Ninth Circuit Rejects Tax Sale Purchaser’s Use of CERCLA’s Third Party Defense

In California Dep’t of Toxic Substances Control v. Westside Delivery, LLC, the Ninth Circuit recently reversed the District Court for the Central District of California and held that a defendant that purchases contaminated real estate at a tax sale has a “contractual relationship” with the previous owner “in connection with” the previous owner’s polluting activities, and therefore was not entitled to CERCLA’s “third party defense.” As a result, the tax-sale purchaser is potentially liable for clean-up costs.

The property was the Davis Chemical Site in Los Angeles, CA, a former spent solvents recycling facility.  In the 1990s the EPA and the California Department of Toxic Substances Control (DTSC), lead environmental investigations to evaluate releases of hazardous substances on the property. From 2010 through 2015 DTSC conducted a clean-up of those hazardous substances. Before clean-up started, however, the owner of the Davis Chemical Site stopped paying property taxes.  As a result, in 2009, the property was sold at a tax-sale auction to Westside Delivery, LLC (Westside). 

Later, DTSC sued Westside to recover its clean-up costs under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). CERCLA, however, provides the “third party defense” which shields a defendant from liability if it can establish that the release of hazardous substances was caused solely by an act of a third party who was not acting in connection with a contractual relationship with the defendant. Westside invoked the third party defense, arguing that because it purchased the property through a tax-sale, it had no contractual relationship with the former owner that caused the release. The District Court agreed and granted summary judgment to Westside. 

The Ninth Circuit reversed, finding that CERCLA’s definition of a “contractual relationship” is broad – sufficiently broad to encompass a tax deed.  Thus, the court held that the tax deed transferring property ownership to Westside created a contractual relationship between Westside and the Davis Chemical Site’s previous owner.  Further, the court found that because the previous owner’s actions that lead to the release of hazardous substances were related to the previous owner's status as a landowner, those actions were “in connection with” the “contractual relationship” with Westside.  As a result, the Court held that Westside was not entitled to CERCLA’s third-party defense.   

The Court noted that, in addition to the third party defense, CERCLA provides the Bona Fide Prospective Purchaser (BFPP) defense which protects purchasers who knowingly buy a contaminated property. However, Westside did not contend that it qualifies for the BFPP defense. To receive liability protection under the BFPP defense, a purchaser must, among other things,  demonstrate completion of  "all appropriate inquiries" before acquiring the property.  Performing “all appropriate inquiries” can be time and resource intensive, but does not have to be.  At the Kimmell Law Firm, LLC we have significant experience counseling clients on performing all appropriate inquiries and taking other steps to protect against CERCLA liability – all in a cost-effective manner. Please contact us if we can be of assistance.

Court Protects Bona Fide Prospective Purchaser from CERCLA Liability

There are very few court decisions that guide potential purchasers of contaminated property as they attempt to limit their liability for clean-up costs by obtaining Bona Fide Prospective Purchaser (BFPP) status.  However, a recent decision out of Maryland should give purchasers comfort that the money spent establishing BFPP status is often well worth it; demonstrating courts will honor the BFPP protections guarding purchasers against clean-up responsibility.   See SPS Ltd. v. Sparrows Point, LLC, No JFM-14-589 (D. Md. Sept. 6, 2017).    

The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA) was designed to promote the cleanup of hazardous waste sites and ensure the clean-up costs are borne by those responsible for the contamination. To that end, CERCLA imposed strict liability on owners and operators of contaminated sites to pay for their clean-up. That liability, however, was a significant disincentive to potential purchasers of contaminated property and thus hindered redevelopment.  As a result, Congress amended CERCLA to allow purchasers of contaminated property to avoid clean-up liability if they were BFPPs.  See CERCLA § 107(r)(1)       

