ENVIRONMENTAL ISSUES FOR BUILDING RENOVATION, DEMOLITION AND NEW CONSTRUCTION--PART 1

 

In addition to my usual caveat (that this is intended to be informative but not intended as legal advice in any specific situation) I want to add that demolition/renovation rules are particularly detailed, and  yet somehow still unclear from time to time. I have provided a fair amount of detail here-especially with regard to asbestos, because I could not think of any other way to usefully describe these requirements.  However, no one should be relying on the generic regulatory interpretations in this blog, as a substitute for careful fact-specific evaluation of regulations and guidance. 

 

Renovation or demolition of older buildings may pose regulatory liability issues and compliance requirements pertaining to asbestos-containing material (ACM) or lead based paint (LBP).  The applicable regulatory requirements are sometimes fuzzy, which can result in both regulatory issues and legal disputes over contract scope of work. New construction on a Brownfield site poses design challenges and legal issues arising from uncertainty about sub-surface conditions, especially where soils beneath a former industrial building have not been thoroughly examined.  

 

  In Part 1 of this blog, below, we will consider OSHA and EPA asbestos regulations and liability risks generally.

 In Part 2 [ To be posted by October 15] we will consider construction regulations pertaining to Lead Based Paint.

  In Part 3, [ to be posted by November 15] we will look at new construction on properties having historic industrial use, which can pose a variety of design and regulatory issues for construction contractors, design professionals, and construction counsel.

 In January and February 2018, I will host several multi-disciplinary roundtable discussions covering all of these subjects.  If you think you may not be on the roundtable notice list from last year, [ Phase I investigations] please drop me an email to be added for this round. 

 

PART 1—DEMOLITION AND RENOVATION ISSUES—ASBESTOS

Asbestos is a potential issue in buildings constructed before approximately 1980.   The common theme for asbestos regulation is minimization of airborne fibers due to disturbance of ACM (defined as containing at least 1% asbestos).

Many construction lawyers, contractors, environmental consultants, and even specialized industrial hygiene/abatement specialists, do not have a full and accurate understanding of applicable legal requirements pertaining to ACM. This can lead to legal disputes over the intended scope of work. It can also lead to regulatory violations with penalties, or law suits by construction workers, site occupants and neighbors against the owner and contractors for negligent exposure during site work.

           

Some of the key questions which arise include:

1)     Is a pre-demolition/renovation building survey required or advisable? Is bulk sampling required?

2)    Is advance government notification required if ACM is detected or assumed to be present?

3)    Is pre-demolition removal of ACM required in order to comply with OSHA and EPA regulations?  If so, what are the applicable safety standards

4)    If demolition debris is likely to contain some asbestos, how does that affect disposal requirements or use as fill? 

5)    If I follow the regulations and available agency guidance, does that protect me from claims by workers or neighbors alleging negligent exposure?

 

OSHA construction regulations

OSHA construction rules for asbestos materials are found at 29 CFR § 1926.11.    Regulations include both work practice requirements and numerical standards.  Employers are required to carry out an initial evaluation to assure that air borne fibers will not exceed 1 fiber/cc for a 30-minute period, and 0.1 fibers/cc, 8-hour time-weighted average (TWA).  A Negative Initial Evaluation (NIE) allows work to proceed without a majority of otherwise applicable worker protection measures. However, a number of generic work practices aimed at minimizing airborne release of fibers, can still be applicable. OSHA “Class II” materials (e.g. vinyl asbestos floor tiles) have such requirements. 

EPA regulations

Regulations are located at 40 CFR § 61, and are part of the hazardous air pollutant “NESHAPS” program. These rules are aimed more at minimizing exposure to building occupants and to neighbors.   PADEP regulations incorporate the EPA regulation by reference.  These regulations apply to all buildings except single family residence or multi-family residential with 4 units or less.   Under both EPA regulations and PA DEP regulations, advance notification of demolition is required if there is any ACM, even if the project is ultimately exempt from specific work requirements.

