Congress had a good idea when it belatedly, and surprisingly, reformed parts of Superfund effective January 11, 2002. The main obstacle to Brownfields redevelopment has been the uncertain Superfund liability that potentially hangs over the head of any site owner – including a new buyer. So Congress exempted new buyers –”bona fide prospective purchasers,” or BFPPs – of contaminated sites from Superfund liability. But Congress also created a liability trap for the unwary BFPP: the so-called “windfall lien.” Until EPA disarms the trap through guidance or regulations, uncertainty about potential “windfall lien” liability will delay Brownfields redevelopment and defeat Congress’ good intentions. A windfall lien in favor of the U.S. government attaches to cleaned-up property acquired by a Superfund–exempt BFPP. The lien is for the lesser of two dollar amounts: the government’s total unrecovered response costs, or the increase in the property’s fair market value attributable to government-funded cleanup. In computing unrecovered response costs for purposes of the windfall lien, the Superfund 113 statute of limitations does not apply. This bears repeating: there is no statute of limitations on recovery of government response costs via the “windfall lien” mechanism. The windfall lien concept seems reasonable enough if the goal of the new amendments is to protect the assets of the U.S. Treasury. To the extent that government-funded environmental cleanup has increased the fair market value of the cleaned-up property, why shouldn’t the U.S. Treasury, rather than a PRP, reap the benefit of the increase in property value? But if the goal of the new amendments is to jump-start Brownfields redevelopment, then the “windfall lien” is a potential deal-killer because it introduces a new set of uncertainties that must be figured into the calculus of the sale price of Brownfields property before the deal can close. Just as Superfund cases seldom settle until the remedy cost is known, real estate sales seldom close until contingent liabilities are either liquidated or indemnified against. Primary among the contingent liabilities and uncertainties that a careful buyer of Brownfields property must resolve before closing are:
1. The unknown amount of unrecovered government response costs. 2. The unknown amount of increase in property value attributable to the cleanup. 3. Uncertainty whether a prospective buyer is a BFPP; and if so, the uncertain effect of post- closing forfeiture of BFPP status. 4. Uncertainty as to when and how the government may enforce its lien, and against what assets.(1) Unknown Response Costs. When the U.S. government collects response costs via a windfall lien, the § 113 statute of limitations does not apply. Thus, the government is entitled to dust off its closed files and reassert cost claims that were written off long ago. The Superfund program will run out of money in 2004. EPA may try to wring enough money out of the “old and cold” response cost debts at Brownfields sites to operate Superfund another year or two. Moreover, the new law does not limit recoverable response costs to costs incurred by EPA and DOJ. The statutory phrase is “unrecovered response costs incurred by the United States.” The United States also incurs response costs in its capacity as a PRP. Will the Department of Defense and other government agency-PRPs use the windfall lien to recover their unreimbursed cleanup costs? (2) Unknown “Windfall” Amount. The amount of government response costs recoverable through a windfall lien is capped at the amount of the “windfall,” which is defined as the amount by which the “response action” increased the fair market value (FMV) of the property above the FMV that existed “before the response action was initiated.” The FMV of most Superfund sites was probably zero, or less, before cleanup commenced. Property values presumably were restored as a result of site remediation. But how much of the property’s present-day FMV is attributable to the response action, rather than market conditions, neighborhood redevelopment, on-site improvements, or other factors? Appraisers who attempt to carve out the response-action-related portion of increased FMV will be breaking new ground. Can a prospective buyer rely on an expert’s appraisal based on new, unproven methodology? (3) Qualification/disqualification. To qualify for the BFPP exemption from Superfund liability, a buyer must be free of any “financial relationship” with the seller or any other PRP, and must conduct a Phase I environmental assessment before purchasing the property. After closing, the BFPP-turned-owner may forfeit the exemption by contributing to the site’s contamination or by failing to cooperate with parties that are cleaning up the property. How may a prospective purchaser be reasonably certain that it qualifies for the exemption? Suppose one of the site PRPs is a public company and the buyer owns a small amount of stock in the company. Does the buyer nevertheless qualify as a BFPP because ownership of a non-controlling amount of stock in a public company is not a “financial relationship” contemplated by the statute? Conversely, suppose the buyer does not want to qualify as a BFPP because it prefers the nominal risk of being a PRP-owner of a remediated Superfund site to the unknown liability of a “windfall lien.” Can the prospective buyer disqualify itself from BFPP status by acquiring a minimal financial interest in one of the site PRPs? And finally: if, after closing, the owner-turned-BFPP forfeits its liability exemption by performing a forbidden action such as contributing to on-site contamination, is the windfall lien thereby nullified? (4) Enforcement/Settlement. When the original owner-PRP sells cleaned-up property to a BFPP for fair market value, the original owner-PRP will pocket the entire windfall profit, but the “windfall lien” will attach to the BFPP’s newly-acquired property–an obviously inequitable result. The mere threat of such inequitable lien enforcement, which could result in a BFPP paying for property twice, may be enough to deter prospective buyers. The new law allows a BFPP to satisfy the lien “by sale or other means.” Perhaps EPA eventually will establish a procedure that will allow a prospective buyer to pay off EPA at closing in return for a lien waiver. Even so, buyers and sellers may have to endure a substantial time delay while EPA processes any settlement proposal. EPA will have to calculate the before-and-after-FMVs, add up all its unrecovered past costs, negotiate the settlement, and possibly then may have to obtain Department of Justice approval of any settlement. Conclusion. Too many details of the BFPP exemption have been left to EPA or the courts. The many ambiguities in the windfall lien provision could neuter the Brownfields revitalization effort. BFPPs who purchase contaminated property before EPA issues clarifying guidance or regulations may find themselves liable for more of a “windfall” than they actually received. Developers who wish to quantify their potential exposure to the windfall lien will have to do some due diligence of their own or try to negotiate a lien waiver with EPA prior to closing. If EPA wants to help revitalize Brownfields redevelopment, it must remove the ambiguities and streamline the process through guidance or regulations; and, most importantly, must develop a practical process for prompt evaluation and resolution of potential windfall lien claims.