SABRA Reshapes CERCLA Liability

In the last days of a lame-duck session, the 96th United States Congress enacted the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly referred to as Superfund. CERCLA was rushed through Congress with limited debate, a weak understanding of the issues and an even poorer drafting of the law. The many ambiguities and inconsistencies of CERCLA supported two decades of high-stakes litigation, which has been greatly appreciated by your authors and other attorneys. Alas, the courts have now sorted out most of the issues. But attorneys need not fear for their livelihood, because the 107th Congress granted them another holiday gift-the Small Business Liability Relief and Brownfields Revitalization Act ("SABRA"-see Brief, Insider #288). Congress passed SABRA just as US senators and representatives were rushing home to enjoy their December holidays. This great-sounding piece of legislation came with promises to protect small businesses from the heavy burdens of Superfund liability (about 20 years after they needed it) and to make contaminated properties (brownfields) easier to sell and develop. Unfortunately, this new law is plagued by the same weak understanding of the issues and poor drafting that are the hallmarks of the original CERCLA. The result is likely to be more litigation and new impediments to the transfer and development of brownfield properties.

The parts of SABRA that probably have the broadest implications are revisions to the CERCLA liability scheme, in particular the third-party causation defense and the portion of that defense known as the innocent-purchaser defense. Under CERCLA § 107, the current owner or operator of contaminated property is liable for the cleanup of that contamination. Section 107 provides limited defenses to this liability, the most important of which is the third-party causation defense. Under CERCLA § 107(b)(3), the current owner or operator is not liable if the contamination was caused by the act or omission of a third party. This defense is limited in that the third party's act or omission cannot have occurred in connection with a direct or indirect contractual relationship with the defendant. The defendant also must show that due care was exercised with respect to the existing contamination and took reasonable precautions to protect against such acts or omissions.

This third-party causation defense is what protects an innocent property owner against liability for contamination that migrates to his or her property from someone else's property. Without this defense, every property owner in Milwaukie, Oregon or east Multnomah County would be liable for the chlorinated solvent contamination that is pervasive in their regional groundwater. The third-party causation defense is also the basis for the so-called innocent-purchaser defense. SABRA substantially narrows the third-party causation defense.

INNOCENT PURCHASER DEFENSE

SABRA adds considerable detail to the innocent purchaser defense. An initial concern is SABRA § 223 amends the definition of contractual relationship to add easements and leases so that these relationships (in addition to deeds) defeat the third-party causation defense unless the lessee or easement holder satisfies all the requirements of an innocent purchaser. Up to now, we regarded most forms of easement holders as outside the scope of owner or operator liability; SABRA now suggests they are liable parties. Most attorneys also were not ready to concede that a lessee that did not cause contamination is an owner or operator and liable for that contamination. SABRA now suggests otherwise. To be protected by the third-party causation defense, easement holders and tenants now will need to undertake the same level of due diligence that is expected of a purchaser of property.

SABRA also raises the bar for qualifying for the innocent purchaser defense (now called the innocent landowner defense, even though it applies to easement holders and lessees). In addition to all the old CERCLA requirements, the innocent purchaser now must:

• Provide "full cooperation, assistance and access" to persons authorized to conduct response actions at the facility.
• Be in compliance with any land-use restrictions imposed on the property.
• Not impede the effectiveness or integrity of any institutional controls on the property.
• Take reasonable steps to stop any continuing release, prevent any threatened future release and prevent or limit human, environmental or natural-resources exposure to the contamination.

SABRA does not explain just how far a landowner, lessee or easement holder must go to satisfy these various requirements, but one can envision how expensive measures may be necessary. The "full cooperation, assistance and access" requirement is particularly disturbing. The obligation appears to be owed not just to the US Environmental Protection Agency (EPA) or the state, but also to a private party, such as the owner of the source property, who is conducting remedial action.

SABRA promises to standardize the requirements for Phase 1 Assessment for property transfers. SABRA requires EPA to adopt rules within two years to establish new standards and practices for Phase 1 Assessments. Until EPA completes this task, SABRA adopts the American Society for Testing and Materials (ASTM) Standard Practice for Environmental Site Assessment for Phase 1 Assessments. Although such congressional action might have been desirable 10 years ago, one has to wonder why such governmental intervention is necessary now that the market has fairly well standardized the scope of Phase 1 Assessments and ASTM has published its widely accepted standard.

