Emerging Contours of the CERCLA "Innocent Purchaser" Defense

G. Van Velsor Wolf Jr.

Editors' Summary: The far-reaching effects of the nation's hazardous waste laws have become legendary. Manufacturers, insurers, bankers, senior corporate managers, and even cleanup contractors now worry about their liability under CERCLA. For the most part, Congress has left CERCLA's liability provisions intact since first enacting them in 1980. But Congress did make some changes in its 1986 amendments to CERCLA, and the meaning of some of these changes is only now emerging.

In this Article, the author analyzes one of the most important of such changes, the innocent purchaser defense. Congress enacted protections for some buyers of land, but the line between who is and who is not covered can be hard to discern. This Article reviews the CERCLA innocent purchaser provisions, traces the case law, summarizes the Environmental Protection Agency's policy on the issue, and tracks curent proposals in Congress to amend this part of CERCLA. Finally, the author reviews strategies for lawyers working in the high-stakes world of uncertain CERCLA liability.

Mr. Wolf is a partner in the Phoenix, Arizona, firm Lewis & Roca where his practice focuses on environmental compliance counseling, corporate and real estate transactions, and the defense of enforcement and other actions by environmental regulatory authorities at all levels. He is chairman-elect of the Environmental and Natural Resources Law Section of the Arizona State Bar. From 1976 to 1981, he was editor-in-chief of the Environmental Law Reporter. Mr. Wolf received his J.D. in 1973 from Vanderbilt Law School and his B.A. in 1966 from Yale University.

[20 ELR 10483]

The flood of court decisions in the last few years imposing liability on property owners for environmental contamination under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA, or Superfund)¹ has changed the nature of real estate transactions. Purchasers are increasingly skittish of acquiring an unknown and potentially mammoth environmental liability² left by past owners. In light of several recent court decisions,³ even lenders and other financial institutions have become cautious about acquiring present or potential interests in real estate.

Ignorance of the contamination has been no defense to liability,⁴ although when Congress amended CERCLA in 1986, it grafted an "innocent purchaser" defense onto a very narrow third-party defense. Key to the innocent purchaser defense is that the purchaser must have conducted an "environmental due diligence" investigation. The environmental consulting industry has been quick to seize the opportunity by offering due diligence services, but court interpretations of the limited guidance CERCLA provides have shed little useful light on the scope of due diligence. Notwithstanding, there has been a revolution in the nature of real estate negotiations, and environmental investigations are now de rigeur in all commercial transactions as borrowers and lenders make every effort to position themselves to assert the innocent purchaser defense. This Article discusses the defense described by CERCLA and the court decisions that have explored it. It provides recommendations for an environmental due diligence investigation and discusses unsettled issues.

1980 Superfund Defenses

As set forth in § 107(a) of the original version of CERCLA, a property⁵ purchaser or owner could be liable due to current ownership or operation⁶ of the property or past ownership or operation of the property at the time the disposal causing the Superfund liability occurred.⁷ The only defenses to Superfund liability are those expressly listed in § 107(b).⁸ In addition to acts of God⁹ or acts of war, the [20 ELR 10484] only defense in § 107(b) is the so-called third-party defense, where the defendant can avoid liability if the release or threatened release and resulting damages derive "solely" from an act or omission by an unrelated third party.¹⁰

Congress added two significant qualifications to the third-party defense, however. First, the act or omission of the third party could not occur "in connection with a contractual relationship, existing directly or indirectly, with the defendant."¹¹ Congress provided no definition of "contractual relationship," but it is clear that a real estate transaction creates the requisite relationship¹² so that the buyer could not use the defense.¹³

The second qualification was that the current owner had to have exercised due care regarding the hazardous substances after he learned of any release, and he had to take precautions against the foreseeable acts or omissions of the allegedly responsible third party, as well as the foreseeable consequences.¹⁴ Essentially, this qualification adds a tort concept, putting responsibility of some care on the purchaser, whose "innocence" cannot rely on a halo of "blissful ignorance."¹⁵

1986 Amendments

The third-party defense created in 1980 was narrow and especially difficult for buyers in real estate transactions. In response to many concerns about the Superfund program, Congress added substantial amendments when it reauthorized CERCLA in 1986.¹⁶ Responding particularly to doubt about the practical usefulness of the third-party defense,¹⁷ Congress added language to establish a mechanism for how a buyer could avoid Superfund liability in the acquisition of property.

