Managing Environmental Risk in Transactions

New Jersey’s new governor signed an executive order yesterday directing his acting Department of Environmental Protection commissioner, Catherine McCabe, and Board of Public Utilities President Joseph Fiordaliso to begin negotiations with current state members of the Regional Greenhouse Gas Initiative (RGGI) to re-enter the program.  This order reverses former Governor Chris Christie’s 2011 action to withdraw New Jersey from the program.

RGGI, established almost 10 years ago in 2009, is the first mandatory market-based program in the United States to reduce greenhouse gas emissions.  At Governor Murphy’s direction, New Jersey will rejoin the cooperative effort among fellow northeastern states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce carbon dioxide (CO2) emissions from the power sector.

What does that mean?  From the 30,000 foot view, it means fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater would be required to hold allowances equal to their CO2 emissions over a three-year control period.  The power plants can use allowances issued by any of the participating states, and can buy them at regional auctions or in secondary markets.  The regional cap on total CO2 emissions ratchets down 2.5% each year until 2020, theoretically relying on the regional market to drive prices and efficiencies.  Proceeds from the auctions are used to fund renewable energy and energy efficiency projects.

In the weeds, it means the Department of Environmental Protection drafting new regulations (presumably using RGGI’s Model Rules), participation in a complex and well-developed compliance and tracking system as well as the auctions and secondary markets, passing along costs and savings to consumers, periodic reviews and adjustments, entering cooperative memorandums, and more.  It may also mean more opportunities to promote solar, wind, and other renewable projects.

Overall, RGGI has been seen as a success, reportedly reducing power sector carbon emissions as much as 40% since 2005, while member state economies continued to grow.  There are, however, many ways to interpret the different data and forecast future impacts.  Nonetheless, New Jersey is on the path back to RGGI and we will be on the lookout for the implications, costs, and opportunities.  We are also keeping an eye on state legislation directing New Jersey to join the U.S. Climate Alliance, which Governor Murphy is expected to approve if it hits his desk.  The governor may also bypass the legislature and use the executive order route.  The U.S. Climate Alliance doesn’t come along with the same compliance commitments as RGGI, but it is another example of ramped up state- and regional-level actions to address climate change in reaction to the reduction in federal action.  The U.S. Climate Alliance was formed in direct response to President Trump’s withdrawal of the United States from the Paris Climate Accord.

 

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

 

After the NJ Supreme Court Finally Closed the Door on The Statute of Limitations Defense To NJ Spill Act Contribution Claims, Laches Emerges as a Possible Backdoor Defense. 

The Bergen County Superior Court issued a surprise decision this month in 22 Temple Avenue v. Audino, Inc., et al., Docket No. BER-L-9337-14, ruling that NJ’s Spill Compensation and Control Act permits the defense of laches as an affirmative defense to contribution liability.  The decision is inconsistent with the NJ Supreme Court’s 2015 Morristown Associates v. Grant Oil Co., 220 N.J. 360 (2015) ruling, which not only confirmed that there is no statute of limitations time bar to contribution claims, but also confirmed that the universe of defenses available to contribution defendants is limited to only those specifically identified in the Spill Act or permitted by court rule.  The Spill Act does not identify laches – or any equitable defenses – to contribution claims.

Unlike a statute of limitations, which bars claims brought after the expiration of a time period specified by statute, the defense of laches relied upon by the 22 Temple Avenue court is an equitable defense that bars claims when the passage of time renders it unfair to a defendant for the claim to move forward.  This unpublished decision is not only inconsistent with the Morristown Associates decision, but it is also inconsistent with another unpublished decision, Ann Bradley v. Joseph Kovelesky, Docket No. A-0423-14T4, in which the Appellate Division refused to apply the defense of laches to a Spill Act contribution claim.

The Morristown Associates decision had been viewed as bringing finality to the longstanding question of whether a Spill Act contribution claim can be affirmatively time barred.  Yet, the 22 Temple Avenue decision raises the question of whether a backdoor time bar exists to Spill Act contribution claims.

22 Temple Avenue

22 Temple Avenue asserted Spill Act contribution claims against Peter Audino, the former operator of a dry cleaner, for contamination related to those operations.  The court rejected 22 Temple Avenue’s claim for cleanup costs for discharges that occurred from 1989 to 1992 against the then 89-year old Audino, individually, based on the defense of laches.  Notwithstanding the Morristown Associates ruling against a time bar for Spill Act private party contribution actions, the court sought to apply “basic principles of fairness and substantial justice” in the context of 22 Temple Avenue’s claims.

The court’s reliance on Morristown Associates and the 2012 Supreme Court decision in N.J. Dept. Env. Protection v. Dimant, 212 N.J. 153 (2012) in applying the defense of laches to 22 Temple Avenue’s claim is surprising.  The Morristown Associates Court made no mention of the defense of laches or other equitable defenses as an exception to its very clear ruling that the language of the Spill Act contribution provision provides that there are no defenses to a Spill Act private party contribution claim except those that the New Jersey Legislature wrote into the Spill Act or those that are established by court rules under the jurisdiction of the Supreme Court.  The defense of laches is neither written into the Spill Act nor established under the New Jersey court rules.  Indeed, some federal district courts, including NJ, have applied similar reasoning in holding that there are no equitable defenses to a Superfund §107(a) cost recovery claim.

