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Presenting a live 90-minute webinar with interactive Q&A

CERCLA Bona Fide Prospective Purchaser Defense:

Securing and Maintaining Liability Protection Strategies for Overcoming BFPP Defense Challenges and Restrictions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, MARCH 28, 2017

Bradley R. Sugarman, Partner, Krieg DeVault, Indianapolis

Charles S. Warren, Partner, Kramer Levin Naftalis & Frankel, New York

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CERCLA Liability and the Bona Fide Prospective Purchaser

Bradley R. Sugarman Charles S. Warren bsugarman@kdlegal.com cwarren@kramerlevin.com

(317) 238-6265 (212) 715-9387

1. Current owner or operator of a vessel or facility;

2. Past owners and operators at the time of disposal;

3. Any person who by contract, agreement, or otherwise arranged for disposal or treatment of hazardous substances

4. Any person who accepts or accepted any hazardous substances for transport to disposal or treatment facilities

Comprehensive Liability – 107(a)

6

The case law interpreting CERCLA has enlarged this catalog of liable parties to include:

successor corporations,

lessees of current and former owners,

corporate officers who were active in site operations,

active shareholders,

parent corporations,

lenders, and

trustees.

Comprehensive Liability

7

• CERCLA liability is strict and does not require proof of negligence or wrongdoing.

Harley-Davidson, Inc. v. Minstar, Inc., 41 F.3d 341, 343 (7th Cir. 1994).

• CERCLA liability is not dependent upon any showing of causation or fault.

Farmland Indus., Inc. v. Morrison-Quirk Grain Corp., 987 F.2d 1335, 1339 (8th Cir. 1993).

• “Often, liability is imposed upon entities for conduct predating the enactment of CERCLA, and even for conduct that was not illegal, unethical, or immoral at the time it occurred. We recognize . . . that CERCLA, as a strict liability statute that will not listen to pleas of ‘no fault,’ can be terribly unfair in certain instances in which parties may be required to pay huge amounts for damages to which their acts did not contribute.”

Matter of Bell Petroleum Servs., Inc. 3 F.3d 889, 897 (5th Cir. 1993).

Comprehensive Liability – Strict and Retroactive

8

Responsible parties are jointly and severally liable unless they can prove a reasonable basis for apportionment exists.

Burlington N. & Santa Fe Ry. Co. v. United States, 556 U.S. 599, 1881 (2009).

United States v. Capital Tax Corp., 545 F.3d 525, 534 (7th Cir. 2008).

United States v. NCR Corp, 688 F.3d 833 (7th Cir. 2012).

“Divisibility is a legal defense to joint and several liability under CERCLA in which a party makes ‘a causation based argument that the cleanup costs at a single CERCLA facility should be divided between [a defendant] and [other] responsible part[ies].’”

Ashley II v. PCS Nitrogen, Inc., 791 F.Supp.2d 431, 481 (D.S.C. 2011).

Comprehensive Liability – Joint & Several

9

A party seeking to avoid joint and several liability bear the burden

of proving that a reasonable basis for apportionment exists.

United States v. Chem–Dyne Corp., 572 F. Supp. 802, 810 (S.D. Ohio 1983)

Restatement (Second) of Torts § 433B (1976)) (placing burden of proof on party seeking apportionment).

• “The practical effect of placing the burden on defendants has been that responsible parties rarely escape joint and several liability, courts regularly finding that where wastes of varying (and unknown) degrees of toxicity and migratory potential commingle, it simply is impossible to determine the amount of environmental harm caused by each party.”

O’Neil v. Picillo, 883 F. 2d 176, 178-79 (1st Cir. 1989).

Comprehensive Liability – Joint & Several

10

An act of God;

An act of war;

An act or omission of a third party – except those acts or omissions that “occur[] in connection with a contractual relationship”;

Or any combination of these.

Only Limited Defenses

11

Definition of “hazardous substance” does not include

“petroleum, including crude oil or any fraction thereof.”

Blake Memorandum: 1987 memo from EPA’s General

Counsel stating that the agency considers individual

constituents of petroleum (BTEX) to be hazardous

substances unless they are found in refined petroleum

fractions or when they are present at levels which do not

exceed these fractions.

Implication. CERCLA often does not apply to gas

stations or other petroleum facilities.

Petroleum Exclusion

12

CERCLA § 103(a).

Any person who operates or has control over a vessel

or facility must notify EPA’s National Response

Center as soon as there is a release equal to or

greater than a “reportable quantity.”

