A federal district court was recently presented several government standards to use in determining whether indoor air contamination from vapor intrusion created an imminent and substantial endangerment to human health or the environment to support a citizen suit claim asserted under the Resource Conservation and Recovery Act (RCRA), 49 U.S.C. § 6972(a)(1)(B).
In Tilot Oil LLC v. BP Products North America Inc.¸ Case No. 9-CV-210 (E.D. Wisc. 1/17/12), Tilot claimed that petroleum contamination migrated onto its property from an adjoining property owned by BP, which contaminated its groundwater. Tilot further claimed that when the water table rose above the elevation of the floor in its basement, petroleum-impacted groundwater entered the basement and threatened the health and safety of its employees.
One building in particular, Building D, had the highest concentration of benzene in indoor air. Benzene was detected in Building D’s basement in March of 2008 at a concentration of 5,700 ug/m3. This equals a concentration of 1,800 parts per billion by volume, or 1.8 parts per million. Except for the 1.8 ppm result in March of 2008, none of the other 14 sampling events in Tilot’s buildings ever showed a concentration exceeding the OSHA Permissible Exposure Level (OSHA PEL) of 1.0 ppm.
Tilot claimed that as a result of the benzene contamination, it had to seal off the basement stairs in Building D to reduce employee exposure to vapors rising from the basement level to the main floor. In January 2010, Tilot also developed a benzene compliance program restricting employee activity in the basement of Building D.
BP responded to Tilot’s claims and an investigation by the Wisconsin Department of Natural Resources (WDNR). In particular, since 2008, BP has, in part: (1) installed monitoring wells on the Tilot site; (2) installed thirty fluid recovery wells on the BP site; (3) removed product and water from the basement of Building D; (4) collected groundwater sampling from monitoring wells and submitted them to WDNR on a quarterly basis; and (5) conducted enhanced fluid recovery at the BP and Tilot sites.
In addition, in June 2008, BP and WDNR began to discuss a remediation system for the basement of Building D. On June 8, 2010, BP, Tilot, and WDNR reached an agreement on a vapor intrusion remediation system. The system was constructed and started on May 31, 2011, and it remains in operation today. WDNR approved the system and determined that no additional remediation was necessary pending an evaluation of the system.
Tilot filed a lawsuit against BP alleging a citizen suit under RCRA, likely to have a basis to recover attorney fees, in addition to common law claims for negligence, trespass, and nuisance. To establish a prima facie claim under RCRA’s citizen suit provision, Tilot was required to establish: (1) that BP has generated solid or hazardous waste; (2) that BP is contributing to or has contributed to the handling of this waste; and (3) that this waste may present an imminent and substantial danger to health or the environment. BP did not dispute that it was a generator of solid or hazardous waste or that it contributed to the handling of the waste in question. Instead, BP challenged only the existence of a possible “imminent and substantial danger to health or the environment.”
Both Tilot and BP presented several government standards to the court to aid in its determination of whether an imminent and substantial endangerment to human health or the environment existed, including the following:
Occupational Safety and Health Administration permissible exposure level (OSHA PEL)
1.0 ppm TWA
National Institute for Occupational Safety and Health’s recommended exposure limit (NIOSH REL)
United States Environmental Protection Agency’s Region III Industrial Indoor Air Screening Level (EPA IIASL)
Wisconsin Department of Natural Resources vapor action level (WDNR VAL)
The district court held that the test results for Building D, combined with the ongoing remediation by BP, foreclosed a conclusion that any threat of harm is currently serious or necessitates action beyond what was already taking place. In essence, the court dismissed the RCRA citizen suit claim, but allowed Tilot to continue with its common law tort claims.
The combination of the fact that Tilot has never really used the basement for any activity in the first instance, that BP is currently engaged in remedial activities, and the lack of any relevant exceedances while the ventilation fan is running places the threat of harm outside that sufficient for a RCRA violation. Given the apparent effectiveness of the fan, in combination with BP’s ongoing efforts, overseen by the state under threat of enforcement action, any threat of harm is currently minor and no remedy is necessary beyond that already occurring. It might be different were Tilot simply forced to run a fan while BP did nothing else to clean the contamination, but that is not the case.
The interesting part of the decision though was the court’s handling of the different government standards because the mere presence of benzene, even though it is classified as a human carcinogen, was not enough to support the RCRA claim.
By the same token, the court disagrees with BP that the OSHA PELs are the only relevant standard. RCRA does not incorporate or otherwise rely solely on reference to regulatory standards, let along any specific standard. Thus, OSHA PELs, used to assess danger to employees, provide useful insight into whether employees are faced with harm or threat of harm. As to other standards, the court agrees with BP that the EPA screening level sheds little insight on whether a possible imminent and substantial endangerment exists because screening levels are developed solely for the purpose of setting a level at which further investigation is required; they are not a determination of actual danger. . . . similar to EPA screening levels, VALs are used to determine whether further action is required. . . . exceedance of Wisconsin’s VALs tells the court only that something should be done, not that the current remediation is insufficient to abate a threat of substantial harm. On the other hand, NIOSH recommendations, while not legally binding, are recommendations made to OSHA and based on scientific study. . . . Lacking the force of law does not mean such recommendations lack the force of science as pertains to what constitutes a risk to health or the environment.
The court dismissed the relevance of the VALs saying “To the extent VALs have been exceeded even while the fan was running, that standard simply does not speak to the presence or level of threat after remediation has begun.”
