Volume 18, Number 3
CERCLA AND RCRA MINIMIZE YOUR LIABILITY
Two federal statutes create the greatest potential liability in connection with real estate transactions: the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), and the Resource Conservation and Recovery Act of 1976 (RCRA), as amended by the Hazardous and Solid Waste Amendments of 1984 (HSWA). Each of these statutes creates liability in a slightly different manner, but both relate to the cleanup of hazardous materials already released into the environment.CERCLA
The underlying policy of CERCLA is to shift away from the public the ultimate responsibility for cleaning up hazardous substances. The statute establishes four categories of "potentially responsible parties" (PRPs) on whom liability may be imposed:
- Current owners and operators of a facility where hazardous substances were released or are in danger of being released.
- Owners or operators of a facility at the time hazardous substances were disposed of at the facility location.
- Persons or entities who arranged for the treatment or disposal of hazardous substances at the facility (commonly, "generators").
- Persons or entities that transported the hazardous substances to a facility they selected.
Any person or entity that falls into one or more of these categories is liable for responding to a release of "hazardous substances." CERCLA's definition of hazardous substances is quite broad. It includes substances typically found in industrial and manufacturing settings as well as more common substances such as paint, batteries, solvents, drain cleaners, and photographic chemicals.
CERCLA defines an "owner or operator" as the "person" owning or operating a facility or, if the facility has been abandoned, as a "person who owned, operated, or otherwise controlled activities at such facility immediately [prior to such abandonment]." This rather circular definition has been interpreted by the EPA and the courts in such a way that current owners may be found liable even though no hazardous substances were disposed of during their ownership. A person may also be held liable as an "owner" if that person held title for as little as one hour. Moreover, a person holding equitable title to property may be deemed an owner, and a person who merely signed an agreement to purchase contaminated property could face liability under the act. Courts have also ruled that lessees fall within the statutory definition of owner. In addition, officers and employees of companies operating a facility may be treated as owners or operators and, in some cases, held personally liable even though performing the work of the employer.
Courts have uniformly held that CERCLA imposes strict liability, irrespective of fault. As a result, courts have tended to impose liability on CERCLA defendants who fit into one of the PRP classes and who cannot raise one of the limited defenses set forth in the act. CERCLA liability is also retroactive; entities that disposed of hazardous substances or owned contaminated property before the statute's enactment have been held liable for the resulting response costs.
Allocation of responsibility to landowners. The wide net cast by CERCLA can ensnare a large number of PRPs at a given site. These are usually past and present owners and operators and, in some cases, large numbers of "generator" PRPs. In the EPA's view, each of these parties is just as strictly, jointly, and severally liable as any other. In practice, however, liability is rarely shared equally among the PRPs.
Allocation among owners and operators on the one hand and generators on the other hand can be difficult. Each group obviously seeks to impose a larger share of costs on the other group. In any case, negotiations often deteriorate. As a result, case law has begun to address the allocation of cleanup costs among PRPs through contribution claims filed against one another. The courts have found apportionment to be difficult, particularly at a site where hazardous substances have been present for an extended period and where the substances possess diverse characteristics. Some courts have placed on the defendant the burden of proving that there is a reasonable basis for apportionment.
Corporate liability. In a June 8, 1998, ruling in United States v. Bestfoods, the Supreme Court resolved years of disagreement among the lower courts over holding parent companies liable simply because they controlled the overall affairs of subsidiaries or had a vague "authority to control" hazardous waste decisions. The Bestfoods case overrules these expansive theories and returns instead to the "bedrock principle" that "a parent corporation...is not liable for the acts of its subsidiaries." The Court said that "nothing in CERCLA purports to reject this bedrock principle, and against this venerable common-law backdrop, the congressional silence is audible" (emphasis added).
In Bestfoods the Court adopted the general rule that a parent company can be liable for the acts of its subsidiary in two situations: (1) when a basis exists for "piercing the veil" under traditional corporate law principles; or (2) when the parent company actually "manage[s], direct[s], or conduct[s] operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations." Even active participation in the general affairs of the subsidiary will not make a parent company liable unless a basis exists.2
Liability of successor corporations. CERCLA does not expressly state whether or under what circumstances a company that merges with, acquires, or purchases some or all of the assets of another company succeeds to the liabilities of the predecessor company. Thus, a majority of courts have applied the common law doctrine of successor liability in the CERCLA context. For example, one court that examined the act's legislative history and purpose held that congressional intent supports the conclusion that, when choosing between taxpayers or a successor corporation, the successor should bear the cost of cleanup. The EPA also has taken the position that successor corporations are liable for the acts of their predecessors.