CERCLA § 102 establishes reportable

quantities.

Beware of state-specific requirements!

Release Reporting

13

CERCLA defines a brownfield site as “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.”

Bona Fide Prospective Purchaser Background

14

Small Business Liability Relief and Brownfields Revitalization Act,

Pub. L. No. 107-118, 115 Stat. 2356 (2002).

1. De Micromis Exemption

2. Municipal Solid Waste Exemption

3. Contiguous Property Owner Exemption

4. Bona Fide Prospective Purchaser Exemption

15

To meet the statutory criteria for liability protection, a landowner must

meet certain threshold criteria and satisfy certain continuing obligations.

How to Qualify - BFPP

16

(1) Disposal Occurred Prior to Acquisition

(2) Performed “All Appropriate Inquiry”

(3) No Affiliation

Threshold Criteria

17

Broadly defined and interpreted.

“The discharge, deposit, injection, dumping, spilling, leaking, or placing of any solid waste or hazardous waste into on any land or water so that such solid waste or hazardous waste or any constituent thereof may enter the environment or be emitted into the air or discharged into any waters, including ground waters.”

Disposal

18

“Disposals are not limited to one-time occurrences, but instead include times when hazardous materials are moved or dispersed.”

Ashley II v. PCS Nitrogen, Inc., 791 F.Supp.2d 431, 499 (D.S.C. 2011).

A disposal may occur when a party disperses contaminated soil. Id.

“Secondary disposal” is the dispersal of already-once-disposed hazardous substances through earthmoving or construction activities. PCS Nitrogen Inc. v. Ashley II, 714 F.3d 161, 177 (4th Cir.

2013).

Disposal – Secondary Disposal

19

“[CERCLA’s] definition of disposal does not limit disposal to a one-time occurrence—there may be other disposals when hazardous materials are moved, dispersed, or released during landfill excavations and fillings.”

Tanglewood E. Homeowners v. Charles–Thomas, Inc., 849 F.2d 1568, 1573 (5th Cir.1988).

“Disposal” includes passive acts, such as leaking or spilling.

Nurad, Inc. v. William E. Hopper & Sons Co., 966 F.2d 837, 844–46 (4th Cir. 1992).

Disposal – Secondary Disposal

20

The Objective? The identification of conditions indicative of releases or threatened

releases of hazardous substances on, at, in, or to the subject property.

Who conducts AAI? An “Environmental Professional.” 40 C.F.R. § 312.20(a)(1).

Environmental Professional qualifications are specifically defined. 40 C.F.R. § 312.10.

When must AAI be performed?

“Within one year prior to the date of acquisition of the subject property[.]” 40 C.F.R. § 312.20(a).

“Notwithstanding paragraph (a), of this section, the following components of all appropriate inquiry must be conducted or updated within 180 days of and prior to the date of acquisition of the subject property[.]” 40 C.F.R. § 312.20(b).

All Appropriate Inquiry

21

1. An inquiry by an Environmental Professional “as provided in § 312.21.”

40 C.F.R. § 312.20(a)(1).

2. “Additional inquiries” under § 312.22.

40 C.F.R. § 312.20(a)(2).

3. Searches for recorded environmental cleanup liens.

40 C.F.R. § 312.20(a)(3).

All Appropriate Inquiry – 1 year requirements

22

1. Interviews with past and present owners, operators, and occupants, 40 C.F.R. § 312.23;

2. Reviews of historical sources of information, id. at § 312.24;

3. Reviews of federal, state, tribal, and local government records, id. at § 312.26;

4. Visual inspections of the facility and adjoining properties, id. at § 312.27;

5. Commonly known or reasonably ascertainable information, id. at § 312.30; and

6. Degree of obviousness of the presence or likely presence of contamination at the property and the ability to detect contamination. Id. at § 312.31.

Additional discussion: “Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability,” U.S. Envtl. Protection Agency (Mar. 6, 2003), at 4-5.

All Appropriate Inquiry – 180 day requirements

23

Which ASTM Standard Applies?

On December 30, 2013, EPA amended the rule to add ASTM E1527-13 as an option in addition to E1527-05. See 78 Fed. Reg. 79,319.

On October 6, 2014, EPA amended the rule to remove ASTM E1527-05 as an option for complying with AAI. See 79 Fed. Reg. 60,087.

