"Brownfields" and Small Business Superfund Amendments: Important New Changes in Real Estate Practice and in Liability Relief

Donald B. Mitchell, Jr.
Arent Fox Kintner Plotkin & Kahn

The "Small Business Liability Relief and Brownfields Revitalization Act," H.R. 2869 - passed by the House of Representatives on Dec. 19, 2001, by the Senate on Dec. 20, 2001, and signed by the President on Jan.11, 2002 (2001 CERCLA Amendments) - is the most wide-reaching and comprehensive package of CERCLA amendments since the Superfund Amendments and Reauthorization Act (SARA) of 1986. In spite of the potentially limited scope suggested by its name, however, the 2001 CERCLA Amendments make a number of important changes in the general CERCLA liability scheme - including the removal of liability under CERCLA § 107(a)(1) as a current owner for any person buying contaminated properties, see Part I, below - changes with implications well beyond small businesses or Brownfields development questions.

As passed by the 107th Congress, H.R. 2869 was a marriage of two separate bills. Subtitle I of H.R. 2869, titled the Small Business Liability Protection Act, was taken verbatim from H.R. 1381, which had passed the House of Representatives unanimously on May 22, 2001. Subtitle II of H.R. 2869, titled the Brownfields Revitalization and Environmental Restoration Act, contained the provisions of S. 350, which passed the Senate 99-0 on April 25, 2001. The two bills were combined and introduced into the House on Sept. 10, 2001, finally passing both houses, as combined, in the rush to adjourn in late December.

The 2001 CERCLA amendments address eight distinguishable issues. Five of these matters involve direct changes in the liability standards under CERCLA. Another affects certain types of settlements under CERCLA. The last two create federal-state programs, including funding and grants designed to spur and affect development of brownfields, and tend to devolve enforcement authority to the state level. Because of the breadth and importance of the brownfields-related liability changes and related funding programs, the brownfields provisions found in Title II of H.R. 2869 are discussed first.

Bona Fide Prospective Purchasers (And "Windfall Liens")

The most dramatic change made by the 2001 CERCLA Amendments is a new provision eliminating § 107(a)(1) current owner liability for future purchases of contaminated property when certain conditions are satisfied.

The statute does this by adding a new CERCLA § 101(40) defining the term "bona fide prospective purchaser," Act § 222(a), and then providing, in new CERCLA § 107(r), that any person who is a "bona fide prospective purchaser" "shall not be liable as long as the bona fide prospective purchaser does not impede the performance of a response action."

The key to the new exemption is the definition of "bona fide prospective purchaser" found in new CERCLA § 101(40). A "bona fide prospective purchaser" is a person who acquires a facility after Dec. 20, 2001, and establishes the following:

• all disposal at the site occurred prior to acquisition,
  
• for commercial property, that the person made all commercially appropriate inquiries in accordance with the revised due diligence standard in § 101(35) pertaining to the Innocent Landowner defense [discussed in Part II, below] (or for residential property did inspection and title search that revealed no basis for further investigation),
  
• provided all legally required notices regarding the discovery of the hazardous substances,
  
• exercised appropriate care by taking reasonable steps to stop any continuing release, to prevent future releases, and to prevent or limit human or environmental exposure to previous releases,
  
• provides full cooperation to persons conducting response actions,
  
• complies with any existing or cleanup-derived "institutional controls" on the use of the land such as types of development,
  
• complies with requests for information from USEPA, and
  
• is not a PRP, or affiliated with another PRP through direct or indirect family relationship, or through any contractual, corporate (including successor) or financial relationship.

The burden of proof to establish these factors is on the defendant/would be bona fide purchaser.

Several points bear reiterating here.

• First, unlike the revised Innocent Landowner and new Contiguous Landowner defenses [both discussed below], the pre-purchase environmental assessment may result in finding hazardous substances on the land and the subsequent purchasing of the contaminated land with knowledge of the contamination. There is no requirement expressed in § 101(40)(B)(i) that the result of due diligence studies must be "no reason to know" of any contamination, as is the case for Innocent Landowner status under § 101(35). Indeed, new § 107(q)(1)(C), part of the Contiguous Landowner defense, expressly states that "[a]ny person that does not qualify as a person described in this paragraph [regarding Contiguous Landowners] because the person had, or had reason to have, knowledge [of the contamination] at the time of acquisition of the real property may qualify as a bona fide prospective purchaser under section 101(40) if the person is otherwise described in that section."
  
