Patrick J. Paul & Christopher P. Colyer
As activity on the real estate transactional front continues to gain momentum, real estate practitioners need to increasingly be aware of due diligence requirements necessary to minimize or avoid liability under federal law—namely, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA” or “Superfund”). Performing the required due diligence prior to property acquisition is an essential prerequisite for three significant defenses to CERCLA liability—the Innocent Landowner, Bona Fide Prospective Purchaser (“BFPP”), and Contiguous Property Owner defenses—as well as to qualify for CERCLA Brownfield grants. The common thread to each of these CERCLA defenses and grants is the requirement that a purchaser or operator perform “All Appropriate Inquiry” (“AAI”) prior to acquisition.
Performing AAI is not an idle exercise, as the United States Environmental Protection Agency’s (“EPA”) AAI rule, established at 40 C.F.R. part 312, sets forth specific inquiry requirements that must be met for purposes of CERCLA. These inquiry requirements generally are satisfied by performing a Phase I Environmental Site Assessment in accordance with standards adopted by the American Society for Testing and Materials (“ASTM”)—namely, the E1527-05 standard and its more recent update, the E1527-13 standard.
“Environmental Law” is, on the one hand, a phenomenon—an active, sometimes frenetic, area of the law for the last forty years. On the other hand, it is an ages-long reaction of civilization to, variously, preserve, protect, use and/or harness natural resources while, at the same time, protecting society from health risks (e.g., typhus) and providing safe public services (e.g., waste disposal and water supply). It is easy for society today to get carried away with arguments over hot topics such as “global warming,” “environmentalism” and/or the never-ending debate between private property rights and the “public right” to be protected from heath threats (whether from air or water sources). It is useful, however, from time to time to put those debates aside and concentrate on context. That is the purpose of this article.
“Environmental law” used to take the form of common law—often times through familiar tort doctrines such as trespass and nuisance; and, for that matter, zoning and land use law. An excellent work on the evolution of environmental law was produced by Alan Parks, who reported that: “In 1202, King John of England proclaimed the first English food law, the Assize of Bread, which prohibited adulteration of bread with such ingredients as ground peas or beans. Regulation of food in the United States dates from early colonial times.” The same work recites that Benjamin Franklin argued, in 1739, on behalf of the “public right” in the “Liberty of Breathing freely in their own Houses” in a case involving the dumping of tannery and slaughterhouse waste into surface water. The genesis of the environmental law extends deep into Colonial American history.
The following Article is based on comments given by Laura Malone at “Saving the Deal: Avoiding and Minimizing Environmental Liability in Corporate and Real Estate Transactions,” a continuing legal education seminar. The information contained below is a summary of information available through the Arizona Department of Environmental Quality (“ADEQ”) at http://www.azdeq.gov/ and from various ADEQ documents.
Those of you in the environmental field back in 1970 may remember the passage of the National Environmental Policy Act (“NEPA”). Subsequent to NEPA, and later that same year, then President Richard Nixon signed an Executive Order creating the United States Environmental Protection Agency (“EPA”). Both NEPA and EPA were predicated on public concerns that, as a nation, we were not focusing on the environment or even had an understanding of how human activity could have an impact on the environment. The creation of EPA and subsequent legislation, such as the Clean Water Act (“CWA”), Clean Air Act (“CAA”), Resource Conservation and Recovery Act (“RCRA”), and Superfund, to name just a few, started the environmental regulatory transformation.
Hayleigh S. Crawford
In 2012, public pension systems responsible for providing retirement benefits for hundreds of thousands of state employees were underfunded by an estimated one trillion dollars. The recent recession’s enormous toll on investment earnings, combined with many states’ failures to make the required contributions to their retirement funds, has left state legislatures, employees, and taxpayers with a looming debt and few palatable options.