 

Regulated and Non–Regulated ACM  

The key threshold criterion for substantive requirements under the regulation is whether the ACM is already in friable condition (able to be crushed into powder by hand pressure) or likely to become friable as a result of demolition/renovation activity or subsequent debris consolidation or recycling. Such material is considered “Regulated” ACM (RACM) and is subject to pre-project removal requirements if the affected surface area exceeds 160 square feet of floor or other surface, or 260 linear feet of pipe insulation.

Owners and contractors generally know what to do when they are removing thermal pipe insulation containing obviously friable ACM.    However, there are also several other types of ACM which are less well understood, and can result in either non-compliance or unnecessary costs due to “over-compliance.” Examples would include vinyl asbestos floor tiles, asphalt roofing shingles with ACM, asbestos cement roofing material, and window caulking with ACM.

For EPA purposes, material which is not automatically RACM based on current friability, must be evaluated for RACM status based on likelihood of becoming friable, in light of the removal method and equipment to be used. Category I ACM is presumed Non-RACM unless it is subject to sanding, grinding, cutting, or abrading, which automatically renders it RACM.   Sanding and abrading are not defined; and the EPA definitions of grinding and cutting are subjective enough to be open to some interpretation. Thus, it is important to read all definitions carefully, apply common sense to non-defined terms, and also to document (and have your contractor document) your interpretation and the basis for it, in case there are future inquiries. 

 EPA Category II material is presumed to have the potential to become friable during renovation or demolition, and must be evaluated in advance on a case by case basis.  If the evaluation indicates a high probability of becoming crumbled or pulverized during planned demolition of renovation activity, then the material must be handled as RACM.  Before undertaking such an evaluation, one should review the EPA asbestos guidance, which identifies a number of generic scenarios for which the Agency has already created a “presumption” of either RACM or non-RACM.  These presumptions are a function of the type of material as well as the removal method to be used.  Thus, if one wishes to assure that a demolition contractor will be in compliance, it is necessary to know some details about plans for removal of materials having ACM.  Most materials which contain ACM can potentially become RACM if damaged extensively during demolition.    

A few of the EPA presumptions are:

-Sanding, grinding, cutting, or abrading—any ACM becomes RACM

-Floor tiles—Non-RACM so long as not “extensively damaged,” “tile breakage is minimal”, and a shot blaster is not used;

-Asphalt Roofing material—This is considered Category I and can be left in place for general demolition; Pre-demolition removal via power plows or power slicers is also considered ok.

-Waste Consolidation—Moving debris by bulldozer is considered ok.  However, use of any equipment which will break up the material [e.g. jack hammer] will be considered “grinding” and therefore it becomes RACM.

 

Disposal and use as fill

There are several important rules to note:  1) Non-RACM maygo to a C&D landfill but cannot be sent anyplace where it will likely be pulverized ( e.g. cement recycling facility; 2) RACM can only be disposed of in a landfill licensed to take asbestos material; 3) Mixing RACM into any demolition debris makes the entire pile RACM and unsuitable for on-site fill; PA Management of Fill Policy  prohibits use of “friable asbestos” as fill material but does not specifically prohibit non-RACM ( unless of course you grind it up to make useful as fill, and thereby create RACM.)

 

Is Regulatory Compliance a Shield Against Common Law Exposure Claims?  

  Legally, compliance with asbestos construction regulations does not bar a common-law claim for damages.  However, most of the asbestos legal problems I have seen were caused by some combination of outdoor unsecured debris piles containing asbestos material, or failure to remove asbestos material before commencement of aggressive demolition work which created visible emissions of white dust.  Such situations are typically the result of regulatory misunderstanding or disinterest, which resulted in no real compliance effort. 

