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.

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.

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.

 

In the recent case of Northern International Remail and Express Co. v. Lester Robbins, et al., the Appellate Division held that a plaintiff’s claim against a former owner of property cannot survive without evidence that the former owner’s tenants did more than just generate hazardous waste. In Northern International, Northern International Remail and Express Co. (“Northern”) purchased a site in Union, New Jersey from defendant, Lester Robbins (“Robbins”) in 1991. The site was purchased by Robbins in 1976, and at the time was being leased by Baron Blakeslee, Inc. (“Baron”). Baron was engaged in the storage and distribution of chlorinated solvents, and used “a minimum of two 1,000 gallon outdoor tanks” for storage of such solvents. Although Baron continued to be a tenant at the Union site after it was purchased by Robbins, Baron, however, moved the work it performed at the Union site to another location in 1970.

After moving its operations in 1970, Baron subleased the Union property to J&J Construction Co. (“J&J”), a corporation engaged in the installation of car radios. Another entity known as T&T Corporation (“T&T”) may also have operated at the property. The evidence indicates that both J&J and T&T generated hazardous waste. However, there was no evidence of the type of hazardous waste generated or if any governmental actions were taken against any of these entities for the storage of hazardous waste at the Union site.

In 1998, Northern sought to refinance the Union property. In connection with the refinancing, contamination was uncovered at the Union property, which was attributed to past operations by Baron. Northern’s counsel in 1998 asked Robbins to contribute to the cost of the clean up at the Union property.

Northern eventually sued Robbins in 2008 based on New Jersey’s Spill Compensation and Control Act (the “Spill Act”) and common law claims of strict liability, nuisance, negligence, indemnification and restitution. On motion for summary judgment, the lower court dismissed Northern’s common law claims on the basis that the six year statute of limitations expired. The lower court also entered a judgment in favor of Robbins under the Spill Act on the basis that the evidence produced did not show that there had been a discharge of hazardous substances during the period of Robbins’ ownership of the Union property. Northern appealed the lower court’s ruling.

In order for Robbins to be held liable under Spill Act, Northern had to prove that hazardous substances were discharged at the Union site while Robbins was the owner of the property. Because Baron transferred its operations from the Union site prior to Robbins taking title to the Union property, Northern did not allege that Baron discharged any contamination at the Union property after Robbins took title to the property. Rather, Northern argued on appeal that Robbins was not entitled to summary judgment under the Spill Act because J&J and T&T were “registered generators of hazardous waste at the Union property during the period that Robbins was owner” asserting that this fact was sufficient to establish that there was a discharge at the Union property during Robbins’ ownership.

The Appellate Division rejected Northern’s contention noting that there was no evidence that the hazardous waste generated by J&J and T&T included the contaminants that were being detected at the Union property. The Court reasoned that given the absence of such evidence, it could not find that J&J or T&T discharged hazardous substances at the property. Therefore, the Court concluded that the “generation of hazardous waste, without more, does not give rise to [Spill Act] liability.”

The Court also dismissed Northern’s argument that Robbins was responsible for the continuing discharge of hazardous waste from Baron’s operation even though Baron’s activity at the property ended prior to Robbins’ ownership of the property. The Court held that liability under the Spill Act cannot be imposed “if a party’s only link to the discharge is through the passive migration of pre-existing contamination.” Thus, continuing contamination from a pre-existing contamination is insufficient to impose liability under the Spill Act.

The Appellate Division also upheld the lower court’s determination that Northern’s common law claims should be dismissed on the basis of the statute of limitations. The Court noted that the information obtained by Northern in 1998 at the time it was refinancing its property “was more than sufficient” for Northern to realize that it should have pursued its claim against Robbins. Thus, Northern’s cause of action accrued in 1998 and clearly by statute would have had to bring suit within six years of 1998.

This case is instructive for several reasons. In order to establish liability of a prior owner or operator for contamination at a site, there must be evidence connecting the prior owner’s or operator’s operations at the site to the contamination being detected at the property. The mere fact that a former owner or operator handled hazardous substances is insufficient. Typically, such a connection is established through direct evidence such as former employee testimony or expert testimony based on the expert’s review of records linking the former owner’s or operator’s operations to the contamination at the site. Thus, it is essential when contemplating an environmental cost recovery action to put in place a team of experts and attorneys that will be able to gather the necessary evidence to maintain a case against former owners or operators that were responsible for the contamination.

