Whether you are a buyer, a seller, or a lender, it is important to understand the environmental liability risks in a transaction, and how to assess and manage those risks during the course of the transaction.

1. Evaluating and Managing
Environmental Risk in Business
Transactions
George J. Marek and Michael S. Mostow
October 12, 2017

2. Presenters
George Marek
414.277.5537
george.marek@quarles.com
Michael Mostow
312.715.5158
michael.mostow@quarles.com
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3. Today’s Goals
• Understand the major environmental liability schemes and defenses
• Understand the levels of due diligence assessment and their legal and
practical implications to choose the right level of due diligence
• Learn how to leverage environmental due diligence information to
effectively manage risk
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4. Topics
• Basic Liability Concepts and Environmental Statutes and Defenses
• All Appropriate Inquiry
• Environmental Assessment Tools - the ASTM Phase I Practice and Other
Options
• Vapor Intrusion
• Addressing the Risks
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5. Evaluating Risk
• The goal of due diligence is not to eliminate 100% of the environmental
risks
• The goal is practical: to reduce those risks—through knowledge and deal
terms—to an acceptable level, dependent on a client's risk management
comfort level
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6. What can affect a property from an environmental perspective?
• Historical operations or activities
• Structural conditions and site development
• Natural site conditions
• Current environmental compliance
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7. What can affect a property from an environmental perspective?
• Types of contaminants
• Affected media
• Vapor intrusion
• Resulting potential impacts to buyer
• Remediation obligations
• Other liabilities
• Suitability of property for intended use
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8. Types of Environmental Liabilities to Evaluate
• Current conditions and activities
• Historical conditions
• Adjacent sites
• Non-acquired sites
• Third party claims (e.g., current and past employees, neighbors, etc.)
• Governmental enforcement
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9. Environmental Liability Framework
• Generally, Environmental Liability is strict, joint and several, and runs with
the land
• A purchaser/lessee/operator of contaminated property can be held liable,
even though they are not responsible for contaminating the property at
issue
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10. Types of Environmental Liabilities
• CERCLA (Superfund)
• Liability can be asserted against potentially responsible parties (PRPs) as follows:
• The current owner or operator of a facility
• A past owner or operator of a facility at the time hazardous substances were disposed of
• The person who arranged for hazardous substance disposal
• The transporter of hazardous substance to the facility
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11. Environmental Liability Framework
• Statutory Defenses to CERCLA Liability
• Innocent Landowner (Cannot have prior knowledge)
• Bona Fide Prospective Purchaser (Prior knowledge OK)
• Contiguous Property Owner
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12. Environmental Liability Framework - History
• 1980 CERCLA
• 1986 SARA Amendments
• 2002 Brownfield Revitalization Act
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13. Environmental Liability Framework – Bona Fide Prospective
Purchaser
• Avoids CERCLA liability IF all appropriate inquiry performed, disposal on
site took place before date of purchase and appropriate care exercised
with respect to any discovered contaminants (only valid for purchases
after January 11, 2002) See 42 U.S.C. sec. 9601(40)
• Property may be subject to CERCLA "windfall" lien if property is cleaned up
by U.S. EPA (and it has not recovered its response costs) and property
owner would reap a windfall due to increased value of clean property
(notice to owner not required)
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14. BFPP Requirements
• 42 U.S.C sec. 9601 (40):
• Bona fide prospective purchaser — The term “bona fide prospective purchaser”
means a person (or a tenant of a person) that acquires ownership of a facility after
January 11, 2002, and that establishes each of the following by a preponderance
of the evidence:
• (A) Disposal prior to acquisition
• (B) Inquiries
• (C) Notices
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15. BFPP Requirements (cont.)
• (D) Care
• (E) Cooperation, assistance, and access
• (F) Institutional control
• (G) Requests and subpoenas
• (H) No affiliation
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16. All Appropriate Inquiry
• What’s “all appropriate inquiry” and how does it relate to the ASTM Phase
I practice?
