The Journal of The DuPage County Bar Association

Back Issues > Vol. 18 (2005-06)

Risks Involved With Brownfield Transactions and How Sellers Can Manage That Risk Through Remediation and Contractual Mechanisms
By Andrew J. Marks

What is a Brownfield?

A "brownfield" is defined as "any real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant."1  The United States Environmental Protection Agency (USEPA) estimates that over 450,000 such sites exist in the United States.2  In the past, these sites were mothballed and unproductive. Since the mid 1990s, the perception of these contaminated properties has changed. The federal and state brownfields programs have provided funding for redevelopment, and private parties have recognized the financial benefits gained from remediation. With the passage of the Small Business Liability Relief and Brownfields Revitalization Act,3  successful policies have been codified, government funding has been increased, and additional exemptions for private parties create more of an incentive to reinvest.

Brownfield transactions have increased in recent years due to extra government funding, additional liability exemptions, and advances in cleanup technology. Various cities and towns throughout Illinois, including Chicago, Aurora, Joliet, Peoria, Franklin Park, Oak Park, Cicero, Waukegan, and Rockford have contaminated properties that are being redeveloped. Indeed, any time a gas station, dry cleaner, or closed manufacturing facility is remediated and a new business is placed on the site, a brownfield transaction has likely occurred.

While the social, economic, and environmental benefits of redeveloping these sites is increasingly being realized, myriad risk factors still exist in brownfield property transfers. Accordingly, lawyers, bankers, developers and property owners engaged in real estate transactions can benefit from proper remediation and contractual protections. This article addresses some concerns involved with redevelopment of these properties from a seller’s perspective.

Hypothetical Brownfield

With this background in mind, a private owner (Seller) may wish to sell its property, which we will call Blackacre and assume that the property contains an abandoned manufacturing and distribution facility. The structures present on this hypothetical brownfield are older buildings that contain asbestos insulation, tiles, and mastics. Federal and state asbestos regulations require a licensed remediation contractor to remove material containing at least 1 percent asbestos before any demolition work can begin.

According to recent USEPA policy statements, the 1 percent threshold for asbestos-containing materials was based on antiquated detection technology. While the current regulatory threshold is still 1 percent, new data suggests that material containing significantly less than 1 percent asbestos can release unacceptable concentrations of asbestos into the air.4  Indeed, a recent federal indictment charges W.R. Grace and its executives with violations of the Clean Air Act where studies showed that vermiculite released into the air contained 0.039 percent tremolite asbestos.5  Also in the indictment, the government states that "modern science has not established a safe level of asbestos exposure for which there is no increased risk of disease."6  The current position of the government, therefore, may result in different cleanup standards in the future, alteration of the regulations, and may be used as negative evidence in a toxic tort suit against Seller.

Other hazardous contaminants are present at our hypothetical site. For example, volatile organic compounds, including benzene, a known carcinogen, and trichloroethylene, a suspected carcinogen are present since the Seller stored or used petroleum7  products and solvents. Another troublesome contaminant at Blackacre is polychlorinated biphenyls (PCBs), which cause a variety of adverse health effects, including cancer, neurological impairment, and endocrine disruption. PCBs are currently present at numerous sites because of their widespread use in electrical equipment such as transformers, despite the production ban in the late 1970’s. Finally, inorganic contaminants, such as lead, cadmium, or arsenic, are located in this site. These hazardous substances can cause neurological impairment, reproductive problems, and birth defects. The potential harm that may result from exposure to the aforementioned contaminants should be factored into any risk assessment and insurance calculations when deciding on the structure of the transaction.

Sellers of Brownfields are Potentially Exposed to Statutory and Common Law Liability

Given the presence of hazardous substances, the sale of Blackacre potentially exposes the Seller to statutory and common law liability. Primarily, Seller may be liable under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Resource Conservation and Control Act (RCRA), and the Illinois Environmental Protection Act (Act). Under the common law, Seller may be liable for fraudulent misrepresentation and certain toxic tort theories.

A. Potential Liability Under Federal and State Environmental Statutes

CERCLA and the Illinois Environmental Protection Act impose liability on past owners of contaminated property and allow the federal and state government to force responsible persons to perform remediation. Seller can transfer financial responsibility, but not liability to a purchasing party (Buyer) through an indemnification provision.

