ALI-ABA Course of Study Environmental Law

201 ALI-ABA Course of Study Environmental Law Cosponsored by the Environmental Law Institute and The Smithsonian Institution February 4-6, 2009 Washington, D.C. Federal Environmental Law and the Redevelopment of Contaminated Sites By Walter E. Mugdan U.S. Environmental Protection Agency, Region II New York, New York

202 2

203 FEDERAL ENVIRONMENTAL LAW AND THE REDEVELOPMENT OF CONTAMINATED SITES By: Walter E. Mugdan 1 Director, Division of Environmental Planning & Protection U.S. Environmental Protection Agency Region 2 December, 2008 Introduction For more than a dozen years the U.S. Environmental Protection Agency (EPA) has been actively promoting the redevelopment of sites contaminated with hazardous substances commonly called brownfields. Brownfields are abandoned or under-used industrial or commercial properties where redevelopment is hampered by real or perceived environmental contamination. Due in part to the risks associated with brownfields, developers have often turned instead to greenfields, land previously undeveloped (or used only for agricultural purposes). This trend has contributed to the economic decay of older urban areas, and has added to sprawl. 2 While many factors may cause investors to shy away from brownfields, it was the Superfund law of 1980 that created much of the risk associated with ownership of previously contaminated sites. CERCLA s revolutionary liability scheme assigned liability for the costs of cleanup to a number of classes of responsible party, including the current owners and operators of a contaminated site. Court cases in the early years of the program confirmed that CERCLA liability for the enumerated classes of responsible parties was with narrow exceptions strict, joint, several, perpetual and (effectively) retroactive. Set against this backdrop, the unattractiveness of an old industrial or commercial site is easy to understand. What buyer would voluntarily turn himself into a potentially responsible party (PRP) by becoming the owner of an older facility or site with known or worse unknown environmental problems? Such a site may already be, or may become, the subject of lengthy, disruptive and costly government-sponsored cleanup work; and under the Superfund liability scheme the new owner would become legally liable for the unknown but potentially substantial costs of that work. Even if a prospective purchaser, for reasons of her own, might be willing to accept such a risk, she might not be able to borrow money to do the deal. As lending institutions learned more about 1 Any opinions expressed in this article are those of the author, and do not necessarily reflect the position of the U.S. Environmental Protection Agency. 2 The Comprehensive Environmental Response, Compensation and Liability Act or CERCLA, 41 U.S.C. 9601 et seq., first enacted in December, 1980, and amended several times since. 1

204 Superfund in the late 1980s and into the 1990s they stayed away in droves from association with any brownfields property. At every level of government, among civic and environmental groups, and among more far-sighted developers, it was recognized that this was an undesirable state of affairs. Environmental laws with otherwise salutary purposes had unintentionally placed a roadblock in the path of urban redevelopment, and added to developers inclinations to site new facilities in rural areas. Of course, many factors influence the decision of a prospective buyer whether or not to acquire and redevelop a certain piece of property. As in all real estate deals, the most important factor is likely to be location the intrinsic desirability of the site in terms of such considerations as its proximity to natural resources, infrastructure, population centers, etc., and the prevailing economic and social conditions. The environmental conditions of the property and adjacent areas are also factors that must be taken into consideration. As to these, Government can provide three things to prospective purchasers and developers to make brownfields more attractive: Information, Money, and Clarification or Liquidation of Liability. Information: Government can provide (a) information about the site itself i.e., data the government has already gathered or is gathering about conditions at the site; and (b) information about cleanup expectations, i.e., what cleanup standards will be imposed, what flexibility will be allowed, to what extent future land use will be considered, whether institutional controls may be used, etc. Money: The federal and state governments can provide direct grants to municipalities to inventory sites, do planning, or develop a brownfields program; and grants can be provided to municipalities, site owners or non-governmental organizations to carry out actual site cleanups. Government can, of course, also spend money directly to carry out site cleanups, as for example under the federal Superfund law and state analogs, but this can impose liability which, if not satisfactorily clarified or liquidated, may further hinder the redevelopment of brownfields. Clarification or Liquidation of Liability: Government can address uncertainty about liability on the part of prospective purchasers, would-be redevelopers and lenders by clarifying or resolving, in advance of acquisition, the extent of liability. 2

