A recent decision out of the Southern District of Indiana joins a small number of decisions that have considered what is required for a buyer to satisfy all appropriate inquiries and qualify as a bona fide prospective purchaser (“BFPP”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA” also known as “Superfund”). The case, Van Duprin LLC v. Moran Elec. Serv., No. 16-cv-01942 (S.D. Ind. March 30, 2020), highlights the fact that even though Phase I Environmental Site Assessments (“Phase Is”) have become a routine component of many corporate and real estate transactions, they should be more than just a “check the box” exercise. Strict adherence to ASTM Standard E-1527-13 and CERCLA’s All Appropriate Inquiries (“AAI”) regulations is needed in order for a party to avail itself of the affirmative BFPP defense and avoid broad CERCLA liability.
At issue in the Van Duprin LLC case were response costs that Van Duprin LLC incurred when it remediated TCE and PCE contamination at a property that the Company formerly owned and operated. The contamination was associated with Van Duprin’s historic operations, as well as operations at nearby properties that were owned and operated by unrelated parties. To recover some of its response costs, Von Duprin brought cost recovery and contribution claims under CERCLA Sections 107 and 113 against current and former owners of the neighboring properties. These defendants responded by asserting the BFPP defense based on Phase Is that had been completed prior to their property acquisitions.
The BFPP defense exempts from CERCLA liability a party who:
- acquired ownership of the property after January 11, 2002;
- demonstrates that all dispose of hazardous substances at the property occurred before the party acquired ownership of the property;
- conducts “all appropriate inquiries” into the previous ownership and uses of the property;
- provides all legally required notices with respect to the discovery or release of any hazardous substances at the property;
- exercises appropriate care with respect to hazardous substances found at the facility;
- provides full cooperation, assistance and access to those conducting response actions at the property;
- complies with institutional and engineering controls at the property;
- complies with requests for information and subpoenas from U.S. EPA; and
- is not affiliated with a responsible or potentially responsible party.
See CERCLA Section. 101(40). While the court agreed that certain of the defendants met these requirements and qualified as BFPPs, certain other defendants lost the defense because of faulty Phase Is. In particular, the court called out the following deficiencies:
- Timing – the court affirmed that, in order to satisfy “all appropriate inquiry” for the BFPP defense, a Phase I must be completed or updated within 180 days of acquiring the property. That timing is set forth in the ASTM Standard and AAI regulations. In this case, one of the defendants had leased its property in November 2007 and then purchased it in January 2013 by exercising a purchase option in the lease agreement. Although the defendant timely completed a Phase I within 180 days of the purchase, a Phase I had not been timely completed prior to entering into the lease. The court confirmed that the 180-day window applies to both owned and leased property. The failure to complete a Phase I within 180 days prior to entering into the lease itself invalidated the BFPP defense, even though the tenant subsequently conducted a new Phase I within 180 days of purchasing the leased property.
- Environmental Professional’s Statement and Necessary and Required Inquiries regarding Ownership and Use of the Parcel – the court also affirmed that a successful BFPP defense hinges upon compliance with both the ASTM Standard and AAI regulations. Specifically, the Phase I must include an “Environmental Professional’s Statement” in accordance with 40 CFR 312.21, which provides that the environmental professional has the education, training, and experience to perform the Phase I assessment. In addition, the Phase I must include the requisite inquiries into current and past ownership and uses of the property per 40 CFR 312.22. Because these components were lacking, the Phase I could not be used to support the BFPP defense.
Interestingly, while the court took a strict view of certain Phase Is that were relied upon by the defendants for the BFPP defense, the court also determined in a previous summary judgement decision that a Phase I was not the only way to satisfy the all appropriate inquiries component of the statutory defense. In granting summary judgement in favor of one defendant property owner, the court recognized a BFPP defense based on that defendant’s Phase II Site Investigation conducted prior to purchasing the property. The defendant’s response actions, as recommended by the Phase II, were sufficient for the court to find that defendant to be a BFPP, despite having not commissioned a Phase I.
Despite this quirk at the summary judgment stage, the key takeaway from the Van Duprin case is that a Phase I is more than just a vehicle to identify recognized environmental conditions. Administrative details and form matter and can have significant legal implications. It is important to ensure that the Phase I is completed or updated within the 180-day window before signing a lease or closing a real estate acquisition. And, the Phase I report must follow the required language specified in the ASTM Standard E-1527-13 and AAI regulations, including the obligatory Environmental Professional’s Statement and information regarding current and past ownership and use of the parcel. Consequently, it is advisable that the Phase I process be incorporated into broader transaction timetables and that Phase I reports be first prepared in draft for legal counsel review to ensure all requirements are met to satisfy the BFPP defense.