• Phase I ESA performed in compliance with the ASTM standard E1527-13 is
"blessed" by EPA as AAI
• Final Rule for "All Appropriate Inquiry" – 40 CFR Part 312
• Caution: AAI must be performed within one year of acquiring property and
certain elements (interviews, site inspection, lien searches, etc.) must be
performed or updated within 180 days from acquisition
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17. BFPP Summary
• To qualify as a BFPP for protection from CERCLA liability, the landowner
must:
• Acquire the property after January 11, 2002
• Perform AAI prior to acquisition of the property
• Acquire the property after the disposal of hazardous substances
• Not be affiliated with any other person potentially liable for response costs
• Comply with continuing obligations
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18. Continuing Obligations
• Exercise appropriate care regarding the property's contamination by taking
reasonable steps to:
• Stop any continuing release
• Prevent any threatened future release
• Prevent or limit human, environmental, or natural resources exposure to previously
released contamination
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19. Environmental Liability Framework
• But consider…
• What happens if you buy some contaminated property and can establish a defense,
but the original polluter is long since gone or is judgment-proof?
• You still own contaminated property
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20. Types of Environmental Liabilities other than CERCLA/Superfund
• State Environmental Statutes and Common Law Claims
• State “baby Superfund” laws
• Other state environmental laws, such as Wisconsin’s Hazardous Substance Spill Law,
Section 292.11, Wis. Stats.
• Common law causes of action
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21. Types of Environmental Assessments – Phase I ESA
• ASTM Phase I Environmental Site Assessment (ESA) ASTM Practice E1527-
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• The Phase I report identifies “recognized environmental conditions”
(“RECs”) or indicates they are absent
• REC:
• The presence or likely presence of any hazardous substances or petroleum products in, on, or at
a property: (1) due to release to the environment; (2) under conditions indicative of a release to
the environment; or (3) under conditions that pose a material threat of a future release to the
environment
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22. Types of Environmental Assessments – Phase I ESA (cont.)
• De minimis conditions are not recognized environmental conditions
• Historical REC (HREC):
• Refers to a past release that has been addressed to the satisfaction of the applicable regulatory
authority without subjecting the property to any required land use restrictions. Section 3.2.42
• Controlled REC (CREC):
• Refers to a past release that has been addressed to the satisfaction of the applicable regulatory
authority, but which is subject to the implementation of required land use controls. Section
3.2.18
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23. Types of Environmental Assessments – Phase I ESA
• What a Phase I is NOT
• A “clean” Phase I is NOT a guarantee that a site is clean
• A Phase I is NOT a compliance audit
• A Phase I does NOT necessarily guarantee that a property purchaser will be able to
claim a defense against future environmental liability
• A Phase I does NOT have eternal life
• All Phase I reports are NOT created equal
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24. Evaluating Environmental Liabilities
• Evaluating the validity/scope of NFR / NFA or equivalent case closure
letters
• Do not assume that just because there is a closure letter in the chain of title that it
signifies a “clean bill of health” for the property
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25. Other Types of Environmental Assessments
• Phase I ESA + customized add-ons/non-scope considerations
• ASTM Transaction Screen
• Desktop Reviews
• Customized Mini Phase Is
• Compliance Audits
• Phase II Invasive Testing Investigations
• ASTM Vapor Intrusion Assessment Standard E2600-10
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26. Environmental Due Diligence Assessment Process
• What happens after the Phase I? That depends…
• Are there RECs?
• Phase II Environmental Assessments
• Contract remedies
• Indemnities
• Escrow/holdbacks
• Pre- and post-closing requirements
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27. Due Diligence as a Tenant
• All Appropriate Inquiry still applies
• Establish Baseline
• Development Issues
• Lease Negotiation
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28. Due Diligence as a Lender
• CERCLA excludes from the definition of an “owner or operator” any “person, who,
without participating in the management of a . . . facility, holds indicia of ownership
primarily to protect his security interest in the . . . facility”
• What happens if lender forecloses on the property?
