There has not been a lot of recent case law applying the CERCLA Bona Fide Purchaser Defense or Innocent Landowner Defense. Every time a new case emerges it is picked apart by the environmental bar trying to discern the value of the CERCLA defenses as well as pitfalls that will result in failure to establish the defense.
The latest case is Viola Coppela v. Gregory Smith (Case No. 11-cve-01257-AWI-BAM, E.D. Cal., Jan 15, 2015). The case involved contamination from dry cleaners. Plaintiff owned a dry cleaner facility. In 2011, the State of California issued an order requiring plaintiff to investigate and remediate contamination from its dry cleaner.
Defendant, Martin and Martin Properties, LLC ("M&M") owned a commercial center in close proximity to Plaintiff's property. As it turns out, a former dry cleaner operated on Defendant's property from 1959 to possibly 1971.
Plaintiff learned about the former dry cleaner on Defendant's property likely because it was listed on CERCLIS (a federal database of properties that are suspected to have contamination). Defendant's listing on CERCLIS was due to a 2006 investigation performed by the State of California . In 2009, a site investigation was performed which did detect low levels of PCE in the soil. EPA determined that no further cleanup was needed due to the low levels.
Once Plaintiff learned of the investigation of Defendant's property it likely believed it had an opportunity to claim releases from Defendant's property migrated onto its property. Therefore, Plaintiff asserted Defendant should share responsibility in cleaning up its property. This is very common with regard to dry cleaners and gas stations (i.e. parties try to deflect blame by pointing to historical releases that may have occurred on neighboring property).
Plaintiff sued Defendant under CERCLA as well as brought common law claims. Defendant asserted the Innocent Landowner's Defense under CERCLA. The defense allows parties to avoid CERCLA liability if it did not contribute to contamination, conducted proper due diligence prior to purchase and exercised due care with any contamination found. The burden is on the party asserting the defense to establish it is entitled to the liability protection provided by the defense.
Court's Analysis of the Innocent Landowner's Defense
M&M moved for summary judgment on Plaintiff's CERCLA claim alleging to be an "innocent landowner." M&M alleged prior to its purchase it had performed the following due diligence activities:
- Reviewed prior environmental reports prepared for the prior owner;
- Conducted a physical inspection;
- interviewed the seller, neighboring business owners, and financial consultant's regarding the properties prior use
Clearly, the level of due diligence exercised by M&M would not be adequate under current standards (ASTM 1527-13). Defendant did not even retain its own environmental consultant to perform an independent review. Rather, it relied on reports prepared for the prior owner- something not allowed under U.S. EPA current "All Appropriate Inquires Rule" (AAI) which recognizes ASTM 1527-13.
However, the property transfer took place in 1995- before U.S. EPA promulgated its AAI rule. Therefore, despite the fact Defendant's level of due diligence was inadequate under current standards, the Court was willing to rule mostly in favor of Defendant, concluding some of the key elements for the "Innocent Landowner" defense were satisfied. To establish the innocent landowner defense you must establish the following:
- The party acquired the property after the disposal or placement of the hazardous substances occurred;
- At the time of acquisition, the party did not know and “had no reason to know,” i.e. made all “appropriate inquiries” in accordance with customary “standards and practices,” that any hazardous substance was disposed of or placed at the facility;
- The party did not actively or passively contribute to the “release” of the hazardous substance; and
- Once contamination was found, the party exercised due care with respect to the hazardous substance concerned, took precautions against foreseeable acts or omissions of third parties and the foreseeable corresponding consequences, and acted in compliance with land use regulations and governmental responders.
The Court determined that M&M satisfied elements 1, 3 and 4. With regard to element 2, the Court noted that the M&M did not hire its own consultant and simply relied on reports prepared for the benefit of the prior owner. With regard to the issue of whether M&M exercised "all appropriate inquiries" (element 2) the Court refused to grant summary judgment.
Frankly, I'm surprised how far the Court went in finding in favor of Defendant on elements 1, 3 and 4. Furthermore, Defendant still has the possibility of establishing element 2. At trial, Defendant could produce evidence that it was common in 1995 (prior to EPA's AAI Rule) to rely on a prior owners environmental reports. If successful, Defendant will still be entitled to the "Innocent landowner" defense.
I think the key takeaways from this case are the following:
- Prior to EPA's "All Appropriate Inquiries" Rule, Parties may have wider latitude to argue what was standard industry practice and the accepted level of due diligence;
- After AAI, the party should make sure it follows ASTM 1527-13 or it is very unlikely a party will meet its burden in establishing the defense;
- There is a lot of value to the defense to fend off exactly this type of litigation- a property owner in the vicinity with contamination on-site who is looking to deflect blame or try and offset their own costs; and
- Courts may inclined to protect parties that showed genuine effort to perform proper due diligence prior to purchase.