The 1986 amendments did not alter the fundamental liability/defense structure in § 107(a) and (b). Rather, they defined "contractual relationship"¹⁸ and, in the process, gave a buyer of property the opportunity to use the third-party defense if the buyer conducted a due diligence investigation and the contamination that caused the liability was not discovered. First, Congress stated that the contractual relationship specifically includes "but is not limited to, land contracts, deeds or other instruments transferring title or possession."¹⁹ Notwithstanding, there is no contractual relationship²⁰ (and, thus, the third-party defense could take effect) if the buyer acquired the facility after the "disposal or placement"²¹ of the hazardous substances at the facility and the buyer established by a preponderance of the evidence that at the time of acquisition he did not know and had no reason to know that the hazardous substance had been disposed of at the facility.²²

[20 ELR 10485]

To establish that he had "no reason to know" of the disposal at the facility, Congress required the buyer to conduct what has become known as the "environmental due diligence" investigation. To meet the statutory standard, the buyer must have undertaken, (1) "at the time of acquisition," (2) "all appropriate inquiry into the previous ownership and uses at the property," (3) "consistent with good commercial or customary practice," (4) "in an attempt to minimize liability."²³ As further guidance, Congress also set out specific criteria that a court should evaluate in determining whether the buyer has met the due diligence standard, essentially holding a commercial transaction to a higher standard. A court should consider, (1) "any specialized knowledge or experience on the part of the [buyer or owner]," (2) "the relationship of the purchase price to the value of the property upon contamination," (3) "commonly known or reasonably ascertainable information about the property," (4) "the obviousness of the presence or likely presence of the contamination at the property," and (5) "the ability to detect such contamination by appropriate inspection."²⁴

Further guidance in the legislative history is not particularly illuminating, although the message from Congress was crystal clear that buyers had to make some investigation if they hoped to use a defense to the increasing concern over environmental pollution. The Conference Committee Report stated:

The duty to inquire under this provision shall be judged as of the time of acquisition. Defendants shall be held to a higher standard as public awareness of the hazards associated with hazardous releases has grown, as reflected by this Act, the 1980 Act [CERCLA] and other Federal and State statutes.

Moreover, good commercial or customary practice with respect to inquiry in an effort to minimize liability shall mean that a reasonable inquiry must have been made in all circumstances, in light of best business and land transfer principles.

Those engaged in commercial transactions should, however, be held to a higher standard than those who are engaged in private residential transactions.²⁵

Court Decisions

The few court decisions to date on the innocent purchaser defense indicate that a defendant will have a heavy burden to qualify. Two 1988 decisions focused on the tort standard of due care in the original legislation.²⁶ In Washington v. Time Oil Co.,²⁷ the court granted the governmental plaintiffs' motion for summary judgment preventing the defendant from asserting the innocent purchaser defense. The court first noted that the burden of proving the innocent purchaser defense is on the party seeking to assert it. The defendant had failed to establish facts to show that a third party was solely responsible for the release. Second, once it had knowledge that a sublessee's operations involved hazardous substances, the defendant failed to exercise due care to prevent the contamination, despite seeking a preliminary injunction to prevent the sublessee from damaging the property.

