THE SMALL BUSINESS LIABILITY RELIEF AND BROWNFIELDS REVITALIZATION ACT

• Changes to the due diligence standards necessary to satisfy the "innocent purchaser" defense.
• New liability protections for purchasers where hazardous substance contamination is known to be present prior to the purchase.
• A new and potentially problematic lien created in favor of EPA for unrecovered response costs.

With the enactment of the Superfund Amendments and Reauthorization Act ("SARA") in 1986 amending the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") came the "innocent purchaser defense." In the late 1980's, the Phase I environmental site assessment evolved into the due diligence tool used by purchasers to assess and avoid liability under CERCLA. Environmental lawyers were generally involved in the process from helping to define the scope of work through reviewing and commenting on the draft of the Phase I and resolving issues.

As we moved through the 1990's, the American Society for Testing and Materials developed its "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process" E 1527. In the late 1990's, Phase I's practically became commodity work and many purchasers began relying on their real estate attorneys or in house personnel to review Phase I's for completeness and concerns or simply relied on their consultants to have completed the work appropriately. Environmental lawyers now are generally involved only in special circumstances, for lenders and when issues are found. The Brownfields Act includes a number of changes that will result in purchasers and lenders needing to revisit their basic policies and practices regarding their environmental due diligence in acquisitions involving real property.

SARA included basic language regarding how a purchaser was to meet the criteria for the innocent purchaser defense. The purchaser "must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and use of the property consistent with good commercial or customary practice in an effort to minimize liability." It provided further guidance that "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 appropriation inspection" should be considered to meet the "all appropriate inquiry" standard. From this language the Phase I was born.

The Brownfields Act provides for EPA to promulgate regulations to definitively define the scope of the necessary due diligence for "all appropriate inquiry" within two years of the enactment of the Brownfields Act. Beginning with acquisitions on or before May 31, 1997 until such time as EPA promulgates the regulations, the procedures of the 1997 version of the ASTM Standard Practice E 1527 (known as E 1527-97) "shall satisfy the requirements."

While having a definitive standard to follow will be very helpful to purchasers (provided it is clear), the establishment of ASTM Standard Practice E 1527-97 as the interim guideline is a real concern. If you pull out the last Phase I prepared for your company, you will likely find that it was performed "generally in accordance with ASTM Standard Practice E1527-97" or E 1527-00, the 2000 revision. Do you know how it did not conform to E 1527-97; or the better question is whether you know if it did not? When following the language of SARA, the standard was simply "good commercial or customary practice." General conformance with the ASTM standard likely met this. Now a purchaser is faced with making sure that the "procedures" of the ASTM Standard Practice E1527-97 are followed, and it is not clear whether the courts will accept a Phase I performed "generally in accordance" with the standard.

A primary difficulty with ASTM Standard Practice E 1527-97 are the judgment calls left to the consultant and this is why many consultants add the "generally in accordance" qualifier. One issue which comes immediately to the forefront is whether a chain-of-title is necessary. The consultant must review the history of the property back to its obvious first developed use or 1940, whichever is earlier. This requires reviewing only those standard historical sources (which include a chain-of-title) as are necessary, "and both reasonably ascertainable and likely to be useful." Consultants vary as to whether a chain-of-title is useful. Many take the position that simply seeing names of owners does little to identify the use, but a minority believe it may lead to other paths of inquiry. Producing a chain-of-title can be difficult for the consultant to perform on his or her own and it adds additional fees if a title company is asked to complete it. The Brownfields Act instructs EPA to include in its regulations defining "all appropriate inquiry" a review of "historical sources, such as chain-of-title documents…." Congress obviously believes it is useful, so will a court accept a consultant's determination that it is not? This is only one example of the many complexities ASTM Standard Practice E1527-97 brings to the due diligence process and emphasizes the need for consulting with those experienced in ASTM Standard Practice E 1527-97, CERCLA and the Brownfields Act.

An even more material change is the addition of the new "bona fide prospective purchaser" protections. In very simplified terms, this new protection allows a purchaser to conduct "all appropriate inquiry" following the criteria described above and to purchase property with knowledge of hazardous substance contamination without incurring liability as an owner or operator. To qualify as a bona fide prospective purchaser, the purchaser must "not impede the performance of a response action or natural resource restoration." While it sounds fairly simple, it comes with numerous strings attached to requirements that will need to be carefully assessed on a case-by-case basis.

