Superfund Exempt Liability

Published: September 30, 2004, By John Watson, Gardner Carton & Douglas

EPA's new All Appropriate Inquiry rule is changing the face of environmental site assessments.

On August 26, the US Environmental Protection Agency (EPA) published its proposed All Appropriate Inquiry (AAI) rule as mandated by the 2002 amendments to the federal Superfund statute. The AAI rule promises to change forever the way in which pre-acquisition environmental site assessments are performed at commercial and industrial sites across the country.

Parties involved in the sale, acquisition, and redevelopment of environmentally impaired property must understand the new site assessment requirements and conform pre-acquisition due diligence to the standards and practices prescribed in the AAI rule to preserve important protections from Superfund liability.

The Brownfields Amendments
After almost a decade of political wrangling over the scope of Superfund reforms, Congress finally succeeded in amending the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) in January 2002 through passage of the Small Business Liability Relief and Brownfields Revitalization Act (the Brownfields Amendments). While falling short of the legislative changes many in Congress thought necessary, the Brownfields Amendments nonetheless were billed as an important step forward in easing some of the barriers created by Superfund to the cleanup and redevelopment of industrial property. As advertised, the goal of the Brownfields Amendments was to promote the cleanup and reuse of “Brownfields” sites — those properties where environmental contamination was serving as an impediment to expansion, redevelopment, or reuse.

The heart of the Superfund reforms offered by the Brownfields Amendments is found in expanded liability protections. Specifically, the amendments added two new categories of exempt parties — bona fide prospective purchasers and contiguous property owners — to go along with the statute's “innocent landowner” defense. The crown jewel of the Brownfields Amendments is the new bona fide prospective purchaser protection, which allows, for the very first time, a party to acquire title to contaminated property with knowledge of the contamination and yet be exempt from CERCLA owner and operator liability.

The liability protections offered in the Brownfields Amendments are not free of obligation. To qualify for any one of these three exemptions from Superfund liability, a buyer of contaminated property must satisfy the following conditions:

1. The party must have conducted pre-acquisition “all appropriate inquiries” into the past history and environmental condition of the property.
2. The party must exercise post-acquisition “appropriate care” by taking “reasonable steps” to stop continuing releases or to prevent future releases at a site.
3. The party must cooperate with EPA or other parties that might desire future access to perform cleanup work.
4. The party must agree to comply with any land-use restrictions imposed in connection with any cleanups.
5. The party must recognize the property might be saddled with EPA “windfall liens,” allowing EPA to recoup financial gains from the subsequent sale of the property if any EPA cleanup increases its value.

The initial step toward claiming the CERCLA liability exemptions offered by the Brownfields Amendments is the completion of pre-acquisition all appropriate inquiries into the past ownership, use, and environmental condition of a site.

The all appropriate inquiry concept is not new to CERCLA. It was first introduced into the statute in the 1986 amendments as part of the creation of the innocent landowner defense. Simply stated, then as now, all appropriate inquiry mandates that, to seek CERCLA liability protection, any potential buyer of environmentally impaired property must perform an environmental site assessment prior to acquiring title to the site.

Over the years, a Phase I Environmental Site Assessment industry standard has emerged — the American Society for Testing and Materials (ASTM) Standard 1527 — which is recognized by real estate developers, banks, and regulators alike as defining a parties' CERCLA statutory all appropriate inquiry obligations.

Notwithstanding the regulated public's familiarity with the all appropriate inquiry requirements and the emergence of the ASTM standard as the industry guidepost, Congress, in its inimitable wisdom, saw fit to require EPA, in the Brownfields Amendments, to promulgate a rule to establish standards and practices for conducting these necessary inquiries.

The Brownfields Amendments set forth a number of criteria Congress thought should be part of this environmental inquiry and gave EPA two years — until January 2004 — to come up with a rule.

Negotiated Rulemaking Committee
Armed with this Congressional mandate and in recognition of both the importance of the AAI rule and its potential implications on the thriving Brownfields cleanup and redevelopment market, EPA decided to convene a Negotiated Rulemaking Committee and develop the AAI regulations through a consensus-negotiated rulemaking process pursuant to the Federal Advisory Committee Act.

