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.

EPA Decisions to Delay Field Work at Environmental Clean Up Sites Due to COVID-19 Will Be Made on a Case-by-Case Basis

On April 10, 2020, the U.S. Environmental Protection Agency (EPA) issued Interim Guidance on Site Field Work Decisions Due to Impacts of COVID-19, which applies to response action related to cleanup and emergency response sites where EPA is the lead agency or has direct oversight of or responsibility for the work being performed. The interim guidance is available here. The interim guidance outlines certain factors EPA Regional Offices should consider when evaluating whether to pause, continue, or reduce on-site response actions in light of challenges posed by the COVID-19 situation. It provides, however, that none of the factors should be “considered in a manner that would override protection against unnecessary potential exposure to COVID-19.” The interim guidance makes clear that EPA has made and will continue to make decisions regarding pausing, continuing, or delaying response actions on a case-by case basis. Regional Offices will balance the health of workers and the risk of COVID-19 exposure against the imminent and substantial endangerment to human health or the environment that may be caused if the response action is slowed or paused. Regional Offices are unlikely to delay or suspend a response action where doing so would pose an imminent and substantial endangerment to human health and the environment and it is practical to continue the response action. In addition, the interim guidance provides that Regional Offices will decide whether to delay on-site work in accordance with the terms of the applicable enforcement instrument and will determine whether COVID-19 constitutes a force majeure based on site-specific circumstances. 

The interim guidance directs parties who believe COVID-19 will impact their ability to perform response actions to communicate with EPA project managers about the status of their field work and any anticipated challenges and mitigation measures. The interim guidance also advises parties to consult the applicable enforcement instrument, including provisions allowing schedule adjustments at the discretion of EPA’s project manager and/or force majeure provisions, for directions on providing the requisite notice and for other information described in the provisions.

Read more about the interim guidance here.

DOJ Says Goodbye to Federal SEPs. What’s Next?

With news rightfully dominated these days by Covid-19, it would have been easy to miss the significant policy change enacted a few weeks ago by DOJ’s Assistant Attorney General for the Environment & Natural Resource Division (ENRD), Jeffrey Clark. On March 12, Clark issued a lengthy memo that prohibits ENRD attorneys from using Supplemental Environmental Projects (SEPs) in environmental settlements.

While’s Clark’s policy change is the final nail in the coffin for federal SEPs, it should come as no surprise. The AAG made clear his view of SEPs in a previous memo that prohibited their use when resolving claims against state and local governments. The new memo expands that prohibition to include all federal SEPs (with a few limited exceptions). Comments made by Clark last week at a Federalist Society forum suggest there may still be more to come on this front, as he indicated DOJ is studying the implications for the new policy on citizen suits. 

SEPs, which have been used in environmental settlements since the 1980s, allow a settling party to agree to undertake an environmentally beneficial project—with some nexus to the alleged violation—in exchange for a reduction in civil penalty. Some examples of SEPs in recent federal settlements include energy efficiency projects to replace PCB-containing light fixtures in public schools and the donation of safety equipment to first responders in areas impacted by chemical releases from manufacturing plants. 

Because SEPs typically provide tangible community benefits, enhance the environment, and often help bridge gaps in settlement negotiations, they have proven to be very popular among federal law enforcers, states, NGOs, and businesses alike. Regardless of their popularity, however, Clark believes SEPs may violate the law by diverting funds that otherwise would go to the treasury. 

What does this mean for environmental settlements going forward? 

No more federal SEPs … DOJ will no longer approve consent decrees that contain SEPs except for certain mobile source cases, where the projects are authorized by statute. This prohibition will apply to ongoing negotiations, regardless of how close they are to wrapping up and regardless of their impact on negotiations. The new policy won’t affect consent decrees that have already been signed.

Uncertainty for citizen suits … There is also reason to believe that DOJ may start objecting to settlements in citizen suits that contain environmental projects. Clark’s recent comments to the Federalist Society indicate that DOJ is “studying” whether the logic behind the new SEP policy impacts what should be permissible in citizen suits. It is not clear what actions, if any, will be taken, but DOJ is evaluating the issue. 

Different rules for states … The new ENRD policy is silent on the use of SEPs in federal consent decrees that also involve state co-plaintiffs and state law claims. And the policy doesn’t impact the ability of states to include SEP-like projects in separate settlement agreements with private parties who also enter federal decrees. This is exactly what happened in a Clean Air Act settlement entered just a few months ago between DOJ, the State of California, and Kohler. There, California and Kohler entered into a separate agreement under which Kohler agreed to supply $1.8 million worth of solar-battery generators to low-income Californians living in areas subject to frequent power outages to reduce wildfire risks. 