Liability of lenders. Financial institutions that lend money to companies owning or operating property contaminated with hazardous substances have long relied on the "secured creditor" or "security interest" exemption to shield them from liability under CERCLA. The secured creditor exemption excludes from the definition of "owner or operator" any person "who, without participating in the management of a…facility, holds indicia of ownership primarily to protect his security interest in the…facility."
Court decisions establishing lender liability under CERCLA fall into two main categories: (1) those in which the lenders foreclose on a mortgage and take legal title to a property, and (2) those in which the lenders exercise control over the property or the operations of the borrower. A 1990 decision of the Court of Appeals for the Eleventh Circuit caused great alarm in the lending community when it greatly increased the potential exposure of lenders by narrowing the scope of CERCLA's secured creditor exemption.3 The EPA responded by issuing a rule intended to narrow the scope of a lender's liability, but the D.C. Circuit reversed that rule as ultra vires. Congress then codified the provisions of this rule when it passed the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996, known as the Lender Liability Amendments.
Costs for which the landowner or purchaser is liable. CERCLA provides for recovery of removal or remedial action costs incurred by the United States or the individual states or of necessary response costs incurred by any other person. Response costs incurred by the federal or state government must be "not inconsistent with the National Contingency Plan." Response costs incurred by any other person must be "consistent with the National Contingency Plan."4 This small difference in wording has been construed to mean that in government enforcement cases, the burden of proof is on those who are attempting to prevent the government from recovering cleanup costs to show that specific costs are not consistent with the plan. In contrast, in litigation between private parties, plaintiffs attempting to recover cleanup costs bear the burden of proving that the costs they incurred are consistent with the plan.
Various courts have held that the term "response costs" includes costs of removal, remedial action, monitoring, testing, site investigation, medical evaluations, relocation, provision of alternative water supplies, and interest. Cleanup costs also include government oversight costs.
Defenses to CERCLA liability. Parties to CERCLA lawsuits have attempted to employ a variety of defenses. Almost invariably those efforts have failed. For example, although some courts have allowed equitable defenses, such as unclean hands, in CERCLA actions, others have rejected such defenses as being contrary to congressional intent. In particular, courts have rejected the caveat emptor defense under CERCLA, which explicitly provides for three statutory defenses: act of God, act of war, or act or omission of a third party.5 Of these, the third-party defense has been the most widely litigated.
To establish that contamination was caused solely by a third party, all three elements of CERCLA § 107(b)(3) must be met: (1) no direct or indirect relationship, contractual or otherwise, exists between the defendant/landowner and the third party who (allegedly) caused the contamination; (2) upon discovery of hazardous substances, the landowner must have exercised due care; and (3) the landowner must establish that he or she took precautions against the acts or omissions of the third party. SARA defined the term "contractual relationship" to include "land contracts, deeds, or other instruments transferring title or possession" unless certain narrow showings can be made.6 Thus, the property owner may not assert the third-party defense based on the actions of a prior landowner unless certain limited conditions are satisfied. These conditions have come to be known as the "innocent purchaser" or "innocent landowner" defense of CERCLA.
The innocent landowner defense. Under CERCLA's innocent landowner provisions, a defendant may avoid liability only if able to show that the property was acquired after hazardous substances were disposed on it and (1) the defendant did not know or have reason to know of the hazard when the land was acquired; (2) the defendant is a government body that acquired the property by escheat, involuntary transfer, or exercise of eminent domain; or (3) the property was inherited.7 Thus, in most cases, defendants have the burden of proving that they did not and had no reason to know of the contamination.
The statute sets forth criteria for establishing that the defendant had no reason to know of the contamination.8 CERCLA indicates that the defendant must have undertaken, at the time of acquisition, "all appropriate inquiry" into the previous ownership consistent with good commercial practice. This translates into a requirement for some type of preacquisition property audit or survey to identify potential environmental hazards. The act leaves to the courts the task of determining whether a purchaser claiming to be an innocent landowner under CERCLA has made all appropriate inquiry. To date, however, the courts have not articulated a standard, and the EPA has not issued any guidance that meaningfully deals with what constitutes an "appropriate inquiry."