 Time weighted average.
Post-closing diligence is critically important when buying or selling environmentally-contaminated property. Whenever contaminated property changes hands, one of the first questions asked is who will be responsible for cleaning up the contamination and obtaining closure from the appropriate regulatory agency. Clients often turn to their lawyers to come up with the appropriate terms and conditions to best protect their interests, but ultimately the clients make the decision of the terms they are willing to accept and the risks they are willing to take. But what happens post-closing?
For example, assume a seller will remain obligated to “remediate the contamination in a diligent and commercially reasonable manner so as to promptly achieve closure with the responsible regulatory agency.” Will the seller’s post-closing proposal to achieve closure by a decade of monitoring and natural attenuation, as compared to an active remediation system that can achieve closure in half the time, be interpreted by the appropriate regulatory agency or the courts in your jurisdiction as “diligent and commercially reasonable”?
A recent case examining the problems that can arise when post-closing diligence goes astray is Houston Auto M. Imports North, LTD. v. R & A Harris South, L.P., 2012 WL 3628878 (Tex. Ct. App. Aug. 23, 2012). There, the seller sold an automobile dealership to a buyer for $3.1 million. The parties each had their own environmental consultant conduct pre-closing environmental due diligence. As a result of their investigations, they discovered soil and groundwater contamination and suspected the contamination source to be a former underground storage tank. Solvents used to clean automobiles were stored in the tank.
The buyer turned to its environmental consultant for a “best case” and “worst case” assessment of the time and cost to remediate the contamination. The consultant’s best case scenario involved a plan consisting of 5 years of monitoring with natural attenuation at a cost of approximately $180,000. The worst case scenario, which assumed the contamination migrated offsite, involved more than 10 years of monitoring and an active remediation system to achieve closure at a cost of approximately $730,000. As you might imagine, the closing was delayed while the parties haggled over the details.
Eventually, the parties agreed to amend their purchase agreement and enter into an environmental indemnification agreement. They agreed that the seller would be responsible for achieving regulatory closure through a proposal for monitoring with natural attenuation, for interacting with the regulatory agency, and directing the remediation to immediately commence and be conducted in a reasonably diligent and commercially reasonable manner. Further, the seller agreed to indemnify and defend the buyer from and against all losses, including but not limited to, attorneys’ fees and environmental consultant expenses “incurred in investigating, preparing for, … or defending against any action” arising from or in connection with the removal of any hazardous substance on or released from the property prior to the effective date of the agreement.
To make a long story short, the regulatory agency approved the remediation plan, but the seller failed to abide by the plan by failing to conduct quarterly groundwater monitoring for a period of 3 consecutive quarters. What was once thought to be a localized area of contamination with concentrations above regulatory closure levels increased in concentration by an order of magnitude and the contamination spread to the southern edge of the property at concentrations higher than regulatory closure levels. Over the course of the next few years, the buyer had its consultant install borings and take its own groundwater samples and submit a competing site investigation and remediation plan to the agency.
In 2008, 6 years after the closing and 4 years after the agency first approved the remediation plan of natural attenuation and monitoring, the buyer filed a lawsuit against the seller for breach of contract and declaratory judgment. The buyer sought to recover almost $86,000 in attorneys’ fees and about $80,000 in environmental consultant fees, costs, and expenses. The buyer's damages were incurred as a result of the environmental contamination on the property and the seller’s alleged failure to diligently pursue remediation of the property and complete the remediation within a reasonable time after closing.
The seller raised several defenses. The seller first argued that the delays in the beginning of the remediation activity were ordinary delays typically experienced when dealing with a government agency. Second, the seller argued that while it missed some groundwater monitoring events, no enforcement action was filed against it by the agency. Finally, based on the seller’s analysis of other properties in the State’s voluntary cleanup program, 15 years was a reasonable time for remediation and achieving closure so that the remediation was, in fact, progressing diligently.
The trial court rejected each of the defenses and ruled for the buyer. The trial court concluded that the seller’s failure to obtain a certificate of completion within 4 years constituted a breach of its contractual obligations and awarded the buyer approximately $117,000 in damages. The trial court also declared that the seller would be required to indemnify the buyer for future costs and expenses the buyer may incur as a result of the seller’s cleanup and remediation activities.
Ten years to the day after the August 23, 2002 closing on the real estate transaction, the Texas Court of Appeals affirmed the trial court’s decision finding that “the trial court could have reasonably concluded that it was not ordinarily prudent or diligent for [the seller] to go over one year without conducting groundwater monitoring as required by [the agency], especially when the chance for expansion of the contamination plume was known.” And, in the years between the closing and the beginning of trial, the contamination spread from a localized area near 2 monitoring wells to the southern boundary of the property with results above the protected concentration levels. In addition, the Court of Appeals held that the failure to conduct the groundwater monitoring and reporting to the agency constituted a breach of contract. Finally, the Court of Appeals upheld the finding on the declaratory judgment claim.
In summary, it is often critically important that the seller and the buyer each have a knowledgeable and experienced environmental consultant for post-closing advice and to make sure the post-closing obligations are diligently pursued. In the long run, the cost of a great consultant who can work with the other party’s consultant, pulling or prodding to keep the project moving toward closure, will likely be less expensive and time consuming than the cost of resolving a dispute through a lawsuit.
