A recent federal court decision serves as a reminder how a lack of attention to seemingly administrative details can have significant legal consequences.

TAKEAWAYS

• Parties seeking to use a Phase I Environmental Site Assessment for purposes of establishing a defense to Superfund liability should make sure that the report satisfies the requirements of the All Appropriate Inquiries (AAI) Rule and ASTM E 1527-13 standard and should not operate on the premise that courts will be lenient if applicable criteria are not satisfied.

• Based on dicta in the decision, courts are unlikely to grant Bona Fide Prospective Purchaser status to a company based on a report prepared for that company’s affiliate, in the absence of language permitting such usage in the report itself or in a separate reliance letter prepared by the consultant who authored the report.
• In a lease-to-purchase transaction, AAI, usually in the form of a Phase I, should be conducted before the lease is executed because a later purchase will not reset the clock for the BFPP defense.

CERCLA Liability and the Bona Fide Prospective Purchaser Defense

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) creates liability for current and past owners and operators of property contaminated with hazardous substances, transporters of hazardous substances, and arrangers of transport for hazardous substances. Generally speaking, the liability scheme for these potentially responsible parties is strict, joint and several. Because of this and given the uncertainty and potential costliness of environmental remediation projects, CERCLA liability can be a dealbreaker in corporate and real estate transactions.

Initially, CERCLA provided defenses only for parties who established that the release of hazardous substances was caused solely by an act of God, an act of war or an act of a third party. In 1986, CERCLA was amended to add the “innocent landowner” affirmative defense, which applies to purchasers who acquire property without knowledge of it being contaminated, despite the performance of “all appropriate inquiries,” i.e., benchmark environmental due diligence. To encourage the purchase and redevelopment of contaminated properties, in 2002 Congress created additional affirmative defenses, including one for bona fide prospective purchasers (BFPP).¹ The BFPP defense allowed purchasers and (as clarified through 2012 EPA guidance and, more recently, the 2018 Better Utilization of Investments Leading to Development Act) lessees to avoid CERCLA liability for pre-existing contamination by performing “all appropriate inquiries” before taking title to or entering into a lease, and satisfying other conditions related to managing the contamination. In 2005, EPA promulgated the AAI Rule at 40 CFR Part 312 to establish the baseline requirements for this environmental due diligence. This baseline consists of a Phase I Environmental Site Assessment (ESA) that meets the specifications set forth in the rule, which largely mirror the American Society for Testing and Materials (ASTM) standard for conducting Phase I Environmental Site Assessments. The current version of this standard is ASTM E 1527-13.

A recent decision by a federal district court highlights the need for strict compliance with the AAI Rule and ASTM E 1527-13 standard for purposes of attaining BFPP status.

Summary of the Case

In Von Duprin LLC v. Moran Elec. Serv. No. 16-cv-01942 (S.D. Ind. Mar. 30, 2020), the U.S. district court for the southern district of Indiana considered and ultimately rejected multiple attempts to assert a BFPP defense. The case arose after the plaintiff, Von Duprin, LLC, discovered that contaminants had migrated from surrounding properties onto a property it had formerly owned and contaminated, resulting in a plume of commingled trichlorethylene (TCE) and perchloroethylene (PCE). After investigating and remediating its former property and other nearby areas, Von Duprin brought CERCLA 107(a)(4)(B) and 113(g)(2) actions against the current owners and operators (i.e., industrial lessees) of four properties seeking to recover response costs and to receive a declaratory judgment, even though the current owners and operators had not contributed to the contamination.

A set of defendant owners and lessees, referred to collectively as the “Major Defendants,” moved for summary judgment on the basis of the BFPP defense for all four properties. Van Duprin contested the Major Defendants’ BFPP status for three of the four properties on the basis that the Phase I ESAs failed to meet the requirements of the AAI Rule. The court denied summary judgment for two of the three properties, thereby allowing Von Duprin’s claims against the Major Defendants relating to these properties to proceed to trial. (See Von Duprin LLC v. Moran Elec. Serv. No. 16-cv-01942 (S.D. Ind. Feb. 11, 2019).) At trial, the availability of the BFPP defense for the same two properties was again at issue, and once more, the court ruled in Von Duprin’s favor due to the reports’ shortcomings.