Arizona is no exception to the nationwide public pension problem. Within ten years, Arizona’s pension funds have gone from “healthy” to seriously underfunded. As a result, Arizona taxpayers are paying more than ever for public employee retirement benefits: in 2010, Arizona taxpayers were paying paid at least $1.39 billion annually to fund the state pension systems, more money than the estimated cost for higher education, corrections, or an indigent healthcare program. That pension liability represented a 448% increase in pension costs over the past ten years. With Arizona’s state budget projecting a deficit of $1.24 billion between fiscal years 2012 and 2014, the state legislature has been forced to take a hard look at pension reform options.
The alphabet soup of federal and state statutes and rules regulating the purchase and sale of property can quickly become overwhelming. Nevertheless, parties to commercial and residential real estate transactions ignore such laws at their own peril: failure to comply with these regulations, whether intentional or not, can impose serious costs on all parties involved.
This Article focuses on some practical approaches to due diligence inquiries and allocations of potential liabilities, and includes only brief comments on some of the legal liabilities regarding environmental disclosure requirements in real property transactions. The main take-away from this article is that the Arizona Department of Environmental Quality (“ADEQ”) is the key environmental regulatory agency in Arizona with a mission to protect the environment. As such, the Agency is a great resource for information and cooperative ideas to ensure the deal will close.
Christopher D. Thomas
Few statutes bedevil experienced litigators as often as the federal Superfund act, the Comprehensive Environment Response, Compensation, and Liability Act (“CERCLA”). Although CERCLA practice is now into its third decade, the statute’s chronic drafting flaws and the absence of definitive judicial resolution of numerous fundamental issues continue to create uncertainty. This uncertainty offers the opportunity for both creative lawyering and spectacular failure. Many Superfund cases end badly because the lawyers spend their time preparing to fight the last war. In an attempt to mitigate the unease, this article will—after a rapid review of history—address the crucial legal issues we can expect to be front and center of hazardous substance litigation in the next several years.
It is no secret that CERCLA was hastily and sloppily drafted in late 1980 in the waning days of the Carter administration, in response to the serious environmental and health risks posed by property contaminated by hazardous substances. Substantially amended in 1986, the federal Superfund law now is codified at 42 U.S.C. §§ 9601–9675. CERCLA establishes both a liability scheme that generates government and private-party litigation and provides for an administrative enforcement program for remediation of hazardous substance contamination. That program is largely detailed in the National Contingency Plan (“NCP”). Under CERCLA, the U.S. Environmental Protection Agency (“EPA”) may either spend government funds to remediate contaminated sites and then seek reimbursement from responsible parties, or administratively or judicially compel site investigation and/or remediation. States can conduct many of the same enforcement activities. Independent of any agency action, private parties can employ CERCLA to recover their own investigative and remedial expenses in a civil suit against statutorily defined liable parties.
Michelle De Blasi
The high cost of remediating contaminated sites and the joint and several liability scheme under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) (42 U.S.C. § 9607), as amended, have led the United States Environmental Protection Agency (“EPA”) and CERCLA Potentially Responsible Parties (“PRPs”) to pursue every available resource to cover cleanup costs. Litigation seeking reimbursement for remediation expenses from corporate parents, corporate successors, officers, directors, and shareholders has shown that plaintiffs will attempt to cast CERCLA’s liability over every possible party with resources, and any such party can be caught under the right circumstances.
United States v. Bestfoods established the standard by which the liability of corporate entities and their subsidiaries is determined. In Bestfoods, the Court held that parent corporations can be directly liable under CERCLA § 107(a) if they are directly involved in the company’s management of hazardous substances, or indirectly liable under traditional principles of corporate veil piercing. Courts have found that corporate officers, directors, and shareholders also face similar liability risks.
Secured creditors can be exempted from liability for contamination from properties for which they hold security interests under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Underground Storage Tank (“UST”) program under the Resource Conservation and Recovery Act (“RCRA”) and Arizona’s CERCLA-counterpart, the Water Quality Assurance Revolving Fund (“WQARF”).
However, these protections are far from absolute and will be lost if applicable requirements are not followed while a loan is active, or after a lender acquires ownership or possession. Additionally, even if a lender follows the steps necessary to protect itself from cleanup liability, additional efforts should be undertaken before a loan is originated to protect a security interest to the fullest extent possible.