If our Buyer is a municipal corporation, Seller should be aware that the municipal corporation is a person under CERCLA and the Act, unless it takes the property through its eminent domain powers and does not cause or contribute to the release of hazardous substances.8  Therefore, Seller’s exposure to risk would expand if a municipal corporation takes its property. In the wake of a recent United States Supreme Court decision, the exercise of eminent domain may increase given the Court’s expansive interpretation of taking for "public use."9 

While not as comprehensive as CERCLA, but extraordinarily complex, RCRA imposes liability on owners and operators of property where the presence of waste poses an imminent or substantial threat.10  Additionally, RCRA regulates the disposal of hazardous and solid waste and includes a program to deal with underground storage tanks. Depending on the type and concentration of contaminants, costly remediation may be mandated.

B. Potential Liability Under the Common Law

1. The Tort of Fraudulent Misrepresentation

Traditionally, a party selling property has relied on barrier clauses in a real estate sales agreement to manage its risk under statute and common law. In Illinois, barrier clauses in a real estate contract - including as-is, release, and defense, hold harmless and indemnification clauses - are an effective means to transfer environmental liability to a purchaser.11  However, barrier clauses may be vitiated if fraudulent conduct is proved by the purchaser.12  For example, an "AS IS" provision in a real estate contract, which disclaims any representations about the property, would not exonerate Seller from liability to Buyer for failing to disclose a known material environmental condition.

To void a barrier clause based on fraudulent misrepresentation, Buyer would need to prove the following elements: (1) a false statement of material fact; (2) the defendant’s knowledge or belief that the statement was false; (3) the defendant’s intent that the statement induced the Buyer to act; (4) Buyer’s justifiable reliance upon the truth of the statement; and (5) damages resulting from reliance on the statement.13 

In Giannis, a case heard by the Second District, the seller of residential property failed to disclose their knowledge of a past flooding event. The purchaser bought a house after inspecting the property multiple times. A few years after closing, two rooms in the basement flooded with water almost to the ceiling. The court stated that the purchaser is entitled to rely on the "truthfulness, accuracy, and completeness of the statements" made by the seller.14 

Furthermore, the Giannis court held that the "as-is" clause is not a defense to a claim for fraud. Agreeing with the majority view, the court stated that nothing in the "as-is" provisions may be read to allow a seller to contract out of its disclosure obligations. The court concluded that the "as-is" clause in the sales contract "does not shield a seller from liability for fraud."15 

Before granting relief, courts require convincing evidence of fraud where the sale involves a business-to-business sale.16  If the future use of Blackacre is for residential purposes, however, a court may view Seller’s "duty to speak" broadly and may be more inclined to find Purchaser’s reliance justified. In this vain, a court may be more inclined to take an expansive view of what constitutes the passive omission of facts if families will be living on the property or if school construction is planned.

2. Fear of Cancer as a Toxic Tort

In the toxic tort context, actions have typically sounded in negligence, trespass and nuisance. However, Illinois courts have expanded the causes of action available to plaintiffs to include a fear of cancer for mere exposure to a harmful chemical. Regardless of any physical manifestation, plaintiffs may now successfully plead negligent infliction of emotional distress for fear of getting cancer.17  However, the plaintiff must prove "actual exposure" in addition to proving that defendant breached an owed duty.

In Illinois, courts recognize this cause of action, as long as the plaintiff establishes "actual exposure to a harmful agent."18  Additionally, the fear may develop at some point, even years, after the actual exposure occurs.19  An Illinois "plaintiff must be permitted to recover all demonstrated injuries."20  While these injuries include "future injury that is not reasonably certain to occur, . . . the compensation would reflect the low probability of occurrence."21 

Generally, in environmental cases where the plaintiff’s allege negligence, causation may be established by merely showing that the plaintiff came into contact with the chemical at issue without quantifying the level of the exposure.22  However, in cases where healthy patients are advancing a stand-alone negligent infliction of emotional distress claim predicated on a fear of cancer absent any physical injury, the plaintiff must prove actual exposure above a published state standard based on empirical evidence.23  Keep in mind though, that the plaintiff is not required to show any physical manifestation of his fear. 24 

Thus, a fear of cancer allegation by a healthy plaintiff based solely on exposure may fail if the evidence reveals contaminant levels below state standard. In such a case, the court may find that the defendant satisfied its duty of care by adequately removing the contamination and that the plaintiff’s fear is objectively unreasonable.

Seller Must Tender Merchantable Title

Another issue that our seller should keep in mind is that a significant environmental blight can cloud title and unravel the sale. In Jones, the First District ruled that "the presence of hazardous waste materials, in itself, is sufficient to preclude defendant [Seller] from tendering merchantable title to plaintiff [Buyer]."25  Since every contract for the sale of real estate contains an implied condition of merchantable title, the Jones decision may afford purchasers of contaminated property with a unique contractual remedy.