All Appropriate Inquiries – ASTM Standards

24

Important changes from ASTM E1527-05 to E1527-13:

Revised definitions to align with CERCLA

Clarified definition of Recognized Environmental Condition and an Historical Recognized Environmental Condition.

Created a new category of REC called a Controlled REC (or CREC)

Revised file review requirements

Clarified vapor migration risk analysis

All Appropriate Inquires – ASTM Standards

25

E1527-13 expressly requires environmental professionals to account for “vapor migration” or “encroachment” in looking for Recognized Environmental Conditions (“RECs”). Also, EPA’s 2013 (general) Vapor Intrusion Guidance includes two significant changes: 1. It recommends indoor air sampling instead of modeling;

and; 2. It seeks to extend EPA’s authority to indoor air risks in

commercial and industrial buildings traditionally governed by OSHA.

All Appropriate Inquiries – Vapor Intrusion

26

Party must not be potentially liable or affiliated with any person who is potentially liable for response costs.

“Affiliation” is not explicitly defined, but appears to be broadly interpreted to include:

Direct and indirect family relationships;

Many contractual, corporate, and financial relationships

Factors to consider: Whether or not the BFPP is otherwise a potentially responsible party (“PRP”)

Whether the BFPP is in fact the same entity as a PRP;

Whether the BFPP is the result of a reorganization of a liable party through bankruptcy or other corporate restructuring; and

Whether a party with whom the BFPP is associated is an actual PRP.

No Affiliation

27

Exceptions:

Instruments by which title to the facility is conveyed or financed

Contracts for the sale of goods or services

Generally exempt relationships include:

Relationships at other properties

Post-acquisition relationships

Relationships created during title transfer

Relationships established between a tenant and owner during leasing process

CERCLA § 101(40)(H)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 5 - 6.

Mem. from EPA on Enforcement Discretion Guidance Regarding the Affiliation Language of CERCLA’s Bona Fide Prospective Purchaser and

Contiguous Property Owner Liability Protections (Sep. 21, 2011), at 6.

No Affiliation

28

1. Complying with Restrictions & Controls

2. Reasonable Steps (appropriate care)

3. Cooperation, Assistance, and Access

4. Compliance with Information Requests

5. Providing Legally Required Notices

Continuing Obligations

29

Must be in compliance with any land use restrictions established or relied on in connection with a response action.

CERCLA § 101(40)(F)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 6 – 8.

Complying with Restrictions & Controls -

Restrictions

30

Institutional Controls are administrative or legal controls that:

• Minimize the potential for human exposure to contamination, and

• Protect the integrity of remedies by limiting land or resource use and by providing information to modify behavior.

CERCLA § 101(40)(F)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 6 – 8

Complying with Restrictions & Controls –

Institutional Controls

31

Required to comply even if: → Restrictions have not been properly implemented; → Controls are never, or have yet to be, implemented;

→ Property owner impedes the effectiveness of a control and the party responsible for enforcement neglects to take sufficient measures to bring those persons in compliance; or

→ A court finds those controls unenforceable.

CERCLA § 101 (40)(F)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 6 - 8.

Complying with Restrictions & Controls

32

Must not impede the effectiveness or integrity of any institutional control.

For example: →EPA and state programs often use notices to convey

information regarding site contamination rather than actually restricting land use.

→If an owner removes notices from land records, the removal would impede the effectiveness of an institutional control.

CERCLA § 101 (40)(F)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 6 – 8.

Complying with Restrictions & Controls

33

Will be a site-specific analysis aimed to:

→ Stop continuing releases,

→ Prevent threatened future releases, and

→ Prevent or limit, human, environmental, or natural resource exposure to earlier hazardous substance release.

CERCLA § 101(40)(D)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 9 – 12.

Reasonable Steps

34

• The pre-purchase inquiry will most likely inform the BFPP as to the nature and extent of contamination.

• Phase I RECs and Recommendations will become reasonable steps

• This requirement only relates to contamination for which the BFPP is not responsible.

• More than “reasonable steps” will likely be required from the landowner if there is new hazardous substance contamination for which he is responsible.

CERCLA § 101 (40)(A)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for

Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on

CERCLA Liability (Mar. 6, 2003), at 9 – 12

Reasonable Steps

35

EPA or state agency may provide a comfort/status letter addressing reasonable steps at a specific site.

• Generally limited to sites with significant federal involvement.

Most likely given where:

• It may facilitate the cleanup and redevelopment process;

• There is a realistic probability of superfund liability; and

• There are no other means to adequately address the party’s concerns.