One of your most valuable rights under an insurance policy is having your insurance company defend you from a covered claim, no matter how frivolous. This is known as the "duty to defend." The Alabama Supreme Court recently joined the majority of jurisdictions in holding that a potentially responsible party (PRP) letter from USEPA under the Superfund (CERCLA) law satisfies the "suit" requirement under a commercial general liability insurance policy, triggering the duty to defend. Travelers Casualty and Surety Co. v. Alabama Gas Corp., 2012 WL 6720790 (Ala. Dec. 28, 2012).
The duty to defend is separate and broader than the duty to indemnify. Commercial general liability (CGL) policies generally impose on the insurer two duties: a duty to defend a claim potentially covered by the policy, and a duty to indemnify the insured for damages the insured is legally obligated to pay. The duty to defend its insured from any suit alleging bodily injury, property damage, or personal injury covered by the policy terms is triggered no matter how frivolous the claim. The duty to defend has generally been held to be separate from and broader than the insurer’s duty to indemnify the insured for damages.
A PRP letter from USEPA has dire consequences. A PRP letter is not your garden variety demand letter. Under CERCLA and equivalent state laws, a PRP’s substantive rights and ultimate liability are affected from the start of the administrative process. CERCLA is a strict liability statute meaning liability is imposed regardless of fault. Liability can be joint and several, and defenses are very limited. The failure to comply with an EPA Section 106 administrative order directing a response action can result in substantial fines ($25,000 per day) and treble damages. Furthermore, if the PRP refuses, USEPA may implement any investigatory and remedial action it deems necessary at a site, subject only to an abuse of discretion review. That means, if challenged, a district court only determines whether USEPA’s actions were arbitrary and capricious. This is a very low threshold for the agency, and a very high threshold for a PRP to overcome. USEPA-conducted CERCLA response actions tend to be significantly more expensive than actions conducted by PRPs.
In Travelers v. Alabama Gas Corp. (Alagasco), Alagasco was a corporate successor to a company that long ago operated a gas manufacturing process at the site. The gas manufacturing plant was demolished and eventually replaced by public housing in 1970. Almost 40 years later, USEPA issued a Section 104(e) information request to regarding the site and a Pollution Report. The Pollution Report advised that USEPA’s Enforcement Section was assessing PRP liability and ability to pay to complete a removal action. Further, the report advised that if USEPA determined that one or more PRPs were able to complete a removal action, the agency may pursue an Administrative Order on Consent with the PRPs to carry out a time-critical removal action and provide reimbursement of past response costs. When Alagasco demanded that its insurers (all subsidiaries of Travelers) defend this claim and provide coverage, the insurers refused arguing that the PRP letter was not a "suit" under the CGL policies because no lawsuit had been filed against Alagasco. The issue eventually made its way to the Alabama Supreme Court, which rejected Travelers’ arguments.
The majority of jurisdictions hold that a PRP letter triggers a duty to defend. With Alabama, thirteen state supreme courts have now determined that a PRP letter issued by USEPA or an equivalent state agency constitute a "suit" under CGL policies sufficient to trigger an insurance company’s duty to defend its insured – Alabama, Colorado, Connecticut, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Vermont, and Wisconsin. State trial and appellate courts and federal courts have interpreted the law of the following states as similarly triggering a duty to defend – Georgia, Hawaii, Idaho, Indiana, Kansas, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington, and Wyoming.
Only three state supreme courts have rejected this view – California, Illinois, and Maine. Other state and federal courts have interpreted the state laws of Delaware, Florida, Louisiana, Missouri, Ohio, Pennsylvania, South Carolina, and Utah as not triggering a duty to defend. (Yes, there are conflicting opinions concerning Utah law.)
In practice, anyone receiving a PRP letter should contact their lawyer to determine how to proceed to notify their insurance company of the claim and demand a defense and indemnification. Environmental professionals should also be alert to ask their clients whether they have spoken to a lawyer practicing environmental law and/or insurance coverage law to determine their respective rights under CGL policies and whether the claim can be paid under the client’s insurance policies.
An environmental contamination case set for trial based on liability under the Resource Conservation and Recovery Act ("RCRA") for “passive inaction and studied indifference” recently settled, but the court filings provide a valuable lesson to property owners to address contamination promptly and to document delays outside of their control (such as agency review and approval of work plans) rather than being second-guessed for delays.
To establish a claim for injunctive relief under RCRA, 42 U.S.C. § 6972(a)(1)(B), a plaintiff must show that: (1) the conditions at the site may present an imminent and substantial endangerment; (2) the endangerment stems from the handling, storage, treatment, transportation, or disposal of any solid or hazardous waste; and (3) the defendant has contributed or is contributing to such handling, storage, treatment, transportation, or disposal.
In Sisters of Notre Dame de Namur v. Garnett-Murray, 2012 WL 2050377 (N.D. Cal. 2012), the Sisters inherited contaminated property through a charitable bequest in a will. The property was located next to a long-standing dry cleaning business (operated since about 1960) that used tetrachloroethylene (also known as perchloroethylene, perc, or PCE) in its business until 2009. PCE from contaminated soil below the dry cleaning business migrated in the form of PCE vapor into the soil beneath the Sisters’ property next door. From there, the PCE vapor migrated up and into the indoor air of the Sisters’ property. The PCE vapor inside the Sisters’ property was at a level of 15 times the local Environmental Screening Level.