The committee assembled by EPA was comprised of 25 member organizations representing prominent interest groups engaged in the Brownfields redevelopment process, including real estate developers, lenders, environmental conservation and public interest groups, environmental consultants, and state and local governments. By requiring the development of a consensus rule from a committee comprised of such disparate interest groups, EPA was confident that a well-reasoned and balanced rule would emerge.

From April through November 2003, the committee conducted public hearings to hammer out the details of the AAI rule. Much of the initial debate centered on the extent to which the proposed AAI rule might stray from the well-established ASTM 1527 environmental site assessment standard. Not surprising, a number of interest groups, led by the real estate and banking lobbies, argued for a rule closely aligned with ASTM 1527, as the ASTM guidance represented a well-understood and fully integrated industry standard.

Other interest groups, most vociferously the environmental justice and conservation communities, argued that the Act's expanded liability protections afforded to buyers of contaminated sites warranted more rigorous site assessment obligations, including the need for extensive subsurface soil and groundwater sampling. For its part, EPA concluded it could not simply adopt the ASTM 1527 standard as the new AAI rule, as ASTM 1527 did not meet all of the statutory criteria outlined by Congress in the Brownfields Amendments.

Several other issues dominated much of the sometimes contentious debate among the committee members during the hearings. Chief among these were disputes over the qualifications of “Environmental Professionals,” the need for Phase II sampling as part of the all appropriate inquiry process, and the obligation of a prospective purchaser of property to interview neighboring landowners to ascertain their knowledge of historical operations on the property.

The AAI Rule
In November 2003, the Negotiated Rulemaking Committee reached consensus on the draft AAI rule. The rule proposed by EPA for public comment virtually is identical in form to the committee's draft. The proposed AAI rule is organized around each of the ten enumerated statutory all appropriate inquiry criteria (see sidebar) and spells out, for each criteria, the extent of the inquiry required.

The over-arching goals and methodologies governing the all appropriate inquiry process was a subject of great debate by the committee and is captured in Section 312.20 of the proposed rule. Section 312.20(d) makes clear the site assessment embodied in the all appropriate inquiry is intended to identify “conditions indicative of releases and threatened releases of hazardous substances on, at, in, or to the subject property.” Section 312.20(e) also establishes performance factors governing the all appropriate inquiry process.

As explained by EPA in the preamble to the proposed rule, “EPA and the Negotiated Rulemaking Committee are not suggesting that the goal of the conduct of the all appropriate inquiries is to identify every available document and piece of information regarding a property and the environmental conditions on the property.” Rather, Section 312.20(e)(1) confirms that the inquiry is limited to the identification of information that is publicly available and capable of being obtained within reasonable time and cost constraints.

Section 312.20(e)(2) also documents the committee's consensus that compliance with the ten criteria must be viewed together to determine whether the inquiry meets the requirements of the rule. Consequently, where documentation exists clearly describing the nature and extent of historical uses and environmental conditions at a site, less attention to interviews with property owners and neighbors may be necessary. In the absence of such documentation, however, the inquiry may mandate more diligence in identifying parties that may possess undocumented, though equally reliable, information regarding a site.

A review of these criteria by an educated reader quickly leads to the conclusion the AAI rule looks and sounds much like the existing ASTM 1527 standard for environmental site assessments. The rule, however, does deviate from the current ASTM standard in a number of significant ways, thus resulting in a new standard for environmental site assessments that is more rigorous and more extensive than current industry practices. Some of the important departures from the existing ASTM standard include the following items:

• A definition of “Environmental Professional” that requires greater oversight and report certifications by senior engineers of Phase I audits and, arguably, limits the universe of consultants that may be authorized to perform these assessments.
• Expanded obligations to interview current and past owners and occupants of a site.
• Affirmative requirements to interview neighboring property owners in the case of abandoned properties.
• Review of historical sources of information dating back to the first use of the property for residential, agricultural, or commercial/industrial purposes.
• A mandate to search for any environmental cleanup liens recorded under any federal, state, or local laws.
• Substantially increased report drafting and documentation requirements imposed on environmental consultants, including obligations to document the extent of the review, identify “data gaps,” and provide opinions regarding the significance of data gaps on the identification of potential releases of hazardous substances.

