Environmental Transactions and Brownfields Committee ...

1Environmental Transactions and Brownfields Committee, June 2013

June 2013Vol. 15, No. 2

Environmental Transactions and BrownfieldsCommittee Newsletter

MESSAGE FROM THE CHAIRJon Schuyler BrooksPhillips Nizer LLPNew York, NY

Welcome to the latest edition of the ETAB Newsletter!Our committee is pleased to present another set ofarticles covering topics of interest and import topractitioners involved in transactions with environmentalissues, and to provide the latest ETAB committeenews.

As always, ETAB strives to provide information that isboth timely and timeless (so make a folder labeled“ETAB Newsletters” and, after you’ve read this issue,file it for future reference). This issue includes threeexcellent articles on diverse subjects.

First, Summer Nastich and Diane Smith (both of SmithTrager PC) discuss some of the key points to considerin drafting and evaluating indemnity provisions andcontracts that seek to cover, prevent, or apportionenvironmental liabilities in their aptly-titled IndemnityProvisions for Environmental Liability: The Devil Isin the Contractual Details. Woe to the lawyer whoopts for general indemnity language in theenvironmental space!

Next, Kenneth Gray, Mark Beliveau, and JohnFormella (all of Pierce Atwood) shed light on the once-vexing issue whether and when tenants potentiallyexpose themselves as de facto owners to CERCLA’sdread liability dragnet. Take note, and take care to doall things needed to allow your clients to avail

themselves of the Bona Fide Prospective Purchaser(BFPP) defense.

Finally, many of us have come to recognize that uniquereek when supposedly odorless vapors intrudethrough not only concrete foundations, but also wood-paneled conference rooms. Todd Fracassi, ThomasWilczak, and Andrea E. Hayden (all of PepperHamilton LLP) remind us of the need to “trust, butverify,” and help us try to contain the applicable vaporintrusion regulations and guidance that often seem asethereal as the vapors themselves.

Many thanks to our contributors, our ETABNewsletter vice chairs, and our SEER editorial staff!Enjoy your summer reading.

And once summer is over, come join the throng at the21st Fall Conference, returning this year to Baltimore.Mark your calendars: October 9–12, 2013. If you’venever attended a Fall Conference, or if you’veattended and missed our much-envied ETABcommittee dinner, find your way to Charm City thisyear!

CALL FOR ARTICLES. The ETAB Newsletter ismost robust and valuable when our readers take theleap and become authors. Surely, at the root of thatrecent war story you love to share is an issue thatother ETAB members deserve and need to hear. Goforth and write!

Once we collect all those new proposed articles, weput out another edition or two of the ETABNewsletter, and then it will be time to gather once

2 Environmental Transactions and Brownfields Committee, June 2013

Environmental Transactions andBrownfields Committee NewsletterVol. 15, No. 2, June 2013Thomas R. Doyle, Robert R. Gelblum,and Lindsay P. Howard, Editors

In this issue:

Message from the ChairJon Schuyler Brooks .............................. 1

Indemnity Provisions for EnvironmentalLiability: The Devil Is in the ContractualDetailsSummer L. Nastich, Esq., andDiane R. Smith, Esq. ............................... 3

CERCLA Owner Liability for Tenants—EPA Clears the AirKenneth F. Gray, Esq., Mark E. Beliveau,Esq., and John M. Formella, Esq. ........ 6

Uncertainty over Potential VaporIntrusion Complicates ClosingTransactionsTodd C. Fracassi, Esq., Thomas P. Wilczak,Esq., and Andrea E. Hayden, Esq. ...... 8

Copyright © 2013. American Bar Association. Allrights reserved. No part of this publication may bereproduced, stored in a retrieval system, ortransmitted in any form or by any means,electronic, mechanical, photocopying, recording,or otherwise, without the prior written permission ofthe publisher. Send requests to Manager,Copyrights and Licensing, at the ABA, by way ofwww.americanbar.org/reprint.

Any opinions expressed are those of thecontributors and shall not be construed torepresent the policies of the American BarAssociation or the Section of Environment,Energy, and Resources.

more by the Wasatch. The 43rd Spring Conference (f/k/a the Keystone Conference) will find SEER back inSalt Lake City, March 20–22, 2014. In case youneeded an added incentive to join us, the GreatestSnow on Earth is only 45 minutes away from theconference room.

We’re constantly adding new volunteers to our ranks,and are always looking for potential committee vicechairs. If you would like to play a more active role inthe Section, get to know your fellow committeemembers, and have lots of fun together, we lookforward to hearing from you and, we hope, to meetingyou soon!