The Sisters discovered the PCE contamination shortly after inheriting the land in October 2007. They intended to sell the property to a local residential developer to fund their charitable activities, but building permits could not be issued until the contamination was reduced below “non-dangerous levels”. The owners of the shopping center that leased the property to the dry cleaning business obtained reports of the contamination beneath the shopping center in 2006 and 2007 while negotiating with potential buyers, but made no remediation efforts until 2010. According to the opinion, the Sisters filed their lawsuit after the remediation plan was approved but before remediation began. The remediation was ongoing as of the June 2012 decision.
The decision is attached below, but one interesting point dealt with whether the shopping center owners “contributed” to the handling, storage, treatment, transportation, or disposal of hazardous waste or whether they were simply a drop box for monthly checks. When the Sisters moved for summary judgment on their RCRA claim, the court noted that “passive inaction or studied indifference can create liability under RCRA." Id. at *6. This is because
RCRA is not primarily targeted at punishing environmentally unsound acts, but rather at reducing the generation of hazardous waste and ensuring the property treatment, storage, and disposal of waste which is nonetheless generated. Therefore, an owner’s potential culpability is irrelevant.”
The court noted that undisputed evidence showed the shopping center owners knew of PCE contamination in 2006, the PCE vapor may have caused or may still be causing further damage to the land and surrounding environment, and defendants took no steps to remediate the contamination until 2010. The court then held that it was "not prepared to hold as a matter of law that plaintiff’s evidence establishes liability through passive inaction or studied indifference, although it might well persuade a jury.” Id. at *7.
The case recently settled, but, according to the Sisters’ pretrial brief, the Sisters intended to offer the following evidence in support of the owners’ passive inaction or studied indifference:
The lesson for property owners is to take claims of environmental contamination seriously and to document your files appropriately to note delays outside of your control, including administrative agency review and approval of work plans and other submissions.
 Sisters of Notre Dame de Namur v. Garnett-Murray, Case 5:10-C-01807 (N.D. Cal.), Docket Entry 107, filed July 10, 2012.
I had the privilege of speaking on real estate broker liability resulting from environmental contamination at the 2012 Indiana Commercial Real Estate Conference. Attached is a copy of my presentation. Take the test and see how you score.
The United States Supreme Court recently tossed $18 million in criminal fines issued under the Resource Conservation and Recovery Act of 1976 (RCRA) against Southern Union Company because the imposition of the fines violated Southern Union’s Sixth Amendment right to have a jury determine any fact (other than the fact of a prior conviction) that increases a penalty for a criminal sentence, and have it proved beyond a reasonable doubt at trial.
In Southern Union Company v. United States, 2012 WL 2344465 (decided June 21, 2012), natural gas distributor Southern Union appealed the trial court’s setting of a maximum criminal fine at $38.1 million, from which the court imposed an actual criminal fine of $6 million and a $12 million “community service obligation.”
Southern Union’s predicament arose in 2004, after youths from a nearby apartment complex broke into a 12-acre facility in Pawtucket, Rhode Island, where Southern Union’s subsidiary stored malfunctioning mercury-sealed gas regulators. The youths played with the mercury and spread it around the facility and apartment complex. Southern Union spent $6 million on the cleanup, and approximately 150 residents were temporarily displaced for approximately two months from the apartments during the cleanup. Most of the residents underwent testing for mercury poisoning. A grand jury indicted Southern Union on multiple counts for violating federal environmental laws, and a jury ultimately found Southern Union guilty of unlawfully storing liquid mercury, a hazardous waste, in violation of RCRA “on or about September 19, 2002 to October 19, 2004.”
After a defendant pleads guilty to, or is found guilty of, a federal crime, the U.S. Probation Office is responsible for recommending a sentence to the trial court. In Southern Union’s case, the Probation Office set the maximum fine at $38.1 million. In essence, the Probation Office took RCRA’s maximum fine, under 42 U.S.C. § 6928(d), of “not more than $50,000 for each day of violation,” and multiplied it by the 762 days between September 19, 2002 and October 19, 2004.
Southern Union objected arguing that the “on or about” language used in the jury instructions could have permitted the jury to convict even if the jury only found a 1-day violation; a fact the Government conceded on appeal. Accordingly, Southern Union argued that imposing any fine greater than the 1-day penalty of $50,000 violated its Sixth Amendment’s right to have a jury determine any fact, other than the fact of a prior conviction, that increases a defendant’s maximum potential sentence as determined by the Supreme Court’s decision in Apprendi v. New Jersey, 530 U.S. 466 (2000).
In response, the Government argued that Apprendi did not apply to criminal fines, but the Supreme Court disagreed. The Supreme Court explained that Apprendi’s core concern is to reserve to the jury the determination of facts that warrant punishment for a specific statutory offense, whether the sentence is a criminal fine, imprisonment, or death. And, “Sometimes, as here, the fact is the duration of a statutory violation; under other statutes it is the amount of the defendant’s gain, or the victim’s loss, or some other factor.” The Court cautioned though that “where a fine is so insubstantial that the underlying offense is considered ‘petty,’ the Sixth Amendment right of jury trial is not triggered, and no Apprendi issue arises.” But for Southern Union, the $18 million in fines were clearly sufficient to trigger its right to have a jury decide the number of days of the alleged violation.
It is important to be mindful that a jury will hold the Government to the burden of proof of “beyond a reasonable doubt” for each day of an alleged violation, rather than having a judge decide the number of days of an alleged violation at sentencing, where the burden of proof is only the “more likely than not” preponderance of the evidence standard.
