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.

Having represented environmental contractors accused of malpractice, I welcomed a recent federal court decision finding that an environmental contractor is not liable under RCRA simply because it hired a subcontractor that performed a wrongful act, even though the act resulted in the release of a hazardous waste into the environment.

In National Exchange Bank and Trust v. Petro-Chemical Systems, Inc., et al., 2012 WL 6020023 (E.D. Wisc. Dec. 3, 2012), a contractor, Petro-Chemical Systems, was hired to test the tightness of an underground fuel oil storage tank.  Petro-Chemical subcontracted this work to Tanknology, Inc.  Tanknology’s technician performed the test, which included disconnecting pipes to the furnace and reconnecting them.  An investigation showed that the piping from the tank was reconnected backwards, which the parties agreed led to a buildup of pressure that caused the seals on the pumps to fail.  Approximately 550 gallons of fuel oil spilled from the broken seals and entered into the basement.  Some of the fuel oil was suspected of having seeped into the soil below the basement.

The bank that hired Petro-Chemical filed a lawsuit against Petro-Chemical, Tanknology, and their respective insurers asserting claims under Wisconsin state law for breach of contract, negligence, and nuisance, and a claim under the federal Resource Conservation and Recovery Act (RCRA).  Of particular importance was the court’s analysis of the RCRA claims, which unlike the common law claims provides a statutory remedy that includes reimbursement of litigation expenses, such as attorneys’ fees and costs. 

The bank alleged that Petro-Chemical was responsible for damages under RCRA because it “contributed” to the spill by subcontracting the work to Tanknology and then failing to properly supervise and inspect Tanknology’s work.  Under RCRA,

any person may commence a civil action on this own behalf … against any person, … including any past or present generator, past or present transporter, or past or present owner or operator of a treatment, storage, or disposal facility, who has contributed or is contributing to the past or present handling, storage, treatment, or transportation, or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or the environment.

42 U.S.C. § 6972(a)(1)(B).

The court rejected the bank’s RCRA claim as to Petro-Chemical.  The court concluded that while Congress intended the term “contributed” to be interpreted liberally, “the court finds no reason to conclude that Congress intended the term ‘contributed’ to be an invitation to string together an expansive causal chain of tangential defendants.”  In so holding, the court rejected the bank’s argument that RCRA liability exists “simply because [Petro-Chemical] hired an allegedly malfeasant subcontractor.”  Instead, the court noted the absence of evidence that Petro-Chemical contributed to the waste—“Petro-Chemical did not generate the waste, nor is there any evidence that Tanknology has a record of unlawful actions, much less that Petro-Chemical knew this.  Here, Petro-Chemical simply hired Tanknology as a subcontractor.” 

The court also denied the bank’s motion for summary judgment on its RCRA claim against Tanknology, but for a different reason.  The court concluded that Tanknology’s switching of the piping,

is plainly sufficient to support a conclusion that Tanknology contributed to the spill.  Congress certainly did not intend to allow a polluter to avoid liability through, for example, a creative use of timed release valves and ensuring to be a good distance away when the hazardous waste is dumped.  Tanknology’s alleged actions led directly to the spill and in the court’s view this is quite obviously within the scope of the statute.  

But, there was a factual dispute over whether Tanknology, or someone else, switched the piping.  Tanknology presented evidence that the property was unoccupied and left insecure during the relevant time period.  For this reason, the court denied the bank’s summary judgment motion and held that a trial was necessary to determine Tanknology’s liability under RCRA.

Victims of federally-prosecuted environmental crimes have the right to full and timely restitution under the federal Crime Victims’ Rights Acts (the "Act"). A recent case raises the issue of what specific damages are recoverable under the Act. In United States v. CITGO Petroleum Corp., et al., Case No. 2:06-00563, pending in the Southern District of Texas, 15 crime victims have asked the Court to order CITGO to fund two trusts with approximately $30 million for restitution damages.

