Author: James R. Arnold
The Arnold Law Practice
3620 Happy Valley Road
Lafayette, CA 94549

June 18, 2004

1. The Role of Lawyers — Lawyers act as conservative “predictors” of:
   1. what the law requires (duties), and
      
   2. what the law gives (rights)
   3. Result: Lawyers in a confidential relationship represent and counsel clients in fulfilling duties required by the law and protecting and asserting rights protected by the law. Lawyers represent clients by negotiating, drafting, and preparing final documentation for transactions
2. The Concepts of “Environmental Law Liabilities”
   
   a) Liability for affirmative conduct and assisted creation of nuisance by failure to act – Leslie Salt Co. v. SFBCDC(1984) 153 Cal.App.3d 605, 619, 622; Newhall Land, etc. v. Sup. Ct. (1993) 19 Cal.App.4th 334, 343.
   b) Products Liability? – For MtBE Contamination?(South Tahoe Public Utility District v. Atlantic Richfield Co., et al., No. 999128, Calif. Super., San Francisco Co.)1
   c) For dry-cleaning fluids & equipment? (Modesto Redevelopment Agency v. Sup. Ct.(Dow))2
   1. The Common Law Roots
      
      1. Negligence – Breach of a Duty of Care
      2. Strict Liability – Liability Without Fault
      3. Nuisance (Important for petroleum contamination)
   2. Sources of Environmental Law — Federal and State Statutory Systems3
      
      1. (“Status Based” Liability — “Liability Without Fault”)a) CERCLA & HSAA (Calif.)
         (1) Strict, Joint & Several Liability to Clean Up “Abandoned” Sites
         (a) CERCLA — 42 U.S.C. §9601 et seq.,
         (b) HSAA — §25300 et seq., H&S Code
         (2) Few statutory defenses – “innocent purchaser”
      2. The “Anti-Innocent Purchaser” Laws
          
         a) Residential (not part of HSAA)
         
         (1) Broker’s duties – Inspect & Report: Easton v Strassberger & §2079 et seq., Civil Code
         (2) Seller’s Transfer Disclosure Statement: §1102.6, Civil Code
         b) Non-residential (part of HSAA): § 25359.7, Calif. H&S Code (“SB245″)
         (1) “Reason to believe”
         (2) “Hazardous wastes”(pet. excl.)
         (3) “On or under the land”
      3. RCRA/HWCL (Calif.) Strict, Joint & Several Liability for “active sites”
         a) for “Corrective Action”
         b) for “Active” Sites (Including USTs)
         c) with “Solid Waste” Disposal,
         (1) RCRA — 42 U.S.C. §6901 et seq.
         (2) HWCL — §§ 25180 to 25196, H&S Code
         
      4. Clean Water Protection Laws (Clean Water Act, 33 U.S.C. §1251 et seq.; Porter-Cologne Act, §13000 et seq., Water Code)
      5. Clean Air Protection Laws (Clean Air Act, 42 U.S.C. §7401 et seq., California Clean Air Act, §39000 et seq., H&S Code)
      6. Other California laws, e.g., §5650, Fish & Game Code; §25249.5, H&S Code (Prop. 65 discharge ban)

 

1. The Role of “Due Diligence” – To Inspect or Not to Inspect?
   
   1. There are two questions from clients:
      
      1. Why Should I Inspect a Property if I am Going to Sell It?
      2. Why Should I Inspect a Property if I am Getting It for a Good Price?
   2. And two answers:
      
      1. Environmental Lawyer’s Short Answer: “Status-Based Liabilities”
      2. Environmental Lawyer’s Answer Everyone Can Understand: “You Can Run, But You Can’t Hide”
   3. Why is This? There are three economic issues for every seller, buyer, or developer of property.
      
      1. The certainty of economic return
      2. The allocation of any “status based” liability for cleanup costs
      3. The allocation of residual risks arising from “status based” liability
   4. The result of the potential for contamination of any property has been a decline in the principle of caveat emptor and the boilerplate “as is” sale.
      
      1. “As is” boilerplate clauses have betrayed many owners and landlords.
      2. The current weight of authority is that “as is” clauses do not necessarily protect sellers from cleanup liabilities.
         a) Why?b) Once buyer has “status” of owner of property, owner is jointly and severally liable without fault for contamination
      3. Various commentators have suggested that when a purchase and sale contract specifically references the known or potential contamination as something as to which the buyer is taking the property “as is” and without warranty a seller will be protected.4 Additional protection includes:
         a) Buyer releases seller from environmental liabilities, and
         b) Buyer gives seller an environmental indemnity (and defense and hold harmless)
         

 

1. What about the so-called “innocent purchaser” “defense”? (Really, the “unwitting buyer argument.”)
   
   1. If a buyer does a careful environmental assessment of property before purchase, it may be able to use the “innocent purchaser” defense to CERCLA and HSAA liabilities to the government and third parties. 42 U.S.C. §9601(35) (CERCLA).5
   2. Of course, the “innocent purchaser” defense does not shield against common law nuisance or trespass liabilities; or against Clean Water Act or Clean Air Act or Prop. 65 liabilities.
      
