October 01, 2013

Managing the Risks of Ashley II to Protect CERCLA Defense

Hong N. Huynh

In spring 2013, the Court of Appeals created a bit of a shock wave through the world of environmental due diligence with the much-anticipated decision in PCS Nitrogen Inc. v. Ashley II of Charleston, LLC. While affirming the lower court’s finding, the Fourth Circuit authored the first appellate decision interpreting the “bona fide prospective purchaser” (BFPP) defense. No. 11-1662 et al. (4th Cir. April 4, 2013), aff’d 791 F. Supp. 2d 431 (D.S.C. 2011) (Ashley II).

Because of the pervasive application of the BFPP defense, it remains the goal for many entities that are engaging in real property transactions. The defense allows them to acquire property while knowing, or having reason to know, of contamination on the property. With clarification from the U.S. Environmental Protection Agency (EPA) in a December 2012 guidance entitled Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision, the BFPP defense is also available to prospective tenants leasing contaminated properties. Under this guidance, prospective tenants can now act independently of the property owner and be exonerated from liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Finally, the elements of the BFPP defense are common to those of the innocent landowner and the contiguous property owner defenses. In sum, these buyers and tenants want to believe in the promise Congress made in 2002 when it passed the Brownfields Amendments to CERCLA—that the defense offers tangible relief from the strict liability scheme of CERCLA and from the increasingly expensive and unpredictable world of environmental remediation.

Ashley II concerns environmental contamination that resulted from approximately 100 years of fertilizer manufacturing at a site in Charleston, South Carolina. After a series of transactions, Ashley II of Charleston, LLC, became the current owner of a portion of the site. It had retained an environmental engineer with experience at more than thirty Superfund sites whose duty was to comply with the BFPP requirements. Ashley brought a cost recovery action against the corporate successor of the manufacturer, PCS.

After addressing a number of other significant CERCLA issues, the Fourth Circuit tackled Ashley’s assertion that it qualified for the BFPP defense. To that point, the Fourth Circuit made it clear that the purchaser must meet each element of the BFPP defense by preponderance of evidence. That is, before acquiring title, the purchaser must (1) have acquired title to the property after January 11, 2002; (2) have made all appropriate inquiries into the site’s history; (3) show that all hazardous waste disposals occurred at the facility before its ownership; and (4) have no affiliation with any prior owner or operator. After acquiring title, the purchaser, now the property owner, has the continuing or ongoing obligation to (1) not impede the performance of a response action or natural resource restoration; (2) provide all appropriate notices regarding any discovered contamination; (3) exercise “appropriate care” with respect to hazardous substances found at the facility by taking reasonable steps to contain and prevent contamination; (4) fully cooperate with all authorized remediation personnel; (5) comply with all required institutional controls; and (6) respond to all subpoenas and information requests.

At the district court level, Ashley was found to meet the majority of criteria, including the fact that it had made all appropriate inquiries into the site’s history. The district court found that Ashley had conducted an adequate Phase I environmental site assessment (Phase I), even though some elements of that Phase I were inconsistent with the relevant ASTM International E1527 standard at the time. More significantly, however, the district court found that Ashley had failed to meet the “appropriate care” standard by not taking reasonable steps to address the known contamination and caused a release during its ownership. Ashley appealed.

The Fourth Circuit stated poignantly that the appropriate care standard required Ashley to take “‘all precautions with respect to the particular waste that a similarly situated reasonable and prudent person would have taken in light of all relevant facts and circumstances.’” Ashley II, slip op. at 32 (citation omitted). It affirmed the lower court’s finding that Ashley failed to exercise appropriate care, in particular, by failing to timely remediate contaminated sumps that were part of a wastewater system and that had been discovered when related aboveground structures were demolished. Ashley’s failure to take timely action caused releases to occur during its ownership period.

In reaching this decision, the Fourth Circuit rejected a number of Ashley’s arguments. First, the court declined to apply the less-stringent standard of “appropriate care” and “reasonable steps” expected of an innocent landowner, as compared to those expected of a potentially responsible party. To this argument, the court stated:

Logic seems to suggest that the standard of “appropriate care” required of a BFPP, who by definition knew of the presence of hazardous substances at a facility, should be higher than the standard of “due care” required of an innocent landowner, who by definition “did not know and had no reason to know” of the presence of hazardous substances when it acquired a facility.

Ashley II, slip op. at 31.

