Managing Environmental Risks Presented by: Jeff Civins Mary Mendoza November 4, 2014
Agenda Basic Principles Tools for managing environmental risks Environmental due diligence Contractual Extra-contractual Brownfield opportunities 2
Basic Principles Environmental laws are laws that regulate activities or conditions because of their effect or potential effect on public health and welfare and the environment Environmental laws exist on the federal, state, and local level 3
Bad Things That Can Affect A Property Chlorinated solvents Petroleum hydrocarbons MTBE PCBs Mold Asbestos Lead in drinking water Lead paint Underground storage tanks Indoor air pollution Radon Vapor intrusion Recognized environmental conditions 4
This figure depicts the migration of volatile chemicals from contaminated soil and groundwater plumes into buildings. Volatile chemicals are shown to enter buildings through cracks in the foundation and openings for utility lines. Atmospheric conditions and building ventilation are shown to influence vapor intrusion. 5
Good Things That Can Affect A Property Bad things, like contamination, are a concern because of the legal consequences associated with them, but so too are good things because of the protections the law affords them Good things include: Endangered species Water bodies and wetlands Aquifers Historical sites The presence of good things may result in, among other things, significant restrictions on property use 6
Sources of Environmental Liabilities and Responsibilities Environmental Conditions Activities Potential Contaminants / Structures Asbestos Lead Paint Contaminated Soil / Groundwater PCBs Indoor Air Pollution Vapor Intrusion Tanks Specially Protected Property or Biota Endangered Species Historic Sites Wetlands Floodplains Sole Source Aquifer Protected Watershed Air Emissions Water Discharges Waste Management Hazardous Materials Handling Conduct of Business Activities, e.g., construction 7
Legal Sources Of Environmental Liabilities And Responsibilities Statutes Rules Permits Administrative and Judicial Orders Ordinances Common Law Nuisance Negligence Trespass Strict Liability Contract 8
For transactions involving real estate, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or Superfund is the most significant environmental statute because of the substantial liabilities it imposes 9
Liability Under CERCLA CERCLA imposes liability for the cost of: Investigation Remediation Natural Resource Damages Liability is strict - without fault Liability is generally joint and several Liability is retroactive There are defenses, but they are limited 10
CERCLA Potentially Responsible Parties (PRPs) Present owners and operators of a facility from which there is a release or threatened release of hazardous substances Past owners and operators of a facility (at the time of disposal) Arrangers who arranged for the disposal of hazardous substances Transporters who selected the disposal facility 11
Environmental Liabilities/Concerns Cost of compliance (time and money) Cost of Non-Compliance Penalties Injunctive Relief (mandatory and prohibitory) Cost of Investigation and Remediation Damages to Natural Resource Damages to, and Diminution in Value of, Property Damages to People (Toxic Tort) Land Use Restrictions Stigma Damages 12
Managing Environmental Risks Through Due Diligence Perform appropriate due diligence In scoping due diligence Determine business objective with respect to environmental matters Recognize the unique circumstances of the pending transaction Determine scope that would satisfy those objectives Be sure contract with environmental professional is sufficiently protective, e.g., as to limits of liability, and provides for reliance by appropriate parties 13
What Are The Circumstances Of A Particular Transaction That Should Be Taken Into Account In Due Diligence? Procedural Timing Access restrictions Confidentiality Substantive Nature of Assets Stock v. Assets Brownfields v. Greenfields Ongoing Operations Existing Structures Expansion or Development Change of Land Use Legal Deal Requirements Potential applicability of environmental transfer statutes, e.g., NJ Industrial Site Recovery Act Role in transaction, e.g., borrower, lender, lessor, lessee, buyer, seller, broker, manager 14
Environmental Concerns Assets v. Stocks Assets Purchase Stock Purchase Onsite Conditions X X Offsite Conditions Migration Groundwater X X Air X Transport/Disposal X Formerly Owned X Land Use X X Non Compliance Past X Present X X 15
Identifying Bad Things A basic concern for any deal involving real property is the presence of contamination Some contamination you can see, e.g., stains, some you can t, e.g., in subsurface or ground water To determine if contamination is present Perform a Phase I observe and research Perform a Phase II sample 16