Implications of the AAI Rule
The proposed AAI rule creates a new standard that will need to be closely adhered to by parties conducting environmental site assessments at commercial and industrial properties. As detailed, the site assessment requirements set forth in the AAI rule represent a material expansion of the inquiry incorporated in the existing ASTM 1527 standard.

The new standard includes not only expanded assessment requirements but also dramatically increased burdens on the part of environmental consultants to document the scope of their reviews, the existence of “data gaps,” and the significance of the ultimate assessment performed. ASTM already is working on a new standard it believes will reflect these additional requirements.

In the near term, the most immediate impact of the AAI rule, once effective, will be an increase in the cost of Phase I site assessments. EPA's cost analysis provided in the preamble to the proposed rule forecasts only a $41-$47 increase in the cost of these assessments. This overly precise cost range almost certainly is too low. Some industry experts are projecting cost increases in the range of $1,500-$2,000 or more, potentially doubling the cost of these assessments.

While the cost issue may be mildly troublesome to some industry observers, the AAI rule is about far more than Phase I assessment pricing. The fact is the Brownfields Amendments have expanded the liability protections afforded purchasers of contaminated property and have created the impetus for increased markets for environmentally impaired property, especially given that the bona fide prospective purchaser defense allows parties to take title to property with knowledge of contamination but without liability for the cleanup of such conditions.

While the purchase and sale of sites with known environmental problems creates business opportunity, it also likely will result in increased challenges to the legitimacy of any claimed CERCLA defenses to liability by contaminated property owners.

In light of this fact, great care must be taken by potential buyers of commercial and industrial property to ensure any pre-acquisition assessment of such properties will conform closely to the standards and practices set forth in the AAI rule. It also must be understood that compliance with the AAI rule is but step one in an ongoing process toward preserving a purchaser's CERCLA liability defenses.

The Negotiated Rulemaking Committee discussed at length how AAI fits into the overall CERCLA liability defenses. The committee was able to reach consensus on the hotly contested issue of soil and groundwater sampling as part of the all appropriate inquiry process — ultimately concluding that, while advisable under certain circumstances, Phase II sampling was not required to satisfy the AAI standard. Nonetheless, EPA clearly stated the post-acquisition “appropriate care” requirements of the defenses almost certainly would require sampling to resolve identified data gaps from the Phase I site assessment or to confirm the extent of impacts associated with identified recognized environmental conditions.

In the final analysis, then, buyers of industrial property must be very purposeful in proceeding with both pre- and post-acquisition steps to satisfy the requirements of the Brownfields Amendments' liability protections. Step one is compliance with all appropriate inquiry as articulated in EPA's proposed AAI rule.

The results of the all appropriate inquiry process, however, most certainly will dictate what post-acquisition actions are necessary to satisfy the remaining elements of the available defenses. Consequently, these purchasers need to work closely with their consultants and counsel before, during, and after the AAI assessment to ensure the appropriate assessment scope, the proper documentation of the inquiry, and the strategy for post-acquisition responses to the AAI findings to ultimately achieve the overriding objective of exemption from Superfund liability.

The deadline for submitting public comments on the proposed rule is Oct. 25, 2004. In light of the extensive deliberations of key stakeholder groups during the rulemaking hearings, it is not anticipated the proposed rule will face significant opposition nor will EPA pursue significant changes prior to the rule being finalized. For these reasons, it is possible the AAI rule will be finalized before the end of 2004.

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John Watson is a partner in the Environmental Group at Gardner Carton & Douglas and is active in Brownfields cleanup and redevelopment matters throughout the US. He represented a leading trade association on the 25-member Negotiated Rulemaking Committee convened by EPA to develop the proposed “All Appropriate Inquiry” rule. For further information on the proposed AAI rule, contact him at 312/569-1446 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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