Some have suggested that Apprendi might be used to argue that a jury should determine victim restitution. Just a few weeks before the Southern Union decision, the U.S. Court of Appeals for the Seventh Circuit decided that an Apprendi challenge to a court’s restitution award—that a jury should determine victim restitution—would be frivolous. United States v. Rutley, 2012 WL 1950408, *2 (7th Cir. May 31, 2012) (“But no case law and nothing in the Mandatory Victim Restitution Act or sentencing guidelines support Rutley’s argument.”)
The importance of working with skilled and knowledgeable lawyers and environmental consultants when buying or selling commercial property and negotiating purchase agreements and access agreements was recently confirmed in a federal district court case from North Carolina entitled Metropolitan Group, Inc. v. Meridian Industries, Inc., case number 3:09-cv-440. The case demonstrates the pitfalls with asbestos inspections and the need to hammer out the details of access agreements should the parties’ future positions be adverse for whatever reason.
The seller, Meridian, operated a textile dying plant on property in North Carolina for a century before ceasing operations, transferring unused chemicals to another plant, and performing asbestos remediation on the property to prepare it for sale. The buyer, Metropolitan, purchased the property intending to demolish the buildings and construct residential units at the site. Less than a year after closing, Metropolitan’s demolition contractor ran into a retaining wall rupturing a fuel line at the site. The rupture resulted in an oil spill into an adjacent river for which the contractor was criminally charged and convicted. (His attempt to clean up the spilled oil with kitty litter was unsuccessful, and the contractor failed to notify the authorities of the spill leading to the prosecution.) As a result of the criminal investigation, chemicals and other hazardous materials were discovered behind a wall at the plant, the existence of which (according to the evidence) neither the buyer, the seller, nor their environmental experts were aware of prior to the demolition.
To prepare the property for sale, Meridian hired a licensed asbestos removal company to remediate the asbestos at the site. Six months later, the consultant inspected the work and confirmed that “no visible, friable asbestos [remained] at the facility.” The consultant cautioned, however, that the facility was not asbestos free and noted asbestos in roof and wall panels. In April 2005, the parties entered into a purchase agreement with Metropolitan agreeing to pay $1 million for the property after an inspection period of 120 days. In the option, Meridian disclosed:
That it … previously had certain asbestos removed from the Property, although it believes asbestos-containing materials may still be present in the building located on the Property, including specifically with the roof of the building located on the Property. In light of the age of the buildings located on the Property, [Meridian] acknowledges it is probable asbestos still is present on the Property.
Although the Option gave Metropolitan the right to enter and inspect the property, it instead retained an environmental consultant to review environmental reports and studies prepared by Meridian’s consultant. Metropolitan did not authorize its own consultant to perform an independent environmental assessment of the property, and even testified that it factored the demolition costs for the building and removal of asbestos into the purchase price. Metropolitan never asked its consultant to determine the amount of asbestos remaining on the property.
In the purchase agreement, Meridian represented that it had “no actual knowledge of the presence or disposal within the buildings or on the Property of hazardous or toxic waste or substances,” including “asbestos.” The term “actual knowledge” was negotiated, agreed to, and defined as the “current, actual conscious knowledge of the officers and employees of Meridian Dyed Yarn Group.” As might be expected, none of the Meridian employees or former employees testified that they had “actual knowledge” of the presence of chemicals or hazardous materials at the time of the sale.
At the summary judgment hearing, Meridian conceded to having breached the agreement as to asbestos, but because no evidence was presented that Meridian had “actual knowledge” of the other chemicals, the court entered judgment against Metropolitan on its breach of contract, fraud, and its Unfair Deceptive Trade Practices Act claim. At trial, on June 18, 2012, Metropolitan recovered $74,296.25 in damages related to the presence of asbestos. In Metropolitan’s trial brief, it argued that the Meridian’s disclosure provided that no asbestos remained “on steam lines, air ducts, and insulated piping.” And, during demolition, “substantial asbestos was found in pipe, chill water, and steam line insulation, duct insulation, floor covering materials, and more than 40,000 square feet of friable asbestos in roofing materials.”
Meridian also succeeded on its counterclaim for breach of the purchase agreement in connection with access for groundwater monitoring. Prior to the sale, Meridian discovered groundwater contamination issues. It installed six permanent groundwater monitoring wells and submitted a proposed Corrective Action Plan (“CAP”) to NCDENR to monitor the groundwater on a semi-annual basis. In the purchase agreement, the parties acknowledged the groundwater contamination issues. Meridian retained responsibility for complying with the CAP, and “in turn, Metropolitan was required ‘to reasonably cooperate with [Meridian] to facilitate access to the Property and the groundwater under the Property (which access existed through groundwater monitoring wells) in order for Meridian to perform its approved CAP.” In May 2008, Meridian was unable to perform its testing because Metropolitan’s demolition contractor destroyed four of the wells. Metropolitan refused to repair or replace the wells, which Meridian eventually replaced at a cost of $36,821.38. In August 2009, one of the monitoring wells was again covered with debris. In July 2010, all of the groundwater monitoring wells, including the replaced wells, were completely destroyed or rendered inaccessible. In December 2010, NCDENR sent Metropolitan a Notice of Violation that destruction of the wells constituted a failure to abandon a well and failure to submit records of well abandonment.