205 A. More and Better Information One of the most important elements necessary for encouraging and facilitating redevelopment of brownfields is for all potential parties to the transaction to have better information about the nature and extent of any contamination. All levels of government may play a role in gathering such information, and making it available to potential developers. With respect to federal Superfund sites i.e., the several thousand sites at which EPA has carried out a removal and/or remedial response action under CERCLA substantial information has usually been gathered. EPA will, of course, share that information with prospective purchasers (or any interested party). EPA also has a data base, known as CERCLIS, containing more limited information about tens of thousands of additional known or suspected hazardous substance release sites. In some circumstances EPA will summarize its available information and provide a statement of its future intentions with regard to action at a site (known as a comfort letter see Section II.C.2.a., below). State governments have their own inventories with data about many thousands of other sites. Local governments may also have substantial amounts of pertinent data. Information is needed by potential sellers and buyers of brownfields to answer a variety of crucial questions: Is the site contaminated today, or was it contaminated in the past? If so, by what chemicals, in what quantities, and to what extent? Has any cleanup work been done at the site? What are the details? Is it likely that additional cleanup work will be necessary in the future, due to currently existing contamination? If so, how long will it take? How much will the cleanup work prevent or disrupt other activities at the site? Most important, how much will it cost and who will pay? Each of these questions, and particularly the last, will figure directly in the prospective purchaser s decision about whether or not to buy the brownfields site and, of course, for what price. Prospective purchasers need access to all the information available from government to answer these questions, and government can do much to promote brownfields redevelopment by being able and willing to share such data on a timely basis. However, government will not have detailed environmental data about many (perhaps even most) brownfields sites. For that reason, as set out further below, there is a federal grants program to assist municipalities by providing seed money to help the local government develop an inventory and information database about its brownfields, and to help establish community planning and outreach efforts designed to promote brownfields cleanup and redevelopment. Good information is critical if private developers are to be tempted back to industrialized urban areas. Though government can do much in this regard, it can certainly not do it all. 3

206 Savvy owners of brownfields may choose to fund their own, more detailed, site-specific environmental assessments, which can be shared with prospective purchasers. To a considerable extent, however, prospective purchasers will need and want to rely on their own experts to gather additional environmental data and/or interpret existing data. Indeed, as discussed further below, carrying out all appropriate inquiries into the environmental conditions at a piece of property is an essential component of good business practice, and will be very important for liability purposes. Fortunately, as environmental cleanup science and technology has matured over the past decades, it has become substantially easier to accurately predict how much a given site cleanup is likely to cost. In the early 1980's, during the infancy of the Superfund program, cleanup cost estimates were often wrong by factors of four or more; and sometimes even by an order of magnitude. Similarly, estimates of the time it would take to select, design and complete a cleanup were often wildly optimistic. Today, knowledgeable experts can at least for many sites involving common environmental problems estimate the likely costs and duration of cleanup work with considerable accuracy. This is precisely the kind of information that prospective sellers and buyers need in order to intelligently estimate risks and set realistic prices. B. Money 1. Superfund and State Analogs. The largest source of funding for cleanup of sites with hazardous substance contamination is, of course, the Superfund that is, a government-funded cleanup under the federal CERCLA and/or state analog laws. The obvious drawback of this source of funding is that it creates precisely the kind of liability concerns that potential brownfields redevelopers and municipalities typically wish to avoid (but see II.C., below). A number of states provide direct grants to municipalities for actual cleanup of brownfields sites. These may require some matching funding from the recipient. 2. Direct Federal Grants. There is also federal grant funding available. The Small Business Liability Relief and Brownfields Revitalization Act ( the Brownfields 3 Law ), included significant amendments to CERCLA. Among other things, the Brownfields Law authorizes up to $200 million per year for brownfields assessment and cleanup. This includes $50 million per year (or 25% of the total amount funded, 4 if less than $200 million) for brownfields with petroleum contamination. The term Brownfields Site is defined as real property, the expansion, redevelopment, or 3 Pub. L. No. 107-118 4 Section 211(b) of the Brownfields Law establishes a new subsection (k) in CERCLA 104, 42 U.S.C. 9604. Paragraph 12 of the new subsection provides this substantial federal funding for brownfields work. 4

207 reuse of which may be complicated by the presence of a hazardous substance, 5 pollutant, or contaminant. Excluded from the definition of Brownfields Site is 6 any facility that is: subject to a planned or ongoing CERCLA removal action; listed or proposed for listing on the CERCLA National Priorities List (NPL); subject to a unilateral administrative order, court order, administrative order on consent, or consent decree under CERCLA; the subject of a unilateral administrative order, court order, administrative order on consent, consent decree, or permit under the Resource Conservation & Recovery Act (RCRA, 42 U.S.C. 6901 et seq.), the Clean Water Act (CWA, 33 U.S.C. 1251 et seq.), the Toxic Substances Control Act (TSCA, 15 U.S.C. 2601 et seq.) or the Safe Drinking Water Act (SDWA, 42 U.S.C. 300f et seq.); subject to corrective action under RCRA 3004(u) or 3008(h), 42 U.S.C. 6924(u) or 6928(h), and the subject of a corrective action permit or order requiring the implementation of corrective measures; a land disposal unit with closure notification submitted and a closure plan or permit; located on federal land; subject to remediation under TSCA for PCB contamination; or the recipient of assistance for response activity from the Leaking Underground Storage Tank Fund established in Subtitle I of RCRA. While thus limiting the categories of sites eligible for 104(k) Brownfields Revitalization funding, Congress on the other hand identified several additional areas which are added to the class of sites eligible for such funding: land contaminated by petroleum or petroleum products; land contaminated by a controlled substance (drug labs); and mine-scarred land. Entities eligible for Brownfields funding include States, Indian Tribes, local governments, land clearance authorities, regional councils, redevelopment agencies 5 Section 211(a) of the Brownfields Law establishes this new subsection (39) in CERCLA 101, 42 U.S.C. 9601, the definitions section. 6 The President is authorized to provide funding for some sites that would otherwise be excluded under the list in the text above, if doing so would protect human health and the environment, and either promote economic development or enable the creation of, preservation of, or addition to parks, greenways, undeveloped property, other recreational property, or other property used for nonprofit purposes. CERCLA 101(39). 5

