No Good Deed Goes Unpunished: The CERCLA BFPP Defense in the Wake of Ashley II

In 2002 the U.S. Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act (the 2002 Brownfields Amendments), offering property owners the specter of relief from the joint, strict and several liability scheme of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund). It did so by adding certain Landowner Liability Protections (LLPs) under the Act: the bona fide prospective purchaser (BFPP) defense (42 U.S.C. §§ 9601(40) and 9607(r)) and the contiguous property owner (CPO) defense (42 U.S.C. § 9607(q)), and a modified “innocent landowner” defense (42 U.S.C. § 9601(35)(B)(i)(II)). The BFPP defense is particularly noteworthy because it explicitly allows a purchaser to buy land with knowledge that it is contaminated, yet have a potential defense to federal Superfund liability.¹

In the intervening eight years, neither EPA nor the courts have done much to clarify the scope of the LLPs or to provide a roadmap regarding how to maximize the likelihood of qualifying for any of these protections. Now, at least one trial court has offered some guidance on the BFPP defense and, in the process, probably made these protections even more ephemeral than ever.² In fact, the most likely outcome is more litigation between the parties as they have even more issues about which to argue.

Background of the Case

Ashley II of Charleston, LLC vs. PCS Nitrogen, Inc. et al., 2010 U.S. Dist. LEXIS 104772 (Civ. Action No. 2:05-cv-2782-MBS) (D.S.C. Oct. 13, 2010), decided by the U.S. District Court for the District of South Carolina on October 13, 2010, involved a number of cost recovery and contribution actions by current and former owners and operators of 43 acres of industrial land in Charleston, South Carolina. Phosphate fertilizer plants had operated on and near the site since the late 1880s and had caused extensive contamination, including lead, arsenic, polyaromatic hydrocarbons (PAHs) and acidic (low pH) conditions. The Environmental Protection Agency (EPA) determined that the site met the requirements for initiating a Non-Time-Critical Removal Action under the National Contingency Plan (NCP). While there are a number of interesting CERCLA issues in the case, the case is particularly noteworthy for its analysis of what might be required to qualify for the BFPP defense under the 2002 Brownfields Amendments.

Ashley II of Charleston, LLC (Ashley) was a sophisticated brownfields redevelopment company that had purchased the site shortly after passage of the 2002 Brownfields Amendments. Ashley intended to redevelop the site into a mixed-use project. It conducted a Phase I Environmental Site Assessment (ESA) prior to purchasing the Holcombe and Fair Parties’ (27.62 acres) portion of the site in 2003. Ashley promptly contacted EPA to determine whether EPA needed any “specific cooperation, assistance, access or the undertaking of any reasonable steps” on the site. EPA sent Ashley an information request in 2004, to which Ashley promptly responded. Ashley collected over 450 soil samples to characterize and delineate known environmental conditions on the site. Ashley secured the site by providing access controls (fencing, gates and “no trespassing” signs) and periodic inspections. A contractor for EPA had conducted Phase I and Phase II Remedial Investigations between 1999 and 2001, and EPA had published an initial remediation plan in October of 2005. Ashley provided access to EPA in 2007 and submitted revised remediation plans in March and October of 2008.

Ashley conducted a Phase I Environmental ESA prior to purchasing the Allwaste (2.99 acres) portion of the site in 2008. This Phase I ESA identified the concrete pads and sumps on the site as “Recognized Environmental Conditions” and observed that there was evidence of staining and cracks, prior spillage, and elevated levels of contaminants in the soil and ground water. In total, Ashley spent approximately $195,000 assessing the environmental conditions on the site and estimated that cleanup would cost approximately $8-9 million.

In June of 2008, shortly after taking title, Ashley retained a consulting firm to demolish the remaining structures on the Allwaste parcel, but did not remove the underground structures, including cement pads, sumps, trenches and underground pipes. Runoff was able to collect in these structures and, according to the court, overflow with some degree of regularity. Ashley did not retain its own consultant to evaluate the sumps until September of 2009, and that consultant concluded that the sumps were not leaking. Ashley also did not assess the contents of a debris pile that it had been aware of since 2006, or remove this debris pile which contained hazardous substances, until 2008.

As part of its agreement to acquire the site, Ashley had also agreed to release and indemnify the prior owners, the Holcombe and Fair Parties, from all environmental claims, including response costs under the Environmental Laws.³ Upon learning that EPA was considering bringing cost reimbursement claims against the Holcombe and Fair Parties, Ashley contacted EPA, saying such an action would discourage Ashley’s future development activities.

