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August 05, 2013 Articles

Pitfalls in the "Third Party" and BFPP Defenses to CERCLA Liability

CERCLA liability is difficult to shake, and these two defenses don't make it any easier.

By Peter Klock – August 5, 2013

The so-called third-party defense and the more recently enacted “bona fide prospective purchaser” (BFPP) defense have created a sometimes confusing and seemingly counterintuitive liability scheme under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).

The inefficacy of the third-party defense has been underscored in light of the 2002 amendments to CERCLA, which created two new statutory defenses, one of which is the BFPP defense, and pulled the rug out from under one federal circuit’s interpretation of the third-party defense. While the questionable availability of these defenses may come as a surprise to the uninitiated, it is not altogether surprising given the nature of the act.

CERCLA, as amended, 42 U.S.C. §§ 9601–75, is a remedial statute that imposes strict liability. The express purpose of CERCLA is to facilitate the prompt cleanup of hazardous waste and to ensure that those responsible for contamination shoulder the cost of reversing environmental damage. See Monarch Tile, Inc. v. City of Florence, 212 F.3d 1219, 1221 (11th Cir. 2000). CERCLA grants the president of the United States (whose authority is largely delegated to the Environmental Protection Agency (EPA)) authority to use Superfund money to respond to any threatened or actual release of hazardous substances that may pose an imminent and substantial threat to public health. 42 U.S.C. §§ 9604, 9607. To ensure that the proper parties pay their fair share, the president is additionally granted the authority to recover response costs from any and all persons responsible for the release of the hazardous substances.

As CERCLA imposes strict liability on “covered persons” without regard to causation, a party who purchases a CERCLA “facility” with knowledge of the contamination may be subject to a cost-recovery action by the EPA even where the purchaser has done nothing to cause or contribute to the contamination. Redwing Carriers, Inc. v. Saraland Apts., 94 F.3d 1489, 1496 (11th Cir. 1996). “Covered persons” include

(1) the owner and operator of a vessel or a facility, (2) any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of, (3) any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances, and (4) any person who accepts or accepted any hazardous substances for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance. . . .

42 U.S.C. § 9607(a)(1)–(4). CERCLA defines the term “facility” to include any property at which hazardous substances have come to be located. 42 U.S.C. § 9601(9).

Defenses to CERCLA cost-recovery actions are limited as set out in the act, and a purchaser with knowledge of prior contamination has two seemingly viable defenses, which may be available if the purchaser meets the onerous continuing obligations required by the act. See Blasland, Bouck & Lee, Inc. v. City of N. Miami, 283 F.3d 1286, 1304–5 (11th Cir. 2002) (holding that CERCLA bars equitable defenses not enumerated in section 9607(b)). These defenses are the long-standing third-party defense and the more recently enacted BFPP defense. 42 U.S.C. § 9601(40); 42 U.S.C. § 9607(b)(3).

The Third-Party Defense
According to the language of 42 U.S.C. § 9607(b)(3), the “third party” defense appears to be available to a facility owner who can establish by a preponderance of the evidence that the facility’s contamination was caused solely by the acts or omissions of a third party prior to his or her ownership.

Additionally, by the language of the act, the third party’s acts or omissions must not have occurred “in connection with a contractual relationship” with the defendant. Thus, a cursory reading of the language of section 9607(b)(3) would seem to excuse from liability a facility owner who knowingly purchased a previously contaminated facility as long as there was no contractual relationship directly or indirectly connected to the contamination, and indeed the Second Circuit has interpreted the language of section 9607(b)(3) as such. See Westwood Pharm., Inc. v. Nat’l Fuel Gas Dist. Corp., 964 F.2d 85 (2d Cir. 1992).