208 and other quasi-governmental entities created by States or local governments; in limited circumstances, private non-profit groups are also eligible. The Brownfields Law authorizes grants of up to $200,000 per eligible entity to inventory, characterize, assess and conduct planning at brownfields sites; authorizes targeted site assessments at brownfields sites; authorizes grants of up to $1 million to eligible entities to capitalize revolving loan funds to clean up brownfields; and authorizes grants of up to $200,000 per site to eligible entities or non-profit organizations to clean up brownfields owned by the grant recipient. These grants generally require a 20% match; significant restrictions are imposed on charging administrative costs to grants; and construction, alteration and repair work funded all or in part with grant funds is subject to the Davis Bacon Act, which requires contractors to pay employees prevailing wages. The Brownfields Law also establishes a program to provide training, research and technical assistance to facilitate brownfields assessment and cleanup, but limits spending for this program to no more than 15% of total program funding. 3. Federal Grants for State Response Programs. Section 231 of the Brownfields Law authorizes $50 million per year for grants to assist States in the development of their own response programs. In order to receive such grants the State may have a memorandum of agreement with EPA, or may include or be working toward including the following elements in its program: timely survey and inventory of brownfields sites; oversight and enforcement authorities to ensure protection of human health and environment; meaningful public participation; and a mechanism for approval of a cleanup plan and certification that response is complete. 6

209 C. Clarification or Liquidation of Liability One of the most important things government can do to encourage redevelopment of brownfields is to clarify, and where possible resolve or liquidate the liability or potential liability of would-be redevelopers and the lending community upon which they depend. 7 1. Greater Certainty for Lenders. After the watershed Fleet Factors court case, EPA agreed with the lending community that it needed greater certainty regarding the kinds of actions that would and would not turn lenders into PRPs with respect to federal Superfund sites. In 1992, EPA promulgated a rule interpreting the liability 8 provisions of CERCLA with respect to lenders. However, this rule was promptly 9 challenged in Kelley, et al. v. EPA. Congress responded by passing the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (known 10 generally as the Asset Conservation Act or ACA). That law amended, inter alia, 11 the secured creditor exemption of CERCLA, and validated a portion of EPA s Lender Liability Rule concerned with involuntary acquisitions by government entities. The law took effect on September 30, 1996 and is applicable to actions then pending against lenders and fiduciaries (and, of course, to future actions). 12 7 901 F.2d 1550 (11th Cir. 1990), cert. denied, No. 90-504 (U.S. Jan. 14, 1991). The court in this case ruled that a lender can be held liable for a site owned or operated by its borrower, if the lender participated in the borrower's management to a degree indicating the capacity to influence the corporation's treatment of hazardous wastes. Id. at 1557 (emphasis added). 8 40 CFR Part 300.1100 et seq., 57 Fed. Reg. 18344. 9 15 F.3d 1100 (D.C. Cir. 1994), reh g denied, 25 F.3d 1088 (D.C. Cir. 1994), cert. denied, American Bankers Ass n v. Kelley, 115 S. Ct. 900 (1995) 10 110 Stat. 3009-462 11 As noted above, under CERCLA those who own or operate contaminated property may be held liable for the costs of cleanup. 42 U.S.C. 9607(a). Only limited affirmative defenses to liability exist. The term owner or operator is defined at 42 U.S.C. 9601(20). The definition excludes one who, without participating in the management of a... facility, holds indicia of ownership primarily to protect his security interest in the... facility (known as the security interest exemption ; emphasis added). The nature and extent of a lender s activities with respect to the operations of its borrowers thus become highly significant in determining lender liability. 12 For a more detailed discussion of the provisions of the ACA, see, e.g., Assessing Environmental Liability of Lenders and Fiduciaries Under the Asset Conservation Act by Maureen F. Leary, Environmental Law in New York, Vol. 9, No. 1, Jan. 1998, Matthew Bender & Co. 7

