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Brownfields: Revisions to EPA “All Appropriate Inquiries” Rule Could Protect More Buyers of Contaminated Property from Liability

October 6, 2013

An improving economy is bringing more developers and investors back into the brownfields market. As shovels turn dirt at what were once service stations, factories, and dry cleaners, developers and investors are again asking their environmental counsel how they can minimize or avoid liability for historic contamination on developable land. Into the mix comes EPA, which recently announced plans to revise its so-called All Appropriate Inquiry standard that lenders and developers, and their environmental counsel, use to assess whether a new property owner is exempt from liability under CERCLA, the federal Superfund law.

In a Federal Register Notice published on August 15, 2013, EPA proposed to adopt a new ASTM International standard (ASTM E1527-13), which would revise the criteria used to satisfy the All Appropriate Inquiries requirement via a Phase I Environmental Site Assessment (ESA). The new standard changes certain definitions in order to better differentiate between traditional brownfield sites (e.g., sites with unremediated contamination), and former brownfields that have either been cleaned up to unrestricted levels, or that have obtained regulatory closure subject to engineering controls or land use restrictions. The proposed standard also emphasizes the assessment of the potential for vapor migration, so as to be more definite as to where it presents an environmental risk.

In brief, ASTM E1527-13 makes three notable changes to the Phase I process, discussed in further detail below. It: 1) revises the definitions of Recognized Environmental Condition (REC) and Historical REC (HREC) and adds a new definition for Controlled Recognized Environmental Condition (CREC); 2) adds standards for evaulating the potential for vapor intrusion in a Phase I ESA; and 3) revises standards for regulatory file review.

EPA’s proposed rule clarifies that a Phase I ESA consistent with the new ASTM E1527-13 standard is not the only option for satisfying the All Appropriate Inquiries requirement. Parties may continue to rely on the standards EPA developed in its 2005 All Appropriate Inquiries Final Rule. See EPA Issues “All Appropriate Inquiry Rule” to Promote Brownfield Redevelopment, Marten Law Environmental News (Nov. 9, 2005).

EPA’s proposal is a direct final rule. The agency accepted public comments through September 16, 2013, and could still make some changes before the rule becomes effective on November 15, 2013.

I. All Appropriate Inquiries – the Key to Three CERCLA Defenses

CERCLA broadly imposes liability on current and past owners and operators of contaminated property, as well as other parties who generate and transport hazardous substances.[1] CERCLA liability is strict and is imposed without regards to fault. CERCLA’s unforgiving liability scheme ensures that “polluters pay.” At the same time, it imposes liability on innocent parties who have no connection with hazardous substance releases other than purchasing (often unwittingly) a previously contaminated site, or perhaps even worse, purchasing property with no historic use of chemicals that has been contaminated by hazardous substances migrating from a nearby parcel.

As initially acted, CERCLA’s affirmative defenses to liability were limited to those releases caused by an act of God, an act of war, or a third party in certain circumstances. The third-party defense shields an otherwise liable party who demonstrates, among other things, that the contamination was caused solely by “an act or omission of a third party other than an employee or agent of the [landowner asserting the defense], or than one whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly, with the [landowner] …”[2]

Congress has amended CERCLA to add three additional liability exemptions for innocent landowners, contiguous property owners, and bona fide prospective purchasers. Each of those defenses turns on a showing that All Appropriate Inquiries were made prior to the purchase.

A. The Innocent Landowner Defense

The original third-party defense was largely useless to parties who purchased contaminated properties because purchasers will always have a contractual relationship with all predecessors in title by virtue of the deed.[3] Congress attempted to rectify this in the Superfund Amendments and Reauthorization Act of 1986 (SARA), which established the innocent landowner defense. The innocent landowner defense was intended to protect landowners who, in good faith, acquired property without knowledge of contamination.

Congress implemented the innocent landowner defense by revising the definition of “contractual relationship” to exclude transfers of ownership of land where the owner acquires the land after the disposal of hazardous substances has occurred, and when the owner did not know, and had no reason to know, of the contamination.[4]  To establish that it did not know, and had no reason to know, about contamination, a party seeking to avail itself of the innocent landowner defense must demonstrate (among other things) that it undertook “All Appropriate Inquiries” prior to purchasing the property.[5]

SARA, however, did not define what steps a prospective purchaser must take to satisfy the All Appropriate Inquiries requirement. The result – CERCLA’s ambiguous, and often elastic, liability scheme continued to make investors wary of redeveloping property that was – or even remotely might be – contaminated.

