November 01, 2014

CERCLA’s Bona Fide Prospective Purchaser Defense: The Good, the Bad, and the Ugly

Jenny McClister

The Bona Fide Prospective Purchaser (BFPP) defense to liability under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601, et seq. (CERCLA) has been a welcome relief to parties wanting to purchase contaminated property. CERCLA was enacted in 1980 and created liability for, among others, current owners and operators for the cleanup of contaminated property, without regard to fault. The BFPP defense was established in 2002 and, for the first time since CERCLA’s enactment, purchasers could establish a defense to CERCLA liability for preclosing contamination even if they knew that a property was contaminated at the time of purchase. But such significant liability protection does not come without effort.

To qualify for the defense, parties must conduct “all appropriate inquiries” to the US Environmental Protection Agency’s (EPA’s) specifications, meet the qualification criteria, and comply with a number of additional continuing obligations set forth in the statute. Because the defense is relatively new, until now there has been little guidance to help a party know exactly what it needs to do to establish and maintain the BFPP defense. In addition, the ability of tenants to establish the defense has been hazy, at best. This article presents a brief background on CERCLA and the BFPP defense. It then discusses the guidance and interpretations that have emerged since the enactment of the BFPP defense, including case law, guidance from EPA, and updated professional standards. As the title of this article suggests, this guidance has not always been clear or helpful, but it pays to be aware of it all—the good, the bad, and the ugly. The article concludes with practice pointers for practitioners assisting their clients in real property transactions so that they can support their clients’ efforts to establish and maintain the BFPP defense.

In 1980, Congress passed CERCLA to address contamination that was persisting unchecked under the environmental laws at the time. CERCLA established a strict liability framework for cleanup of contamination. This seemed like sound policy in the wake of environmental disasters such as Love Canal, a residential neighborhood built on top of a chemical waste dump that was linked to birth defects, cancer, and other health problems of residents. An unintended consequence of this liability scheme, however, was to drive away prospective purchasers from properties that were suspected of being contaminated. This contributed to the development of greenfields and urban sprawl. To swing the liability pendulum back closer to the center, Congress created the “innocent landowner” defense in 1986. Under the innocent landowner defense, a party that has performed “all appropriate inquiries” and does not know or have reason to know of a release of hazardous substances can establish a defense to preclosing contamination identified later, so long as that party acts responsibly with respect to the contamination (the party’s “continuing obligations”).

The innocent landowner defense was a good start, but it did not provide protection to parties acquiring property known or suspected of being contaminated. To address this, in 2002, Congress created the BFPP defense allowing parties acquiring property after January 11, 2002, to establish a defense to CERCLA liability for known or suspected preclosing contamination. As mentioned above, there are several elements to the BFPP defense, see 42 U.S.C. §§ 9601(40)(A), 9607(r), and therefore establishing the defense requires some effort. The best way to understand these elements is to think of them in three different categories: adequate diligence, no other liability, and continuing obligations.

First and foremost, a buyer must perform adequate diligence before it acquires the property. Specifically, a buyer must conduct “all appropriate inquiries” (AAI) on or before the date on which it acquires the property. This requirement can be met in a couple different ways. A buyer can follow the AAI rule found at 40 C.F.R. § 312. More commonly, buyers choose to conduct a Phase I environmental site assessment pursuant to an ASTM International (ASTM) standard. ASTM is a private standards-setting body that has established various standards for performing environmental diligence on real property, and EPA has incorporated certain ASTM standards into the AAI rule. See 40 C.F.R. § 312.11.

In addition to the diligence requirement, to establish the BFPP defense a buyer cannot already be a potentially responsible party (PRP) or be affiliated with one. Specifically, a buyer cannot have caused or contributed to the release of hazardous substances at the property and all disposals at the property must have ceased prior to acquisition. The buyer cannot be “affiliated with” (via certain contractual, familial, corporate, or financial relationships) any PRP, for cleanup costs at the property.