Another common-law trouble spot is the fact that the asbestos NESHAP exempts buildings with four or less residential units, as well as friable asbestos of less than 260 linear feet.  It is common to think that asbestos can be ignored in these situations, but that is actually a bad idea. Aggressive treatment of friable asbestos in these situations can easily cause visible dust emissions and a potential health hazard, which will obviously not be considered “due care”.

  A take home point would be that good asbestos liability management in an older building depends on accurate information about the extent of potential ACM, which can then be used to assure regulatory compliance as well as minimization of unnecessary health risk.  A good survey decreases the risks of spreading friable asbestos dust from undocumented sources.  This reduces the risk of temporary project shut-down by OSHA or EPA, expensive abatement actions and civil penalties, as well as the risk of possible common law legal action by tenants, neighbors, or workers. 

September 14--Vapor intrusion sampling shows low level TCE above standard and State says that short-term exposure poses immediate risk to pregnant women--What do you do?

 

Quick Overview of Vapor Intrusion(“VI”) and Regulatory Standards:

Vapor intrusion is caused by contaminated soil and/or groundwater. VI conditions can occur via natural movement of vapor through soil, as well as migration facilitated through and along underground drainage and utility lines [ “preferential pathways”].   Vapor migration situations caused by TCE and PCE are commonly encountered, despite the fact that these solvents are no longer commonly used.  One key reason is that historic dry cleaners, auto repair facilities and small industrial shops often get a “passing” grade in rigidly performed Phase I site investigations [See my Jan.27, 2016 blog] because of the absence of obvious evidence of either contamination or agency files indicating historic regulatory issues.  Consequently, these potentially impacted sites are allowed to evolve into environmentally benign neighborhood commercial establishments without either documentation or remediation of historic leakage and spillage of solvents. The day of reckoning may arrive years later when a Phase II investigation is finally done and   groundwater contamination is detected above cleanup standards and above the established VI screening level.  These findings lead to requirements for further plume delineation as well as possible VI sampling in nearby buildings.

If indoor air sampling shows VOCs above established VI standards, the legally responsible party will usually be required to implement remedial action such as installation of a vapor mitigation system.  There will also be continuing concerns about property value and the possibility that occupants of the home have already been exposed to contamination for a substantial period of time. 

Many VI standards for VOCs are extremely low [e.g. TCE standard of 3 ug/m3 in New Jersey, and proposed TCE standard of 2.1 ug/m3 in Pennsylvania] and are therefore readily triggered. Such standards are based on extrapolation from animal research data which is typically focused on long-term exposure at fairly high levels.  There have also been human epidemiologic studies such as the recent effort at the IBM plant in New York.   The data as a whole are widely acknowledged to be inconclusive and in need of further research.  Nevertheless, EPA stands by its no-risk level (Rfc) of 2 ug/m3 TCE for all media; and this has become a benchmark for state standards seeking to accomplish maximum protection of public health, pending development of more reliable information.   

Short-Term TCE Exposure and Risk of Birth Defects:

The highly charged atmosphere of vapor intrusion has been turned up several clicks by growing additional concern over potential cancer and non-cancer risks from short-term exposure to VOCs.  Of particular concern is TCE-- and EPA warnings beginning in 2011, of the possibility of fetal heart damage occurring early in a pregnancy.  A number of states, including New Jersey have recently issued guidance (NJDOH June 2016 Fact Sheet] specifically addressing TCE and congenital heart damage, and recommending response action for residents. NJDEP has distributed the fact sheet to LSRPs with recommendations for how and when to include the fact sheet with VI data given to residents.    Issuance of a generic, accurate, and understandable guidance on a complex and sensitive public health issue raises challenges for regulators in any state. New York, Massachusetts and Ohio are among the limited group which has also attempted to address the acute TCE exposure issue.   However, the New Jersey fact sheet and LSRP recommendations starkly illustrate some of the key challenges—thereby providing a vehicle for discussion of issues.  To the extent I am singling out the New Jersey effort in this blog entry, it is with all due respect to both NJDOH and NJDEP and for the sole purpose of constructive dialogue. 

