Achieving Bona Fide Prospective Purchaser Status: Yes, the Details Matter

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) provides a defense to liability to “bona fide prospective purchasers” (BFPPs), who, among other things, obtain Phase I Environmental Site Assessments (ESAs) that are timely (issued within 180 days prior to acquisition of the subject property) and conducted by a qualified environmental professional. Phase I ESAs that are more than 180 days old are “stale” and must be updated or they are considered expired and therefore ineffective for the purpose of establishing BFPP status. 

In Von Duprin LLC v. Moran Elec. Serv. (S.D. Ind., March 30, 2020), the federal district court for the Southern District of Indiana held that the defendants were not BFPPs with respect to two parcels, one that was acquired based on a 10-month old Phase I ESA and another that was first leased for 99 years based on a 14-month old Phase I ESA, but was subsequently acquired following a timely Phase I ESA. The court held that the second, fresh Phase I ESA did not cure the expiration of the pre-lease Phase I. 

The court also found that the stale Phase I ESA for the directly acquired parcel was deficient in any case because it did not observe all of the requirements for the CERCLA standards contained in 40 C.F.R. Parts 312.21 and 312.22. Specifically, the Phase I ESA was prepared for a related party that was not the nominal owner of the parcel in question and it did not include the required inquiries of the owner of the parcel regarding environmental conditions or the environmental professional’s certification of qualifications. 

The court entered a $510,000 award against the defendants, plus a declaratory judgment requiring them to pay 20% of all future cleanup costs. 

Lessons Learned

• Get a Phase I ESA before leasing or taking title to commercial/industrial property.
• Make sure the Phase I ESA is still fresh or get it updated.
• Check that every aspect of the Phase I ESA meets each of the CERCLA regulatory requirements. 

It is not uncommon for Phase I ESAs to be considered a low priority “check-the-box” exercise during a real estate transaction. The Von Duprin case is a cautionary tale. Details matter and ignoring them can be costly.