210 Using language very similar to the Lender Liability Rule, ACA defined or amended the definitions of certain important terms in CERCLA, and listed activities that a lender may engage in without being considered to have participated in the management of a borrower institution so as to forfeit the secured creditor exemption. ACA makes it clear that secured lenders who do not participate in management do not become owners/operators, and therefore are not liable. ACA specifically provides that lenders can take certain actions prior to and after foreclosure without vitiating the secured creditor exemption. They may sell, lease or liquidate the facility in question; maintain business activities or wind up operations at a facility; or undertake response actions with respect to hazardous substance contamination. These activities are only exempted if the lender is actively attempting to divest itself of the facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements. 13 Participation in management is also further clarified in ACA. It includes the exercise of decision-making control with respect to hazardous substance management and disposal at a facility; exercising overall, day-to-day management of a facility; and, importantly, exercising all operational control other than environmental compliance functions. (In other words, a lender cannot effectively take over a business yet try to avoid environmental liability by excluding itself only from the environmental functions.) On the other hand, many types of activities which lenders might engage in are specifically not deemed to constitute participation in management. These include, e.g.: providing financial or administrative advice and assistance to the borrower; restructuring a loan agreement; having the mere capacity to influence facility management, or the unexercised right to control operations; policing the terms of the loan contract, including environmental compliance terms; and requiring environmental response actions to be undertaken by the borrower, or directly undertaking such actions. 14 13 14 42 U.S.C. 9601(2)(E)(ii). 42 U.S.C. 9601(2)(F)(iii). 8

211 On June 30, 1997, EPA issued its Policy on Interpreting CERCLA Provisions 15 Addressing Lenders and Involuntary Acquisitions by Government Entities. This policy clarifies the circumstances in which EPA will apply the provisions of the Lender Liability Rule in interpreting the CERCLA secured creditor exemption as amended by the ACA: In light of the substantial similarities between CERCLA s amended secured creditor exemption and the CERCLA Lender Liability Rule, where the Rule and its [Federal Register] preamble provide additional clarification of the same or similar terms used in the secured creditor exemption, EPA intends to treat those portions of the Rule and preamble as guidance in interpreting the exemption. An example is the requirement that, in order to enjoy the exemption, a lender must seek to divest itself of a foreclosed-upon facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms... EPA will consult the portions of the Rule that describe how a lender may establish that it is undertaking to divest itself of the property in accordance with this requirement. 16 ACA also validated the portion of EPA s Rule that addresses involuntary acquisitions 17 by government entities. These situations typically arise when the government gains an interest in contaminated property by taking over the assets of failed financial institutions. Under the Rule, these are considered involuntary acquisitions by the government, which do not give rise to ownership liability. 18 15 See: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/lendr-aquis-mem.pdf 16 The Rule provides that a lender can foreclose and subsequently sell collateral property without becoming a responsible party for that property, providing it does so in a reasonably expeditious manner, using whatever commercially reasonable means are relevant and appropriate with respect to the... facility, taking all facts and circumstances into consideration, and providing that the holder [of the security interest] did not participate in management... prior to foreclosure... 40 CFR 300.1100(d). The lender can continue operating an enterprise after foreclosure in order to maintain its value pending sale. However, if the lender fails to make efforts to sell promptly after foreclosure, or rejects a fair offer to purchase, it may be deemed to be holding the property for investment purposes rather than just to secure a loan, thus voiding the liability exemption. 17 40 CFR 300.1105. 18 When interpreting the meaning of involuntary acquisition or transfer, EPA will consult the definition in the preamble to the Rule: Any acquisition or transfer in which the governments interest in, and ultimate ownership of, a specific asset exists only because the conduct of a non-governmental party as in the case of abandonment or escheat gives rise to a statutory or common law right to property on behalf of the government. 57 Fed. Reg. 18372 (1992). 9

212 2. Greater Certainty for Owners and Operators It is uncertainty, perhaps more than anything else, which stands in the way of brownfields redevelopment. Much of that uncertainty comes from the potential, under Superfund and similar state laws, for essentially unlimited liability on the part of a property owner including a new owner for the costs of any cleanup that government may determine needs to be carried out. This is true even when the contamination in question is attributable to past (often distantly past) owners. A key element to promoting brownfields redevelopment, therefore, is for government to be willing to clarify or even resolve (that is, liquidate) a prospective purchaser s potential liability before the acquisition takes place. EPA has created two mechanisms for clarification and liquidation of the potential liability of prospective purchasers: comfort letters and prospective purchaser agreements. And Congress, in the 2002 Brownfields Law, went further and exempted from liability certain classes of facility owners and operators. a. Comfort Letters. Though seen by some business people as not very comforting, the purpose of comfort and/or status letters is to provide prospective purchasers and others with the best, current information about the federal government s interest (or lack thereof) in a given site. In 1996 EPA 19 issued its Policy on the Issuance of Comfort/Status Letters. These letters summarize data available to EPA regarding a site and, importantly, summarize the federal government s past actions and future expectations with respect to response action at the site. It is this information which is intended to provide the comfort to one who has an interested in a possibly contaminated property. The policy makes it clear that EPA will not issue comfort letters for any piece of property in the United States, nor even for every site listed in its CERCLIS inventory of known or suspected hazardous substance release sites. On the contrary, comfort letters are available only for sites where there is a realistic perception or probability of [a prospective new owner] incurring Superfund liability. Such comfort as these letters may give is by way of providing useful information about the status of a site with respect to the federal Superfund program. Thus, they clarify the risk of liability for prospective purchasers, but do not resolve it. 19 November 8, 1996; see: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/comfort-let-mem.pdf 10