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INDEMNITY PROVISIONS FORENVIRONMENTAL LIABILITY: THE DEVIL IS INTHE CONTRACTUAL DETAILSSummer L. Nastich, Esq.Smithtrager PCBerkeley, CA

Diane R. Smith, Esq.Smithtrager PCIrvine, CA

Indemnity and liability provisions are always among themost highly negotiated and potentially treacherous, orbeneficial, parts of a contract. When such provisionsaddress or are intended to address environmentalliabilities, they and certain others warrant specialattention and care. Clarity and attention to specific,precise language within the actual indemnity provisionitself is obviously crucial. But, because other easilyoverlooked and seemingly innocuous provisions canaffect the scope and enforceability of an indemnity,these other provisions are also of crucial importance.

This article offers a general overview of some, but notall, key points to consider in drafting and evaluatingindemnity provisions and contracts that seek to cover,prevent, or apportion environmental liabilities.

The Indemnity Provision Itself—Focus onSpecificity, Clarity, and Scope

Where environmental concerns are involved, a criticalelement is delineating the intended scope of the parties’indemnity and liability. The scope is crucial for both theindemnitee and the indemnitor, as each seeks to limitrisk and exposure.

Keeping in mind that courts tend to construe indemnityprovisions narrowly, and against the indemnitee, thedrafter must ensure that the indemnity provisionspecifically identifies liability he or she intends theindemnity to encompass, or exclude. As examples:investigation, remediation, disposal costs and liability,bodily injury or death, historic disposal liability, and/orcontinuing or historic compliance responsibility shouldall be considered. It is neither safe nor prudent to

assume that a sweeping indemnity will be interpreted toinclude all, or any, environmental liabilities. Courtsgenerally hold that an indemnity provision that does notspecifically include a clear reference to environmental,health, and safety issues is overly vague and thereforeunenforceable with respect to those liabilities. Thatbeing the case, if the parties intend to includeenvironmental liabilities, the language used should, at aminimum, include something along the lines of,“liabilities and responsibilities arising under any federal,state, or local statute addressing environmentalconditions, remediation, environmental protection, orhuman health and safety matters . . .”

What to Consider with Other CrucialTerms—Choice of Law, Severability, andExclusivity

Choice of Law Provisions: Unless one of the partiesto the contract is the U.S. government, in which casefederal law will generally apply, indemnities areinterpreted under state law. State indemnity and anti-indemnity laws vary widely. Some states have statutesthat limit the permissible scope of indemnities. In somejurisdictions these limitations vary depending on thetype of contract at issue. In California, for example,California Civil Code section 2782 rendersunenforceable indemnities in construction contracts thatpurport to make the indemnitor liable for the sole orgross negligence or willful misconduct of theindemnitee. Since virtually all contracts forenvironmental remediation or removal are constructioncontracts, the implication of Civil Code section 2782 isthat a remediation contractor cannot indemnify theother party to the remediation contract for that otherparty’s sole or gross negligence or willful misconduct.This can be a nasty shock if that other party is you, oryour client! Because other states might have laws thatallow such indemnities, the humble choice of lawprovision could save an indemnity in its entirety, void italtogether or something in between. Severabilityprovisions, discussed below, can have a similarlysignificant impact.

Severability: Far from being the “plain-vanillaboilerplate” they are often mistaken for, severabilityprovisions can be traps, or escape hatches. Initially,


keep in mind the following: (1) where environmentalliabilities are involved, the interpretation andenforcement of an indemnity provision could easilymean millions of dollars paid, or saved, depending onwhich side you are on; (2) indemnities are some of themost often litigated provisions because of thepotentially significant impact their interpretation andapplication are likely to have on both sides; and (3)indemnity provisions are some of the most likely to beheld fully or partially unenforceable.

Now, consider the potential consequence to anindemnitee that hired someone to clean up a hazardousmaterials spill of some kind on the indemnitee’sproperty. The contract with the remediation contractorincludes an indemnity provision that may be all orpartially void or unenforceable under applicable statestatutory law, perhaps because it obligates thecontractor to indemnify the property owner against theowner’s sole or gross negligence. Add to the contracta typical severability provision, which reads somethinglike, “Where a provision of this contract is found to bevoid or unenforceable, whether all or in part, suchprovision shall be deemed stricken, and the remainingportions shall remain enforceable as originally written.”Something goes wrong during the cleanup, andmaterials reach groundwater. The owner/indemnitee islooking at serious potential liability. Both parties allegethe other was negligent. The owner asserts theindemnity provision. If the court finds the indemnityprovision unenforceable, even in part, which couldhappen under California Civil Code section 2782,under the severability provision the entire indemnitycould be struck from the contract! For the owner/would-be indemnitee, this could be devastating, if notcatastrophic.

