On April 4, 2013 the Court of Appeals issued its opinion upholding the trial’s ruling that the BFPP defense did not apply to Ashley. Although the district court’s decision was based on several facts, the Court focused on only one of them: Ashley’s failure to exercise appropriate care by: (i) stopping continuing releases; (ii) preventing future releases; and (iii) limiting human or environmental exposures. On appeal, Ashley argued that the “appropriate care” required under CERCLA should be a lower threshold for developers given Congress’ intent to promote brownfield redevelopment. The 4th Circuit rejected this. In doing so it examined what steps must be taken to satisfy the “appropriate care” requirement. The Court concluded that the Second Circuit’s due care inquiry was the appropriate assessment. That inquiry looks at whether the party “took all precautions with respect to the particular waste that a similarly situated reasonable and prudent person would have taken in light of the circumstances.” [Citing, New York v. Lashins Arcade Co., 91 F3d 353, 361 (2d Cir. 1996)] In Ashley’s situation, the Court noted that Ashley’s failure to fill certain sumps demonstrated it did not take reasonable steps that a similarly situated person would have taken.

The 4th Circuit’s decision should be a warning to all developers; do not presume that BFPP or innocent purchaser status shields you from properly handling contaminants when the site is redeveloped. Developers should establish, and follow, a clear due care plan that describes: how continuing and future releases are to be handled and how human and environmental exposures are to be controlled. Failure to do so could result in liability for response costs beyond what was originally contemplated.

The post Redevelopments Gone Bad: An Update on Ashley II of Charleston LLC V. PCS Nitrogen INC. appeared first on Dawda PLC.

I. Nu-West Mining Inc. v United States (U.S.D.C., Idaho, 4:CV 09-431-BLW)

This case involved mining leases that the governor awarded in the late 1940s. As part of the leases, the lessees had the right to dump waste rock on national forest land adjacent to the leased mines. During the mining operations, the government approved plans for mining waste disposal and reclamation, monitored the mining process, required the mines to meet certain production requirements, and collected a royalty fee. Unfortunately, the government-approved waste pile design allowed selenium to leach out of the waste pile and contaminant the groundwater in the area around the mines.

Cost Recovery Suit Against The US.
In the 1990s, Nu-West entered into an AOC to clean up the sites and filed suit against the US under the “arranger” liability provisions of CERCLA §107 to recoup those costs. The court, in analyzing the government’s potential arranger liability, primarily relied on prior rulings in U.S. v Shell Oil Company (294 F.3d 1035(9th Cir. 2002)) and Burlington Northern and Santa Fe Railroad Company v U.S. (129 S.Ct. 1870 (2009)). In particular, the Nu-West court focused on the Shell Oil court’s statement that an entity has “arranger liability” if it has “direct involvement in arrangements for the disposal of waste”. Shell at 1055. It also focused on the following three elements relied upon by the Shell Court:

(1) whether the entity owns the hazardous substance;

(2) whether the entity had authority to control the disposal; and

(3) whether the entity exercised some actual control over the disposal.

In addition, the court relied on Burlington Northern’s interpretation of to “arrange for” as meaning that an arranger must take “intentional steps to dispose of a hazardous substance”.

US Liable As An Arranger
Because the US owned the waste piles, had authority to control the disposal, and exercised control over the disposal, the Nu-West court concluded that the US was liable as an “arranger” under CERCLA §107. The court also rejected the government’s argument that its conduct was purely regulatory and was intended to only mitigate the environmental harm caused by the parties. In doing so, the court noted that the government previously waived its sovereign immunity under CERCLA and has even been liable under CERCLA in situations that “cannot possibly be characterized as “non-governmental” (i.e., military base operation).

II. Pakootas v Teck Cominco Metals, Ltd. et al. (U.S.D.C., E.D. Wash; 2:04-CV-00256-LRS)

Like Nu-West, the State of Washington entered into mining leases in the 1940s for the purposes of removing copper, silver, lead, gold and other valuable minerals from State land. Although the contract specified a royalty payment to the State, it did not address waste disposal.

Cost Recovery Suit Against the State
The plaintiffs’ land was contaminated by the defendant’s historical mining operations and they filed suit under CERCLA. The defendant filed a counterclaim against the State as a CERCLA §107 “arranger”. The defendant claimed that waste disposal was an inherent part of mining and, therefore, the State had contracted for waste disposal by contracting for the mining.