213 b. Prospective Purchaser Agreements Prospective Purchaser Agreements (PPAs), by contrast, provide actual resolution or liquidation of any legal liability the prospective purchaser might incur upon becoming an owner. For this reason, they are or were a highly desirable commodity. (As discussed further below, the need for PPAs has been substantially reduced by Congress, and thus their value has decreased.) EPA issued its Guidance on Agreements with Prospective Purchasers of Contaminated Property in 1995. An updated version of the attachment to this guidance a model agreement 20 was issued in 1999. The Guidance states that PPAs are available only for sites where there has been, or where there is a realistic expectation that there will be, a Superfund response action. This standard for issuance of PPAs is somewhat different from, and more restrictive than that which governs issuance of comfort letters. Both standards, and the policy documents in which they are embodied, make it clear that it is not EPA s intention to allow the Agency to be drawn into every private real estate transaction in the country. On the contrary: EPA is willing to become engaged in only a very limited number of transactions involving those properties that are or are very likely to be active Superfund sites. The heart of a PPA is a covenant not to sue the new owner for pre-existing contamination. The covenant is granted in exchange for appropriate consideration (see further discussion, below), and serves to resolve any liability the new owner might have towards the United States with respect to such pre-existing contamination at the site. Accordingly, the covenant also serves, pursuant to 113(f)(2) of CERCLA, to protect the new owner from possible contribution actions by other PRPs. It is these features which give (or gave) PPAs their substantial value. The guidance indicates that in consideration of granting the covenant not to sue, EPA should receive a substantial benefit either in the form of a direct benefit for cleanup, or as an indirect public benefit in combination with a reduced direct benefit to EPA. Earlier versions of this guidance had 20 October 1, 1999. The revised portion of the guidance is at: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/expreq-ppa-mem.pdf. The original 1995 guidance is at: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/prosper-cont-mem.pdf. Further clarifying guidance was issued January 10, 2001 in a memorandum from Barry Been, Director of EPA s Office of Site Remediation Enforcement, and Bruce Gelder, Chief of DOJ s Environmental Enforcement Section, entitled Support of Regional Efforts to Negotiate Prospective Purchaser Agreements (PPAs) at Superfund Sites and Clarification of PPA Guidance. This document and other pertinent additional, current information and subsequent guidance about PPAs can be found at: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/neg-ppasuper-mem.pdf 11

214 restricted the consideration to direct benefits cash or cleanup work. The current guidance recognizes the considerable indirect benefits that can come from brownfields redevelopment, and that these benefits can be coupled with reduced direct benefits to provide the necessary consideration for the PPA. Examples of indirect benefits to the community enumerated in the policy include: measures that serve to reduce substantially the risk posed by the site, creation or retention of jobs, development of abandoned or blighted property, creation of conservation or recreation areas, or provision of community services (such as improved public transportation and infrastructure). In summary, the prospective purchaser must be willing to provide suitable consideration to the United States in exchange for the PPA, which serves to resolve or terminate any further liability he might have acquired as a new owner of a Superfund site. That consideration may take the form of cleanup work, cash (reimbursement of past or expected future EPA costs), indirect benefits to society (from redevelopment) or some combination of these three. c. Liability Exemptions in the Brownfields Law. The 2002 Brownfields Law exempts from Superfund liability two classes of owner/operator: contiguous property owners and bona fide prospective purchasers (whose property may, however, still be subject to a federal windfall lien). The Brownfields law also provided further clarification with respect to a third class of owner/operator that had long been exempt from liability, the so-called innocent landowner. There are numerous conditions that each of these three classes of owner/operator must satisfy in order to enjoy the exemption from liability. Many of these conditions are common to all three classes, and are the subject of interpretive guidance issued by EPA known as the Common Elements Guidance. Among the most important of these common elements is the requirement that persons or entities hoping to enjoy one of these liability exemptions must have carried out all appropriate inquiries (AAI) into the environmental conditions of the property in question before acquisition thereof. As directed by Congress, EPA promulgated its AAI rule which establishes standards for such inquiries. (Both the Common Elements Guidance and the AAI rule are discussed further below.) 12

