On August 27, 2014, the Superior Court of New Jersey ruled in favor of Puritan Oil against a New Jersey property owner, finding that where the oil company had already taken steps to remedy contamination it caused on Plaintiff’s property, no further measure of damages was appropriate.  Favorito v. Puritan Oil Company, Superior Court of New Jersey, Appellate Division, Docket No. A-3426-12T1.

In 2005, Plaintiff Anthony Favorito purchased real estate as an investment from Defendant Jennifer Schwartz for $224,900.  Favorito was able to rent out the property for its fair market value.  Favorito later discovered that in 1988, underground gasoline storage tanks on a neighboring property had leaked causing hazardous substances to migrate into groundwater beneath Plaintiff’s property.  The neighboring tanks had been owned by Defendant Puritan Oil Company, Inc.  Plaintiff learned of the contamination in 2009 when he was contacted by Puritan’s agents, who advised him that wells needed to be installed on his property to periodically sample the ground water.

For its part, Puritan discovered the contamination in 1988 and began remedying its property.  It removed six underground storage tanks and all of the contaminated soil from its property and shut down the gas station.  Monitoring wells revealed that groundwater below Plaintiff’s property had been contaminated by petroleum and in 1996, two underground wells were installed on Plaintiff’s property which were removed in 1999.  The New Jersey Department of Environmental Protection also placed a portion of Plaintiff’s property within a Classification Exception Area (CEA) suspending the groundwater’s classified use while the area is remediated.

Municipal water is supplied to Favorito’s property and thus, groundwater contamination impacting onsite wells was not at issue.  Plaintiff sued Puritan Oil, Schwartz and the real estate agent and agency involved in the sale.  Plaintiff settled with all of the Defendants except Puritan Oil.  In his complaint, Plaintiff alleged that Puritan Oil violated the New Jersey Spill Compensation Control Act as well as committed a nuisance and trespass.  Plaintiff argued that he was entitled to the difference between what he paid for the property in 2005, and what the property was in fact worth at that time, given its contaminated condition, which an appraiser estimated to be $98,000.  Plaintiff did not state that he was seeking damages for the stigma that may be associated with the property after it is remedied or any other measure of damages.

The trial court granted Puritan Oil’s motion for summary judgment and found that Plaintiff’s damages were limited to either the cost of cleaning up the property or the difference between the fair market value of the property in its contaminated state, and in an uncontaminated one.  As Puritan was cleaning up the Property, Plaintiff was not entitled to the difference in value.

On appeal, Plaintiff reasserted his claims for nuisance and trespass and requested that the court award $126,900 in damages – the difference between what he paid for the property and what it was worth, as damages for having monitoring wells on his property and having a portion of the property in a CEA, which limits the use of groundwater and will require him to disclose this classification to potential buyers.  The appellate court refused to consider the claim for additional damages for the monitoring wells and CEA since they had not been raised at the lower court level, and affirmed the trial court’s finding that a party may receive the difference between the value of the land before and after the harm or at the party’s election, the cost of restoration, not both.  Since Plaintiff chose to have his property restored, he could not also seek another measure of damages.

Furthermore, the Appellate Court stressed that Favorito had never claimed that he had been deprived of any use of his property.  He had been able to rent out the premises for fair market value, was supplied with municipal water, and had not contended that he, or his tenants,  experienced any discomfort or annoyance as a result of the contamination.  Based on these findings, the Court granted Puritan Oil’s motion for summary judgment.

The Appellate Division’s decision in Favorito underscores the need for proper due diligence prior to purchase, as well as for litigants to carefully consider their options early in order to avoid unknowingly waiving potential claims.  In the present case, Favorito failed to engage in a thorough inquiry of the property’s use prior to purchase.  Once Favorito had taken title, in accepting Puritan’s offer to enter onto the property to install groundwater wells, Favorito was deemed by the court to have “elected” to have the property remediated and to have effectively waived his potential claim for damages based on diminution in value.

As indicated in our latest blog post, here, on US EPA’s adoption of the new ASTM E1527-13 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, US EPA has taken the step necessary to make it clear that the  2013 Phase I standard should dictate future landowner efforts to meet the all appropriate inquiry (“AAI”) requirements to achieve liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

In December 2013, US EPA issued a final rule solidifying the agency’s adoption of the 2013 standard by inserting a reference to ASTM E1527-13 into the AAI Rule (40 CFR part 312) to accompany the 2005 standard, effectively permitting the use of either standard for AAI compliance.  On Monday, US EPA proposed to clean up the AAI Rule to remove the reference to the old ASTM E1527-05 standard in order to alleviate any confusion as to which standard governs Phase I Environmental Site Assessments going forward.