CONTIGUOUS PROPERTY

The most important application of the third-party causation defense is to protect the innocent victim of contamination that migrates to his or her property. Under the original provisions of CERCLA § 107(b)(3), relatively little has been expected of these victims to satisfy the due care and reasonable precaution criteria of the defense. Although CERCLA left some uncertainty, the risk to innocent property owners was not substantial. Needed or not, SABRA comes to the rescue with detailed requirements that these victim property owners must meet in order to use the defense. In particular, the property owner must satisfy each of the bulleted items listed above for innocent purchasers. Under SABRA § 221, the property owner must also satisfy the following:

• Comply with any request for information or administrative subpoena from EPA;
• Provide all legally required notices with respect to the contamination;
• Have no affiliation with any other person who is potentially liable for the contamination, including family relations and contractual, corporate or financial relations; and
• Conduct "all appropriate inquiry" before acquiring the property and "not know or have reason to know the property was or could be contaminated."

This last requirement makes the defense unavailable for anyone who knows of contamination when he or she acquires property. It also indicates that the defense is not available if the person merely has reason to know that the property could be contaminated. In this manner, SABRA effectively strips the innocent property owner of the value of the third-party causation defense. Even if the innocent property owner can satisfy the many requirements of the defense as now defined by SABRA, the innocent property owner cannot pass the defense on to a subsequent purchaser of the property. Before SABRA, purchasers of property overlying regional groundwater contamination problems were protected from liability unless they purchased the source property itself. Because the buyer would enjoy the same defense as the current owner, confidence in the third-party causation defense typically allowed these property owners to sell their property without any discount. By taking this defense away, SABRA likely will create a whole new category of thousands of brownfield sites that cannot be sold for fair market value because of migrating contamination.

BONA FIDE PROSPECTIVE PURCHASER

SABRA § 222 creates a very limited defense for someone who purchases contaminated property with knowledge of the contamination. To qualify for the defense, the purchaser must satisfy essentially all the same requirements listed above for the contiguous property owner defense, except that the purchaser can have knowledge or reason to know of the contamination (after conducting all appropriate inquiry). The defense protects the bona fide prospective purchaser from direct liability for response costs claims and natural resource damage claims.

Most of what the defense gives, however, it takes away by giving EPA a lien on the property, which arises the moment EPA incurs response costs at the property. The amount of the lien is limited to the amount by which EPA's response action increases the fair market value of the property, but EPA could argue that this amount is substantial. The amount of the lien is to be determined when the property owner resells the property, which could be many years later when the property has appreciated in value, and the appreciation is not necessarily due to the contamination. This windfall lien continues indefinitely until it is satisfied either through sale of the property or by EPA recovering the costs from a liable party. SABRA specifically relieves EPA from any statute of limitations that would otherwise apply to its response costs claim.

This lien provision is intended to prevent the purchaser from obtaining a "windfall" from the purchase and resale of contaminated property. The very notion that such appreciation in value is a windfall is debatable. A person who purchases contaminated property assumes various risks not associated with clean property. One of the most significant risks is that the remedial action will interfere with the use and enjoyment of the property. For example, implementation of remedial action could require demolition of improvements or shutting down operations for an extended time. Contaminated property also carries a stigma that may make it hard to lease (particularly now that SABRA appears to have expanded the risk of lessee liability) or to resell. Real estate investors who take such risks do so in hopes of a greater return on their investment than can be realized on clean properties. By depriving the investor of any reward for the risk, the windfall lien has the potential for making development of brownfields even more difficult-precisely the opposite of the advertised intent of the act.

