Skip to content

The Council on Environmental Quality has proposed a new rule which would streamline the National Environmental Policy Act (NEPA) which is the federal law that requires review of the environmental impacts from federal projects or projects that receive federal funding.  NEPA has been called by its critics as an unnecessarily long paperwork exercise that delays projects.

The Trump Administration responding to criticism from industry has proposed the most significant overhaul to the process in its history.  The changes highlighted below are designed to shorten the review process and limit the scope of the review.

What is the NEPA review process?

The purpose of NEPA is to force the federal government to review the impacts of projects it controls or that receive federal funding.  Unless the project or action falls under an exemption, the agency must prepare an Environmental Assessment to determine if it will have significant impacts on the environment.  If the project or action will not have significant impacts, the agency issues a “finding of no significant impacts” (FONSI).  If the review shows the project or action will have significant impacts on the environment, the agency must prepare an Environmental Impact Statement (EIS).   The EIS process is long with opportunities for public comments.  The goal of an EIS is to force the agency to consider the impacts of the project or action in the agency’s decision making process.  If the agency decides to move forward with the action or project it must publish a Record of Decision (ROD) documenting what it considered and any changes to the project.

What are the proposed changes to NEPA?

  1. Limit which projects are covered by NEPA- The proposed rule redefines what is considered a “major federal action” triggering the NEPA process.  Only those actions are subject to “federal control or and responsibility” are covered by NEPA.  If the action or project is nondiscretionary, limited federal funding or limited federal control, NEPA will not be triggered.  As an example, if a project receives funding for design, but local or private funding will pay for the project, NEPA would not be triggered.
  2. Only direct environmental effects must be considered (i.e. not cumulative impacts like climate change)-  the proposed rule eliminates consideration of indirect or cumulative impacts.   Impacts that are considered remote in time or geographically remote do not need to be considered.
  3. Speed up the review process- the proposed changes seek to limit Environmental Assessments to one year and Environmental Impact Statements to no longer than two years (unless senior management approves a longer time period).  The proposed rulemaking notes that the average time to complete an EIS and ROD is 4.5 years.
  4. Reasonable alternatives- the proposed rule defines which alternatives must be considered as “reasonable alternatives” as those that are technically and economically feasible, meet the purpose and need for the proposed action and the goal of the applicant.

There are numerous other major proposed changes.  All of the changes are designed to limit which projects trigger a review, reduce the time period to complete reviews and limit what impacts must be considered.

The rule was proposed on January 10, 2020.  Comments must be submitted by March 10.

 

What action was taken?

On January 23rd, the Trump Administration released the final version of the rule which defines which waters are protected under the Clean Water Act.  The new rule is called the Navigable Waters Protection.  It replaces the prior Obama Administration rule referred to as WOTUS- “Waters of the United States.”

Back on February 28, 2017, President Trump signed an Executive Order titled “Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the “Waters of the United States Rule.”  The Order called for repeal of the WOTUS rule and replacement with a new definition of federally protected waters.

The Navigable Waters Protection rule goes into effect 60 days after publication in the federal register.

What is the significance of the action?

The Navigable Waters Protection Rule defines which waters and wetlands in the country are protected under the Clean Water Act.  WOTUS broadly defined federally protected waters.  The Trump Administration wanted to rollback protections under federal law to benefit development and farmers.

For federally protected waters (i.e. waters that are regulated under the Clean Water Act), businesses must obtain permits prior to discharging wastewater into such waters.  In addition, before development can occur which impacts federally protected waters, any person placing fill into either federally protected streams or wetlands must obtain a 404 permit from the Army Corps of Engineers along with a 401 water quality certification from the state or U.S. EPA.

What is the current extent of federal regulation prior to the new rule taking effect?

The Obama WOTUS rule never went into effect nationwide.  As a result, which waters were protected under the Clean Water Act was largely based a test that emerged from years of litigation in the courts.  Following the 2006 decision by the U.S. Supreme Court in Rapanos v. United States, the “significant nexus” test was used to determine which waters were jurisdictional (i.e. federally protected).   Basically, any waters that if impacted could have a chemical or biological impact on navigable waters.  However, under the significant nexus test it was difficult to ascertain how far federal protection extended.  In some cases, it extended to ephemeral streams that were dry except for when it rained.  It could also extend to wetlands that were not adjacent to navigable waters.

What waters are protected under the new rule?