Metropolitan did not contest that it repeatedly destroyed the wells, that it had been fined or cited by the State of North Carolina for doing so, or that it has refused to pay Meridian for the costs of replacing the wells. Instead, Metropolitan argued that it was only obligated to provide reasonable access and nothing more. The court entered summary judgment in favor of Meridian and against Metropolitan. The court awarded Meridian $32,059 for its prior replacement of the wells and the cost for new wells. The court also entered an injunction ordering Metropolitan to not unreasonably interfere with each Meridian's ability to access the groundwater wells and ordering Meridian to not unreasonably interfere with Metropolitan’s development of the property. The court noted in its summary judgment ruling that “the wells have to be placed somewhere, and the court is amazed that the parties have not agreed with each other and NCDENR as to their placement.”
The lessons learned from this case are many. The seller clearly should not have represented that it had no actual knowledge of the presence of asbestos given its consultant’s report identifying asbestos in the roof and wall panels. Second, while the seller would have had to pay for the asbestos remediation at the other locations (pipe, chill water, and steam line insulation, duct insulation, floor covering materials, and roofing materials) anyway, it may pursue an indemnification and/or professional negligence claim against the asbestos contractor to recover its costs incurred to defend against the asbestos claims. Third, the seller was wise to negotiate the representation of “actual knowledge” based on the knowledge of its employees as of the date of the sale. That being said, fourth, the buyer should have negotiated a broader representation and authorized its environmental professional to actually inspect the property it was buying to avoid any surprises. Finally, when negotiating access agreements, it is important to have certainty that your client will be able to continue to conduct sampling and remediation as required, yet also having the flexibility to accommodate future changes, a topic for another blog post.
As a trial lawyer and having taught expert witness skills to professionals (e.g., accountants, appraisers, business valuation experts, environmental professionals, etc.), I routinely get calls from friends who have agreed to serve as an expert witness in a case and had an issue come up. I’ve also had expert witness issues come up in my practice where an opposing party’s expert is demanding to be paid their full rate to perform clerical or administrative tasks, like providing copies of the studies or materials they rely on in support of their opinions, or to be paid their full hourly rate to travel for an upcoming deposition. The answers to these issues are often specific to the jurisdiction where the case is pending, but here are some considerations and common fact patterns that arise for those of you who would like to be an expert witness.
Are you being subpoenaed to a deposition because you are a fact witness or because you are an expert? If a doctor witnesses a car accident, the doctor should expect to receive the standard compensation for fact witnesses if called for a deposition or trial, which by statute or rule (depending on your jurisdiction) is one day’s fees ($40 per day in federal court), mileage, and expenses like parking. If, however, you are being called as a witness for work done as a fact witness, the law in your jurisdiction may permit you to recover a reasonable fee for time away from work, which is often paid directly to your employer. See Hamilton v. General Motors Corp., 490 F.2d 223, 229 (7th Cir. 1973) (allowing a fact witness to be reimbursed for out of pocket costs and the reasonable value of time lost in attendance); Mataya v. Kingston, 371 F.3d 353, 394 (7th Cir. 2004) (“To pay a witness, other than an expert witness, for his testimony is irregular and in fact unlawful in federal trials….”) Some guidelines include that compensation may not be paid to influence the witness’s testimony; the payment must be reasonable (i.e., comparable to the witness’s most recent rate of pay); and the court should be informed of the fact that the witness has been compensated to allow the opposing party to challenge the witness’s impartiality. Jeffrey S. Kinsler & Gary S. Colton, Jr., Compensating Fact Witnesses, 184 F.R.D. 425, 430-432 (1999).
Assuming you are an expert witness, what are some of the common issues?
Do you know the client or law firm that would like to hire you? Sometimes experts are so thrilled with the request to serve as an expert witness, they fail to perform due diligence on the client, lawyer, or law firm hiring them.
Have you hammered out the business details of the engagement? What are you being asked to do? What materials will be provided to you for your review? Are you being asked to provide an oral opinion of your findings, a written expert report, or some type of hybrid based upon your initial opinions? When is your report due? Are you working on one report that will be continually updated with new information or are you allowed to save draft reports?
If you have to prepare a written report, what are the requirements for the contents? Under Rule 26(a)(2)(B) of the Federal Rules of Civil Procedure, an expert has to provide, among other things, “a complete statement of all opinions the witness will express and the basis and reasons for them; [and] the facts or data considered by the witness in forming them.” If you fail to provide an opinion, the court may prevent you from offering your undisclosed opinion at trial. Some jurisdictions, however, have no formal requirements for expert reports. The Indiana Rules of Trial Procedure do not list any requirements for expert reports, forcing the parties to work out between themselves what will be required.
Who will pay your fees? Typically, your client or the client’s law firm will pay your fee for you to develop and write your expert report and to testify at deposition and/or trial, while under certain rules, like the Federal Rules of Civil Procedure, the opposing party has an obligation to pay for the expert witness’s fees related to the deposition.
Put your fee agreement in writing. How much will you charge to review materials and arrive at an opinion? How much will you charge if called to testify at a deposition or for trial? Some consultants may charge a higher rate for deposition and a ½ day or full day rate for testimony at trial because you will be out of the office for the entire day.
Request a retainer fee and if you don’t know the lawyer or the firm, you might consider requiring that all your fees be paid up before certain milestones, e.g., before your expert report is due or before you testify. Some experts will condition their appearance for a deposition and/or trial on pre-payment of their fees and travel expenses.