However, 42 U.S.C. § 9601, which contains the act’s definition of the term “contractual relationships” and expressly includes land contracts or other instruments transferring title or possession, belies the Second Circuit’s interpretation of the effect of the “in connection with” language on the term “contractual relationships.” 42 U.S.C. § 9601(35)(a); see also R.E. Goodson Constr. Co. v. Int’l Paper Co., No. 4:02-4184-RBH, 2006 WL 1677136, at *7 (D.S.C. 2006) (noting that the Westwood court’s interpretation of the “in connection with” language would “render the explicit statutory language of [‘contractual relationship’] inoperative”). Furthermore, the Third, Sixth, and Ninth Circuits have held that facility owners who knowingly purchased their contaminated properties from polluting owners cannot assert the third-party defense. United States v. CMDG Realty Co., 96 F.3d 706, 716 (3d Cir. 1996) (holding that the third-party defense is not generally available to an owner in the chain of title with the polluter); United States v. 150 Acres of Land, 204 F.3d 698, 704 (6th Cir. 2000);Carson Harbor Vill., Ltd. v. Unocal Corp., 270 F.3d 863 (9th Cir. 2001).

A tale of two transfers. The analysis performed by the Sixth Circuit in 150 Acres of Land was legislatively prescient, as its reasoning regarding the intended applicability of the act’s then-existing statutory defenses was consistent with the creation of further defenses two years later under the Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Amendments), Pub. L. No. 107-118, 115 Stat. 2356 (2002). 150 Acres of Land, 204 F.3d 698. In that case, a facility owner took possession of a 37/45 interest in a contaminated property by way of two transfers. She inherited a 25/45 interest in the property from her deceased husband and then purchased a further 12/45 interest in the property from a co-legatee.

The EPA later discovered hazardous materials on the property, completed a removal operation, and brought a cost-recovery action. In considering the 37/45 owner’s presentation of a third-party defense, the Sixth Circuit considered the owner’s interest obtained by inheritance separately from the interest she purchased from the other legatee.

After reciting the language of 42 U.S.C. § 9607(b)(3), the court turned to section 9601 for the act’s definition of the term “contractual relationship,” which states:

(35)(A) The term “contractual relationship,” for the purpose of section 9607(b)(3) of this title, includes, but is not limited to, land contracts, deeds or other instruments transferring title or possession, unless the real property on which the facility concerned is located was acquired by the defendant after the disposal or placement of the hazardous substance on, in, or at the facility, and one or more of the circumstances described in clause (i), (ii), or (iii) is also established by the defendant by a preponderance of the evidence: (i) at the time the defendant acquired the facility the defendant did not know and had no reason to know that any hazardous substance which is the subject of the release or threatened release was disposed of on, in, or at the facility; (ii) the defendant is a government entity which acquired the facility by escheat, or through any other involuntary transfer or acquisition, or through the exercise of eminent domain authority by purchase or condemnation; or (iii) the defendant acquired the facility by inheritance or bequest.

Reading these sections together, the court explained that the language of 42 U.S.C. § 9607(b)(3), which states that the release of hazardous substances must have occurred “solely by an act or omission of a third party,” is merely a threshold requirement, rather than a defense in itself. 150 Acres of Land, 204 F.3d at 703–4;accord United States v. Domenic Lombardi Realty, Inc., 290 F. Supp. 2d 198, 210–11 (D.R.I. 2003). Accordingly, to avail oneself of a third-party defense, the court held, a landowner must additionally meet one of the three requirements laid out in section 9607(35)(A), which excludes from liability only owners of contaminated properties who were innocent purchasers, government entities that took transfer by escheat or condemnation, or owners who acquired a facility by bequest. 150 Acres of Land, 204 F.3d at 704.

Thus, the court held a third-party defense was possibly available with respect to the 25/45 interest that had been inherited, but pointed out that the landowner would be subject to CERCLA liability for response costs related to her other 12/45 interest, which was obtained via land contract, unless she could demonstrate that at the time she purchased that interest she did not know and had no reason to know of contamination on the property. Accordingly, the Sixth Circuit’s analysis made it clear that (1) knowing purchasers of contaminated property cannot avail themselves of a third-party defense, and (2) the so-called third-party defense is actually three separate defenses, which are respectively available to the three specific classes of defendants identified by section 9607(35)(A)(i)–(iii).