United States v. Monsanto²⁸ appears to have established an affirmative duty for absentee landlords. Although the site owners were not involved in the waste disposal activities that took place on their land and they had lease provisions to prohibit the storage of chemical wastes, they continued to accept rent payments after they became aware of the waste storage. The Court of Appeals for the Fourth Circuit concluded that they took no "precautionary action against the foreseeable conduct" of the third parties: "[T]he statute does not sanction such willful or negligent blindness on the part of absentee owners."²⁹

The nature of the due diligence inspection necessarily varies on a case-by-case basis. For example, in United States v. Serafini,³⁰ the court was unwilling to hold that the 1969 acquisition of a site littered with drums of hazardous substances, which was to be used as a landfill, required the same kind of on-site inspection as would be required by the heightened concerns illustrated by CERCLA.³¹

The burden on a commercial purchaser, especially one with knowledge, to do a thorough inspection was reinforced in Wickland Oil Terminals v. ASARCO, Inc.³² Although the buyer did not own the facility at the time the metal slag was dumped on the property, through discussions with state agencies it was aware of the slag and that it was leaching into local waters. Furthermore, site tests and the inspection of state files would have revealed additional information. Thus, since the buyer knew of the present wastes and the risk of future contamination, it could not assert the innocent purchaser defense because it had not conducted "all appropriate inquiries."³³

The court in BCW Associates, Ltd. v. Occidental Chemical Co.,³⁴ raised the specter of a problem with the innocent purchaser defense that the Environmental Protection Agency (EPA) would savor. Essentially, the court rejected the defense because the due diligence investigation was inaccurate. Notwithstanding the consultant's [20 ELR 10486] "clean" report, the court said that the buyer should have investigated further on a suspicion of an environmental problem. Clearly, there can be no hard objective standard of "how good is good." On the other hand, the buyer has an obligation not only to choose a qualified consultant but to review the report carefully. The burden is on the buyer to make the defense as strong as possible, and the due diligence investigation and report must not be simply a mechanical task.

Most transaction documents include the seller's warranties regarding the condition of the property. Since the due diligence portion of the innocent purchaser defense is relatively recent and not well understood, an issue can be made whether a buyer could rely on the seller's warranties as sufficient investigation. Although the issue has not been litigated specifically, several court decisions have implied that such warranties in past transactions may suffice, but the courts concluded that the seller rather than the buyer was liable because the seller owned the property when the contamination occurred.³⁵

Notwithstanding the foregoing discussion, now that Congress has set out a mechanism to secure the innocent purchaser defense, courts will insist that in future transactions the buyer conduct some form of investigation. The Wickland decision relies strongly on the absence of a "due" inquiry to deny the innocent purchaser defense.³⁶ Furthermore, a recent bankruptcy decision, In re Sterling Steel Treating, Inc.,³⁷ emphatically rejected the claim that the buyers had no reason to know of the contamination because they had dealings with the facility prior to acquisition, knew the business, and declined the opportunity to inspect. Thus, the innocent purchaser defense was not available.

As the above cases show, the trend is for courts to require the purchaser to have conducted some sort of due diligence investigation to avoid Superfund liability, but some courts recognize the innocent purchaser defense even in the absence of an investigation. In United States v. Pacific Hide & Fur Depot, Inc.,³⁸ the defendants were children who received stock shares as gifts from their father (a founding shareholder and operator of the facility), the widow of another founding shareholder, and a sibling of the two founding shareholders. A significant holding in the decision is that the innocent purchaser does not always require that some investigation be made. The polychlorinated biphenyl (PCB) contamination that was the subject of the cost-recovery action by EPA was not discovered until after the facility was sold. Furthermore, since none of the defendants was a managing operator of the facility, they would have had no reason to know that the children's father disposed of the PCB-containing equipment at the property years before. Thus, the lack of any investigation, even though the children and widow acquired the shares in the early 1980s, was no bar to an assertion of the innocent purchaser defense. The defendants had no knowledge or reason to know of any contamination; thus, no inquiry was appropriate. Furthermore, at least in the case of the children and the widow, ownership came through an outright inheritance or a gift similar to inheritance, thereby meeting one of the criteria for the innocent purchaser defense.³⁹

Even if a defendant incurs response costs in cleaning up contamination, the defendant need not be adjudged liable before it can seek cost recovery against another party on the ground that it was initially an innocent purchaser.⁴⁰ Such a precondition of confirmed liability would be a logical impossibility because § 107(b)(3) is, if successful, a complete defense to liability.