I have fielded several calls over the past year by professionals who have been asked to serve as expert witnesses. The lawyers asked the expert “to be available” in case they were needed to testify on a particular day. One expert took the day off from his regular work, was not called to testify (he hadn’t even received a courtesy call during the days leading up to the day that he may have been needed to testify), and was upset with the lawyer for not communicating with him and not paying him to be available to testify. All the expert had to do was have a provision in his engagement letter that stated that the client had to provide him one month written notice (or insert what you think is an appropriate lead time) of the trial date in order for the expert to schedule the time for trial testimony, provided the expert is otherwise available to testify, and payment in full of all amounts owed prior to trial and payment for one day of trial and costs and expenses. The expert also needed some provision to handle trial cancellation or the granting of a last minute continuance and payment of his fees under such circumstances.
If your client asks that the opposing party pay your fee to take your deposition, remember that the opposing party can challenge the reasonableness of your fee. You will want to make sure that your engagement letter discusses what happens in those situations where your fee is challenged and reduced for whatever reason. Here are some recent examples.
Expert wanted to get paid her standard hourly rate to provide reference materials she failed to attach to her expert report. The court held that because the expert was doing administrative work (pulling reference materials), the expert was only entitled to be paid as such and not entitled to her regular expert witness fee. Artistic Carton Co. v. Thelamco, Inc., 2008 WL 2622806 (N.D. Ind. 2008) (court did not permit expert witness to charge $270/hour to compile and copy documents, but instead held that $50/hour was a reasonable rate); Dominguez v. Syntex Labs, Inc., 149 F.R.D. 166 (S.D.Ind. 1993) (“The doctor is asking defendant not to pay for his medical skills, but for his personal clerical skills…. The doctor is not doing work that requires a medical degree; accordingly, he should not be paid as such.”)
Expert wanted to get paid his standard hourly rate while traveling to and from the deposition. The court held the expert was only entitled to a reduced hourly rate for his travel time. United States v. 1.604 Acres of Land, 2011 WL 3022303 (E.D. Va. 2011) (Expert entitled to 50% of his hourly rate during travel.) Your engagement letter should address those situations where a court may decide to cut your fees where the obligation to pay your fees is being shifted to an opposing party. Just because a court decides the opposing party does not have to pay your full hourly rate for travel does not mean your client does not have to pay you for your full hourly rate for travel provided you address such a situation in your engagement letter.
Other problems have arisen where the client’s lawyer failed to adequately prepare the expert prior to the deposition or trial. You don’t want to find out that fact witnesses have undercut the foundation for your opinions at your deposition or at trial. Unfortunately, the expert will look foolish and unprepared when the blame really belongs to the client’s lawyer for failing to adequately prepare the expert witness.
A final problem is obtaining payment after a loss. Some lawyers will ask the expert witness to cut his or her fee after a loss, in essence making the expert’s fee contingent on the outcome. This should be covered by the fee agreement.
I could go on and on about expert witness issues, but if you have a question, be sure to talk with your lawyer before agreeing to be an expert witness rather than having to deal with the pitfalls afterwards.
Some states prohibit indemnity clauses in construction contracts that attempt to absolve a contractor for its own negligence.
In 2008, the Georgia Supreme Court struck down a limitation of liability clause under Georgia's anti-indemnity statute in Lanier at McEver, L.P. v. Planners and Engineers Collaborative, Inc.¸ 663 S.E.2d 240 (Ga. 2008). The facts were that a developer retained an engineering firm and paid it $81,514 to design a storm-water drainage system for a 220-unit apartment complex. The clause at issue stated:
In recognition of the relative risks and benefits of the project both to [the developer] and [the engineer], the risks have been allocated such that [the developer] agrees, to the fullest extent permitted by law, to limit the liability of [the engineer] . . . to [the developer] and to . . . any third parties for any and all claims, losses, costs, damages of any nature whatsoever . . . so that the total aggregate liability of [the engineer] . . . to all those named shall not exceed [the engineer’s] total fee for services rendered on this project."
After the apartment building was completed, the developer discovered erosion and other physical damage that the developer’s expert witness attributed to the engineer’s negligent design of the storm-water drainage system. The developer claimed that it spent $250,000 for partial repairs and expected to spend $500,000 in total to complete the repairs. The developer sued the engineer for negligent construction, breach of warranty, and litigation expenses. The engineer responded by trying to invoke the parties' limitation of liability clause to cap the developer's damages at the engineer's fee of $81,514.
Ultimately, the Georgia Supreme Court determined that the clause violated a state law, which prohibited indemnification in a construction contract for liability for bodily injury or property damage resulting from the sole negligence of the promisee (or contractor). The court reasoned:
This is because the clause applies to “any and all claims” by third parties and shifts all liability above the fee for services to the developer no matter the origin of the claim or who is at fault. Thus, while a third party is not precluded from suing [the engineer] for any negligent actions in constructing the storm-water drainage system, the clause at issue here allows [the engineer] to recover any judgment amount entered against it from [the developer] once the $80,514 threshold has been surpassed, including judgment amounts on third party claims for which [the engineer] is solely negligent.”
So even though there were no actual third party claimants and the word “indemnity” did not appear in the contract, the court held that theoretically the developer’s damages of $250,000 already incurred exceeded the $80,514 threshold so that the developer would be liable to the engineer for all future third party claims. Similarly, on November 21, 2011, the Georgia Supreme Court again struck an indemnity provision in Kennedy Development Co., Inc. v. Camp, et al., 2011 WL 5830482 (Ga. Nov. 21, 2011), where the court invalidated an indemnification clause within an assignment and assumption agreement transferring responsibility for the management and operation of a newly developed subdivision to its homeowners’ association.