The 2016 New Jersey Dept. of Health TCE Fact Sheet

The NJ Dept. of Health (DOH) fact sheet, states that: “...animal studies show that exposure to low levels of TCE during the three-week period of heart formation in the first trimester of pregnancy could result in an increased risk of a heart defect in the unborn baby”. [emphasis added]

 It also states that: any woman exposed to TCE above vapor intrusion standards who is pregnant or “who may become pregnant” should “reduce their exposure to TCE as soon as possible” and talk to a health professional. [emphasis added] Just in case the reader has missed the point, the fact sheet also includes a photo of the abdomen of a quite pregnant woman. 

 I think the intent was to create awareness of potential immediate health concerns, which an individual can then pursue individually with government personnel by telephone, or with their personal doctors.  That makes some sense in principle; but I think it could be received poorly by residents in real time.  Remember that the fact sheet is intended for distribution to families who were very recently told that that there is a contaminated property in the neighborhood, raising the need to test air in their home.  Now you are telling them that their home is in fact contaminated.  I think if there is anyone in the household who is definitely pregnant or trying to be, they will be scared to death, regardless of the qualified terminology used in the fact sheet. Many of these people will immediately seek answers to predictable questions, either from the LSRP or from NJDOH, NJDEP, EPA, or ATSDR [ as the fact sheet invites them to do].  In the absence of a well-funded and material upgrade to existing communication resources, it is optimistic to expect that these inquiries can be adequately and skillfully handled.

The other reality is that government agencies will always have restrictions on the extent to which subjective information about health risk can be provided over the phone.  When residents receive incomplete answers to their questions, combined with the heavily nuanced risk language of the fact sheet, many will feel like they are being “managed”—like the government feels obligated to say something but really doesn’t know the answer and is not in a position to provide a solution. This leads to the anger and hostility toward government officials and responsible parties alike, which we often see at local public meetings about environmental situations in residential areas.   Among the people reacting this way will undoubtedly be those who call the phone number in the fact sheet for the Rutgers University Occupational Health Sciences Institute and are told [ as the fact sheet does imply] that the Institute can only talk to a health care provider.

Obvious questions which should be anticipated  

If we are going to distribute fact sheets about dangers to unborn babies, we can expect a number of predictable and complex questions to be raised by recipients. Some of the these could conceivably be addressed anticipatorily in a fact sheet.  Some, not so easily:

  •  When exactly is this “3-week period” during the first trimester?  I researched on google and it says the critical time for fetal heart damage could be before the end of the second gestational month. Is that true?
  •  Google also says that short-term vapor exposure research is considered inconclusive by     many scientists—so why are you saying that research “shows” there is a problem?  Is there new information? 
  •  What do you mean exactly by “increased risk”?
  •   How likely exactly is harm to my baby, given the TCE level in my home?
  •  What does that mean-- “reduce my exposure”? Are we talking about leaving the windows open? Staying out of the basement? Evacuation of my home? When I was asked for permission to sample my home, the fact sheet I received said that if there were problems it might require a “depressurization” system like people have for radon.  Are you saying that would not be enough here? 
  •  It sounds like you have known about these TCE “risks” for a while, and it looks like this contamination may have been in my house for years.  Why am I first learning about this now, when I am already 12 weeks pregnant?

General Suggestions and Observations:   

In fairness, it would be impossible to meaningfully answer all reasonably anticipated questions in a fact sheet; and some questions would be tricky in any format. Nevertheless, we need to consider a more mindful attempt to anticipate obvious concerns and how people will be reacting in real time. I think we need to do a better job of communicating risks in plain and specific language. Perhaps there is a way that agencies can take some risks and honestly explain that the scientific research on acute TCE exposure is inconclusive but it is nevertheless deemed necessary and important to disclose to the public so that impacted families can make informed personal choices.  I think agencies also need to find a way to clearly communicate the timing of the narrow window of opportunity for risk minimization, and the consequent need for any response to be immediate.