The bona-fide-prospective-purchaser defense and EPA's lien right applies to any contaminated property, including source property and victim migration property. As mentioned above, the combination of this provision and the contiguous property owner defense provisions effectively strips innocent landowners of the value of their third-party causation defense. Even though the innocent owner of property contaminated by migration may qualify (with considerable diligence) for the contiguous property owner defense, the owner cannot pass the defense on to a buyer. One can easily envision a cycle in which a buyer insists on a deep discount to compensate for: the risk of an EPA lien; the risk of not satisfying the high standard for the defense; and the risk that the property cannot be leased because SABRA creates whole new risks for tenants. When EPA cleans up the property, all these risks will be eliminated, thus restoring the fair market value of the property in a resale transaction. In this cycle, EPA's lien could be for the entire amount of the appreciation in the property value, even though the original discount was artificially created by the threat of the EPA lien and the new risks created by SABRA. So the increase in value becomes a self-fulfilling prophecy and any discount to the purchase price simply increases the appreciation that EPA will claim is due to the response action. There may be no way, therefore, to compensate the buyer for the risk and the market for the property may dry up entirely. To the extent contaminated property is sold, EPA may be able to extract its response costs out of what otherwise would have been value paid to the first innocent owner.

The interaction between this new defense and prospective purchaser agreements (PPAs) is not yet clear. The requirements of the defense are more onerous and more vague than the requirements imposed on purchasers under EPA's current form of PPA. Moreover, EPA does not typically include a windfall lien provision in its PPAs. One wonders whether EPA will continue to be willing to negotiate PPAs that actually provide benefits to the purchaser in exchange for the purchaser's risk or whether EPA will simply point to SABRA as defining the terms for PPAs. Certainly, any PPA will need to specifically address the new windfall lien provision in order to protect the purchaser from surprises later.

Under the original CERCLA statutory scheme, a single responsible party could be held liable for the entire investigation and cleanup of a site, regardless of the party's financial status or the amount of hazardous substances it contributed to the site. Although the name of the Small Business Liability Protection Act implies that SABRA provides protection to small businesses, the legislation actually provides a few new benefits to all businesses and only limited relief to small businesses that dispose of municipal waste.

The newly created de micromis exemption and the municipal solid waste (MSW) exemption are limited in both application and scope. First, both exemptions apply only to liability for the worst sites-those listed EPA's National Priorities List (NPL). Thus, the exemption does not apply to the majority of brownfield sites-non-NPL sites where EPA is overseeing the cleanup and state cleanup sites. In addition, neither exemption applies to transporters and generators that have failed to respond to an information request, impede response action or convicted of a relevant criminal violation. Lastly, EPA has broad discretion to revoke the exemptions upon a determination that the potentially responsible party's (PRP's) hazardous substances contributed, or could contribute, significantly to the cost of a response action or natural-resource damages.

DE MICROMIS EXEMPTION

EPA's current policy is to release de micromis PRPs (that contributed only "minuscule" amounts of material to a site) from CERCLA liability in exchange for a settlement fee. Congress created a new de micromis exception for generators and transporters that transport or arrange for the disposal of nonhazardous household waste of less than 110 gallons of liquids or less than 200 pounds of solid materials. Unlike EPA's procedures, this exemption essentially pertains to the disposal of solid waste. In addition, the determination by EPA of de micromis status is not subject to judicial review, although the constitutionality of such a provision is questionable. The de micromis exemption applies to businesses of any size.

Possibly the most important aspect of this exemption is that SABRA places the burden of proof on a plaintiff in a contribution action between PRPs to show that each defendant is responsible for more than these volumetric limits. This may be a very difficult burden to meet at sites with many PRPs and poor records. Thus, a PRP that voluntarily takes the lead at multi-party sites is likely to be saddled with even greater costs than under the original CERCLA scheme.

MUNICIPAL SOLID WASTE EXEMPTION

The MSW exemption applies only to: (1) business entities (including a parent, subsidiary or affiliate of the entity) that generate household waste and employ 100 or fewer workers and are nonprofit organizations under § 501(c)(3) of the Internal Revenue Code or small business concerns as defined in the Small Business Act; and (2) owners, operators and lessees of residential property. SABRA does not provide relief to owners or operators of municipal landfills or transporters of municipal waste. Nor did Congress provide relief to small companies that are in any way owned or affiliated with large generators of hazardous waste. For those companies that qualify for the MSW exemption, Congress imposed an additional condition that requires the PRP to show that the MSW is "attributable to the entity with respect to the facility." Congress may have added this provision to prevent commercial entities that dispose of other people's residential waste from asserting the exemption. In contribution suits, the plaintiff has the burden of showing that each defendant does not qualify for the exemption. If the plaintiff fails to meet this burden, it is liable for the defendant's attorney fees. Thus, this exemption further frustrates any voluntary action by a PRP at a multi-party site.