The Navigable Waters Rule covers four categories of waters:

  1. The territorial seas and traditional navigable waters (i.e. waters currently used, or were used in the past, or may be susceptible to use in interstate or foreign commerce);
  2. Perennial and intermittent tributaries that contribute surface water flow to navigable waters;
  3. Certain lakes, ponds, and impoundments that contribute surface flow to jurisdictional waters; and
  4. Wetlands adjacent to other jurisdictional waters (in some circumstances even when an artificial or natural barrier exists between the wetland and jurisdictional water).

Which waters are now excluded from federal protection?

The rule specifically excludes certain types of waters from regulation under the Clean Water Act, including the following:

  • groundwater;
  • ephemeral streams (streams that only contain water when it rains);
  • diffuse storm water runoff;
  • categories of road and farm ditches (ditches that constructed to relocate a tributary can be jurisdictional);
  • prior converted cropland (prior to December 23, 1985 was drained or otherwise manipulated for agriculture);
  • manmade features for irrigation;
  • mining, construction or other activities located upland of jurisdictional waters; and
  • wastewater treatment systems

What’s next?

Litigation will certainly continue.  Expect multiple challenges to the new rule.  The legal basis for such challenges will likely include whether the Trump Administration provided sufficient justification for revoking the Obama WOTUS rule.  Legal challenges may also focus on whether the new rule’s definition of federally protected waters is too narrow under the U.S. Supreme Court’s 2006 Rapanos ruling.

Does Ohio have different standards for which waters are protected?

Yes. Ohio was one of a few states that passed separate legislation protecting so called “isolated wetlands.”  Therefore, in Ohio even if the wetland is not protected under the Clean Water Act you will still need to obtain an isolated wetland permit.

Also, the definition of “Waters of the State” under Ohio Revised Code 6111.01 includes:

  • “all streams, lakes, ponds, marshes, watercourses, waterways, wells, springs…” (Ohio EPA takes the position that “all streams” includes ephemeral streams that only receive water when it rains);
  • irrigation systems and drainage systems;
  • underground waters (i.e. groundwater)

Based on this definition of “waters of the state” more waterways, including groundwater, are protected under state law versus the Clean Water Act as defined in the Trump Administration’s Navigable Waters Rule.

The Greater Ohio Policy Center (GOPC) has been calling attention to Ohio’s so-called “legacy cities.”  These are the smaller to mid-sized cities across the state other than Cleveland, Columbus, Cincinnati, Toledo, Akron, Canton and Youngstown.  Cities like Portsmouth, Mansfield, and Lorain.

A recent Dispatch editorial called attention to GOPC’s efforts regarding Ohio’s legacy cities citing to a recent GOPC report.  Once fact highlighted in the report shows that, despite the nation’s booming economy, legacy cities continue to struggle.

Between 2000 and 2014, most Ohio cities with populations of 20,000 or more lost jobs, population and property value even as Columbus and the state overall improved on those measures.

With the loss of population and jobs comes more brownfield sites-  More empty buildings and factories with legacy pollution issues complicating their reuse.  It is difficult enough to attract new companies and jobs to smaller cities in Ohio, but the additional hurdle of historical contamination deters reuse.

The only way to address these properties is through brownfield grant programs such as former Clean Ohio program.  Grant funds are needed to pay for cleanup to prepare sites for reuse.  The State cannot wait until a company or developer shows interest in these properties.  That interest may never come if the company or developer has deal with the added cost of historical pollution on site.

As detailed in a prior post, with the sunset of the Clean Ohio program, brownfield cleanups declined.  The Voluntary Action Program (VAP) is the Ohio EPA cleanup program.  Here are the statistics of the number of completed cleanups in the last two years:

  • 2018 there were eighteen (18) completed VAP cleanups
  • 2019 there were nine (9) completed VAP cleanups with several pending
  • At the height of the Clean Ohio program, Ohio was completing thirty-five (35) VAP cleanups per year

GOPC has been advocating for new funding into the Clean Ohio program as one strategy to help legacy cities.  The Columbus Dispatch editorial board endorsed that proposal.  Now is the time to provide that funding while the economy in Ohio is still fairly strong.  Once the next recession hits, legacy cities will fall even further down the priority list.

On Friday, the Legislative Service Commission hosted a seminar discussing Ohio’s efforts to solve harmful algae blooms in its waterways including Lake Erie.  The seminar brought together researchers, government officials and business groups to discuss the science and solutions for addressing algae blooms.

