Federal Court Decision Highlights Pitfalls of CERCLA Bona Fide Prospective Purchaser Defense
On September 30, 2010, the United States District Court for the District of South Carolina published a rare decision providing rare analysis of the applicability of the Comprehensive Environmental Response, Compensation and Liability Act’s (“CERCLA”) Bona Fide Prospective Purchaser (“BFPP”) defense. Ashley II of Charleston, LLC v. PCS Nitrogen, Inc. et al., 2010 U.S. Dist. LEXIS 104772 (Civ. Action No. 2:05-cv-2782-MBS) (Sept. 2010). The BFPP defense, set forth under 42 U.S.C. §§ 9601(40) and 9607(r), provides a defense to CERCLA liability for purchasers of property who have knowledge of contamination prior to property acquisition. In Ashley II, the Court held that a property owner failed to satisfy the elements of the BFPP defense and was allocated liability for a portion of cleanup costs due to the owner’s (1) affiliation with past owners and operators of the subject property; (2) failure to exercise ongoing reasonable care related to hazardous substances at the subject property, and (3) failure to prevent disposal of hazardous substances at the subject property after acquisition.
As part of a significant redevelopment project, Ashley II of Charleston, LLC (“Ashley”) purchased portions of a 43 acre property located in Charleston, South Carolina (the “Site”). Specifically, in 2003 Ashley acquired a 27.62 acre portion of the Site formerly utilized as a fertile and acid plant and in 2008 acquired a 3 acre portion of the Site formerly utilized by a tank cleaning business. The Site contained contamination consisting of lead, arsenic, polyaromatic hydrocarbons and acidic conditions known to Ashley prior to purchase. As part of the purchase agreements under which Ashley acquired the properties, Ashley released and indemnified the sellers from all environmental liability arising from contamination of the Site.
Prior to acquiring both portions of the Site, Ashley obtained Phase I Environmental Site Assessments (“ESA”). Following purchase of the Site, Ashley conducted extensive investigative activities including soil, groundwater and sediment sampling. In June 2008, Ashley demolished the remaining structures at the Site but did not remove or otherwise investigate related subsurface structures including sumps, trenches, piping and cement pads identified during the Phase I ESA. Ashley did not investigate or otherwise address these structures until over one year after demolition of the buildings. In addition, Ashley did not address a debris pile present at the Site until over a year after becoming aware of the debris pile’s presence. Finally, Ashley attempted to persuade the U.S. EPA not to pursue enforcement actions against the prior site owners and operators from whom Ashley purchased the Site in an attempt to avoid incurring expenses associated with Ashley’s release and indemnification of these entities.
Ruling Regarding Ashley’s Eligibility for the BFPP Defense
Based on the facts presented, the Court ruled that Ashley failed to quality for the BFPP defense and was therefore subject to allocation of remediation costs. Citing 42 U.S.C. § 9601(40), the Court stated that a purchaser of a contaminated facility must satisfy the following eight elements in order to qualify for the BFPP Defense:
1. All disposal of hazardous substances must have occurred prior to acquisition of the facility;
2. Conduct “all appropriate inquiries”;
3. Provide all legally required notices regarding the release of hazardous substances at the facility;
4. Exercise reasonable care with respect to hazardous substances by taking reasonable steps to stop continuing releases, prevent threatened future releases, and prevent or limit human or natural resource exposure to any previously release hazardous substance;
5. Provide full cooperation, assistance and access to persons authorized to conduct response actions or natural resource restoration;
6. Comply with use restrictions and not impede the effectiveness or integrity of institutional controls;
7. Comply with information requests and administrative subpoenas; and
8. Must not be potentially liable or affiliated with any person that is potentially liable for the response costs.
Ashley II at *155-57. Based on the Court’s review of Ashley’s conduct with regard to the Site both before and after acquisition, the Court concluded that Ashley failed to comply with elements 1, 4 and 8 of the BFPP defense and therefore could not rely on the BFPP defense to avoid liability for response costs at the Site.
With regard to the requirement that disposal of hazardous substances must occur prior to acquisition of the facility, the Court held that Ashley failed to establish this element of the defense because it was “likely that there were disposals . . . after Ashley tore down the structures . . . because sumps contained hazardous substances, were cracked, and were allowed to fill with rain water.” Ashley II at *158. With regard to the requirement that reasonable care be taken, the Court held that Ashley failed to exercise reasonable care by: (1) failing for over one year to clean out and fill or otherwise address the sumps associated with the demolished buildings that were identified in the Phase I ESA; (2) failing to prevent a debris pile identified in 2006 from accumulating at the property and failing to investigate and remove the debris pile for over a year; and (3) failing to properly maintain cover materials at the property that resulted in the exposure of contaminated soils. Ashley II at *161-64. With regard to the requirements that a BFPP have no affiliation with any person potentially liable for response costs, the Court held that Ashley was affiliated with the former owners and operators from whom Ashley purchased the Site because Ashley released and indemnified the prior owners and operators and sought to “persuade EPA not to take enforcement action to recover for any harm at the site” from the former owners operators. Ashley II at *167. According to the Court, Ashley’s release and indemnification coupled with its attempts to influence the U.S. EPA on behalf of the potentially responsible parties precluded Ashley from satisfying this element.
Analysis of the Ashley II Decision
The Court’s ruling in Ashley II illustrates the significant uncertainties that face purchasers of contaminated properties who rely on the BFPP defense to avoid potential CERCLA liability. Although the Ashley II decision is not directly applicable in jurisdictions outside South Carolina, the decision provides rare insight into how courts in other jurisdictions may analyze the applicability of the BFPP defense. The ruling clearly illustrates that purchasers who intend to rely on the BFPP defense must not only comply with pre-acquisition requirements such as the performance of all appropriate inquiries, but must be diligent in complying with all post-acquisition obligations. Under the Ashley II analysis, a delay of slightly more than a year in addressing potential disposal or reasonable care obligations could result in disqualification from the protections afforded by the BFPP defense. In addition, prospective purchasers seeking BFPP status should take seriously the Court’s ruling regarding release and indemnification of and attempts to prevent the U.S. EPA from taking actions against potentially responsible parties. Prospective purchasers must carefully consider whether a release and indemnity should ever be provided to a potentially responsible party under CERCLA. Although it is unclear whether all releases and indemnifications of potentially responsible parties will jeopardize the viability of a BFPP defense, Ashley II provides strong evidence that prospective purchasers should avoid attempts to influence regulators with regard to whether such potentially responsible parties will be subject to an enforcement action.