In September 2005 Ashley had sued PCS Nitrogen, Inc.,⁴ a prior owner/operator of the site, seeking a declaratory judgment that PCS was liable for the expected remediation costs and for Ashley’s previously incurred costs. PCS, in turn, brought contribution claims against Ashley and several former owners and operators of the site,⁵ claiming that they were Potentially Responsible Parties (PRPs) and had liability for the environmental conditions on the site. Several of those parties filed counterclaims or cross-claims against the other parties. The court bifurcated the case into liability and allocation phases.

The court rejected PCS’s argument that the harm was divisible or that there was a reasonable basis for apportionment of those costs under the Supreme Court’s Burlington Northern⁶ decision. Instead, the court used equitable factors in the contribution action to allocate those costs among the parties. The court ultimately concluded that the following parties had liability for the listed percentages of the cleanup costs at the site:

Ross (fertilizer plant owner for 60 years, 1906-1966) 45%

PCS (conducted manufacturing operations for six years)⁷ 30%

Holcombe and Fair Parties (former owners who engaged in earthmoving) 16%

RHCE (current tenant) 1%

Allwaste (former owner) 3%

Ashley⁸ (current owner) 5%

City of Charleston (former right-of-way holder) 0%

Key Holdings Relating to the BFPP Defense

The court analyzed in detail whether Ashley qualified as a BFPP under the 2002 Brownfields Amendments. It concluded that Ashley had satisfied five of the eight elements⁹ of the defense, but had failed to satisfy the remaining three. A number of the court’s conclusions are troubling for parties hoping to qualify for the BFPP defense in the future.

Whether All Disposals Occurred Before Taking Title. The District Court concluded that “disposals” were likely to have occurred after Ashley tore down the structures on the Allwaste parcel, leaving the sumps in place and allowing them to fill with rainwater. The court appeared to be particularly troubled by the fact that Ashley did not test under the concrete pads, sumps or trench to determine if the soil beneath these structures was contaminated. Ashley attempted to offer expert testimony that no disposals had occurred, but this testimony was stricken at trial. Accordingly, the court found that Ashley had not met its burden of proof¹⁰ that no disposals had occurred after it acquired the site. In other words, the new property owner must be prepared to prove a negative – that “no disposals” occurred.

It is particularly noteworthy that the court appeared to interpret “disposals” and “releases” differently. On a separate element of the defense – whether Ashley had provided all legally required notices – Ashley’s position was that no releases of hazardous substances had occurred that would have required notice to EPA or the state environmental agency. The court agreed that the record did not establish that any releases had occurred subsequent to Ashley’s acquisition of title. Accordingly, the court concluded that Ashley had satisfied its burden of proof on this element of the defense.

Whether the Purchaser Exercised Appropriate Care. Pointing to EPA’s Common Elements Guide¹¹ and existing case law on “due care,” the court concluded that Ashley had not satisfied the “appropriate care” element of the BFPP defense. The court appeared to be particularly troubled by the fact that Ashley had not cleaned out and filled the sumps on the Allwaste parcel when it demolished the above-ground structures, but had instead left them exposed to the elements. Ashley’s decision to test, clean and fill the sumps in 2009 came too late, according to the court, to prevent possible releases. The court was also troubled by Ashley’s failure to prevent a debris pile from accumulating, to investigate the contents of that debris pile, or to remove the debris pile for over a year. The court considered these failures to be a lack of “appropriate care.” Ashley’s failure to maintain the crushed rock on the site, which was serving as a “cap” over much of the arsenic and lead contamination, was additional evidence of the lack of “appropriate care” in the court’s view.

Whether the Purchaser Was a Potentially Responsible Party or Affiliated With a Potentially Liable Party. In the aspect of the decision that is probably most troubling, the court concluded that Ashley had not met its burden of proof that it was not a PRP or affiliated with PRPs. First, apparently ignoring the language in section 9607(r) of the statute,¹² it pointed to the fact that current owners and operators of a facility are liable for response costs, and that Ashley was the current owner of a majority of the site where hazardous materials were still leaching through the soils. Second, the court determined that Ashley’s efforts to dissuade EPA from recovering response costs from the Holcombe and Fair Parties, the prior owners whom Ashley had indemnified, revealed “just the sort of affiliation Congress intended to discourage.” Ashley II, slip op., at 103. This so-called affiliation precluded application of the BFPP defense.