The biggest takeaways from the seminar is that Ohio has a  very good understanding of the causes of harmful algae blooms.  Here is a quick summary of the causes of the large blooms in Lake Erie:

  • Lake Erie is the most shallow Great Lake
  • There is very little forested land around Lake Erie, in particular in the land along Ohio’s shoreline
  • Non-point source runoff, primarily from the Maumee River, carry the pollutants that provide the fuel for the algae blooms
  • Phosphorus loading from fertilizer is the primary cause of algae growth
  • More rainfall results in more runoff and worse seasonal algae problems
  • Warmer temperatures mean more algae (there has been a 2 degree increase in average temperatures since 1900 in Lake Erie Region)

With an understanding of the causes of harmful algae blooms, what is the solution?  Scientists have a pretty good understanding of the solution- reduce phosphorus loading.  Ohio is targeting a 40% reduction target in phosphorus loading.  A 40% reduction equates to 3,316 metric tons (7.3 million pounds) in phosphorus.

The level of cooperation in Ohio has never been greater.  I was impressed by one panel that included the Farm Bureau, The Nature Conservancy and the Ohio Environmental Council.  The presenters all spoke about the unprecedented level of cooperation between these organizations in the last few years.  In this age of divisive politics, it was encouraging to see environmental and industry groups working together.

This July, the H2Ohio Water Fund was established by Ohio Governor Mike DeWine. The legislation establishing the fund was a bipartisan effort.  H2Ohio will provide $172 million for projects to address water quality issues over the next two years.  The money will be used for the following:

  • Soil and nutrient management on farms
  • Restoring floodplains and wetland; and
  • Slowing down water through creation of two-stage ditches or other management practices

The level of commitment and cooperation is certainly unprecedented.  The open question is whether the 40% phosphorus reduction can occur simply as a target using voluntary efforts.  The significant water quality improvements that have been made in Ohio over the last several decades have largely been through permitting and regulation of wastewater discharges from industry.

Many businesses or developers are intimidated about purchasing property former industrial or commercial property that may be contaminated.  The fear of the unknown can be the biggest deterrent to considering properties that may be contaminated.  Common concerns include:

 

  • Could I be buying a potential mess, which could cost me six to seven figures to cleanup?
  • Could I be risking being liable to neighboring property owners if contamination is migrating off-property?
  • I don’t like spending upfront money on due diligence that may be lost if I don’t purchase the property; and
  • The complexity of environmental risk management is daunting.

These are legitimate concerns.  However, with the right approach there could be advantages to developing potentially contaminated property.  First, you should likely be able to negotiate a reduced purchase price.  I have had multiple deals where the property was purchase for $1.  Second, you may be able to leverage brownfield incentives to offset your due diligence or cleanup costs.

I have reviewed hundreds of Phase I and Phase II environmental assessments.  I also have managed redevelopment of highly complex brownfield sites as well as smaller sites with moderate contamination.  Here are five common mistakes I see by businesses, developers and even attorneys when purchasing potentially contaminated property.

1.  The LLC

Many buyers think that if the simply put contaminated property under ownership by a limited liability company (LLC) they will avoid personal liability.  While putting such property under separate corporate ownership is still advisable, it will not insulate you from personal liability.  There are a number of cases in which members of the LLC have been held personally liable even though they purchase the property with pre-existing contamination.  Ohio is particularly aggressive in pursuing members of an LLC personally.  Check out the following Ohio cases:

  • State ex rel. Petro v. Mercomp, Inc.  (2006) 167 Ohio App. 3d 64 – sole shareholder individual liable for corporation’s violations;
  • State ex rel. Cordray v. Evergreen Land Development, LTD 2016 WL 5408651- members personally participated in violations, and thus were jointly and severally liable with the LLC;
  • State ex rel. Petro v. Pure Tech Sys., Inc., 2015 WL 1959935- evidence sufficient to hold shareholder personally liable for a $6 million dollar penalty;
  • State v. Tri-State Group, Inc., 2004 WL 1882567- shareholder found personally liable for permit violations;
  • State ex rel. DeWine v. Sugar, 2016 Ohio 884- shareholder personally liable for failure to correctly remove and dispose of asbestos;
  • State ex rel. DeWine v. Marietta Industrial Enterprises, Inc., 2016 WL 6875425- overruled lower court and found there were genuine issues of material fact as to whether the president of the company, who was engaged in day-to-day compliance, could be held personally liable

2.  The “As Is” Sale 

This is more of a mistake on the seller’s side, but it is probably the singled biggest costly mistake I see made in transactions involving contaminated property.  The seller includes an “As Is” clause in the sale agreement and believes that the buyer is taking on all liability with regard to pre-existing contamination.