215 i. Contiguous Properties Section 221 of the Brownfields Law created a new subsection 107(q) of CERCLA, which generally excludes from liability under CERCLA 107(a) the owner of a property contiguous to one from which there is a hazardous substance release. (This is similar to and consistent with EPA s longstanding policy that owners of land above an aquifer contaminated by releases from 21 another s property will not be pursued as PRPs for that contamination. ) As noted, the exemption from liability is encumbered by a number of conditions and limitations. Under the Brownfields Law, a person that owns land contaminated by a contiguous (or similarly situated) property is exempt from owner/operator liability, provided the person did not cause, contribute or consent to the release or threatened release of hazardous substances; is not potentially liable or affiliated with any other person potentially liable for the release; takes reasonable steps to stop any continuing release, prevent any threatened future release, and prevent or limit exposure from hazardous substances released on the person s own property; provides full cooperation, assistance, and access to persons authorized to undertake response actions and natural resource restoration; complies with all land use controls being relied on in connection with the response action and does not impede the performance of any institutional controls; complies with all information requests; provides all legally required notices with respect to the discovery or release of any hazardous substance at the facility; and conducted all appropriate inquiry at time of purchase (see further discussion below concerning innocent landowners ), and did not know or have reason to know of the contamination. The burden is on the landowner to prove, by a preponderance of the evidence, that these conditions are satisfied. If a person does not qualify for liability relief as a contiguous landowner because he knew or should have known of the contamination at the time of purchase, and therefore cannot satisfy the 21 See Policy Toward Owners of Property Containing Contaminated Aquifers, May 24, 1995, at: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/contamin-aqui-rpt.pdf Indeed, H.R. 2969 specifically adopts and incorporates this policy, and states that to meet the conditions of the Brownfields Law for contiguous landowner liability relief, it is not necessary for the owner to have conducted groundwater investigations or install groundwater remediation systems except in accordance with that policy. 13

216 condition in the last bullet point above, the person may nevertheless qualify for the liability relief afforded under the Brownfields Law to bona fide prospective purchasers. In 2004 EPA issued guidance on the application of the contiguous landowner 22 liability exemption. The guidance provides clarification on how EPA will interpret and apply this statutory provision. For instance, EPA will not restrict application of the liability exclusion to owners whose land is literally contiguous to the property from which there is a release; those who own land that is close, even if not adjacent, will be treated the same way. Although the statutory provision applies to current landowners, EPA will exercise its enforcement discretion to treat in the same manner former owners who meet the same tests. And while EPA will not routinely do so, the Agency may in certain circumstances be willing to provide a No Action Assurance letter to a contiguous property owner. ii. Bona Fide Prospective Purchasers and Windfall Liens Section 222 of the Brownfields Law created a new subsection 107 in CERCLA that exempts bona fide prospective purchasers of sites (and their tenants) from owner or operator liability under 107(a), so long as the person does not impede the performance of a response action or natural resource restoration. The Brownfields Law also creates a new subsection 101(40) which defines a bona fide prospective purchaser (BFPP) as one who buys a property after the date of enactment of the Brownfields Law (January 11, 2002) and establishes, by a preponderance of the evidence, each of the following conditions with respect to the property in question: all disposal at the property took place before the date of purchase; the person made all appropriate inquiry (see further below); the person provides all legally required notices with respect to the discovery or release of any hazardous substance at the facility; the person exercises appropriate care with respect to the hazardous substances at the property by taking reasonable steps to stop any continuing release, prevent any threatened future release, and prevent or limit exposure; the person provides full cooperation, assistance, and access to persons authorized to undertake response actions or natural resource restoration; 22 See Interim Enforcement Discretion Guidance Concerning Contiguous Property Owners, January 13, 2004, at: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/contig-prop.pdf 14

217 the person complies with land use restrictions and does not impede any institutional controls; the person complies with all information requests; and the person is not otherwise potentially liable or affiliated with any other person who is potentially liable. If one did not read further in the Act, it would appear that the federal government need no longer offer to resolve the potential liability of a prospective purchaser of contaminated property through a Prospective 23 Purchaser Agreement. However, what Congress giveth, it also taketh away, for the Brownfields Law provides the United States with a lien (referred to as a windfall lien ) on property acquired by a BFPP if the U.S. has unrecovered response costs with respect to the property and the government s response action has increased the fair market value of the property. Persons contemplating purchase of a property where such a lien would exist may have an interest in resolving that lien through an agreement with the government. Such an agreement may be simpler than the traditional PPA, however, since it may need to address only the windfall lien not the liability of the purchaser, who as a BFPP is exempt from liability. In 2003 issued a guidance document entitled Interim Enforcement Discretion 24 Policy Concerning Windfall Liens Under Section 107 of CERCLA. The guidance reiterates that a windfall lien is only for the increase in the fair market value of that property attributable to EPA s cleanup efforts. Unlike a CERCLA 107(l) lien, it is not a lien for all of EPA s unrecovered response costs. The windfall lien is limited to the lesser of EPA s unrecovered response costs or the increase in fair market value attributable to EPA s cleanup. 25 23 See EPA s policy on issuance of PPAs and related guidance and model documents cited at n. 19, supra. Essentially this view i.e., that the need for PPAs has been greatly lessened or eliminated by the CERCLA amendments is expressed in a memorandum dated May 31, 2002 from Barry Breen, then Director of EPA s Office of Site Remediation Enforcement, titled Bona Fide Prospective Purchasers and the New Amendments to CERCLA. That memorandum states, inter alia, EPA believes that, in most cases, the Brownfields Amendments make PPAs from the federal government unnecessary. The memo goes on to indicate in what circumstances the government will, nevertheless, consider issuance of a PPA. The memo can be found at: http://epa.gov/compliance/resources/policies/cleanup/superfund/bonf-pp-cercla-mem.pdf 24 See: <http://www.epa.gov/compliance/resources/policies/cleanup/superfund/ interim-windfall-lien.pdf>, July 16, 2003. 25 Because a windfall lien can only arise on properties where the United States spends money cleaning up a property, at the vast majority of Brownfields sites where the federal government will not carry out a cleanup there will be no windfall or other lien. 15

