Appellate Court Upholds Statutory Due Diligence Requirement and Finds Ownership Status after Declaration of Taking

by Cole Schotz

[author: Susan C. Karp]

Liability based on property ownership under New Jersey’s Spill Compensation and Control Act (“Spill Act”) and its impact on condemnation cost recovery suits were the subject of an interesting decision last  month in New Jersey Schools Development Authority vs. Marcantuone (October 29, 2012 ). The New Jersey Appellate Division made two rulings in this eminent domain cost recovery case against a property owner who did not cause contamination identified at the site. The court ruled that:

1. The existence of the Spill Act affirmative defense for pre-1993 acquisitions set forth in the law allows liability   to be inferred for current owners of contaminated property, where the Property was purchased before 1993, unless   the  property owner  can establish a defense to liability.

 2. Even where contamination is identified by a condemning authority after it has filed its declaration of taking, the condemned party is still considered the property owner for purposes of liability in a subsequent cost recovery suit.

In this case, the City of East Orange acquired Marcantuone and Gieson’s property by eminent domain in 2005 to build a performing arts pre-school. Under well established condemnation law in New Brunswick v. Suydam Investors, 177 N.J. 2 (2003), a portion of the acquisition money was set aside in court to pay for any cleanup costs incurred by the New Jersey Schools Development Authority (“NJ Schools”), which funded the acquisition.

A number of environmental assessments prepared for the City and for NJ Schools prior to the taking  had identified former dry cleaning operations at the site since the 1930′s,  but did not recommend  that any investigation be performed. A subsequent  environmental assessment after the taking, however, led to sampling which revealed the dry cleaning  solvent PCE in soil. Cleanup was completed and NJ Schools sued defendants for recovery of its cleanup costs of approximately $200,000.

Pre-1993 Acquisition Spill Act Liability

At trial, Plaintiff asserted that the defendants  were liable because they owned  the property with no defense to Spill Act liability , in that they failed to undertake pre-acquisition environmental due diligence when they purchased the property in 1985 in accordance with a 2001 amendment to the Spill Act (with retroactive applicability) requiring due diligence based on generally accepted good and customary standards for pre-1993 acquisitions. Defendants argued  that although there is a defense in the Spill Act for pre-1993 acquisitions, the existence of the defense does not  in itself create Spill Act liability for pre-1993 purchasers,  and that  prior case law did not clearly establish such liability.

Although NJ courts have been reticent about making clear assertions of current owner liability under the Spill Act, the Spill Act rules implementing the statute are clear that current owners are liable for contamination, subject to any of the available defenses under the law. In addition to an act of war and an act of god, these defenses include pre-acquisition environmental due diligence that does not identify any reason to know that there is contamination at the property. The Appellate Division’s decision here clarifies the situation, stating “Although it may seem counterintuitive to infer liability from legislation establishing an affirmative defense, logic dictates that that is the case….and reveals the Legislature’s acknowledgment of the underlying liability these affirmative defenses were intended to counteract.” 

The Appellate Division remanded the matter to the trial court  to determine whether  the defendants met the pre-1993 due diligence requirement which is vaguely worded in the statute as being based on generally accepted good and customary standards for pre-1993 acquisitions. The opinion details an interesting analysis prepared by NJ School’s expert as to the evolution of due diligence practices from the 1970′s , when only high risk properties were evaluated for environmental risks by large and multi-national corporations, to the current practice based on the 1993 Spill Act amendment setting out NJ’s prescriptive preliminary assessment process.

Timing of Ownership in Condemnation

Since the liability of the defendants was based on their ownership of the property, the defendants argued that no contamination was identified until after the property had been taken by NJ Schools and that they no longer owned the property at that time.

The Appellate Division looked at the Suydam decision in which the court determined that properties are to be valued as if remediated and fair compensation paid  based on that valuation, with funds being placed in escrow until the true cost of remediation and the liability of the condemned party is determined in a cost recovery action. Using the intent of Suydam to bifurcate the condemnation proceedings from the cost recovery process, the Appellate Division held that although the act of filing a declaration of taking vests title in the condemning authority, the condemned party is deemed to be the “current owner” even after that point, for purposes of the cost recovery suit.  

On remand, if defendants are not able to establish a defense to liability based on the pre-1993 acquisition due diligence standard,  defendants will be liable for the cleanup costs even though they were discovered after title had passed.

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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