B. The Contiguous Property Owner and Bona Fide Prospective Purchaser Defenses

Congress again attempted to rectify the problem in 2002, when it passed the Small Business Liability Relief and Brownfields revitalization Act (the Brownfield Amendments). The Brownfield Amendments established new exemptions to CERCLA liability, including the contiguous property owner and bona fide prospective purchaser exemptions. Under the contiguous property owner exemption, property owners whose land is (or may become) impacted by contaminants migrating from neighboring parcels are exempted from liability, subject to a number of restrictions.[6] Under the bona fide prospective purchaser exemption, a land owner who acquires ownership of a facility and demonstrates that “all disposal took place before the purchase” is exempted from liability, again subject to an number of restrictions.[7]

Like the innocent landowner exemption, the contiguous property and bona fide prospective purchaser exemptions turn on a showing that the landowner conducted All Appropriate Inquiries prior to purchasing the property. Recognizing that the requirement remained ambiguous and subject to varying judicial interpretations, Congress directed EPA to develop rules establishing the standards for All Appropriate Inquiries.

II. EPA’s 2005 All Appropriate Inquiries Rule

In 2005, EPA published its long-anticipated final rule establishing standards and practices for conducting All Appropriate Inquiry.[8] In general terms, the rule requires parties to investigate past uses and ownership of a property and visually inspect the property to identify conditions that indicate releases or threatened releases of hazardous substances.

Relevant here, EPA’s rules provide that compliance with ASTM 1527-5 (“Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process”) and ASTM E2247-08 (“Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property”) satisfy the All Appropriate Inquiries requirements.[9] Under the ASTM standards, the purpose of the Phase I ESA is to identify any and all Recognized Environmental Conditions (RECs), which are indications that a site is, or may be, impacted by hazardous substance releases.

The Phase I must also identify “historical” Recognized Environmental Conditions (HRECs), which are environmental conditions that in the past would have been considered a REC, but which may or may not be considered a REC currently.

Like EPA’s rules, the ASTM standards detail the steps that must be taken to identify RECs and HRECs, including interviews, record reviews, and site reconnaissance.

III. EPA’s Proposed Amendments to the All Appropriate Inquires Standard

EPA’s current rulemaking flowed from ASTM International’s decision to revise its standard for Phase I ESAs, i.e., ASTM E1527-05. Earlier this year, ASTM International approved its updated Phase I ESA standard, and submitted it to EPA for formal approval, including a determination that it is compliant with the All Appropriate Inquiries rule.

ASTM E1527-13 makes three notable changes to the Phase I process: 1) revising the definitions of REC and HREC and adding a new definition for Controlled Recognized Environmental Conditions; 2) adding standards for addressing the potential for vapor intrusion in a Phase I ESA; and 3) revising standards for regulatory file review.

A. RECs, HRECs, and CRECs

First, the new standard revises the definitions of REC and HREC, and adds a new definition for Controlled Recognized Environmental Condition. These revisions will help developers and lenders distinguish between sites impacted by hazardous substance releases (or threatened releases), previously contaminated sites that have been cleaned up, and sites that have obtained regulatory closure despite the presence of residual contamination (i.e., sites subject to institutional or engineering controls).

RECs

The new standard first simplifies the definition of REC. REC is currently defined as:

The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substance or petroleum products into structures on the property or into the ground, groundwater, or surface water of the property. The term includes hazardous substances or petroleum products even under conditions in compliance with laws.

The proposed standard proposes to redefine REC as:

The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property due to the release to the environment; under conditions indicative of a release to the environment or under conditions that pose a material threat of future releases. De minimis conditions are not recognized environmental conditions.

The revised definition has little in the way of substantive differences, but removes some ambiguity, and according to EPA, better comports with the objective of All Appropriate Inquiries as set out in EPA’s regulations.[10]

HRECs & CRECs

Under the current definition, HREC is intended to apply to releases that have been cleaned up and have received regulatory closure (for example, a No Further Action or NFA determination):

An environmental condition which in the past would have been considered a REC, but which may or may not be considered a REC currently ….

The definition, however, has caused some confusion – particularly in circumstances where regulatory closure was obtained with residual contamination remaining on-site, because such a scenario could arguably qualify as both a REC and a HREC. The revised definition clarifies that HRECs apply only to sites where contamination has been remediated to unrestricted residential use:

A past release of any hazardous substances or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority or meeting unrestricted residential use criteria established by a regulatory authority, without subjecting the property to any required controls (e.g., property use restrictions, AULS, institutional controls, or engineering controls) ….

