EPA Clarifies Superfund Liability Protections for State and Local Governments

The U.S. Environmental Protection Agency (EPA) issued important guidance (EPA's Guidance) on June 15, 2020, clarifying the recently amended exemption of state and local governments from the definition of an "owner" responsible for remediating contaminated properties under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in certain acquisition scenarios or circumstances.

State and local governments often deliberately acquire contaminated properties to assist with redevelopment efforts that can financially, environmentally, and socially transform and revitalize their communities. However, state and local governments are at risk of being held responsible to remediate the historic contamination at these properties as the current owner under CERCLA. EPA's Guidance confirms that state and local governments can mitigate this risk by performing due diligence prior to acquisition and taking certain steps after the closing to secure and maintain CERCLA's bona fide prospective purchaser (BFPP) and innocent landowner (ILO) protections available to other prospective purchasers.

In many instances, state and local governments acquire contaminated properties in emergency or unplanned situations and are, therefore, unable to perform pre-acquisition due diligence to secure landowner liability protections under CERCLA. Prior to 2018, state and localities could satisfy an exemption from the definition of an owner responsible to remediation historic contamination if they had involuntarily acquired the property. This term does not adequately capture all unplanned or emergency situations in which a state and local government would acquire a property.

The 2018 Better Utilization of Investment Leading to Development Act (BUILD Act) amendments to Section 101(20)(D) of CERCLA clarified that the owner/operator protections were no longer dependent on acquisitions being involuntary, and provided a more specific, albeit limited, list of circumstances in which state and local governments are exempt from the definition of an "owner" responsible for remediation of historic contamination. Even with these changes, the Section 101(20)(D) exemption from CERCLA liability for local governments is fairly limited, and would apply only under the following circumstances:

• through seizure or in connection with law enforcement activity
• bankruptcy
• tax delinquency
• abandonment or other circumstances in which the government takes title by virtue of its function as sovereign

However, these new categories of acquisitions and other terms in CERCLA have raised several new questions, which EPA's Guidance clarified. This Holland & Knight alert discusses the questions that EPA clarified it its latest guidance.

Which Entities Qualify as a "Unit of Local Government" under CERCLA?

Many state and local governments establish entities, such as land banks and redevelopment authorities, to assist with the acquisition, remediation, and redevelopment of contaminated and underutilized properties. Since "State and local governments" are not defined under CERCLA, one critical question is which units of local government, if any, qualify for the Section 101(20)(D) exemption from CERCLA landowner liability. EPA's Guidance indicated that it will turn to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. Part 200, to determine whether a particular unit of state or local government qualifies or not. EPA confirmed that it intends to recognize redevelopment authorities, land banks and community development agencies as a "local government" under CERCLA § 101(20)(D).

Which Additional Governmental Acquisitions Fall Under the Local Government Exemption from CERCLA Owner Liability?

Furthermore, EPA did not provide a definition to clarify what it intended by a state or local government taking title "by virtue of its function as sovereign" in the BUILD Act amendments to Section 101(20)(D). EPA indicated that it is interpreting this language as any acquisition that is a uniquely governmental function, such as the following:

• tax lien foreclosures
• tax increment financing transactions
• escheat
• eminent domain, especially when that authority is used to create parks, recreation, civic buildings, mass transit, infrastructure, utility projects, and the like
• holding an unexercised right of way
• demolition lien foreclosures
• acting as a conservator or a receiver
• transfers between governmental entities related to tax delinquent properties, as enumerated in the receiving agency's enabling statute

Does an Acquisition by Means of a Purchase, Inheritance, Bequest, Gift or Donation Qualify as "Taking Title by Virtue of its Function as Sovereign"?

When an acquisition is by means of a purchase, inheritance, bequest, gift or donation, EPA's Guidance advises local governments to look to the elements of the BFPP or IPO protections to CERCLA liability to establish and maintain their liability protections. EPA points local governments to its 2019 Common Elements Guidance (Common Elements Guidance) to understand what steps must be taken prior to taking title, and what steps must be taken after acquiring title.

Briefly, to secure the BFPP protection, the locality must establish the following pre-acquisition criteria:

• performance of an "all appropriate inquiries," and
• not being affiliated with a responsible party or potentially liable party

To maintain the BFPP protection, the locality must satisfy the following post–acquisition criteria:

• do not dispose of contamination post-acquisition
• do not impede the integrity or effectiveness of institutional controls
• comply with land use restrictions
• exercise appropriate care by taking reasonable steps with respect to hazardous substances affecting the property
• provide full cooperation, access and assistance to remedial parties and governmental agencies with respect to ongoing remedial efforts
• comply with information requests and subpoenas, and
• provide legally required notices for any releases of contamination

EPA's Common Elements Guidance describes each of these requirements in detail. See Holland & Knight's previous alert for a more in-depth summary of EPA's Common Elements Guidance and the nuances of each of these requirements.

How Involved Should Local Governments Be in the Development and Future Operations at Their Properties?

EPA's Guidance makes special effort to discuss the role of local governments in implementing, monitoring and enforcing compliance with institutional controls, such as deed restrictions, environmental easements, and building and zoning codes. EPA expects local governments to work with developers, prospective buyers and tenants, and other parties that will be engaged in the development and operational future of the site to ensure that institutional controls are understood and integrated into the construction and development of their properties. In essence, EPA confirms that municipalities must actively participate in construction and development to ensure that the continuing obligations are executed to avoid losing their landowner liability protections against CERCLA liability.

Do Windfall Liens Apply to Local Governments that Satisfy the BFPP?

Whether a local government owner qualifies as a BFPP or not, EPA reminded local governments that EPA's expenditures of response costs at properties acquired by local governments could be subject to windfall liens if EPA incurs any response costs that increase the fair market value of their properties. EPA pointed localities to its 2002 guidance on windfall liens and to 2003 joint guidance from EPA and the U.S. Department of Justice.

When Does the Innocent Landowner Exemption to CERCLA Liability Apply to Local Governments?

EPA Guidance indicates that the ILO defense may be appropriate for local governments when the contamination was caused solely by the act or omission of a third party and the locality exercised due care. This is particularly appropriate in situations where the locality acquired title to the property via escheat, an involuntary transfer or acquisition, or eminent domain. EPA encouraged local governments to review its Common Elements Guide closely to understand the due care requirements with respect to contamination that the locality did not cause but which remains on the property.

Are There any Unique Enforcement Avoidance Tools for Local Governments?

Finally, EPA discussed several topics related to enforcement avoidance tools that local governments can utilize. EPA noted that there is an enforcement bar under Section 128(b) of CERCLA for cleanups that are performed in compliance with a state response program. EPA also observed that state and local governments will not be liable for costs and damages as a result of actions taken in response to an emergency under CERCLA § 107(d)(2), and that local governments will be eligible for reimbursement of costs for temporary emergency measures (up to $25,000) under CERCLA § 123.

For more information or questions regarding the EPA's Guidance, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.