Finally, after purchase, a buyer must take certain steps with respect to contamination on the property in order to maintain its BFPP defense. A buyer must (1) exercise appropriate care by taking reasonable steps to stop any continuing release, prevent any threatened future release, and prevent or limit any human, environmental, or natural resource exposure to any previously released hazardous substance (except that in the case of groundwater contamination, groundwater investigations and remediation generally are not required); (2) provide full cooperation, assistance, and access to the persons that are authorized to conduct cleanups or natural resource restoration; (3) comply with any land use restrictions that are part of a cleanup, and must not impede a cleanup or natural resource restoration or any institutional control used in a cleanup; (4) comply with all EPA information requests and administrative subpoenas; and (5) provide all legally required notices with respect to the discovery or release of hazardous substances at the property.

Note that the discussion above states that the “buyer” must perform these steps as, on its face, the BFPP defense applies to purchasers of property. The statute states that “a tenant of a person” that meets these requirements is also a BFPP, but the statute does not directly address whether a tenant can avail itself of the defense where its landlord is not a BFPP. See 42 U.S.C. § 9601(40). The availability of the defense to tenants will be discussed further below.

BFPP Defense Guidance

When the BFPP Defense was established, there was little guidance available to assist parties in complying with its requirements. In 2003, EPA issued its “Common Elements” guidance that discussed EPA’s interpretation of the common elements among CERCLA’s diligence-based defenses: the innocent landowner defense, the contiguous property owner defense, and the BFPP defense. See 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, US EPA, Mar. 6, 2003. The principal purpose of this guidance was to provide EPA personnel a framework for understanding the overlapping elements among the three diligence-based defenses. This guidance provides some fact-specific examples of what EPA considers to satisfy the “reasonable steps” criteria for the BFPP defense, but overall it is very general. It took almost another decade for the courts and EPA to provide more compelling, fact-specific guidance on whether and how the BFPP defense applies to specific circumstances.

Recent Case Law on the BFPP Defense

The first cases to provide significant guidance on what parties must do to establish the BFPP defense arose from a developer’s purchase of brownfields property in Charleston, South Carolina. Ashley II of Charleston LLC v. PCS Nitrogen Inc., 791 F. Supp. 2d 431 (D.S.C. 2011), upheld by PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013) (the Ashley II decisions). The property at issue had been impacted by industrial use, including phosphate fertilizer production, dating back to the beginning of the twentieth century. In particular, there were high levels of heavy metals, including arsenic and lead, across the property. Other potential sources of contamination included debris piles and sumps. Ashley II of Charleston LLC (Ashley), an experienced brownfields developer, acquired the majority of the property in 2003 and the remainder in 2008. To establish the BFPP defense, Ashley performed AAI through conducting an ASTM Phase I prior to acquiring both properties. It also hired an experienced environmental consultant to help Ashley comply with its continuing obligations for the BFPP defense. Ashley hired security for the property and conducted periodic inspections. It fenced, gated, and put up signage at the property to prevent trespassing and exposure to contaminants. It also worked with EPA to develop a remediation plan for Ashley’s proposed end use.

Ashley, however, arguably made some mistakes. A prior owner had installed a limestone run of crusher (ROC) cover over much of the property, which served as a makeshift cap over the metals-contaminated soils. During its ownership, Ashley allowed the ROC cover to deteriorate in places. Ashley also waited until five years after the purchase to remove debris piles. In addition, Ashley removed onsite buildings, exposing sumps within those buildings. Although the sumps had been identified as potential sources of contamination in Ashley’s preacquisition diligence, it left the sumps exposed to rain and other elements for a year before it cleaned and filled the sumps. Lastly, in its purchase agreements with its sellers, Ashley released and indemnified the sellers from CERCLA liability. When Ashley later learned that EPA was considering suing one seller for EPA’s past response costs at the property, Ashley requested that EPA not sue the seller since Ashley ultimately would be responsible for EPA’s costs under its purchase agreement.

This case began when Ashley sued PCS Nitrogen Inc. (PCS), a prior fertilizer manufacturer at the property, under CERCLA for recovery of Ashley’s cleanup costs. PCS counterclaimed for contribution under CERCLA for an equitable allocation of costs between the parties. Ashley asserted the BFPP defense in an effort to avoid any attribution of costs to it. The district court found that Ashley had failed to establish three elements of the BFPP defense, based on its post-closing actions.

