EPA Clarifies the "No Affiliation" Requirement for Purposes of Qualifying for Protection as a Bona Fide Prospective Purchaser or Contiguous Property Owner Under the Brownfields Amendments
On September 21, 2011, the United States Environmental Protection Agency (EPA) issued a memorandum titled "Enforcement Discretion Guidance Regarding the Affiliation Language of CERCLA's Bona Fide Prospective Purchaser and Contiguous Property Owner Liability Protections." This guidance document attempts to clarify when EPA will (or will not) exercise its enforcement discretion in determining that a purchaser of contaminated property is not "affiliated with" another potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §9601 et seq. (CERCLA). The "no affiliation" requirement is a potentially significant hurdle for purchasers attempting to qualify for CERCLA liability protection under the Bona Fide Potential Purchaser (BFPP) and Contiguous Property Owner (CPO) provisions of the 2002 Brownfields Amendments.
The BFPP provision, which provides protection from CERCLA liability for a party who knowingly purchases contaminated property after January 11, 2002, requires that the party satisfy a number of requirements, including that the party not be "affiliated with" a PRP of the contaminated property. Specifically, a purchaser cannot be:
potentially liable, or affiliated with any other person that is potentially liable, for response costs at a facility through
- any direct or indirect familial relationship; or
- any contractual, corporate, or financial relationship (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
- the result of a reorganization of a business entity that was potentially liable.
The CPO provision, which offers similar protection from CERCLA liability, provides, in part:
A person that owns real property that is contiguous to or otherwise similarly situated with respect to, and that is or may be contaminated by a release or threatened release of a hazardous substance from, real property that is not owned by that person shall not be considered to be an owner or operator of a vessel or facility . . . solely by reason of the contamination if . . . .
- the person is not --
- potentially liable, or affiliated with any other person that is potentially liable, for response costs at a facility through any direct or indirect familial relationship or any contractual, corporate, or financial relationship (other than a contractual, corporate, or financial relationship that is created by a contract for the sale of goods or services); or
- the result of a reorganization of a business entity that was potentially liable . . . .
In the new guidance document, the EPA emphasized that relationships between a purchaser and PRP "not created to avoid CERCLA liability" would generally not constitute a prohibited "affiliation" and, therefore, would not prevent the purchaser from qualifying as a BFPP or CPO. In particular, the EPA identified four permissible affiliations:
- relationships between a purchaser and a PRP at other properties;
- relationships between a purchaser and a PRP that arose after the purchase and sale of the property;
- contractual relationships created at the time that title to the property is transferred; and
- relationships created between a tenant and an owner.
To illustrate, the EPA provided a series of hypothetical real estate transactions and analyzed whether it would exercise its enforcement discretion and treat the purchaser as a BFPP or CPO. Though the EPA, by issuing this guidance, sought to clarify the "no affiliation" requirement, the EPA nevertheless reiterated that it will apply this guidance on a case-by-case basis and "may deviate from this guidance as necessary or appropriate based on the facts of each case." Thus, while indemnification or insurance agreements between buyers and sellers may not automatically constitute an impermissible "affiliation," EPA reserves the right to look behind the documents.