Split with the Second Circuit. The Second Circuit has taken an altogether different tack in interpreting 42 U.S.C. § 9607(b)(3), owing mostly to its interpretation of the “in connection with” language found in that section. Indeed, Second Circuit precedent only precludes assertion of the third-party defense by knowing purchasers of contaminated facilities if they were a party to a contract that was “connected with” the handling of hazardous substances on the property. See N.Y. State Elec. & Gas Corp. v. FirstEnergy Corp., 808 F. Supp. 2d 417, 516–17 (N.D.N.Y. 2011). However, criticisms of such a construction have not gone unnoticed in that circuit. Id. at 517 (noting criticism of Lashins Arcade andWestwood holdings, which “essentially [render] academic the requirements of” 42 U.S.C. § 9601(35)(A), but ultimately finding itself bound by that precedent); see generally New York v. Lashins Arcade Co., 91 F.3d 353 (2d Cir. 1998); see also Westwood Pharm., Inc.,964 F.2d 85. Furthermore, the Brownfields Amendments’ creation of the BFPP defense belies the Second Circuit’s construction of the third-party defense, as the new defense would be totally superfluous if subsequent purchasers of contaminated facilities could already avoid liability by proving that any contamination occurred through the actions of a third party prior to their ownership. Accordingly, prospective purchasers of CERCLA facilities in EPA Region IV should not count on the availability of the third-party defense and should instead prepare to run the gauntlet that is the BFPP defense.

The BFPP Defense
The creation of the BFPP defense further reinforces that the third-party defense was not intended for use by knowing purchasers of contaminated properties. Part of the 2002 Brownfields Amendments, the BFPP defense was enacted to carve out a liability exemption for certain knowing purchasers of contaminated properties. To establish the BFPP defense, as defined at 42 U.S.C. § 9601(40), a defendant must have acquired ownership of the facility after the amendment was enacted on January 11, 2002, and must establish by a preponderance of the evidence each of eight elements listed in that section. Given that two of those elements are that the owner made “all appropriate inquiries into the previous ownership and uses of the facility” and that “the defendant exercised appropriate care with respect to the hazardous substances found at the facility,” the BFPP defense was clearlydesigned with knowing purchasers of contaminated properties in mind. 42 U.S.C. § 9602(40)(B), (D).

However, as indicated above, the availability of the BFPP defense is anything but assured, and defendants asserting the BFPP defense must establish each of the eight elements of the defense by a preponderance of the evidence to avoid CERCLA liability as a facility owner.

All elements of the defense must be established, but three of them have proven to be the most problematic. Those three are 42 U.S.C. § 9601(40)(A), (B), and (D), which require (A) the disposal of hazardous substances at the facility occurred before the person acquired the facility, (B) the defendant made “all appropriate inquiries into the previous ownership and uses of the facility,” and (D) “the defendant exercised appropriate care with respect to the hazardous substances found at the facility by taking reasonable steps to— (i) stop any continuing release; (ii) prevent any threatened future release; and (iii) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance.”

While an analysis of whether an owner has complied with these elements may seem at first blush to be relatively straightforward, the state of CERCLA precedent across the federal circuits has led to confusion and varied applicability of the defense. For example, the federal circuit courts are in disagreement with respect to something as fundamental as what constitutes a “disposal” as that term appears in the act. The debate is largely centered on passive versus active contamination. See Disposing of Leaks and Spills: Passive Disposal of Hazardous Wastes under CERCLA, 80 Wash. U. L. Q. 945 (2002); see also Putting the Remedial Cart Before the Statutory Horse: The Ninth Circuit Reopens Debate on CERCLA’s Definition of Disposal, 20 B.C. Envtl. Aff. L. Rev. 69 (2001). In certain circuits, the BFPP defense may not be available to a facility owner where passive migration of hazardous substances has occurred during that party’s ownership.

Indeed, the Fourth, Sixth, and Eleventh Circuits, each partly comprising EPA Region IV, are in disagreement as to what constitutes a “disposal.” Compare Crofton Ventures Ltd. P’ship v. G & H P’ship, 258 F.3d 292, 297 (4th Cir. 2001) (holding that passive leakage from a storage drum on a landowner’s property constituted disposal irrespective of the landowner’s knowledge of its existence), with United States v. 150 Acres of Land, 204 F.3d 698, 706 (6th Cir. 2000) (holding that “disposal” requires evidence that there was human activity involved in the migration of hazardous substances on the property), and Redwing Carriers, Inc. v. Saraland Apts., 94 F.3d 1489, 1511–12 (11th Cir. 1996) (holding that a “disposal” may occur when a party grades and fills a construction site, and thereby disperses previously disposed contaminants). Because the BFPP defense requires that the “disposal” occurred prior to the potential BFPP’s ownership, the definition of that term can be a deciding factor with respect to the applicability of the defense.