Phase I s What Are They? Phase I s look for recognized environmental conditions or REC s the presence or potential presence of hazardous substances or petroleum products The industry standard for a Phase I is now ASTM E1527-13 ASTM E1527-13 distinguishes among RECs, historic RECs (HRECs), and controlled RECs (CRECs) and requires more detailed records review; it extends to vapor migration CRECs entail risk based cleanups and either institutional or engineering controls An ASTM E1527-13 Phase I qualifies as all appropriate inquiry or AAI, a prerequisite to obtaining certain CERCLA defenses (See 40 CFR Part 312) Note: Recommendations are not required and may not be desired 17
What Does AAI Entail? Inquiry by environmental professional Interviews with past and present owners Reviews of historical sources Searches for environmental cleanup liens Review of federal, state & local records Visual inspection of facility and adjoining properties Specialized knowledge or experience* Relationship of purchase price to value of the property* Commonly known or ascertainable information about the property* Degree of obviousness of the presence or likely presence and ability to detect by investigation* *Applicable to users as well as environmental professionals. 18
Is AAI Required? Only if you want to take advantage of: CERCLA s transaction defenses Innocent Purchaser Bona Fide Prospective Purchaser Contiguous Land Owner CERCLA s Brownfields site characterization and assessment grant programs 19
Interpreting Phase I s A clean Phase I does not mean nothing is there There s no guarantee a Phase I or even a Phase II will identify contamination that is present Different consultants arrive at different conclusions based on the same information Things that are not RECs may pose concerns; things that are RECs may not How significant a REC is depends on many factors 20
Buildings Trigger Additional Environmental Concerns Conditions of concerns include: Asbestos* Formaldehyde* Lead in water* Lead paint* Mold* Indoor air pollution* Underground and above ground storage tanks Radon* PCB transformers Vapor intrusion These environmental conditions give rise to potential regulatory and common law concerns Asterisked items are not covered by a standard phase I, so consider adding them 21
Ongoing Business Activities Trigger Additional Environmental Concerns For ongoing business, regulatory compliance is of particular concern Compliance issues are not covered by a Phase I unless specifically included To address, consider use of audit policies, e.g., Texas Environmental, Health and Safety Audit Privilege Act 22
What Concerns Do RECs Or Other Bad Things Create? Regulatory Requirements and Exposure Costs of compliance time and money Costs of non-compliance -- Penalties -- Injunctive relief Costs of Investigation and Remediation Natural Resource Damages Common Law Liability Toxic tort Property Damage Triggering of Contractual Obligations 23
What opportunities do RECs create? The term Brownfield generally refers to real property the redevelopment of which may be complicated by the presence of contamination Because it is in the public interest, there are a number of governmental programs, which include provision for loans, grants, and tax credits, that encourage Brownfield development EPA--See http://www.epa.gov/brownfields/grant_info/index.htm TCEQ--See http://www.tceq.state.tx.us/remediation/bsa/benefits.html 24
Identifying and Dealing with Good Things How do you identify whether good things might be present Not covered by a Phase I unless specifically included Requires research and field investigation and possibly agency sign-off Presence of good things may restrict development How to address Change locations Obtain approvals Mitigate 25
Managing Environmental Risks Contractually Deal Structure Contract Terms Reps Covenants Indemnities Responsibility for identified conditions Note: Beware form contracts 26
Managing Environmental Risks Extra-Contractually Superfund defenses Secured creditor Transactional defenses» Third Party» Bona Fide Prospective Purchaser Brownfields Programs Voluntary Cleanup Program Innocent Owner/Operator Program Dry Cleaners Remediation Program Compliance audit policies Insurance Other financial assurance (e.g., fixed price remediation & liability transfers) 27
Secured Lenders As PRPs Secured lenders are afforded special treatment by CERCLA (and state analogs) and RCRA (as amended by the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996). 28
Secured Lenders Protection Under CERCLA* Pre-Foreclosure for secured lenders who do not participate in management, i.e., do not exercise decision-making control over environmental compliance, e.g., hazardous waste management overall operational management Post-Foreclosure for secured lenders who hold property only to protect security interest, i.e., take steps consistent with safe harbor provisions an seek to sell, re-lease or otherwise divest themselves of assets at earliest practicable, commercially reasonable time, on commercially reasonable terms *CERCLA protection does not protect against liabilities under other statutes or the common law 29