The Facts – A jury found CITGO Petroleum Corp. and CITGO Refining and Chemicals Co., LP (collectively, "CITGO") guilty of two felony Clean Air Act violations for conduct occurring between January 1994 and May 2003. CITGO illegally used open-top tanks at its East Plant refinery in Corpus Christi, Texas to remove oil from water without required emission equipment. Chemical emissions from the tanks blew into the neighborhood surrounding the plant and caused health effects to people living around the refinery. The Court identified 15 crime victims who suffered injuries from CITGO’s crimes, including "burning eyes, bad taste in the mouth, nose burning, sore throat, skin rashes, shortness of breath, vomiting, dizziness, nausea, fatigue, and headaches." (Docket Entry ("DE") 819, at p. 7.) These symptoms resulted from what prosecutors called a "chemical cocktail" containing the by-products of petroleum refining, including benzene; ethyl-benzene; toluene; 1,2,4 tri-methyl-benzene; xylenes (total); styrene; 1, 3 butadiene; methyl butyl ether; and a host of other hazardous compounds.

The Crime Victims’ Rights Act of 2004, 18 U.S.C. § 3771, grants crime victims certain rights, including "the right to full and timely restitution as provided by law." On September 25, 2012, the Court entered an order establishing a time limit for the Government to identify additional crime victims. To meet its obligations, the Government planned to hold a series of community meetings. In preparation for the meetings, the Government sought the Court’s blessing of its proposed instructions to public (DE 836), which stated in part:

[Y]ou may also believe that CITGO should pay for the harm its crimes did to you directly. In a criminal case, this is called "restitution." Restitution is different from (and typically smaller than) the kind of award you could get if you sued CITGO and won. If you think you have other claims against CITGO, you should consult an attorney."

(DE 836-1.) The Government then gave some examples of appropriate restitution damages in a draft victim’s affidavit. These examples included $90 for the cost to visit a doctor because of breathing problems and $375 for the cost to repaint a car that suffered surface damage.

The Requested Restitution – The 15 crime victims instead sought much broader restitution damages than that proposed by the Government according to the "Community Victims’ Sentencing Memorandum, Requests for Restitution, and a Remedial Order Addressing the Harms Created By CITGO." (DE 831.) There, the 15 crime victims asked for reimbursement of out-of-pocket losses for future medical screening costs and attorneys’ fees, and approximately $30 million to establish two trust funds for themselves and other similarly situated crime victims (estimated to be 300 people in total).

First, the 15 crime victims claimed restitution for themselves for medical screening of $80,900 based on figures from the Texas Department of State Health Services for cancer screening. This amounted to $250 per person per year. Second, they asked for attorneys’ fees and costs, but claimed the amount would be unknown until the case concluded. Third, they asked the Court to create the two trust funds for an estimated 300 total crime victims (including the 15 who filed the request) for:

• Future Medical Expenses – "Using 300 as a conservative figure, an appropriately-sized trust fund for medical expenses would be $10,000,000 (300/15 x $500,000). Administrative costs to run the trust fund could be reasonably estimated at 10%. Accordingly, the community members request that the Court order CITGO to place $11,000,000 into a trust fund for future medical expenses." The crime victims proposed that money not used over a 30-year period be returned to CITGO with interest earned.

• New Homes and Moving Costs – "The cost of relocating the [15] community victims to comparable homes in a neighborhood away from the refinery is reasonably estimated at $766,800. … Thus, an appropriate trust fund for relocation would be estimated as 20 x $766,800 = $15,336,000. … Because real estate transactions necessarily involve fees and other expenses, administrative costs are estimated at 20%. Adding an additional 20% for administrative costs yields a trust fund of $18,403,200." The crime victims proposed that money not used after 2 years be returned to CITGO with interest earned.

The crime victims argued that the United States Sentencing Guidelines § 5E1.1(b)(2) "sets a high bar for declining to provide restitution" (DE 831, p. 12), and pointed to CITGO’s profits of more than $1 billion earned by its East Plant Refinery during the relevant time period as justification for their request for almost $30 million.

Analysis – Interestingly, the 15 crime victims have not sought any restitution for past out-of-pocket medical or other expenses incurred between January 1994 and May 2003. And, ordinarily, the question of whether a person has suffered an injury from a chemical exposure involves complicated questions of medicine and science. Yet, the 15 crime victims have not submitted any of the traditional causation proof evidence typically offered in a toxic tort case, e.g., testimony from a medical expert, toxicologist, or epidemiologist, and have instead simply sought a summary award of restitution. It will be interesting to see how the Court rules.

