On January 20, 2015, the United States District Court for the Eastern District of California in Coppola v. Smith, 2015 U.S. Dist. LEXIS 5127, addressed the application of CERCLA’s innocent landowner defense against a somewhat intricate property ownership and due diligence backdrop.
In Coppola, Martin LP, a Delaware limited partnership, purchased property in 1995 in Visalia, California, containing a commercial office building, without knowledge that it had been contaminated with perchloroethylene (PCE) from historic dry cleaning operations, despite having reviewed prior environmental due diligence. In 2006, Martin LP converted to M&M, LLC, though the ownership and operation of the property otherwise remained the same. Having operated the property for 13 years without issue, a neighboring dry cleaner sued Martin LP/M&M, LLC for contributing PCE to regional groundwater contamination. Martin LP/M&M, LLC claimed it was protected by the innocent landowner defense under CERCLA § 101(35)(A) and (B) and moved for summary judgment.
The court partially granted summary judgment finding that M&M, LLC and Martin LP were the same entity and that the former could rely on the latter’s pre-purchase environmental investigation. The court further found that M&M, LLC did not dispose of, place or contribute to the release of PCE at the property, that it paid the appraised price and that it exercised due care for purposes of CERCLA § 9607(B)(3). Nevertheless, the court determined that there was a genuine issue of disputed material fact as to whether M&M, LLC conducted all appropriate inquiries prior to purchase. The court noted a lack of clarity as to whether M&M, LLC’s reliance on the prior diligence was in accord with then accepted commercial practices. Prior to purchase, Martin LP reviewed a Preliminary Site Assessment (PSA) prepared in 1991, four years before the 1995 purchase. Although that assessment found no environmental issue with the property, it was not conducted in accordance with ASTM standards. It did, however, confirm that information about the ownership and operation of the property from 1958 to 1972 could not be found, and noted that PCE had been detected at low levels in two nearby groundwater wells without any apparent source.
Martin LP did not retain an engineer, a geologist or any type of environmental professional to inspect the property. Its pre-purchase investigation did not identify any PCE contamination or any past operation of a dry cleaning business at the property. The PSA relied upon stated that it was prepared in accordance with current standards of professional practice and in accordance with the duties of environmental engineers in 1991.
The dry cleaner argued that the PSA could not satisfy the innocent landowner defense because it did not utilize ASTM standards, did not involve soil and groundwater testing and failed to consult historical Sanborn maps which demonstrated prior property use as a dry cleaner. However, the federal court rejected the dry cleaner’s contention on the ground that it had failed to show non-compliance with standards and practices otherwise customary in 1995.
When addressing properties purchased before May 31, 1997, a court must consider five factors under 42 U.S.C. § 9601(35)(B)(iv)(I) to determine if a purchaser had “reason to know” of environmental contamination. The Coppola court determined that the five factors weighed in M&M, LLC’s favor. The court then addressed the innocent landowner defense under CERCLA, which requires the purchaser to make “all appropriate inquiries” in accordance with “good commercial and customary standards and practices” before the purchase.
The plaintiff offered expert testimony that the PSA did not comply with the ASTM standards. The court determined that non-compliance with ASTM standards was not dispositive because the property was purchased before May 31, 1997. The court also rejected the plaintiff’s argument that M&M, LLC could not rely on Martin LP’s prior due diligence for purposes of the innocent landowner defense, holding that M&M, LLC was allowed to rely on Martin LP’s due diligence given that the entities are treated as being the same under Delaware’s conversion law.
Although the court invited a subsequent dispositive motion, it partially denied the landowner’s summary judgment request because no expert witness testimony was offered on its behalf about the generally accepted commercial practices in Visalia at the time of the 1995 purchase. Specifically, the court noted that the property owner had failed to present any evidence as to whether its review of the preliminary report was consistent with the standard of environmental due diligence customarily employed in the area in 1995 when purchasing property.
Importantly, for transactions occurring on or after May 31, 1997, compliance with ASTM standards is deemed to be compliance with the “all appropriate inquiries” standard. However, for transactions that occurred on or before May 31, 1997, the court suggested an expert witness should offer testimony about the customary commercial standards and practices in the area where the property is located at the time of purchase. Consequently, it may be prudent to utilize an expert familiar with relevant pre-1997 standards to demonstrate compliance with customary commercial standards when seeking to invoke the innocent landowner defense. Expert testimony should be offered when it is otherwise impossible to establish the elements of a CERCLA defense.