However, this potential catastrophe may be avoidablethrough the inclusion of a “savings severability”provision. An example of such a savings provision is,“Where a portion of this contract is found to be void orunenforceable, that provision shall be renegotiated andmodified so as to give effect to the original intent of theparties to the maximum extent possible.” Even better,including these savings provisions at the outset isunlikely to raise the hackles or eyebrows of those onthe other side of the table during negotiation of the

contract. Our owner/indemnitee can now argue that theintent of the parties was for the contractor to providethe broadest, most comprehensive indemnity lawfullyallowed.

Of course, potential indemnitors can come at this issuefrom the other side. These parties can intentionallycombine a dicey indemnity provision that is likely to runafoul of a state statute, such as Civil Code section2782 (or other principle of law) with a severabilityprovision that mandates striking the indemnity provisionif it’s found unenforceable or in violation of a statute.Although the outcome is uncertain, the pseudo-indemnitor would have an argument to avoid potentiallycrushing indemnity liability.

Exclusivity: Contract disputes commonly includeclaims of both breach and negligence. (These aresometimes called “contort” cases, and in them a courtmust often decide if it’s looking at a breach of contractaction in negligence garb, or the other way around, anda whole lot rides on the decision.) The inclusion of acause of action for negligence may trigger insurancecoverage where a breach of contract claim alone willnot. However, unless the contract says something alongthe lines of, “The remedies set forth in this contract areexclusive, and the limitations on liability set forth in thiscontract apply regardless of whether a claim isasserted in negligence, contract or under any othertheory of law” (italics included here for emphasis butare not necessary in practice), the allegedly negligentparty may be shocked to learn that the limitations onliability don’t apply to the negligence claims. This is areal issue in cases with significant consequentialdamages, like business interruption resulting fromdamage to a storage tank or other container full ofhazardous materials. Take heed: Unless negligence isspecifically stated in the exclusive remedies/limitation, or in each of the liability provisionsincluding the consequential damages exclusionitself, these provisions may not be enforced in casesof negligence.

The potential consequential damages in cases ofenvironmental contamination can be massive—forexample, lost profit, increased carrying costs, lost rent,and/or business interruption resulting from having to


shut down a facility during remediation. The numberscan be staggering. The importance of including, orexcluding, consequential damages and including, orexcluding, the word “negligence” in the exclusiveremedies provision and/or the general provision limitingliability cannot be overstated.

Also, note that at least one court has held that contrac-tual indemnity “statutes of limitations” prohibiting claimsafter passage of a certain amount of time may noteliminate claims under, for example, the federal Com-prehensive Environmental Response, Compensation,and Liability Act (CERCLA), unless the contractclearly says the remedies set forth in the contract, andthus the limitations periods, are exclusive.

A Final Word to the Wary

Save your drafts and notes! You may need to be ableto show that your client considered, and madeconscious decisions, about how liability was to beapportioned.

June 5-7, 201331st Annual Water Law ConferenceRed Rock ResortLas Vegas, NV

June 18, 2013The Expanding Intersection BetweenFERC and EPAWebinar

August 8-13, 2013ABA Annual MeetingSan Francisco, CA

October 9-12, 201321st Fall ConferenceHilton BaltimoreBaltimore, MD

2014

February 5-11, 2014ABA Midyear MeetingChicago, IL

March 20-22, 201443rd Spring ConferenceThe Grand America HotelSalt Lake City, UT

August 7-12, 2014ABA Annual MeetingBoston, Massachusetts

October 8-11, 201422nd Fall ConferenceThe Trump Doral Golf Resort & Spa

CALENDAR OF SECTION EVENTS

AMERICAN BAR ASSOCIATION

SECTION OF ENVIRONMENT,ENERGY, AND RESOURCES

For full details, please visit www.ambar.org/EnvironCalendar

2013 ABA Award for Excellence inEnvironmental, Energy, and ResourcesStewardshipThe ABA Award for Excellence in Environmental,Energy, and Resources Stewardship recognizes andhonors the accomplishments of a person, organization, orgroup that has distinguished itself in environmental,energy, and resources stewardship. Nominees must bepeople, entities, or organizations that have madesignificant accomplishments or demonstrated recognizedleadership in the areas of sustainable development,energy, environmental, or resources stewardship.