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[1], the Sisters intended to offer the following evidence in support of the owners’ passive inaction or studied indifference:  

• The property manager routinely inspected the dry cleaning business during the 28 years he worked for the owners;
• The property manager first observed solvent degrading floor tiles near the dry cleaning machine at the dry cleaners prior to 2002, but did not investigate the PCE releases at that time;
• In November 2006, a potential buyer’s investigation showed high PCE concentrations in soil and soil vapor.  When the potential buyer demanded further investigation and delineation of the pollution on the property, the shopping center owners backed out of the deal, “in part, because another potential buyer thought the PCE contamination was ‘less of a situation that the first group of buyers’ – i.e., that another buyer would take care of the problem”;
• The owners did nothing in response to the Sisters' demands to clean up the contamination;
• In June 2009, the shopping center owners’ environmental consultant discovered extremely high levels of PCE (967,000 ug/m³) in soil beneath the dry cleaners and confirmed treatment was necessary to reduce hazardous concentrations of PCE in the soil vapor beneath the dry cleaners and the Sisters' property, but failed to submit a work plan until May 2010, after the lawsuit was filed; and
• The owners delayed submitting a pilot-scale test of a cleanup system, delayed submitting the required air permit by 3 months, and delayed full-scale treatment of the contaminated soil until almost five years after defendants confirmed the presence of the PCE contamination. 

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.

Joe Derhake’s recent post raised an interesting question about what environmental consultants need to know about the attorney-client privilege.  Not only do environmental consultants need to be aware of the attorney-client privilege, but approximately 27 states have adopted a statutory privilege for environmental self-audits.  One or both may shield an environmental consultant’s reports from discovery.  Below is a brief discussion of the attorney-client privilege and links to a prior post on the environmental self-audit privilege.[1]

The attorney-client privilege.  The attorney-client privilege is the oldest recognized privilege at common law.  It exists “to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of the law and administration of justice.”  Upjohn v. United States, 449 U.S. 383, 389 (1981).  The essential elements to create the privilege are: “(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure made by himself or by the legal adviser, (8) except the protection be waived.”  United States v. White, 950 F.2d 426, 430 (7^th Cir. 1991).  Courts have held that "the attorney-client privilege must be narrowly construed because it comes with substantial costs and stands as an obstacle of sorts to the search for truth."  Lluberes v. Uncommon Productions, LLC, 663 F.3d 6, 24 (1st Cir. 2011) 

“The attorney-client privilege is strongest when a client seeks advice to determine the legality of conduct before taking action.”  In re Sulfuric Acid Antitrust Litigation¸ 235 F.R.D. 407, 424 (N.D. Ill. 2006).  “The very meaning of a line in the law is that right and wrong touch each other, and … anyone may get as close to the line as he can if he keeps on the right side.”  Id., quoting Louisville & Nashville R.R. v. United States, 242 U.S. 60, 74 (1916).  Sometimes call safe-side counseling, “lawyers are constantly called upon to tell people in advance of action or developed controversy, what their duties are to other people and to the government, and what the duties of others are to them.”  In re Sulfuric Acid Antitrust Litig., 235 F.R.D. at 424 (internal citations omitted). 

The attorney-client privilege extends to confidential communications made by a client to his or her attorney where legal advice is sought or to aid in determining the client’s rights and liabilities.  Hueck v. State, 590 N.E.2d 581, 584 (Ind. Ct. App. 1992).  The privilege also extends to communications between the attorney (and his or her agent) and the client (and his or her agent).  “Just as communications made directly between an attorney and his or her client are privileged, so too are communications between attorneys and the experts or investigators they hire on behalf of a client, as well as communications between agents of the client and agents the attorney hires on behalf of a client.  The attorney-client privilege attaches to communications between the client and an agent of the attorney, as long as (1) the communication involves the subject matter about which the attorney was consulted and (2) the agent was retained by the attorney for the purpose of assisting the attorney in rendering legal advice to or conducting litigation on behalf of the client.”  In re Witham Memorial Hosp., 706 N.E.2d 1087, 1090-91 (Ind. Ct. App. 1999). 