What the Case May Mean for Future Brownfields Transactions

While Ashley II is binding case law only in the state of South Carolina, this decision is likely to have a significant chilling effect on future brownfields transactions throughout the country. If a sophisticated brownfields developer, which cooperated fully with the EPA and state environmental agency and which responsibly investigated the condition of the property, cannot qualify for the BFPP defense, then who can? Among other things, a number of determinations made by the court need to be clarified in future decisions, EPA guidance or congressional amendments to CERCLA if the BFPP defense is ever going to provide meaningful protection to brownfields redevelopers.

“Disposal.” The Ashley II court interpreted the phrase “disposal” to mean something more than “releases” or “threatened releases” that must be reported to regulatory officials.¹³ Pointing to the Fourth Circuit’s decision in Nurad, Inc. v. William E. Hooper & Sons Co., 966 F.2d 837 (4th Cir. 1992), the court suggested that “disposal” does not have to include active involvement in dumping or placement of hazardous waste on a site, but could include spillage or leakage of the waste, or movement or dispersal of the waste. So, is passive migration of existing contamination through soil or groundwater enough to constitute “disposal”? If a broad interpretation of this phrase is upheld, in which the continued leakage or passive migration of contamination is sufficient to constitute “disposal,” then virtually no owner of a brownfields site will ever qualify for the BFPP defense. Surely, this cannot be what Congress intended when it enacted the BFPP defense.

Appropriate Care/Due Care. Despite finding earlier that no “releases” had occurred on the site after Ashley had acquired title, the court then determined that Ashley had not complied with the “appropriate care” elements of the defense. The “appropriate care” element of the defense is focused on stopping any continuing releases, preventing any threatened future releases, and preventing or limiting human, environmental or natural resource exposure to any previously released hazardous substance. In this regard, the court appears to have used the terms “disposals” and “releases” interchangeably. The court was influenced in part by the fact that Ashley’s consultant had identified the sumps and concrete pads as recognized environmental conditions (RECs). Is the REC designation (which simply means the presence or likely presence of hazardous substances or petroleum products under conditions that indicate an existing release, a past release, or a material threat of a release) now going to be enough to trigger heightened appropriate care requirements? What if the consultant had discussed these features but not designated them as a REC?

In light of the court’s broad interpretation of Ashley’s “appropriate care” obligation, it will behoove every brownfields redeveloper to examine its site carefully to determine whether there are any existing structures, waste piles or other areas of concern that may be contributing to continuing releases, threatened future releases, leakage or passive migration on the site and to address those threats promptly. While the site in question had been contaminated for more than 100 years, the court seemed particularly troubled by the fact that Ashley took a couple of years to sample, clean and fill underground sumps and to remove a debris waste pile, and that it failed to maintain the crushed rock as an adequate cover or cap on portions of the site.

The court also found that the former owners, the Holcombe and Fair Parties, had failed to exercise “due care” by waiting to put crushed stone on various parcels until those parcels had been leased, by failing to inform environmental authorities about the contamination and by failing to properly maintain certain stormwater detention ponds. Ashley II, slip op., at 88-89.

Affiliation Issue. Prospective purchasers will need to consider seriously whether they should release and indemnify a party who is clearly a PRP under CERCLA. It is not clear from the Ashley II decision whether every environmental indemnification might be considered to be proof of “affiliation” in future cases. Assuming that the mere existence of an environmental indemnity does not defeat the defense, the new owner should certainly refrain from taking any action with the regulators that might be construed as discouraging them from taking enforcement action against a PRP, even if that means that the new owner will be forced to honor an environmental indemnity that it has entered into in order to facilitate the sale.

Grading/Soil Movement. While not discussed in the sections of the opinion dealing with the BFPP defense, the court discusses elsewhere whether grading, excavating and proof rolling of contaminated soil could be sufficient to constitute “disposal,” thereby making the party engaging in those activities a PRP. The court concluded that it could. Ashley II, slip op., at 68-69. Most brownfields redevelopers will need to move potentially contaminated dirt around a site. If they do so responsibly, will this simple action be enough to void the BFPP defense? If so, virtually no one will ever qualify for the BFPP defense.