The proposed standard also adds a new definition, Controlled Recognized Environmental Condition (CREC), which applies to sites with residual contamination that have been closed via risk-based criteria and may present future obligations for the landowner. CREC is defined as:

A REC resulting from a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority (e.g., as evidenced by the issuance of a NFA letter or equivalent, or meeting risk-based criteria established by regulatory authority), with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (e.g., property use restrictions, AULS, institutional controls, or engineering controls ….

B. Vapor Intrusion

The potential for vapor intrusion into buildings has been drawing increased regulatory scrutiny in recent years. EPA, for example, published earlier this year two draft guidance documents on addressing and mitigating vapor intrusion.[11] Lenders, in turn, have grown increasingly concerned about the potential impact on property value associated with vapor intrusion. The current ASTM standard is ambiguous on whether a Phase I Environmental Site Assessments should assess vapor intrusion risk. In order to resolve that ambiguity, the proposed standard has several changes intended to emphasize the assessment of vapor intrusion risk. For example, the proposed standard revised the definition of “migrate/migration” to specifically include vapor migration:

[T]he movement of hazardous substances or petroleum products in any form, including, for example, solid and liquid at the surface or subsurface, and vapor in the subsurface.

Furthermore, the new standard differentiates between the intrusion of vapors attributable to hazardous waste releases from non-scope indoor air quality issues that are not attributable to hazardous substance releases (e.g., naturally occurring radon).

C. Regulatory File Review

The proposed standard has a new section addressing regulatory file reviews, with an emphasis on reviewing regulatory files for adjacent properties. Specifically, the proposed standard states that if the target property or an adjacent parcel is identified in government records, the “pertinent regulatory files and/or records associated with the listing should be reviewed” based on the environmental professional’s discretion.  This requirement is intended to document the validity of information found from searches of agency databases. If the environmental professional decides that a regulatory file review is not warranted, it must justify that decision in the Phase I report.

III. Conclusion

Barring adverse public comments, the rule will go into effect on November 15, 2013, without further agency action. If adverse comments are received, EPA will withdraw the direct final rule, address the comments, and issue a new final rule.

If you have any questions, please contact any member of Marten Law’s Property Development practice group.

[1] See generally 42 U.S.C. § 9607(a).

[2] 42 U.S.C. § 9607(b)(3).

[3] See, e.g., M&M Realty Co. v. Eberton Terminal Corp., 977 F. Supp. 683, 686 (M.D. Pa. 1997).

[4] 42 U.S.C. § 9601(35)(A) (definition of “contractual relationship”).

[5] 42 U.S.C. § 9601(35)(B) (definition of “reason to know”).

[6] To qualify for the contiguous property owner exemption, the land owner must demonstrate that it: 1) did not cause or contribute to the release or threatened release; 2) is not potentially liable or affiliated with any other potentially liable party; 3) exercises appropriate case with respect to the release; 4) fully cooperates with efforts to respond to the release and restore natural resources; 5) complies with all land use controls and does not interfere with institutional controls; 6) complies with all information requests; 7) provides all legally required notices regarding hazardous substance releases; and 8) conducted all appropriate inquiry at the time of purchase and did not know or have reason to know of contamination. 42 U.S.C. § 9607(q).

[7] The bona fide prospective purchaser exemption is quite similar to the contiguous property owner exemption. To qualify, the land owner must demonstrate that it: 1) made all appropriate inquiry; 2) exercises appropriate care with respect to any release; 3) fully cooperates with efforts to respond to the release and restore natural resources; 4) complies with land controls and does not interfere with institutional controls; 5) complies with all information requests; 6) provides all legally required notices regarding hazardous substance releases; and 7) is not potentially liable or affiliated with another potentially liable party. 42 U.S.C. § 9601(40).

[8] Standards and Practices for All Appropriate Inquiry, 70 Fed. Reg. 66,070 (Nov. 1, 2005).

[9] 40 C.F.R. § 312.11(a). EPA’s 2005 regulations initially allowed parties to comply with the All Appropriate Inquiries standard via ASTM E1527-5. EPA revised the regulations in 2008 to allow parties to also use ASTM E2247-08.

[10] EPA’s regulations state that the “standards and practices set forth in this part for All Appropriate Inquiries are intended to result in the identification of conditions indicative of releases and threatened releases of hazardous substances on, at, in, or to the subject property.” 40 C.F.R. § 312.20(e).

[11] EPA has not yet finalized these guidance documents: OWSER Final Guidance for Assessing and Mitigating the Vapor Intrusion Pathway From Subsurface Sources to Indoor Air – External Review Draft and Guidance for Addressing Petroleum Vapor Intrusion at Leaking Underground Storage Tank Sites – External Review Draft.

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