Mitigation projects go on … While the new policy applies only to SEPs, there’s an open question as to whether its rationale will impact the use of mitigation projects in settlements. Such projects are similar in nature to SEPs but serve a different purpose: to remediate a specific harm caused by an alleged violation. Because mitigation is a core component of a court’s equitable powers, one would think they would be unaffected by the principles underlying the new SEP policy. And, indeed, the new policy expressly states that it doesn’t apply to projects that “directly remedy” harm to the environment. Clark even explains that the new policy could result in an increase in “classic forms of injunctive relief” like mitigation. 

For as long as Clark remains AAG, the only real question is how he views the nexus requirement for mitigation. What he says about nexus for SEPs in the March 12 memo is instructive: such projects need to have a “strict” nexus in terms of (a) the geographic area affected by the violation, and (2) the pollutant(s) at issue in the violation. Look for EPA and ENRD attorneys to continue to seek mitigation in cases where there are practical means of achieving reductions in the pollutants subject to the alleged violations. For violations that have widespread geographic impacts—such as Clean Air Act violations affecting distant downwind communities—examples abound of the types of projects that could satisfy the nexus requirement. 

The only constant in life is change … Finally, it’s important to recognize that while the new DOJ policy does reflect a significant departure from existing policy, policy changes like these are not etched in stone. Clark’s new policy reverses the use of a popular settlement tool that had been in use for nearly four decades. It reverses guidance issued just two years ago by the current administration, which found the use of SEPs to be appropriate. When administrations change, so too do their enforcement priorities, and it’s safe to assume that undoing this new policy would be near the top of the list of any new ENRD administration. 

We’ll just have to wait and see whether this is a short blip or a long-term change in federal environmental enforcement policy.
                                    

PretiFlaherty attorneys Jeff Talbert and James Beers contributed to this article.

 

"Navigable Waters Protection Rule" Narrows Federal Clean Water Act Permitting Authority

On January 23, 2020, the U.S. Environmental Protection Agency and the Army Corps of Engineers finalized the Navigable Waters Protection (NWP) Rule, which redefines what waters are considered "navigable" and therefore regulated under the Clean Water Act (CWA). The final rule replaces the much-litigated Obama-era "Waters of the United States" (WOTUS) rule that was rescinded by the Trump administration in September 2019, as well as the case-specific "significant nexus" test enunciated by U.S. Supreme Court Justice Kennedy in Rapanos v. U.S. (2006) and subsequently issued agency guidance.

The NWP Rule substantially narrows the definition of "jurisdictional" waters to include only:

• Territorial seas and traditional navigable waters
• Perennial and intermittent tributaries that in a typical year flow to territorial seas and traditional navigable waters
• Wetlands that are directly adjacent to jurisdictional waters
• Lakes and ponds that are or contribute flow to navigable waters or are inundated by flooding from a jurisdictional water in a typical year and impoundments of jurisdictional waters

Excluded from federal jurisdiction are several categories of waters, including:

• Groundwater and surface water features connected only by groundwater to jurisdictional waters
• Interstate streams
• Ephemeral streams, swales, gullies, rills, and pools; i.e., that fill only in response to rainfall
• Diffuse stormwater run-off and sheet flow
• Many ditches, including most farm and roadside ditches
• Artificially irrigated areas and artificial ponds and lakes, such as farm and stock watering ponds
• Prior converted cropland
• Waste treatment systems

The NWP Rule becomes effective on March 23, 2020. Agricultural groups and the National Association of Home Builders have embraced the NWP Rule, praising its clarity and consistency. Environmental groups sued the Trump administration when it rescinded the WOTUS rule and a number are currently planning to take legal action against the NWP Rule.

For the time being, finalization of the NWP Rule means that the entire U.S. is now covered under a single regulation, whereas a welter of litigation had resulted in half the country being covered by the WOTUS rule and the other half operating under the predecessor to the WOTUS rule. However, it can be anticipated that the new rule will be vigorously contested nationwide, with the possibility that it will eventually come before the U.S. Supreme Court.

Most states, except for Idaho, Massachusetts, New Hampshire, and New Mexico, have been delegated CWA authority. Regulatory agencies in delegated states may continue to administer and enforce state regulations that define protected waters more broadly than the NWP Rule.