Transactions Involving Contaminated Property

Last week, the New Jersey Department of Environmental Protection (NJDEP) announced a new Response Action Outcome (RAO) Notice, which allows Licensed Site Remediation Professionals (LSRPs) to issue an RAO for a site with contaminated sediment that migrated from an off-site source.  The new notice, entitled “Sediment Contamination From an Off-Site Source Not Remediated – General,” is the most recent addition to the growing list of RAO notices.

The notice can be used after a Preliminary Assessment and Site Investigation (PA/SI) confirms that the source of the sediment contamination is off-site and not related to the site being evaluated.  The off-site source must be reported to NJDEP and the resultant new incident number included in the Notice.  Furthermore, the LSRP can identify an existing NJDEP case if it is known to be the off-site source and is currently undergoing investigation or remediation.

Given that it is well-established law that you are not responsible for contamination coming from offsite, the primary purpose of this action appears to be to streamline the RAO process.  So, this is another tool in the LSRP toolbox for the often complicated sediment cases, which continue to garner regulator’s attention here in New Jersey and nationwide.

Read more on sediment contamination in these discussions:

JOIN THE CLUB: EPA Sizing Up Hackensack River for Superfund Listing

WE ARE JUST GETTING STARTED: EPA Issues Much Anticipated Cleanup Plan for the Lower 8.3 Miles of the Lower Passaic River

 

The New Jersey Appellate Court recently upheld a spoliation claim against a plaintiff company that sued prior owners for violations of New Jersey’s Spill Compensation and Control Act and common law claims of nuisance and negligence.

In 18-01 Pollit Drive v. Engel, Docket No. A-4833-13T3, the new owner of a former printing facility site discovered contamination during redevelopment activities and filed a contribution suit against several former owners for investigation and remediation costs.  The owner’s expert concluded that contamination under the building came from an acid dilution sump pit and sewer piping under the concrete slab floor.  To demonstrate the timing and source of the discharges of contamination, the owner’s expert relied on photos of the pipe, the sump pit and concrete floor, samples of piping from another location on the site, and data derived from sludge in the sump pit and soil from under the sump, all of which had been excavated and discarded before defendants’ experts could examine them.  Defendants argued that their experts needed to examine the original pipe, sump pit and concrete floor and filed motions to dismiss the action on spoliation grounds.

A “spoliation claim arises when a party in a civil action has hidden, destroyed, or lost relevant evidence and thereby impaired another party’s ability to prosecute or defend the action.”  Plaintiff argued that it was not required to save the pipe because it did not intend to bring suit at the time it was discarded.  The Court disagreed, stating that “the obligation to preserve evidence is not triggered by the spoliator’s intent to bring suit but rather it arises when litigation is probable.”  Noting that plaintiff was a sophisticated investor that knew the site was contaminated, had access to remediation experts and knew about an ongoing cleanup at a nearby Superfund site, the Court held that plaintiff should have anticipated that it could become involved in litigation in some capacity regarding the contamination and therefore had a legal duty to preserve the original pipe.  The Court also affirmed that plaintiff had a duty to preserve the sump and concrete floor materials.

The Appellate Court reversed the trial court’s dismissal of plaintiff’s complaint and remanded the case for consideration of whether a lesser sanction could have cured the prejudice created by the spoliation.

As this decision illustrates, failing to preserve evidence in an environmental case can have serious consequences, including dismissal.

The New Jersey Tax Court recently ruled in Methode Electronics, Inc. v. Twp. Of Willingboro, Docket Nos. 019012-2010 and 014098-2011 (Tax January 22, 2015) that the assessment on contaminated property located in Willingboro, New Jersey must be reduced to a mere nominal amount due to its undevelopable condition.  In Methode, the property owner manufactured printed circuit boards on a 3-acre parcel.  As a result of the owner’s manufacturing activities, the property became contaminated with volatile organic compounds and metals.  Methode ceased operations in 1999 and no other businesses operated at the property since that time.  Except for the floor slab, all improvements were demolished.  As part of its environmental cleanup obligations Methode installed a groundwater treatment system consisting of a number of wells.  These monitoring wells were required to remain in place indefinitely.  In addition, pursuant to a deed notice, the floor slab was also to permanently remain in place as a cap to prevent off-gassing of toxic vapors from soil and groundwater.  The remaining portion of the property was paved and previously served as a parking lot and loading area for the facility.