Importantly, ASTM E1527-05 is still AAI-compliant for properties acquired between November 1, 2005 and the effective date of the proposed rule.  To smooth the transition to the new standard and give parties time to complete investigations under the old standard, US EPA expects to delay the effective date of the rule until one year from when the final rule is published.

As we wrote here, a key change to Phase I investigations under ASTM E1527-13 includes an assessment of the potential for vapor encroachment into buildings at the subject property, and the inclusion of a new definition to characterize contamination where a chemical has been released and the cleanup allows some residual contamination to remain in-place at the property – this is now a “Controlled Recognized Environmental Condition.”

US EPA proposes no other changes to the AAI Rule and the proposed rule is currently undergoing the 30-day comment period.

When a party buys or leases real estate, they may become liable for the cleanup of pre-existing environmental contamination, even if the new property owner/tenant did not release the contaminants.  That liability exists under the Federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law.  Most states also have similar laws which make the current property owner/operator a responsible party for site contamination.  Likewise, lenders are also keenly concerned with the environmental quality of real property used as collateral for their loan transactions.

To provide some protection for new property owners, the Federal Superfund law contains an Innocent Purchaser Defense to property owner liability.  If the purchaser conducted “all appropriate inquiry” (“AAI”)  into the environmental conditions of the property, that property owner will have a defense to liability if it is later discovered that the property is in fact contaminated. 

The AAI requirements are generally met where a buyer has undertaken a “Phase I Environmental Site Assessment.”  That term generally refers to an environmental site assessment prepared in accordance with the American Society for Testing and Materials (“ASTM”) Standard E1527-05 – “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.”   The US EPA’s regulations explicitly approve of the use of ASTM E1527-05 as an allowable method for performing AAI. 

The ASTM E1527-05 standard became effective in 2005.  ASTM is in the process of finalizing its revised Phase I Standard, E1527-13.  The new Standard is expected to be released shortly.  As part of the revision process, ASTM submitted the new Phase I standard to US EPA for confirmation/approval that the new E1527-13 standard continues to satisfy the requirements for AAI.  On August 15, 2013, the US EPA did just that when it approved the current use of E1527-13 as an additional option for meeting the AAI requirements.  US EPA is amending its regulations accordingly, but expects no adverse public comments to its approval of the new ASTM standard.

It is worth noting that the US EPA did not replace the older standard with the new standard.  Instead, US EPA indicated that either the 2005 or 2013 ASTM Phase I standard will satisfy the AAI requirements. 

The three key changes to the new standard relate to: (a) the identification and analysis of the potential pathways for contamination in soil and groundwater to give off vapors which can migrate into buildings and impact indoor air quality; (b) refined definitions of Recognized Environmental Conditions (“REC”), including the addition of a new term, the “controlled REC” or “CREC”, which is a REC that has been investigated and is already subject to controls and restrictions; and (c) clarification of when an environmental consultant is required to conduct a review of a governmental agency’s files.

Since both the old standard and the new standard will satisfy AAI, which standard should a prospective purchaser or lender require?  At this point, since US EPA has approved both standards, there is no simple answer to this question.  While it is still too early to tell, we can assume that there may be a slight increased cost for a Phase I under the new ASTM standard.  However, the new standard is presumed to have been drafted to correct perceived limitations and issues identified through eight years of experience with Phase I assessments under the old standard.  As such, we would expect a more comprehensive analysis of potential issues under the new ASTM standard.  At this time, the choice of which standard to apply will need to be determined on case-by-case basis depending upon the needs of the parties in that transaction.

Liability based on property ownership under New Jersey’s Spill Compensation and Control Act (“Spill Act”) and its impact on condemnation cost recovery suits were the subject of an interesting decision last  month in New Jersey Schools Development Authority vs. Marcantuone (October 29, 2012 ). The New Jersey Appellate Division made two rulings in this eminent domain cost recovery case against a property owner who did not cause contamination identified at the site. The court ruled that:

  1. The existence of the Spill Act affirmative defense for pre-1993 acquisitions set forth in the law allows liability   to be inferred for current owners of contaminated property, where the Property was purchased before 1993, unless   the  property owner  can establish a defense to liability.
  2. Even where contamination is identified by a condemning authority after it has filed its declaration of taking, the condemned party is still considered the property owner for purposes of liability in a subsequent cost recovery suit.