 If time is of the essence, it also seems necessary to articulate the concentration at which emergency relocation merits serious consideration [ versus just installation of a mitigation system and implementation of interim protective measures].  It should be possible to take this approach, with appropriate caveats, and without unintentionally suggesting that any particular TCE concentration below that level is “safe”. An example would be the Ohio EPA guidance issued in August.  They identify >6.3 ug/m3 as the threshold where “temporary relocation of receptors may be necessary”. Then they say that >20 ug/m3 is a threshold at which to “relocate receptors”.  In between 6.3 and 20, the meaning is still unfortunately fuzzy; but the agency has at least identified a universe below 6.3, in which relocation is probably not necessary, and a universe above 20 where no one is going to tell you it might be safe to stay. That seems like a step forward from avoiding mention of any specific number and implying that response strategy cannot be rationally linked to actual TCE concentration.

The NJDEP Recommendations for fact sheet distribution by LSRPs

The NJDEP emailed a copy of the June 2016 DOH fact sheet to LSRPs.  Their recommendation was that the fact sheet be given to residents [along with vapor data] “when there is an exceedance of TCE in the indoor airand occupants of the building include “women of childbearing age”; [ emphasis added] I think the highlighted language could be problematic for LSRPS. 

What is the definition of “Child-Bearing Age”?

  This language puts a LSRP in the awkward position of appearing to have responsibility to determine the age of every female in a household [ summer guests as well?], and interpreting the meaning of “childbearing age”—15-44?  15-49? Perhaps it would make more sense to just distribute to all households with elevated TCE levels, and to let the residents determine for themselves whether there is a female occupant in harm’s way. 

What is the applicable air concentration threshold for distribution of the fact sheet?

There also seems to be unnecessary ambiguity regarding the threshold level that should trigger distribution of the fact sheet.  The DEP recommendation seems to suggest that distribution to residents is required only if there is “an exceedance of TCE.”   If the intent is to distribute only if the vapor concern level of 3 ug/m3 (or immediate action level of 4?]  is exceeded, why not just say so?

Another consideration is that most people do not understand micrograms and parts per billion.  They tend to be extremely uncomfortable learning that their indoor air [ or drinking water] has a detectable level of a carcinogen that is “below standards”. Pregnant women and their families living in a home having a TCE level of 2.5 ug/m3 TCE, will be very preoccupied with wondering if they are really safe. They may become extremely activated upon learning that a 43-year-old non-pregnant female neighbor,  with 3.1 ug/m3 TCE in their basement, received a warning fact sheet  about risk of birth defects, and is having a mitigation system installed at no cost;  Given the uncertainty and anxiety surrounding these issues, perhaps it would make sense to distribute an agency fact sheet to any household with detectable TCE, so that they could be informed of the TCE issue and proceed as they deem appropriate.

What about the Responsible party?

Responsible parties everywhere can no longer afford to focus solely on applicable regulatory requirements.   Vapor intrusion is a fertile subject for civil litigation seeking property damages, medical monitoring, or personal injury damages for conditions allegedly caused by exposure. A typical responsible party may be decades removed from the original site contamination.  Unlike regulatory obligations to investigate and remediate, which are usually strict liability, common law tort liability is very much about legal duties to warn of or prevent harm, and alleged negligent failure to do so.  Thus, extent of liability can be strongly affected by how thoroughly and how promptly an off- site investigation is carried out.

In light of the narrow window of opportunity discussed earlier, there are really important access issues that responsible parties [ and agencies] need to consider for implementation of vapor intrusion sampling –

(1) How long it will take to accurately identify target property owners and addresses, deliver a request for access, obtain a positive response, make access arrangements, obtain vapor samples, obtain results, and notify residents.   In most cases the answer is well over a month.

