When buyers request that sellers warrant compliance with environmental law, sellers need to appreciate that agency interpretation or agency enforcement discretion may have played a role in the seller’s apparent ongoing compliance. Sellers need to remember that interpretation and discretion can change, especially in the complex world of environmental regulation. For compliance issues that may be subject to interpretation or enforcement discretion, transaction documents should clearly allocate any risks that may come from changes in interpretation or discretion.

A recent decision from a New York federal court illustrates that sellers may unknowingly accept risks of changes in agency interpretation or discretion. Superior Plus US Holdings, Inc. v. Sunoco, Inc., No. 13 Civ. 7740 (S. D. NY), opinion issued May 30, 2014.

Sunoco sold the Marcy Terminal in Oneida County, New York to Superior Plus in 2009. Many years prior to that sale, Sunoco had modified certain oil storage tanks. After the sale to Superior Plus, an inspection by the New York Department of Environmental Conservation (DEC) discovered that many of the modifications did not comply with the terminal license that DEC had issued to Sunoco. DEC commenced enforcement action against Superior Plus, which then agreed to an enforcement order to perform corrective actions on the tanks.

Superior Plus notified Sunoco of the enforcement action, but Sunoco did not try to participate in defending that action. Sunoco also refused a request for indemnification; Superior Plus sued.

The Court’s opinion indicates that Sunoco had notified DEC of the modifications proposed for the tanks, and that DEC had been aware of the modifications for many years. During those years, DEC never raised an issue with Sunoco regarding the modifications. The Court determined that the notice to or past knowledge of DEC neither excused Sunoco nor bound DEC to any implied interpretations from years past.

The Court held that Sunoco’s modifications violated Sunoco’s terminal license and that the violations continued under Superior Plus’s ownership. The Court then examined the transaction documents, and determined that this violation breached the warranty that Sunoco was in compliance with all material terms and conditions of its environmental permits. Based on the breach of warranty, the Court ruled that Sunoco must indemnify Superior Plus.

The transaction documents apparently did not specifically address the compliance status of these tanks. Sunoco would have benefited from an exception to the general warranty of permit compliance regarding these tanks. Such exceptions often cover situations where compliance, or the materiality of non-compliance, is uncertain.

Facilities that have compliance uncertainties need to consider these uncertainties in transactions. I recommend clearly identifying all compliance uncertainties, and allocating the risks they entail in the transaction documents. That risk can include the potential for agency interpretation or discretion to change.

For a copy of the Court’s opinion click here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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