On April 4, 2013, the Fourth Circuit issued its opinion in PCS Nitrogen v. Ashley II of Charleston, LLC. The Fourth Circuit affirmed the District Court’s opinion holding several potentially responsible parties (“PRPs”) liable under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601, et seq. (“CERCLA”). The Fourth Circuit’s decision provides insight with respect to the bona fide prospective purchaser defense to CERCLA liability, corporate successor liability, and allocation of CERCLA costs.

Bona Fide Prospective Purchaser (BFPP) Defense - Appropriate Care Standard

In this decision, the Fourth Circuit held that a bona fide prospective purchaser (“BFPP”) must exercise at least “due care” with respect to hazardous substances on the property and indicated that the standard of care may be higher. On appeal, the current owner of the property, Ashley II of Charleston, LLC (“Ashley II”), defended its BFPP status and unsuccessfully attempted to persuade the Fourth Circuit that the standard of care required of a BFPP was less than the standard of care required for an innocent landowner.

Both the BFPP and the innocent landowner defense require the purchaser to take “reasonable steps” with respect to hazardous substances on the property. The statutory language imposing reasonable steps is similar for both the innocent landowner and the BFPP. However, CERCLA provides that the standard of care is “due care” for an innocent landowner and “appropriate care” for a BFPP. See 42 U.S.C. §§ 9607(b)(3), 9601(40)(D). The Fourth Circuit disagreed with Ashley II's argument that “appropriate care” is a lesser standard than “due care.” The Fourth Circuit reasoned that an innocent landowner, by definition, would not know or have reason to know of the presence of hazardous substances when it acquired the facility, while a BFPP, by definition, should discover hazardous substances at the property through the “all appropriate inquiry” required of a BFPP prior to purchase. The Court suggested that the standard of care should be higher for a BFPP who knew of hazardous substances than for an innocent landowner who was unaware of hazardous substances prior to purchase. The Fourth Circuit limited its holding to a determination that “appropriate care” for a BFPP is at least as stringent as the “due care” required of an innocent landowner.

The Court specifically found that Ashley II failed to clean out and fill in sumps that should have been capped, filled, or removed when related above-ground structures were demolished. Further, the Court found that Ashley II did not monitor and adequately address conditions relating to a debris pile and the limestone crushed-stone cover on the property. These inactions established that Ashley II did not exercise “appropriate care” at this site; it therefore lost its BFPP defense and became liable.

Unfortunately, the Fourth Circuit did not address the District Court’s holding that Ashley II’s contractual relationship with the former property owners was a prohibited affiliation that defeated Ashley II’s BFPP status. The District Court held that Ashley II could not meet the “no affiliation” provision of the BFPP defense, which provides that a BFPP cannot be affiliated with any other person who is potentially liable under CERCLA. The District Court held that Ashley II could not meet the “no affiliation” provision because Ashley II had provided a contractual release to the former owner of the property and had attempted to persuade EPA not to take enforcement action with respect to the actions of that former owner. This holding by the District Court calls into question indemnities and releases typically used between buyer and seller in property transactions, including those for brownfields. The Fourth Circuit had an opportunity to clarify the affiliation provision of the BFPP, but declined to reach the other provisions of Ashley II's BFPP defense once it determined the District Court was correct in holding Ashley II liable for failure to exercise “appropriate care.”

Successor Liability

The Fourth Circuit upheld the District Court's finding of successor liability for a PRP that had never owned or operated the site. The Fourth Circuit held that PCS Nitrogen, Inc. (“PCS”) assumed the liabilities of a predecessor company, which previously purchased certain assets in an "as is" transaction. The Fourth Circuit disagreed with the lower Court's holding that PCS unambiguously assumed the CERCLA liabilities under relevant contractual provisions. Applying New York law to the contract language, however, the Fourth Circuit found sufficient detail and ambiguity in the contract, and sufficient analysis of the terms in the lower Court holding, to determine de novo that PCS was a PRP.

Allocation Of Liability Under §9613(f)

The Fourth Circuit upheld the District Court's allocation of liabilities under §9613(f) for the seven (7) PRP's. The Court determined that the District Court reasonably weighed the relevant factors, including the degree of involvement of each party in disposals (both primary and secondary), the degree of care each exhibited with respect to the hazardous waste, and the benefit each reaped from the disposals on the property. Ashley II received a 5% allocation, while PCS received a 30% share of liability. Only the City of Charleston received a 0% share. The Fourth Circuit found that, while the record might also have supported a different conclusion, the District Court's allocation is among the reasonable conclusions supported by the evidence.

While the Fourth Circuit’s decision in this case was based on case-specific, significant facts brought forth in the trial before the District Court, the decision provides insight for prospective purchasers of contaminated property in achieving and maintaining the BFPP defense and in avoiding any successor liability.