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Page 1: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know
Page 2: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

Chicago | Indianapolis | Madison | Milwaukee | Naples | Phoenix | Tampa | Tucson | Washington, D.C.

Evaluating and Managing Environmental Risk in Business Transactions

What Every Company Needs to Know

November 19, 2014

Lawrence W. FalbeGeorge J. Marek

Association of Corporate Counsel, Wisconsin Chapter

Page 3: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

Biographies

3

Lawrence W. [email protected]

George J. [email protected]

414-277-5537

Page 4: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Get comfortable with the major environmental liability schemes – and defenses.

• Understand the various levels of due diligence assessment methodology (and their legal and practical implications) to choose the right level of due diligence.

• Know how to leverage environmental due diligence information to effectively manage risk.

• Recognize traps for the unwary.

• Learn about the recent changes to Phase I ESA requirements.

• Learn more about Vapor Intrusion issues in due diligence.

Today’s Goals

4

Page 5: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• The goal of due diligence is not to eliminate 100% of the environmental risks...

• The goal is practical: to reduce those risks to an acceptable level, dependent on your organization’s internal risk management comfort level

Evaluating Risk

Page 6: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• At the end of our time today, you should be able to evaluate your due diligence procedure and answer the following question:

– Are you doing the right things at the right time (and for the right reasons) to evaluate and manage environmental risk?

At the end of the hour...

Page 7: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Basic Liability Concepts and Environmental Statutes and Defenses

• All Appropriate Inquiry – What is required to qualify for a bona fide prospective purchaser defense

• Environmental Assessment Tools - the ASTM Phase I Practice and other options

– Hot Topic: Vapor Intrusion

Topics for Today

Page 8: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Leaking Underground Storage Tanks (LUSTs)

• Landfills

• Midnight Dumping

• Industry (solvents, paints, hydraulic fluid, petroleum)

• Dry Cleaners

• Asbestos-containing materials; radon; lead in paint and water

• Wetlands, ecological resources, endangered species

• Industrial hygiene, health and safety

• EMF/high voltage power lines

• Off-site treatment, storage, recycling or disposal of wastes or recyclables

• Vapor Intrusion

What can affect a property from an environmental perspective?

Page 9: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Types of contaminants:

– Metals (plating operations, foundries, other industry)

– Chlorinated solvents (dry cleaners, degreasers)

– Petroleum (leaking underground storage tanks, spills)

• Affected media:

– Soil

– Groundwater

What can affect a property from an environmental perspective?

Page 10: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Vapor Intrusion (VI)

– is an indoor air quality condition that occurs when volatilizing chemicals migrate from polluted soil and groundwater in the form of hazardous vapors into overlying buildings – for purposes of ASTM standard, not from naturally occurring substances

– Vapor Intrusion will be discussed in more detail later in this presentation – including why you must pay attention to it, and how to address it

What can affect a property from an environmental perspective?

Page 11: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Current conditions and activities

• Historical conditions (that may or may not have been addressed, with varying degrees of effectiveness)

– Known

– Unknown

• Target Site vs. Adjacent Sites

• Target Sites vs. non-acquired Sites

• Third-Party claims (e.g., current and past employees, neighbors, etc.)

• Governmental Enforcement

Types of Environmental Liabilities

Page 12: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Generally: Environmental Liability is strict, joint and several, and runs with the land.

• Many people don’t realize that….

– ... a purchaser/lessee/operator of contaminated property can be held liable, even though they are not responsible for contaminating the property at issue.

Environmental Liability Framework

Page 13: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• CERCLA (Superfund)

– Comprehensive Environmental Response, Compensation and Liability Act – Federal statute that applies to any release of hazardous substances at a facility.

– Liability can be asserted against Potentially Responsible Parties (PRPs) as follows:

• The current owner or operator of a facility;

• A past owner or operator of a facility at the time hazardous substances were disposed of;

• The person who arranged for hazardous substance disposal; and

• The transporter of hazardous substance to the facility.

