The United States Environmental Protection Agency (EPA) issued a notice in the Federal Register on Aug. 15, 2013, of a direct final rule to allow purchasers to follow ASTM’s new Phase I standard E1527-13 (the New Standard) in addition to E1527-05 (the Existing Standard) in meeting the federal all appropriate inquiries (AAI) requirements that are critical to the innocent purchaser, bona fide prospective purchaser and contiguous landowner defenses to liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Due to adverse comments on the proposed rule, EPA withdrew it on Oct. 29, 2013. Apparently the comment of concern was that allowing the use of both the New Standard and Existing Standard would be confusing to purchasers. Although EPA had an advance copy of the New Standard for its rulemaking, ASTM did not release the New Standard to the public until this month. EPA is expected to issue a final rule late this year or early next year allowing the use of either standard, potentially with guidance regarding a preference for use of the New Standard.

Background

AAI

The Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Act), signed into law by President Bush on Jan. 11, 2002, amended CERCLA to help stimulate the redevelopment of brownfields. One of the requirements was for the EPA to develop its own Phase I environmental site assessment criteria AAI. On Nov. 1, 2005, EPA published its AAI rule that specifically provided that a then-new version of the ASTM Phase I standard, the Existing Standard, may be used to meet AAI. Since the AAI rule went into effect, most Phase I environmental site assessments have been performed following the 2005 ASTM Standard.

Liability Defenses

In 1986 the Superfund Amendments and Reauthorization Act amended CERCLA, adding the “innocent purchaser defense.” This allowed potential purchasers to acquire property after performing a Phase I environmental site assessment if no concerns for releases of hazardous substances were found. A purchaser either had to walk away from the purchase or understand that upon closing it would become an owner or operator under CERCLA and would have liability for the contamination on the property if the Phase I environmental site assessment identified any releases. This was an obvious roadblock to the acquisition and redevelopment of contaminated properties.

The Brownfields Act created the bona fide prospective purchaser (BFPP) defense, and the lesser-used contiguous property owner defense, that was meant to help alleviate this issue. The BFPP defense in its most simplistic form allows a purchaser to conduct AAI and to purchase property with knowledge of hazardous substance contamination without incurring liability as an owner or operator, provided certain additional criteria are met to maintain the BFPP status post-closing. These requirements are that:

  • The disposal of hazardous substances on the site occurred before acquisition;
  • All legally required notices regarding the release are provided;
  • Full cooperation, assistance and access to those conducting response actions are provided;
  • Institutional and engineering controls are complied with and do not impede the effectiveness;
  • Governmental requests for information and subpoenas are complied with;
  • The purchaser is not already liable, affiliated with a responsible party “(other than a contractual, corporate or financial relationship that is created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services)” or simply the reorganized entity of a responsible party; and
  • Appropriate care with respect to the hazardous substances found is exercised— by taking reasonable steps to stop any continuing release, prevent any threatened future release and prevent or limit exposure to any previously released hazardous substances

The exercise of the appropriate care requirement may be the driver for using the New Standard as provided below.

Material Changes in the New Standard

The New Standard certainly helps to clarify a number of items so that the Phase I environmental site assessments will better define the environmental conditions on sites with some revised and additional definitions. The term recognized environmental condition (REC) is revised to be more consistent with the AAI rule, and the terms environment and release are changed to be the same as under CERCLA. The more important definitional changes are likely the revisions to the term historical recognized environmental condition (HREC) and the addition of the term controlled recognized environmental condition (CREC). HRECs will now be limited to past releases that have been remediated to unrestricted residential use, meaning that they are identified, they have been corrected and there are no future obligations pertaining to them.

The new CREC definition is different from the HREC. The CREC is a REC that has been addressed in a manner to control in place the hazardous substances to alleviate the concern for the condition. For example, a release to soil may have been remediated to commercial/industrial use and a restrictive covenant recorded to prevent future residential use. A purchaser has to comply with the restrictions in place to maintain the BFPP defense, so highlighting these CRECs will be helpful post-closing since any such requirements should be readily found when reviewing the Phase I environmental site assessment into the future. There is also a change to de minimis condition definition that will lessen the use by consultants in allowing a condition to be ignored simply because the concern is not subject to enforcement action, as in the definition under the Existing Standard.

There are some helpful clarifications to the information that is to be provided by the user/purchaser that will have some impact on the interaction between the user and consultant as the Phase I is developed. This is an item in practice that is generally poorly handled, yet is critical to meeting AAI. Under the New Standard it is clear that the tasks although imposed on the user may be performed by or on behalf of the user, such as the review of records for liens and activity and use limitations, and the New Standard adds guidance on how this may be accomplished. It also clarifies that while the land and judicial records are not expected to be reviewed by the environmental consultant unless specifically engaged by the user, if a state keeps a special environmental registry for the recording of such liens or activity and use limitations such registry is to be included by the consultant in the standard governmental database review.

Likely the most important two changes in the New Standard are the change to the definition of migration and the added requirements for agency record file reviews that are to be conducted based upon the agency record database reports. These two changes appear to be tied closely to the evolving issue of assessing and remediating vapor intrusion concern. See the following for more information on vapor intrusion. The term migration was revised to specifically include vapor. This then will be a very important focus when off-site releases are identified in the regulatory database searches, because the off-gassing from groundwater plumes in particular will be a key concern for impacts to the site that is the subject of the Phase I. The new requirement for file reviews provides that agency files for the property or adjoining properties should be reviewed if identified on the standard government list searches to determine if they represent a REC, HREC, CREC or de minimis condition. The consultant may use alternative sources of information such as agency official interviews or other knowledgeable individuals. The consultant may also document, with an explanation in the report, why such a review is not warranted. There is a limitation in the New Standard regarding file reviews that will help avoid material delays and expenses that may be incurred with trying to access and review certain agency records:

Information that is obtainable within reasonable time and cost constraints means that the information will be provided by the source within 20 calendar days of receiving a written, telephone, or in-person request at no more than a nominal cost intended to cover the source’s cost of retrieving and duplicating the information. Information that can only be reviewed by a visit to the source is reasonably ascertainable if the visit is permitted by the source within 20 days of request.

