What You Don't Know About Phase I Can Cost YouPhase I Environmental Site Assessments (Phase Is) are widely used by purchasers of property and lending institutions providing capital for the purchase. A Phase I can provide valuable information about past uses of the property that assists purchasers and lenders in making informed decisions. In many instances, however, once the Phase I is received and reviewed, it is put in a file and forgotten, even when the Phase I reveals that the property may be contaminated. This is a mistake made by those who do not understand the true purpose behind a Phase I and do not realize that it is only one piece of a larger puzzle. Unfortunately, such ignorance can be costly.
The Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as CERCLA or the Superfund Law, imposes liability for response costs on current owners and operators of a contaminated facility. There are very few defenses to such liability and those defenses are very narrowly construed because they are exceptions to the general rule. A defense available to a current owner of contaminated property is called the Bona Fide Prospective Purchaser (BFPP) defense, which allows the acquisition of contaminated property without liability for response costs. However, in order to claim the BFPP defense and exception from liability, strict adherence to the terms of the defense are absolutely necessary and entitlement to each element must be proven.
A BFPP "shall not be" liable for a release if liability is based solely on the BFPP's status as an owner or operator of a facility and the BFPP does not impede the performance of a response action. 42 USC 9607(r)(1). To claim BFPP status, the main requirement is to conduct "all appropriate inquiries." This requirement is satisfied by conducting a Phase I that complies with the ASTM or EPA standards. But, there are other requirements as well that must be strictly followed. In general terms, the property must have been purchased after January 11, 2002; the disposal of contaminants must have occurred prior to the purchase; all legally required notices with respect to the discovery of contamination must be made; all "appropriate care" is exercised to stop continuing releases, prevent future releases, and prevent exposure to previously released substances; the BFPP provides full cooperation to persons conducting response actions, complies with land use restrictions, does not impede the effectiveness of institutional controls, and complies with all information requests; and the BFPP must not be affiliated with any person who is potentially liable for response costs. 42 USC 9601(40).
The consequence of failing to meet each of these requirements was illustrated in a recent decision by the U.S. Fourth Circuit Court of Appeals. Ashley was the current owner of property that had been used for decades for the production of phosphate fertilizer and which was contaminated with arsenic, lead, and other hazardous substances. Ashley tried to claim the BFPP exemption. Although Ashley had completed a Phase I, Ashley did not exercise "appropriate care" to stop continuing releases and prevent future releases. Specifically, Ashley failed to clean out and fill a sump and did not monitor and adequately address conditions relating to debris and limestone piles. The court found that Ashley's one year delay in filling the sumps established that Ashley did not exercise appropriate care. As a result, Ashley was unable to claim BFPP status and was held to be liable as an owner. PCS Nitrogen v. Ashley II of Charleston, 714 F.3d 161 (4 Cir. 2013).
Buying property with contamination is risky and what you don't know or don't do can cost you, just like it cost Ashley. The Phase I is a useful first step but it is one of many such steps. Liability can be avoided only by knowledge of the requirements and strict adherence to those requirements.