Common Elements Of CERCLA Transaction Defense Before Acquisition AAI and No Affiliation Post-acquisition Continuing Obligations, including: Stop and prevent continuing releases and threatened future releases Prevent or limit any human, environmental or natural resource exposure to any previously released hazardous substances 30
Relative Value Of CERCLA Defenses Third Party Defense > Bona Fide Prospective Purchaser Defense (BFPP) > Contiguous Land Owner (CLO) & Innocent Land Owner/Purchaser (ILO) Defenses Transaction-related defenses (BFPP, CLO & ILO) require all appropriate inquiry and no affiliation, as well as satisfaction of continuing obligations 31
CERCLA Defense Limitations Provide no protection for Petroleum contamination Stock acquisition Other federal and state statutes Common law Unlike prospective purchaser agreements, give no certainty as to what is required and must be raised as a defense in litigation 32
Creating Opportunities Sophisticated parties who appreciate and properly value environmental risks may get a good deal Brownfields programs may provide financial assistance The Property Assessed Clean Energy (PACE) program provides tax incentives for owners of commercial and industrial property to obtain funding for water and energy efficiency and conservation projects See http://www.keepingpaceintexas.org/pace-overview/ 33
Hypotheticals 34
The seller tells you there was a dry cleaners on the property but it's gone now so there's nothing to worry about things relating to deals that should cause you to perk up 35
Your contractor tells you there's a real cute family of prairie chickens living on the tract you're about to build a shopping center on things that can foul up a project 36
Your client tells you all that white powdery dust is making it difficult for its contractor's employees to renovate its office building things relating to ongoing businesses that take your breath away 37
You receive notice from EPA that you re liable for millions of dollars of cleanup costs and think there are no worries because the notice relates to a property you ve never owned or occupied litigation-related things that are not super fun 38
Conclusion Good things and bad things may create environmental risks To help manage these risks, consider Appropriate due diligence Contractual measures Extra-contractual measures Brownfields may create opportunities 39
Q&A 40
CLE Credit Texas: This course has been approved for Minimum Continuing Legal Education credit by the State Bar of Texas Committee on MCLE in the amount of 1.0 credit hour. California: This activity is approved for MCLE credit by the State Bar of California in the amount of 1.0 credit hour. New York: This non-transitional course or program has been approved in accordance with the requirements of the New York State CLE Board for a maximum of 1.0 credit hour, of which 1.0 credit hour can be applied toward the Areas of Professional Practice requirement. 41
Attorney Biography Jeff Civins Partner jeff.civins@haynesboone.com +1 512.867.8477 www.haynesboone.com Jeff Civins has practiced all aspects of environmental law since 1975, assisting clients in compliance matters, transactions, and litigation. As an adjunct professor at the University of Texas School of Law, Jeff taught a seminar on Environmental Law Concerns to Business in 1987 and has taught a seminar on Environmental Litigation each Spring since 1992. He also is on the Advisory Board of the Law School's Center on Energy, the Environment and International Dispute Resolution. Jeff is the organizer and co-editor of the Thomson Reuters Texas Practice 2-volume treatise on Texas Environmental Law (1997, 2005 and 2013 editions), a former chair of the Environmental and Natural Resources Law Section of the State Bar of Texas, and standing chair of the section's annual Texas Environmental Superconference. Prior to law school, Jeff taught science in New York City schools. 42
Attorney Biography Mary Simmons Mendoza Partner mary.mendoza@haynesboone.com +1 512.867.8418 www.haynesboone.com Mary Mendoza concentrates her practice in the areas of environmental and administrative law. She represents clients in regulatory compliance matters, hazardous and solid waste cleanups, contested case hearings, enforcement matters, appeals of agency decisions, and toxic tort litigation. Mary counsels clients on general issues of regulatory compliance as well as on environmental issues associated with real estate, corporate and other transactions. 43
Managing Environmental Risks Presented by: Jeff Civins Mary Mendoza June 24, 2014