Gary E. Marchant
Uncertain risks present unique challenges to the law. Unlike science, which can always defer judgment until more data are generated and uncertainties are reduced, law must often come to final decisions on uncertain risks that are indeterminate and contested. A relatively new area of uncertain health and environmental risks, which often arise in the context of property transactions, is vapor intrusion. Although the potential for vapor intrusion has always been present on contaminated lands, it is only due to recent legal and policy changes that vapor intrusion evaluation has now become a part of almost every investigation of a potentially contaminated site, and many real estate transactions. This article describes this emerging problem, and the challenges and liability risks it presents for environmental transactions and remediation.
Part I briefly describes what vapor intrusion is and how it is addressed as a technical issue. Part II describes the rapidly evolving legal response to vapor intrusion in the context of clean-up of contaminated sites and property transactions. Part III identifies eleven major issues of uncertainty relating to vapor intrusion, which is making this issue such an intractable and controversial legal, scientific and policy problem. Finally, Part IV provides some practical advice for dealing with the vapor intrusion issue.
Kenneth A. Hodson & Charles H. Oldham
This article discusses potential liability under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”) and certain defenses thereto including the Bona Fide Prospective Purchaser (“BFPP”) defense. Under certain circumstances, the assertion of the BFPP defense may enable the purchaser (and the lessee) of real estate to avoid liability under CERCLA.
As discussed more fully below, in general, a potential purchaser of real estate should be aware that, under CERCLA, the new purchaser of the property may be liable for, among other things, the cost of cleaning up any “hazardous substances” that may have been released at the property.
Mark A. McGinnis, Esq. & R. Jeffrey Heilman, Esq.
Water is and always has been an issue of critical importance in Arizona. Living in Arizona’s desert climate means that all economic activity, from agricultural and industrial enterprises to residential development, is entirely dependent on the state’s limited water supplies. Even today, Arizonans engaged in buying or selling real estate confront significant water issues, both legal and technical. This paper examines several of the issues that commonly arise in the context of real estate transactions. Although these issues most often arise with respect to transactions involving commercial or industrial property, some of the most perplexing problems can arise in the normal course of residential sales.
The potential ramifications of unrecognized water issues are easy to appreciate. For example, a “prime commercial property” with a water supply of adequate quantity and quality is far more valuable than one that lacks such a supply. In most cases, failure to adequately address water supply issues will result in buyers spending substantially more capital to remedy the situation. In other situations, it might be impossible, regardless of the cost, to make such arrangements after the fact. Unlike in other areas, the three most important attributes of a parcel of land in Arizona are “location, location, and water”—and not necessarily in that order.
Robert D. Anderson, Norm James, Dawn Meidinger & Greg Adams
Standard practice for conducting due diligence as part of real estate transactions has long included an assessment of the potential for a site to have “recognized environmental conditions,” i.e., hazardous substances or petroleum products released to the environment. In addition to this evaluation, sound due diligence practices should include an evaluation of the potential for federal regulatory requirements to significantly affect value. This paper will look at four general areas: the Clean Water Act (“CWA”), the Endangered Species Act (“ESA”), the National Environmental Policy Act (“NEPA”) and the National Historic Preservation Act (“NHPA”).
Section 404 of the CWA generally requires that a permit be obtained from the U.S. Army Corps of Engineers to discharge dredge or fill material into “navigable waters.” The term “navigable waters” is defined as “the waters of the United States, including the territorial seas.” In turn, the Corps of Engineers and the Environmental Protection Agency (“EPA”) have each adopted rules that define “waters of the United States” to include virtually every type of water body imaginable, as well as the tributaries of such waters. Under the Section 404 permit program, regulated “discharges” include activities such as placing fill material into a watercourse or wetland area in connection with routine construction activities. Consequently, this program imposes significant burdens on the regulated community, and can complicate site development and thereby substantially affect value.