In 2010, the Township of Willingboro (the “Township”) assessed the property at $404,600.  That assessment was appealed by the owner and the Burlington County Board of Taxation reduced the assessment to $244,600.  Methode thereafter further appealed its case to the Tax Court.  Subsequently, in 2011, while the case relating to the 2010 taxes was still pending, the Township again assessed Methode’s property at $404,600.  The 2011 tax assessment was then also appealed to the Tax Court and consolidated for trial with the 2010 matter.

In considering this consolidated matter, the Tax Court found that Methode’s proofs provided sufficient evidence to call into doubt the Township’s assessment and thereby overcame the presumption of correctness attaching to all municipal tax assessments.  The Court was then required by law to determine the appropriate value of the property.  In evaluating the property, the Tax Court concluded that the subject property did not have any utility due to the extensive costs associated with a cleanup of an indeterminate duration; the limited amount of land that remains free from encumbrance due to the required presence of remediation equipment and the maintenance of the 6,800 square foot concrete cap in order to prevent vapors from migrating into the atmosphere, and due to the continuing prospect that any owner or future owner would be exposed to continuing liabilities associated with the contamination.

Consequently, the Tax Court concluded that the property was indeed overassessed and reduced its assessment to the nominal sum of $2,000.  In so holding, the Tax Court determined that prior precedence relating to contaminated properties was of little value because here a convincing showing was made that the property lacked utility in its current state and also lacked the prospect for utility into the immediately foreseeable future.

The impact on property value resulting from contamination therefore continues to be a critical component that must be addressed whenever evaluating the merits of a property tax appeal.

In a much anticipated decision, the New Jersey Supreme Court ruled today in Morristown Associates v. Grant Oil Co. that the general six-year statute of limitations for injury to real property is not applicable to claims made pursuant to the New Jersey Spill Compensation and Control Act (“Spill Act”). In reaching this decision, the Court noted that the Spill Act sets forth the only defenses available to contribution defendants and a statute of limitations defense is not included. Further, the Court explained that the New Jersey Legislature could not have intended for an unreferenced statute of limitations to impede the Spill Act’s imposition of contribution liability on responsible parties.

This case has significant implications. Parties performing remedial activities can proceed with the understanding that there is no time limit to file a contribution action.  In doing so, plaintiffs will encounter less difficulty when attempting to recoup some, or all, of the costs associated with a New Jersey Department of Environmental Protection approved cleanup. A more in-depth analysis will follow.

Please feel free to contact Richard Ericsson, the Chair of the Environmental Department, with any questions.

In the recent Orient Way Corp. v. Tp. of Lyndhurst (35-2-4760) decision, the Appellate Division upheld the Tax Court’s determination that an arms’ length sale of the subject contaminated property provided credible evidence of true market value. The import of this decision is that where an arms’ length transaction exists, the reliance on the highly subjective process of determining the appropriate deduction to be applied to the value of the property as if “clean” (free from contamination) can now be avoided. As confirmed by a long line of cases, discussed in a previous piece I authored on our Real Estate and Construction Blog, the valuation methodology in this area requires satisfaction of three critical components:

  • First, the taxpayer needs to establish the appropriate amount of the cleanup costs required to return the property to a “clean” state
  • Second, the taxpayer must establish the reasonable period required to complete the cleanup
  • Third proof must be offered establishing that there has been a cessation of the cause of the property contamination

Once these three elements are satisfied, the cleanup costs can then be capitalized over the expected cleanup period to determine the amount of the appropriate deduction to apply when fixing a final true value for the property in its current contaminated state. While these proofs will undoubtedly continue to be required, the holding in Orient Way makes plain that our courts will now have the ability to afford great weight to an arms’ length sale of the property where the parties were acting with full knowledge of the existing contamination. As the Tax Court recognized in the case below, the impact of the cleanup obligations will have been appropriately built into the sales price and therefore this price will represent the best indicator of the value of the property in its contaminated state.