  
• Second, the new section only goes part way. It does not provide protection for the purchasers of sites contaminated with petroleum products, i.e., former gasoline stations, because CERCLA excludes petroleum from the definition of hazardous substances and only "facilities" contaminated with hazardous substances are covered by the new Prospective Purchaser Exemption.
  
  
• Third, the new Prospective Purchaser Exemption, while is part of the Brownfields title of the new Act, is not limited to "brownfields sites" as that term is now defined in the new Act [see Part IV, below]. Instead, the new Prospective Purchaser Exemption applies to all hazardous substances sites.

One limit on the new provision, however, is that it provides that the United States shall have a lien on the purchased property if it has unrecovered response costs. New Act § 107(r)(2). This lien is for the amount of those costs up to the amount of the increase in value caused by the USEPA response action, subject to the usual state priority laws. One ambiguity in the statute is whether this lien arises only for costs incurred by the USEPA post-acquisition or for all costs, including those incurred before the Prospective Purchaser's acquisition.

The "Innocent Landowner" Defense Has Been Rewritten

Added in 1986 by SARA, CERCLA § 101(35) set forth the requirements for what became known as the Innocent Landowner Defense. That provision provided, in short, that a defendant who could establish, first, that all disposal had taken place prior to his purchase, and second that he had "no reason to know" of that disposal even though he undertook all commercially appropriate environmental due diligence, would have a defense to current owner liability under § 107(a)(1) if he also exercised "due care" regarding any hazardous substances subsequently found.

Section 223 of the 2001 CERCLA Amendments substantially rewrites the Innocent Landowner provisions of § 101(35). First, in what the Legislative History describes as a "clarification" of the existing "due care" requirement, new CERCLA § 101(35)(A) adds provisions requiring that any person seeking to establish the Innocent Landowner Defense must establish that he has cooperated with any cleanup ongoing at the site by, for example, granting all required access to the site and complying with any restrictions on site use imposed as part of any cleanup.

More importantly, the new Act rewrites the substance of the Innocent Landowner Defense. New § 101(35)(B). Under the new Act, to establish that one had "no reason to know" - and thus is an Innocent Landowner - a purchaser-defendant must now must show that he:

i. conducted "all appropriate inquiry" consistent with generally accepted commercial practices, which will become a term defined by regulations [below], and

ii. took all reasonable steps to stop any continuing release, to prevent future releases, and to limit human or environmental exposure to previous releases. This latter requirement is a new provision that, it would appear, will make the Innocent Landowner Defense more difficult to establish.

Under SARA's original version of § 101(35), what constituted "all appropriate inquiry" was a fact question heavily dependent on the evolving state of practice of environmental due diligence. The new Act requires EPA to promulgate regulations to "establish standards and practices for the purpose of satisfying the requirement to carry out all appropriate inquiries." New § 101(35)(B)(ii). These regulations will contain special provisions that require "inquiry by an environmental professional" and will set forth the types of materials to be evaluated by that professional. For the most part these factors appear to mirror factors already part of standard practice and reflected in the ASTM standard for the performance of Phase I due diligence investigations.

In the interim, until EPA promulgates these regulations, Congress has established two standards, depending on whether the property was purchased before or after May 31, 1997. For any purchase prior to June, 1997, the standards set forth criteria to be considered (such as price and easily ascertainable information), but do not explicitly require any actual pre-purchase environmental assessment. For purchases after that date, performance of due diligence pursuant to the ASTM Standard for Phase I studies is deemed to satisfy the appropriate inquiry standard (and is thus essentially required).

A New Liability Exemption for Owners of Properties Contiguous to Contaminated Properties

One particularly vexing problem under CERCLA has been the treatment of down-gradient property owners. Read literally, the statute made these victims of pollution liable as owners of contaminated properties. This imposed particular burdens in the case of extensive groundwater plumes. EPA had addressed this problem by issuance of a guidance document in 1995, but the existence of continued statutory liability remained a concern in the real estate markets.
The 2001 CERCLA Amendments add a new § 107(q) to CERCLA eliminating owner/operator liability for the owner of property contiguous to the site of a release - e.g., downgradient property owners - if defendant adjacent landowner:

i. did not cause or contribute to release,
ii. is not affiliated with or successor to the person who is liable for release,
iii. takes reasonable steps to stop any continuing release, to prevent future releases and to limit exposure to release [this provision does not apply to migrating groundwater, § 107(q)(1)(D)],
iv. provides full cooperation and access to response action providers,
v. does not impede any ongoing response action,
vi. complies with requests for information,
vii. provides all required notices of release, and
viii. is an Innocent Landowner under new § 101(35) as to the contiguous property owned and did not know about contiguous release at time of purchase.