DE MINIMIS SETTLEMENTS

SABRA amends CERCLA § 122(g) regarding de minimis settlements to require EPA to consider a PRP's ability to pay response costs and still maintain basic business operations. This is not limited to small businesses or municipal waste exemption. In the past, EPA has been willing to consider a reduced settlement with a de minimis PRP upon a showing by the PRP that it is not financially capable of paying its share of the costs. This provision essentially codifies and reinforces EPA's current policy.

Title II of SABRA-known as the Brownfields Revitalization and Environmental Restoration Act-provides public funding to states, local governments, Indian tribes and certain nonprofit organizations to identify, investigate, assess and clean up brownfield sites. A "brownfield site" is defined as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant." Unlike Superfund, SABRA provides funding for brownfield sites contaminated by petroleum or petroleum products. The definition is broad; however, there is a long list of types of sites that are excluded, including sites listed on the NPL and those that are otherwise subject to a CERCLA or Resource Conservation and Recovery Act corrective action.

According to the Senate Committee Reports, SABRA funding was intended to target site assessments and to be used to leverage other financial resources. New CERCLA section 104(k)(12) authorizes EPA to award grants of $200 million per fiscal year. Eligible entities may apply for a maximum of $200,000 for site characterization and assessment per brownfield site, but EPA may waive the limit for up to $350,000 for one site. Awards for remediation are limited to $1 million per entity on a community-wide basis, and local governments can designate 10 percent of the fund toward medical monitoring programs and other controls to prevent human exposure. Given the large amounts of money that Congress directed EPA to spend on a year-to-year basis, EPA will likely begin distributing grants at a fast pace to eligible applicants. Funding eligibility may be determined more on a first-come-first-served basis than on the merit of the grant application.

FUNDING

SABRA creates a new CERCLA section 128 that provides $50 million to states to enhance state response programs in fiscal years 2002 through 2006. To qualify for grants under the program, a state or Indian tribe must either have executed a memorandum of agreement with EPA or established a response program meeting certain requirements-such as mechanisms for meaningful public participation and adequate oversight and enforcement authorities. These factors are subjective, granting EPA broad discretion to determine which states qualify under SABRA. The attached strings are clearly intended to give EPA influence over state programs, particularly those that EPA believes are not sufficiently enforcement oriented. At this point, it is too early to tell how EPA will apply these requirements or whether the Oregon cleanup program will qualify.

ENFORCEMENT

For parties who perform remedial action under state programs or who enter PPAs with a state, the risk of EPA overriding the state and requiring a more stringent cleanup has always been a nagging concern. SABRA gives some comfort against this risk. Under SABRA § 231, EPA may not use its authority under CERCLA to take an administrative or judicial enforcement action against a PRP that is conducing or has completed response actions at an eligible site. An "eligible site" under Section 128 is one that is not on the NPL site and does not pose a threat to sole-source drinking water or a sensitive ecosystem. Several exceptions apply to this limitation. For instance, EPA can step in on a state cleanup when it determines that an imminent and substantial endangerment exists or when new information about the site becomes available to EPA or the state.

DEFERRAL OF NPL LISTING

At the request of a state qualified under SABRA, EPA must defer final listing of an NPL site for one year if EPA determines the PRP is acting or plans to act pursuant to a state order or agreement. If EPA determines that there is no reasonable progress after one year, the site may be listed under a new CERCLA section 105(h)(3), or if reasonable progress is being made, EPA may defer for another six months beyond the one-year period. The purpose of this provision is to give PRPs the opportunity to avoid the stigma of being a PRP for a Superfund site under the federal program. The extent to which listings will be deferred depends on how many state programs are approved by EPA and how EPA defines "reasonable progress."

Despite the large support that SABRA received from various interests, and notwithstanding Congress' best intentions to provide liability relief to innocent parties and small businesses, SABRA may have created as many problems as its solves. If the original CERCLA is an indicator, attorneys and their hapless clients will enjoy years of frustrating litigation to sort out the ambiguities, inequities and internal inconsistencies of SABRA. Possibly, most important, SABRA's new liability provisions, referred to as "Brownfield Liability Clarifications," have the potential to frustrate property transactions and to create whole new communities of unmarketable brownfield properties.