"Innocent Landowners" and "Prospective Purchasers" Under the Superfund Act
Released: 2003-05-08T00:00:00

I. Innocent Landowner Status as a Defense to Liability

Put most simply, the innocent landowner defense allows owners of contaminated property toescape CERCLA liability if the contamination was placed on the property before acquisition, andthe landowner did not know, or have reason to know, at the time of acquisition of thecontamination's presence. As discussed below, the landowner also has several continuingobligations after the land is bought and contamination is discovered if he or she is to hold on toinnocent landowner status.

The defense evolved over three enactments. It began with the original Superfund Act in 1980. (5) There, Congress created the Act's basic liability scheme, unchanged to this day. As mentioned, thatscheme subjects the present owner of the facility to strict, joint, and several liability for cleanup andother costs. One of the few defenses to this stringent liability scheme is the "third-party defense,"available when the defendant can show by a preponderance of the evidence that the release or threatof release was caused solely by "an act or omission of a third party other ... than one whose act oromission occurs in connection with a contractual relationship , existing directly or indirectly, withthe defendant ...." (6) The third-party defense requiresfurther that the defendant establish that (a)he/she exercised due care as to the hazardous substance concerned, and (b) took precautions againstforeseeable acts or omissions of the third party. (7)

To the Congress of 1980, the "contractual relationship" exception to the third-party defense must have made perfect sense. Why should a site owner escape CERCLA liability under the defensewhen the third party who caused the contamination was an entity with whom the owner hadcontractual dealings? The potential for manipulation seemed obvious. Others pointed out, however,that the contractual-relationship exception might have an untoward result. If the instruments ofconveyance between a seller and buyer of land were viewed as placing them in a "contractualrelationship," a buyer whose property had been contaminated solely by a predecessor in the chainof title was in a bind. Despite innocence, the buyer could not invoke the third-party defense. Heor she remained liable under CERCLA as an owner of the property.

In 1986 amendments to CERCLA, (8) Congress resolved the instruments of conveyanceconundrum. "Contractual relationship," the Act now says, does indeed include such instruments,but with a big exception (in effect, an exception to an exception). The exception is for the landownerwho acquired the property after the hazardous substance was disposed of or placed there, and --

at the time [the landowner] acquired the facility ... [he/she] did not know and had no reason to know that any hazardous substance which is the subjectof the release or threatened release was disposed of on, in, or at thefacility. (9)

The 1986 amendments went on to explain: to establish that a defendant "had no reason to know," he/she "must have undertaken, at the time of acquisition, all appropriate inquiry into the previousownership and uses of the property ...." (10) The1986 amendments thus answered one question: whendoes "contractual relationship" include land contracts? But they created another: What does "allappropriate inquiry" involve? Congress did include a brief definition of "all appropriate inquiry"in the 1986 amendments, but just a few years later efforts began in Congress to provide moredetailed guidance.

These clarifying efforts culminated in 2002 in the SBA. The SBA instructs EPA to establish by regulation "standards and practices" that satisfy the "all appropriate inquiry" requirement. Theregulations, required by January 11, 2004, must include --

inquiry by an environmental professional

interviews with past and present owners, operators, and occupants of thefacility

reviews of historical sources, such as chain of title documents and aerialphotographs, and land use records

searches for recorded environmental cleanup liens

review of government records, waste disposal records, and hazardous wasterecords

visual inspection of the facility

specialized knowledge or experience on the part of the landacquirer

the relationship of the purchase price to the value of the property ifuncontaminated

reasonably ascertainable information about the property,and

the obviousness of the property contamination, and the ability to detect thecontamination by appropriate investigation. (11)

Plainly, these regulations, when issued, will be a quantum leap beyond the existing CERCLA in the degree of guidance available to land purchasers. (12)

