EPA Adopts New Rule for Protection from Superfund Liability

As the Toxins-Are-Us audience well knows, one of
the most important issues confronting purchasers and secured lenders
is the “innocent landowner” and other safe-harbor
provisions in federal environmental laws.<small>¹</small> On
Nov. 1, 2005, the U.S. Environmental Protection Agency (EPA) adopted a
new rule called the “All Appropriate Inquiries Rule” (AAI
Rule), which significantly changes the way a Phase I Environmental
Site Assessment (Phase I ESA) must be conducted when commercial
property is purchased. Congress directed the EPA to issue this new
rule when it passed the Small Business Liability Relief and Brownfields
Revitalization Act of 2002 (Pub.L 107-118). The new rule clarifies the
requirements necessary to establish the original superfund
“innocent landowner” defense, as well as the new
“prospective purchaser” and “adjoining property
owner” defenses created in the Brownfields Revitalization
Act.<small>²</small> </p><p> Even though lending institutions and
banks have the added protection of the “secured creditors
exemption” to Superfund liability, they would be well-advised to
apply the AAI Rule as the new standard for pre-loan environmental due
diligence. Of course, protection for the lender remains a contingency
until the borrower defaults on the loan and the lender wants to get
full value for the mortgaged property. If the lender does not require
conformance with the AAI Rule on the “front end” of the
loan, the lender may be faced with the unsavory prospect of having to
walk away from the property.</p><p> The AAI Rule is more stringent than the
ASTM 1527-97 or 1527-00 standards that most environmental consultants
have previously used to conduct a Phase I ESA. The AAI Rule defines,
for the first time, the qualifications that an environmental
professional (EP) must have to perform the environmental investigations.
The AAI Rule also requires more extensive interviews and
investigations of surrounding properties. The EP must now consider the
relationship of the purchase price to the fair market value if the
property was not contaminated and must identify and discuss the impact
of any “data gaps,” such as the unavailability of
historical information, that are identified during the investigations.
Finally, the EP must declare that he/she qualifies as an EP as defined
in the AAI Rule and that the investigation has been conducted in
conformance with 40 CFR §312.</p><p> As petroleum and petroleum
products are not “hazardous substances” under Superfund,
they do not have to be considered under the AAI Rule. However,
petroleum contamination is often an important component to the
environmental condition of a property; therefore, the prospective
purchaser, tenant or lender should seriously consider requiring that
the EP include petroleum and petroleum products in the scope of any
Phase I ESA investigation being conducted.</p><p> EPA also will require that
the AAI Rule be followed when a party, generally a governmental
entity, is conducting a property assessment that has been funded by an
EPA Brownfields grant. In addition to the matters reviewed for a
commercial property transaction, in the context of a Brownfields
grant, the EP must also look for evidence of a release of petroleum or
petroleum products, “controlled substances” and
“pollutants and contaminants,” which is a very broad
category that includes “disease-causing agents....” The
requirement to assess an actual or threatened release of a
“controlled substance” or “disease-causing
agents” will place new, unfamiliar obligations on the EP.</p><p> The
effective date of the AAI Rule is Nov. 1, 2006. In the meantime, the new
AAI Rule or the old ASTM standard may be used to satisfy the inquiry
standard required to claim the prospective purchaser, adjoining
property-owner and the innocent landowner defenses to Superfund
liability. However, in light of the AAI Rule, prospective purchasers,
tenants and lenders should consider migrating toward the new rule in
advance of its Nov. 1 effective date.

</p><hr><h3>Footnotes</h3><p>1 <i>See, generally</i>,&nbsp;Kilpatrick and
Coster, “The Environmental Primer-A Reprise: A General Compendim
on Fundamental Environmental Statutes in Bankruptcy,” 16 ABI J.
8 (March 1977); Ames, Kilpatrick, Salerno and Coster, “Hemingway
Revisited,” 14 ABI J. 8 (May 1995). <br> 2 <i>See,
generally</i>,&nbsp;40 CFR §312.</p>