The United States Court of Appeals for the Fourth Circuit recently issued a ruling in PCS Nitrogen Inc. v. Ashley II of Charleston, LLC, 714 F.3d 161 (4th Cir. 2013) (Ashley II) that makes it more risky to rely on the bona fide prospective purchaser (BFPP) defense. Ashley II is the first decision by a federal appellate court concerning the scope of the BFPP defense. The decision highlights the risks of reliance on the defense and the need to strictly comply with the statutory prerequisites. In addition, Ashley II underscores the importance of conducting thorough due diligence to gain an understanding of site conditions and risks, which allows prospective purchasers to mitigate risks pre-closing through contractual protections, insurance or other means, or walk away from the prospective deal.
The BFPP Defense
Congress enacted CERCLA in 1980 to identify and clean up inactive hazardous waste disposal sites and to impose liability for the costs of remedying hazardous conditions on the parties responsible for creating or contributing to such conditions and other designated parties. Section 107(a) of CERCLA identifies the categories of persons responsible for the costs associated with remedying a contaminated site. The parties include, among others, current owners and operators of any facility from which hazardous substances are released or threatened to be released, and persons owning or operating the facility at the time of waste disposal.
On January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Amendments) to encourage the acquisition and development of brownfields. The Brownfields Amendments created a CERCLA liability defense for bona fide prospective purchasers who meet certain statutory requirements. Prior to the enactment of the Brownfields Amendments, purchasers of contaminated property generally could avoid CERCLA liability only if they qualified for the more limited "innocent landowner" defense, which is unavailable to purchasers who have knowledge or reason to know of the contamination at the time of purchase. The BFPP defense, however, allows purchasers of contaminated property to avoid CERCLA liability, even if a purchaser knows the site is contaminated, so long as the statutory requirements for the defense are satisfied.
To successfully assert the BFPP defense, a purchaser must have acquired ownership of the property after January 11, 2002 and prove each of the following elements by a preponderance of the evidence:
- The disposal of hazardous substances occurred prior to acquisition.
- "All appropriate inquiry" was made into the prior owners and uses of the facility.
- Legally required notices were provided with respect to the discovery or release of hazardous substances at the facility.
- "Appropriate care" was exercised by taking "reasonable steps" to stop any continuing release from the facility, to prevent any threatened future release, and to prevent or limit public exposure to any previously released hazardous substance.
- Full cooperation with all authorized remediation personnel.
- Compliance with all required institutional controls.
- Compliance with any information request or administrative subpoena issued under CERCLA.
- No affiliation with any prior owner or operator.
Because a BFPP must demonstrate that it has met all eight criteria, a failure to prove even one of these criteria by a preponderance of the evidence prevents a purchaser from qualifying for BFPP status.
Ashley II concerned a dispute over liability for cleanup of hazardous substances at a former fertilizer manufacturing site in Charleston, South Carolina. After incurring response costs, Ashley II of Charleston, LLC (Ashley), the current owner of a portion of the site, brought a CERCLA cost recovery action against PCS Nitrogen Inc. (PCS). PCS counterclaimed and asserted third-party claims against other prior owners and operators. In response to PCS's counterclaim, Ashley asserted a BFPP defense. The trial court rejected Ashley's defense, finding that it had failed to establish three of the eight requirements, including the requirement that the current owner exercise appropriate care by taking reasonable steps to contain and prevent contamination. Specifically, the court found that Ashley failed to clean out and fill in sumps that should have been capped, filled or removed when related aboveground structures were demolished, and that Ashley did not monitor and adequately address a debris pile and other conditions on the site.1
On appeal, Ashley argued that the purposes of the Brownfields Amendments necessitate that courts apply a less-stringent standard of appropriate care and reasonable steps than that applied by the district court. Otherwise, Ashley contended, landowners will not undertake voluntary brownfields redevelopment for fear of becoming fully liable for cleanup costs as a result of minor mistakes that may not even contribute to harm at the facility.
In rejecting Ashley's arguments, the Fourth Circuit explained that the standard of appropriate care required of a BFPP, who by definition knew of the presence of hazardous substances at the facility, should be at least as stringent as the standard of "due care" required of an innocent landowner, who by definition did not know and had no reason to know of the presence of hazardous substances when it acquired the facility.
The court went on to apply the Second Circuit's standard for innocent owner due care to determine whether Ashley exercised BFPP appropriate care with respect to hazardous substances found at the site. Specifically, the court considered whether Ashley "took all precautions with respect to the particular waste that a similarly situated reasonable and prudent person would have taken in light of all relevant facts and circumstances." The court concluded that Ashley's inactions clearly showed that it did not meet this standard. The court reasoned that "Ashley's delay in filling the sumps - which even Ashley's expert admitted should have been filled a full year before Ashley did so - demonstrate[d] that it did not take the reasonable steps to prevent any threatened future release ... that a similarly situated reasonable and prudent person would have taken."
The Fourth Circuit's decision highlights several lessons for prospective purchasers of contaminated properties. First, after conducting appropriate due diligence, prospective purchasers should determine the cost of remedial measures they may need to take to meet the appropriate care standard and evaluate the impact of those costs on the value of the property. Second, prospective purchasers should assess the likelihood that additional problems could be discovered after the closing (e.g., during property development) that also will be subject to the appropriate care requirements. Third, after acquisition, purchasers must ensure proper post-purchase site management. They will be required to use appropriate care with respect to any discovered conditions (which could include expensive investigation and remediation) to preserve the defense and, importantly, to develop the property. Purchasers should adequately document the reasonable steps taken to meet the appropriate care standard.
It is prudent for prospective purchasers to conduct thorough due diligence of properties, including Phase I assessments and, in some circumstances, Phase II soil and groundwater testing, with the primary goal being to gain an understanding of site conditions and risks. With this information, purchasers can address or mitigate risks by obtaining covenants and/or indemnities from the seller, obtaining insurance or other protections, or decide to walk away from the prospective deal. The BFPP defense is relatively easy and inexpensive to obtain but, as shown in Ashley II, can be difficult and costly to preserve. Thus, it is preferable to take steps to avoid liabilities and disputes rather than to rely on the defense.