Not all property owners will be subject to the new "all appropriate inquiry" regulations. The SBA grandfathers property purchased before May 31, 1997; it need only comply with CERCLA'sstandards for "all appropriate inquiry" prior to the SBA. These less specific standards are --

specialized knowledge or experience on the part of the land acquirer

the relationship of the purchase price to the value of the property ifuncontaminated

reasonably ascertainable information about the property

the obviousness of the property contamination, and

the ability to detect the contamination by appropriateinspection. (13)

Property purchased on or after May 31, 1997, but before the new regulations are promulgated, must satisfy American Society for Testing and Materials procedures -- including its document entitled"Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site AssessmentProcess." Finally, nongovernmental or noncommercial entities that buy property for residential orsimilar use need only do a "facility inspection and title search," if they reveal no basis for furtherinvestigation.

The SBA adds further prerequisites for invoking the innocent-landowner defense, relating to the defendant's conduct after land purchase. He/she must cooperate with those conductingthe response action, comply with any land use restrictions linked to the response action, andnot impede institutional controls. Further, he/she must take "reasonable steps" to stop anycontinuing release, prevent any threatened future release, and prevent or limit human,environmental, or natural resource exposure to any previously released hazardous substance. (14)

In sum , the innocent-landowner defense to CERCLA liability is available on two multi-part conditions. Both must be satisfied. First , the release must have been caused solelyby a third party lacking a contractual relationship, direct or indirect, with the defendant. Alandowner lacks a contractual relationship with predecessors in the chain of title if the disposalof the hazardous substances on the site preceded acquisition and at time of land acquisitionhe/she did not know and had "no reason to know" that the hazardous substance had beendisposed of there. "No reason to know," in turn, means that before the date of acquisition,he/she made "all appropriate inquiry" (as defined above). Second , the landowner must haveexercised due care and taken precautions against foreseeable acts of the third party, cooperatedwith the response action, complied with pertinent land use restrictions, and not impededinstitutional controls. Further, he/she must take "reasonable steps" to stop any continuingrelease, prevent any threatened future release, etc.

II. Innocent Landowner Status as Enabling De Minimis Settlement

At large contaminated sites, the number of parties swept into the CERCLA liability netcan be daunting -- occasionally in the hundreds. To address this, CERCLA requires EPA,when appropriate, to enter into "de minimis settlements" with certain liable parties whoseblameworthiness was deemed by Congress to be minor. (15) A de minimis settlement enables aparty identified by EPA as potentially liable to settle early with EPA and thereby avoidprotracted, expensive negotiations with the agency and a myriad of other liable parties over theallocation of liability at the site. At the same time, it allows the government to focus itsresources on negotiations or litigation with the major parties.

One type of liable party eligible for de minimis settlement is the innocent landowner. When "practicable and in the public interest," the agency is directed by CERCLA to settlepromptly with a landowner if the settlement involves only a "minor portion" of the responsecosts and the landowner "in the judgment of [EPA]" --

owns the land where the facility is located

did not conduct or permit the generation, transportation, storage,treatment, or disposal of any hazardous substance at the facility

did not contribute to the release or the threat of release of a hazardoussubstance through action or omission, and

did not buy the real property with actual or constructive knowledge thatthe property was used for the generation, transportation, storage, treatment, or disposal of anyhazardous substance. (16)

Note the several terms (e.g., "in the judgment of EPA") that give EPA wide discretion as to whether to offer de minimis settlements. Note also the absence of "all appropriate inquiry"and certain other prerequisites for innocent-landowner status as a third-party defense. Notwithstanding, EPA guidance demands all appropriate inquiry for de minimis settlementeligibility as well. (17) The guidance documentmakes a two-step argument. First, it asserts thatCERCLA's de minimis settlement prerequisite that the landowner lack "constructiveknowledge" is similar to the "had no reason to know" language in CERCLA'sinnocent-landowner-as-defense provision. Second, since "had no reason to know" requires allappropriate inquiry, the lack-of-constructive-knowledge prerequisite for settlement must beread to do the same. (18) Indeed, as a general matter,EPA's willingness to enter into de minimissettlements with landowners is based on the likelihood the landowner can successfully assertinnocent landowner status as part of a third-party defense.

