July 2011 – The Importance of Thorough Diligence for Environmental Risk

The importance of thorough diligence for environmental risk was highlighted in a recent Kentucky federal court decision for 500 Associates, Inc. v. Vermont American Corporation that involved the cleanup of a former saw blade and hand tool manufacturer.   Simply completing due diligence is not sufficient to meet the “due care” obligations under the “innocent landowner” defense in Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§9601 et seq.

Background

During its extensive operating history from 1949 to 1986, the manufacturer generated various hazardous wastes associated with its electroplating and heat treatment operations (500 Associates, 2011).  When the manufacturing facility closed in 1986, a group of commercial real estate developers entered into a contract to purchase the property and retained an environmental consultant to perform a cursory environmental audit.  The audit found chromium contamination existed at the site; however, soil samples were collected and the auditor did not recommend further testing or review of publically available records to determine the extent of potential contamination.  This review would have revealed that the manufacturer released untreated wastewater and hazardous substances on numerous occasions during its ownership (Rubrecht, 2011).

In 1990, after the developer purchased the site, it demolished a portion of a building in the area of the former electroplating and waste treatment operations, and moved concrete and exposed impacted soils in the process (500 Associates, 2011).  The same year, the developer agreed to sell the property to an advertising agency, which hired its own consultant to conduct an environmental audit.  This audit included a review of public records, and sampled soil and groundwater.  The audit revealed various contaminants in soil and groundwater including the presence of hazardous substances below the concrete floors that the developer demolished.  In 1991, a third consultant was hired by the developer, only this time when soil and gas samples confirmed hazardous substances, the consultant concluded that the source was another property.  The advertising agency ultimately withdrew from the purchase agreement.

Outcome

The developer did not report any of the audit results to the Kentucky Department of Environmental Protection (DEP) and failed to take remedial action (Rubrecht, 2011).  A four year investigation of the property was initiated by the DEP in 1994, which subsequently filed an enforcement action against the developer and manufacturer.  After a lengthy legal process, almost 20 years after the initial contract between the developer and the manufacturer, the Kentucky Court of Appeals issued a final decision in the enforcement action finding substantial evidence to uphold the determination that the developer failed to exercise “due care” in the management of the property and thus, was not entitled to the benefit of an “innocent purchaser” defense based the inadequate initial investigation (Rubrecht, 2011).  Furthermore, the developer failed to exercise due care when it demolished structures on the site and then took no action to remedy the property once it knew of the contamination.  Two years later, the DEP issued a final cleanup order, which determined that the manufacturer was completely responsible for characterizing and remediating the release of contaminants.

As for the developer, in a cost-recovery action pending in federal district court in Kentucky, the court concluded that the developer could not recover its costs because CERCLA “does not sanction willful or negligent blindness.”  While the developer was not required to characterize or remediate the site, it was civilly fined and denied recovery of its costs associated with environmental investigation of the site (Rubrecht, 2011).  This penalty does not include the inconvenience of time and expense of consulting and attorney fees to defend their actions from the contract to purchase the site in 1986 until the district court rendered a decision in 2011.

The developer’s failure to exercise due care is an important lesson to be learned for purchasers and developers of distressed properties, licensed remediation specialists, environmental consultants preparing Phase I reports, lending institutions requesting or relying upon Phase I reports, and anyone involved in brownfields transactions (Rubrecht, 2011).  The court concluded that a corporation was not entitled to recover costs under the CERCLA of 1980, 42 U.S.C.S. § 9607(a)(4)(B), because the costs could not be shown to have furthered the response cleanup of property, rather the costs were incurred for the corporation’s own business purposes or were incurred in the course of attempting to convince the DEP that the corporation had no liability (500 Associates, 2011).  The extra expense to complete thorough due diligence as during a real estate transaction reduces risk and cost.

References

Rubrecht, G.L. (June 1, 2011). Federal Court Denies Cost Recovery, Finding Purchaser Acted With Willful Blindness. Retrieved June 23, 2011, from https://eem.jacksonkelly.com/2011/06/page/2/

500 Associates, Inc. v. Vermont American Corporation, 3:96CV-847-S (M.D. Ken. 2011)

For more information about reducing your risk, contact Amy Bauer at 251-533-6949 or amy.bauer@ehs-support.com.

 

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