Types of Environmental Liabilities

Page 14: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• CERCLA (Superfund) Cont.

– Damages – recovery of costs of response

• Typically allocated between PRPs

– Injunctive Relief

• not available for private parties

• Available to USEPA under Section 106 Order

– Attorneys’ Fees – generally not recoverable

Types of Environmental Liabilities

Page 15: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Statutory Defenses to CERCLA Liability

– Innocent Landowner – Must prove that contamination was caused by 3rd party with whom purchaser has no contractual relationship and “all appropriate inquiry” was performed. (Cannot have prior knowledge.)

– Bona Fide Prospective Purchaser – Avoids CERCLA liability IF all appropriate inquiry performed, disposal on site took place before date of purchase and appropriate care exercised with respect to any discovered contaminants. (Prior knowledge OK.)

• NOTE: See Addendum 1 to PowerPoint, for a more detailed discussion of this defense.

– Contiguous Property Owner – Avoids CERCLA liability for neighbors whose property is contaminated by the offending property.

Types of Environmental Liabilities

Page 16: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Statutory defenses are great…

• But consider…

– What happens if you buy some contaminated property and can establish a defense… but the original “polluter” is long since gone or is judgment-proof…

• YOU STILL OWN CONTAMINATED PROPERTY!

Types of Environmental Liability

16

Page 17: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• The Resource Conservation and Recovery Act (RCRA)

– “Cradle-to-Grave” statute designed to govern the generation, identification, storage and disposal of hazardous waste.

– No private cause of action for a cost recovery claim under the statute, but citizen suits may be asserted against any party for any release of hazardous wastes that currently pose endangerment to health and environment.

– Attorney’s fees can be recovered.

– Injunctive relief available to private parties.

Environmental Liability Framework

Page 18: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• State Environmental Statutes and Common Law Claims

– State “baby Superfund” laws.

– Common law causes of action such as public and private nuisance, trespass, strict liability, ultra hazardous activity.

• Criteria for proving claims are same or less burdensome than criteria for proving CERCLA or a RCRA claim and remedies can be more expansive. Often, these are added to CERCLA/RCRA claims in the same complaint.

• Common law causes of action can sometimes be pre-empted by state or federal law.

– Other state environmental laws, such as Wisconsin’s Hazardous Substance Spill Law, Section 292.11, Wis. Stats.

– Party in “possession or control” of hazardous substances that has been discharged into environment is “responsible party.”

– Owner is in “possession or control” – even if did not cause the release.

Types of Environmental Liabilities

Page 19: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• In a typical deal situation:

– Buyer’s Concern: A purchaser of contaminated property can be held liable, even though it is not responsible for contaminating the property at issue.

– Seller’s Concern: Neither indemnities nor any other contractual provisions can completely exculpate a seller from future liability. CERCLA sec. 107(e), 42 USC sec. 9607(e).

Environmental Liability Framework

Page 20: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Seller’s Side - how do I protect myself from future liability?

– What the Seller Wants

• To leave all environmental liabilities with company or shift them to buyer

• Not to have any surprises!

• Buyer’s Side - how do I investigate a property and define environmental problems?

– What the Buyer Wants

• To have liability only for post-closing matters

• Not to have any surprises!

• Lender’s Side -

– What the Lender Wants

• To avoid environmental liabilities interfering with debt repayment or value of collateral

• Not to have any surprises!

Environmental Liability Framework

Page 21: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• The earlier one becomes aware of environmental risks, the better the chances to become comfortable with those risks and structure the deal accordingly.

Environmental Due Diligence – Overall Objectives

21

Page 22: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Evaluate known potential risks

• Identify previously unknown risks

• Quantify all risks identified

• Consider options for managing risks

Objectives of Due Diligence

Page 23: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Cost

• Timing

• Risk of killing the deal

• Client pushback

Remember: You can buy the same amount of environmental liability for $1

as you can for $1 million...

