Bona Fide Purchasers of Contaminated Land Beware – All Appropriate Inquiry is Not Enough
The Bona Fide Prospective Purchaser ("BFPP") provision of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") gives liability protection to buyers of contaminated land. The protections afforded to BFPPs are intended to courage Brownfields redevelopment as a means to get contaminated sites cleaned up. Anyone involved in a real estate transaction on a property that may have environmental challenges knows the drill – All Appropriate Inquiry ("AAI") into the site must be conducted. At the very least, that means hiring an environmental consultant to prepare a Phase I Environmental Site Assessment. Depending on the findings, it could also include Phase II sampling. But there are other elements to the BFPP defense. Those other elements recently became abundantly clear to one developer who learned the hard way.
In Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 746 F. Supp. 692 (D.S.C. 2010), a developer sought recovery of cleanup costs associated with a former fertilizer manufacturing plant it acquired. Consistent with AAI, the developer’s environmental consultant performed Phase I and Phase II work. After the purchase, the developer demolished many of the above-ground improvements on the property and began remediating the site. Some of the defendants in the case challenged whether the developer had satisfied all of the elements of the BFPP defense. Those elements are: (a) disposal of hazardous substance occurred prior to acquisition; (b) the purchaser conducted AAI; (c) the purchaser provided all required notices with respect to the discovery or release of any hazardous substance; (d) the purchaser exercises appropriate care with respect to hazardous substances found; (e) the purchaser cooperates with agencies; (f) the purchaser complies with institutional controls; (g) the purchaser complies with information requests or administrative subpoena; (h) the purchaser is not affiliated with a potentially responsible party.
The court decided that developer was not a BFPP, as it claimed, and was responsible for 5% of the cleanup costs based on the following facts: (1) The developer demolished some structures, which allowed rainwater to contact cracked sumps containing hazardous substances. As a result, disposal of hazardous substances had occurred after the developer took possession of the property; (2) The developer was "affiliated" with other potentially responsible parties ("PRPs") because the developer indemnified them and, more significantly, attempted "to discourage EPA from recovering response costs covered by the indemnification"; and (3) The developer did not exercise appropriate care because it failed to address recognized environmental conditions ("RECs") that were identified in the environmental site assessment as well as other potential site hazards.
Those considering purchasing contaminated property should not be put off by the Ashley II case. The court’s decision to hold the developer liable as a current owner of the property was made on the unique facts before it. Developers should act with prudence in planning for demolition, construction, and other site activites given the broad definition of "disposal" in CERCLA. In addition, consideration must be given to the effect of indemnity provisions and any interactions with government agencies regarding other PRPs. Finally, it is critical that all RECs be addressed, beginning no later than the time the purchaser acquires the property and continuing for the duration of its ownership.
Thus, future purchasers of contaminated sites should beware of – but don’t fret about – the Ashley II case.