There are some additional changes in the New Standard and purchasers should become familiar with them or engage consultants and counsel that are fully versed in the standard when it may be applicable.

So Should a Purchaser Use the New Standard?

These new changes will certainly increase the cost for completing a Phase I and may result in delays as the consultant obtains the required file review information. At this point, a purchaser should follow the Existing Standard, because the New Standard is not currently approved by EPA for meeting AAI. Once the New Standard is available for such use, a purchaser will need to give serious consideration to dictating its use with the Phase I consultant. The concern driving this is the BFPP defense requirement to “exercise appropriate care” with respect to the hazardous substances found — stop continuing release, prevent threatened future release and prevent exposure. A purchaser potentially could obtain the Phase I following the Existing Standard and not assess vapor migration from an off-site source and meet AAI. However, if a file review at the agency would have revealed a concern for vapor intrusion to which occupants of a building on the purchased property are being exposed, does the purchaser risk losing its BFPP status for failing to prevent the continuing exposure? Seems unfair that if an acceptable standard for meeting AAI were used, that it could be a problem with appropriate care later, but it is a separate component of the defense. Certainly if the New Standard becomes customary in the industry then a purchaser may be even more at risk in not using it. EPA may very well provide some guidance on the issue in the final rule and that should be carefully assessed.

One solution though, subject to EPA guidance on the issue, may be to complete the Phase I following the Existing Standard and pursue the vapor and off-site issues following the New Standard promptly post-closing, to address any exposure concerns. This would allow the purchaser to avoid the pre-closing delays but to attempt to meet appropriate care within a reasonable period after closing. The issue that a purchaser faces is whether the response to the potential for off-site vapor migration and intrusion into the building on-site is addressed quickly enough post-closing, but there is precedent for some delay in addressing issues post-closing.

In 3000 E. Imperial, LLC v. Robertshaw Controls Co., LEXIS 138661(C.D. CA 2010), the court focused on the “appropriate care” component of the BFPP defense. 3000 E. Imperial, LLC (Imperial) purchased a property in Lynwood, CA, on Nov. 30, 2006. Investigations prior to the purchase identified soil and groundwater contamination, primarily from trichloroethylene (TCE) and benzene. A manufacturing facility, a lumber and hazardous materials storage shed, and a maintenance shed were demolished in 2007, leaving “a vacant concrete lot.” Underground storage tanks had been installed on the property in 1942.

Imperial brought suit against a former owner, Robertshaw Controls Co., seeking among other relief, response costs under CERCLA. Robertshaw Controls Co. brought a counterclaim for contribution, claiming that Imperial was liable as the current owner and operator of the property. Imperial asserted its defense to liability as a “bona fide prospective purchaser whose potential liability for a release or threatened release is based solely on the purchaser being considered to be an owner or operator of a facility shall not be liable as long as the bona fide prospective purchaser does not impede the performance of a response action or natural resource restoration.”

The court noted that Imperial cooperated with the California Department of Toxic Substances Control (DTSC) to coordinate a voluntary cleanup of the site beginning in May 2007, and that the DTSC had found that Imperial was a BFPP under California law. The court noted that while the requirements for a BFPP are similar under California law and CERCLA, the definition of appropriate care is different. In California, it means performance of response actions directed by the DTSC, which is what Imperial was doing. CERCLA has a broader definition requiring “reasonable steps to (i) stop any continuing release; (ii) prevent any threatened future release; and (iii) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance.”

Imperial had the contents of the underground storage tanks sampled in May 2007. The consultant reported in September 2007 that the contents contained TCE. Imperial pumped the contents from the tanks in October 2007, then removed the tanks in 2009. The court determined that since Imperial removed the contents of the tanks shortly after learning that they contained TCE, that it had exercised appropriate care and was a BFPP. What is unclear from the case is whether the tanks were identified in the Phase I. If they were identified, it would seem that appropriate care would require sampling much sooner when they were identified, to be able to exercise appropriate care beginning upon learning of the presence of the tanks. If they were not identified in the Phase I, there would be a question whether the consultant actually completed AAI correctly under the Existing Standard. However, for purposes of an off-site issue that the Existing Standard would not lead to identifying the concern, the 3000 E. Imperial case does provide support for pursuing the issue post-closing.

Conclusion

Until the New Standard is officially adopted by EPA as satisfying AAI, the Existing Standard of the AAI rule itself must be followed to meet AAI for the defenses to liability. Purchasers should consult with counsel when the New Standard is adopted and follow a reasonable approach in selecting which Phase I Standard to follow. There are risks to purchasers that do not maintain the BFPP criteria post-closing, and that will need to be considered in selecting a standard to follow. While the 3000 E. Imperial court found that the post-closing BFFP requirements were met, the contrary was found in the 2010 Ashley II of Charleston, LLC v. PCS Nitrogen, Inc. case that is discussed in Bona Fide Prospective Purchaser Defense under CERCLA: Post-Closing Concerns and Tenant Issues Update.