In this case, the City of East Orange acquired Marcantuone and Gieson’s property by eminent domain in 2005 to build a performing arts pre-school. Under well established condemnation law in New Brunswick v. Suydam Investors, 177 N.J. 2 (2003), a portion of the acquisition money was set aside in court to pay for any cleanup costs incurred by the New Jersey Schools Development Authority (“NJ Schools”), which funded the acquisition.

A number of environmental assessments prepared for the City and for NJ Schools prior to the taking  had identified former dry cleaning operations at the site since the 1930’s,  but did not recommend  that any investigation be performed. A subsequent  environmental assessment after the taking, however, led to sampling which revealed the dry cleaning  solvent PCE in soil. Cleanup was completed and NJ Schools sued defendants for recovery of its cleanup costs of approximately $200,000.

Pre-1993 Acquisition Spill Act Liability

At trial, Plaintiff asserted that the defendants  were liable because they owned  the property with no defense to Spill Act liability , in that they failed to undertake pre-acquisition environmental due diligence when they purchased the property in 1985 in accordance with a 2001 amendment to the Spill Act (with retroactive applicability) requiring due diligence based on generally accepted good and customary standards for pre-1993 acquisitions. Defendants argued  that although there is a defense in the Spill Act for pre-1993 acquisitions, the existence of the defense does not  in itself create Spill Act liability for pre-1993 purchasers,  and that  prior case law did not clearly establish such liability.

Although NJ courts have been reticent about making clear assertions of current owner liability under the Spill Act, the Spill Act rules implementing the statute are clear that current owners are liable for contamination, subject to any of the available defenses under the law. In addition to an act of war and an act of god, these defenses include pre-acquisition environmental due diligence that does not identify any reason to know that there is contamination at the property. The Appellate Division’s decision here clarifies the situation, stating “Although it may seem counterintuitive to infer liability from legislation establishing an affirmative defense, logic dictates that that is the case….and reveals the Legislature’s acknowledgment of the underlying liability these affirmative defenses were intended to counteract.” 

The Appellate Division remanded the matter to the trial court  to determine whether  the defendants met the pre-1993 due diligence requirement which is vaguely worded in the statute as being based on generally accepted good and customary standards for pre-1993 acquisitions. The opinion details an interesting analysis prepared by NJ School’s expert as to the evolution of due diligence practices from the 1970’s , when only high risk properties were evaluated for environmental risks by large and multi-national corporations, to the current practice based on the 1993 Spill Act amendment setting out NJ’s prescriptive preliminary assessment process.

Timing of Ownership in Condemnation

Since the liability of the defendants was based on their ownership of the property, the defendants argued that no contamination was identified until after the property had been taken by NJ Schools and that they no longer owned the property at that time.

The Appellate Division looked at the Suydam decision in which the court determined that properties are to be valued as if remediated and fair compensation paid  based on that valuation, with funds being placed in escrow until the true cost of remediation and the liability of the condemned party is determined in a cost recovery action. Using the intent of Suydam to bifurcate the condemnation proceedings from the cost recovery process, the Appellate Division held that although the act of filing a declaration of taking vests title in the condemning authority, the condemned party is deemed to be the “current owner” even after that point, for purposes of the cost recovery suit.  

On remand, if defendants are not able to establish a defense to liability based on the pre-1993 acquisition due diligence standard,  defendants will be liable for the cleanup costs even though they were discovered after title had passed. 

When hiring an environmental consultant, it is important to carefully review the terms and conditions governing the agreement between you and your consultant.  One of the key components of the professional services agreement is the section dealing with the consultant’s potential liability for its own negligence.  Consulting firms will often look to limit their liability to the contract price or some other nominal amount.  Richard Ericsson and David Steinberger of the Cole Schotz Environmental Law Department discuss this issue and a recent New Jersey court decision in an article titled, "Be Aware of Your Consultant’s Liability Limit."

In its decision, the Appellate Division upheld a consultant’s contract which limited the consultant’s liability to $25,000.  In that case, the consultant, retained by a real estate buyer for pre-acquisition due diligence, had grossly underestimated the cost to clean up the property.  The consultant’s initial cleanup cost estimate was between $13,000 to $17,000, while the final cleanup cost estimate was over $3 Million.  Nevertheless, the court upheld the consultant’s contractual liability limit of $25,000.  This case reinforces the need to carefully review professional services agreements to make sure you are adequately protected.