State of Washington Not Liable As An Arranger
The court rejected the rationale of the defendant’s argument. In doing so, the court relied heavily on the Supreme Court’s analysis in Burlington Northern case:

It is plain from the language of the statute that CERCLA liability would attach under Section 9607(a)(3) if an entity were to enter into a transaction for the sole purpose of discarding a no longer useful hazardous substance. It is similarly clear that an entity could not be held liable as an arranger merely for selling a new and useful product if the purchaser of that product later, and unbeknownst to the seller, disposed of the product in a way that led to contamination. Less clear is the liability attaching to the many permutations of “arrangements” that fall between these two extremes – cases in which the seller has some knowledge of buyer’s planned disposal or whose motives for the “sale” of a hazardous substance are less than clear. In such cases, courts have concluded that the determination whether an entity as an arranger requires a fact-intensive inquiry that looks beyond the parties’ characterization of a transaction as a “disposal” or “sale” that seeks to discern whether the arrangement was: (1) Congress intended to fall within the scope of CERCLA’s strict liability provisions. (129 S.Ct. 1878-79)

Using this analysis, the Pakootas court found that the State mining leases before it were not like any of the “extreme” cases referenced in Burlington Northern. The court also found that the State did not enter into these mining contracts for the sole purpose of discarding a used and no-longer useful hazardous substance because the ore deposits were useful. However, the State had some knowledge of the disposal so the case was the type that fell in between the two extremes.

Therefore, the court performed a fact intensive inquiry whether the lease between the State and mining companies in question was the type “(1) Congress intended to fall within the scope of CERCLA’s strict liability provisions”. Relying on the Supreme Court’s analysis in the Burlington Northern decision, the trial court stated that “disposal and/or treatment of hazardous waste cannot be merely “foreseeable”. It must be a specific purpose of the transaction, not merely “inherent” in the transaction.

In terms of the facts before it, the court noted the following: naturally ore deposits did not have the “characteristic of waste” when they were “delivered” to the mining companies pursuant to the leases, there was no intent by the State to dispose of the mining waste merely because of the mining, disposal of hazardous waste was not the purpose of the transaction, the State did not require the mining companies to dispose of the waste in any particular manner, the ore deposits did not have the characteristic of waste and the State never owned or possessed any hazardous waste. In light of these factors, the court held that the State did not qualify as an “arranger” under CERCLA §107.

Reconciling the Cases
Comparing the two cases, it’s pretty clear why the courts wound up with two seemingly different results. In Nu-West, the court focused on the fact that the US Government owned the property where the waste was disposed and the Government’s intimate involvement with approving the waste pile design. The mining leases in the Pakootas case, on the other hand, simply addressed mining and were silent on waste disposal or handling.

However, what these seemingly disparate cases show is that the more a government agency becomes involved in the manner of handling the mining wastes, the more likely it is to be held liable as an “arranger” under CERCLA. This is a very odd result indeed from a policy perspective because it discourages government agencies form overseeing and ensure that wastes are handled properly.

The post Can Governments Really Be Held Liable Under Cercla for Mine Waste Contamination? appeared first on Dawda PLC.

Ashley II originated in South Carolina and was heralded as one of the first cases to examine CERCLA’s Bona Fide Perspective Purchaser (“BFPP”) defense (which provides a liability defense to purchasers). You would think that this would be a good thing. In this case, it wasn’t.

Background

The background of Ashley II is a lot like the Saline case; a developer being held liable for contamination on a brownfield redevelopment. The property that Ashley intended to redevelop into a sustainable/mixed use redevelopment was contaminated with arsenic, lead and other substances as a result of historical fertilizer plant operations.

As part of its acquisition, Ashley indemnified the sellers of both parcels. Ashley also had Phase I Environmental Site Assessments performed for each of the parcels prior to purchase, and hired an environmental engineer to oversee the environmental aspects of the development. The site was gated and patrolled and during the development, Ashley’s environmental engineer would inspect the property. On one of these occasions, the engineer noted areas of staining, neglected trash piles and, on the smaller parcel, some cement pads, sumps, trenches and pipes. Because Ashley left these structures in place during development, they collected water that caused a release of contaminants into the soil.

During the development, Ashley brought a CERCLA §107 cost recovery action against the prior owners, PCS, and the PCS filed a claim for contribution from Ashley and others under CERCLA §113. Because Ashley performed a Phase I before acquiring the property, Ashley tried to rely on the BFPP defense of CERCLA §107(r), however, the trial court didn’t buy it.

