Some of the more interesting CERCLA cases involve lawsuits between current and former property owners. Usually, the current owner assumes it qualifies as bona fide prospective purchaser (BFPP) or for the Innocent Landowner (ILO) Defense and sues the defendant/former owner for cost recovery. The defendant/former owner invariably files counterclaims alleging the current owner/plaintiff is not entitled to the BFPP and ILO and should be partially responsible for the cleanup. These cases give courts an opportunity to explore the contours of the federal All Appropriate Inquiries (AAI) rule as well as to evaluate the sufficiency of phase 1 environmental site assessment practices.
The leading case of a cost recovery action backfiring on a plaintiff/owner was Ashley II of Charleston, LLC v. PCS Nitrogen, Inc. where the court held where the plaintiff was found to have failed to exercise appropriate care and therefore lost its BFPP status. A recent installment in this line of cases was TC Rich, LLC v. Shaikh, 2021 U.S. Dist. LEXIS 69483 (C.D. Cal. 2/22/21).
In this case, defendant Shaikh was the sole shareholder and director of Pacifica Chemicals Incorporated and a predecessor (collectively “Pacifica”) which occupied the property from 1980 to the early 200s. Pacifica’s operations involved formulating fabric softeners, dyes, and light detergents for the textile industry. The detergents and softeners were blended in mixing tanks. Pacifica leased the property from defendant Shaikh who was the record owner from 1979 to 1984 and 1987 to 2003.
Wastewater generated from rinsing of mixing tanks was initially discharging the wastewater into the sewer. After receiving a notice of violation from the Los Angeles County Sanitation District (LACSD) for failing to obtain an industrial wastewater discharge permit, Pacifica installed a concrete floor trench system and a 1500-gallon three-stage clarifier to collect and treat the rinsate before it was discharged into the sewer.
The businesses stored perchloroethylene (“PCE”) in a 2,000-gallon above-ground storage tank (AST) inside the building. The parties dispute if the PCE was used in the manufacturing process or that the drain system was used to collect PCE spills. The defendants claimed the PCE was purchased for re-sell to customers in 55-gallon drums. However, the discharge monitoring reports that Pacifica filed detected low levels of PCE in the industrial wastewater.
In 2003, Shaikh sold the Property to Eun Lee (Lee) who used the Property for storing garments and handbags. A phase 1 identified the former unregistered clarifier and the former PCE AST as RECs but concluded there were no significant environmental concerns associated with current or previous operations that required further action. As part of the transaction, Shaikh abandoned the clarifier and trench drains by filling them with cement.
In 2005, TC Rich LLC (TC Rich) bought the Property from Lee. A phase 1 prepared by TC Rich’s lender identified the former clarifier as a Recognized Environmental Condition (REC) but concluded the former PCE AST did not pose a risk since it had been removed and there were no known regulatory violations reported. The phase 1 recommended collecting samples around the abandoned clarifier for the purpose of submitting a closure report to the LACSD. No samples were collected along the floor trenches or piping associated with the clarifier nor from the area of the former AST. The phase 2 found no evidence of volatile organic compounds and semi-volatile organic compounds and concluded that the “use of the wastewater clarifier at the subject site has not impacted the subsurface with contamination.”
The property was used by affiliates of TC Rich (Rifle Freight, Inc., and Fleischer Custom Brokers) to operate a logistics and distribution services businesses. In 2015 TC Rich sought to refinance its mortgage. A lender phase 1 concluded that the former Pacifica operations constituted a REC based on their prior handling and storage of PCE and recommended a phase 2. This time, the phase 2 detected PCE in soil, soil gas and groundwater at the Property. Based on the concentrations and locations of the PCE, the phase 2 concluded the contamination was “consistent with discharges from Pacifica Chemical’s operations at the Property”. The phase 2 consultant prepared a technical memorandum that estimated the total remedial costs at $700K and suggested that Pacifica should be financially responsible for the costs of the investigation and remediation. A peer review of the technical memo estimated the total remedial costs could range as high as $925K. The contamination was reported to the DTSC.
In 2015, TC Rich, its associated operational entities along with the individuals who owned these entities (Plaintiffs) filed a complaint against Pacifica and its environmental consultants. The count against the consultants alleged that the 2005 investigation was “insufficient for purposes of evaluating the potential nature and extent of contamination at the property.” The court agreed to stay the litigation in this related case after the parties disclosed that Pacifica’s consultant had offered to perform certain remedial activities at a fixed price of $940,000 which would be funded by Pacifica’s insurer as a defense cost.
[As an aside, the plaintiffs had never received reliance from the 2005 phase 1 consultant. To navigate around the absence of any contractual relationship (privity) with the consultant, plaintiffs asserted they were intended beneficiaries of the engagement between the consultant and the lender since the consultant knew phase 1 was prepared to facilitate plaintiff’s purchase of the property. The consultant filed a motion to dismiss based on the lack of privity and statute of limitations which the court denied. The parties then settled the malpractice claims and the consultants were dismissed from the case.]
