CERCLA Bona Fide Prospective Purchaser

Defense: Securing and Maintaining Liability

ProtectionStrategies for Overcoming BFPP Defense Challenges and Restrictions

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WEDNESDAY, FEBRUARY 5, 2020

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

Toni L. Finger, Special Counsel, Kramer Levin Naftalis & Frankel, New York

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

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CERCLA Liability and the Bona Fide Prospective Purchaser

Toni L. Finger Charles S. Warrentfinger@kramerlevin.com cwarren@kramerlevin.com

(212) 715-9239 (212) 715-9387

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Current owner or operator of a vessel or facility;

Past owners and operators at the time of disposal;

Any person who by contract, agreement, or otherwise

arranged for disposal or treatment of hazardous

substances; and

Any person who accepts or accepted any hazardous

substances for transport to disposal or treatment

facilities.

Comprehensive Liability –107(a)

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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

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• 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

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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

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A party seeking to avoid joint and several liability bears 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).

• To establish divisibility, courts look to geographical, volumetric, chronological or other types of evidence.

Comprehensive Liability – Joint & Several

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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

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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

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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

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Small Business Liability Relief and Brownfields Revitalization Act,

Pub. L. No. 107-118, 115 Stat. 2356 (2002).Recognizing that parties interested in purchasing these contaminated sites for redevelopment and reuse may be concerned about potential liability from contamination they have not caused, Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act to provide liability protections for:

1. Bona Fide Prospective Purchasers

2. Innocent Landowners

3. Contiguous Property Owners

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A person (or tenant of a person) that acquires ownership of a facility after January 11, 2002 and establishes they have met certain continuing obligations by a preponderance of evidence

Practice Notes:

A tenant can qualify for the BFPP under certain circumstances

No site acquisition means no BFPP defense. BFPP defense is important to asset purchasers, as real estate is often an asset acquired by the new entity, thereby making the new entity an owner/operator under CERCLA. This differs from stock purchases where the company and ownership of real estate is essentially unchanged.

What is a BFPP?

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To meet the statutory criteria for liability protection, a landowner must meet certain threshold criteria and satisfy certain continuing obligations set forth at § 9601(4)(A)-(H).

In July 2019, EPA issued the “Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner (“Common Elements”)” U.S. Envtl. Protection Agency(July 29, 2019), to clarify statutory criteria for meeting these landowner liability protections.

The Guidance superseded the EPA’s “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).

The 2003 Interim Guidance noted that there may be revisions as EPA gained more experience with the Brownfield Amendments.

How to Qualify - BFPP

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(1) Disposal Occurred Prior to Acquisition

(2) Performed “All Appropriate Inquiry”

(3) No Affiliation

Note: Meeting the eight statutory threshold criteria allows BPFFs to purchase property with knowledge of the contamination and qualify for the BFPP defense. However, property acquired may still be subject to a windfall lien (§ 9607(r)) for the lesser of the unrecovered response cost or the increased fair market value of the property attributable to a Superfund Cleanup.

Threshold Criteriabefore acquiring the property

“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

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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

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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

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

2. Searches for recorded environmental cleanup liens, id. at § 312.25;

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. Declaration of an environmental professional § 312.21.

Additional discussion: EPA Mem. Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at 6.

All Appropriate Inquiry – 180 day requirements

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Which ASTM Standard Applies? As of October 16, 2014 ASTM E1527-13 (“Standard Practice for

Environmental Site Assessments: Phase I Environmental Site Assessment Process”) became the standard for complying with AAI. See 79 Fed. Reg. 60,087.

The final rule was amended in on September 15, 2017 to recognize another industry standard practice (ASTM E2247-16) (“Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property”) as compliant with the requirements of the Final Rule for forestland or rural property. See 82 Fed. Reg. 43,310.

Practice Notes:

AAI covers only CERCLA and does not cover petroleum, asbestos or lead based paint.

All Appropriate Inquiries – ASTM Standards

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Important things to note from E1527-13:

Definitions align with CERCLA

Defines Recognized Environmental Condition (“REC”) and an Historical Recognized Environmental Condition (“HREC”) and Controlled Recognized Environmental Condition (“CREC”).

Clarifies vapor migration risk analysis

All Appropriate Inquires – ASTM Standards

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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

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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

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▪ 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) Memo from EPA on Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at 7-8.

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

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A party can lose the BFPP protection if these steps are not complied with after acquisition:

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

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

▪ Cannot impede the effectiveness of any institutional control employed in connection with a response action.

CERCLA § 101(40)(F)

Mem. from EPA on Enforcement Discretion Guidance Regarding Criteria for

Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous

Property Owner, or Innocent Landowner (“Common Elements”)

(July 29, 2019), at 12-17

Complying with Restrictions & Controls -Restrictions

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▪ 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 Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as

CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner

(“Common Elements”) (July 29, 2019), at 12-17

Complying with Restrictions & Controls –Institutional Controls

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

prior to site acquisition;

→ 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

CERCLA § 101 (40)(F)

Memo from EPA on Enforcement Discretion Guidance Regarding Criteria for

Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous

Property Owner, or Innocent Landowner (“Common Elements”)

(July 29, 2019), at 12-17

Complying with Restrictions & Controls

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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 and may place those notices in land records.

→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 Enforcement Discretion Guidance Regarding Criteria for Those Who

May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or

Innocent Landowner (“Common Elements”) (July 29, 2019), at 14

Complying with Restrictions & Controls

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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 Enforcement Discretion Guidance Regarding Criteria for Those

Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property

Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at 17-20

Reasonable Steps

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• 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)

Memo from EPA on Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as

CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner

(“Common Elements”) (July 29, 2019), at 12-17

Reasonable Steps

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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 Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as

CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at 20

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

Reasonable Steps – Comfort Letters

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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

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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 on Enforcement Discretion Guidance Regarding Criteria for Those Who May

Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or

Innocent Landowner (“Common Elements”)” (July 29, 2019), at 21.

Cooperation, Assistance & Access

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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 Enforcement Discretion Guidance Regarding Criteria for Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at 21-22.

Providing Legally Required Notices

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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)

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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

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▪ 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

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▪ 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

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▪ 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

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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.

Ÿ Compliance with Continuing Obligations & Requests → Yes.

Ashley II – Analysis of BFPP

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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

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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 mightlead to or result in further leaking or contamination

Ashley II – Mistakes

Reasonable steps

– Ashley failed to take reasonable steps to prevent future releases.

– Reasonable steps will involve site-specific, fact based analysis.

Mem. from EPA on Enforcement Discretion Guidance Regarding Criteria for

Those Who May Qualify as CERCLA Bona Fide Prospective Purchaser, Contiguous

Property Owner, or Innocent Landowner (“Common Elements”) (July 29, 2019), at

20

Ashley II - Mistakes

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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

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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

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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).

Other Cases