An “As Is” clause is simply a disclaimer of representations with regard to the condition of the property.  Unless the seller specifically includes a release of liability in the sale agreement, buyer still can sue seller for pre-existing contamination under a number of environmental statues as well as common law.  If you are selling property make sure you include a well-crafted release of environmental causes of action.

3.  If I Buy Contaminated Property I Must Perform a Highly Expensive Cleanup 

Most transactions involving contaminated property actually do not involve a full-blown cleanup under a particular environmental statute.  In Ohio, the brownfield cleanup program is called the Voluntary Action Program (VAP).  While the VAP can work well with highly contaminated property it doesn’t fit well with smaller or properties with marginal or moderate contamination.

To promote more redevelopment and reuse of contaminated property, U.S. EPA created the “Bona Fide Purchaser Defense” (BFPD).  The BFPD allows a buyer or potential tenant to significantly reduce their potential liability if the perform a certain level of due diligence (Phase I and Phase II property assessments).  If those assessment identify contamination, the BFPD requires the buyer to take “reasonable steps” to address contamination.  Broadly speaking, reasonable steps means eliminating ongoing releases of contamination and prevent exposure to contamination.  In the vast majority of cases, it will not mean full-blown cleanup of contamination.  Someone who properly utilizes the BFPD can appropriately manage their environmental risk allowing them to purchase or lease property that other buyers or tenants may avoid.

4.  Seller Gave Me a “Clean” Phase I 

Often I will hear a buyer say they don’t need to worry about environmental contamination because the seller of the property gave them a Phase I environmental assessment that showed no issues (i.e. a “Clean” Phase I).  However, over reliance on another party’s Phase I could be very problematic for several reasons:

  • A Phase I must be less than a year old and updated after six months to still provide BFPD protections to a buyer;
  • In order to use the seller’s Phase I, the buyer must get what is called a reliance letter from the environmental consultant that allows the buyer to rely on the conclusions of the report;
  • Low quality Phase I environmental assessment often show no issues.  Make sure the Seller used a reputable company and that the Phase I was performed to appropriate standards (i.e. ASTM 1527-13)
  • Remember that a Phase I does not involve any actual sampling of the property, therefore, contamination may go missed which is why it important to make sure you, as the buyer, qualify for the BFPD

5.  Not Having an Environmental Attorney Review the Purchase Agreement

I know this sounds self-serving, but I cannot tell you how many times in my practice I have seen this issue cause huge issues for both buyers and sellers of potentially contaminated property. A number of times I have been brought in late into a deal and the Client sends me a form purchase agreement that doesn’t address environmental issues. There are very specific environmental provisions in purchase agreements, which need to be carefully reviewed and negotiated.  These include:

  • Reps and warranties- Is there an “As Is” Clause?  Are there other reps being made about the environmental condition of the property?  Has the buyer made a rep that they have provided all available environmental reports in their possession?
  • Release- Is there a release of environmental liability included in the contract?  If so, what is the scope of the release?  There are court cases which have heavily analyzed the exact wording of environmental releases in contracts
  • Environmental Indemnity- Is either buyer or seller or both providing indemnification for environmental liability?  This is often the most challenging environmental provision in a purchase agreement to negotiate.

The Trump Administration has made it a priority to shift more responsibility to the states on enforcement.  On July 11, 2019, U.S. EPA released a memorandum to the Regional Administrators regarding federal and state enforcement.   The latest policy memorandum was a collaboration between U.S. EPA and State EPA Administrators.  The memorandum includes:

  • Best Practices for Coordination between U.S. EPA and the states on enforcement; and
  • Emphasizes the states primary role in performing inspections and taking enforcement

The first part of the memorandum discusses joint planning between U.S. EPA and the States to avoid duplicative inspections and enforcement.  The second part of the memorandum emphasizes a Trump Administrative priority that the states should be in the primary role of implementing programs under the Clean Air Act, Clean Water Act, Safe Drinking Water Act and hazardous waste regulation (i.e. RCRA).  The memorandum indicates that U.S. EPA will step in to take enforcement when “a state lacks economic or technical capability or the will to take timely an appropriate action.”