In the Jones decision, the purchaser agreed to buy real estate that he subsequently learned to be contaminated with polychlorinated biphenyls (PCBs) and subject to an inquiry from the USEPA. Although the purchaser had occupied the subject property pending the real estate closing, the purchaser refused to close, and instead, moved out of the premises when the Seller failed to obtain a release from liability from the USEPA. Observing the high environmental remediation costs, (approximately $100,000 to remedy the PCB contaminants) and a penalty demand from USEPA for $28,500 (compared to the property’s purchase price of $265,000), the First District found that the Seller was unable to tender merchantable title. Therefore, the court awarded the Purchaser reimbursement of his earnest money and consequential damages made during his occupancy.

A straight-forward reading of the Jones decision indicates that the court was "comparing the relative value of the cleanup with that of the original purchase price to contamination’s impact on mer-chantability."26  However, courts in other jurisdictions and the US Court of Appeals for the 7th Circuit, applying Indiana law, have refused to follow the Jones decision to the extent that Pickus correctly interpreted Jones. Instead, subsequent decisions have limited the Jones decision to its particular facts: the seller had given the purchaser an express warranty that it had received no notice of violations with respect to the real estate, when in fact the USEPA had previously filed a complaint alleging environmental contamination against the seller.27 

Although the Jones decision can be considered an anomaly, or minority position in real estate jurisprudence, there is no doubt that an environmental problem can prevent merchantable title to be tendered.

Mechanisms to Manage Risk That are Available to Seller of Blackacre

A. Overview of Several Risk Management Mechanisms

Several options are available to the Seller to manage the aforementioned risks including: (1) conduct comprehensive remediation prior to sale; (2) comprehensive disclosures of environmental conditions at Blackacre; (3) contractual indemnification provisions; (4) having Seller’s own environmental consultant on site to monitor the remediation undertaken by Buyer’s environmental contractor; (5) conditioning occupancy on an issuance of a No Further Remediation letter (NFR) by the Illinois Environmental Protection Agency (IEPA), as described more fully below; and (5) requiring the remediation contractors and subcontractors to procure high rated environmental insurance liability policies, with the Seller as a named insured.

B. Use of State Standards and the Utility of Obtaining a No Further Remediation Letter from the Illinois Environmental Protection Agency

The risk management options listed above all have merit. The remainder of this article, however, will focus on the value of obtaining an NFR.

In a typical brownfield transaction, the type and scope of the remediation technique can vary: excavation of impacted soil down to a clean layer of soil, capping contaminated soils with an engineered barrier, or a combination of excavation and capping. Regardless of the cleanup technique used, some long term liability for the site remains with Seller as a former owner.28  In an effort to minimize Seller’s exposure to the statutory and common law liability described above, Seller can rely on traditional barrier clauses. Another layer of protection can be sought in the IEPA’s Site Remediation Program where an applicant, either Seller or Buyer, can receive a NFR upon demonstrating the property is "clean."

The NFR serves as prima facie evidence that the site has been cleaned to state standards. Importantly, the NFR provides a certain level of protection from an enforcement action by IEPA. Additionally, IEPA and the USEPA entered into a Memorandum of Understanding that significantly decreases the likelihood of an enforcement action by USEPA after an NFR has issued.

The Agency issues two subcategories of NFR letters: comprehensive and focused. A comprehensive NFR letter includes "all recognized environmental conditions and all related contaminants of concern that may be expected to exist at a remediation site."29  On the other hand, a focused NFR letter only includes specific recognized environmental conditions or contaminants of concern.30 

The issuance of a NFR is not a guarantee the remediated site will never be subject to an enforcement action. The IEPA may void the NFR in the following circumstances:

1. violation of the land use restriction;

2. failure to operate and maintain preventive or engineering controls;

3. improper disturbance or removal of contamination;

4. failure to comply with recording requirements;

5. obtaining the NFR letter by fraud or misrepresentation;

6. subsequent discovery of contaminants not identified as part of the investigation upon which the NFR letter was based; or

7. failure to pay the NFR assessment fee or site remediation fees.31 

In addition to the voidance of the NFR because of one of the enumerated causes, new medical, toxicological, or epidemiological findings after the NFR issues could prompt the government to make the cleanup standards more stringent. As stated above, the NFR is prima facie evidence that the site is clean and does not pose a threat to human health or the environment. Prima facie evidence is merely evidence that will establish a fact or sustain a judgment unless contradictory evidence is produced.32  Since the NFR establishes a rebuttable presumption that the site is clean and harmless, a plaintiff may seek to use new science to contradict the NFR and rebut the presumption.

