|CERCLA Liability Concerns for Owners and Operators of Properties with Institutional Controls
CERCLA contains three affirmative defenses to liability. The most common defense that may be raised by a CERCLA defendant is the third party defense. To prevail under this defense, a defendant must establish by a preponderance of the evidence that the release or threatened release of the hazardous substance and the resulting damage was
SOLELY to the acts or omissions of a third party who was not an agent or employee of the defendant
The defendant did not have a direct or indirect contractual relationship with the third party.
The defendant exercised due care in dealing with the hazardous substances and
The defendant took precautions against foreseeable acts or omissions of any third party and the foreseeable consequences of those acts or omissions.1
The third-party defense has generally been unavailable to purchasers or occupiers of property or anyone in the chain of title because of the requirement that the person asserting the defense cannot be in contractual relationship with the third party (usually a prior landowner or tenant) who caused the release. CERCLA defines a "contractual relationship" to include "land contracts, deeds or other instruments transferring title or possession." The majority of courts have broadly construed the meaning of this term so that it encompasses nearly every contractual arrangement between potential defendants. Under this interpretation, a landowner could only invoke the defense if the release was a result of acts of trespassers, or adjacent landowners, and then only if the landowner exercised due care. Thus, very few landowner defendants have been able to assert the defense. One exception to this trend was New York V. Lashins Arcade,2 where a federal district court allowed the current owner of a shopping center to invoke the third-party defense because it did not have a contractual relationship with the polluting tenant who had discharged hazardous substances into the ground 15 years prior to the current owner's acquisition.
Assuming that a prospective purchaser or tenant could overcome the “contractual relationship” hurdle, it would still have to establish that it satisfied the third prong of the test to exercise due care in dealing with the hazardous substances and the fourth prong which requires taking precautions against the foreseeable actions of omissions of third parties. These elements can be problematic for properties where institutional controls have been implemented. If an institutional control such as an impervious cap is constructed on a property to prevent exposure to contaminated soils, a subsequent purchaser or lessor will probably be required to ensure that the institutional controls are properly maintained to be able to assert the third party defense even where the seller or lessor contractually agrees to maintain the institutional controls. This is because the failure of a seller or lessor to properly maintain the institutional controls could probably may be construed as a foreseeable omission. Moreover, if the subsequent property owner or lessee fails to monitor the condition of the controls or fails to maintain the controls in the event the the seller or lessor fails to do so, this omission could constitute failing to exercise due care regarding the contaminants at the site.
Because the third party defense as generally not been available to purchasers who acquired title to contaminated property, Congress enacted the "innocent purchaser's defense" in 1986.3 To take advantage of this affirmative defense, a subsequent owner must establish that it did not know and had no reason to know that any hazardous substances were disposed of at the facility. To establish that it had no reason to know of the contamination, a defendant must demonstrate that it took "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability.” In determining whether there was an "appropriate inquiry," CERCLA requires that any specialized knowledge or experience of the innocent owner must be taken into account as well as the relationship of the purchase price to the contaminated property and whether the presence of contamination was obvious or could be detected by an appropriate site inspection.4
In enacting this innocent purchaser's defense, Congress attempted to establish a course of conduct in real estate transactions and it is certain that sophisticated buyers will be required to perform a detailed site investigation to take advantage of this defense.5 However, the courts have not consistently interpreted what constitutes an “appropriate inquiry.” For exarnple, in In Re Hemingway Transport, Inc.,6the United States Court of Appeals for the First Circuit held the purchaser liable even though it had conducted a site inspection during the winter time but failed to observe drums submerged in a frozen wetlands. The court noted that the purchaser was a sophisticated developer who may have been familiar with the environmental risks of the site and may have realized that the purchase price represented a discount because of the contamination. As a result, the court remanded the case back to the bankruptcy court for further fact finding. In contrast, other purchasers who did not conduct any pre-acquisition investigation have qualified for the innocent purchaser’s defense even where there were obvious signs of contamination.
While the innocent purchaser cases are not uniform, it appears that this defense will be largely unavailable in most CERCLA cases even if the landowner defendant can survive summary judgment. The kind of information that courts may require to establish the innocent purchasers defense, such as whether the contamination was readily observable and what information was available at the time, will be difficult to establish for purchases that date back several decades. Even if an inspection was done and it failed to uncover contamination, many courts are likely to find that the investigation was inadequate, regardless of the documentation that may be provided by the owner showing that it complied with the commercially reasonable standards of the time. Thus, the existence of institutional controls will probably be sufficient to prevent a prospective purchaser or lessee from asserting the CERCLA innocent purchaser’s defense since the existence of the institutional controls should provide the party with knowledge that the site is contaminated.
Many states have enacted their own innocent purchaser defenses. Like CERCLA, many states require the prospective owner or operator to conduct an appropriate inquiry while others specify the kind of a environmental site assessment that must be performed prior to taking title or occupying the property (e.g., M.S.A. 32620126) Some though, provide that subsequent purchasers will not be responsible for pre-existing contamination where the site has been remediated by the prior owner/operator in accordance with state standards (E.g. Pennsylvania Land Recycling and Environmental Remediation Standards Act, 35 P.S. 6026.501). Even where prospective purchasers may qualify for the innocent purchaser’s defense, some states provide that if the owners or operators fail to maintain institutional controls on their properties, they will lose their status as an innocent purchaser and forfeit their immunity from liability (See New Jersey P. L. 1997, ch.278, §20.)
142 U.S.C. 9607 (b)(3).
2 91 F.3d. 353 (2d Cir. 1996)
3 42 U.S.C. 9601(35)(A)
4 Id. at 9601(35)(B)
5 H.R. Conf. Rep. No.962, 99th Cong., 2d Sess., at 186~8 (1986).
6 993 F.2d 915 (1st Cir. 1993)