 (2) What do we do in the not- uncommon situations where access requests are ignored? And what if we have a non-resident owner? In either case, requests for access are typically repeated again in 30 days, and then action to obtain a court order is contemplated.  Meanwhile, tenants or other occupants are still not having their homes sampled to determine if a warning or mitigation is appropriate.

It seems fair to say that the typical process of obtaining access for vapor sampling, would disable any effort to give timely warning of birth defect risk from TCE exposure.  Thus we need to consider whether a best effort to warn needs to be a lot more aggressive in attempting to gain access, regardless of any state regulatory standard or guidance on the subject. Likewise, agencies will need to consider direct involvement to facilitate timely approvals for access so that sampling and delivery of data to residents can be expedited.   

 

This blog is intended solely as a generic commentary and should not be considered as legal advice.  It is also not intended as criticism of any specific company or individual. 

 

 

Post-Real Estate Transaction Liability--Beyond ASTM 1527, All Appropriate Inquiry and Innocent Owner Status

In the previous blog we explored the limitations of the ASTM 1527-13 Phase I protocol, and the consequences of the currently trending rigid and commoditized approach to Phase I due diligence.  Today we engage in a reality check about what happens AFTER you get a Phase I report.  The questions discussed below are very common and reflect some key misconceptions which interfere with good decision making.  I offer for each, a short answer and then some commentary:

1.     I did the required ASTM 1527 Phase I and it said there are no RECs (Recognized Environmental Concerns):

(A)  “That means the the site is clean—Isn’t that right?” [ NOT EXACTLY—ASTM DEFINES EVIDENCE OF HISTORIC SUSPECT USES AS “DE MINIMIS” UNLESS THERE IS SPECIFIC EVIDENCE OF A LIKELY RELEASE.  IN ANY EVENT, “CLEAN” IS A GOOD WORD TO AVOID BECAUSE IT MEANS DIFFERENT THINGS IN DIFFERENT SITUATIONS]

(B)  “And if I find something later I don’t have to worry because I have the innocent owner defense—right?” [ YOU MAY HAVE A DEFENSE UNDER FEDERAL LAW BUT THAT IS ONLY A SMALL PIECE OF THE WORRY SPECTRUM]

                      (C) “So now it’s ok to go to closing with an “as-is” provision in the sale agreement    without doing a lot of expensive Phase II sampling?  [ NO—YOU STILL NEED SOME RISK ASSESSMENT INFORMATION—BECAUSE THE DEFENSE WON’T SOLVE YOUR PROBLEM IF RELEASES ARE DISCOVERED AFTER CLOSING AND YOU HAVE TO REMEDIATE TO ALLOW CONSTRUCTION.   

 

2.     “The report identified several RECs—so should I insist on an indemnity from the Seller? 

[ YES BUT KEEP IN MIND THAT SELLER MAY NOT HAVE SUFFICIENT ASSETS TO COVER A FUTURE CLAIM, AND/OR MAY DRAG YOU THROUGH LITIGATION BEFORE OFFERING A COMPROMISE SETTLEMENT.]

1(A)—No RECs means the site is clean? 

 Consider removing the word clean from your vocabulary when discussing environmental issues.  “Clean” is one of those undefined short hand terms that means different things on different days, and gets people into trouble. For example: Soil contamination is measured by a variety of numerical contamination standards which consider site use (residential vs. non-residential) and exposure pathways (human contact, impact to groundwater, or potential vapor intrusion for a nearby building). Groundwater contamination is also measured by residential and non-residential standards, and vapor intrusion screening levels.  So on most days, Clean really means “below all applicable numerical standards based on intended future use”.  Is that reasonably equivalent to a Phase I finding of no RECs?