New § 107(q)(1)(A). Thus, the new Contiguous Landowner provision is, essentially, the Innocent Landowner provision extended to neighboring properties. The burden of proof for each of these factors is on the party claiming the exemption. Like the Innocent Landowner provision, this provision would appear to be very difficult for a purchaser to satisfy and would appear to contribute little to the redevelopment of Brownfields. One innovation that may develop in importance is a provision allowing USEPA to grant letters stating that a person qualifies as a protected contiguous landowner and granting protection from contribution actions. New § 107(q)(3)(B).

Importantly, however, a person who cannot satisfy the Contiguous Landowner Defense may still qualify as "bona fide prospective purchaser" under § 101(40), discussed in Part I above, even if he cannot qualify as exempt adjacent landowner.

Brownfields Programs

Most of the attention generated by the new CERCLA Amendments has been garnered by the Brownfields provisions. In addition to the liability changes regarding Innocent Landowners, Contiguous Landowners, and Prospective Purchasers, addressed above - each of which is found in Title II of the 2001 CERCLA Amendments, former S. 350 pertaining to Brownfields Revitalization - C Title II also establishes a Brownfields federal/state grant program and a federal/state grant program to assist State Response Programs, such as Voluntary Remediation Programs now common in most states.

Definition of "Brownfield site" added at § 101(39)

The Brownfields grant program is established in new CERCLA § 104(k), discussed below. The program applies to "brownfield site[s]," a newly defined term in new CERCLA § 101(39). The term "brownfield site" means real property, "the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of" hazardous substances or pollutants. New CERCLA § 101(39)(A). Further, the definition of a brownfield site also includes, for purposes of the federal/state grant program under new CERCLA § 104(k) [Revitalization Funding], (i) a site contaminated by CERCLA-excluded petroleum if the site is of low risk and there is no viable responsible party, § 101(39)(D)(ii)(II), and (ii) mine-scarred land.

In order to limit the type of sites to which Brownfields funding might otherwise be available, nine types of sites are then excluded from this broad definition. New CERCLA § 101(39)(B). The nine exclusions are:

i. any "facility that is the subject of a planned or ongoing removal action under this title,"
ii. a facility on or proposed for the NPL,
iii. a facility subject to any kind of CERCLA Order,
iv. a facility subject to a permit under RCRA, FWPCA, SDWA or TSCA,
v. a facility subject to corrective action under RCRA,
vi. a land disposal unit under RCRA Subtitle C or for which "closure requirements" have been specified in a "closure plan or permit,"
vii. federal facilities,
viii. any portion of a facility containing PCBs, and
ix. any portion of a facility for which assistance "has been obtained" under the federal LUST fund.

Some of these excluded facilities can be brought back into the program on a case-by-case basis by the USEPA.

Revitalization Funding Program

The 2001 CERCLA Amendments add a new § 104(k) to CERCLA, creating a federal funding program. Congress has authorized up to $200 million per year for the program, to be appropriated from FY 2002 through 2006. New CERCLA § 104(k)(12). One-quarter of the funds are set aside for petroleum-contaminated brownfield sites, described in § 101(39)(D)(ii)(II). See new § 104(k)(12)(B). (The Brownfields grant program language consumes about one-third of the text of the 71-page bill. The description of the grant program here is not intended to be comprehensive. It should be noted that while the 2001 CERCLA Amendments "authorize" such appropriations, it does not make them; whether actual appropriations of funds will be made will be left to the legislative appropriations process.)

Eligible grant recipients are (generally) governmental or quasi-governmental redevelopment authorities. New CERCLA § 104(k)(1). The federal funds are generally to be used for inventorying potential brownfield sites, and for site characterization and assessments to be performed by environmental professionals under the standards of new CERCLA § 101(35), up to a limit of $200,000 per site. New CERCLA § 104(k)(2) & 104(k)(4)(A). Other grants, in amounts up to $200,000, are available for capitalizing a local government revolving loan fund or for actual remediation; the loan funds created in local governments are intended to be used for loans to site owners or developers or others, including non-profits. New CERCLA § 104(k)(3)(A), (B). (Limited exceptions permit remediation grants up to $1,000,000, § 104(k)(4)(A)(ii), with possible additions to those funds in subsequent years.) Congress has specified that the detailed National Contingency Plan requirements normally applicable to CERCLA-funded work shall not be applied brownfields sites, except to the extent they are relevant and appropriate.