Factors that have been considered by the courts include special knowledge on the part of the buyer; whether the purchase price was related to the existence of contamination on the property; the level of diligence of the purchaser's inquiry; and the ease with which the contamination could have been detected. To provide some assistance to real estate buyers and sellers, the American Society for Testing and Materials (ASTM) has released two standards for conducting environmental assessments, both of which are intended to satisfy the required "all appropriate inquiry."
The EPA has published a policy for taking action against residential property owners. The agency states that it will refrain from taking action against a homeowner on property subject to CERCLA cleanup unless the homeowner (1) acts in a way leading to a release or threat of release of hazardous substances that results in a response action; (2) fails to cooperate with the EPA's response actions; or (3) uses the residential property in a manner inconsistent with residential use or develops the residential property, leading to a release. The policy points out, however, that the policy is not law and does not provide an exemption from CERCLA liability.9
De minimis settlements. Purcha-sers who may not be able to avail themselves of the absolute defense under CERCLA § 101(35) may nevertheless be able to minimize their liability by being characterized as de minimis parties. SARA added to CERCLA a provision allowing de minimis settlements.10 Thus, the EPA may settle with a PRP if "the settlement involves only a minor portion of the response costs at the facility concerned" and the PRP falls into one of two categories: (1) PRPs for whom the amounts or toxic effects of their contribution of hazardous substances to the site are minimal in comparison to other hazardous substances at the site; and (2) owners of the real property on which the facility is located who did "not conduct or permit the generation, transportation, storage, treatment, or disposal of any hazardous substance at the facility, and did not contribute to the release or threat of release of a hazardous substance at the facility." In addition, the property owner must establish that he or she purchased the property without actual or constructive knowledge of the presence of hazardous substances.11RCRA
The Resource Conservation and Recovery Act was enacted in 1976 as an amendment to the Solid Waste Disposal Act.12 As originally enacted, RCRA and CERCLA served two separate and distinct purposes. CERCLA was backward-looking-it was a nonregulatory statute enacted to address lingering problems with former disposal sites and to impose liability for the cost of those cleanups. By contrast, the original RCRA was forward-looking-it was intended to provide a comprehensive regulatory program for the active management of hazardous wastes from the point of generation to ultimate disposal (cradle to grave). Thus, RCRA was of lesser significance for real estate professionals and lenders, except on properties where active hazardous waste facilities existed. The Hazardous and Solid Waste Amendments of 1984, however, served to blur the distinction between CERCLA and RCRA by adding to RCRA enhanced provisions requiring the cleanup of hazardous waste sites. In addition, the 1984 amendments added a new federal program for the regulation of underground storage tanks (USTs) (see the article on page 34 for more information). These amendments made RCRA more important for real estate professionals and lenders.
Currently, RCRA prohibits open dumping; encourages recycling and treatment of hazardous wastes; establishes standards for hazardous waste management; regulates cleanup of active facilities; restricts land disposal of hazardous wastes; provides technical requirements for disposal facilities; controls use of USTs; and establishes hazardous waste permit review procedures for storage, treatment, or disposal facilities. RCRA regulations prescribe detailed requirements for anyone who generates, transports, treats, stores, or disposes of hazardous wastes.13 Disposal is defined as the discharge, deposit, injection, dumping, spilling, leaking, or placing of any solid or hazardous waste on the land or water in such a way that the waste enters the environment.
The two types of RCRA regulation of greatest significance to real estate professionals are the regulations governing hazardous waste and USTs. RCRA hazardous waste regulation, in turn, generally takes one of two forms: regulation of the generators of hazardous waste, or regulation of the owners and operators of facilities for the treatment, storage, or disposal of hazardous waste.
RCRA imposes two basic types of liabilities: civil penalties generally amounting to $25,000 per day, with criminal penalties available under certain circumstances; and certain obligations to perform or finance "corrective actions" or cleanups or to remedy imminent and substantial endangerments to health or the environment. Thus, unwary purchasers, occupiers, or financers of real estate may find themselves liable for penalties, cleanup costs, or both.