Common Objections/Challenges

Page 24: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

“My organization doesn’t support my efforts to require/perform robust due diligence”

v.

“My organization is too conservative in evaluating environmental risks”

How Much is Enough?

Page 25: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• ASTM Phase I Environmental Site Assessment (ESA) ASTM Practice E1527-13

• Customized Mini Phase Is

• ASTM Transaction Screen

• Phase I + (customized add-ons/non-scope considerations)

• Compliance Audits

• Phase II Invasive Testing Investigations

• ASTM Vapor Intrusion Assessment Standard E2600-10

Types of Environmental Assessments

Page 26: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• What’s the procedure for a standard Phase I?

– An environmental professional performs historical research using a variety of sources: old aerial photographs, city directories, fire insurance (Sanborn) maps.

– Environmental databases (usually EDR) are used to identify any issues with the property or adjacent land (e.g., LUST databases, NPL sites, RCRA waste generators)

– Freedom of Information Act (FOIA) requests are made to U.S. EPA, Wisconsin DNR or other state equivalent, and local government agencies

– Interviews with current/former site owners, government officials, etc.

– A visual “site reconnaissance” is performed

– The Phase I report identifies “recognized environmental conditions” (“RECs”) or indicates they are absent

Types of Environmental Liabilities

Page 27: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Non-ASTM Considerations

– Asbestos-containing materials; radon; lead in paint and water

– Wetlands, ecological resources, endangered species

– Industrial hygiene, health and safety; indoor air

– EMF/high voltage power lines

– REGULATORY COMPLIANCE

– Former or adjacent sites

– Off-site treatment, storage, recycling or disposal of wastes or recyclables

– Third-Party Liabilities

Types of Environmental Liabilities

Page 28: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• What a Phase I is NOT

– A “clean” Phase I is NOT a guarantee that a site is clean.

– A Phase I may NOT reveal every possible environmental problem on the property, nor does it define the extent of the problem, if any.

– A Phase I is NOT a compliance audit.

– A Phase I does NOT necessarily guarantee that a property purchaser will be able to claim a defense against future environmental liability.

– A Phase I does NOT have eternal life.

– All Phase I reports are NOT created equal.

Types of Environmental Liabilities

Page 29: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• What’s “all appropriate inquiry” and how does it relate to the ASTM Phase I practice?

– Prior to 2002 (the Brownfield Revitalization Act), “all appropriate inquiry” was not defined

– Most professionals used the ASTM Phase I and Phase II Standards … because there was no guidance

– Now… AAI is the official rule, and ASTM has revised its Phase I standard to comply with AAI:

• ASTM E 1527-13

• Copyrighted document available for purchase from ASTM

• They guard this zealously!

Types of Environmental Liabilities

Page 30: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Final Rule for “All Appropriate Inquiry” – 40 CFR Part 312

– Inquiries expanded to past owners or occupants of site, or neighbors prior owners unavailable; former practice usually limited inquiry to current owners.

– AAI must be done by an Environmental Professional (“EP”) - may be PE, PG, or have experience.

– EP may use professional judgment in determining search radius for potential environmental problems from other sites in the area.

– “Catchall category”: EP must consider “commonly known” information about the property (rumors?).

– AAI must be performed within one year of acquiring property and certain elements (interviews, site inspection, lien searches, etc.) must be performed or updated within 180 days from acquisition.

Types of Environmental Liabilities

Page 31: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• AAI Cont.

– Must identify “data gaps” discovered during the investigation and address them when possible.

– Must consider if purchase price reasonably reflects the fair market value of property (i.e., has it been discounted for contamination?)

– AAI may be conducted by one party and transferred to another under certain circumstances.

Caution: While your institution may not require AAI, the client may benefit by performing AAI for use in establishing one or

more CERCLA defenses.