Finally, it is important to note where Congress has stated specifically that the innocent purchaser defense is not available. If, after purchasing property, the buyer learns of contamination, he may have the innocent purchaser defense available. If, however, he sells the contaminated property without disclosing the contamination, he may not assert the innocent purchaser defense in a subsequent action by the future owner against past owners for CERCLA liability.⁴¹ Nonetheless, he may be able to avoid CERCLA liability as an owner at the time of disposal⁴² because passive contamination through leaking or migration without active involvement or dispersal of the contaminants may not be a Superfund "release."⁴³

EPA Guidance

Although it does not provide significant guidance on the innocent purchaser defense, EPA issued a policy guidance document in 1989⁴⁴ primarily aimed at de minimis settlements under CERCLA § 122(g).⁴⁵ The guidance stated that EPA will rely on the strength of the party's showing regarding the innocent purchaser defense, especially the results of a due diligence investigation, to determine how much settlement it will offer.

Additionally, EPA established a policy for prospective purchasers. The Agency stated that it had no intention of getting involved in private real estate transactions, but it listed the following criteria that could lead to a covenant [20 ELR 10487] not to sue, which effectively would make the buyer an innocent purchaser according to EPA:

1. The facility must currently or potentially be subject to an enforcement action, due either to present or proposed placement on the National Priorities List (NPL) or because of an existing enforcement action;

2. A substantial benefit, not otherwise available, would accrue to EPA through cleanup;

3. Continued due-care operation of the facility would not aggravate the contamination or interfere with any remedy;

4. Continued operation would be unlikely to exacerbate the health risk to people present at the site; and

5. The purchaser is financially viable.

The foregoing criteria are rigorous and not generally applicable to most real estate transactions because there are relatively few NPL sites on the open market. Nonetheless, potential buyers of known contaminated property, who had already calculated the cost of remedying a property, could benefit from the EPA "hands-off" approach that a settlement would bring. In addition to meeting the criteria, the buyer may have to (1) provide a cash payment,⁴⁶ (2) agree not to claim against the Superfund, (3) grant EPA an irrevocable right of entry, and (4) commit to exercise due care at the facility, all to be incorporated into a formal settlement document with EPA, though not necessarily a formal consent order. It should be noted that not only would EPA have substantial discretion regarding continuing cleanup, but the covenant not to sue would be neither a bar nor a defense to later EPA action against the buyer for newly discovered contamination. Furthermore, it would have no effect against a private cost-recovery action.

Representative Weldon's Bill

The 1986 adoption of the innocent purchaser defense was generally thought to help remove CERCLA liability from some real estate transactions, but many felt that the lack of explicit guidance on the due diligence investigation element took away from the value of the defense. Consequently, Representative Curt Weldon (R-Pa.) introduced H.R. 2787 in 1989,⁴⁷ which provided an explicit checklist for what constituted the "all appropriate inquiry"⁴⁸ for due diligence. More important, the bill would establish that a purchaser who followed the guidelines created a rebuttable presumption that he had met the due diligence portion of the innocent purchaser defense.

H.R. 2787 lists what must be investigated as follows:

1. Recorded chain-of-title documents, including restrictions and covenants, for the past 50 years;

2. Aerial photographs that may reflect prior uses and that are reasonably available through governmental agencies;

3. Recorded environmental cleanup liens pursuant to federal, state, or local law;

4. Reasonably available (i.e., available by simple request from the government) government records, including investigations, that should show whether there has been a release or potential release at the real property; this could include information about adjacent properties as well, although the only guidance in the bill is that a release at an adjacent property could affect the target property (there is no spatial limit); and

5. A visual site inspection of the target property and "immediately adjacent" properties, including an investigation of "chemical use, storage, treatment and disposal practices on the property."

To secure the rebuttal presumption, H.R. 2787 would require that there be a further investigation if the Phase I Environmental Audit disclosed "the presence or likely presence of a release or threatened release of hazardous substances on the real property to be acquired." The bill would also require that the investigation be conducted by an "environmental professional" who is sufficiently trained and experienced to conduct the investigation objectively. The bill recognizes that the nature of the investigation could require an environmental professional with different skills for different aspects of the investigation, and that an environmental lawyer may be appropriate.

