EBI’s current blog series is based around non-standard conditions that raise red flags during environmental site assessments (ESAs).
This first post will look at the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), laws that essentially created the need for environmental due diligence, putting into perspective the significance of scrupulous environmental assessments.
The Genesis of Environmental Due Diligence
In the 1970s, environmental disasters were getting tremendous media attention. The public was witnessing black sludge and oils filling the yards and basements of residents in Love Canal, NY, an entire town abandoned in Times Beach, MO, and headlines reporting spiked rates of leukemia in neighborhoods of Woburn, MA, all tracing back to hazardous-waste pollution. Without sufficient regulations in place, many companies handled and disposed of toxic wastes recklessly, and often abandoned or sold contaminated sites. ESAs were seldom performed and cover-ups were common as the public demanded responsibility for pollution and its effects.
Love Canal, NY
Times Beach, MO
Around the same time that the Love Canal disaster was being exposed in 1976, congress enacted the Resource Conservation and Recovery Act (the public law that creates the framework for the proper management of hazardous and non-hazardous solid waste) and the Toxic Substances Control Act (the law that regulates the introduction of new or already existing chemicals). While these laws aimed to control any future risks of hazardous wastes to the environment or public health, they did not address sites that were already contaminated.
Four years later, CERCLA, commonly known as Superfund, was enacted as a measure to clean up hazardous waste sites that have been abandoned or uncontrolled in addition to accidents or other releases of contaminants. “CERCLA has four parts:
- It establishes a system to identify chemical dump sites and develop priorities for cleanup actions
- It grants authority to the EPA to engage in “removal” actions to respond to emergency situations involving hazardous substances and to engage in “remedial” actions to clean up hazardous waste sites
- CERCLA creates a Hazardous Substances Trust Fund to pay for removal of hazardous wastes and for remediation actions at hazardous waste sites
- It places liability for cleanup costs upon “responsible parties” who contributed wastes to the site being cleaned up” [i]
The last measure listed may be the most controversial, as it begets the question – who pays? While there is a fund established for certain cases, CERCLA challenges to go by the “polluters pay” methodology.
Potentially Responsible Parties
CERCLA established procedures to determine liable parties, or potentially responsible parties (PRPs), for the cleanup of contaminated sites. Four classes of PRPs may be liable for contamination at a site:
- The current owner or operator of the site
- The owner or operator of a site at the time that disposal of a hazardous substance, pollutant or contaminant occurred
- A person who arranged for the disposal of a hazardous substance, pollutant or contaminant at a site
- A person who transported a hazardous substance, pollutant or contaminant to a site, who also has selected that site for the disposal of the hazardous substances, pollutants or contaminants [ii]
Notice that the first PRP class listed does not state that they have contributed to the contamination, simply that they are the current owner or operator. In 2001, an amendment was passed to mitigate the fear of total liability which hindered redevelopment of contaminated sites. However, it still stands that the current owner or operator could be liable if they are not qualified as a bona-fide prospective purchaser (BFPP) under CERCLA.
BFPP Status and Liability Protection
BFPPs must acquire the property after January 11, 2002 and satisfy specific criteria outlined in CERCLA, including three threshold requirements and five continuing obligations.
The threshold requirements state that the disposal of contamination must have occurred prior to acquisition, the purchaser must not be affiliated with any potentially responsible party, and they must conduct “all appropriate inquiry” (AAI) into the past and present condition of the property prior to title transfer. AAI is the process of evaluating a property’s environmental conditions and assessing potential liability for any contamination. The EPA has set its own standards for AAI, but suggests following the recommendations published in ASTM E1527-13, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, as it is the basis for AAI standards.
If the threshold requirements are met, then the purchaser must agree to the five continuing obligations:
- Provide all legally required notices with respect to the discovery or release of any hazardous substances on the property
- Exercise appropriate care with respect to hazardous substances found at the property
- Provide full cooperation, support, assistance, and access to persons authorized to conduct response actions at the property
- Be in compliance with land use restrictions and you must not impede the effectiveness or integrity of any institutional controls
- Comply with any request for information or administrative subpoena
This overview of CERCLA reflects the importance of environmental due diligence, specifically Phase I ESAs, in acquisitions. An ESA, when performed according to standards, can offer certain protections to the purchaser if contamination is found on a property. Just consider that if someone purchases a property without conducting investigations in accordance with CERCLA standards and finds out later it is contaminated, by law they could be responsible for the cleanup. The significance of retaining a proactive and vigilant environmental consulting team is also greatly underscored when considering these potential liabilities.
[ii] CERCLA section 107(a)(1-4)