An example of the bona fide prospective purchaser requirements is that the purchaser must exercise "appropriate care" with respect to hazardous substances found at the facility by taking steps to stop any continuing releases, preventing threatened future releases and to prevent or limit human, environmental or natural resource exposure to any previously released hazardous substance. One would think that the interpretation of this requirement would be that it includes fairly minor actions falling short of any remediation, but it is not clear. Some guidance is found in another section of the Brownfields Act that basically codifies EPA's 1995 Final Policy Toward Owners of Property Containing Contaminated Aquifers. The policy provides for when EPA will not pursue the owner of a site contaminated through groundwater migration. This section on contiguous properties in the Brownfields Act contains the exact same language regarding "appropriate care." Unlike the bona fide prospective purchasers section, it then goes on to specifically provide that such language does not require the owner of the property to which the contamination has migrated to conduct groundwater investigations or to install groundwater remediation systems, except under limited circumstances as set forth in the 1995 policy. Such limited circumstances include where the owner has a groundwater well that may be causing the migration of the contamination onto the property.

The obvious concern is that the bona fide purchaser's section does not include this same limitation. This leaves open the question as to whether the facts of a particular situation may require the purchaser to take certain remedial actions to avoid being liable under CERCLA. Such actions may be expensive, but may fall well short of the full response or natural resource restoration costs imposed on the parties liable for the release. The purchaser must also "provide all legally required notices with respect to the discovery or release of any hazardous substances at the facility." Whether notice is required under CERCLA must be carefully assessed depending on the facts, but the language does not expressly limit it to notices required under CERCLA. It very well may be interpreted to require notices that may be applicable under state or local law. All applicable notice laws should be assessed when considering becoming a bona fide prospective purchaser. Many other issues exist in connection with the requirements which are too numerous to set forth herein.

A new "windfall lien" is created by the Brownfields Act and applies in a bona fide prospective purchaser situation. The lien is for unrecovered response costs and is for an amount not to exceed the increase in the fair market value of the property attributable to the response action, i.e. the clean up. The difficulty with the lien will likely come from lenders. The Brownfields Act provides that the lien "shall arise at the time at which costs are first incurred by the United States with respect to a response action at the facility." The problem is that the language does not indicate how perfection of the lien is to occur so that a lender knows that its own lien will take a priority over the windfall lien. Another federal lien is created elsewhere in CERCLA for certain costs and damages incurred by the United States that uses similar language regarding when it arises. The provision for this separate federal lien goes on to provide that such federal lien is subject to the rights of other lien holders perfected prior to notice of such federal lien being filed in the appropriate office within the state or political subdivision.

The failure to include these same perfection requirements in the windfall lien provision leaves open the question as to how the title companies may react and take exception to the possibility of the windfall lien. Although the windfall lien will only arise where EPA incurs response costs at sites where the purchaser acquires the property as a bona fide prospective purchaser, title companies may add the potential windfall lien as an exception to title coverage in all policies. This will then leave the purchaser in the position of trying to convince the title company to remove the exception in each transaction so that the lender is assured that its own lien has priority over the windfall lien. What information a purchaser will have to provide to the title companies to remove the exception should play out over the next few years.

The new changes to CERCLA under the Brownfields Act are certainly a step in the right direction to allow contaminated property to be purchased more freely and to better define the due diligence requirements to avoid liability. The difficulty is that at least over the next few years purchasers must be careful with the shake up in what had become a fairly straight forward environmental due diligence process. The affects of these changes must be assessed in connection with how property is being acquired. Lenders will have to step up and take notice as well that the lender liability protections only go so far and do not, for example, extend to someone purchasing a site from the lender at foreclosure. Additionally, the windfall lien could become a sticky issue for both purchasers and lenders. Purchasers and lenders should consult with those experienced with CERCLA, the Brownfields Act and ASTM Phase I Standard Practice E1527-97 when purchasing or taking liens on commercial and industrial properties.

Jim Thornhill is a partner with McGuireWoods LLP and co-team leader of the firm's Environmental Solutions practice area. Jim can be reached at (804) 775-1163 or jthornhill@mcguirewoods.com.