Nomination deadline: June 17, 2013This award will be presented at the 21st Fall Conferencein Baltimore in October 2013.

www.ambar.org/EnvironAwards

Call forNominationsABA Section of Environment,Energy, and Resources


CERCLA OWNER LIABILITY FOR TENANTS—EPA CLEARS THE AIRKenneth F. Gray, Esq.Pierce AtwoodPortland, ME

Mark E. Beliveau, Esq. and John M.Formella, Esq.Pierce AtwoodPortsmouth, NH

Introduction

Since the 2002 amendments to the ComprehensiveEnvironmental Response, Compensation, and LiabilityAct (CERCLA), attorneys advising on transactions inwhich contaminated property is being leased haveoften advised clients to conduct all appropriate inquiry,on the belief that the CERCLA bona fide prospectivepurchaser (BFPP) or other landowner defenses couldbe available to avoid traditional owner or operatorliability under federal law. In guidance in 2009, theEnvironmental Protection Agency (EPA) providedsupport for that view, indicating that the Agency wouldexercise its enforcement discretion and not enforceagainst tenants who met certain requirements.

In December 2012, EPA released additional guidance,prompted by the Agency’s goal of encouragingrenewable energy projects on contaminated propertysites, including sites on the National Priorities List.1

However, the guidance clearly covers sites where therewill be no energy development. The 2012 guidancesupersedes the guidance issued by EPA in 2009 and,when read in conjunction with CERCLA’s liabilityscheme and the past decade’s important case law,helps to provide the clearest picture yet of what tenantscan expect when it comes to their exposure to ownerliability under CERCLA.

Owner vs. Operator Liability

Given that Congress saw fit to include both “owner”and “operator” in the statute, courts have stressed thedisjunctive character of CERCLA liability, and haveconfirmed that owner liability and operator liability

denote two separate concepts.2 The U.S. SupremeCourt has indicated that operator liability is a narrowerconcept than owner liability. To be liable as anoperator, a party must “manage, direct, or conductoperations specifically related to pollution.”3 Thus, therelevant inquiry for operator liability focuses on atenant’s actions. In contrast, the relevant inquiry forowner liability, as the below discussion will illustrate,focuses on whether a tenant has the requisite “indicia ofownership” to be a de facto owner. The practicalimplication is that while tenants might escape liability asoperators because of their actions or lack thereof, suchtenants must still worry about whether they might fallwithin the broader scope of CERCLA’s owner liability.

CERCLA Liability Scheme as It Pertains to“Owners”

CERCLA imposes strict liability for environmentalcontamination upon four broad classes of “potentiallyresponsible parties,” including a property’s owner.4

Owner liability can be imposed on any party whoacquires contaminated property, even if a partyacquires that property after contamination hasoccurred.5 Because CERCLA liability is joint andseveral, an owner can be held liable for the entire costof cleanup even where other parties contributed to thecontamination.6

The prospect of owner liability for tenants began tobecome clear in the year 2000 with the SecondCircuit’s decision in Commander Oil Corp. v. BarloEquip. Corp., 215 F.3d 321 (2nd Cir. 2000). Whilerejecting the positions of a number of district courtsthat had held that a tenant’s site control was sufficientfor owner liability, the court in Commander Oilconfirmed that tenants could be subject to liability ifthey had the “requisite indicia of ownership vis-a-visthe record owner to be de facto owners.”7 Althoughthe court avoided laying out a clear-cut definition of“de facto ownership,” it identified a number ofnonexclusive factors to consider when inquiring into thetotality of a given lease relationship, including thefollowing: (1) the length of the lease term; (2) whetherthe landowner has the ability to determine how theproperty is used; (3) whether the landowner has theability to terminate the lease prior to the end of the


lease term; (4) whether the tenant has the ability tosublet without the consent of or notice to thelandowner; (5) the tenant’s responsibility for paymentof taxes, assessments, insurance, etc.; and (6) thetenant’s responsibility for structural and other repairs.The court also emphasized that the critical relationshipfor determining owner liability was that between theowner and primary tenant, as opposed to anyrelationship between the primary tenant and asublessee.

With Potential Owner Liability for TenantsComes Potential Defenses

In 2002, Congress revised CERCLA to provideliability protection to “bona fide prospectivepurchasers.” The “BFPP defense,” as it has come tobe known, is available to a person, or tenant of aperson, who acquires ownership of a property afterJanuary 11, 2002, and is able to establish the existenceof certain threshold and ongoing requirements.