      1. Under common law, the buyer can be liable for “maintaining” the nuisance or trespass.
      2. According to the Clean Water and Clean Air laws, the buyer can be considered an “operator” or a “person in charge”

 

1. What is the “unwitting buyer” argument (aka “the innocent purchaser defense”?) A heavy burden of proof that--
   1. The buyer made “all appropriate inquiry” into prior ownerships and uses of the property — according to “generally accepted good commercial and customary standards and practices. 42 U.S.C. §9601(40)(B). Proofs?
      
      1. Buyer acquired property after release or threatened release of hazardous wastes.
      2. When buyer closed on property, he, she, or it had no reason to know that any hazardous substance had been released or threatened to be released.
      3. The buyer exercised “due care” as to the hazardous substances – prevented its spread, etc.
      4. The buyer guarded against foreseeable acts of third parties and consequences (e.g., kids coming through the fence to ride moto-cross bikes; grading contractor spreading smelter waste across property, etc.)
      5. The buyer fully cooperated with cleanup agencies (e.g., the buyer spent whatever government agencies required be spent on investigation and cleanup)
      6. The buyer didn’t violate any land use restrictions imposed on the property as part of a cleanup imposed by the government (e.g., limited to non-residential uses)The Courts? Most have rejected the defense, based on the buyer’s proofs. Buyers can’t prove they used all “appropriate inquiry” according to “best practices.”

 

1. The 2002 Brownfields “reform” of CERCLA
   
   1. Not much of a reform – “a horse designed by a committee” However, it does
      
      1. Establish standards for property bought before May 31, 1997, and
      2. Refers to common commercial standards for property bought later.6
      3. For purchases before 1997, the buyer must prove that he, she, or it
         a) had insufficient specialized knowledge or experience,
         b) paid full price as if the property were clean,
         c) looked at commonly known or easily found information about the property,
         d) contamination was not obvious or suspected, and
         e) could have found the contamination with an appropriate inspection.
         
      4. For purchases after May 31, 1997, the buyer must prove
         a) it met the standards developed for Phase I Environmental Assessments, andb) Phase II Environmental Assessments by
         c) the American Society for Testing and Materials (“ASTM”)
         
   2. What if a buyer followed either the pre-1997 statutory standards or the post-1997 standards and found contamination? The buyer cannotassert the innocent purchaser defense.
   3. But, since the 2002 Brownfields Act amendments, the buyer may be able to qualify for the “bona fide prospective purchaser” (“BFPP”) exemption from CERCLA liability to the government and third parties.
   4. One achieves BFPP status by:
      
      1. Buying the property after January 11, 2002. 42 U.S.C. §9601(40).
      2. All “disposal” of hazardous substances ceased before the purchase.
      3. The buyer made “all appropriate inquiries” as outline above.
      4. The buyer gives all legally required notices (i.e., reports the hazardous substances releases).
      5. The buyer has stopped releases and has protected human, environmental or natural resources (i.e., water, trees, etc.).
      6. The buyer is cooperating with the government and third parties
      7. The buyer, as above, complies with land use restrictions.
      8. The buyer gives the EPA all information it requests (Note: This can include expensive investigations).
      9. The buyer is not potentially liable due to any familial, corporate, or other relationship.

 

1. The Best Result?
   The Seller and the Buyer allocate duties for cleanup. The selling price for the property reflects the economic return sought by the seller, allocates the cleanup, and allocates the residual risk to the seller and the buyer. The lawyer crafts an agreement based on the allocation, and including:
   
   1. Reference to the environmental assessment as a “baseline” “snapshot” of the then existing conditions.
   2. Completion of duties for all reporting and disclosure to third parties. – Lenders, et al.
   3. Appropriate releases, indemnities, etc. (Don’t forget §1542 waivers)
   4. Possible transfer of rights to recoveries or contributions from third parties, including insurance, UST Fund, litigation recoveries, etc.
   5. Note: Escrow may include “hold backs, partial payments, etc.”
   6. Identification of parties relationships with environmental regulators – who does what, and talks to which regulator
   7. Cooperation, cooperation, cooperation.
   —–*—–*—–*—–
   
   1 Described briefly at 2004 WL 1102415
   2 — Cal.Rptr.3d —-, 2004 WL 1179297, 4 Cal. Daily Op. Serv. 4692, 2004 Daily Journal D.A.R. 6452, Cal.App. 1 Dist., May 28, 2004
   3 For a summary of the laws affecting toxics cleanups of industrial property – with citations to statutes — see Ch. 72, “Hazardous Waste Cleanup and Land Use,” Vol. 5, California Environmental Law and Land Use Practice (Matthew Bender/Lexis 2004), James R. Arnold, author.
   4 California Practice Guide: Real Property Transactions, Dennis L. Greenwald and Michael Asimow (Rutter 2004); see Kaufman & Broad v. Unisys
   5 Section 25323.5, H&S Code has the effect of adopting CERCLA’s liability scheme into the HSAA.
   6 42 U.S.C. §9601(35)(B)(iv)(II)