Unfortunately, H.R. 2787 has made little progress in Congress.⁴⁹ Nonetheless, there continues to be significant interest in providing more explicit guidance,⁵⁰ and the bill may resurface in the CERCLA reauthorization effort in 1991 or 1992. Further elaboration may be necessary, including explicit clarification of how wide an area of adjacent properties must be covered and the extent to which the reports may be kept confidential.⁵¹ Despite pressure otherwise, EPA apparently is reluctant to establish a nationwide standard, preferring instead to maintain flexibility on a site-by-site basis.⁵² Also, the requirement for further investigation if the Phase I investigation reveals contamination may not be realistic. Very few sites subject to commercial sale are totally pristine, and there can be technical, legal, and business judgments whether the contamination is sufficient to generate liability.⁵³

The "Due Diligence" Investigation

Notwithstanding Pacific Hide & Fur and similar decisions [20 ELR 10488] applying site-by-site or defendant-by-defendant flexibility, it appears that courts are increasingly skeptical of an assertion of an innocent purchaser defense if some sort of investigation is not done. BCW Association and Sterling Steel Treating indicate that courts may adopt a demanding and rigorous view toward the due diligence investigation. While no court may go as far as EPA would presumably prefer (i.e., if any contamination was missed, the investigation was not sufficiently "due"), courts may look closely to discern a prevailing community or industry standard.⁵⁴

Most environmental lawyers and consultants would agree that Representative Weldon's checklist constitutes a minimum. Depending on the area, state and local records may be more informative than those provided by EPA.⁵⁵ Local trade associations may provide guidance that would be good evidence of a customary practice.⁵⁶ It is important to remember, however, that the person asserting the defense has the burden of proving it. This will require that the consultant's investigation be for his benefit,⁵⁷ that his intent be to minimize liability, and that he investigate further if there is any reasonable indication of a problem. Courts will not tolerate a report prepared and then simply tossed in a file without competent evaluation.⁵⁸

Although no court has considered CERCLA liability and specifically the innocent purchaser defense in the residential context, as opposed to the acquisition of a commercial or industrial property such an extension of the doctrine may not be over-reaching. Congress expressly stated that the defense will be construed more strictly in commercial transactions, but it did not except residential transactions.⁵⁹ Furthermore, the guidelines for the Federal National Mortgage Association (Fannie Mae) establish environmental assessment procedures for each multifamily project submitted for commitment.⁶⁰ Finally, the Resolution Trust Corporation expects to conduct a "potential environmental hazards liability" assessment prior to selling a one-to-four family residential property that it acquires in the course of its activities.⁶¹

Other Issues

Who Investigates?

The issues described above also apply to lenders. Although CERCLA contains a liability exemption for a lending institution that is not involved in the management of a facility,⁶² if the loan defaults and the lender's capacity changes, the lender could acquire CERCLA liability.⁶³ Thus, increasingly lenders are conducting due diligence investigations prior to even granting the loan application. A seller can derive value from the due diligence investigation by knowing in advance whether he will have any lingering liability and by a strengthening of his bargaining position if the investigation shows that the property is clean.⁶⁴ Notwithstanding Pacific Hide & Fur, discretionary legatees and donees⁶⁵ would be well advised to consider a due diligence investigation prior to taking title to real estate.⁶⁶ Finally, although state and local governments may be exempt from CERCLA liability,⁶⁷ there may be an issue whether such exemption shouldapply to a voluntary acquisition.⁶⁸ Nevertheless, governmental entities are beginning to recognize that environmental investigations may be beneficial.⁶⁹

[20 ELR 10489]