Although not a guarantee and still subject to the attacks described above, a comprehensive NFR is preferable to a focused NFR. The comprehensive version includes all recognized environmental conditions at Blackacre so it will be less susceptible to reopening from a discovery of a previously unidentified contaminant.33 

While a comprehensive NFR is preferable to a focused NFR, the comprehensive letter is not an absolute shield. Please keep in mind however, that of the 1,500 NFRs issued by the IEPA’s Site Remediation Program since 1996, two have been voided by the IEPA. In one instance the voidance occurred because the remediation applicant failed to properly record the letter on title and failed to pay the appropriate fee. In the other instance, the IEPA inspected the property and concluded that the engineered barrier was inadequate.

The infrequency of voidances should be weighed against information learned from an unnamed source within the Agency. The official stated that the Agency is beginning to conduct more frequent random inspections of sites that have received NFRs, and these inspections will increase with time. The purpose of the inspections is to ensure compliance with the terms of the NFR, including adequacy and maintenance of engineered barriers installed during remediation.

Conclusion

The sale of a brownfield is inherently risky, but potentially profitable if adequate protections are in place. The presence of hazardous substances may trigger legal action by the government, the purchaser or third-parties allegedly injured during, or at some point after, remediation. A seller can reduce its risk exposure by removing the contaminants itself prior to sale and obtain a NFR. In the alternative, the seller can disclose all know contamination to the purchaser and through risk shifting mechanisms in the real estate sales contract rely on the purchaser to conduct remediation and obtain a NFR. Overall, candid communications with a purchaser and insistence on cleanup to state standards should mitigate risk and provide positive evidence in any future lawsuit against seller.

 1 42 U.S.C. § 9601(39)(A).

 2 http://www.epa.gov/swerosps/bf/about.htm.

 3 Small Business Liability Relief and Brownfields Revitalization Act, Pub. L. No. 107-118 (2002).

 4 See Michael B. Cook, Clarifying Cleanup Goals and Identification of New Assessment Tools for Evaluating Asbestos at Superfund Cleanups, August 10, 2004; Health and Human Services Joint Press Release, July 26, 2005.

 5 Indictment, U.S. v. W.R. Grace, CR 05-07-M-DWM, at ¶ 126 (D. Mont. Feb. 7, 2005), http://www.mtb.uscourts.gov/mtd/images/1.pdf. By order dated March 15, 2005, the court set the jury trial for September 11, 2006. However, a Joint Motion for Continuance filed on March 10, 2006 is before the court. http://www.mtb.uscourts.gov/mtd/mtdcaselookup.asp.

 6 Id. at ¶ 47.

 7 While petroleum is generally excluded from CERCLA liability, 42 U.S.C. § 9601(14) ("hazardous substance . . . does not include petroleum, including crude oil or any fraction thereof which is not otherwise specifically listed or designated as a hazardous substance."), this general exclusion does not apply to RCRA, CWA or common law theories of liability.

 8 42 U.S.C. §§ 9601 (20)(D), 9601(21), 9601(35)(A)(ii), 9607(b)(3); 415 ILCS § 5/22.2(h)(2)(H).

 9 Kelo v. City of New London, 125 S.Ct. 2655, 73 USLW 4552 (2005).

 10 42 U.S.C. §§ 6972 (a), 6973(a).

 11 See Village of Fox River Grove v. Grayhill, Inc., 806 F. Supp. 785 (N.D. Ill. 1992); Weyerhaeuser Co. v. Edward Hines Lumber Co., No. 91 C 623, 1991 WL 169385 (N.D. Ill. Aug. 28, 1991). See generally Kerr-McGee Chem. Corp. v. Lefton Iron & Metal Co., 14 F.3d 321 (7th Cir. 1994).

