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Congress Seeking to Restore Brownfields

Superfund 2002: Congress Seeks To Restore Brownfields, But "It Ain't Easy Being Exempt”

The Commercial Record

August 9, 2002

Authors: Joseph P. Williams

I. Introduction

Those in the real estate and development communities know only too well the ways in which "Superfund" -- the common reference to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. ("CERCLA") -- can spell bad news. Most commonly, the presence of contamination on a site can kill a deal. To be sure, the players have become more sophisticated as to such matters over the past decade and a half; environmental insurance may be available in certain circumstances to help manage risk; and some limited statutory and regulatory incentives (such as covenants not to sue) have been added over the years. But the threat of strict, joint and several, and potentially limitless liability still often sends lenders and other investors running for cover.

For some truly unlucky businesses and individuals, their disposal 25 or more years ago of even minimal amounts of common municipal solid waste can ensnare them in a lengthy contribution action, the costs of which can far exceed the ultimate liability for cleaning up the site. That is precisely what happened to scores of such parties in the decade-plus litigation surrounding the Beacon Heights and Laurel Park landfills in Connecticut. See B.F. Goodrich v. Murtha, 958 F.2d 1192 (2nd Cir. 1992); B.F. Goodrich v. Betkoski, 99 F.3d 505 (2nd Cir. 1996).

Congress addressed both of these types of potential heartburn in the Small Business Liability Relief and Brownfields Revitalization Act (the "Act"), which was signed into law by President Bush on January 11, 2002. Public Law No. 107-118, 115 Stat. 2356. The Act merged an effort by the House to provide liability protection for small businesses and an effort by the Senate to encourage brownfields redevelopment. As noted below, the Act contains a lengthy list of criteria and exclusions that may, in some instances, actually make the defenses to liability more difficult to satisfy. However, there is no question that this reform, which had been years in the making, will provide welcome relief to many developers and other small businesses.

II. Title I: "Small Business Liability Protection"

A. De Micromis Exemption

Title I of the Act creates two new exemptions in CERCLA § 107, which defines who is a "responsible party" at a Superfund site. The first is a "de micromis" exemption, 42 U.S.C. § 9607(o). Under this exemption, a party whose CERCLA liability is based on its status as a generator or transporter of hazardous substances is exempt if it can demonstrate that the total amount of hazardous substances that it sent to the site was less than 110 gallons of liquid materials or less than 200 pounds of solid materials and that the disposal or transport occurred before April 1, 2001.

This exemption does not apply if the EPA determines that the materials sent to the site by the party have contributed (or could contribute) significantly, either individually or in the aggregate, to the cost of the response action or natural resource restoration at the Superfund site. It also does not apply if the party: has failed to comply with an information request or subpoena issued by the government; has impeded the remediation; or has been convicted of a criminal violation for the conduct to which the exemption would apply.

B. Municipal Solid Waste Exemption

The second exemption applies to municipal solid waste (or "MSW"). 42 U.S.C. § 9607(p). MSW is defined for this purpose as waste material generated by a household (including a single or multi-family residence), or by a commercial, industrial or institutional entity so long as the waste (i) is essentially the same as waste normally generated by a household; (ii) is collected and disposed of with other MSW; and (iii) contains a relative quantity of hazardous substances no greater than that contained in typical household waste. The Act provides specific examples of MSW: "food and yard waste, paper, clothing, appliances, consumer product packaging, disposable diapers, office supplies, cosmetics, glass and metal food containers, elementary or secondary school science laboratory waste, and household hazardous waste." MSW does not include combustion ash generated by resource recovery facilities or municipal incinerators, or waste from manufacturing or processing operations that is not essentially the same as normal household waste.

C. Ability-to-Pay Settlements

Title I also adds language permitting a reduction in a settlement payment based on a party's limited ability to pay. CERCLA § 122(g) already authorized EPA to enter into expedited de minimis settlement agreements with potentially responsible parties (PRP's) who contributed a relatively minor portion of the hazardous substances at a particular site. In the Act, Congress added a paragraph allowing the EPA, in arriving at a de minimis settlement, to take into consideration "the ability of the person to pay response costs and still maintain its basic business operations, including consideration of the overall financial condition of the person and demonstrable constraints on the ability of the person to raise revenues." 42 U.S.C. § 9622(g)(7). This provision also allows the EPA to consider alternative payment methods as may be necessary or appropriate. The party seeking an ability-to-pay settlement must provide all information that the government needs to determine the ability of the person to pay response costs, and comply with several other conditions. Like the MSW exemption, this section provides statutory backing to EPA administrative policies already in place.