One of the most common mistakes by a property owner is delaying to act upon information suggesting that a prior owner or tenant may have contaminated the property. Therefore, it is imperative to bring a cost recovery action immediately when you know or suspect your property was contaminated by a prior owner or current or former tenant at the property. This information can be based on, as in Northern International, recent soil or groundwater sample results indicating that the property is contaminated. Generally, once such information is available, the “clock” starts running for filing a cost recovery action. For common law claims such as strict liability, nuisance, and negligence the statute of limitations is six years. Thus, to avoid running afoul of the statute of limitations for these types of claims, an action must be brought within six years of when you knew or should have known that the that the property was contaminated.

Often the hardest issue to negotiate in a real estate transaction involving a contaminated property is which of the parties has to pay if the actual environmental cleanup costs are much higher than the estimate used by the parties when they negotiated the deal terms. Many deals used to die over this issue either because neither of the parties to the transaction were comfortable accepting the risk or because the purchaser’s lender was the uncomfortable one. Now Guaranteed Cleanup Cost Contracts – in which the environmental consultant agrees to complete the cleanup for no more than an agreed upon guaranteed cleanup cost – are used to close many of these deals. If the guaranteed cleanup cost is exceeded, the environmental consultant pays the cost overruns to the extent provided by the Guaranteed Cleanup Cost Contract (“GCCC”). Where cost cap environmental insurance is purchased, an environmental insurance company pays the cost overruns to the extent provided in the policy. By laying this risk off on someone who is otherwise not a party to the real estate transaction, it often becomes much easier to get the parties to close. These deals are not easy to close, but much easier than they were before GCCCs.

GCCCs Without Environmental Insurance: GCCCs can be used to help close contaminated property deals regardless of the purchase price or the amount of the guaranteed cleanup cost. For transactions with a lower purchase price or guaranteed cleanup cost, the GCCC may be the only practical way to address the issue so that closing can occur immediately. This is because the parties may be unwilling to pay the cost of environmental insurance or environmental insurance may be unavailable and therefore the only practical way to secure the payment of costs in excess of the guaranteed cleanup cost is to get the consultant to accept the risk. 

All of the environmental documents the seller has concerning the contamination on the property are provided to one or more consultants; who review the documents and provide a proposed guaranteed cleanup cost to obtain a regulatory sign-off from the appropriate governmental agency with jurisdiction over the cleanup (e.g. – the New Jersey Department of Environmental Protection). If the amount of information concerning the contamination on the property is not sufficient for the consultant to provide a guaranteed cleanup cost, they are asked to provide a proposal for whatever additional work they would need to do in order to provide a proposed guaranteed cleanup cost – different consultants require different amounts of information depending upon how risk adverse they are. Some consultants require a governmentally approved cleanup plan in place before they will agree to enter a GCCC, while others simply want enough sampling data so that they can somewhat confidently predict what the governmental agency that will one day oversee the cleanup will require.

A consultant is then selected to do the cleanup, usually on some combination of their skill and experience and having a relatively low guaranteed cleanup cost. A GCCC is then negotiated with the consultant selected whereby the consultant agrees to perform the cleanup of the known contamination for no more than the guaranteed cleanup cost. Typically, the consultant entering the GCCC agrees to cleanup only the known contamination, which is broadly defined to include the entire discharge of contamination of which there is any evidence in the existing sampling data, both its source and the full extent of its migration. Newly discovered discharges of contamination not seen by the consultant in the sampling data before the GCCC was entered are not part of the consultant’s remedial obligation, although environmental insurance can be obtained to cover this risk as discussed below.

Some consultants want the guaranteed cleanup cost to be paid in full no matter what the cleanup actually costs them to perform, while others are willing to be paid on a time and materials basis with the understanding that upon completion of the cleanup the consultant will receive some percentage (e.g. – 50 percent) of the unspent portion of the guaranteed cleanup cost as a bonus. These GCCCs cover a wide range of issues, but most importantly they make it clear that the environmental consultant is liable for all costs to clean up the known contamination in excess of the guaranteed cleanup cost. Of course, often the only security for the environmental consultant’s obligations, which may take many years for the consultant to fully perform (e.g. – where there is groundwater contamination), is the financial strength of the environmental consultant. Clearly, that financial strength may change over time and could reduce the security of the property owner for the consultant’s performance, so that it needs to be scrutinized at least before entering a GCCC.