In EPA’s 2009 guidance, the agency expressly adoptedthe “indicia of ownership” inquiry set forth inCommander Oil as the basis to consider treating atenant as a BFPP. With EPA’s new 2012 guidance, the“indicia of ownership” standard has been abandonedand a broader group of tenants now enjoy protection.The 2012 guidance announced EPA’s intention toextend BFPP protection to a tenant in situations wherethe landowner is not a BFPP and where the tenantdoes not have sufficient indicia of ownership to be anowner, but meets all of the BFPP requirements. Thus,these tenants can take advantage of the BFPP defenseif they entered into their lease after January 11, 2002,and can show that all of CERCLA’s BFPP provisionsare satisfied as follows: (1) all disposal of hazardoussubstances at the facility occurred prior to execution ofthe lease (this is narrower than EPA’s 2009 guidance,which simply required that the tenants themselves notdispose of hazardous substances on the property); (2)the tenant conducted “all appropriate inquiry” prior toexecution of the lease; (3) the tenant provides legallyrequired notices; (4) the tenant takes reasonable stepswith respect to hazardous substance releases; (5) thetenant provides cooperation, assistance, and access;(6) the tenant complies with land use restrictions and

institutional controls; (7) the tenant complies withinformation requests and administrative subpoenas; (8)the tenant is not potentially liable for response costs atthe facility, nor is it “affiliated” with any such person;and (9) the tenant does not impede any responseaction or natural resource restoration. As to provision(8), EPA clarified that it intends to exercise itsenforcement discretion and not treat the existence of alease between the tenant and the landowner as aprohibited affiliation. While a lease does not fall withinthe “title instrument” exception in CERCLA §101(40)(H)(i)(II), EPA is choosing to treat it as suchfor purposes of its guidance.

Substantially consistent with EPA’s 2009 guidance,EPA stated in its 2012 guidance that, in certaincircumstances, a tenant can derive BFPP status fromthe landowner without independently satisfying BFPPrequirements. The tenant’s derivative BFPP status willendure as long as the landowner remains a BFPP, alldisposal of hazardous substances occurred prior topurchase, and the tenant does not impede remedialaction. If the landowner loses BFPP status, then thetenant will as well. However, a tenant who losesderivative BFPP status may still be treated as a BFPPby EPA, as long as that tenant satisfies the BFPPprovisions identified above, with the exception of allappropriate inquiry. In the context of lost derivativeBFPP status, EPA does not expect a tenant to haveconducted all appropriate inquiry, as the landownerwould have already done so.

The Current State of Play and Things toConsider

Even with the strong potential for a BFPP defense,there are still a few remaining considerations thattenants or potential tenants must keep in mind. The firstis that BFPP protections are self-implementing,meaning EPA, with limited exceptions, will not issuecomfort letters or assist tenants with obtaining BFPPstatus. Letters will only be issued where EPAdetermines that it is necessary and appropriate toaddress a tenant’s concerns, or to further the publicinterest. The second is that since BFPP liabilityprotections are self-implementing, it will be difficult ifnot impossible for a tenant (or its lawyer) to know with


a high degree of certainty whether the landowner hassatisfied and continues to satisfy all BFPP criteria,thereby allowing the tenant to enjoy derivative BFPPstatus. Accordingly, at sites where a tenant concludesthat it wants to maximize its potential to benefit fromthe BFPP protections, it should take steps toindependently meet all of the BFPP requirements,including conducting all appropriate inquiry prior tosigning the lease. Third, a practice tip: tenants shouldconsider whether it is appropriate to add terms to thelease providing that the landowner will take all actionsnecessary to discharge landowner’s “continuingobligations” so that landowner will be the first line ofdefense in any assertion of CERCLA responsibility.That will be particularly important for any obligationsthat only the landowner can discharge, such asadopting enforceable activity and use limitations orother institutional controls. Fourth, tenants shouldalways keep in mind that BFPP status does notprovide a defense to liability imposed under otherfederal law (e.g., the Resource Conservation andRecovery Act or state law, as some jurisdictions do nothave comparable defenses. Finally, it is critical toremember that EPA’s guidance is not binding on thecourts. Although they may give more or less weight toEPA’s guidance, the courts will be the final arbiter ofwhat protections from liability tenants have under thelaw.

Endnotes

1 http://www.epa.gov/enforcement/cleanup/documents/policies/superfund/tenants-bfpp-2012.pdf.2 Schiavone v. Pearce, 79 F.3d 248, 254 (2nd Cir. 1996).3 United States v. Bestfoods, 524 U.S. 51, 66–67 (1998).4 42 U.S.C. § 9607(a).5 See California Dept. of Toxic Substances Control v.Hearthside Residential Corp., 613 F.3d 910, 914 (9th Cir.2010).6 Fireman’s Fund Ins. Co. v. City of Lodi, 302 F.3d 928,945 (9th Cir. 2002).7 Commander Oil Corp., 215 F.3d at 330.