62 Fed. Reg. 4,624 (1997) Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for

Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 9 – 12.

Office of Enforcement and Compliance Assurances’ Policy on the Issuance of Comfort/Status Letters

Reasonable Steps – Comfort Letters

36

Why should you get a Comfort Letter?

Clients & lenders.

Courts will likely give deference to agency’s determination that client is a BFPP.

Provides a written record that client is a BFPP versus relying solely on defense where client has burden of proof.

Reasonable Steps – Comfort Letters

37

BFPP must provide full cooperation, assistance, and access to persons authorized to conduct response actions.

In particular, EPA expects timely, accurate, and complete responses from all recipients of Section 104(e) information requests.

CERCLA § 101 (40)(E),(G)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 12-13.

Cooperation, Assistance & Access

38

BFPP must provide all legally required notices with respect to the discovery or release of any hazardous substance at the facility.

BFPP must ensure that EPA and others are made aware of hazardous substance release in a timely manner.

BFPP has the burden of ascertaining what notices are legally required in a given instance.

Regions may require landowners to self-certify that they have provided or will provide all legally required notices.

CERCLA § 101 (40)(C)

Mem. from EPA on Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (Mar. 6, 2003), at 13.

Providing Legally Required Notices

39

Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F. Supp. 2d 431 (D.S.C. 2011), aff’d, 714 F. 3d 161 (4th Cir. 2013)

40

Ashley II

41

The Magnolia Project

42

Case: 63-page decision with careful analysis of factual history.

Procedural Background:

Plaintiff and current owner of Brownfield site (Ashley) brought suit under CERCLA § 107 (a) to recover response costs from former site owners

Defendant and former site owner (PCS Nitrogen) counterclaimed, seeking contribution from current owner (Ashley) contending owner had also contaminated site

Ashley raised BFPP defense

Ashley II

43

1906–1985: Site occupied and contaminated by phosphate fertilizer manufacturing: low pH, lead and arsenic in soil

1985–2003: Holcombe and Fair purchase land with intent to develop and subdivide

1989–2008: Allwaste buys 3 acres from Holcombe

Ashley II – Timeline

44

In 2003, Ashley acquires 27.62 acres from Holcombe and Fair for development.

In the purchase contract, Ashley indemnifies Holcombe and Fair for environmental liabilities.

Environmental investigations conducted in September 2003

In 2004, EPA requests information.

Ashley collects 452 soil samples.

In 2006, Ashley discovers stained soil and trash pile on Site.

Tests for soil, but only for lead and arsenic

Fails to remove trash pile

Ashley II – Key Facts

45

In 2007, environmental investigations continue at the site.

In 2008, updated environmental assessment identifies sumps as recognized environmental conditions (RECs).

In 2008, Ashley also acquires 2.99 acres from Allwaste.

Soil and sediment samples discover contaminated soil.

Demolition of above-ground buildings. Runoff collects in pads, sumps and trench.

In 2009, the sumps are investigated.

– Investigators observe water level and analyze depth of cracks in sumps, but do not take underground samples.

– Ashley had a protocol in place requiring it to look under slabs to ensure no environmental concerns, but did not follow protocol on Allwaste parcel.

– Conclude water loss due to evaporation not subsurface leaks.

Ashley II – More Key Facts

46

On September 3, 2008, Ashley writes a letter to the EPA acknowledging that Holcombe and Fair may be liable for response costs.

As it had indemnified Holcombe and Fair from all environmental liabilities, Ashley then asked the EPA to refrain from enforcement.

Should EPA pursue the claim against Holcombe and Fair, Ashley argued “it would discourage Ashley’s future development efforts.”

Ashley II – More Facts

47

1. Disposal occurred prior to acquisition → No.

Accumulation in sumps, failure to test.

2. All Appropriate Inquiry → Yes.

3. No Affiliation → No. Indemnity and release of Holcombe, Fair and

Allwaste.

Discouraged EPA from taking enforcement action against them.

4. Compliance with Continuing Obligations & Requests → Yes.

Ashley II – Analysis of BFPP

48

5. Reasonable Steps (Care) → No.

Failed to clean and fill sumps.