 12 Bauer v. Giannis, 359 Ill. App. 3d 897, 834 N.E. 2d 952 (2nd Dist. 2005).

 13 Id. at 957-58 (citations omitted).

 14 Id. at 960 (citing e.g., Hogan v. Adams, 333 Ill. App. 3d 141, 147-8, 775 N.E.2d 217 (4th Dist. 2002)).

 15 Id. at 962.

 16 See Weyerhaeuser Co. v. Edward Hines Lumber Co., No. 91 C 623, 1991 WL 169385, at *2 (N.D. Ill. August 28, 1991) (Where a party has sold its property "as-is," courts have appropriately required very convincing proof of fraud before granting relief.); Perlman v. Time, Inc., 64 Ill. App. 3d 190, 195, 380 N.E.2d 1040 (1st Dist. 1978). (Concealment may not merely be passive omission of facts in a business transaction, but must have intentionally been done to deceive under circumstances creating an opportunity and duty to speak." (Quoting Lagen v. Lagen, 14 Ill. App. 3d 74, 79, 302 N.E.2d 201, 205 (1st Dist. 1973)); cf. Joel S. Moscowitz, Environmental Liability and Real Property Transactions, 154 (2nd ed., Aspen Law & Business 1995) (While active fraud can occur when lies are spoken, a party can engage in passive fraud by merely being quiet about the truth).

 17 Schrott v. Bristol Meyers Squibb Co., 403 F.3d 940, 944 (7th Cir. 2005) (Successful recovery of damages based on theory of negligent infliction of emotional distress based on fear of developing cancer depends on showing that defendants owed plaintiff a duty, breach of that duty, and that the breach proximately caused injury).

 18 Meyer v. Lockformer Co., No. 02 C 2672, 2005 WL 1869656, at *4 (N.D. Ill. Aug. 02, 2005) (citing Majca v. Beekil, 183 Ill.2d 407, 420, 701 N.E.2d 1084 (1998)) ("Under Illinois law, a plaintiff alleging a fear of future injury as a result of exposure to a toxic substance must establish actual exposure to the harmful agent.); see e.g., Ehrhart v. Lockformer Co., No. 02 C 7068, 2005 WL 1869731, at *3 (N.D. Ill. Aug. 02, 2005).

 19 See Majca, 183 Ill.2d 407 (1998); Wetherill v. University of Chicago, 565 F. Supp. 1553 (N.D. Ill. 1983).

 20 Dillon v. Evanston Hospital, 199 Ill.2d 483, 504 (2002).

 21 Id.

 22 Donaldson v. Central Illinois Public Service Company (CIPS), 199 Ill.2d 63, 91-92, 767 N.E.2d 314 (1st Dist. 2002) ("Environmental exposure cases . . . do not afford litigants the opportunity to specify with such certainty the exact level and dose of exposure."), abrogated by In re Commitment of Stephen E. Simons, 213 Ill.2d 523, 529-531 821 N.E.2d 1184 (2004) (Dual standard of review is applicable to trial court’s admission of expert scientific testimony, leaving expert qualification and relevancy to the sole discretion of the trial court, but subjecting a trial court’s Frye analysis to de novo review. ) (citing Frye v. U.S., 293 F. 1013 (D.C. Cir. 1923)).

 23 See Hennessy v. Commonwealth Edison Company, 764 F. Supp. 495 (N.D. Ill. 1991).

 24 See Corgan v. Muehling, 143 Ill.2d 296, 308-311, 574 N.E.2d 602 (1991).

 25 Jones v. Melrose Park National Bank, 228 Ill. App. 3d 249, 592 N.E.2d 562 (1st Dist. 1992).

 26 Oechsle v. Pickus, No. 94 C 5936, 1995 WL 430946 (N.D. Ill. July 18, 1995) (Illinois law; gasoline contamination).

 27 See HM Holdings, Inc. v. Sharyn Rankin, 70 F.3d 933, 936 (7th Cir. 1995) (interpreting Indiana law); In Re: Country World Casinos, Inc., 181 F.3d 1146, 1154 (10th Cir. 1999) (interpreting Colorado law).

 28 See CIPS, 199 Ill.2d 63, 66-69.

 29 35 Ill. Admin. Code § 740.420 (emphasis added).

 30 35 Ill. Admin. Code § 740.430.  

 31 415 ILCS 5-58.10(e) and (f).

 32 Black’s Law Dictionary 579 (7th ed. 1999).

 33 35 Ill. Admin. Code 740.625(6) (IEPA may void a NFR upon "subsequent discovery of contaminants not identified as part of the investigative or remedial activities upon which the issuance of the No Further Remediation Letter was based, that pose a threat to human health or the environment.").

Andrew J. Marks is an associate with The Misiorowski Law Group, LLC in Naperville, IL. Mr. Marks graduated from The Pennsylvania State University in 1995 and Vermont Law School in 2002. He is licensed to practice law in Illinois and Massachusetts and was formerly employed at USEPA in Washington, D.C. The views expressed herein are solely those of the author and do not represent the opinions of The Misiorowski Law Group, LLC or its clients.


 
 
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