The problem is that a Phase I is a preliminary qualitative evaluation of property which relies   solely on visual inspection, interviews and review of available public records and on-site documents.  The report categorizes all findings as either REC [ specific evidence of likely release] or De minimis [ evidence of past suspect use but no specific evidence of likely release].  There is no sampling data for comparison to applicable standards unless previous site sampling results are identified and obtained.   Thus, at most sites, the finding of REC or de minimis is reached without any data or with whatever limited historic data can be obtained.  The ASTM definition of de minimis would include a finding of likely historic use by a dry cleaner, gas station, metal plating shop, or all three, if there is no specific evidence of a specific likely release. That is why “De Minimis” does not equal “Clean”.

To be fair, a Phase I report is sometimes able to conclude “no RECs” because there is no evidence of suspect historical uses and there is enough available documentary evidence to give that conclusion reliable credibility. Unfortunately, there are often important gaps in the historic record, or the available evidence in fact suggests the possibility of historic use of solvents or other chemicals—sometimes well before the emergence of environmental regulations in the 1980s.  In these situations, the REC/De minimis pass-fail test may convey a false sense of certainty. 

What if the Phase I reveals that there are documented past releases, for which a government agency has issued a no further action approval based on meeting numerical standards?   Based on ASTM definitions, such a condition would be considered a REC but specifically, a Historic REC (HREC).  However, this can actually be a good thing—and such a site might actually be considered “clean” at least with respect to the location and media addressed previously. [Unless the applicable standards have changed]

Achievement of numerical standards can be difficult at sites where contamination has resulted from long term impact.  Thus we also find sites where agency approvals are granted based on risk assessment, despite residual soil and groundwater contamination above standards.   These sites are not “Clean” but are “Clean Enough” that site development is still feasible so long as one can tolerate protective institutional controls [activity and use limitations, capping of specific areas, perhaps building on a slab instead of excavating a large foundation].   A Phase I report would appropriately label this situation a “Controlled” REC [ CREC]. 

1(B) Phase I with no RECS means I have a defense and don’t have to worry if contamination is found later?

This question illustrates the result of 10 years of media discussion about the importance of ASTM 1527 for qualifying for the CERCLA “innocent purchaser” defense, and readers assuming that it means more than it really does, and then spreading those assumptions to others, in briefing and training sessions. First-- it is easy to forget that CERCLA is not the only or even most common legal basis for resolving site cleanup disputes.  Pennsylvania has two statutes of its own—one of which [ Hazardous Substance Clean up Act—HSCA]  has an innocent owner defense which is worded a little differently and does not provide automatic compliance with the All Appropriate Inquiry (AAI) criterion by completing an  ASTM Phase I report.  There is a second state law, which does not have an innocent owner defense at all [ Clean Streams Law-CSL] and can actually result in strict liability for an innocent buyer.  There are also several commonly invoked common law tort claims, such as negligence, trespass, and nuisance, which are likely unaffected by any statutory defense.  Thus a CERCLA innocent owner defense would not necessarily protect against a PADEP clean up order, a third-party claim by a neighbor seeking property damages or claiming illness, or a HSCA claim 10 years later by a future owner of the property who discovers contamination. 

Another reality is that a CERCLA defense can turn out to have limited value.  For example, EPA does not often go after the owner of a property discovered to have contamination during construction.  The main value of a CERCLA innocent owner defense would be to facilitate a private cost reimbursement claim under CERCLA against a past owner/operator.    Nevertheless, most defendants will resist a reimbursement claim that ostensibly gives them sole responsibility for site costs. In order to level the playing field, it is reasonable to expect an argument that the Phase I report did not meet the requirements of the defense, despite having received a Phase I report which follows the ASTM 1527 scope. Such argument might include the position that   your Phase I report [ the one concluding no RECs] in fact demonstrates you had “reason to know” of likely hazardous substance disposal, because of findings of historic suspect uses which labelled “De minimis”; and therefore you have some liability too.  If suit is filed and the court rules on summary judgment that entitlement to the defense is a legitimate question of fact [ a common result of such motions] trial or settlement may be several years away.  This creates the common situation where assertion of claims or defenses may require substantial unilateral investment of remedial and legal cost resources as well as time, before having a shot at cost recovery.