Investigation and Contract Issues

The buyer will not automatically be protected against past liability for contamination discovered during the due diligence investigation.⁷⁰ Thus, the buyer has several options, including declining to go forward with the transaction, allocating responsibility between the buyer and seller for the contamination, and acquiring the property regardless of the contamination. The investigation is intended to protect against undiscovered contamination (assuming the investigation is technically proficient), and the buyer would be well advised to anticipate later-discovered contamination and to allocate responsibility in the sale documents.⁷¹ The investigation may reveal that past activities did not use hazardous substances at the facility, but adjacent releases resulted or may have resulted in contamination migrating beneath the property. Although the property could still be a facility subject to CERCLA liability,⁷² there may be an argument that the owner did not carry out the act of disposal that caused the incriminating release. To assure the defense, however, the owner of the otherwise "clean" property may have to claim against the adjacent responsible party.⁷³ Finally, if a buyer relies on the seller's representations regarding the lack of environmental contamination and discovers later that the representations were intentionally false or misleading, the buyer may still be able to use the innocent purchaser defense if the due diligence investigation was otherwise appropriate. If need be, the buyer could seek to rescind the sales contract on the ground of fraud. Rescission could mean that the buyer was never an owner.

Conclusion

As difficult as it will be for the innocent purchaser defense to succeed, there are two benefits from it. First, it should ease the burden for a truly innocent landowner and give him comfort that he will not be held liable as a current owner under the strict language of CERCLA § 107(a)(1). The obverse is that if the prior owner or operator who caused the contamination cannot be found or is judgment-proof, Superfund will have to assume the cost of cleanup. This result, however, is consistent with the fundamental approach of CERCLA, which is to make the responsible party pay for the remedy or else rely on the $10 billion Superfund derived from taxes with the express intent of cleaning up "orphan" sites.

The second benefit will derive from the wealth of new information that will come from the due diligence investigations. Although there is some tension in the courts as to whether a due diligence investigation is essential to secure the innocent purchaser defense,⁷⁴ it is likely that transactions negotiated since environmental issues became a more visible part of the national concern⁷⁵ will be subject to closer scrutiny regarding whether a buyer considered potential environmental liabilities. Furthermore, the effort by Representative Weldon to create both a national standard and a rebuttal presumption would be beneficial.

Clearly, there will be a greater burden on the legal profession to understand not only the subtleties of the environmental liability schemes but also the more technical aspects of environmental conditions,⁷⁶ as well as to create solutions to the allocation of responsibilities in drafting the sales documents.

More than ever before, environmental lawyers need to be involved in the day-to-day operations of business: buying land, selling land, and making loans are becoming as much a part of environmental practice as negotiating a permit. Environmental considerations are becoming intertwined with business decisions. In the long run, this is good for both business and the environment.

1. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075.

2. See CERCLA § 107(a)(1), 42 U.S.C. § 9607(a)(1), ELR STAT. CERCLA 024.

3. See, e.g., United States v. Fleet Factors Corp., 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990); Guidice v. BFG Electroplating & Mfg. Co., 732 F. Supp. 556, 20 ELR 20439 (W.D. Pa. 1989); United States v. Maryland Bank & Trust Co., 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986).

4. Liability under CERCLA is strict, and intent, fault, or negligence is irrelevant. New York v. Shore Realty Co., 759 F.2d 1032, 15 ELR 20358 (2d Cir. 1985).

5. CERCLA liability focuses on the "facility," defined as either

(A) any building, structure, installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed or, or placed, or otherwise come to be located . . . .

CERCLA § 101(9), ELR STAT. CERCLA 001. This Article focuses on real estate transactions but is also applicable to a nonrealty fixture (i.e., a building or structure) if it is acquired without an interest in the underlying land. See, e.g., United States v. Fleet Factors Corp., 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990) (security interest was in equipment, inventory, and receivables). However, building materials containing hazardous substances, such as asbestos, may not be subject to § 107(a) liability. Section § 104(a)(3) exempts building materials from a § 104 order, and the reach may extend to other CERCLA liability. Retirement Community Devs., Inc. v. Merine, 713 F. Supp. 153, 19 ELR 21336 (D. Md. 1989).

6. Although CERCLA § 107(a)(2) refers to "owner and operator" (emphasis added), courts have no trouble making the conjunctive disjunctive. See, e.g., New York v. Shore Realty Co., 759 F.2d 1032, 1044, 15 ELR 20358, 20363 (2d Cir. 1985).