Likewise, the Supreme Court made no mention of the defense of laches in Dimant.  In that matter, the Court refused to find a dry cleaner liable for a discharge because NJDEP could not prove any nexus between drips of PERC to pavement and contamination found in groundwater.  However, the Court projected that where there is liability, equitable factors such as the passage of time disabling the dry cleaner’s ability to defend itself can be considered in allocating damages.  A similar use of equitable considerations has been used by courts in the context of apportionment of Superfund liability.

The 22 Temple Avenue decision does not undo the Morristown Associates holding that there is no statute of limitations time bar to private party Spill Act contribution claims.  This decision does however raise the question as to whether lower courts are looking to create an equitable backdoor of laches to bar such claims.

The New Jersey Department of Environmental Protection (NJDEP) recently renamed and revised its clean fill guidance, which now makes it clear that fill material obtained from a licensed quarry or mine may be used for site remediation without any sampling requirement.

NJDEP’s Technical Requirements for Site Remediation define “clean fill” as material—soil or non-soil—to be used in a remedial action that meets all soil remediation standards and has no debris, solid waste, or free liquids.  Under NJDEP’s December 2011 Alternative and Clean Fill Guidance, offsite material that was proposed for use as clean fill at a Site Remediation Program (SRP) site was required to undergo an evaluation of the historical and current uses of the material, a review of the conditions at the site from which it originated, and sampling to certify that the fill was clean.  While the 2011 guidance made certain exceptions for fill material obtained from a quarry or mine, a minimum of at least one sample was required to be analyzed.

The new “Fill Material Guidance for SRP Sites” addresses concerns raised by redevelopers and LSRPs regarding the burdensome sampling requirements and unnecessary paperwork associated with the use of fill material on SRP sites from a licensed quarry or mine.  Under the new guidance, fill material obtained from a licensed quarry or mine (defined as a facility permitted or authorized to operate under the New Jersey Mine Safety Act or other similar state statutes) may be used at a SRP site without any sampling as long as the quarry or mine operator certifies that the material is from a licensed quarry or mine facility and that the material has not been subject to a discharged hazardous substance at any time.  In the absence of such certification, proposed fill would need to meet the sampling and analysis requirements for clean fill.  This change is significant as it relieves suppliers and users of quarry or mine material of burdensome sampling and certification requirements and eases the process of closing out cleanups and site redevelopment.

On February 26, 2015, in Coty US LLC v. 680 S. 17th Street LLC, the Superior Court of New Jersey, Chancery Division, pierced the veil of a New Jersey limited liability company and held its sole member liable for environmental cleanup costs it agreed to undertake in the purchase of real estate in Newark, New Jersey.

Del Laboratories, Inc. previously owned the property in question, which was subject to New Jersey’s Industrial Site Recovery Act (ISRA). As a result of former industrial operations, soil and groundwater contamination existed at the site. Airaj Hasan formed 680 S. 17th Street, LLC for the purpose of acquiring the property and engaged in a sale transaction with Del in 2007. Under the purchase agreement, 680 LLC agreed to assume all environmental liabilities, including, but not limited to, its obligations under ISRA. 680 LLC also agreed to indemnify Del for its liabilities respecting the property under all environmental laws. About a year after selling the property to 680 LLC, Del merged with Plaintiff Coty US LLC.

In April 2010, the New Jersey Department of Environmental Protection (NJDEP) sent a directive to 680 LLC and Del (presently Coty) stating that 680 LLC failed to perform required vapor intrusion sampling and to submit required reports to the NJDEP. As a result of 680 LLC failing to respond, Coty contacted the NJDEP and retained a LSRP itself to conduct required remediation at the property and to also avoid civil penalties. Subsequently, Coty sought to hold 680 LLC and Mr. Hasan liable for the costs it incurred in responding to the NJDEP directive.

Coty contended that Mr. Hasan should be held personally liable for Coty’s environmental costs in connection with the property. Coty argued that 680 LLC continuously represented that it had sufficient resources to conduct remediation at the site and to perform all its obligations under ISRA. The Court agreed with Coty and found that 680 LLC was merely a “shell company” established for the purpose of acquiring the property and had no cash flow or assets other than the parcel of real estate. Consequently, the Court found it proper to pierce the LLC veil of the single purpose real estate entity. The Court emphasized that Mr. Hasan represented numerous times that 680 LLC had enough financial resources to complete the necessary environmental work, despite its known inability to do so.

The Court’s decision in Coty is significant, as it may serve to increase the susceptibility of sole members of LLCs to environmental liabilities in the purchase of real property. It further demonstrates that environmental liabilities can reach far beyond the protection of the corporate or LLC forms and reach members, officers, directors, and shareholders.