Analysis of Key Points of the Decision and Practical Tips to Avoid Repeating These Errors

Specifically, in its two decisions, the court determined that the following AAI/ASTM elements had not been satisfied in the various reports used to assert the BFPP defense:

• The “Environmental Professional’s Statement” required by 40 CFR § 312.21 (and Section 12.13 of the current ASTM E 1527-13 standard). This statement is a declaration by the consultant(s) who authored the report that they have the education, training, and experience to perform the assessment and identify “recognized environmental conditions,” that is, indicia of potential non de minimis contamination.

Analysis: The possibility of overlooking the Environmental Professional’s Statement was more of an issue before the issuance of the ASTM E 1527-13 standard, as the earlier ASTM E 1527-05 standard did not include this element of the AAI Rule. Therefore, it was possible at the time of the facts underlying this decision for a Phase I ESA to be ASTM-compliant but not AAI-compliant. This discrepancy between the standard and the rule was resolved with the issuance of ASTM E 1527-13.

• Timeliness of the report. Under 40 CFR § 312.20 (and Section 4.6 of ASTM E 1527-13), the shelf-life of a Phase I ESA is one year, although certain elements of the report (the site inspection, environmental records review, environmental lien search, interviews with owners and operators, and the environmental professional’s statement) must be updated to within 180 days of the closing. This deficiency was cited in relation to a property that one of the Major Defendants had leased in November 2007 and then purchased on January 17, 2013, by exercising a purchase option in the lease agreement. The Major Defendant in question had prepared a timely Phase I ESA for the acquisition; however, the court determined that in such transactions, BFPP status would hinge on “all appropriate inquiries” performed prior to the acquisition of a leasehold interest, and the Phase I ESA prepared for that purpose was dated November 2006, more than a year before the commencement of the lease.

Analysis: Transaction timelines are always unpredictable, especially in larger deals with numerous pre-conditions to signing and closing. In such cases, it is important to keep track of the date of the Phase I, as well as of those elements that require updating to within 180 days of closing. Incorporating Phase I timeliness into transaction closing checklists or even using Outlook calendar reminders and other similar tools are easy ways to stay on top of this issue.

• Finally, in the dicta of the summary judgment decision, the court repeated one of Van Duprin’s counterarguments to the assertion of the BFPP defense—namely, that the report was prepared for the benefit of a corporate affiliate of the Major Defendant seeking the defense. The report did not name the Major Defendant itself as a user or reliance party.

Analysis: This is a common error that can arise in transactions involving corporations with multiple subsidiaries or special purpose entities, especially if the Phase I ESA has been issued before the corporate entity that will take title or enter into a lease has been incorporated or identified. A practical solution to this problem (which the Major Defendants could have used) is to have the Phase I consultant prepare a reliance letter before closing authorizing the purchaser (once it has been identified) to rely upon the report.

Conclusions

Given the high stakes of transacting contaminated properties and the narrow margin for error to establish CERCLA defenses, the Von Duprin decision drives home an oft-repeated point: establishing a defense to CERCLA liability requires more than simply commissioning a Phase I ESA and uncritically accepting a consultant’s report. A BFPP defense is often only as strong as the underlying Phase I ESA, and a lack of attention to seemingly administrative details can have significant legal consequences. Therefore, close attention should be paid during environmental due diligence to the federal AAI requirements during the process of retaining a consultant, and Phase I ESAs should be reviewed closely to ensure that all aspects of the AAI regulations, not just the ASTM standards, have been met.

1 The 2002 amendments also revised the innocent landowner defense and created the contiguous landowner defense—a defense to CERCLA liability for landowners of property adjacent to a contaminated site who can prove that they were not aware of any releases of hazardous substances and did not consent to the release of hazardous substances. The issue of the all appropriate inquiry is critical to both of these defenses, as a landowner must perform an all appropriate inquiry to demonstrate their “innocence” with regard to the contamination.

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