Warning- this post is 'hot'. If you dont want to read a post with an edge, stop here.
ok- you have been warned
Earlier this year, I discussed the BNY Mellon v Morgan Stanley Mortgage Corp where the defendant/mortgage originator has been sued by the CMBS trust for a $80MM shopping center loan where methane gas issues led to a default. See detailed post at: http://lschnapf.blogspot.com/2011/07/cmbs-lender-kept-in-case-over-questions.html
Now we have another mind-boggling case involving a $35MM development loan where a bank is a plaintiff and is seeking damages from several environmental consultants for failing to anticipate methane gas problems at the development site. In Bancorpsouth Bank v. Environmental Operations, Inc., 2011 U.S. Dist. LEXIS 117010 (E.D. Mo. 10/11/11, the development site contained two former landfills that had been closed before the current closure requirements went into effect. The defendants filed motions to dismiss the complaint and while the court agreed to dismiss some of the claims, it allowed the negligence and CERCLA claim to proceed to discovery. If you want to read the case, it is attached below.
My friend and fellow CG blogger, Bill Wagner, wrote about this case earlier this week from the environmental consultant malpractice perspective. I will discuss this case from the transactional perspective. It is a very complex transaction involving an environmental agency, an economic development agency, both a acquisition and development loan, a brownfield tax credit purchaser and three consultants who ignored the potential for methane gas.
The full discussion of the case is available at: http://lschnapf.blogspot.com/2011/10/35m-brownfield-project-derailed-by.html
. It illustrates the danger and complexity of brownfield developments in general and landfill developments in particular. It also raises questions on how sophisticaed parties who are represented by experienced counsel can miss such an obvious issue as methane gas from a former landfill.
The case is only in the earliest stages of litigation and no discovery has yet occurred so we have only the barest facts from the pleadings. However, it does highlight some important and interesting issues:
1. Methane and Phase 1 reports- The phase 1 in this case not only did not address methane but expressly provided it was excluded from the scope of services. Now it is true that methane is not a CERCLA hazardous substances and therefore the presence of methane cannot be a REC. But it ahouls have been identified as an "item of environmental concern" separate and apart from a REC as the consultant did in the BNY v Morgan Stanley case. Indeed, the phase 1 identified the former landfill as a REC for the potential presence of hazardous substances.
2. At least three phase 2 reports were prepared and while they analyzed samples for VOCs and SVOCs, they never thought about sampling for methane.
3. The project obtained two loans from the same lender. How did the bank's consultant not flag methane or at least ask the question.
4. The project had both a PLL policy and a cost-cap policy. If methane was not disclosed as part of reports used to procure insurance, why wasnt there coverage.
On CommonGround and other social networking sites such as the "Environmental Issues in Business Transactions" group that I moderate on Linked-in, there have been a number of intense discussions on the current state of the environmental consulting industry. This case seems to me to reinforce the view that "environmental professionals" consultants are forgetting about the "P" part of their title. I put the blame squarely on the heads of the commodity shops and low cost providers. In my view, they have abrogated their professional responsibilities for advising clients on what is an appropriate scope for diligence. They have successfully convinced the marketplace that the only distinguishing factor among firms is price, price and price.
But AAI/E1527 is predicated on the performance of "professional judgment". Too many phase 1 reports are being performed by under-qualified people who are "supervised" by EPs. They act more like appliance salesman or life insurance who have only one product to sell. I see very little evidence of these firms and individuals helping clients shape their due diligence. Instead, they reinforce the view that phase 1 reports are basically off-the-shelf products- as we say in the legal community-they are fungible.
Part of being a PROFESSIONAL is telling clients what they may not want to hear so they can make informed risk decisions. Patients dont tell doctors how to examine them or what surgical procedures to follow. The doctors discuss the options with their patients so they can make informed decisions. Likewise, transactional lawyers often have to advise clients that their business plan does not make sense, the price is wrong or sometimes the deal does not make sense. The client of course has the final say but to not advise clients on their options is to abrogate one's professional responsibility.
If the clients approaches a consultant and says it wants a standard phase 1 and the consultant knows the site is likely to have lots of hair or has issues issues that are not included in the standard scope of work, the consultant should advise the client. If the client declines to expand the scope, the consultant should document its file or end up like the consultants in this case who got sued when the methane problems soured the deal---so to speak.