Other CERCLA provisions empower EPA to include covenants not to sue in de minimis settlements (19) (as CERCLA authorizes for otherCERCLA settlements), direct that suchsettlements be entered as consent decrees or embodied in an administrative order (presumablyfor more effective enforcement), (20) and immunizede minimis settlors from contribution suitsbrought by other liable parties (claiming that the de minimis settlors got off too easy andshould have to pay more). (21)

Historically, EPA has entered into few de minimis settlements with landowners.

III. Prospective Purchasers

The prospect of CERCLA liability has long been thought to chill investment in realproperty that is known or feared to be contaminated. The reason is plain enough. A purchaserof land, as has been mentioned, becomes potentially liable under CERCLA as an "owner" ofthe site for any response costs that may be necessary. And when a buyer of land knows or hasreason to know of its contaminated condition at the time of purchase, he or she does not qualifyfor use of either innocent landowner device (Parts I and II).

In the current policy debate, such known or possibly contaminated sites are dubbed "brownfields." (22) They often consist of abandonedindustrial sites in urban areas, andencouraging private investment in them -- cleaning them up for redevelopment -- is a goalwith which few would argue. But how to get around the CERCLA liability disincentive?

Early on, EPA saw a way. If a buyer could know the amount of his/her liability in advance of purchase , an informed business decision could be made as to whether the purchasewas attractive even with liability. So EPA in 1989 established a policy toward prospectivepurchasers of contaminated property, (23) offeringin "very limited circumstances" to enter intoa "prospective purchaser agreement" (PPA) -- effectively, a settlement with the would-bepurchaser by which EPA covenants not to sue based on existing contamination at the site. Asauthority, EPA cited its inherent enforcement discretion. Its criteria for PPAs included that (1)EPA enforcement action was anticipated at the facility, and (2) the purchaser agreed to makesubstantial monetary contribution to, or conduct of, the response action, where EPA's responsecosts would not otherwise be recoverable.

Prospective purchasers of contaminated property were slow to take advantage of the new PPA device. So in 1995, EPA issued superseding guidance to add flexibility to the agency'scriteria for entering into PPAs. (24) Still, only about160-170 were entered into from the 1989guidance to 2002. For a Congress seeking to encourage redevelopment of brownfields, thisnumber was too low. As a result, the SBA in 2002 inserted a definition of "bona fideprospective purchaser" (BFPP) into CERCLA and gave them not merely eligibility for aliability settlement, but an outright exemption from liability (25) -- except for the potentialwindfall lien noted below. And in contrast with PPAs, which require the actuality orlikelihood of EPA enforcement at the site and a negotiated settlement with the buyer, the newprovisions are self-executing -- EPA need not do anything. Once the parcel is bought, thebuyer becomes a BFPP automatically as long as the statutory criteria are satisfied.

As EPA put it: "The BFPP provisions represent a significant change in CERCLA. For the first time, a party may purchase property with knowledge of contamination and not acquireliability under CERCLA as long as that party meets the BFPP criteria." (26)

More specifically, the SBA exempts BFPPs and their tenants from CERCLA "owner" or "operator" liability -- but not "transporter" or "generator" liability -- if the person does notimpede the response action or natural resource restoration. The exemption applies to anycontaminated site, not just those meeting the SBA definition of "brownfields." A BFPP is aperson who acquires ownership after SBA enactment (January 11, 2002) and who showsamong other things that --

all hazardous substance disposal at the facility occurred pre-acquisition

the person made "all appropriate inquiry" (as defined in PartI)

the person exercises "appropriate care" as to hazardous substances foundat the facility by taking "reasonable steps" to stop releases, prevent any threatened futurerelease, etc.