LURs/Institutional Controls. While the court concluded that Ashley had met its burden of proof on this element of the defense, it left open the question of what it means to be “in compliance with any land use restrictions” and to not impede “the effectiveness or integrity of any institutional controls.” Ashley’s environmental representative argued that there were no land use restrictions or unusual institutional controls in place on the site, and that it was in compliance with any controls that were being used. The court concluded that Ashley had met its burden of proof on this issue. This element of the defense could be more troublesome in future cases. For example, over the past couple of years, there has been a heated debate among the regulated community about the meaning of the term “land use restrictions,” and it seems reasonable to suggest that the court’s conclusion is consistent with the “narrow view” on this issue. In particular, the court did not consider the crushed stone, which constituted an engineering control on the site, to be a land use restriction.

Conclusion

Ashley II has now made it much more difficult to redevelop contaminated brownfields sites. It is clear that there are many potential pitfalls in trying to qualify for the defense, and that other PRPs and the court will probe every potential weakness in the defense. Congress, EPA and the courts should strongly consider what further guidance may be necessary to give the BFPP defense real teeth in order to satisfy its intended purpose. In the meantime, for anyone considering redevelopment of a seriously contaminated site, it would be prudent to obtain a “reasonable steps” letter from the EPA and to avoid incurring significant assessment and cleanup costs unless you are prepared to spend substantial sums litigating your entitlement to recoup those costs from the truly responsible parties.

¹ It is important to note that there is no automatic process for qualifying for the bona fide prospective purchaser defense. In other words, conducting “all appropriate inquiries” prior to taking title to the property and trying to comply with the seven other elements of the defense may not be enough. At best, whether one qualifies for the defense or not will only be determined in court after a trial.

² Another recent court decision, 3000 E. Imperial, LLC v. Robertshaw Controls Co., 2010 U.S. Dist. LEXIS 138661 (C.D. Cal. 2010), found that a purchaser exercised “appropriate care” and satisfied the BFPP defense after excavating underground storage tanks promptly.

³ It is interesting that the court found that one of the indemnity provisions, which was capped at an overall indemnity amount of $2.7 million, and which required cost sharing for the first $400,000 in expenses, had not been triggered. That provision only applied if EPA brought a claim against the prior owners. In this case, Ashley, the current owner, had brought the claims.

⁴ The court found PCS to be the successor-in-interest to a former site owner, Columbia Nitrogen Corporation.

⁵ These parties included Ross Development Corporation, the DSM Parties, the Holcombe and Fair Parties, Allwaste, RHCE and the City of Charleston, South Carolina.

⁶ Burlington Northern & Santa Fe Railway Co. et al. v. United States, 129 S.Ct. 1870 (2009).

⁷ Ross was a dissolved corporation, but actions had been brought against it alleging that it had illegally disgorged itself of assets knowing that a cleanup action was pending.

⁸ Because of its indemnity agreements with the Holcombe and Fair Parties and Allwaste, Ashley may ultimately be liable for 24 percent of the remediation costs at the site.

⁹ The eight elements of the BFPP defense include: (1) all disposal of hazardous substances must have occurred prior to acquisition of the facility; (2) the person must have conducted “all appropriate inquiries”; (3) the person must have provided all legally required notices regarding the release of hazardous substances at the facility; (4) the person must have exercised “appropriate care” with respect to hazardous substances by taking “reasonable steps” to stop continuing releases, prevent threatened future releases, and prevent or limit human or natural resource exposure; (5) the person must have provided full cooperation, assistance and access to persons authorized to conduct response actions; (6) the person must be in compliance with land use restrictions and not impede the effectiveness or integrity of any institutional controls; (7) the person must comply with any information requests or administrative subpoenas; and (8) the person must not be potentially liable, or affiliated with any person that is potentially liable for response costs.

¹⁰ The statute provides that the proponent of the defense must establish each element of the defense by a preponderance of the evidence. See 42 U.S.C. § 9601(40).

¹¹ EPA Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability (“Common Elements”) (March 6, 2003).

¹² Section 9607(r)(1) provides that “a bona fide prospective purchaser whose potential liability for a release or threatened release is based solely on the purchaser’s being considered to be an owner or operator of a facility shall not be liable as long as the bona fide prospective purchaser does not impede the performance of a response action or natural resource restoration.”

¹³ In fact, the court found that “[t]he record does not establish that any releases occurred on the Site subsequent to Ashley acquiring ownership.” Ashley II, slip op., at 99 (emphasis added).