The memorandum identifies specific instances when it may be appropriate for U.S. EPA to take the lead on inspections or enforcement, including:

  1. When States request U.S. EPA take the lead;
  2. Violations that are part of the National Compliance Initiative (i.e. federal enforcement priorities);
  3. Emergency situations or where there is a substantial risk to human health or the environment;
  4. States lack the resources;
  5. Situations involving multi-state issues;
  6. Significant violations that a state has not timely or appropriately addressed;
  7. Situations where U.S. EPA criminal enforcement may be needed;
  8. When reviewing the effectiveness of a state’s enforcement program; and
  9. Enforcement at state owned or operated facilities

With a federal decrease in enforcement has there been an increase at the state level?

As reported in the Washington Post, in 2018 U.S. EPA inspected around 10,600 industrial facilities.  This amounts to about half as many inspections as U.S. EPA performed in 2010.  U.S. EPA assessed approximately $69 million in civil penalties which is the lowest in almost twenty-five years.  These statistics are based on data released by U.S. EPA.  While there has been a steady decline in enforcement over the last decade, the drop is more significant since the Trump Administration announced its policy that states will take the lead on enforcement.

Has there been a corresponding increase in the number of inspections and enforcement in the states?  It is very difficult to tell.  There a lack of consistency among the states in reporting enforcement statistics. Therefore, it is very difficult to determine if there has been an increase in recent years to correspond with the increased reliance on state enforcement by U.S. EPA.

Ohio is a good example of the difficulty in tracking whether states have increased enforcement in the past two years.  Ohio EPA no longer maintains a comprehensive enforcement report which annually reports its enforcement statistics.  Instead, each division publishes, in different locations on their webpages, links to each enforcement action taken sorted by calendar year.  A review of the number of enforcement actions taken over the last five years shows the difficulty in making any conclusions regarding Ohio EPA’s overall enforcement record.

    Air     Surface Water Hazardous Waste Drinking Water  Solid Waste/C&DD
2018  Not reported            69            11  Not reported                17
2017 Not reported            31            13 Not reported                16
2016 Not reported            39            17 Not reported                22
2015 Not reported            31            15 Not reported                12
2014 Not reported            33            18 Not reported                16

With the exception of a significant increase in enforcement actions in 2018 for the Division of Surface Water, the other divisions at Ohio EPA have not seen a significant increase in enforcement.  Two of the divisions do not publish issued enforcement actions on their webpages.  The Division of Air Pollution Control stopped listing the enforcement actions taken by calendar year in 2012.  No listing of enforcement actions taken could be found on the Division of Drinking and Groundwater webpage.

Some debate whether states should be required to report enforcement statistics.  During a time when there is major shift toward prioritizing state enforcement by the Trump Administration transparency is even more critical.

The primary source of grant funding for brownfield redevelopment is the JobsOhio Revitalization Fund.  The program can provide up to $200,000 in grant money to fund Phase II environmental assessment work which is key to positioning brownfield properties for redevelopment.  Many times it is difficult to determine whether a project is viable on a brownfield property because the level of contamination is unknown.  Phase II assessment funds, whether under the old Clean Ohio Fund or the JobsOhio Revitalization Fund, have been absolutely essential to spurring brownfield redevelopment.

Once sampling has been completed, cleanup estimates can be made, which allows the developer or business to determine the capital stack necessary to complete the project.  The JobsOhio Revitalization Fund can provide up to $1 million in grant funding to help pay for cleanup.  This is less than the $3 million available under Clean Ohio, but still critically important to level the playing field between redeveloping an urban brownfield site and a greenfield site.

Under the Kasich Administration, JobsOhio placed tight restrictions on both Phase II assessment and cleanup funding.  First, there was the requirement to have a known end user for the project that fit within JobsOhio targeted industries.  Second, a requirement to create a certain amount of new jobs over a three year horizon.

These eligibility restrictions virtually eliminated speculative development projects on brownfield sites.  It also limited a developers ability to position a property to attract end user because, without assessment funding, it is impossible to determine how much will be needed for cleanup.

Furthermore, by limiting eligibility to targeted industries with a prescribed set of new jobs, only a narrow set of projects could compete for brownfield grant funding.  As such, positive attributes associated with brownfield redevelopment, such as elimination of urban blight, reducing sprawl, eliminating public health issues, attracting jobs to lower income neighborhoods were not considered when evaluating projects.

The Kasich Administration defended its brownfield redevelopment policy by stating the JobsOhio Revitalization Fund was focused on job creation, not necessarily brownfield redevelopment.  Such a focus fails to leverage the generational shift toward moving to urban centers and away from continued sprawl.