Documents and communications that do not contain a request for legal advice or do not give legal advice do not fall within the scope of the privilege.  McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D. Ill. 2000).  For instance, business advice does not count and is not protected.  In re Sulfuric Acid Antitrust Litig.¸ 235 F.R.D. at 415. And, “simply funneling communications past an attorney will not make them privileged.”  Equity Residential v. Kendall Risk Mgt., Inc., 246 F.R.D. 557, 563 (N.D. Ill. 2007).  In other words, “if an attorney is simply a mail ‘drop box’ for the purpose of trying to create a screen against discovery, and the content of the document indicates it is neither work product nor a communication subject to the attorney-client privilege, the fact that a document is sent through an attorney cannot prevent it having to be produced.”  In re Air Crash Disaster at Sioux City, 133 F.R.D. 515, 520 (N.D.Ill. 1990). 

Finally, while the attorney-client privilege protects disclosure of communications, it does not protect from disclosure the underlying facts communicated with the attorney.  Upjohn, 449 U.S. at 395.  In other words, while the privilege would prevent a client from being compelled to answer the question, “'What did you say or write to your attorney?', the client may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a statement of such fact into his communication to his attorney."  Upjohn, 449 U.S. 395-396.  For example, if the client knows of a past leaking underground storage tank on the property, his communication of that fact to his lawyer would not make that fact privileged or protected from discovery. 

Protecting the environmental consultant’s report under the attorney-client privilege.  Assume the purpose of environmental due diligence was for the client’s lawyer to determine whether the client could qualify for CERCLA’s bona fide prospective purchaser defense.  This is a legal question, but one that requires factual information (to be gathered by the environmental consultant) that the lawyer can use in his or her analysis and advice to the client. In a perfect world, the client would be best served by having the lawyer hire the environmental consultant through a written engagement letter that spells out that the lawyer is hiring the environmental consultant as its agent for the purpose of providing factual information and technical analysis that the lawyer will use in rendering legal advice to the client.  The environmental consultant should mark the report as “Privileged and Confidential, Subject to the Attorney-Client Privilege.”  The report should be sent to the lawyer and the lawyer can decide whether to provide it to the client.  (The attorney-client privilege is a matter of state law and some states hold that the client would have to divulge factual information within their knowledge as long as it does not require the disclosure of the attorney’s legal advice.  If the client learns of facts from the report, the client may later be required to disclose those facts.) Finally, the environmental consultant should bill the lawyer for his or her work and the lawyer should pay the environmental consultant rather than the client paying the environmental consultant directly.  (This is probably one of the least important indicia of whether the attorney has employed the environmental consultant as its agent and some courts would not even consider it.)  The lawyer can then use the information in the report to answer the legal question of whether the facts and circumstances allow the client to qualify for the bona fide prospective purchaser defense. 

There is some case law that indicates that an environmental consultant’s act of simply providing factual information to the client’s lawyer, with no technical analysis, does not qualify for the privilege.  Coastline Terminals of Conn., Inc. v. U.S. Steel Corp., 221 F.R.D. 14 (D.Conn. 2003).  There is some case law that holds that the client’s ordering and paying for the report and simply sending a copy to the client’s lawyer is not enough to qualify for the privilege.  Id.  The key is whether the consultant is putting the information in a usable form for the attorney to render legal advice.  And, of course, the report must not be communicated to any third party or else the privilege will, or may, be waived. 

The environmental self-audit privilege.  In a prior post, I linked to an article prepared by my law partners Kim Burke and Tom Barnard that discussed the environmental self-audit privilege.  More than half the states have adopted an environmental self-audit privilege, and it is important to read your state’s self-audit privilege statute because it often has nuances that can mean the difference between qualifying or not qualifying for the privilege. 

In conclusion, if you are left with only one takeaway from this article, it is that you must have a conversation with your client’s lawyer about structuring your engagement and report before your report is prepared and shipped, and not afterwards.  Then it’s too late.  

