Region VIII
Denver, Colorado
Abstract
Landmen have historically been responsible for many aspects of title investigation and title clearance, including identification of past owners and activities. In today's legal climate, past activities have taken on increasing importance, as present owners may be required to accept liability and cleanup environmental problems created by their predecessors in title. Landmen can play a crucial role in protecting purchasers against unpleasant surprises by including an environmental focus in the traditional title search and property investigation. This paper will introduce readers to key aspects of environmental liability and associated defenses related to property acquisition; provide an overview of the three phases of an environmental site assessment and strategies to control costs; and explore settlement options to protect buyers from environmental liability and associated costs.
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1.0 Environmental Liability and Associated Defenses Related to Property Acquisition
A. Superfund Liability
Liability drives the environmental site assessment process. Prospective purchasers fear that unpleasant contamination surprises will result in large outlays of cash for cleanup as well as innumerable headaches in negotiating a way out of the environmental regulatory maze. Liability — and defenses — can arise from a variety of sources: federal and state statutes, federal and state permit regulations, and common law tort theories. Following is a summary of the primary bases for (and defenses to) liability for environmental cleanup.
The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as amended by the Superfund Amendments and Reauthorization Act (SARA),1 establishes liability for property owners and facility operators at sites where hazardous substances have been released into the environment.
The statute establishes liability for:
1. "the owner and operator of a ... facility,
2. any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of,
3. any person who by contract, agreement, or otherwise arranged for disposal on treatment..."2
Metals commonly found at mining sites (such as lead, cadmium, and zinc) are CERCLA "hazardous substances," as are components contained in many industrial solvents commonly used in mining and oil and gas operations.3 A "release" of
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hazardous substances may occur through natural migration of substances through groundwater, surface water, and air, as well as through human activities.4
CERCLA is based on a strict, joint and several liability standard, which means that a present owner may be liable for cleanup costs associated with contamination even though he or she was not involved in the activities that created the release.5 In addition, redevelopment or reclamation activities may trigger "generator" liability for lessees or contractors through activities that disturb existing contamination. The U.S. Environmental Protection Agency (EPA) and the Department of Justice (DOJ) interpret "arranging for disposal" to include activities such as excavation, grading, and demolition, and courts have generally been receptive to this view.6
"Potentially Responsible Parties" (PRPs) under Superfund are liable to the United States and other responsible parties for costs incurred in investigating and reclaiming/restoring a site, including EPA/DOJ's costs in administering and enforcing activities at the site. Superfund also creates a statutory cause of action for reimbursement of costs to any person who has incurred "response costs" as a result of a hazardous substance release.7 CERCLA does not provide a mechanism for recovery of private-party damages (such as diminution in value of property) beyond reimbursement of costs; it does, however, empower federal and state land managers ("trustees") to recover "natural resource damages" for injuries to resources such as ground/surface water, wildlife, vegetation, and soils.8 Trustees are entitled
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to recover damages for injuries such as impairment, lost use, and replacement value.9
The National Contingency Plan (NCP)10 establishes the regulatory framework for Superfund implementation and outlines procedures required to study and remediate a site. Superfund procedural requirements are detailed and arduous, modeled after procedures developed under the National Environmental Policy Act (NEPA).11 Responsible parties who wish to take advantage of Superfund's statutory reimbursement provisions12 to recover costs from other PRPs must follow essential elements of the NCP in carrying out investigation and cleanup costs.13
Liability for releases of hazardous substances at mining and oil and gas properties may also arise from a variety of other statutory and common law sources:
• Section 319 of the Clean Water Act14 provides statutory authority to regulate non-point sources of pollution and federal matching grants for certain toxic source cleanup projects. Several states and at least two EPA Regions (VIII and IX) have begun including non-point sources such as mine drainage in CWA National Pollution Discharge Elimination Permits.15
• Many states have fairly stringent mining reclamation laws, some imposing cleanup requirements on older or abandoned operations.16
• Underground storage tank laws can also give rise to liability for past and present leakage, with common law theories such as trespass and nuisance available to address migrating contamination.
Past agricultural activities may also create a basis for property owner liability today. Residues from most pesticides and herbicides are regulated both as RCRA hazardous wastes and CERCLA hazardous substances. Soil and/or groundwater contamination from pesticides are not uncommon around barns, livestock pens, and livestock dip areas. Although the agricultural industry has historically enjoyed many of the same types of liability exemptions extended to the mining and oil and
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gas industries, this insulation is gradually being eroded away. In particular, EPA is increasing its emphasis on "non-point sources" of pollution (e.g., agricultural runoff, concentrated animal feed operations, and mine drainage) under the CWA.
B. Defenses
When liability for environmental cleanup arises as a result of common law theories on regulatory permit requirements, traditional defenses (such as causation) are available to rebut the prima facie case. Superfund presents a different set of problems. Because Superfund liability is strict, causation on lack of knowledge is not generally available to avoid cleanup costs. There are, however, limited defenses provided in the statute itself, and these statutory defenses are outlined in the following discussion.
The "Innocent Landowner" and "Innocent Seller" Defenses
A property owner who would be liable under Superfund's strict liability standard may escape liability if he or she can prove that the contamination was caused by the "acts or omissions of a third party" with whom the current owner has no contractual relationship.17 The current owner must also demonstrate the exercise of "due care" with respect to the property, including taking precautions against foreseeable acts.18 These provisions are known as the "third party defense."
CERCLA defines a "contractual relationship" to include land contracts, deeds, and other land ownership or possession transfer documents.19 Thus, as originally written, CERCLA provided that a current owner whose predecessor in title created or allowed the contamination could be held responsible for the release of hazardous substances at or from the property. The new owner was held liable even though he/she did nothing to cause the contamination. Congress addressed this anomaly by adding an additional element to the third party defense known as the "innocent landowner" defense in the 1986 SARA amendments. If the current owner "did not know" and "had no reason to know" that hazardous substances had been disposed of on the property prior to transfer of title, liability for cleanup will not accrue.20 The current owner has the burden of showing that he or she purchased without actual or constructive knowledge that the property was contaminated.21 This knowledge requirement is known as CERCLA's "all appropriate inquiry" test.
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CERCLA requires that a purchaser exercise "all appropriate inquiry" in order to be eligible for the innocent landowner defense.22 EPA has interpreted this language to require a site investigation conducted "consistent with good commercial or customary practice," taking into account any readily available information about the property, any obvious contamination, and the new owner's ability to detect contamination with appropriate inspection. The "all appropriate inquiry" test will also consider any specialized knowledge held by the new owner and any discount in the purchase price.23
"All appropriate inquiry" begins with a title search and examination of any business records related to past and present owners and operators. Inquiry should also include a visual inspection of the property for leaking drums, stained soils, and other readily observable environmental hazards.24 These steps are usually undertaken as part of the Phase I assessment (discussed below in Section 2.0). Inquiry may also include taking soil, air, and water samples at the property as a follow-up measure (Phases II and III).
A seller of property may also be entitled to assert the "innocent landowner" defense. The seller, however, must also be able to demonstrate that he/she did not have actual knowledge of...
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