D. Disincentives to Litigation

A few other provisions in Title I make the exemptions described above potentially more valuable. First, a determination by the EPA that a party qualifies for one of the exemptions is not subject to judicial review, thus eliminating the potential for mischief by a disgruntled fellow PRP who may like to appeal such a finding. Moreover, in a third-party contribution action brought by a private party, the burden of proof is on the party bringing the action to demonstrate that the party claiming the exemption does not satisfy the necessary criteria. And in an even stronger disincentive to private contribution actions, Congress provided that if a party is sued but ultimately is found not liable based on either the de micromis exemption or the MSW exemption, the party that brought the action shall be liable to the exempt party for "all reasonable costs of defending the action, including all reasonable attorney's fees and expert witness fees." 42 U.S.C. § 9607(p)(7). Private parties are barred entirely from bringing contribution actions against an owner, operator or lessee of residential property. § 9607(p)(6). Finally, nothing in Title I applies to or affects a settlement approved or a judgment issued by a federal court or any settlement with or order issued by the United States or any state prior to January 11, 2002.

III. Title II: "Brownfields Revitalization and Environmental Restoration"

Title II of the Act is aimed at spurring brownfields redevelopment. To that end, Title II provides funding, criteria and a mechanism for brownfields revitalization grants and creates "brownfields liability clarifications."

A. Brownfields Restoration Grants

The Act creates a program of grants and loans for assessment or remediation of a "brownfield site," which means "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." 42 U.S.C. § 9601(39). There are a number of exclusions from the term "brownfield site," including: a facility that is the subject of a remedial action or is listed on the National Priorities List; a facility that is the subject of an administrative order, court order or judicial consent decree under CERCLA or other listed federal statutes; facilities that are federally owned or controlled; and facilities at which there has been a release of PCB's.

Under the new program, only an "eligible entity" (essentially a state, local government or Indian tribe) may apply for a grant or loan, but an eligible entity may use the funds to provide a loan for remediation to a site owner or developer. 42 U.S.C. § 9604(k). Several factors are listed for the EPA to take into consideration, and there are caps of $200,000 for site characterization and assessment grants and $1 million per eligible entity for brownfield remediation grants. No part of a grant or loan may be used to pay for administrative costs or response costs at a brownfield site for which the recipient is potentially liable.

Connecticut developers also may be interested in the new Brownfields and Information Technology Project Financing Program available from the Connecticut Brownfields Redevelopment Authority under state legislation that became effective last fall. Under this program, if a developer proposes a project that will result in increased tax revenue to a town, and if the town agrees to pay a portion (typically 50%) of the new incremental taxes to the CBRA each year for ten years, the CBRA will make an up-front grant to the developer in the total amount to be repaid by the town. For example, if a project will result in $200,000 in new annual property taxes, and the town agrees to forward $100,000 to the CBRA every year for the next ten years, then CBRA will provide a $1 million grant to the developer. More information on this program is available at www.CTBrownfields.com.

B. Brownfields Liability Clarifications
1. Contiguous Landowners

Title II of the Act also creates additional exemptions to liability under CERCLA § 107. The first one provides immunity for an owner of real property that has been contaminated by a release of hazardous substances from a contiguous property. 42 U.S.C. § 9607(q). In order to qualify for this exemption, however, a person must establish by a preponderance of the evidence that he or she:

  • did not cause, contribute or consent to the release;
  • is not potentially liable for response costs at a facility or affiliated with a PRP through any familial, contractual, corporate or financial relationship, and is not the result of a reorganization of a business entity that was potentially liable;
  • takes reasonable steps to stop any continuing release, prevent any threatened future release, and prevent or limit any exposure to any hazardous substance released from his property;1
  • provides full cooperation, assistance and access for response actions or natural resource restoration;
  • is in compliance with any land use restriction on the property and does not impede the effectiveness of any institutional control as part of a response action;
  • is in compliance with any request for information or subpoena from the EPA;
  • provides all legally required notices with respect to the discovery or release of any hazardous substances; and
  • at the time he or she acquired the property, conducted "all appropriate inquiry" and "did not know or have reason to know that the property was or could be contaminated" from other property. The phrase "all appropriate inquiry" is defined by reference to Section 101(35)(B) of CERCLA, which is discussed below.