A federal district court recently entered summary judgment against a dry cleaner on a property owner’s CERCLA[1] claim for past response costs and declaratory judgment claim regarding future response costs, and allowed the property owner’s RCRA[2] claims to proceed to trial in Forest Park National Bank & Trust v. Ditchfield, 2012 WL 3028342, Case No. 10-C-3166 (N.D.Ill.July 24, 2012).  

In 2009, a bank foreclosed on residential property that shared a boundary with a dry cleaning business that had operated for 35 years and had substantial tetrachloroethylene, also known as perchloroethylene or perc, soil contamination.  Had the bank performed due diligence and searched Illinois EPA’s online database before foreclosing on the property, it would have discovered that the dry cleaner voluntarily entered into IEPA’s Site Remediation Program 5 years earlier, in 2004.  Instead, after foreclosing on the property, the bank hired an environmental consultant to conduct an environmental assessment of the eastern portion of the residential property closest to the dry cleaner.  

The bank’s consultant discovered elevated perc levels, as high as 33 parts per million (ppm) in soil and 0.26 ppm in groundwater, and concluded that the onsite contamination resulted from releases from the dry cleaner.  A follow-up investigation at the dry cleaner found perc contamination up to 14,000 ppm in the soil beneath the business.  The dry cleaner’s consultant determined that the perc contamination in soil was about the size of a football field – 270 feet long, 90 feet wide, and 10 feet deep, with the most concentrated point having a perc concentration of 360 ppm and being 30 feet long, 20 feet wide, and 2 feet deep.  The dry cleaner’s consultant’s figures indicated that the western edge of the sontamination may have crept over the dry cleaner’s western property line and onto the residential property.  (The consultant’s figure is attached below.)

Despite the dry cleaner’s efforts to keep the matter within IEPA’s Site Remediation Program, USEPA became involved when a teacher at St. Luke’s church and school, located across the street from the dry cleaner, emailed her concerns to USEPA.  USEPA conducted indoor air testing at St. Luke’s and a nearby children’s gymnasium.  The Agency for Toxic Substances and Disease Registry (ATSDR) became involved and recommended follow-up testing.  Eventually, ATSDR recommended that the dry cleaner install a vapor mitigation system at the nearby children’s gymnasium because its indoor air perc concentrations exceeded the long-term screening limit of 0.60 ppb established by OSWER’s Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils (Nov. 2002). 

The bank was not so fortunate.  Sub-slab sampling at the bank’s property only showed a residential long-term screening level exceedance for methylene chloride (another solvent used in dry cleaning) in the subsurface vapor of the building at 212 parts per billion.  ATSDR concluded that since the residential property was vacant, there was no completed exposure pathway.  However, ATSDR also concluded that the residential property should not be occupied until there is further site characterization to evaluate exposure from potential vapor intrusion.  The court noted the “Catch 22” presented by the parties.  On the one hand, the house could not be occupied until further indoor air sampling was performed, but further indoor air sampling could not be performed until the house was occupied or getting ready to be occupied (because of the need for the house to be at the proper temperature with the air conditioning or furnace running as if the house was occupied). 

The owner of the dry cleaner and USEPA entered into a settlement agreement pursuant to § 122 of CERCLA.  Under their agreement, the owner of the dry cleaner was required to perform remedial measures at the site and pay almost $40,000 of the nearly $150,000 USEPA incurred in past response costs.  The “site” was defined in a way so as to not include the bank’s residential property. 

Having been left out of the administrative resolution, the bank file a complaint against the dry cleaner and its owners in federal court, asserting claims under RCRA, CERCLA, and state law.  One of the most interesting parts of the court’s decision concerns the bank’s claims asserted under RCRA 7002(a)(1)(B), 42 U.S.C. § 6972(a)(1)(B).  Under that section, a person may file a citizen suit

against any person … including any past or present generator, past or present transporter, or past or present owner or operator of a treatment, storage, or disposal facility, who has contributed or who is contributing to the past or present handling, storage, treatment, transportation, or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or the environment.” 