Landowner liability for disposal of hazardous substances. RCRA liability has been imposed on landowners for hazardous waste that was dumped on property before their ownership. For example, in United States v. Price, the United States sought injunctive relief against current and past owners of property on which the past owners had operated a landfill for hazardous chemicals. Both past and current landowners denied RCRA liability, arguing that RCRA was designed to prevent future dumping, not to remedy the effects of past waste disposal practices. The court held, however, that the term "disposal" encompassed the leaking of hazardous wastes into the groundwater; therefore, the government was authorized to bring suits under RCRA to prevent continued harm to the environment. The previous landowners further argued that they were no longer contributing to the disposal of hazardous wastes at the site, but the court rejected this argument, holding them liable because they failed to store chemical wastes properly and to rectify a hazardous condition. Simply put, the court would not allow the previous owners to avoid liability under RCRA simply by selling their property.
The current owners argued that the disposal of hazardous wastes had occurred before their ownership and, therefore, they did not contribute in any way to the disposal of hazardous wastes. The current owners knew the property had been used as a landfill but failed to investigate, before purchase, whether the landfill had been properly closed. At no time did the current owners "actively dispos[e] of any wastes at the landfill or actively contribut[e] to the migration of contaminants from the site." Nonetheless, the court found that the current owners had contributed "merely by virtue of their studied indifference to the hazardous condition" that existed. The court held them liable under RCRA for their failure "to stop the continued leaking of contamination from the site." Thus, the court imposed an affirmative duty on purchasers either to investigate the property before purchase or to accept the property as is, complete with cleanup responsibilities.15
Landowner liability for underground storage tanks. RCRA is also important to real estate professionals because of subtitle IX, enacted as part of the 1984 amendments, that regulates USTs. Congress enacted subtitle IX to address the problem of groundwater contamination by leaking USTs. RCRA establishes eight categories of federal standards that apply to "owners" and "operators" of USTs: (1) notification of tank existence, (2) leak detection, (3) records maintenance, (4) release reporting, (5) corrective action, (6) tank closure, (7) financial responsibility, and (8) performance standards for new tanks.Protect Yourself
Federal environmental statutes, particularly CERCLA and RCRA, cast a wide net of potential liability for parties involved in real estate transactions. See "Ask These Questions," on page 22 to find out how to limit liability. In addition, buyers should consider other protections before the transaction is finalized. A buyer may avoid CERCLA liability under the innocent landowner defense only if, at the time of acquisition, "all appropriate inquiry" was undertaken. Thus, a due diligence investigation should be conducted in connection with all real estate transactions.
A Phase I investigation may include review of title documents, corporate records, government records, and other sources of information as well as a site visit. In some transactions, a more extensive Phase II assessment may be necessary, involving sampling and investigation to address specific concerns identified in Phase I. Environmental liability may also be minimized by allocating responsibility for hazardous materials contamination in the terms, indemnities, and warranties in the purchase contract.Notes
- CERCLA §107, 42 U.S.C. § 9607 (1980).
- 118 S. Ct. 1876 (1998).
- See United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990), cert. denied, 498 U.S. 1046 (1991).
- 71. CERCLA § 107(a)(4)(A)-(B), 42 U.S.C. § 9607 (a)(4)(A)-(B).
- CERCLA § 107(b), 42 U.S.C. § 9607(b).
- See CERCLA §101(35)(A), 42 U.S.C. § 9601(35)(A)(1980).
- CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B).
- EPA Policy Towards Owners of Residential Property at Superfund Sites, OSWER Directive No. 9834.6 (July 1991).
- CERCLA § 122(g)(1), 42 U.S.C. § 9622(g)(1).
- CERCLA § 122(g)(1)(A)(i)-(ii)-(B)(i)-(iii), 42 U.S.C. § 9622(g)(1)(A)(i)-(ii)-(B)(i)-(iii).
- Pub. L. No. 94-580 (1976).
- See 40 C.F.R. Parts 260-68.
- RCRA §1004, 42 U.S.C. §6903(3).
- 523 F. Supp. 1055 (D.N.J. 1981), aff'd,688 F.2d 204 (3d Cir. 1982).