In applying this higher standard of care, the Fourth Circuit rejected many of Ashley’s factual arguments, including the fact that at the time it took title it had asked EPA to inform it of actions that EPA considers continuing care obligations. Additionally, with respect to the sumps, the Fourth Circuit was not persuaded by Ashley’s explanation as to why it had not taken immediate action. Ashley argued that its ongoing obligations should be dictated by the knowledge of the existing contamination it had when it purchased the property, which was based on a letter from the prior owner to the state agency stating that the area would be “closed” in accordance with state regulations, the representation by the prior owner that the sumps had been pumped, and the opinion of its experienced environmental engineer that the sumps did not require immediate attention following his site inspection of the remediation by the prior owner.

Instead, the Fourth Circuit found as having more significance the admission of Ashley’s expert witness to the effect that the sump “should have been filled a full year before,” when the structures were first demolished. The delay caused the sumps to be exposed to rainwater over a period of time that then caused the residual solid material collected at the bottom of the sumps to mobilize and release either through overflowing over the sumps or leaking through cracks. Therefore, Ashley’s action exacerbated the existing condition and caused a release during its ownership period. But see 3000 E. Imperial, LLC v. Robertshaw Controls, No. CV 08-3985 PA (C.D. Cal. Dec. 29, 2010) (plaintiff found to be a BFPP under CERCLA even though it delayed the removal of underground storage tanks two years after emptying them).

With the Fourth Circuit’s electing the “higher” standard for the BFPP defense, and Ashley’s having retained a qualified environmental engineer whose specific duty was to ensure compliance with such a defense, it is no wonder that prospective purchasers and tenants are left with questions and a sense of uneasiness as they evaluate whether to move forward with a transaction involving a brownfield. While these concerns are reasonable, they are not entirely unmanageable in light of the following considerations.

First, conducting an adequate Phase I before acquiring title is still a key step. Prospective purchasers and tenants could follow the standard established in the federal all-appropriate-inquiries rules, codified at 40 CFR pt. 312, or comply with applicable ASTM E1527, as Ashley did and as permitted by the federal rule.

The proposed revisions to the ASTM E1527 standard cannot come at a more appropriate time. At the time of this writing, the proposed revisions included (1) defining the term “recognized environmental conditions” (RECs) and “historical” REC; (2) adding a new term called “controlled” RECs (e.g., residual contamination that is approved by regulatory authority and subject to ongoing control measures); (3) requiring the evaluation of vapor migration as part of the Phase I and under a method deemed appropriate by the environmental professional (the EP); and (4) reviewing the regulatory agency file and records at subject properties and adjacent properties and as deemed appropriate by the EP. These proposed changes can be helpful to prospective purchasers and tenants because they might generate more refined information that can be used in assessing the existing contamination and quantifying the risks. They might also more accurately identify the existence of various RECS that could be the subject of further investigation.

Second, prospective purchasers and tenants should carefully evaluate the discovered RECs, or controlled RECs, and what remedial measures or ongoing actions they might need to take when they become owners and tenants in order to meet the appropriate care standard. Prudent prospective purchasers and tenants should evaluate the impact of the cost of the measures on the total value of the property or leasehold interest and how to pay for them before finalizing the deal.

Because Ashley II has created an issue with respect to the extent of ongoing obligations that owners and tenants must carry out, ASTM E2790-11, the Standard Guide for Identifying and Complying with Continuing Obligations, could also become a helpful tool. This voluntary standard was drafted with the specific purpose of addressing the statutory requirements of the CERCLA defenses and could be a helpful starting point for cautious owners and tenants. The four-step process includes collecting more information on RECs and activity and use limitations beyond the Phase I, filling in data gaps, and then determining whether there are ongoing obligations. The results of the data collection are then incorporated into a continuing obligation plan that also identifies reasonable steps to address the ongoing obligations. The final step is the implementation, including periodic inspections and monitoring, and identifying and responding to open or new exposure pathways. The latter component of the fourth step—identifying and responding to open or new exposure pathways—was the Achilles’ heel in Ashley’s case. From the court’s perspective, even Ashley’s experienced environmental engineer did not appreciate the potential releases that the exposed sumps posed once the covered structures were demolished and rainwater began to collect.

In sum, Ashley II has wide implications because the defense has wide implications. While it is a seminal case in which the BFPP defense is analyzed against a specific and complicated set of facts, these types of facts are all too common in many cases. Given the heightened level of appropriate care that the court expects prospective purchasers and tenants to meet, it remains to be seen whether this decade-old amendment to CERCLA will in fact accomplish the goals that Congress established in 2002: to “promote the cleanup and reuse of brownfields.” But considerations discussed in this article could at least help to manage some of the risks created by Ashley II and to bring prospective purchasers and tenants a bit closer to this lofty goal.

Hong N. Huynh

Ms. Huynh is a partner in the Portland, Oregon, office of Miller Nash LLP and a member of the editorial board of Natural Resources & Environment.