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The Fourth Circuit’s Ashley II Decision – Property Redevelopers and Superfund Liability Defenses

On April 4, 2013, the Fourth Circuit handed down its much-awaited decision about what a bona fide prospective purchaser (BFPP) of contaminated property must do to retain the Brownfields defense to Superfund liability. In PCS Nitrogen Inc. v. Ashley II of Charleston LLC, No. 11-2087, slip op. at 31 (4th Cir. April 4, 2013), the Court held that a property redeveloper, Ashley II, was liable as a current owner potentially responsible party (PRP) for soil contamination at the former phosphate fertilizer plant despite its “all appropriate inquiry” pre-purchase investigation of past environmental conditions at the facility. Ashley II knew that old sumps at the property contained contaminated water, yet for years did nothing to clean out or close the sumps. This failure to stop a continuing release violated the post-purchase “due care” or “reasonable steps” requirements of the BFPP defense, and negated its applicability to Ashley II.

The Ashley II opinion undoubtedly will stand for the proposition that a BFPP must strictly comply with CERCLA’s post-acquisition due care requirements in order to retain a defense to Superfund liability. But the Ashley II opinion also helps shed light on a number of other case-specific Superfund questions, including the availability of other pre- or post-purchase defenses, liability for earth-moving activities during redevelopment, environmental liability assumption under an asset purchase agreement, and allocation in lieu of apportionment.

Divisibility Defense #1? When a site with pervasive soil contamination (phosphate fertilizer production began at this property in 1884) undergoes redevelopment and secondary disposal via regrading and construction activities, can a PRP rely on divisibility to avoid liability under CERCLA Section 107(a)(1) (42 U.S.C. §9607(a)(1)) by apportioning harm based solely on the initial contaminating activities?

No. Apportioning only the original contamination and ignoring the effects of the secondary disposal activities will preclude a “reasonable basis for apportionment” analysis needed for a court determination that harm is divisible. (Pgs. 36-37.)

Divisibility Defense #2? Can a current owner PRP who neither caused the initial contamination nor engaged in secondary disposal activities prove up its own “zero share” of liability using a divisibility of harm argument?

Also no. Current owners of contaminated property are strictly liable for response costs unless they satisfy all of the elements of one of CERCLA’s statutory defenses: “involuntary acquisition” (§101(20)(D) & 35(A)); “secured lender” (§101(20)(E)); “innocent landowner” (§101(35) & §107(b)(3)); “bona fide prospective purchaser” (§101(40) & §107(r)); or “contiguous property owner” (§107(q)). As the Court stated at page 40, “All of these provisions require much more than a mere showing that no disposal occurred during a current owner or operator’s tenure at a facility. [Citation omitted.] Consequently, allowing such PRPs to apportion solely their own zero-share of liability would render the heightened requirements of these narrow defenses and exemptions dead letters.”

Geography? Does a current tenant PRP who only leases a small portion of a larger site have liability for the entirety of the site?

Yes. CERCLA Section 101(9) defines a “facility” as anywhere hazardous substances have come to be located. Courts are not required to split a large facility into smaller sub-sites based on geographic ownership or operation, nor can a current PRP avoid liability for a large parcel by arguing that its portion is less contaminated than the rest of the facility. (Pgs. 27-28).

Redeveloper Liability? Can liability be imposed on a past owner solely by inference and a showing that the past owner engaged in earth-moving and construction activities at a previously contaminated site?

Yes. “To be sure, PCS presented no direct evidence that Holcombe and Fair moved or dispersed any contaminated soils. However, CERCLA does not require a smoking gun. Instead, CERCLA liability may be inferred from the totality of the circumstances and need not be proven by direct evidence.” (Pg. 25, quotations and citations omitted.)

Asset Purchaser Liability? Can an asset-only purchase transaction result in the imposition of CERCLA liability on the corporate successor of the party who purchases substantially all of the assets?

Yes, if the predecessor’s acquisition documents are ambiguous and extrinsic evidence establishes the predecessor buyer’s intent to take the assets “as is,” including liabilities. (Pgs. 21-22.)

Allocation Instead of Apportionment? If all of these apportionment arguments fail, does that mean a court must impose joint and several liability on the defendant PRPs?

No. CERCLA contains both a liability provision in Section 107 and a contribution provision in Section 113(f). Even if a PRP fails to establish that the harm at a site is subject to apportionment under Section 107, it can still ask a court for an equitable allocation of responsibility among the co-liable PRPs under Section 113. The Fourth Circuit affirmed the district court’s allocation of 75% of the responsibility to the two past owner/operators who caused the original soil contamination; 16% to the redeveloper who secondarily contaminated the site; 5% and 1% to the two current property owners; and 3% to the past owner who installed and contaminated the sumps. The only party given a 0% share was the City of Charleston, which took title to an on-site street extension built during the redevelopment activities. (Pg. 40.)

Also, although plaintiff Ashley II lost its apportionment argument, it gained the Fourth Circuit’s affirmation of a 5% allocation share despite its current ownership of almost 75% of the 43 acre site.

Take-away Message. The world of Superfund liability and defenses was shaken by the U.S. Supreme Court in a trio of first-decade cases — Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), United States v. Atlantic Research Corp., 551 U.S. 128 (2007), and Burlington Northern & Santa Fe Ry. Co. v. United States, 556 U.S. 599 (2009). We are still assessing the new structure and some pieces remain complex and unanswered.

Ashley II, however, continues a recent trend. Apportionment arguments are fact-intensive, require extensive proof, and are difficult to establish, perhaps because courts are reluctant to place the full weight of any missing PRPs or “orphan” liability on a plaintiff. Court have been and remain willing, however, to distribute equitable allocation shares on all of the viable PRPs, again perhaps because this provides what the courts believe is an acceptable level of rough justice.

If you find yourself enmeshed in a Superfund or Brownfields liability puzzle, the members of the Spencer Fane Environmental Practice Group can help.