1037 Twenty First Annual Advanced ALI-ABA Course of Study The Impact of Environmental Law on Real Estate Transactions: Brownfields and Beyond October 2-3, 2008 Boston, Massachusetts Contractual Allocation of Environmental Risk in Transactions: Case Law Developments Under CERCLA By David B. Farer Farer Fersko, P.A. Westfield, New Jersey Copyright 2008 David B. Farer. The author gratefully acknowledges the assistance of Abigail M. Jones and Maureen Benson in the update and preparation of these materials.
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1039 CONTRACTUAL ALLOCATION OF ENVIRONMENTAL RISK IN TRANSACTIONS: CASE LAW DEVELOPMENTS UNDER CERCLA David B. Farer, Esq.* Farer Fersko Westfield, New Jersey Updated to August 2008 I. Case Law as to Caveat Emptor: 1. Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049 (D.Ariz. 1984), aff'd, 804 F.2d 1454 (9th Cir. 1986). "As is" clause only precludes breach of warranty action. 2. Sunnen Prod. Co. v. Chemtech Indus., Inc., 658 F. Supp. 276 (E.D.Mo. 1987). Party which owned property at time of release cannot shift liability to purchaser by claiming caveat emptor. 3. Smith Land & Improvement Co. v. Celotex Corp., 851 F.2d 86 (3d Cir. 1988), cert. denied, 488 U.S. 1029 (1989). Doctrine of caveat emptor is not a defense to CERCLA claims and cannot be invoked to transfer liability to purchaser. 4. Southland Corp. v. Ashland Oil, Inc., 696 F. Supp. 994 (D.N.J. 1988). Caveat emptor doctrine inapplicable in CERCLA action. "As is" clause inapplicable in action not based on breach of warranty. 5. International Clinical Lab. v. Stevens, 710 F. Supp. 466 (E.D.N.Y. 1989). "As is" clause does not bar CERCLA lawsuit; only precludes breach of warranty action. * Copyright 2008 by David B. Farer. The author gratefully acknowledges the assistance of Abigail M. Jones and Maureen Benson in the update and preparation of these materials. 1
1040 6. Allied Corp. v. Frola, 730 F. Supp. 626 (D.N.J. 1990) "As is" clause precludes action for breach of implied representations as to condition of property, but does not preclude either CERCLA or New Jersey common law claims, which cannot be precluded by contract unless buyer knowingly accepts responsibility. 7. Westwood Pharm., Inc. v. National Fuel Gas Distrib. Corp., 737 F. Supp. 1272 (W.D.N.Y. 1990), aff'd on reconsideration, 767 F. Supp. 456 (W.D.N.Y. 1991), aff'd, 964 F.2d 85 (2d Cir. 1992). In rejecting caveat emptor argument, court notes that it is difficult to imagine how buyer could have bargained away CERCLA liability eight years before the statute was passed. 8. Alcan-Toyo America v. Northern Ill. Gas Co., 881 F. Supp 342 (N.D.Ill. 1995). Court considers doctrine of caveat emptor as one element to be considered in equitable allocation, and concludes that buyer should bear "some" responsibility for response costs. 9. New West Urban Renewal Co. v. Westinghouse Electric Corp., 909 F. Supp. 219 (D.N.J. 1995). In 1983 real estate transaction between two sophisticated entities, "as is" clause found insufficient to contractually allocate CERCLA liability. See case 89 below, under "Case Law as to Contract," for decision on subsequent litigation. 10. M & M Realty Company v. Eberton Terminal Corporation, 977 F. Supp. 683 (M.D.Pa. 1997). 1994 sale agreement includes "Environmental Contingency" clause providing that buyer's obligation to purchase is subject to buyer's satisfaction with its own environmental audit, and specifying that if buyer closes it accepts the property "as is," based on its own investigation, with no reliance on any statements or representations by seller. Seller argues that the clause allocated all environmental liability to the buyer. 2
1041 Finding no Pennsylvania law considering the effect of an "as is" provision on CERCLA liability, court follows majority of federal courts in determining that the clause does not bar buyer's CERCLA claims, but does bar buyer's claims of breach of warranty, fraud, and implied warranty of good faith and fair dealing. 11. Foster v. U.S., 130 F. Supp. 2d 68 (D.D.C. 2001). A buyer's 1985 acquisition of property in "as is" condition was not tantamount to assumption of risk for contaminants of which buyer had no knowledge. Nor did "as is" clause inure to the benefit of a non-party to the 1985 transaction, who was not an intended third party beneficiary of the terms of the deal. 12. New York v. Westwood-Squibb Pharmaceutical, 2004 WL 1570261 (W.D.N.Y. May 25, 2004). Non-jury trial proceeds on litigation that was the subject of the Westwood Pharmaceutical case (see case 7 above), and court renders findings of fact on allocation. Court finds no compelling reason to shift any portion of the responsibility for the cleanup from the polluter-seller to the buyer under the doctrine of caveat emptor. Considering all facts and circumstances, court finds it fair and equitable for polluter to bear 90% of past and future costs, and for the buyer to bear the remaining 10%. 13. XDP, Inc v. Watmull Properties Corp., 2004 WL 1103023 (D. Or. May 16, 2004). In multi-party dispute over cleanup of historical contamination at manufacturing site, a former owner-operator seeks summary judgment against the buyer on issues of defense and indemnity based on a 1989 agreement. Agreement was in lieu of foreclosure that settled claims of the buyer on a series of defaulted loans previously made by the seller. As part of the agreement, the seller was released from further liability on the loans in exchange for the transfer of assets, including the property that is the subject of the contamination dispute. 3