UNCERTAINTY OVER POTENTIAL VAPORINTRUSION COMPLICATES CLOSINGTRANSACTIONSTodd C. Fracassi, Esq., Thomas P. Wilczak,Esq., and Andrea E. Hayden, Esq.Pepper Hamilton LLPSouthfield, MI

Introduction

Increased scrutiny of potential vapor intrusion (VI)issues in transactions involving real estate has becomemore and more common for buyers, sellers, tenants,and lenders. While thorough environmental duediligence may be the key to protecting prospectivepurchasers, tenants, and lenders, the evolving state ofVI evaluation guidelines and regulations makes itdifficult to determine what type of evaluation needs tobe completed, whether a problem actually exists at asubject property, the scope or magnitude of thepotential problem, and whether it needs to be or hasbeen properly addressed. Further, althoughcomprehensive due diligence may satisfy CERCLA’sall appropriate inquiry (AAI) requirements1 (and similarstate requirements) for asserting a bona fideprospective purchaser (BFPP) or contiguous propertyowner (CPO) defense, it does not relieve a party fromits due care obligations or protect against private-partylawsuits. Vapor instrusion must therefore be consideredin the due diligence phase of any transaction whendetermining an owner/operator’s potential liability andcontinuing obligations, and must be accounted forwhen negotiating any transaction. If not handledcorrectly, VI issues can result in a costly and time-consuming process that may stall or preventtransactions altogether, or undermine their value atsome future date due to unanticipated costs.

Importance of Transactional Due Diligence,AAI, and More

In any merger, stock acquisition, or asset purchase, thegoal of environmental due diligence is to identify risksthat may impact the value of the target company/asset,that may need to be accounted for in the transaction,or that may be significant enough to terminate the deal.Due diligence also provides a sense of the target’s


history of compliance or noncompliance with environ-mental laws, and aids in planning for environmentalissues once the deal is closed. Of course, it also aids inestablishing certain liability defenses under the Com-prehensive Environmental Response, Compensation,and Liability Act (CERCLA) and other applicablelaws. The proper level of due diligence is extremelyimportant, particularly in a merger or stock purchasewhere liabilities are generally assumed by the acquiringcompany.

From a starting point, it is critical to understand that themigration of chemical vapors from hazardous sub-stances in soil or groundwater, i.e., VI, is considered a“release” under CERCLA, and a facility includes anyarea where hazardous substances have “come to belocated,”2 including indoors. As such, under CERCLA,VI may require response actions, the investigation andremediation of VI are considered valid response costs,and costs to mitigate VI may be asserted in aCERCLA cost recovery claim under section 107 orcontribution claim under section 113.3 Further, becausevapor intrusion may involve petroleum compounds,which CERCLA does not regulate, corrective actionsunder the Resource Conservation and Recovery Act(RCRA) may also be required to address VI prob-lems.4 As such, owners and operators of buildingswhere the intrusion of vapors from hazardous sub-stances is occurring may be liable for response costs toaddress the underlying contamination or to mitigate theintrusion of vapors, or be exposed to personal injuryand property damage claims.

Claim protection from certain cleanup liability may beavailable under CERCLA’s BFPP and CPO defensesif AAI is completed prior to the property’s acquisitionor operation, and continuing obligations or “due care”obligations are met.5 Accordingly, AAI underCERCLA needs to consider VI. This sounds straight-forward enough, but traditionally, the first investigativecomponent of AAI, the Phase I Environmental SiteAssessment, has not included an evaluation of VIunless specifically requested by the client. The currentAmerican Society of Testing and Materials (ASTM)standard for Phase I investigations (E1527-05) notesthat releases into buildings may be a recognizedenvironmental condition (REC), but another section in

that same standard groups VI with indoor air quality,which is a non-scope item. This ambiguity couldchange in the near future. It is anticipated that E1527may be revised to include vapor intrusion screening asa routine component of Phase I assessments once VIguidance becomes more settled (see discussion be-low). Until then, a prospective purchaser needs to payparticular attention to the scope of the Phase I andspecifically request that VI be considered.

ASTM has released its E2600-10, Standard Guidefor Vapor Encroachment Screening of PropertyInvolved in Real Estate Transactions, June 1, 2010,as a method to screen for potential vapor issues.E2600 is not intended to be a full-scale assessment ofVI, but instead focuses on screening for vapors thatmay be migrating onto property by providing a two-tierscreening process. The first tier evaluates and identifiesthe existence of known or potentially contaminatedvolatile organic compounds (VOCs) and petroleumsites within one-third of a mile and within one-tenth ofa mile from the subject property, respectively. Thesecond tier focuses on the proximity of known con-tamination plumes to the subject property, particularlythose within a “critical search distance.” The aim ofE2600 is to provide a tool to identify whether a vaporencroachment condition (VEC) exists, and not tosatisfy AAI. This screening may aid, however, in theclient determining whether a Phase II or a full-blownVI assessment is necessary to evaluate VI potential.