GCCC With Environmental Insurance: Environmental insurance is often used either to provide coverage for the discovery of new discharges of contamination (which are excluded from the consultant’s remedial obligation under the GCCC) or as a better form of security for the consultant’s performance than is provided by the consultant’s assets. Typically, the environmental insurance policy can provide two kinds of coverage: Pollution Legal Liability Coverage and Cost Cap Coverage (the names of coverages vary from insurance company to insurance company).

Pollution Legal Liability Coverage: Pollution Legal Liability Coverage ordinarily covers new discoveries of pre-existing contamination during the policy term. This covers what is ordinarily excluded from the consultant’s remedial obligation under the GCCC. Since the time when pre-existing contamination is most likely to be discovered is in the course of cleaning up the known contamination, we strongly recommend purchasing this coverage as it is usually quite affordable.

Pollution Legal Liability Coverage also covers third party lawsuits (i.e. – lawsuits by anyone other than the seller and purchaser of the property) for property damage or bodily injury arising from any pre-existing contamination, whether known or not when the policy was purchased. So if groundwater contamination on the property migrates off-site and impacts a neighbor’s property, the Pollution Legal Liability Coverage would protect against a lawsuit by the neighbor for property damage or bodily injury. Coverage can be purchased for claims for either new discharges of pollution occurring after the policy is purchased or for business interruption caused by the contamination or its remediation. This coverage is often the key to getting the parties to close, as it covers virtually all of the risks about which a purchaser of contaminated property and its lender are concerned.

Cost Cap Coverage: Cost Cap Coverage generally provides insurance coverage if the cost to cleanup the known contamination exceeds the guaranteed cleanup cost. For as long as the Cost Cap Coverage remains in place, the environmental insurance company is primarily liable for cleanup costs in excess of the guaranteed cleanup cost that must be incurred to obtain the regulatory sign-off from the governmental agency with jurisdiction over the cleanup. There are only a few insurance companies interested in issuing cost cap coverage, as its claims history has often resulted in it being unprofitable.

The guaranteed cleanup cost serves as the deductible that must be exceeded before the insurance company is obligated to provide the Cost Cap Coverage. While this would seem to take the environmental consultant off the risk of such cost overruns, ordinarily the environmental consultant assumes the risk of such overruns once the term of the Cost Cap Coverage has expired and also if the cost of the cleanup exceeds the amount of the Cost Cap Coverage. Since the insurance companies are only willing to provide Cost Cap Coverage for a fairly tight timeframe (e.g.- usually only one year longer than the consultant’s estimated time to conduct the cleanup), this motivates the environmental consultant to finish the cleanup before it assumes the risk of all cost overruns in excess of the guaranteed cleanup cost.

In our experience, using the environmental consultants that we recommend, the insurance companies are willing to provide Cost Cap Coverage even where there is no cleanup plan approved by the governmental agency with jurisdiction over the cleanup. There just needs to be enough investigation done for the consultant to have a good handle on the nature and extent of the contamination. It is the consultant’s job to convince the insurance company that there is a sound basis for its guaranteed cleanup cost to serve as the deductible for the Cost Cap Coverage.

Using one of the options above can make it much easier to close a transaction involving a contaminated property. In fact, by using a GCCC with both Pollution Legal Liability Coverage and Cost Cap Coverage, and adding the lender to the policy as an insured, we have been able to get many of the large institutional lenders to accept the contaminated property as the sole collateral for a purchase money mortgage. Otherwise, they would never accept the contaminated property as the sole collateral for the loan. And when the GCCC and environmental insurance make both the parties and the lender comfortable with the risk, the transaction can close immediately. Only time will tell if, and the extent to which, the recent global economic difficulties for insurance companies and banks will change how GCCCs and related environmental insurance will be used to close transactions involving contaminated property.

 

This article originally ran in the February 23, 2009 issue of New Jersey Law Journal.