• After a foreclosure, a lender who “did not participate in management” prior to foreclosure may
generally conduct certain activities provided that the lender attempts to sell, re-lease or otherwise
divest itself of the property at the earliest practicable, commercially reasonable time using
commercially reasonable means
• Lender will also want to evaluate the borrower’s environmental due diligence to avoid
significant environmental liabilities interfering with debt repayment or value of
collateral
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29. Hot Topic: Vapor Intrusion
• Vapor intrusion is the migration of volatile chemicals from the subsurface into overlying
buildings. Volatile chemicals in buried wastes and/or contaminated groundwater can
emit vapors that may migrate through subsurface soil and into air spaces of overlying
buildings. (USEPA 2002)
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30. Hot Topic: Vapor Intrusion (cont.)
• Factors Affecting Vapor Intrusion
• Source characteristics
• Soil or groundwater
• Concentration and location
• Biodegradability
• Soil characteristics
• Air permeability, moisture content, surface cover
• Building construction
• Foundation type (basement, slab-on-grade, etc.)
• Foundation openings (crack size)
• HVAC system, air exchange rate
• Depressurization
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31. Why Worry about VI?
• Average person drinks 2 liters of water per day
• BUT – the Average person inhales 20,000 liters of air a day
• Potential Impacts
• Assessing property’s suitability for use
• Abatement costs
• Tort liability
• Property value reductions
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32. Environmental Insurance
• Shift potential environmental liabilities to an insurance carrier via a
pollution legal liability insurance policy
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33. Case Studies
• Client wants to sell the stock of a company that has been manufacturing
metal and plastic industrial packaging products at two facilities since the
1900s.
• Deal in 2005 fell apart after the buyer performed a Phase I ESA:
• Significant staining and spillage of inks/coatings and cleanup solvents (methyl
isobutyl ketone, toluene, xylene, trimethylbenzene) were observed on the floor of
the lithography department around coaters and presses. A portion of this spillage
was observed entering a trench that houses miscellaneous equipment (e.g., piping
and equipment drive shafts). Based on a review of waste manifests, the use of
petroleum-based inks dates to at least the early 1980s. Similarly, solvent-based inks
(including chlorinated solvents) also were used historically at the site
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34. Case Studies
• According to an undated Facility Operations Checklist that summarized various
environmental information related to the facility, "Litho solvents were disposed
directly onto the soil behind the plant"
• Solvents and coating materials are stored in a flammable materials storage room,
constructed in 1933, located at the north end of the facility. Historically, this room
was equipped with floor scuppers, sealed a few years ago, that would have
discharged to an unpaved gravel area outside the building
• There was significant staining and evidence of spillage in the courtyard area, which
is underlain by significantly deteriorated asphalt and concrete paving. In addition,
several rusted drums were observed stored on end with a significant accumulation
of liquids
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35. Case Studies
• We did our own Phase I report which was much more measured
• Because the new buyer was purchasing the company as a going concern,
we bought environmental insurance that covered the buyer and our
client/seller from third party claims
• We did not allow any phase II testing
• Deal closed for the purchase price
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36. Objectives of Environmental Due Diligence in a Transaction
• Evaluate known risks or issues
• Identify previously unknown risks
• Confirm suitability for intended use
• Manage risks
• Seller: How do I protect myself from future liability?
• Buyer: How do I investigate a property, define environmental problems,
and protect myself?
• Lender: How can I assure debt repayment and maintain value of collateral?
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37. © 2017 Quarles & Brady LLP -
This document provides
information of a general
nature. None of the
information contained herein
is intended as legal advice or
opinion relative to specific
matters, facts, situations or
issues. Additional facts and
information or future
developments may affect the
subjects addressed in this
document. You should consult
with a lawyer about your
particular circumstances
before acting on any of this
information because it may
not be applicable to you or
your situation.
Thank You! Questions?
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George Marek
414.277.5537
george.marek@quarles.com
Michael Mostow
312.715.5158
michael.mostow@quarles.com