6. Cooperation, Assistance, and Access → Yes.

7. Compliance with Information Requests → Yes.

8. Provided Legally Required Notices → Yes.

Ashley II – Analysis of BFPP

49

1. All Appropriate Inquiries (AAI)

Complied with interim AAI standard (ASTM Standard E1527–00) for

Holcombe and Fair purchase in 2003

Complied with final AAI standard (40 C.F.R. § 312) for Allwaste purchase in

2008

“Ashley acted reasonably; it hired an expert to conduct an AAI and relied on

that expert to perform its job properly.” (791 F. Supp. 2d at 500)

2. Compliance with Continuing Obligations & Requests (Institutional Controls)

Environmental engineer, qualified as an expert, testified that no land use

restrictions or unusual controls in place at Site

Ashley was in compliance with controls in place (791 F. Supp. 2d at 501)

Ashley II – What Ashley did right

50

3. Cooperation, Assistance, and Access

Ashley “immediately notified EPA of its ownership and asked EPA to advise

Ashley if EPA desired Ashley to take specific action.” (791 F. Supp.2d at 501)

“The record demonstrates that Ashley’s cooperation with EPA has been ongoing

since it purchased the site.” (Id.)

4. Compliance with Information Requests Environmental engineer testified that Ashley complied with all information requests and subpoenas issued by EPA (791 F. Supp. 2d at 501-02.)

5. Provided Legally Required Notices “The record does not establish that any releases occurred on the Site subsequent to Ashley acquiring ownership. The court finds that Ashley has met its burden of proving that it made all legally required notices.” (791 F. Supp. 2d at 500.)

Ashley II - What Ashley did right

51

Disposal Prior to Acquisition

– Ashley must prove all disposals occurred before acquisition. (791 F. Supp. 2d at 499)

– “Ashley did not conduct testing to determine whether disposals occurred on the Allwaste parcel during its ownership period.” (Id.)

• Concern that Ashley’s demolition activities contributed to contamination by allowing water to accumulate in sumps

• Ashley did not test under the concrete pads, sumps or trenches to determine if contaminated

– Expert testimony stating no disposal occurred after acquisition was inadmissible because Ashley did not properly disclose the opinion before the trial (Id.)

Lesson: Do not conduct activity on the property that might

lead to or result in further leaking or contamination

Ashley II – Mistakes

52

Affiliation

– Must prove: 1) not responsible through familial or contractual relationships, 2) not affiliated with responsible persons, and 3) not the result of business reorganization of liable party.

– “Ashley is potentially liable for response costs at the Site due to contractual relationships” because Ashley released Holcombe and Fair and Allwaste from environmental liability for contamination at the Site. (791 F. Supp. 2d at 502)

– “Ashley attempted to persuade EPA not to take enforcement action to recover for any harm at the Site caused by the Holcombe and Fair Parties.” (Id.)

– “Ashley’s efforts to discourage EPA from recovering response costs from the Holcombe and Fair Parties reveals just the sort of affiliation Congress intended to discourage.” (Id.)

Lessons: Don’t discourage EPA from enforcing against prior owners.

Don’t indemnify responsible parties

Ashley II - Mistakes

53

Ashley failed to prove 3 of the 8 elements of BFPP defense.

Ashley held liable for equitable share of response costs.

Court determined Ashley would be responsible for 5% of these costs.

Ashley also held liable for Holcombe and Fair’s share of the response costs (16%).

Ashley also responsible for Allwaste’s share of the response costs (3%).

Adds up to almost one-quarter (24%) of the response costs!

Ashley II – The Outcome

54

Court of Appeals affirmed lower court finding that Ashley failed to establish all eight elements required to obtain BFPP status. (714 F.3d 161, 180 (4th Cir. 2013).)

Ashley “failed to demonstrate that it exercised ‘appropriate care’ at the site.” Failure of this one factor enough to deny Ashley BFPP status. (714 F.3d at 181.)

Declined to address two other BFPP elements:

Improper affiliation due to indemnification of PRPs and plea to EPA to not prosecute

Proof that no disposal of hazardous substances occurred after Ashley acquired the site.

Lesson: Must satisfy every one of the 8 BFPP elements.

Ashley II – The Appeal

55

1. 3000 E. Imperial, LLC v. Robertshaw Controls Co.,

2010 WL 5464296 (C.D. Ca., Dec. 29, 2010).

2. United States v. ARG Corporation v. City of South

Bend, 2014 WL 2435629 (N.D. Ind. May 30, 2014).

3. Voggenthaler v. Maryland Square, LLC, 724 F. 3d 1050

(9th Cir. 2013)

Other Cases

56