Cleanup Liability Discussion

The following discussion is intended to be an introduction to these issues. R&W suggests all parties consult with competent legal counsel regarding all cleanup liability issues.

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) created strict, joint, and several clean up liability for owners and operators of property affected by hazardous substances. Originally, there were only three defenses to this liability: acts of God, acts of war, or an act or omission of a third party. Amendments to CERCLA in 1986 and 2002 created more useful defenses to CERCLA liability. Note that although secured creditors were exempt from the definition of owner and operator under certain conditions, some courts did impose liability on some secured creditors.

In 1986, the Superfund Reauthorization and Amendment Act (SARA) modified the CERCLA third party defense to include innocent purchasers, governmental entities that acquire land by involuntary transfer, condemnation, eminent domain, and those who acquire real estate by inheritance. SARA also created defenses for secured lenders. The secured creditor and involuntary acquisition by governmental entity defenses were strengthened in 1996 by the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act.

Due to the limited usefulness of these defenses and the growing realization that CERCLA and similar state laws were a major impediment to redevelopment of brownfield real estate, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act. These amendments to CERCLA modified the "innocent landowner" defense and created the "contiguous property owner" and "bona fide prospective purchaser" defenses. These three defenses are available to all prospective purchasers and tenants of real estate. Therefore, careful redevelopment of brownfield and other contaminated property is possible without incurring cleanup liability for pre-existing contamination.

Innocent Landowner Defense

The "innocent landowner" defense (ILD) was created by SARA in 1986 and was significantly modified by the Small Business Liability Relief and Brownfields Revitalization Act in 2002. The foundation of ILD is performing "all appropriate inquiry" (AAI) prior to purchasing or leasing real estate. SARA included scant guidance on the meaning of AAI. In an attempt to better define the scope of AAI, ASTM International issued its first Standard Practice for Phase I Environmental Site Assessments (ESAs) in 1993. The ASTM International Standard, which was modified in 1994, 1997, 2000, and 2005, quickly became the industry standard for defining due diligence or AAI.

In November 2005, the U.S. Environmental Protection Agency (EPA) issued rules establishing standards and practices for conducting AAIs. The most recent ASTM International Standard Practices for conducting Phase I ESAs (E 1527-05 and E 2247-08) are consistent with the rules. R&W is intimately familiar with both the EPA Rules and ASTM International Standard Practices. R&W provided comments to the EPA during the rule-making process and employs a staff member who is a member of the ASTM International committee responsible for the E 1527-05 and E 2247-08 Standard Practices. Consult the EPA's AAI Final Rule for more information.

The ASTM International Standard Practices may be purchased at www.astm.org.

The AAI rules specifically state that the ASTM International's Transaction Screen Process (E 1528-06) is not sufficient to meet the requirements of AAI. Transaction Screens are, however, still useful in certain circumstances. These include acquisition of easements or rights-of-way for utilities and evaluating real state to be used as collateral for financial transactions.

It is important to note that Phase I ESAs/AAI investigations usually do not include any soil, groundwater, or air testing. If a Phase I ESA/AAI investigation identifies evidence of potential releases of hazardous substances or petroleum (ASTM only) at the subject real estate, additional investigation (Phase II ESA) may be appropriate.

A Phase II investigation is tailored to the specific issue raised during the Phase I ESA/AAI process. Examples of tasks typically performed for a Phase II ESA include collecting and testing samples of stained soil or searching for a suspected underground storage tank. A Phase II ESA is usually designed to confirm or refute the presence of contamination or concerns on the subject real estate. R&W uses techniques and methods developed/created by states, EPA, ASTM International, and other recognized authorities to assure the quality of Phase II ESA investigations. If a Phase II ESA does not identify contamination at the subject real estate, an owner or operator is eligible for one of the ILDs.

To maintain the ILD, a purchaser must also comply with continuing obligations. These include complying with any land use, activity restrictions, or institutional controls on the real estate. An example might include inspecting and maintaining a barrier over contamination left from a prior response action. The innocent landowner must also take "reasonable steps" not to contribute to the release and prevent future releases of hazardous substances. Innocent landowners must also prevent or limit human, environmental, or natural resource exposure to the previously released hazardous substances. Innocent landowners must also cooperate with governmental agencies or other parties who are conducting response actions, provide certain notices about the contamination, and provide requested information to US EPA or state agencies. Failure to comply with these continuing obligations negates the ILD. Additional information pertaining to the continuing obligations is presented in EPA's March 6, 2003, "Common Elements" guidance and the associated Reference Sheet.

If a Phase II ESA identifies contamination on the real estate, prospective owners and operators are not eligible for the ILD. Several alternatives exist to address the contamination. A Phase III ESA may be performed to define the extent of the contamination and provide estimated costs to remediate the contamination. Alternatively, a purchaser could opt to utilize other defenses to the cleanup liability. The defenses under federal law are described below.

Contiguous Property Owner Defense

This defense is available to owners and prospective purchasers of land that is, or may be, affected by an off-site release or threatened release of hazardous substances. To qualify for this defense, a buyer must have purchased or occupied the real estate without knowing or having reason to know of the contamination at the property. Therefore, a Phase I ESA/AAI that does not identify evidence of prior releases of hazardous substances is required for this defense. If contamination is later discovered to be migrating onto the subject real estate, an owner or operator may qualify for this defense under certain conditions. These conditions include not causing or contributing to the contamination and complying with all continuing obligations previously described under the ILD.

The Contiguous Property Owner Defense is, to some extent, derived from EPA's 1995 "Contaminated Aquifer Policy".

This policy indicated that EPA may not impose cleanup liability to parties who owned or operated real estate affected by migration of contamination via groundwater. In some cases, this policy is broader than the Contiguous Property Owner Defense, and in other cases the statutory defense is broader. In July 2004, the EPA published an "Interim Enforcement Discretion Guidance Regarding Contiguous Property Owners."

This guidance states that the EPA may still apply these policies through the exercise of its "enforcement discretion." The EPA has also published a Reference Sheet summarizing this policy.

Bona Fide Prospective Purchaser

The Bona Fide Prospective Purchaser (BFPP) is the only federal defense to cleanup liability for a party who purchases or leases real estate known to be contaminated. This is a significant change designed to foster redevelopment of brownfields.

A BFPP must purchase or lease contaminated real estate after January 11, 2002. To qualify as a BFPP, a purchaser must purchase the real estate after all disposal of hazardous substances has ceased, must complete a Phase I ESA/AAI, and must comply with the continuing obligations previously described under the ILD. The burden of proof is on the purchaser/tenant to convince the EPA or a court that it meets these criteria.

There is one significant wrinkle in the BFPP. If the federal government incurs response costs at a facility where the buyer is protected by the BFPP defense, the United States is entitled to a lien on the Property in the amount not exceeding the increase in fair market value of the real estate attributed to the response action.

State Law Requirements

Although many states have laws similar to CERCLA, others differ significantly. For instance, most state cleanup laws include releases of petroleum products that are not addressed under CERCLA, and some states have much different defenses to liability. Many states have voluntary cleanup programs to facilitate cleanup of brownfields.

Michigan is, however, unique among all states. Michigan law allows a prospective purchaser or occupant to conduct a Baseline Environmental Assessment (BEA) that, when submitted to the Michigan Department of Environmental Quality (MDEQ), provides a conditional exemption from state liability for contamination. A buyer or occupant does, however, have post-BEA responsibilities known as "due care" obligations. These due care obligations are similar to the federal continuing obligations.