218 The guidance identifies factors that EPA will consider in deciding whether or not to perfect such a windfall lien, which include: the existence of substantial unreimbursed cleanup costs, which are unlikely to be recovered from other liable parties; whether a bona fide prospective purchaser will reap a significant windfall directly as a result of EPA s expenditure of Superfund money at a Site; whether there exists a real estate transaction, or a series of transactions, structured so as to either create a bona fide prospective purchaser windfall at taxpayer expense, or allow a liable owner to avoid CERCLA liability. The guidance also identifies situations in which, absent special circumstances, EPA will generally not perfect a windfall lien. These include: a BFPP acquires the property at fair market value after cleanup; EPA has previously resolved the potential windfall through a settlement with the liable owner; EPA s only site expenditures are Brownfields grants or loans; EPA s only site response costs are preliminary site assessment or site investigation costs; a homeowner sells a residential property to another homeowner; the BFPP is going to use the property for the creation of a public park or other similar public purpose; there is a substantial likelihood of full cost recovery from other parties liable under CERCLA; EPA would not seek to hold liable the BFPP based on some other, existing enforcement discretion policy (e.g., the Contaminated Aquifers Policy). In valuing any windfall lien, EPA will generally seek only the increase in fair market value attributable to a response action that occurs after a BFPP acquires the property at fair market value. EPA will typically calculate the increase in fair market value attributable to EPA s cleanup by considering the fair market value of the property as if cleanup were complete versus the fair market value of the property when acquired presumably, the BFPP s purchase price. Where a BFPP acquires a property with a perfected CERCLA 107(l) lien, 26 EPA expects that, in most instances, the CERCLA 107(l) lien will be 26 The new windfall lien provision did not replace the pre-existing lien provision of 107(l) of CERCLA. That provision authorizes EPA to place a lien on a property at which it has incurred response costs; the amount of that lien may be the government s full response costs. 16

219 resolved as part of the transaction between the liable owner and the BFPP. If not, EPA may subsequently seek enforcement of the CERCLA 107(l) lien against the property during the BFPP s ownership. Where EPA is likely to pursue a 107 windfall lien and a BFPP wants to resolve any existing or potential windfall lien, EPA has developed a model windfall lien resolution document, published with the guidance. 27 EPA recognizes that some BFPP s will seek some kind of assurance about EPA s intentions with respect to a possible windfall lien prior to entering into a real estate transaction. EPA believes that the enforcement discretion policy set out in the guidance will address many legitimate windfall lien concerns, and will therefore limit the need for EPA involvement in private real estate transactions. However, EPA also recognizes that situations can arise where it may be appropriate for EPA to provide more site-specific information to interested parties. In those instances, and consistent with EPA s existing Comfort/Status Letter policy, EPA may provide such a letter. In 2006 EPA issued a policy addressing the circumstance where a BFPP does some cleanup work. (By its terms, the policy applies to removal sites, although it has been used, in the author s Region 2 and elsewhere, at remedial sites). The policy provides for an actual covenant not to sue to be given the 28 BFPP; and it also provides for the possibility of a windfall lien waiver. In January, 2008 EPA issued a policy outlining the "due process" steps 29 required when EPA intends to file a windfall lien. This policy draws on an earlier EPA policy for due process in connection with filing of a 107(l) lien, and similarly provides for a hearing before a neutral officer generally the Regional Judicial Officer or other EPA attorney not involved in the 27 Note that while a 107(l) lien is subject to the same statute of limitations as for other CERCLA response costs, there is no statute of limitations for a 107 windfall lien. 28 See: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/bfpp-ra-mod.pdf 29 See: <http://www.epa.gov/compliance/resources/policies/cleanup/superfund/wf-admin-mem.pdf>. For a copy of the model notice letter associated with the policy, see: <http://www.epa.gov/compliance/resources/policies/cleanup/superfund/wf-notice-mod.pdf>. See also FAQs associated with windfall liens in general, and the January 2008 policy specifically, at: <http://www.epa.gov/compliance/resources/publications/cleanup/superfund/factsheet/lien-faqs- 08.html>. 17