The DeWine Administration has already changed leadership at JobsOhio.  Governor DeWine has also made comments on a renewed focus on manufacturing areas, like Northeast Ohio, where the majority of brownfields exist.  The following is from a recent Crain’s Cleveland Article discussing these recent changes with JobsOhio:

According to a Crain’s analysis of JobsOhio data, Northeast Ohio won only 20.7% of the $149 million in financial incentives provided by JobsOhio in 2018 to drive business growth. It also attracted only 29.5% of the capital investment made by businesses coming into the state or expanding existing operations, according to JobsOhio’s annual report. These figures are quite low, considering the size of Northeast Ohio’s economy. As DeWine told those gathered at the May 2 annual meeting of Team NEO, JobsOhio’s partner in the 18-county region, “You know that 40% of the economy of the state comes from Northeast Ohio. So how Northeast Ohio goes, so goes Ohio.”

Discussions are ongoing in Columbus on changes to the programs administered by JobsOhio.  Those discussions include various options to loosen eligibility requirements to attract brownfield funding through the JobsOhio Revitalization Fund.

If the DeWine Administration is serious about putting more money to work in Northeast Ohio, an excellent way to start would be to modify the JobsOhio Revitalization Fund to open up grant funding to more brownfield projects.  Brownfield projects have the ability to transform entire neighborhoods by attracting additional economic investment.  Brownfield projects also have many other benefits to the urban core areas of the State that should not be ignored when evaluating projects.  Right now, the DeWine Administration has an excellent opportunity to transform brownfield redevelopment policy in the State.  The early signs this will occur appear positive.

Despite its limitations, most commercial and industrial property transactions rely on the Bona Fide Purchaser Defense (BFPD) to CERCLA as the principal means of protecting new owners from environmental liability.  While EPA has adopted the “All Appropriate Inquiry” (AAI Rule) to provide some clarity to the steps necessary to qualify for the defense, there is still aspects of the AAI Rule that are open to interpretation.  Therefore, court rulings on applicability of the BFPD can be very instructive to practitioners, developers and property owners.

There have been very few court rulings interpreting application of the BFPD to CERCLA liability. The most notable prior ruling, PCS Nitrogen Inc. v. Ashley II of Charleston, limited the BFPD based on the defendant’s failure to establish certain required elements of the defense.

In a decision issued last month, Von Duprin LLC v. Moran Elec. Serv., Inc., No. 116CV01942TWPDML, 2019 WL 535752 (S.D. Ind. Feb. 11, 2019), the Indiana Federal District Court granted the BFPD even though the party asserting the defense did not obtain a Phase I prior to purchasing the property.  The Court’s ruling is notable in that EPA’s AAI Rule is mostly focused on the required elements of a Phase I environmental assessment to qualify for the BFPD.  The AAI rule also discusses “reasonable steps” that are needed if the Phase I identifies the possibility of any contamination on the property, which include:

  1. Stop any continuing release;
  2. Prevent any threatened future release; and
  3. Prevent or limit any human, environmental, or natural resource exposure to any previously released hazardous substance

Plaintiff’s argued Defendants should not qualify for the BFPD because the Defendants failed to perform a Phase I in accordance with AAI prior to acquiring the property.  Plaintiff also contended that the Defendants failed to perform necessary “reasonable steps” post-acquisition to address the contamination and, therefore, should not qualify for the BFPD.  The Court rejected Plaintiff’s argument regarding the adequacy of Defendants “reasonable steps” stating that Plaintiff’s contention was not “well developed.”  The Court also held that the Defendants’ performance of a Phase II was sufficient to establish the defense even without a Phase I stating:

CERCLA makes it clear that performing a Phase I Environmental Site Assessment is sufficient to satisfy the all appropriate inquiries prong of the BFPP defense. 42 U.S.C. § 9601(35)(B)(iv)(II). But the law leaves open to interpretation whether a Phase I assessment is the only way to satisfy that prong, saying that a Phase I assessment “shall satisfy the requirements” of the all appropriate inquiries prong. At least one court has determined that a Phase I assessment is not the exclusive means by which a purchaser of land can make all appropriate inquiries. R.E. Goodson Const. Co., Inc. v. International Paper Co., No. 4:02-4184-RBH, 2006 WL 1677136, at *6 (D.S.C. June 14, 2006). The Goodson court determined that the Senate Report on the amendment adding the “shall satisfy” language to CERCLA read that a Phase I assessment “can satisfy” the “all appropriate inquiries” requirement. Id. That court also noted that “Congress could have provided that a Phase I site assessment was required or was the exclusive procedure to satisfy the ‘all appropriate inquiries’ standard; however, Congress made no such mandate…This Court is inclined to agree with Goodson that Congress did not intend to make a Phase I Environmental Site Assessment the exclusive means by which a purchaser could satisfy the BFPP defense’s all appropriate inquiries standard.