Types of Environmental Liabilities

Page 32: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Recent ASTM Changes to Phase I

• Differences between E 1527-05 and E 1527-13

– Simplified definition of Recognized Environmental Condition

– A new term, Controlled REC (CREC) was added for closed RECs that are managed under an Activity Use Limitation (AUL). This limits the definition of an historic REC (HREC) to closed RECs that have been completely resolved (“clean closure”) with no restrictions.

– Consideration of the vapor intrusion (VI) pathway is now explicitly required (but use of ASTM E 2600-10 not mandated)

– Less discretion on agency file reviews; now required or consultant must explain why such a review is not warranted.

Types of Environmental Liabilities

Page 33: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• 3.2.78 recognized environmental conditions—the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment. De minimis conditions are not recognized environmental conditions.

* New definition not limited to releases only to the ground, ground water or surface water to take into account vapor intrusion.

Revised Definition of REC

Page 34: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Prior definition of an “Historic Recognized Environmental condition,” (HREC) has been revised so that it now refers to a past release that has been addressed to the satisfaction of the applicable regulatory authority without subjecting the property to any required land use restrictions. Section 3.2.42. The new standard also adopts the term “Controlled REC” (or “CREC”) to refer to a past release that has been addressed to the satisfaction of the applicable regulatory authority, but which is subject to the implementation of required land use controls. Section 3.2.18.

Revision of HREC and New Definition of “CREC”

Page 35: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• So, what’s the controversy?

– Under the new definition of CREC, an Activity and Use Limitation (AUL), engineering control (e.g., engineered barrier) is assumed to be in place and functioning, but the EP is not required to make any finding that such is actually the case. Thus, a client may assume that a “Controlled REC” is actually under control, when in fact it is not.

Revision of HREC and New Definition of “CREC”

Page 36: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• E1527-13 affords less discretion to the EP on conducting agency file reviews

• E1527-13 states that regulatory agency files reviews SHOULD be done

• If reviews are not performed, the EP must explain why such a review is not warranted.

Agency File Reviews

Page 37: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Consideration of the vapor intrusion pathway is now explicitly required (but use of ASTM E 2600-10 not mandated)

• Prior versions of E1527 noted “indoor air quality” as a non-scope consideration, which some interpreted as investigation of vapor intrusion

• New definition of “migrate” refers to movement of hazardous substances or petroleum in any form including “vapor in the subsurface.” (sec. 3.2.56)

• Industry anticipated this change for several years, and many consultants already were adding VI investigation to the Phase I scope anyway

• This will likely increase average costs of due diligence as more Phase IIs are recommended to investigate potential VI issues

Vapor Intrusion Now an Included Pathway

Page 38: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• After ASTM E1527-13 was first released, USEPA indicated that for an indeterminate period, it would allow both ASTM E 1527-13 and the previous version, ASTM E 1527-05, to constitute AAI to qualify for CERCLA liability protections. As of October 6, 2014, USEPA finalized a rule clarifying that going forward the newly approved ASTM E 1527-13 standard will be the only acceptable standard for Phase I ESAs to qualify for AAI. See Quarles & Brady Client Update, October 2014.

• “The End of an Era” – EPA adopts final rule accepting only ASTM E1527-13 for AAI.

• As was originally proposed, the final rule requiring exclusive use of ASTM E 1527-13 for AAI has a delayed effective date of October 6, 2015 to allow completion of investigations currently being conducted under the old standard.

• Although exclusive use of ASTM E 1527-13 will not be required for another year, it is best practice to discontinue reliance on ASTM E 1527-05 and to begin using only the new standard going forward.

Which ASTM Practice (-05 or -13) Applies?