First, the court found that Ashley failed to exercise appropriate care with respect to hazardous substances at the property because it exposed onsite sumps to rain and failed to collect soil samples to prove that the sumps had not leaked, it did not investigate the debris piles for some time after purchase, and it allowed the ROC cover to deteriorate. With respect to the sumps, the court found it compelling that these were identified as potential sources of contamination in Ashley’s preacquisition diligence and yet, in the court’s opinion, Ashley failed to treat them as such. Second, because of Ashley’s inaction, the court also found that Ashley did not prove that no “disposals” occurred during its ownership of the property.

Finally, the court found that Ashley had an improper affiliation with other PRPs based on the contractual protections it offered the sellers—particularly, Ashley’s indemnification of the sellers as liable parties. In addition, the court found evidence of improper affiliation in Ashley’s attempts to discourage EPA from suing its seller based on Ashley’s indemnification.

On appeal, the Fourth Circuit upheld the district court “in all respects” but focused primarily on the district court’s finding that Ashley failed to exercise appropriate care. Notably, the court disagreed with Ashley’s position that the standard of care for a BFPP should be lower than other parties to encourage redevelopment. To the contrary, the court held that the standard of care of a BFPP is higher than it might be for a party such as an innocent landowner, because the former knew of the contamination upon purchase and the latter did not. The court held that inquiry into appropriate care looks at whether a party “took 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.”

Although the Fourth Circuit noted that it was upholding the district court judgment “in all respects,” it did not specifically discuss the district court’s holdings on disposals and improper affiliation. The improper affiliation holding of the lower court produced some angst in the redevelopment community as indemnification of a seller had become common in many brownfields transactions, in particular where a buyer receives a purchase price reduction based on the presence of contamination. The district court opinion was not clear on whether indemnification alone sufficed as an improper affiliation or if Ashley’s solicitation of EPA was critical to the court’s holding on that point. Many were hopeful that the circuit court would provide clarity and perhaps a different view. Instead, the court was silent. It is unclear what to take from this silence on such an important issue that was heavily briefed, which has continued uncertainty regarding the ability of purchasers seeking BFPP protection to indemnify their sellers.

In some contrast to the Ashley II decisions is a California district court opinion, 3000 E. Imperial, LLC v. Robertshaw Controls Co., 2010 WL 5464296 (C.D. Cal. 2010) (Robertshaw Controls), which held that the current owner had achieved appropriate care even though it waited two years to remove underground storage tanks (USTs) that had contained trichloroethylene (TCE). In 2006, the plaintiff acquired the property at issue, which was contaminated by prior uses including aircraft manufacturing. Testing by the plaintiff in 2007 identified TCE in two USTs. The plaintiff emptied the USTs shortly thereafter but waited two years to remove the USTs. Similar to Ashley II, the plaintiff sued the prior owner under CERCLA for recovery of plaintiff’s cleanup costs, and when the prior owner counterclaimed for contribution the plaintiff asserted the BFPP defense. The defendant claimed that the plaintiff did not meet the “appropriate care” requirement arguing that it should have removed the USTs sooner to prevent surface water infiltration and mixing with residual TCE in the USTs. The court disagreed, finding that it was not unreasonable for the plaintiff to leave the USTs in the ground given that they had been emptied and only one was found to contain a small amount of TCE upon removal. The court relied in large part on the fact that the plaintiff was performing a voluntary cleanup under the direction of the state environmental agency, and that agency had determined the plaintiff to be a BFPP under state law. Accordingly, the court held that the plaintiff had established the BFPP defense.

In some ways Robertshaw Controls seems contrary to Ashley II, where the court found the purchaser’s failure to remove sumps to be detrimental to the BFPP defense. However, what these cases drive home is that the inquiry on appropriate care—and the BFPP defense more generally—is very fact-specific.

Not only that, but it is clear from the case law that all of the elements matter. In several cases, courts have denied parties’ assertion of the BFPP defense in large part because the parties did not present evidence on all of the elements. In Voggenthaler v. Maryland Square LLC, 724 F.3d 1050 (9th Cir. 2013), the Ninth Circuit held that the current owner could not establish the BFPP defense based only on submission of an affidavit stating that the seller had disclosed onsite contamination in sale negotiations, the owner had retained advisors to review state files regarding the property, and the owner had hired an environmental consultant to demolish the onsite building. Similarly, in Saline River Properties LLC v. Johnson Controls, Inc., 823 F. Supp. 2d 670 (E.D. Mich. 2011), the court denied the plaintiff’s motion for summary judgment that it was a BFPP because the plaintiff had not presented evidence on all of the elements of the defense and because there was a factual dispute over the impact of plaintiff demolishing a cap over contamination. As these cases illustrate, it is not sufficient for a party to plead a sympathetic position and receive BFPP status. Parties must take each element seriously and ultimately be able to document compliance with them all.