Defendants Phase II assessment included collection of seven soil samples and three groundwater samples.  The sampling showed some exceedances of cleanup standards.  The Phase II report recommended removal of an underground storage tank (UST) and the associated contaminated soil in accordance with Indiana Department of Environmental Management (IDEM) regulations.  Defendants did perform the removal and the UST and excavation of the contaminated soil as recommended in the Phase II report.  After excavation, the Defendants backfilled the excavation with clean soil.

What is interesting is that with no Phase I performed how could the Court determine that the Phase II scope was adequate?  What was the basis of the determination that the UST was the only potential source of contamination on site that warranted sampling?  It is possible there was testimony on this issue, but it was not discussed in the opinion.

The ruling is a hopeful sign for the thousands of transactions that rely on the BFPD to address potential liability that the BFPD will be recognized by Courts.  However, despite the ruling, it is still strongly recommended that parties wishing to establish the BFPD do not skip the Phase I assessment process as set forth in the EPA AAI Rule.  Doing so leaves a new owner open to many different avenues of challenging its assertion of the BFPD.  Furthermore, the cost of a Phase I is somewhere between $2,500 to $4,500- a relatively small price to pay for environmental liability protection.

In February 2019, U.S. EPA released its action plan to regulate Per- and Polyfluoroalkyl Substances (PFASs).  The two most well-known PFAS chemicals are perfluorooctane sulfonate (PFOS) and perfluorooctonoic acid (PFOA).

Consumer products have long used PFASs for things such as non-stick cookware, waterproof carpeting, clothing, and some firefighting foams.  While PFASs made great consumer products, it was later discovered that the chemicals don’t break down in the environment and they have been linked to possible health impacts.  Humans are exposed to PFASs in drinking water, fish consumption and inhalation of dust.

Back in 2016, EPA issued an advisory under the Safe Drinking Water Act (“SDWA”) that recommended levels of 70 parts per trillion in the bloodstream.   An “advisory” is non-regulatory and unenforceable. While EPA adopted this recommendation, some states did adopt drinking water standards.  In the last few years it appeared EPA would defer to the states in regards to establishing standards for PFASs.

On February 14, 2019, after mounting calls for regulatory action on PFAS, EPA releases its PFAS Management Plan.  The plan calls for a number of regulatory actions, but most notably:

  • EPA will adopt a national drinking water standards for PFOAs and PFOS under the Safe Drinking Water Act sometime in 2019.  EPA only regulates approximately 90 chemicals under the SDWA, therefore, this is the most significant aspect of EPA’s announced management plan.
  • EPA will being to take the steps necessary to list PFOA and PFOS as hazardous substances under CERCLA (also known as “Superfund”).  Listing PFOA and PFOS as hazardous substances will leverage CERCLA’s broad joint and several liability scheme for sites across the U.S. with significant groundwater contamination; and
  • EPA is considering including PFASs on the Toxic Release Inventory (TRI) and rules to prohibit the use of certain chemicals.

While adopting an MCL for PFOA and PFOS under the SWDA would be very significant, EPA must go through rulemaking, including a notice and comment period, to put a standard in place.  Any such standard will be controversial because EPA must consider the cost of treatment compared with public health benefits.  Also, any established standard will almost certainly be challenged in the courts.

While EPA is moving forward to adopt regulations pertaining to PFASs, lawsuits have already been filed across the United States against manufacturers of PFASs.  In Ohio, a large private party class action suit against DuPont, a PFAS manufacturer, was settled for $670 million resolving 3,550 personal injury lawsuits related to exposure to PFASs into the environment. In 2018, now Governor Mike DeWine, when he was Attorney General, filed a suit against DuPont for releases of PFASs into the Ohio River.

From the newly announced EPA Management Plan, state regulatory actions and litigation, PFAS issues will be unfolding over the next few decades.

On February 14, 2019, the IRS will hold a public hearing on its regulations governing Qualified Opportunity Zones.  The public comment period closed on December 28, 2018.  The IRS is expected to finalize regulations soon after the public hearing.

