In the first appellate court ruling to address the post-closing obligations of a party asserting the Superfund bona fide prospective purchaser (BFPP) defense, the U.S. Court of Appeals for the Fourth Circuit affirmed that a South Carolina brownfields developer forfeited the defense because of its failure to exercise due care with regard to existing contamination. In PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 2013 U.S. App. LEXIS 6815, 3-4, 43 ELR 20078, 2013 WL 1340018 (4th Cir. 2013), the Fourth Circuit held that the bona fide prospective purchaser (BFPP) defense under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) requires a BFPP to exercise at least as much care in dealing with existing hazardous substance contamination as the innocent landowner defense requires of innocent landowners.

The Court rejected the argument that the “appropriate care” required of a BFPP should be interpreted to impose a lower burden than the “due care” required to qualify for the almost always futile innocent purchaser defense. If the interpretation prevails elsewhere, it calls into question the practical effectiveness of the BFPP defense; if maintaining the defense requires a new owner to undertake a response action to mitigate past contamination, then the defense is effectively rendered irrelevant.

As passed by Congress in 1980, CERCLA contained three defenses, none of which proved to be very useful. The courts rarely found that the first two defenses – that hazardous substance releases were caused solely by an act of war or act of God – had merit. The third defense, known as the “innocent landowner” or “innocent purchaser” defense, was likewise worthless in the context of brownfields redevelopment. That defense protects current owners who did not know and had no reason to know of the presence of hazardous substances on previously contaminated property at the time they acquired it. See 42 U.S.C. § 9601(35). Congress later added the BFPP defense in an attempt to provide protection to those who knowingly acquire previously impacted property for purposes of productive redevelopment.* In part, Congress intended the new defense to lessen the administrative burden on the USEPA, which was met with numerous requests to enter into prospective purchaser agreements that provided new owners with covenants not to sue and contribution protection, or immunity from third-party contribution claims.

The Fourth Circuit’s ruling addressed whether the burden on the BFPP is different than that on a party asserting that they have conducted “all appropriate inquiry” under the “innocent purchaser” defense. The post-closing obligations required under the two defenses are worded slightly differently. A BFPP is required to exercise appropriate care with respect to the hazardous substances found at the property, along with satisfying several other requirements. 42 U.S.C. §§ 9601(40)(D), 9607(r)(1). The innocent purchaser defense, in contrast, requires due care with respect to hazardous substances on the property. 42 U.S.C. §§ 9601(35), 9607(b)(3). Ashley II argued that appropriate care was a lesser standard than due care because Congress intended the BFPP exemption to incentivize redevelopment of contaminated sites, and a higher standard of care would have the opposite effect.

The Fourth Circuit disagreed, concluding that the standard of care should be higher for a BFPP, since by definition the innocent landowner does not know or have reason to know of the hazard. Recognizing the dearth of cases interpreting the BFPP defense, the Court borrowed applications of the due care standard to determine that Ashley II had not met either standard in its handling of the hazardous materials on the property because it failed to (1) remediate and fill in contaminated sumps discovered when existing structures were demolished, and (2) monitor and address an existing and deteriorating control measure that had been taken by the prior owner to mitigate the exposure of existing soil contamination.

Over time, the innocent purchaser defense has proven to be largely irrelevant; the courts and agencies seem to believe that, by definition, any party that conducts “all appropriate inquiry” into past contamination at a property at least should have known of it. If the Fourth Circuit ruling signals the coming interpretation of the BFPP defense, then it, too, may prove to be little comfort.

*This case may also affect tenants who try to claim exemption as BFPPs. The most recent USEPA guidance on tenant liability states that it has a non-enforcement policy against tenants who comply with the BFPP exemption requirements even if the property owner loses or never had BFPP status. This should give tenants more security in protecting themselves from CERCLA liability, but it also puts a greater responsibility on tenants to ensure compliance. Due diligence by tenants as to environmental hazards prior to entering leases is paramount, as is the exercise of appropriate care as to any hazards once the deal is entered into.