Another potential obstacle for facility owners seeking the protection of the BFPP defense is the requirement that the BFPP conducted “appropriate inquiries” before acquiring ownership of the facility. Unlike the “innocent purchaser” defense requirement that a defendant made “all appropriate inquiries” to avoid willfully blind defendants, potential BFPPs are required to make “appropriate inquiries” so that they will be informed enough to identify what reasonable steps will satisfy the further requirement that they exercise “appropriate care” with respect to the hazardous substances contaminating the facility. Indeed, the EPA’s interim guidance on BFPP status states:

The pre-purchase “appropriate inquiry” by the [BFPP] will most likely inform the [BFPP] as to the nature and extent of contamination on the property and what might be considered reasonable steps regarding the contamination—how to stop continuing releases, prevent threatened future releases, and prevent or limit human, environmental and natural resource exposures. Knowledge of contamination and the opportunity to plan prior to purchase should be factors in evaluating what are reasonable steps, and could result in greater reasonable steps obligations for a [BFPP].

Office of Enforcement & Compliance Assurance, U.S. EPA, 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 11 (Mar. 6, 2003).

As noted by the Fourth Circuit, logic suggests that the standard of “appropriate care” required of a BFPP with knowledge of contamination should be higher than the standard of “due care” required from an innocent purchaser who discovers contamination but had no reason to know of the contamination when it acquired a facility. PCS Nitrogen, Inc. v. Ashley II of Charleston LLC, 714 F.3d 161, 180–81 (4th Cir. 2013) (holding that the BFPP standard of “appropriate care” is at least as stringent as the standard of “due care” mandated elsewhere in CERCLA).

Thus, a current owner of a CERCLA facility at which hazardous substances were released prior to that person’s ownership must establish, by a preponderance of the evidence, that he or she exercised at least the due care of an innocent landowner that, at a minimum, requires pre-purchase due diligence in the form of a facility inspection and title search to determine the extent and nature of any contamination. See Bonnieview Homeowners Ass’n v. Woodmont Builders, LLC, 655 F. Supp. 2d 473, 500 (D.N.J. 2009); New York v. Lashins Arcade Co., 91 F.3d 353, 361 (2d Cir. 1998) (holding that the “due care” inquiry asks 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”). Accordingly, whether a potential BFPP exercised an appropriate level of care will at all times depend on the specific conditions of the facility and the actions taken by the facility owner, but it is at least clear that a facility owner is unlikely to be found to have exercised appropriate care if he or she does not take active steps to prevent further contamination of the site. PCS Nitrogen, 714 F.3d at 180–81 (holding a party’s inaction for one year sufficient to find a lack of “appropriate care”).

The BFPP defense further requires proof that the defendant provided all legally required notices with respect to the release of any hazardous substances at the facility; provided full cooperation, assistance, and access to persons authorized to conduct response actions; was in compliance with all land-use restrictions and did not impede the effectiveness of any institutional control employed at the facility in connection with a response action; complied with any request for information issued by the president; and is not potentially liable or affiliated with any person that is potentially liable for response costs at the facility through a familial or contractual relationship.

Because a defendant needs to prove each of these eight elements by a preponderance of the evidence, and a failure as to any element results in liability, the BFPP defense is anything but a sure thing. Indeed, the counterintuitive effect of the onerous obligations of the Brownfields Amendments (which were put in place to facilitate brownfields redevelopment, of course) has been noted and chronicled extensively.

CERCLA liability is, by design, difficult to shake. Courts will routinely affirm any inference of CERCLA liability if it is at all plausible in light of the record, even in the absence of direct evidence. Accordingly, potential purchasers of CERCLA facilities would do well to exercise caution. And, at all times, caveat emptor.

Keywords: environmental litigation, bona fide prospective purchaser defense, third-party defense, brownfields, Region IV

Peter Klock was an associate at RascoKlock in Coral Gables, Florida. He has just begun a clerkship with the Honorable James Lawrence King, U.S. District Judge, Southern District of Florida.

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