the person provides full cooperation and access to persons authorized toconduct response actions or natural resource restorations

the person complies with pertinent land use restrictions and does notimpede institutional controls, and

the person is not potentially liable for response costs at the facility, oraffiliated with anyone that is. (27)

Finally, the SBA gives the United States a "windfall lien" on the property (or the U.S. may, by agreement with the owner, obtain other assurance of payment) if the United States hasunrecovered response costs and the response action increased the market value of theproperty. (28)

Issues remain, however. What constitutes "reasonable steps" (third bullet above)? (29) Asfor the amount of the windfall lien, how does one compute the portion of the property's valueattributable to the response action? These and other ambiguities in the BFPP criteria haveprompted some in the regulated community to point out that lacking a PPA, the buyer ofknown or possibly contaminated land takes a chance that should EPA ever contemplateenforcement at the site, the agency may not agree with the owner's assessment that he or sheis entitled to BFPP status. For this reason, these voices have urged that buyers of such landconsider making use of both a PPA and the new BFPP exemption.

Such a two-prong strategy may have limited prospects under EPA's view as to the effect of the SBA's BFPP provisions, however. A recent agency memorandum states: "EPA believesthat, in most cases, the [SBA] make[s] PPAs from the Federal Government unnecessary." (30) To be sure, the memorandum does indicate that even after SBA enactment EPA is willing toconsider "PPAs or some other agreement" prior to land acquisition if the public interest isserved, but it repeatedly characterizes the qualifying circumstances as "limited" or "unusual." Thus in a given case a buyer of possibly contaminated land may have only BFPP status as arealistic option.

As recited in the EPA memorandum, (31) the circumstances when a PPA or some otherpre-acquisition agreement still may be considered by the Agency are first, "where there islikely to be a significant windfall lien and the purchaser needs to resolve the lien prior topurchasing the property (e.g., to secure financing)." In this circumstance, the agreement withthe buyer might only settle the lien claim, nothing more (so far, EPA has entered into two ofthese agreements). Such an agreement would not be a PPA, since it would not contain acovenant by EPA not to sue. A practical obstacle to use of lien-resolution agreements, ofcourse, is the difficulty of knowing the precise amount of the unrecovered government cleanupcosts at a site in advance of cleanup completion.

In contrast to lien-resolution agreements, PPAs are contemplated by the memorandum when "necessary to ensure that the transaction will be completed and the project will providesubstantial public benefits to, for example, the environment, a local community because of jobscreated or revitalization of long blighted, under-utilized property, or promotion ofenvironmental justice." Such circumstances might arise when (a) "[s]ignificant environmentalbenefits will be derived from the project ... and there is a significant need for a PPA toaccomplish the project's goals"; (b) the facility is currently involved in CERCLA litigationsuch that the party who buys the facility might be sued by a third party; and (c) there are"unique, site-specific circumstances not otherwise addressed above when a significant publicinterest would be served by the transaction ...." To reiterate, however, the memorandumfrequently characterizes these categories as narrow.

To be sure, while prospects for a two-prong strategy by contaminated-land buyers may be uncertain, the need for pursuing a PPA even when one appears to be a BFPP may havelessened recently. Recall that one reason for seeking the certainty of a PPA was the ambiguityof the SBA phrase "reasonable steps." EPA guidance issued March 6, 2003 may have reducedsomewhat the evident confusion over the meaning of "reasonable steps." (32) In addition, buyeruncertainty may be alleviated further by EPA's issuance of a nonbinding "comfort letter," incases where EPA has enough information about the site to make suggestions as to what"reasonable steps" might be. (33) On the other hand,the same EPA guidance repeatedly (andnecessarily) insists that the determination of "reasonable steps" be a "site-specific, fact-basedinquiry." Thus, a buyer of land, even with the guidance, simply cannot have total certainty thatEPA will see things as the buyer does should the agency eventually initiate enforcement action.