However, removing the third party language in the limitation of liability clause avoided the Georgia anti-indemnity statute in RSN Properties, Inc. v. Engineering Consulting Services, Ltd., 686 S.E.2d 853 (Ga. Ct. App. 2009). There, the developer hired an engineer for the sum of $2,200 to perform soil studies and to render a professional engineering opinion on the suitability of using septic systems in a residential subdivision. The developer sued the engineer for breach of contract and negligence for concluding that most of the lots were suitable for septic systems when they were not. The developer claimed it relied on the inaccurate opinion to complete road and waterline construction in order to obtain county approval of the development. The county refused to approve the development of many of the lots resulting in damages to the developer of more than $100,000.
The engineer moved for summary judgment on the basis of the limitation of liability provision, which stated:
[The developer] agrees to limit [the engineer’s] liability to [the developer] arising from [the engineer’s] professional acts, errors or omissions . . . such that the total aggregate liability of [the engineer] to [the developer] shall not exceed $50,000 or the value of services rendered, whichever is greater.”
The Georgia Court of Appeals upheld the provision because the parties were in relatively equal bargaining position in a commercial setting, the provision reflected an arms-length bargain to perform the service at the agreed-upon fee in return for a liability cap and did not release the engineer for its liability, and “nothing in the contract exculpates, holds harmless, or otherwise limits [the engineer’s] liability to third parties.”
The takeaway from these cases is that you must determine whether your state (or the state where you will be performing your work if it is not in your state) has an anti-indemnity statute and how the courts interpret limitation of liability clauses before you sign your contract. By including tested provisions, you can limit your liabilities.
Lawsuits for personal injuries, medical monitoring, and remediation claims resulting from historic environmental contamination often involve successor liability claims, where the corporation that caused the pollution no longer exists, but there appears to be a successor corporation operating the same or a similar business. Below is a general summary of the legal rules pertaining to successor liability claims, with the caveat that the common law in your jurisdiction may vary.
Under traditional common law, when a corporation purchases another corporation’s assets, the assets are typically bought free and clear of any unrecorded liens, and the buyer is generally not liable for the seller’s debts or other liabilities. However, under the successor liability doctrine, a buyer of another corporation’s assets may be held liable to answer for the seller’s debts or other liabilities where:
(1) the buyer expressly or impliedly agrees to assume them;
(2) the transaction amounts to a de facto merger or consolidation of the buyer and the seller;
(3) the buyer is a mere continuance of the seller corporation; or
(4) the transaction is fraudulent to escape such obligations.
See Yankee Gas Servs. Co. v. UGI Utilities, Inc., 852 F.Supp.2d 229, 246 (D. Conn. 2012) (finding de facto merger occurred sufficient to impose CERCLA and Connecticut state environmental law liability on buyer under federal common law and either Connecticut or Pennsylvania law); Reed v. Reid, __N.E.2d __, 2012 WL 6607927, *16 (Ind. 2012) (finding genuine issue of material fact concerning successor liability under Indiana law for claim asserted under the Indiana Environmental Legal Action statute); New York v. Nat’l Serv. Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006) (corporation that bought the assets of a dry cleaning business was not liable for seller’s liability under CERCLA and New York state law under a de facto merger theory of liability); Opportunity Fund, LLC v. Epitome Systems, Inc., __ F.Supp.2d __, 2012 WL 5930592, *7 (S.D. Ohio 2012) (applying Ohio law). The hallmarks for each exception are noted below.
1. An Express or Implied Assumption of Liability.
The Yankee Gas decision held that to transfer CERCLA liability, the transaction agreement must contain language broad enough to allow a court to say that the parties intended to transfer either contingent environmental liability or all liability. 852 F.Supp.2d at 244. This requires a thorough analysis of the language used in the purchase agreement.
2. A De Facto Merger.
A de facto merger happens where a transaction is essentially a merger in all but name. The concept is frequently applied in cases where "the seller’s shareholders retained their interest in the transferred assets through an ownership interest in the [new] corporation, while freeing the assets from the claims of the seller’s creditors by disguising the transaction as an asset sale." Opportunity Fund, 2012 WL 5930592, *13 (internal citations omitted). Generally, at common law, the hallmarks of a de facto merger include: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation as soon as possible; (3) assumption by the purchaser of the debts and liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. (A distinction under Indiana common law, for instance, is that a de facto merger does not require continuity of ownership. Reed, 2012 WL 6607927 at *16.)
3. The Mere Continuation.
The mere continuation exception asks whether the successor corporation is a reincarnation of the acquired corporation. The mere continuation exception is based on the continuation of the corporate entity, and not the business operation. This happens, for example, when one corporation sells its assets to another corporation with the same people owning both corporations. Considerations include whether there is a continuation of shareholders, directors, and officers into the new corporate entity, and the adequacy of the consideration paid for the assets.
4. A Fraudulent Transaction.
The fraudulent transaction exception asks whether the transaction is structured with the intent to escape the seller’s debts and liability and has hallmarks of fraud such as inadequate consideration and lack of good faith.
For buyer’s considering whether to purchase the assets of an existing corporation, the best time to consider whether the asset sale may result in successor liability is when the parties are negotiating the purchase agreement because a transaction can be structured in a variety of ways to avoid successor liability.