The All Appropriate Inquiry (AAI) / ASTM 1527-05 Phase I environmental site assessment is not the panacea to environmental risk.  Environmental service providers (lawyers, consultants, and  EH&S) must be knowledgeable about state laws, ongoing environmental obligations, financial responsibility and anticipate future regulatory changes to avoid unwanted liability - as well as leverage regulatory advantages. 

CERCLA 42 U.S.C. section 9601 et al. is a federal law.  It is not a state law (emphasis added twice).   States can and do have more stringent laws affecting environmental liability; and can also provide different liability exemptions.  For example, under “Massachusetts’ CERCLA” (M.G.L. c. 21E) an “eligible person” is statutorily precluded from third parties lawsuits.  CERCLA does not provide a similar third party exemption.  CERCLA does provide 3 important statutory defenses for landowners: (i) Innocent Landowner (ILD), (ii) Bona Fide Prospective Purchaser (BFPP), and (iii) Contiguous Landowner (CL).  That being said, again each state has its own laws.  For example, CERCLA’s BFPP is not recognized by the Wisconsin Department of Natural Resources.  So state law, while required to be as strict as federal law, can cast a broader net than CERCLA's.

Even if one qualifies for a CERCLA defense – there are ongoing proactive obligations of conformity and financial responsibility to remain exempt from liability.  Phase Is are like a financial statement – they a snapshot in time.  They do nothing regarding ongoing liabilities (see dry cleaners, USTs, conformity with a land use restrictions), changes in the environmental regulations, and third party liability.  In New York (and several other states) there has been regulatory movement to “reopen” of formerly closed sites due to vapor intrusion.   If your site was ‘closed’ with institutional controls (deed restriction, no further action letter), it can be further investigated and require more remediation.

Under CERCLA an owner, operator, arranger or transporter of hazardous substances is strictly, retroactively, jointly and severally liable for environmental cleanup and liability to third parties.  However, if an owner or prospective purchase conducts an AAI, they may qualify (liability exemption) as a:

(i)      Innocent Landowner (CERCLA section 101(35)(A));

(ii)    Contiguous Landowner (CERCLA section 107q); and

(iii)   Bona-Fide Prospective Purchaser (CERCLA 101(40) and 107(r)).

Innocent Landowner Defense and Michigan’s “Baseline Environmental Assessment” (BEA).  In Michigan a BEA allows one to purchase or begin operating at a facility without being held liable for existing contamination and must be conducted according to specific guidelines – otherwise you do not qualify.  A former client (B-piece buyer/property investor) was contemplating taking possession of a contaminated industrial facility but did not want to run the risk of environmental liability.  They hired an out-of-state environmental consultant that was unfamiliar with Michigan’s BEA to conduct a Phase I to establish AAI and the ILD.  After spending money and waiting months for the results (time is money to Wall Street), the B-piece buyer received a Phase I that did not confirm to Michigan's specific regulations.  This investor had to rehire a new consultant to conduct another report in conformity with MI's BEA.  Valuable time and money was wasted because the specific state regulations were not followed.

U.S. v. Domenic Lombardi Realty, Inc., 290 F. Supp. 2d. 198 (D.R.I. 2003), is a case that grappled with the Innocent Landowner Defense (ILD).  After a 6 day bench trial with 403 factual stipulations, witnesses, and hundreds of exhibits and written arguments the court found Lombardi Realty failed to prove it was an innocent landowner.  To further complicate matters was the issue of what environmental standard applied; the 1986 standard when the property was purchased, or the 2002 standard when the government brought the action?  While the court held the 1986 standards, the defendant still did not meet AAI.

Walnut CreekManor, LLC. v. Mayhew Center, 622 F. Supp.2d 918 (2009) is a another case that addressed, inter alia, AAI and environmental Phase I reports.  In 1993 San Francisco Federal Bank foreclosed on the Mayhew Center (“WC”), an industrial property adjacent to a seniors-only residential apartment complex called Walnut Creek Manor (“WCM”).  The bank performed a limited Phase I and sold it to the current owner, WC.  In 2004, when the WC went to refinance, a new bank hired National Assessment Corporation to conduct a new Phase I that revealed contamination and recommended additional testing.  WC hired another consultant, Allwest Association to review NAC’s findings.  Allwest concluded that subsurface investigation was not warranted and did not mention the adjacent landowner, WCM.  In 2004, the California Regional Water Quality Control Board ordered both parties to submit a technical report proposing site investigation and a work plan to assess the soil and groundwater contamination.  Summary judgments were filed and it quickly became a battle of the experts.  WCM prevailed on summary judgment.

            Contiguous Landowner.  In Massachusetts its dubbed ‘downgradient property owner status’ and is a viable defense to liability.  Under both federal and state law, the contiguous landowner must first prove they did not cause the contamination and are not connected to the responsible party.  See Walnut Creek Manor case above.  This defense also requires an ongoing obligation of compliance.

            Bona Fide Prospective Purchaser is designed to provide liability exemptions under CERCLA and therefore encourages purchasing and remediating contaminated properties.  However, the BFPP must take all “reasonable steps” to stabilize and limit exposure to the contamination.  Needless to say, that language is highly subjective requiring a site specific approach.  As stated earlier, some states like Wisconsin do not even recognize the BFPP exemption.   Most practitioners believe the BFPP is a confusing outgrowth of EPA Prospective Purchaser Agreements that really offer little in the way of additional protection.  Again, the BFPP is confined to federal law.  States and third party liability would still remain.  A preferred and more conducive approach would be for a potential purchaser to ascertain their state’s Brownfield legislation.

            Environmental Risk – A Proactive Approach is Required

Today, environmental risk pervades all aspects of business and every company wants to be ‘green.’  Therefore, environmental service providers must be proactive in managing this risk under a comprehensive approach - and even leverage the recent beneficial changes (i.e. tax credits, grants, low interest loans, environmental insurance premium discounts, liability exemptions, etc.).  CERCLA and AAI are just one small element of environmental risk and potential liability exemption.