220 30 Superfund program. The earlier policy was issued in response to a First Circuit case named U.S. v. Reardon, and so the hearing that is provided under both the older and newer policies is commonly known as a Reardon hearing. It is worth noting that a BFPP can lose that status if, at some time after acquiring property, she does not continue to take appropriate care with respect to hazardous substances at the property by taking reasonable steps to stop continuing releases or prevent threatened future releases; or she ceases to provide full cooperation, assistance and access to persons authorized to undertake response actions; and the like. iii. Innocent Landowners Section 223 of the Brownfields Law amended subsection 101(35) of CERCLA, the so-called innocent landowner provision. The most significant change here is that Congress sought to clarify what actions landowners must take to satisfy the all appropriate inquiries requirement of 31 the previously existing affirmative defense. Congress directed EPA to 30 Cynics may question whether an EPA employee typically a colleague of the Agency attorney responsible for asserting the lien can in fact be neutral or fair. In EPA Region 2, the question was recently answered in the affirmative. There the Regional Judicial Officer, after a Reardon hearing, issued a Recommended Decision adverse to EPA, after which the Region decided not to assert the lien. (In the Matter of Combe Fill Corporation, et al., Recommended Decision by Helen Ferrara, Regional Judicial and Presiding Officer, June 6, 2008.) 31 Under Section 107(b) of CERCLA, a person otherwise liable can make out an affirmative defense based, inter alia, on proof that the hazardous substance release in question was caused by a third party. The defense is, however, denied to one who has a contractual relationship, direct or indirect, with the third party who caused the release. Since a deed for property is a contract, subsequent landowners who discovered contamination caused by the previous owner might not be able to avail themselves of the defense. However, CERCLA 101(35) provides that a landowner can escape liability under 107(a) if she acquired the land after hazardous substances were placed there, and can show by a preponderance of the evidence that i. she didn't know and had no reason to know of the release or the presence of hazardous substances; or ii. she acquired the land through escheat or other involuntary transfer, or through eminent domain or condemnation; or iii. she acquired land through inheritance or bequest. CERCLA 101(35) formerly went on to specify that appropriate inquiries, consistent with good commercial or customary practice in an effort to minimize liability, must have been made at the time of acquisition of the property, including inquiry into previous ownership and uses. Furthermore, a 18

221 promulgate regulations establishing standards and practices for satisfying the all appropriate inquiries (AAI) requirement. The Brownfields Law included a substantial list of considerations that EPA was required to include in such regulations, such as inquiries by environmental professionals, interviews with past owners and operators, reviews of historical records identifying past land uses and the like, reviews of government records, etc. 32 The AAI rule is discussed further below. iv. The Common Elements Guidance As is evident from the above discussion, several different provisions of the Brownfields Law established similar threshold criteria in order for an entity to achieve and maintain a certain statutory status. In 2003 EPA issued its Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for the Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability ( Common 33 Elements ). As outlined above, each of these three categories of landowners enjoy conditional CERCLA liability protection, provided they meet and continue to meet certain statutory criteria. For example they must have carried out all appropriate inquiries before buying the property; they must continue to comply with applicable land use restrictions and institutional controls; they must take reasonable steps to stop continuing releases, prevent threatened future releases, and prevent or limit exposure to earlier releases; they must cooperate with persons authorized to carry out a cleanup or other response action; court considering the matter is directed to take into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property and the ability to detect such contamination by appropriate inspection. This provision has been replaced under the new Act, as discussed in the text above. 32 Congress specified that for residential or similar property purchased by a private, noncommercial entity, a facility inspection and title search that reveal no basis for further investigation shall be considered to satisfy the all appropriate inquiries requirement for innocent landowner status. 33 March 6, 2003; usually referred to as the Common Elements Guidance; see: http://www.epa.gov/compliance/resources/policies/cleanup/superfund/common-elem-guide.pdf 19

222 they must cooperate with government requests for information; and they must provide legally required notices related to the discovery or release of hazardous substances at the property. 34 While the all appropriate inquiries requirement is addressed in the separate AAI rule called for by Congress, the Common Elements guidance addresses the remaining shared statutory criteria, stating with specificity the view of EPA about what such landowners must do, or not do, to satisfy the criteria. Among the more important discussions in the guidance is that concerning what kinds of steps are reasonable for landowners to take in order to stop continuing releases, threatened future releases, and so on. The guidance explains that EPA believes Congress intended to balance the desire to protect certain landowners [i.e., BFPPs, CPOs (Contiguous Property Owners) and ILOs (Innocent Landowners)] from CERCLA liability with the need to ensure the protection of human health and the environment. In requiring reasonable steps from parties qualifying for landowner liability protections, EPA believes Congress did not intend to create, as a general matter, the same types of response obligations that exist for a CERCLA liable party (e.g., removal of contaminated soil, extraction and treatment of contaminated groundwater). [Footnote omitted.]... Nevertheless, it seems clear that Congress also did not intend to allow a landowner to ignore the potential dangers associated 35 with hazardous substances on its property. [Emphasis in original.] The required reasonable steps relate only to responding to contamination for which the BFPP, CPO, or ILO is not responsible. Of course, activities on the property after purchase that result in new contamination can give rise to full CERCLA liability. v. The All Appropriate Inquiries Rule 34 The last two of the items enumerated in the text, above, apply to bona fide prospective purchasers and continuous property owners, but not to innocent landowners. However, these landowners may have independent legal obligations to answer such information requests and/or provide such notices. Not included in the above list is the requirement that the individual or entity not be affiliated with a potentially responsible party. The Common Elements Guidance did not address questions that might arise about exactly what kinds of relationships would constitute affiliation in this context. EPA has convened an internal workgroup to consider this subject. 35 Id., n. 22, at 9-10. 20