The conditions which state and local governments must meet in order to receive grants are set forth in § 104(k)(3)(C). The grant application requirements and procedures are set forth at § 104(k)(5)(A). The criteria EPA is required to apply when evaluating applications are found at § 104(k)(5)(C); they focus on spurring economic development, including an economic multiplier effect, reduction of harmful health effects in low-income areas, creation of parks and greenspace, and the neediness of the applicant community.

State Response Programs

The second major grant program created by the 2001 CERCLA Amendments is a program to encourage development of what have come to be known as state voluntary remediation programs. H.R. 2869, § 231. (The State Programs grant program language consumes about one-fifth of the text of the 71-page bill. The description of the grant program here is not intended to be comprehensive.)

The grant program revolves around the concept of an "eligible response site." The term "eligible response site" is defined in new CERCLA § 101(41). An "Eligible Response Site" is a "Brownfields Site" under § 101(39), except that petroleum LUST sites are included in the definition of an Eligible Response Site, and certain other sites excluded from the definition of a Brownfields Site may also be included in the definition of an Eligible Response Site by the USEPA on a case-by-base basis. Sites eligible for the NPL, even if they have not been proposed for listing, are excluded from being Eligible Response Sites, however, even though these may otherwise be "brownfields sites."

The grant program is found in a new CERCLA § 128, titled "State Response Programs." Congress has authorized appropriation of $50 million per year from FY 2002 through FY 2006 for grants by USEPA to States (i) that have acceptable Brownfields-related programs or (ii) Voluntary Response Programs (VRP) that are already the subject of a Memorandum of Agreement (MOA) with USEPA. See new CERCLA § 128(a)(1)(A). (It should be noted that while the 2001 CERCLA Amendments "authorize" such appropriations, it does not make them; whether actual appropriations of funds will be made will be left to the legislative appropriations process.) A brownfields program will be acceptable, and thus qualify a state for State Response Program grants, if (generally) it requires oversight of cleanups, public participation, and permits public nomination of sites. The 15 states which already have signed MOAs for their Voluntary Response Programs are automatically qualified for State Response Program grants. (Locally, Maryland and Delaware have such MOAs. Virginia is working to conclude one in early 2002. The District of Columbia has a new Act (effective June, 2001) establishing a Voluntary Cleanup Program, but its Environmental Health Administration has not implemented that Program as of this writing and so there is no MOA with USEPA; the District has also received a Brownfields Assessment Demonstration Pilot grant from USEPA.)

The grants can be used to establish or enhance such programs, or to capitalize a revolving load fund for Brownfield remediations, or to purchase or create an insurance pool to provide response action funding.

Importantly, new CERCLA § 128(b)(1)(A) provides that USEPA may not exercise CERCLA § 106 (order) or § 107 (cost recovery) authority at any Eligible Response Site if a person is conducting or has completed a response action regarding that release in compliance with a State program. New § 128(b)(1)(A). This provision only applies when the response action is "conducted" after February 15, 2001. This provision essentially delegates exclusive enforcement control to the State at state VRP or state Brownfields sites, and provides the security long sought by developers of brownfields sites that their voluntary agreements with a state will not subsequently be second-guessed by the USEPA. There are, however, a number of complex reopeners that give USEPA authority to take action at these state sites, especially in cases of a subsequently discovered imminent and substantial endangerment.

The State Response Programs provisions also adds a new CERCLA § 105(h) that provides that USEPA shall generally defer listing Eligible Response Sites on the NPL when requested to do so by a state, and when the state or another party subject to state control is providing a response action in compliance with state law
and is making adequate progress with that action.

Small Business Liability Relief at NPL Sites

Section 102(a) of the 2001 CERCLA Amendments adds a new § 107(o) to CERCLA and creates a "De Micromis Exemption" for liability at NPL sites. This change is retroactive and applies to all pending actions, but not to any concluded or settled action. See Act § 103; see also Gould, Inc. v. A & M Battery Service, 232 F.3d 162 (3d Cir. 2000) (interpreting similar provision in 1999 Superfund Recycling Equity Act as requiring retroactive application of new CERCLA amendments).