Page 39: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• What happens after the Phase I? That depends…

– If the Phase I reveals one or more recognized environmental conditions (RECs), more work is (probably) needed

• Generally a Phase II is the next step

• Remediation may need to be performed

• Possibly pursue an NFR/NFA Letter

• Due Care may need to be taken later

Types of Environmental Liabilities

Page 40: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Phase II Environmental Assessments

– Primary Goal is usually to investigate concerns identified in Phase I

• Testing can be performed for soil, groundwater, soil-gas, and interior air (vapor intrusion)

• Soil testing using Geoprobe, hand augers, etc.

• Groundwater testing using temporary or permanent wells

• Soil gas and/or interior air using probes or vacuum canisters

– Secondary Goal is to delineate extent of any problems

• Even a no-action remedy needs to determine the extent of the problem

• Most states insistent on full delineation before issuing closure letter

• Estimate of remediation costs is almost always desired

Types of Environmental Liabilities

Page 41: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Other environmental assessments:

– ASTM Transaction Screen

– Customized Mini Phase Is (may lead to full Phase I)

– Phase I + (customized add-ons/non-scope considerations)

– Compliance Audits

Critical question is what is needed to satisfy your organization’s comfort/risk tolerance level?

Types of Environmental Liabilities

Page 42: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Evaluating the validity/scope of NFR / NFA or equivalent case closure letters

– Do not assume that just because there is a closure letter in the chain of title that it signifies a “clean bill of health” for the property.

• Limitations for industrial/commercial use or other AULs

• Restrictions on use of groundwater

• Duty to maintain engineered barriers

Types of Environmental Liabilities

Page 43: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

43

• All Appropriate Inquiry still applies

– U.S. EPA has stated that tenant that conducts AAI prior to AAI can achieve Bona Fide Prospective Purchaser status

• Conducting Due Diligence can help set a baseline against claims of tenant harm later

• Also, Due Diligence can warn of any potential development roadblocks or costs (e.g., encountering contamination when redeveloping or renovating)

• Lease should provide for due diligence period, or conduct DD prior to lease under separate access agreement

• Lease should clearly indemnify tenant for pre-lease liability (including business interruption if possible) or any issues not caused by tenant (or at least those caused by landlord)

Due Diligence as a Tenant

Page 44: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Definition: Vapor intrusion is the migration of volatile chemicals from the subsurface into overlying buildings. Volatile chemicals in buried wastes and /or contaminated groundwater can emit vapors that may migrate through subsurface soil and into air spaces of overlying buildings. (USEPA 2002)

• In addition to being part of the ASTM E1527-13 Phase I Standard, government agencies – Federal and State – are focusing more on this, for investigation and mitigation

• Wisconsin DNR now requires that, in order to get case closure, a responsible party must assess for vapor intrusion

• Also, see RR-986 (July, 2014): WDNR’s guidance document on sub-slab vapor sampling procedures

Hot Topic: Vapor Intrusion

Page 45: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know
Page 46: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Vapors can accumulate in dwellings or occupied buildings to levels that may pose short-term or long-term safety hazards, and/or health effects.

• Average person drinks 2 liters of water per day

• BUT – the Average person inhales 20,000 liters of air a day

• Because of this health concern, VI can pose an economic risk to retail development

Why Worry about VI?

Page 47: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Pressure-driven flow

– Building underpressurization

• Stack Effect

• Wind loading

• Ventilation systems

• Barometric pressure

– Diffusion through cracks

How does it work?

Page 48: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know
Page 49: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Source Characteristics

• Soil or groundwater

• Concentration and location

• Biodegradability

• Soil Characteristics

• Air permeability, moisture content, surface cover

• Building Construction

• Foundation type (basement, slab-on-grade, etc.)

• Foundation openings (crack size)

• HVAC system, air exchange rate

• Depressurization

Factors Affecting VI

Page 50: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Sealing openings involves filling in cracks in the floor slab and gaps around pipes and utility lines found in basement walls. Concrete can be poured over unfinished dirt floors.

• Installing vapor barriers involves placing sheets of “geomembrane” or strong plastic beneath a building to prevent vapor entry. Vapor barriers are best installed during building construction, but can be installed in existing buildings that have crawl spaces.