The court noted that this subsection was added to RCRA by Congress in 1984 to create a basis for citizen suits against RCRA past violators where the violations were so egregious that their effects continued to pose a serious threat to human and environmental health.  Under RCRA, a court may enter an order imposing injunctive relief, but may not award money damages, except that it can award to the prevailing party or substantially prevailing party costs of litigation, including reasonable attorney and expert witness fees.[3]  Here, the bank hired an expert who concluded that the perc contamination at the residential property presented an imminent and substantial threat to both human health and the environment.  The parties moved for summary judgment on the RCRA and CERCLA claims, which the court addressed in its 43-page order, a copy of which is attached below.

The dry cleaner raised numerous defenses, i.e.,

• it argued (unsuccessfully) that the bank lacked standing to assert its RCRA claims, which the court denied because the contamination amounted to a trespass onto the property sufficient to support standing.

• it argued (successfully) that RCRA 7002(a)(1)(A) claims, asserted under 42 U.S.C. § 6972(a)(1)(A), precluded claims for “wholly past” violations, which the court granted to the extent the claim was based on the "physical presence of contamination" in the environment because the evidence showed that the past owners “indisputably terminated the violating conduct” that caused the past releases years ago even though the past conduct resulted in the continued presence of perc at the site.  (The court did not acknowledge the vast majority of cases that have found "ongoing violations" when contamination improperly discharged to the environment is capable of remediation and is not remediated.  Courts have reasoned that if citizen-suits were barred merely because any illegal disposal was completed before it might reasonably be discovered, violators would have a powerful incentive to conceal their activities from public and private scrutiny, which would lead to serious problems in the public and private enforcement of environmental laws.)

• it argued (unsuccessfully) that RCRA 7002(a)(1)(A) claims for ongoing violations of Illinois regulations relating to the storage and disposal of hazardous waste, which required the dry cleaner, in part, to maintain records for the removal of drums of waste, submit annual hazardous waste reports to IEPA, draft and maintain a written closure plan, and operate the dry cleaner in a manner to minimize unplanned releases of hazardous waste, required judgment in its favor.  Because the defendants countered with evidence that they have been in compliance with applicable regulations since 2002, the court held that the bank’s claims survived summary judgment “only insofar as it is based on Defendants’ alleged violations of Illinois regulations requiring them to properly label drums, maintain hazardous waste manifests, submit annual reports, and develop a written closure plan.” 

• it argued (unsuccessfully) that the CERCLA § 122 settlement acted as a jurisdictional bar under CERCLA § 113(h) to prevent the court from entertaining the bank’s claims, which the court rejected because “There is no evidence that this litigation is delaying or will delay the completion of the ongoing cleanup action.  To the contrary, the evidence suggests the [bank’s] suit seeks to jumpstart a nonexistent cleanup action.” 

• it argued (unsuccessfully) that the citizen suit provisions of RCRA 7002(a)(1)(B), 42 U.S.C. § 6972(a)(1)(B), provided no relief because the bank had no evidence that the dry cleaner “contributed to” any contamination at the residential property, which the court rejected as “border[ing] on the frivolous.”

• it argued (unsuccessfully) that there was no evidence to support the RCRA 7002(a)(1)(B) claim of an “imminent and substantial” endangerment to health or the environment, which the court rejected finding that the issue had to be resolved at trial because “imminence does not require an existing harm, only an ongoing threat of future harm with the key words on RCRA 7002(a)(1)(B) being “may” and “endangerment” as RCRA 7002(a)(1)(B) creates liability where a defendant “contributed to” the handling of a hazardous waste “which may present an imminent and substantial endangerment.” 

• it argued (unsuccessfully), possibly because of the short shrift given the argument, that the bank’s CERCLA claims would not allow the bank to recover its almost $5,700 in investigation costs.  The court also held for the bank on its CERCLA claim for future response costs.

In addition to the legal nuances under RCRA and CERCLA, the opinion is worth reading because of the detailed explanation of how transfer unit dry cleaning machines worked compared to modern dry-to-dry machines and how past efforts used to capture and reuse spent perc and capture perc vapors operated.[4] 

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.[1]  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.”[2]  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.