Importantly for prospective developers and lenders, the Act authorizes the EPA to issue an assurance that no enforcement action under CERCLA will be initiated against a qualifying contiguous property owner. Even better, EPA may grant a qualifying party protection against a CERCLA § 113(f) cost recovery or contribution action. § 9607(q)(3). EPA's willingness to give such highly important protection will be a key barometer of the success of this legislation.

2. Bona Fide Purchasers

Next, Title II creates an exemption to CERCLA liability for a "bona fide prospective purchaser," which is defined as a person (or the person's tenant) that acquires ownership of a facility after January 11, 2002 and that establishes each of the following criteria by a preponderance of the evidence:

  • All disposal of hazardous substances occurred before the person acquired the facility.
  • The person made "all appropriate inquiries into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices" (as described above). The Act states that for residential property purchased by a "nongovernmental or noncommercial entity," this requirement is satisfied by a facility inspection and title search that reveal no basis for further investigation.
  • The person provides all legally required notices with respect to the discovery or release of any hazardous substances.
  • The person exercises "appropriate care" with respect to contamination by taking "reasonable steps" to stop any continuing release, prevent any threatened future release, and prevent or limit any exposure to any previously released hazardous substance.
  • The person provides full cooperation, assistance and access for response actions or natural resource restoration.
  • The person is in compliance with any land use restriction on the property and does not impede the effectiveness of any institutional control as part of a response action.
  • The person is in compliance with any request for information or subpoena from the EPA.
  • The person is not potentially liable for response costs at a facility or affiliated with a PRP through any familial, contractual, corporate or financial relationship, and is not the result of a reorganization of a business entity that was potentially liable. 42 U.S.C. § 9601(40).

A bona fide prospective purchaser meeting the above criteria whose potential liability is based solely on the purchaser's status as an owner or operator will now not be held liable as long as the purchaser does not impede the performance of a response action or natural resource restoration. 42 U.S.C. § 9607(r). However, if there are unrecovered response costs at a facility for which a bona fide prospective purchaser is exempt, the Act gives the United States a lien on the facility for those costs if a response action is carried out and the action increases the fair market value of the facility.

3. Innocent Landowners

The third and final brownfields liability "clarification" significantly expands the criteria required to be met in order to qualify for the "innocent landowner" defense under CERCLA § 107(b)(3). This defense provides immunity from liability for a person who can establish that the contamination was caused solely by an act or omission of a third party other than an employee or agent of the person or a party in a "contractual relationship" with the person, as long as the person can establish that she exercised due care with respect to the hazardous substance concerned and took precautions against foreseeable acts or omissions of any such third party.

The term "contractual relationship" for purposes of this defense is defined to include purchase and sale contracts, deeds, easements and leases. But even if a person had such a contractual relationship with a third party that caused the contamination, the person is still exempt if she acquired the property after the disposal of hazardous substances and can establish that at the time the person acquired the facility, she did not know and had no "reason to know" that any hazardous substance was disposed of at the facility. 42 U.S.C. § 9601(35)(B). The Act defines "reason to know" to require the person to demonstrate that before she acquired the facility, the person carried out "all appropriate inquires" into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices, and took reasonable steps to stop any continuing release, prevent future releases, and prevent or limit exposure to any previously released hazardous substance.

The Act requires the EPA by January 2004 to adopt regulations establishing standards and practices that satisfy the requirement to carry out "all appropriate inquires." It also specifies several criteria that must be included in these regulations. In the meantime, Congress provided "interim standards and practices" that must be considered by a court. § 9601(35)(B)(iv). For commercial property purchased on or after May 31, 1997, the Act specifies that the procedures of the ASTM Phase I standard will satisfy the due diligence requirement. In the case of residential property, a facility inspection and title search that reveal no basis for further investigation will suffice.

The new criteria for satisfying the safe harbors have caused many to complain that in an attempt to clarify the liability defenses, Congress has made them more difficult to attain. Some fear that lenders will now use the exemption criteria as a checklist that must be met before providing financing on a contaminated property.

Whether these criteria will in practice establish a new standard of care for real estate transactions remains to be seen. Yet without a doubt, landowners and prospective purchasers would be well advised to review these criteria and adjust their practices so as to satisfy the new requirements.

1 The Act states that a person need not conduct ground water investigations or install ground water remediation systems (unless required by EPA) in order to comply with this requirement.

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