Beginning in mid-2015, Pacifica agreed to perform an investigation under informal supervision of the state Department of Toxic Substances Control (DTSC). This work included collecting over 100 soil/soil gas and indoor air samples, installing two dozen groundwater monitoring wells, and performing soil vapor extraction (SVE) system and enhanced reductive dichlorination (ERD) pilot tests to evaluate effectiveness of proposed remedial actions. The ERD pilot test showed decreasing contaminant concentrations.
In 2019, the plaintiffs sought leave to amend their complaint to add a RCRA 7002 count for injunctive relief. After the court denied the motion, the plaintiffs sent a 60-day Notice of Endangerment and Intent to File Suit Pursuant to RCRA section 7002. The plaintiffs then filed a second complaint seeking, inter alia, cost recovery under CERCLA and seeking injunctive relief under RCRA.
Shaikh filed a counterclaim against the plaintiffs’ alleging, inter alia, that TC Rich was not entitled to assert any of the CERCLA landowner liability protections because it had failed to comply with AAI and failed to exercise due care/appropriate care.
The defendant argued that TC Rich could not assert that it “had no reason to know” of the contamination because the 2005 phase 1 failed to comply with AAI by failing to identify the former PCE tank as a REC. The defendant noted that the 2005 phase 1 did not review LACSD records which would have revealed that there had been numerous violations for exceeding effluent limitations in wastewater including excessive volatile organic compounds (VOCs). Because of the flawed 2005 Phase I ESA, the defendant argued that the 2005 phase 2 was limited to collecting samples from the area of the clarifier and therefore failed to identify the PCE contamination.
The court denied defendant’s motion for summary judgment saying there were triable issues of fact if TC Rich was entitled to the landowner owner defense. If the court had ended its opinion at this point, the decision would have been an unremarkable decision that did not warrant a blog post. However, the court then went on to justify its decision and, in the process, ventured into Alice in Wonderland territory.
First, the court misunderstood the nature of the defendant’s counterclaim. The defendant was arguing that the 2005 phase 1 was deficient. For some reason, though, the court apparently thought that the defendant was questioning the “propriety” of TC Rich engaging a phase 1 consultant.
Then, the court bizarrely suggested that because TC Rich was not an “industry insider in environmental pollutants,” it reasonably relied on its consultant’s conclusions and could not know that the phase 1 may have been flawed or that it may not have complied with AAI. In the absence of any facts suggesting the TC Rich had any reason not to trust the phase 1 report, the Court said it could not hold that TC Rich had reason to know about the presence of contamination as a matter of law.
This was ill-informed and flawed reasoning. Very few if any potential purchasers are an “industry insider” who would know if a phase 1 was deficient. The innocent landowner caselaw is replete with situations where a purchaser relied on what turned out to be a defective phase 1. In those cases, courts generally hold that the purchaser failed to qualify for the defense because a properly conducted phase 1 would have disclosed the presence of releases of hazardous substances. Indeed, the overwhelming theme of the ILO caselaw is that if the contamination was not discovered, the purchaser failed to conduct an appropriate inquiry. The remedy in these cases is not to allow a purchaser to assert the ILO but for the plaintiff to bring a breach of contract or professional malpractice claim against the consultant who performed the deficient phase 1. To allow a purchaser to rely on its ignorance of what constituted a satisfactory phase 1 would have the effect of rendering the defense superfluous since virtually every purchaser could argue it did not know its consultant was negligent.
The parties submitted expert reports that disagreed on the adequacy of the 2005 phase 1 report. However, whether the 2005 report complied with AAI was really a distraction. The fact is that the 2005 phase 1 report identified the historical presence of the PCE AST. This alone should have led the court to conclude that the plaintiff should have had reason to know” about potential past releases at the time of purchase.
Moreover, despite knowing of the historical existence of the AST and that a chemical supply company previously operated on the Property, the plaintiffs took no actions to determine if the site was contaminated and to prevent the spread or migration of any contamination until the 2015 phase 1. A more reasonable interpretation of the facts would have been that in 2005 the plaintiffs not only had every reason to know of the potential contamination but failed to exercise due care but took no action. As a line of ILO cases have famously said “doing nothing is not due care.”
Likewise, the failure to so inquire has been found was to be a lack of due care with respect to the hazardous substances that are later found to have been present on the Property. See United States v. A & N Cleaners & Launderers, 854 F. Supp. 229, 244 (S.D.N.Y. 1994). Indeed, the consultant who performed the 2005 phase 2 admitted in a deposition that “its investigation was not sufficient to test the property for contamination because it failed to test the entire Property and did not investigate the area that housed a 2,000-gallon tank of PCE.”
On the issue of whether TC Rich exercised its post-acquisition due care/appropriate care obligations, the court noted that the plaintiff had immediately notified the state and provided access to Pacifica to do additional investigations. The court said that the fact that plaintiff had failed to become actively involved in the investigation or failed to implement any remedial measures was not itself evidence of insufficient due care.
After several rounds of mediation. the parties settled both cases by creating a $1.1MM remediation trust that was partially funded by a $940L contribution from the defendant’s insurance policy. It is unclear how much the plaintiffs contributed to the remedial trust fund.
This case illustrates the importance of plaintiffs to carefully evaluate if they satisfy the BFPP or ILO defenses before they decide to commence a cost recovery lawsuit to minimize the chances the defendant may file a successful contribution counterclaim.