South Carolina BAR Journal
SC Lawyer, Sepetember 2011, #1.
Federal Courts Provide Guidance on Bona Fide Prospective Purchaser Obligations under CERCLA
South Carolina LawyerSepetember 2011Federal Courts Provide Guidance on Bona Fide Prospective Purchaser Obligations under CERCLABy Joan W. Hartley Your client wishes to buy a piece of commercial property that was once an industrial site. The client has obtained an Environmental Site Assessment (ESA) from a qualified consulting firm. The ESA reveals that there are contaminants on the property, most likely from operations of a prior owner. The client is aware that she may be able to avoid liability for pre-existing contamination of the property by performing the ESA. But is the ESA enough?
Many real estate practitioners are not intimately familiar with the content and significance of an ESA prior to acquisition of commercial or industrial property. However, an ESA can be as important as a title examination if contamination is discovered after closing. Some sophisticated developers recognize the value of the ESA in satisfying the requirements for bona fide prospective purchaser (BFPP) liability protection with respect to contamination resulting from prior operations and activities on the property, while others only obtain an ESA because the lender required it. However, once the property is acquired and the ESA report is filed away with the closing documents, these clients often fail to give proper consideration to legal advice on their post-acquisition obligations with respect to known or suspected contamination identified during the ESA. Recent decisions in federal court serve as a valuable reminder that when acquiring property with known or suspected contamination, the purchasers BFPP obligations do not end at closing. Such obligations continue throughout the term of ownership and must be given particular consideration during any re-development of the property.
In January 2002 Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Amendments), which significantly amended the liability scheme of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Under CERCLA, a purchaser of contaminated real estate may be subject to joint and several liability for the cost of environmental cleanup of the contamination merely because the party acquired property on which there has been a release or threatened release of hazardous substances. Prior to the Brownfields Amendments, a purchaser of contaminated property could assert a defense to CERCLA liability as an "innocent landowner" only if prior to acquiring the property, the purchaser "did not know and had no reason to know" that the property was impacted by a release of hazardous substances on the property. 42 U.S.C. 9601(35)(A)(i).
The Brownfields Amendments added additional defenses to CERCLA liability, including the BFPP defense. The BFPP defense allows a purchaser of contaminated property to avoid CERCLA liability even when the purchaser is aware of contamination impacting the property prior to its acquisition. Shortly after the enactment of the Brownfields Amendments, the EPA issued guidance on the requirements to satisfy the BFPP defense. See March 6, 2003 Susan E. Bromm memorandum on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchases, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability ("Common Elements"). In 2006, the EPA promulgated regulations defining the requirements for conducting "all appropriate inquiries" requirements for assessing the environmental conditions of a property prior to its acquisition. 40 C.F.R. pt. 312. However, there has been little guidance from the courts on the requirements for establishing the BFPP defense. In recent months, two federal courts have ruled on the BFPP defense. In Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., a federal court in South Carolina undertook a detailed analysis of each of the elements of the BFPP defense and found that the current owner of the property had not established this defense. 746 F.Supp.2d 692 (D.S.C. 2010). In 3000 E. Imperial, LLC v. Robertshaw Controls Company, a federal court in California found that the purchaser of contaminated property had satisfied the requirements of the BFPP defense to CERCLA liability. 2010 WL 5464296 (C.D. Cal. Dec. 29, 2010). A fundamental issue in both cases was the current owner's post-acquisition BFPP obligations, including the obligation to take reasonable steps to stop continuing releases and prevent future release of hazardous substances.
Background on CERCLA liability
Congress enacted CERCLA in 1980 in response to Love Canal and other abandoned hazardous waste sites impacting the environment. CERCLA gives the U.S. Environmental Protection Agency (EPA) broad authority to compel "potentially responsible parties," as defined by the Act (PRPs), to clean up or pay for the cleanup of the property when it has been determined that there has been a release or a threatened release of a hazardous substance on the property. CERCLA also allows PRPs who conduct cleanup of contaminated property or reimburse the EPA for the cost of cleanup to pursue contribution from other PRPs. Under section 107 of CERCLA, liability extends to four categories of PRPs:
1) current owners and operators of a site;
2) owners and operators of the site at the time hazardous substances were disposed of on the property; 3) any person who arranged for disposal or treatment of hazardous substances at the site; and 4) any person who received hazardous substances for transport to the site for disposal or treatment. 42 U.S.C. 9607(a). If a party is in one of these categories, that party is subject to strict liability, which is applied jointly and severally, for all costs associated with a cleanup of the site. Liability also applies...