Under CERCLA  § 101(40), to qualify as a BFPP, a purchaser must have acquired the property after January 11, 2002, and establish the following eight criteria: 
    1) Contamination (i.e. “disposal of hazardous substances”) occurred before the purchaser acquired the property; 
    2) The purchaser made All Appropriate Inquiries into the previous ownership and uses of the property, such that the inquiry would reveal the likely presence of hazardous substances on the property;  
    3) The purchaser provided all legally required notices concerning the discovery or release of hazardous substances on the property; 
    4) The purchaser exercised appropriate care concerning hazardous substances found on the property by taking reasonable steps to prevent exposure to previous releases, stopping continuing releases, and preventing threaten future releases; 
    5) The purchaser fully cooperated with those persons authorized to conduct a clean-up;      
    6) The purchaser complied with land use restrictions and has not impeded the effectiveness of institutional controls imposed on the property in connection with its cleanup; 
    7) The purchaser complied with any request for information issued by the government; and
    8) The purchaser is not affiliated with any other person that is potentially liable for clean-up of the property. 

In Sparrows Point, the court held that the purchaser established those eight BFPP criteria by showing:
    a) All contamination was caused by a prior owner before the purchase – notwithstanding contamination migrated off-site through groundwater after the purchase; 
    b) After buying the property, the purchaser entered into an Administrative Consent Order and a Settlement Agreement with State and EPA that addressed the contamination and the purchaser complied with those agreements; 
    c) The purchaser’s limited contacts with the site were through a sister subsidiary's ownership of above-grade assets purchased from the prior property owner and hiring an environmental consultant.  The court found those contacts were not sufficient to find the purchaser was affiliated with another party potentially liable for clean-up;
    d) The purchaser had an Environmental Site Assessment prepared (ESA) and that an ESA is a recognized way of establishing the All Appropriate Inquiry criteria of CERCLA  § 101(40). 

The Sparrows Point decision shows that establishing the BFPP status is not easy, but it can be done. Those considering the purchase of any property should consult environmental counsel to assist in conducting the appropriate environmental due diligence that will help establish BFPP status and limit their liability for future clean-up costs.  At the Kimmell Law Firm, we have a wealth of experience assisting parties with that environmental due diligence, including making the All Appropriate Inquiries critical to becoming a BFPP. Please contact us to discuss how we can assist you in your next property transaction.  

Court Overturns Key Provisions of EPA's RCRA Rule Defining Hazardous Waste

The U.S. Court of Appeals for the District of Columbia recently vacated two key elements of EPA's rules defining hazardous waste and in doing so may provide additional flexibility (and lower the costs) for companies that recycle or reclaim hazardous secondary materials. See American Petroleum Institute v. EPA, No. 09-0138 (D.C. Cir. July 7, 2017). Hazardous secondary materials are materials generated as the remainder from industrial processes (e.g. spent materials, byproducts, and sludges) that if discarded would be identified as hazardous waste.

In its decision, the Court struck down the 4th factor of the 4-factor “legitimacy test” that the Agency had promulgated to distinguish between “legitimate recycling” and “sham recycling” of hazardous secondary materials. The Court also struck certain conditions, known as the “Verified Recycler Exclusion,” that the agency attempted to impose before generators could send hazardous secondary materials to third-parties for reclamation.

In regard to the 4th factor of the 4-factor legitimacy test, the Court found that the EPA had failed to provide a reasonable basis for assuming that hazardous secondary materials destined for recycling that contain hazardous constituents at concentrations that exceed the concentrations of hazardous constituents in analogous products are being discarded and thus subject to EPA regulation. Therefore, the Court struck the 4th factor.

Similarly, the court found that EPA's Verified Recycler Exclusion requirement that mandates a third-party reclaimer of hazardous secondary materials obtain a regulatory variance or pre-approval if the reclaimer lacks a RCRA permit, lacked a reasonable basis. In its stead, the court reinstated the EPA's prior Transfer-Based Exclusion which does not require the reclaimer to get advanced administrative approval before accepting hazardous secondary material.

Impact of the Court's Decision

In general, this decision should result in greater incentives, fewer barriers, and lower costs to recycling hazardous secondary materials. The extent to which it will impact your company, however, likely depends on the state(s) your company operates, whether that state is authorized to implement the federal RCRA program, and if so, if the state had previously adopted EPA's 4-factor “legitimacy test” or Verified Recycler Exclusion provisions. As a result, companies, including manufacturers and recyclers, should consult their environmental counsel or the appropriate regulators to anticipate how this decision will impact their operations.