1(C)--Phase I with no RECs means I can agree to “as-is” terms without having to do Phase II sampling? 

As discussed above, Phase I conclusion of no RECs does not equate to “clean site”.  If the “de minimis” findings of past site use warrant a closer look, then it is a mistake to assume that detailed due diligence can be avoided—especially if the transaction terms are essentially as-is.  As a practical matter, many sale agreements start out with Seller demanding as-is, but the extent of the as-is gets limited in negotiations.  One way to get those limitations is to generate some Phase II site data and insist that Seller retain responsibility for all known conditions. 

(2) –If the report found several RECs do I have to get a Seller Indemnity? 

Just because a Phase I report concludes there are one or more RECs, does not mean there is a serious problem.  A REC could be evidence of a historic underground tank that was not properly closed, evidence of a historic spill which contaminated soil and groundwater and was not fully addressed, a greasy old floor drain, or records of an ancient septic system which was used by an auto body shop, metal fabrication shop and a dry cleaner.  Some of these sound worse than others but the actual impact of any of them cannot be determined unless some Phase II sampling is done along with some evaluation of potential remedial costs.  The Phase I report can only identify and qualitatively describe the RECs—and under the ASTM protocol it does not even have to include recommendations as to follow up sampling. Thus Phase II sampling could become the basis for giving Buyer sufficient comfort to go forward with a deal despite ominous conclusions in a Phase I [ or an informed basis for backing out].   

In many cases, time and resources discourage proper Phase II sampling.  Thus the next best thing may be perceived to be an indemnity covering any and all future environmental liabilities, or at least the specific identified RECs. Sellers are understandably reluctant to give indemnities, but sometimes need to do so in order to close a sale.   Many buyers view an indemnity as an excuse to skip Phase II sampling because the Seller is on the hook for all RECs.  That is a bad idea.  As discussed earlier, the universe of potential environmental liability concerns can be much broader than those labelled as REC. Thus a limited indemnity may not be covering a potentially serious concern. 

 I also think that all indemnities should be considered limited, because they are only as good as the Seller’s assets at the time of a future claim. Over time, sale proceeds and other liquid assets of a LLC, partnership or other small cap-type of business can easily get lost in distributions, other investments, or insolvency—making it difficult to collect on any judgment that might be obtained. 

 It is also a business reality that one can always find a “plausible” defense to a contractual indemnity and force the matter into prolonged litigation. Thus a buyer with an indemnity should be prepared to unilaterally bear the cost of remediation as well as the cost of litigation, pending the outcome of indemnity claims.  The same is true, of course, for any contribution claims against other past owners or operators.     

The take-home point is that contractual indemnities as well as “legal rights” against past owners and operators may require substantial unilateral investment of resources for remediation and for litigation before any recovery can occur, as well as a solvent party from whom to obtain such recovery.   A much better approach [ when possible] is to seek Seller’s covenant to address environmental conditions to the satisfaction of the state agency, within a specified time period. Such covenant can be secured by escrow of sale proceeds.   But in order to be in a position to demand such a covenant, one needs to have enough site data to describe the situation that would be addressed.  Thus due diligence can become the vehicle for resolving liabilities as well as warning of them.

 

This blog is intended solely as generic commentary and should not be considered as legal advice.  It is also not intended as criticism of any company or individual.   

Reality Check on pre-Acquisition Environmental Due Diligence--Are We Getting Better Quality In a World of Standardized Phase I Investigations?

Phase I environmental due diligence was profoundly impacted by the 2007 EPA regulation which provides that compliance with the ASTM 1527 protocol constitutes "All Appropriate Inquiry". Have we achieved necessary standardization and minimum quality control--or just harmful commoditization?