Evolving Guidance ComplicatesTransactional Due Diligence

Complicating the performance of a Phase II or VIassessment, however, is the fact that there is no staticor uniform standard by which to evaluate the potentialrisks. The Environmental Protection Agency (EPA)initially issued draft guidance in 2001 and 2002 thatonly addressed vapor intrusion at Superfund sites,RCRA corrective action sites, and Brownfield sites.6

On April 15, 2013, EPA published two guidancedocuments on VI that are external review drafts. Thefirst document, “OSWER Final Guidance for AssessingAnd Mitigating the Vapor Intrusion Pathway fromSubsurface Sources to Indoor Air—External ReviewDraft,” provides general guidance for all compounds.


The second document, “Guidance for AddressingPetroleum Vapor Intrusion at Leaking UndergroundStorage Tank Sites—External Review Draft,”addresses petroleum hydrocarbons released fromunderground storage tanks. These documents aresubject to further review and revision as EPA seekspublic input and comment by May 24, 2013. It isanticipated that several key elements within these longand complex documents will need to be clarified, andthus it remains unclear when final EPA VI guidance willbe available.

In addition to the lack of EPA final guidance, at leasthalf of the states have adopted or are in the process ofdeveloping their own VI regulations or policies. Thesestandards vary considerably as to how VI is to beinvestigated, the type and frequency of sampling to becompleted, and applicable screening levels.7 Moststate guidance documents or policies are not legallybinding and are only intended to be instructive (e.g.,Michigan’s draft Guidance for the Vapor IntrusionPathway), whereas certain requirements or policies ofothers are codified in regulations (e.g., New Jersey rule7:26E-1.18(a) 3 requires completion of a VI studywhen particular conditions exist in shallow groundwaterand refers to the department’s final guidancedocument). States may also use differentconsiderations to determine the volatility of differentcompounds; for example, Michigan guidance requiressampling for chemicals with a particular Henry’s LawConstant rather than a select list of VOCs.

Further, other federal agency guidance may need to beconsidered in developing a due diligence strategydepending on the parties to a property transaction. Forexample, all HUD development projects must complywith the U.S. Department of Housing and UrbanDevelopment, “Multifamily Accelerated Processing(Map) Guide,” revised November 23, 2011 (HUDGuide), which requires that Phase I include an initialvapor (a.k.a. gas) intrusion screen.8 Response actionscompleted at Department of Defense sites mustcomply with the Department of Defense VaporIntrusion Handbook,9 and the Army, Navy, and AirForce have finalized vapor intrusion guidance for thoseassessing active and former bases.10 Even the U.S.Postal Service has issued vapor intrusion guidance toensure VI does not impact any of its leased or ownedfacilities nationwide.11

The myriad of federal and state guidance, which isoften inconsistent, makes developing a VI investigationstrategy difficult. While EPA guidance and Phase Istandards work through their growing pains, the safestapproach for prospective property owners and tenantsis to evaluate the vapor intrusion pathway at the earliestpossible stage of due diligence. A VI screening/assessment combined with a tailored Phase I thataccords with applicable federal and state guidance maybe the most effective method of establishing whetherVI is a REC at the subject property and whetherfurther evaluation or sampling is necessary. Lenderrequirements also may play a role in the scope of abuyer’s environmental due diligence. A lender’s needswill vary by lending institution, by state, and by theparties involved in the transaction.

Changes to Applicable Screening LevelsCreate More Difficulty and May Lead toReopened Sites

Another hurdle that adds to the level of complexity inassessing VI is the changing science behind designationfor screening levels for certain VOCs. Even the mostknowledgeable consultants and attorneys cannotpredict how and when the toxicity values or screeninglevels of various chemicals will be modified, thusimpacting AAI and cleanup requirements. Forexample, in 2011, EPA generated new toxicity valuesfor trichloroethylene (TCE) that will be used todetermine vapor intrusion risks from the chemical as itmigrates from soil and groundwater.12 This hastranslated into lower VI screening levels for TCE insome states. As toxicity values are further evaluated forother constituents, a similar lowering of screening levelsmay occur.