• Passive venting involves installing a venting layer beneath a building. Wind or the build-up of vapors causes vapors to move through the venting layer toward the sides of the building where it is vented outdoors. A venting layer can be installed prior to building construction as well as within existing buildings. It is usually used with a vapor barrier.

Passive Vapor Intrusion Mitigation Methods:

Page 51: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

Tier 4 - Mitigation Solutions

Page 52: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know
Page 53: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know
Page 54: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Sub-slab depressurization (SSD) involves connecting a blower (an electric fan) to a small suction pit(s) dug into the slab in order to vent vapors outdoors. (Most common method.)

• Building over-pressurization involves adjusting the building’s heating, ventilation, and air-conditioning system to increase the pressure indoors relative to the sub-slab area. This method is typically used for office buildings and other large structures.

*Note that active systems require ongoing operation and maintenance (O&M) costs.

Active Vapor Intrusion Mitigation Methods:

Page 55: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

Typical fan and vent pipe

Page 56: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

Biographies

56

Lawrence W. [email protected]

George J. [email protected]

414-277-5537

Page 57: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• CERCLA’S Bona Fide Prospective Purchaser Defense

ADDENDUM #1

57

Page 58: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• CERCLA’s BFPP Defense – Background

• Overview of All Appropriate Inquiry (“AAI”)

– What must be done before purchase of the Property

– What must be done after purchase of the Property

Overview

Page 59: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• 1980 CERCLA

– Strict Liability based on ownership without regard to fault or negligence

• 1986 SARA Amendments

– Added “innocent landowner” (a/k/a “third party”) defense

• 2002 Brownfield Revitalization Act

– Amended Innocent Landowner provision

– Added Contiguous Property Owners

– Added Bona Fide Prospective Purchasers (BFPP)

Background

Page 60: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• What changed with the 2002 Amendments?

– ASTM Phase I practice officially sanctioned as meeting AAI requirements

– Post-purchase continuing obligations were identified

– Required that EPA define AAI

– EPA de-emphasizes Prospective Purchaser Agreements

• And, most importantly...

Background

Page 61: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Dichotomy between ‘truly innocent’ land purchaser (no knowledge of contamination allowed) and ‘bona fide prospective purchaser’ (knowledge of contamination gained through AAI is okay, as long as ‘due care’ is taken post-acquisition) is promulgated and clarified.

Background

Page 62: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• Avoids CERCLA liability IF all appropriate inquiry performed, disposal on site took place before date of purchase and appropriate care exercised with respect to any discovered contaminants (only valid for purchases after January 11, 2002) See 42 U.S.C. sec. 9601(40).

• Property may be subject to CERCLA “windfall” lien if property is cleaned up by U.S. EPA (and it has not recovered its response costs) and property owner would reap a windfall due to increased value of clean property (notice to owner not required).

Bona Fide Prospective Purchaser

Page 63: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• 42 U.S.C sec. 9601 (40):

– Bona fide prospective purchaser — The term “bona fide prospective purchaser” means a person (or a tenant of a person) that acquires ownership of a facility after January 11, 2002, and that establishes each of the following by a preponderance of the evidence:

BFPP Requirements

Page 64: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (A) Disposal prior to acquisition — All disposal of hazardous substances at the facility occurred before the person acquired the facility.

BFPP Requirements

Page 65: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (B) Inquiries —

– (i) In general — The person made all appropriate inquiries into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices in accordance with clauses (ii) and (iii).

– (ii) Standards and practices — The standards and practices referred to in clauses (ii) and (iv) of paragraph (35)(B) shall be considered to satisfy the requirements of this subparagraph.

– (iii) Residential use — In the case of property in residential or other similar use at the time of purchase by a nongovernmental or noncommercial entity, a facility inspection and title search that reveal no basis for further investigation shall be considered to satisfy the requirements of this subparagraph.