Recent EPA Guidance on the BFPP Defense

Recently, EPA has issued further guidance on the BFPP defense, some in light of the case law outlined above and some to clarify the position of tenants with respect to the BFPP defense. In 2011, EPA issued its “Affiliation Guidance,” Enforcement Discretion Guidance Regarding the Affiliation Language of CERCLA’s Bona Fide Prospective Purchaser and Contiguous Property Owner Liability Protections, US EPA, Sept. 21, 2011,  regarding the requirement that a BFPP cannot be “affiliated with” a PRP via certain contractual, familial, corporate, or financial relationships. The categories of prohibited affiliations listed in CERCLA are very broad: any direct or indirect familial relationship, or any contractual, corporate, or financial relationship (other than those that are typically created by the instruments by which title is conveyed or financed or by a contract for the sale of goods or services). 40 U.S.C. § 9601(40)(H). In addition, a buyer cannot be a BFPP if it is the result of a reorganization of a business entity that was potentially liable. Id.

The Affiliation Guidance acknowledges the breadth of these categories in CERCLA but sets forth certain relationships that EPA “generally intends not to treat as disqualifying affiliations.” These are: (1) relationships between a BFPP and a PRP at other properties; (2) relationships between a BFPP and a PRP that arose after purchase; (3) contractual or financial relationships created at the time that title to the property is transferred; and (4) relationships between a tenant/prospective purchaser and landlord/PRP. Category 3—relationships created during title transfer—appears to be in response to the Ashley II district court opinion, which held that the purchaser had an improper affiliation because of the contractual protections it provided to its sellers and because it solicited EPA not to sue its sellers. Specifically, EPA states that it “generally does not intend to treat certain contractual or financial relationships (e.g., certain types of indemnification or insurance agreements) that are typically created as a part of the transfer of title, although perhaps not part of the deed itself, as disqualifying affiliations.” EPA also acknowledges that this position is in apparent contradiction to Ashley II and of course is not binding on the courts unless it is so adopted.

EPA also recently issued its Revised Enforcement Guidance Regarding the Treatment of Tenants under the CERCLA Bona Fide Prospective Purchaser Provision, US EPA, Dec. 5, 2012 (2012 Tenant Guidance). The status of tenants as liable parties under CERCLA long has been an area of uncertainty and therefore also of some concern. A tenant can be considered an owner or operator of contaminated property and therefore potentially liable for cleanup costs under CERCLA. At the same time, CERCLA only provides that a tenant can qualify for the BFPP defense if the tenant’s landlord so qualifies (so-called “derivative” BFPP status).

In the past few years, EPA has issued guidance setting forth other circumstances when it may consider a tenant to be a BFPP. Previous guidance limited such consideration to tenants whose leases provided sufficient indicia of ownership (e.g., long-term lease, large range of permitted uses). The 2012 Tenant Guidance superseded previous guidance and further expanded the circumstances when EPA will consider a tenant to be a BFPP. Of note, the new guidance provides that any tenant that complies with all of the BFPP requirements, including AAI prior to execution of the lease, may be considered by EPA to be a BFPP.

The 2012 Tenant Guidance is very helpful in that it makes clear that EPA can consider any tenant to be a BFPP, regardless of the length of lease or other indicia of ownership a tenant may or may not have. It sets forth a clear rule as opposed to a nebulous threshold for application. As with the Affiliation Guidance, however, it remains to be seen whether it will be adopted by the courts.

ASTM Standards

ASTM, the private standards-setting body that developed the industry standard for conducting environmental diligence of real property, recently developed two standards of note for parties desiring to establish the BFPP defense. In November 2013, ASTM issued its new standard for Phase I environmental site assessments, ASTM E1527-13, and retired the older version, ASTM E1527-05. For over a decade, the ASTM Phase I standard has been the industry choice for conducting a preliminary environmental assessment of real property. An ASTM Phase I is an initial “paper review” of a property. It involves a site visit; interviews with owners, occupants, and the party requesting the assessment; review of historical documents to determine past uses of the property; and review of environmental databases for the property and nearby properties to determine known releases of contaminants into the environment. All of this information then is compiled into a report. Certain ASTM Phase I standards are referenced in the AAI rule so that compliance with one of the referenced standards achieves AAI.