One of the most notable comments received during the public comment period on the IRS regulations for Opportunity Zones (QOZ) came from the Deputy Director of U.S. EPA’s Office of Brownfields and Land Revitalization (See, epa_comments_on_qoz_regs).   The comment letter did an excellent job of pointing out that the regulations could, in large part, freeze out brownfields from leveraging the significant advantages of the OZ classification.  This is best highlighted by the following comment in the letter:

EPA’s OBLR encourages the IRS to clarify in the final guidance that investments in the assessment, remediation, and redevelopment of brownfields properties located in Qualified Opportunity Zones (QOZs) are included within the scope of Qualified Opportunity Funds (QOFs).  This clarification will provide an incentive to invest funds in the assessment, remediation, and reuse of brownfield properties.

As discussed in EPA’s comment letter, without proper treatment of costs associated with investigating and cleanup of brownfields, developers will have very little incentive to tackle properties with any significant environmental contamination.  At issue are regulations regarding which properties or improvements allow a property to qualify for the tax incentives associated with QOZs.  Under the draft regulations, properties must meet certain requirements to qualify:

  1. Substantial Improvement Test- the investor must substantially improve the real estate by doubling the tax basis of any building on the property without regard to the value of the land itself.    Under current regulations, if the investor/developer spends funds to investigate or cleanup contamination on the property and, as a result, the land value increases, that increase cannot be counted toward the substantial improvement test;
  2. 30-Month Window for Improvements- the draft regulations establish a 30-month window to complete the investments (i.e. building improvements) used to qualify under the Substantial Improvement Test.  Since most brownfield cleanups will add substantial time to a redevelopment project, the 30-month window requirement would also act to exclude brownfield redevelopment projects; and
  3. Original Use- the original use must commence with the applicable QOZ investment. The draft regulations put the focus on the vertical structure on the property, not the land itself.  By focusing on buildings, the QOZ would provide little incentive to cleaning up contaminated land.

To allow flexibility for brownfield projects, EPA proposes the following changes to the IRS proposed regulations:

  • Brownfield = Original Use- Allow “brownfields” (as that term is defined under CERCLA) to qualify for the “original use” thereby putting the focus on the land when the land is contaminated.  EPA also states that allowing brownfields to qualify as the “original use” will address  30-month deadline for improvements which may be too restrictive if substantial cleanup is needed prior to development;
  • Vacant or Underutilized Properties = Original Use-  Allow properties that have been vacant or underutilized for a period of one year or more to meet the definition of “original use” under the regulations.  “Underutilized” would mean the entire property or a portion thereof which is only used at irregular periods or intermittently.  Expansion of the definition of “original use,” as suggested by EPA, would address concerns related to properties that add to blight even if they don’t meet the definition of a “brownfield;”
  • Foreclosed or Land Bank Property Should Qualify– if a property has gone through foreclosure or is being held by a land bank, EPA encourages the IRS to allow those properties to qualify for QOZ investment by treating them as “Underutilized or Abandoned Property” under the regulations;
  • Sampling and Cleanup Costs = Substantial Improvements- EPA requests that the IRS regulation treat assessment, cleanup and other site preparation costs as expenses that meet the “Substantial Improvement” Test under the QOZ regulations;
  • Allow Redevelopment Ready Brownfield Projects to Qualify-  EPA asks that the regulation allow a project to qualify that is solely assessment and cleanup of a brownfield property in preparation for future development.  Such a change could add a major incentive to spur cleanup of brownfields and positioning such property for future development;
  • Allow Gains from QOZ Investment Related to Brownfield Cleanup to Be Carried Over to Vertical Improvements on the Property-  EPA requests that the regulations allow the gains realized from the sale or exchange of QOZ Property to be deferred if they are reinvested in replacement QOZ Property within a 12-month period.  Without such clarification EPA is concerned that a Redevelopment Ready Brownfield Project may have to delay actual building construction for ten years after cleanup is complete to access the benefits of the Opportunity Zone incentive; and
  • Stack Window for Cleanup with Window for Redevelopment-  EPA requests that the IRS allow a 30-month window for brownfield cleanup to show substantial improvement to the land value and a separate 30-month window for building improvements for costs to count toward the Substantial Improvement Test.

If the IRS does not revise its regulations to address EPA regulations there is a strong possibility that brownfield projects will not be able to leverage the significant tax incentives provided by QOZs.