BFPP Requirements

Page 66: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (C) Notices — The person provides all legally required notices with respect to the discovery or release of any hazardous substances at the facility.

BFPP Requirements

Page 67: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (D) Care — The person exercises appropriate care with respect to hazardous substances found at the facility by taking reasonable steps to—

– (i) stop any continuing release;

– (ii) prevent any threatened future release; and

– (iii) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance.

(N.B. – ASTM standard E2790-11 “Standard Guide for Identifying and Complying with Continuing Obligations”)

BFPP Requirements

Page 68: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (E) Cooperation, assistance, and access — The person provides full cooperation, assistance, and access to persons that are authorized to conduct response actions or natural resource restoration at a vessel or facility (including the cooperation and access necessary for the installation, integrity, operation, and maintenance of any complete or partial response actions or natural resource restoration at the vessel or facility).

BFPP Requirements

Page 69: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (F) Institutional control — The person—

– (i) is in compliance with any land use restrictions established or relied on in connection with the response action at a vessel or facility; and

– (ii) does not impede the effectiveness or integrity of any institutional control employed at the vessel or facility in connection with a response action.

BFPP Requirements

Page 70: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (G) Requests; subpoenas — The person complies with any request for information or administrative subpoena issued by the President under this chapter.

BFPP Requirements

Page 71: Evaluating and Managing Environmental Risk in Business Transactions: What Every Company Needs to Know

• (H) No affiliation — The person is not—

– (i) potentially liable, or affiliated with any other person that is potentially liable, for response costs at a facility through—

• (I) any direct or indirect familial relationship; or

• (II) any contractual, corporate, or financial relationship (other than a contractual, corporate, or financial relationship that is created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services); or

– (ii) the result of a reorganization of a business entity that was potentially liable.

BFPP Requirements

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• What’s “all appropriate inquiry”?

– Prior to the Brownfield Act, all appropriate inquiry was not defined

– Most professionals used the ASTM Phase I and Phase II Standards … because there was no guidance

– Now… AAI is the official rule, and ASTM has revised its Phase I standard to comply with AAI:

• ASTM E 1527-13

• Copyrighted document available for purchase from ASTM

• They guard this zealously!

All Appropriate Inquiry

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• Final Rule for “All Appropriate Inquiry”

– AAI must be performed within one year of acquiring property and certain elements (interviews, etc.) must be performed or updated within 180 days from acquisition.

– Inquiries expanded to past owners or occupants of site, or neighbors prior owners unavailable; former practice usually limited inquiry to current owners.

– AAI must be done by an Environmental Professional (“EP”)- may be PE, PG, or have experience.

– EP may use professional judgment in determining search radius for potential environmental problems from other sites in the area.

All Appropriate Inquiry

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– Must identify “data gaps” discovered during the investigation and address them when possible.

– Filling “data gaps” may even require invasive testing at the ‘Phase I’ stage (previously unheard of!).

– Continuing duties on part of owner: to achieve AAI, owner must comply with CERCLA requirements for taking steps to prevent or stop a release, and prevent exposure once a release has occurred.

– AAI may be conducted by one party and transferred to another under certain circumstances.

– “Catchall category”: EP must consider “commonly known” information about the property (rumors?).

All Appropriate Inquiry

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• AAI is not required when local governments acquire land involuntarily:

– Involuntary taking of property, through tax foreclosure or eminent domain, provides inherent liability protections (but continuing obligations apply)

But –

• AAI is required for local governments acquiring property through donation or for any money

Notes for Local Governments

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• To qualify as a BFPP for protection from CERCLA liability, the landowner must:

– Acquire the Property after January 11, 2002

– Perform AAI prior to acquisition of the Property

– Acquire the Property after the disposal of hazardous substances

– Not be affiliated with any other person potentially liable for response costs, and

– Comply with continuing obligations

Summary

©2014 Quarles & Brady LLP. This document provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.