Elements of BFPP Defense

In ruling against Ashley, the district court noted that Ashley had to prove the following eight elements by preponderance of the evidence to rely on the BFPP defense:

1. The hazardous substances in question were disposed at the facility prior to the buyer’s purchase;
2. The buyer conducted All Appropriate Inquiry into the prior history of the site;
3. The buyer provided all legally required notices regarding the contamination;
4. The buyer exercised due care with respect to hazardous substances found at the facility;
5. The buyer cooperated with persons authorized to respond to the contamination;
6. The buyer complied with land use restrictions;
7. The buyer complied with any requests for information; and
8. The buyer did not have any affiliation with a liable party.

The court examined each one of these elements as they applied to Ashley and determined that it failed on the first, fourth and eight elements. With regard to the first, the court noted that it was likely that hazardous substances were disposed on the property when Ashley removed the water containing sumps and piping. Also, the court noted that Ashley failed to exercise due care because it did not clean out the sumps and left them exposed to the elements. Further, the court pointed to the debris pile as further evidence that Ashley did not use appropriate care.

Affiliation and Loss of BFPP Status

However, it was the court’s analysis of the “affiliation” element that was strange on a number of levels. In its opinion, the court explained that Ashley had to prove that it was not:

• A potentially responsible party;
• Affiliated with persons that are potentially liable for response costs at the site through: (a) any direct or indirect familial relationship; or (b) any contractual, corporate, or financial relationship; and
• The result of a business reorganization.

The court held that Ashley failed to meet the first and second elements. When you look at the actual language of the CERCLA affiliation requirement, though, it’s pretty clear that the court’s recitation of the CERCLA affiliation elements is incorrect. CERCLA §101(40)(H) actually requires the following showing:

The person is not –

(i) potentially liable, or affiliated with any other person that is potentially liable, for response costs at a facility through –
(I) any direct or indirect familial relationship; or
(II) any contractual, corporate, or financial relationship . . . . ; or
(ii) the result of reorganization of a business entity that was potentially liable.

Grammar and sentence structure are key here. If you look closely, subsection (i) actually requires a buyer to show the following: that it is not potentially liable for response costs at a facility:

• Through any direct or indirect familial relationship; or
• Through any contractual, corporate, or financial relationship.

A buyer must also show that it is not affiliated with any other person that is potentially liable for response costs at a facility:

• Through any direct or indirect familial relationship; or
• Through any contractual, corporate, or financial relationship.

Lastly, the buyer must show that it is not the result of a reorganization of a business entity that was potentially liable.

As you can see, there is a strong argument that the court misinterpreted §101(40)(H)(i) as imposing an additional requirement on buyers: to prove that they are not potentially responsible parties (PRPs). However, that is not the requirement. By reading this additional element into the statute, the court gutted the BFFP defense to PRP liability. All purchasers of contaminated property by definition fall within the large category of “PRPs.” Because of this broad definition, buyers who had no relation to the contamination were at risk for being held liable to clean it up. To correct this (and to encourage redevelopment of impaired sites) Congress created CERCLA’s BFPP defense to limit a buyer’s liability Following the court’s logic, however, all buyers of contaminated property would never qualify for the BFPP defense because it would always fail the court’s first element.

The second part of the court’s analysis that developers need to be aware of is how the court applied the “affiliation” requirement to Ashley’s conduct. Although the court found that Ashley did not have any familial relationship with any responsible party, the court ruled that Ashley was affiliated with one of the PRPs (the seller) because: (1) Ashley had indemnified and released the seller in the purchase agreement and (2) Ashley tried to discourage the EPA from taking enforcement action against the seller. The court noted: “In indemnifying [the seller], Ashley took the risk that [the seller] might be liable for response costs. Ashley’s efforts to discourage the EPA from recovering response costs covered by the indemnification reveals just the sort of affiliation Congress intended to discourage.” As a result, Ashley was not able to rely on the BFPP defense and was found liable for a portion of the site’s cleanup costs.

However, the ruling is unclear; was it just the indemnification and release, or was it Ashley’s attempts to affirmatively persuade the EPA not to take action against the seller that caused the court to characterize the relationship as an affiliation?

The Chill

Regardless, this holding is unsettling because of its potential chilling effect on buyers and sellers of contaminated property. Contractual indemnifications are quite common and can be a useful risk-shifting mechanism in the sale of contaminated property. If this ruling is upheld on the appellate level, it could impede the use of such arrangements where the buyer wants to take advantage of the BFPP defense.

Because Ashley has appealed this case to the Fourth Circuit Court of Appeals, the trial court’s analysis of the BFPP defense may just become a small footnote in the law governing the CERCLA BFPP defense. However, given its potential ramifications if it is upheld, this case should be watched closely. We will continue to monitor and provide an update in the future.

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