In light of the potential for changing screeningstandards, it may be necessary to consider the costincrease associated with such lowered screening levelsin any property acquisition, including meetingcontinuing/due care obligations and the potential risk ofreopening a closed remediation. A no-further-actiondetermination, once believed to be a golden ticket forcontaminated property, is not a guaranteed protectionagainst future agency action with respect to property.This is because sites that may have acquired no-further-action status are generally susceptible toreopeners where unknown or new site conditions are


identified. This is a particular concern with respect toVI issues. Should VI criteria for VOCs, such as TCE,be lowered, it may trigger reopener provisions,included in most no-further-action provisions as achanged condition, allowing agencies to requireinvestigation or remedial action related to VI, amongother things. The same may be true in instances wherethe VI pathway was not evaluated, or in the opinion ofthe regulating agency, was not properly evaluated.Some states, whether part of a concerted effort, or aspart of a site’s five-year review process, are re-evaluating the VI pathway at “closed” sites.

Personal Injury and Property DamageClaims Further Raise the Stakes

While proper due diligence may provide BFPP orCPO protection, it does not protect landowners andoperators from private lawsuits for personal injury orproperty damage. Private actions related to VI haveincreased. For example, in a fairly recent class action inIndiana, a group of 200 homeowners sued KraftFoods, alleging that the release of hazardoussubstances at one of its facilities had resulted ingroundwater contamination and VI issues affecting 125nearby residential properties (although not all homeswere affected by VI).13 The case eventually settled,with Kraft paying $8.1 million to the homeowners andagreeing to install mitigation controls on homesimpacted by VI. The potential for such claims must beconsidered when conducting the due diligence.

Conclusion

It is no surprise that the Pandora’s box that a VIproblem brings along with it can significantlycomplicate or delay the disposition of property. Indetermining an owner/operator’s potential liability andcontinuing obligations, thorough due diligence andproper VI assessments as part of a transaction arebecoming more critical and are the keys to protectingprospective purchasers, tenants, and lenders. The VIvariable must be dealt with at the outset of negotiationsin any prospective purchase or lease agreement as itbrings with it a host of considerations. Experiencedlegal counsel and environmental consultants arerequired to navigate the evolving state of the VI

pathway and to ensure that the potential legal risks andtechnical issues that face sellers, buyers, lenders, andlessees of property are properly addressed.

Endnotes

1 42 U.S.C. 9601(40)(B).2 42 U.S.C. 101(9).3 See Castaic Lake Water Agency v. Whittaker Corp.,272 F. Supp. 2d 1053 (C.D. Cal 2003) (a releaseincludes passive migration of contaminants); Amoco OilCo. v. Borden, Inc. 889 F.2d 664 (5th Cir. 1989) (radongas migrating into building).4 See, e.g., ExxonMobil Oil Corp. v. Nicoletti Oil, 713 F.Supp. 2d 1105 (E.D. Cal 2010) (CAFO required investi-gation of vapor intrusion from petroleum products).5 42 U.S.C. 9601(40)(D).6 Draft Guidance for Evaluating the Vapor Intrusion toIndoor Air Pathway from Groundwater and Soils, 67Fed. Reg. 71,169 (Nov. 29, 2002).7 See Interstate Technology and Regulatory Council2004 Vapor Intrusion Survey, available at http://www.itrcweb.org/vaporintrusionresources/ITRC_VI_Survey_8-17-05/ITRC_1_VI_Survey_Index.htm; Massachusetts DEP2009 Vapor Intrusion Survey, available at http://www.mass.gov/dep/cleanup/laws/visurv.pdf.8 U.S. Department of Housing and Urban Development,Multifamily Accelerated Processing (Map) Guide, rev.Nov. 23, 2011 (HUD Guide), ch. 9, at 8.9 Department of Defense (DoD) Vapor IntrusionHandbook, Apr. 3, 2009, available at ftp://swrcb2a.waterboards.ca.gov/pub/swrcb/dwq/dodscp/2009%20Environmental%20Summit/Air%20Force%20Summit%202009/dodvihdbk200901.pdf.10 Tri-Services Handbook for the Assessment of theVapor Intrusion Pathway, Feb. 15, 2008, available athttp://airforcemedicine.afms.mil/idc/groups/public/documents/afms/ctb_093354.pdf.11 U.S. Postal Service Vapor Intrusion Guidance, Sept.2009, available at http://www.optexcorp.com/uspsess/Documents/Vapor%20Intrusion%20Doc.pdf.12 “EPA Releases Final Health Assessment for TCE,”09/28/2011, available at http://yosemite.epa.gov/opa/admpress.nsf/bd4379a92ceceeac8525735900400c27/b8d0e4d8489ad991852579190058d6c3!OpenDocument.13 Stoll v. Kraft Foods Global, Inc., 2010 U.S. Dist.LEXIS 92926 (Sept. 6, 2010).

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