In a landmark decision, FT Investments, Inc. v. State of Florida Department of Environmental Protection, Case No. 1D11-3052,--- So.3d ----, 2012 WL 2138110 (Fla.App. 1 Dist.), 37 Fla. L. Weekly D1410, the First District Court of Appeals has limited the ability of entities to rely upon the third party and innocent purchaser defenses where an entity acquired property with knowledge of petroleum or drycleaning contamination at the time of purchase.  

I. The First District Court of Appeal Issued an Opinion that the Section 376.308(2)(d) Third Party Defense is Not Distinct and Independent from the Section 376.308(1)(c) Innocent Purchaser Defense

On June 14, 2012, the First District Court of Appeal issued an opinion in FT Investments, Inc. v. State of Florida Department of Environmental Protection, Case No. 1D11-3052, maintaining that the “innocent purchaser” defense of Fla. Stat. Section 376.08(1)(c), protects the purchaser of contaminated petroleum and drycleaning sites from strict liability if the purchaser satisfies three statutory conditions by showing that: (1) the purchaser acquired title to property contaminated by the activities of a previous owner, operator, or third party; (2) the purchaser did not cause or contribute to the discharge; and (3) the purchaser did not know of the polluting condition at the time it acquired title after conducting an appropriate inquiry. The Section 376.308(1)(c) innocent purchaser defense is limited statutorily in Florida to petroleum and drycleaning sites. Therefore, purchasers of other contaminated sites remain strictly liable for cleanup costs unless they fall within one of the other defenses listed in Section 376.308, Florida Statutes.  

Among the Section 376.308 defenses is the Section 376.308(2)(d) third party defense which allowed a defendant to escape strict liability for cleanup costs if the defendant meets certain statutory conditions by showing that: (1) a third party’s act or omission was the sole cause of the contamination; (2) the defendant exercised due care with respect to the pollutant concerned, taking into consideration the characteristics of such pollutant, in light of all relevant faces and circumstances; and (3) the defendant took precautions against any foreseeable acts or omissions of any such third party and against the consequences that could foreseeably result from such acts or omissions.  

In FT Investments, the appellant purchased property containing an underground petroleum storage tank system for a gasoline service station on the property that apparently operated for twelve years. Prior to purchasing the property, the appellant contracted for an environmental site assessment which revealed petroleum contamination on the property. The appellant failed to report the discovery of the petroleum contamination for several years. Then, the appellant reported the discovery of the contamination in conjunction with an application for eligibility in the petroleum cleanup program. In response, the Florida Department of Environmental Protection (“FDEP”) denied the application for the petroleum cleanup program and instead initiated enforcement action to compel appellant to undertake assessment and remediation at the property.  

The appellant conceded that that it was not entitled to the Section 376.308(1)(c) innocent purchaser defense because it knew of the petroleum contamination before it purchased the property. However, the appellant argued that it did qualify for the Section 376.308(2)(d) third party defense against strict liability for cleanup because the petroleum contamination was caused solely by the acts or omissions of a third party. The appellant argued that the Section 376.308(2)(d) third party defense is independent from the Section 376.308(1)(c) innocent purchaser defense and knowledge of the contamination prior to purchase did not prevent it from asserting the Section 376.308(2)(d) third party defense.  

The First District Court of Appeal disagreed and affirmed the presiding officer who issued an order in this matter concluding that appellant’s knowing purchase of contaminated property, which precluded the assertion on the innocent purchaser defense under section 376.308(1)(c), Florida Statutes, also precluded the assertion of a third party defense under section 376.308(2)(d), Florida Statutes. The First District Court of Appeal reasoned that when the Florida Legislature amended Section 376.308, Florida Statutes, to expressly provide an innocent purchase defense, the Legislature expressed a clear intent that a purchaser of the property must establish that the purchaser did not have knowledge of the petroleum contamination after making an appropriate inquiry and that this requirement was not limited to only the subject innocent purchaser defense section of Section 376.308, Florida Statutes, but rather this “no knowledge” requirement, as a matter of statutory construction, applied to both the Section 376.308(2)(d) third party defense and the Section 376.308(1)(c) innocent purchaser defense as these sections must be read together.  

II. The First District Court of Appeal Opinion has No Effect on Florida’s Section 376.308(3)(c) Lender Liability Defense

The First District Court of Appeal opinion in FT Investments, Inc. v. State of Florida Department of Environmental Protection, Case No. 1D11-3052 did not change the Section 376.308(3)(c) lender liability defense. This lender liability exception applies to a lender which holds a security interest in the property and has foreclosed or otherwise acted to acquire title primarily to protect its security interest, provided that: (1) the lender seeks to sell, transfer, or otherwise divest the asset(s) for subsequent sale at the earliest possible time, taking all relevant facts and circumstances into account, and (2) has not undertaken management activities beyond those necessary to (a) protects its financial interest, (b) to effectuate compliance with environmental statutes and rules, or (c) to prevent or abate a discharge. If the facility and the relevant discharge at issue are not eligible for cleanup under a state-funded cleanup program, any funds used by the State for cleanup of the property is subject to an environmental lien on the property. Those foreclosing lenders who have conducted traditional environmental due diligence prior to foreclosure on such properties may be later surprised, after foreclosure, to find that they are “not safe” and that their collateral is subject to an environmental lien.  

A. Changing Times

Due to the weak real estate market in recent years, banks and other secured creditors have increasingly moved forward to foreclose and repossess collateral properties, such as unfinished residential developments, mixed use residential/commercial developments, gas station/convenience stores, and marinas. In order to avoid environmental liability associated with collateral, lenders must understand the strict, joint and several statutory liability scheme for environmental clean-up and how to access the statutory protections from environmental liability afforded to lenders and other secured creditors. Traditional environmental liability protection is being circumvented today by the inability of lenders to quickly sell their collateral properties. Instead, lenders must hold onto their foreclosed collateral for an extended period of time, and are consequently deemed and treated as “owners” by federal, state, and local environmental regulatory agencies.  

B. New Approach Required to Avoid, Minimize, and Manage Environmental Liability Associated with Collateral Assets

Since the inability of lenders to quickly sell their collateral properties has circumvented traditional environmental liability protections, it is important not only to conduct a traditional environmental due diligence, but also to obtain environmental regulatory counseling prior to foreclosure. In Florida, environmental regulatory agencies are willing to negotiate cleanup costs at contaminated sites based upon riskbased corrective action (“RBCA”). Under RBCA, cleanup target levels are based upon the “end use” of the property and the real risk of exposure, as opposed to perceived, which may or may not result in more efficient cleanup. Additionally, Florida environmental regulators are now more willing to provide “comfort letters” indicating that the agency will not seek to hold the lender liable for environmental cleanup costs where the lender is forced to foreclose on a property.  

III. Conclusion

The First District Court of Appeal opinion in FT Investments, Inc. v. State of Florida Department of Environmental Protection is the latest district court of appeal opinion addressing statutory strict liability protections in Florida under Section 376.308, Florida Statutes. Although the decision did not change the Section 376.308(3)(c) lender liability defense, due to the changing times, the statutory environmental liability protections of lenders is being circumvented by the inability of lenders to quickly sell their collateral properties. Lenders must hold onto their foreclosed collateral for an extended period of time, and are consequently deemed and treated as “owners” by federal, state, and local environmental regulatory agencies. Therefore, it is now necessary for lenders to take a new approach to environmental due diligence prior to foreclosure to, in fact, avoid, minimize, and manage environmental liability associated with collateral assets.