In December 2013, EPA approved use of ASTM E1527-13 for achieving AAI. While substantially the same as its predecessor, the 2013 standard includes a few key changes. The 2013 standard:

(1) presumes that the environmental professional will review agency files when the environmental database review identifies listings at the subject or adjacent properties; (2) expressly identifies vapor migration as a pathway of concern; (3) clarifies and enhances the “user obligations,” which are the obligations of the party that hires the environmental professional to perform the assessment; and (4) adds a category of “recognized environmental condition” (REC), the ASTM term for known or suspected pollution conditions, called a “controlled” REC (a pollution condition that has undergone a risk-based closure and contaminants have been allowed to remain in place under certain restrictions or conditions).

Although EPA approved the use of the 2013 standard, EPA kept alive the prior ASTM standard by stating that parties can use either ASTM E1527-13 or ASTM E1527-05 to establish AAI. In its rulemaking, however, EPA foreshadowed that it would at some point remove reference to the earlier ASTM standard and allow use of only the 2013 standard. EPA also provided some notable commentary on express inclusion of vapor migration as a concern in ASTM E1527-13. ASTM E1527-05 did not expressly require consideration of the potential for vapor migration in evaluating properties; but EPA stated in its rulemaking that it did not consider this change indicative of a difference between the two standards. Rather, in EPA’s opinion, just because the prior standard (or the AAI rule for that matter) did not expressly reference vapor releases does not mean that consideration of vapor was not necessary when conducting AAI under the previous standard. These statements are troubling, as they cast doubt on prior assessments’ compliance with AAI if the vapor pathway was not considered in the evaluation.

ASTM also recently developed the Standard Guide for Identifying and Complying with Continuing Obligations, ASTM E2790-11 (Continuing Obligations Standard). The standard does not cover all of the continuing obligations. Rather, it focuses on those pertaining to land use restrictions, institutional controls, and taking appropriate care with respect to releases of chemicals of concern. The standard presents a four-step approach to identify and comply with these continuing obligations, which include a detailed review of the AAI report and any cleanup information for the property and the development of methods for selecting, implementing, and monitoring appropriate continuing obligations. The Continuing Obligations Standard is a useful guide for helping parties comply with continuing obligations because it provides explicit guidance on documenting decisions and implementation of continuing obligations. However, use of this standard is voluntary and it is not certain that EPA or the courts will find that compliance with a continuing obligations plan developed under this standard is sufficient to establish the continuing obligation elements of the BFPP defense.

Practice Pointers

A thorough understanding of the case law and guidance discussed above is helpful when advising clients that are purchasing contaminated property and want to establish and maintain the BFPP defense. As discussed above, these cases and recent guidance make it clear that the specific elements of the defense matter. A party will be required to prove each and every one to establish the BFPP defense, and their ability to establish and document these elements can be critical to their ability to maintain the defense.

More specifically, for conducting AAI, ASTM E1527-13 is the preferred standard and should be used absent compelling reasons otherwise. No matter what standard is used to achieve AAI, the environmental professional should consider vapor migration as a pathway of concern. When negotiating the transfer of contaminated property, a buyer and its counsel should consider whether the contractual protections requested by a seller could undermine qualifying for the BFPP defense. Complying with continuing obligations, in particular the reasonable steps/appropriate care requirements, is a very fact-specific exercise. A buyer needs to document what is done and why and needs to stay on task. As part of this, if any diligence reports prepared for the purchase include any recommendations, a buyer should follow these or document why they were not followed. To help achieve compliance, a buyer should consider preparing a continuing obligations plan. Finally, because this is an evolving area of law, attorneys should watch for additional case law and other guidance that will further inform compliance with the elements of the BFPP defense and consider it all: the good, the bad, and the ugly.

Jenny McClister

Ms. McClister is an environmental attorney with Timmins LLC in Denver, Colorado.