The new provision eliminates liability as arranger or transporter under §§ 107(a)(3) and (a)(4) for any person whose liability is based on the generation or transportation of less than 110 gallons of liquid waste or less than 200 pounds of solid waste. See new § 107(o)(1)(A). The burden of proof is on the de micromis defendant in a government action, but is on the private plaintiff in any contribution action. New § 107(o)(4).

The provision, however, only applies to sites listed on the National Priority List (NPL). This restriction limits its effectiveness in most litigation involving private parties; it is possible, however, that a de micromis defendant could argue to a court that the de micromis status of that defendant ought to be considered by the court as an "equitable factor" in a private contribution case not involving an NPL site in order to bring "parity" of treatment to de micromis defendants. And even at NPL sites, the USEPA, on a case-by-case basis, can exclude from the new Act's protection any parties whose waste "contributed significantly" to cost of response action; no judicial review is available of any such action. New § 107(o)(2)(A), (o)(3).

Liability Relief for Generators of Municipal Solid Waste

Section 102(a) of the 2001 CERCLA Amendments also adds a new § 107(p) to CERCLA, which exempts certain persons from liability as an "arranger for disposal" under § 107(a)(3) for the disposal of municipal solid waste containing hazardous substances (MSW). As with the Small Business/de micromis exemption, this change is retroactive and applies to all pending actions but not to any concluded or settled action. The provision is limited in its effect, however, only providing protection if the defendant is -

(1)(A) a homeowner or lessee generating MSW;

(1)(B) a business employing fewer than 100 persons and the MSW came from the business; or

(1)(C) a section 501(c)(3) charitable organization employing fewer than 100 persons and the MSW came from the organization's business.

No action may be brought against a homeowner for MSW disposal at any site except by federal, state or local government entities.

MSW is a defined term under the new provision. See New § 107(p)(4)(A). The statute uses a common sense definition of MSW, based on types of waste traditionally disposed by a single-family household; the provision specifically excludes from the definition of MSW combustion ash and wastes from manufacturing. New § 107(p)(4)(C).

As with the Small Business/de micromis exemption above, however, the new MSW liability exemption only applies at NPL sites. New § 107(p)(1). And of significant interest, the provision provides no exemption from CERCLA liability for municipalities, either as generators of waste or as operators of contaminated MSW landfills. Further, as with the Small Business/de micromis exemption, the USEPA, on a site-by-site basis, can exclude from the exemption any otherwise protected party if that party's MSW has "contributed significantly ... either individually or in the aggregate to the cost of the response action...." No judicial review is available if this exclusion is invoked by EPA. The restriction of this provision to NPL sites limits its effectiveness in most litigation involving private parties; it is possible, however, that an MSW-generating defendant in a private contribution action at a non-NPL site, who would otherwise be protected at an NPL site, could argue to a court that the MSW exemption ought to be considered by the court as an "equitable factor" in order to bring "parity" of treatment of MSW disposers.

Expedited Settlements with De Minimis Parties

The new Act amends CERCLA § 122(g), which provides for "De Minimis Settlements," by adding § 122(g)(7), which now allows the USEPA to take into consideration "inability or limited ability to pay" when evaluating whether to enter such de minimis settlements. (De minimis settlements under § 122(g) are those where the both the amount of waste disposed and its toxicity are minimal in comparison to other generators and their waste, as determined by USEPA.) The provision also adds new §§ 122(g)(8)-(10) requiring the USEPA to respond promptly to requests for de minimis settlement and to give reasons when such settlements are denied. No judicial review is permitted of EPA decisions under this provision, however. New CERCLA § 122(g)(11).

Conclusions

The 2001 CERCLA Amendments hold the promise of substantially changing the approach of real estate investors to contaminated properties, and if properly implemented may reverse the trend toward urban sprawl and encourage the recycling of core urban lands. The Prospective Purchaser non-liability provision, especially when combined with aggressive use of State Voluntary Remediation Programs and the federal deference to State decisions under those programs promise to greatly reduce, or even eliminate, the fears that have deterred the development and reuse of such properties. But the complexity of the provisions will require careful planning and patience and the guidance of experienced real estate and environmental counsel.