A Buyer's Catalogue of Prepurchase Precautions to Minimize Cercla Liability in Commercial Real Estate Transactions
| Publication year | 1991 |
I. Introduction
Since Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),(fn1) fear of hazardous waste pollution liability has thwarted countless business deals.(fn2) In almost any commercial real estate transaction, the specter of astronomically high environmental liability haunts and often dictates the process and structure of these transactions.(fn3)
Although estimates of the scope of hazardous waste pollution and individual site cleanup costs vary widely, the estimates continue to increase. In 1980, one U.S. Representative speaking in support of CERCLA's enactment cited the Environmental Protection Agency's (EPA) $44 billion estimate to clean up approximately 30,000 to 50,000 abandoned hazardous waste sites across the country.(fn4) Nine years later, a congressional report stated that "[o]ver many decades, spending by all parties on cleaning up toxic waste sites could total $500 billion, unless there are major technological innovations that bring the costs of permanent remedies down."(fn5) Regarding individual sites, one commentator estimated that the average cost of cleaning up a contaminated site would be approximately $8 million.(fn6) A more recent estimate of individual site cleanup costs indicates that "[a]s a national average, the cost of a federal Superfund site clean-up exceeds $20 million."(fn7)
In light of these estimates, even the smallest environmental problem can turn a good bargain into a debilitating liability. Naturally, fears of environmental liability may profoundly influence bargaining table dialogue. Because the cost and incidence of hazardous waste contamination are soaring and because the courts favor broad interpretations of CERCLA's liability provisions,(fn8) counsel for prospective purchasers of commercial real estate must take certain prepurchase precautions to minimize potential CERCLA liability. This Comment provides practical suggestions as to the aim and form of those precautions.
In Part II, this Comment first examines the basic statutory framework and liability scheme of CERCLA. Part III discusses the common law principles of successor liability and their relation to CERCLA's liability mechanism. Finally, in Part IV, this Comment presents a variety of preventive law steps to lessen exposure to hazardous waste liability under CERCLA.
Part IV begins by discussing buyers' and sellers' goals when negotiating a real estate purchase and the environmental risks that generally inhere in such a transaction. Part IV then demonstrates in successive subsections how to identify, evaluate, and allocate the risks of a specific purchase. This Comment provides examples of a condition, representations, and an indemnification clause, all of which may serve as protective devices in real estate contracts to allocate these risks. Part IV also considers how courts in four recent cases have responded to buyers' and sellers' attempts to enforce indemnity clauses to avoid CERCLA liability.
II. The Legal Universe of CERCLA
Congress enacted CERCLA in 1980 with two main objectives in mind. First, Congress wanted to provide the federal government with a powerful, effective device to secure the health and safety of the public and to protect the environment from the threat of hazardous waste mismanagement.(fn9) Second, through strong liability provisions, Congress intended to place the cleanup burden upon those responsible for existing contamination and to deter future contamination.(fn10)
In their attempts to honor these broad objectives, courts have recognized that Congress left the statute incompletely written and that Congress intended the judiciary to perform interstitial lawmaking.(fn11) In particular, the lack of congressional guidance regarding CERCLA's liability provisions has created a large degree of uncertainty among the courts and commentators, making it difficult to determine uniform standards regarding successor liability or environmental due diligence.(fn12) To accomplish Congress' policy objectives, the Act establishes two complementary enforcement mechanisms: public suits brought by the federal government(fn13) and private suits brought by individuals.(fn14)
1. Potentially Responsible Parties
According to section 9607, CERCLA's main pronouncement on liability, the following four actors, known as "potentially responsible parties" (PRPs),(fn15) may be held liable for toxic cleanup costs: (1) the owner/operator of the site at the time of disposal,(fn16) (2) generators who arranged for disposal,(fn17) (3) transporters,(fn18) and (4) present owners of the site.(fn19) In the past, entities falling within these four categories have included individual plant supervisors,(fn20) parent corporations,(fn21) officers and stockholders,(fn22) successor corporations,(fn23) lessors,(fn24) lessees,(fn25) trustees,(fn26) realtors,(fn27) and lenders.(fn28) These PRPs may be liable for all removal and cleanup costs, including incidental related costs for the cleanup, and damages to the environment from the hazardous releases.(fn29)
This Comment focuses on the last of these four PRPs- present owners of the site. Liability may attach to a recent successor/purchaser ("a present owner") by mere ownership without consideration of who actually polluted the site.(fn30) Because of CERCLA's structure, the federal government may sue any PRP, including the PRP with the deepest pocket, for cleanup costs. Therefore, every buyer, soon to be a present owner, must be on the alert for possible contamination and CERCLA's strict liability standard.(fn31) This standard is the starting point for the drafting techniques discussed later in Part IV of this Comment.
2. Stating a Claim and the Burden of Proof
To state a claim under CERCLA, a plaintiff must allege that the defendant is (1) a person (2) who is in some way responsible for (3) a release(fn32) of (4) a hazardous substance(fn33) (5) in a facility(fn34) (6) from which there has been a release or threatened release of the substance (7) to which the plaintiff has taken the necessary response actions consistent with the National Contingency Plan.(fn35) In an action by the government to recover cleanup costs, the burden of proof is on the PRP to show that it was not responsible for the release or that the costs incurred by the government were not consistent with the National Contingency Plan.(fn36)
3. Defenses
The statute provides the PRP with the following three limited defenses to liability: (1) an act of God, (2) an act of war, or (3) an unforeseeable act or omission by an unrelated third party.(fn37) In 1986, when Congress amended CERCLA, legislators attempted to develop another exception to the Act's liability provisions for innocent landowners.(fn38) By redefining the term "contractual relationship,"(fn39) Congress created the "innocent landowner" defense from the last of the three defenses in section 9607(b).(fn40)
As an affirmative defense, the innocent landowner provision places the burden on the defendant to establish six elements(fn41) by a preponderance of the evidence.(fn42) Since its creation, few courts have issued rulings on this defense.(fn43) At first glance, the defense appears to be an attractive device to shield buyers from CERCLA liability; however, in cases raising the defense, most defendants have failed to meet its strict requirements.(fn44) This difficulty exists in part because of the courts' broad interpretation of the term "contractual relationship"(fn45) and because no accepted regulatory standard establishes the requisite level of "due diligence."(fn46)
The innocent landowner defense pertains directly to the subject of this Comment-minimizing a buyer's postpurchase liability for prepurchase contaminations of property. By following the measures suggested in Part IV of this Comment, one may possibly establish the requisite due diligence although no particular formula will always satisfy the due diligence requirements. Satisfaction depends upon a variety of factors and is decided on a case-by-case basis.(fn47) As a result, the buyer may rarely rest assured that he or she has met this strict standard; the innocent landowner defense is not as safe a harbor as it might seem.
4. Strict Liability, and Joint and Several Liability
Apart from the above defenses, courts now unanimously hold that section 9607 imposes strict liability for any release.(fn48) Also, nearly all courts have held that defendants are jointly and severally liable.(fn49) To fall within an exception to the rule of joint and several liability, a party must show that the harm is divisible or that some basis exists for apportioning the costs among the PRPs.(fn50)
5. Third Party Contribution
Section 9613(f), entitled "Civil Proceedings-Contribution," also relates to liability.(fn51) Before 1986, courts debated whether a PRP could bring a third party suit for contribution against another actor who also may have violated CERCLA's provisions.(fn52) Originally, CERCLA made no specific mention of rights to contribution from other responsible parties.(fn53) After the 1986...
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