7. International Clinical Laboratories, Inc. v. Stevens, 710 F. Supp. 466, 20 ELR 20560 (E.D.N.Y. 1990).

8. See, e.g., United States v. Stringfellow, 661 F. Supp. 1053, 17 ELR 21134 (C.D. Cal. 1987). Although the minority view recognizes defenses other than those in § 107(b), United States v. Mottolo, 695 F. Supp. 615, 19 ELR 20442 (D.N.H. 1988), several courts have held that the non-§ 107(b) provisions are more in the nature of mitigation than complete defenses. E.g., Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 18 ELR 21026 (3d Cir. 1988), cert. denied, 109 S. Ct. 837 (1989).

9. Traditional tort concepts provide sufficient guidance for the difficulty of successfully asserting a defense of "an act of God." Even without a tort analysis, Judge Ideman, in Stringfellow, 661 F. Supp. at 1061, 17 ELR at 21136, was able to conclude that heavy rains "were not the kind of 'exceptional' natural phenomena" to which the act of God defense should apply.

10. CERCLA § 107(b)(3), 42 U.S.C. § 9607(b)(3), ELR STAT. CERCLA 024.

11. Id. The "contractual relationship" does not include shipment by a common carrier pursuant to published tariff schedules.

12. There is an argument that if the release occurred prior to the sale, it would not have occurred "in connection with" the sale negotiations, but apparently no court has formally analyzed the issue from this perspective.

In Southern Ry. Co. v. Johnson Bronze Co., No. 84-3318 (3d Cir. Apr. 2, 1985), at issue was a lien for cleaning up an off-site drainage ditch. The drainage license required that the ditch be maintained and restored to its original condition and the landowner be indemnified for any liability. The court concluded that the drainage license had not been assigned to the debtor's successor owner (who owned the manufacturing plant that fed into the ditch) and thus "assumed no obligations with respect to that license." Since there was no contractual obligation between the ditch owner and the plant owner specifically requiring certain actions to be taken regarding an environmental condition, there was no liability for the cleanup.

13. Because of the strict nature of Superfund liability, the buyer is put in a caveat emptor situation. In fact, when the federal district court decided Smith Land & Improvement Corp. v. Rapid-American Corp., 18 ELR 20769 (M.D. Pa. 1987), it held that the new owner bought property at his own risk; if he failed to investigate contamination caused by the previous owners, he still had liability. Interestingly, the Court of Appeals for the Third Circuit reversed, holding that caveat emptor was not a defense to liability of a former owner who caused the contamination. Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 18 ELR 21026 (3d Cir. 1988), cert. denied, 109 S. Ct. 837 (1989).

14. The buyer must establish

by a preponderance of the evidence that (a) he exercised due care with respect to the hazardous substance concerned, taking into consideration the characteristics of such hazardous substance, in light of all relevant facts and circumstances, and (b) he took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissions . . . .

CERCLA § 107(b)(3), 42 U.S.C. § 9607(b)(3), ELR STAT. CERCLA 025.

15. Several court decisions have given meaning to this element of the third-party defense. See cases discussed at infra notes 27-29 and accompanying text.

16. Superfund Amendments and Reauthorization Act (SARA), Pub. L. No. 99-499, 100 Stat. 1613 (1986).

17. The "innocent purchaser" defense language grew out of a lengthy House floor discussion almost a year before SARA was adopted. See CONG. REC. H11157-62 (Dec. 5, 1985). Rep. Frank (D-Mass.) proposed a separate amendment to CERCLA § 107 that was a straight-forward list of how the purchaser could establish innocence, also by a preponderance of the evidence, by not engaging in certain acts that relate him to the contamination. The legislators involved in the floor discussion invoked concern for the innocent purchaser who could be liable unless Rep. Frank's amendment was adopted. Although Rep. Frank's language was simpler, at least what was finally adopted in CERCLA § 101(35) attempted to put more flesh on the skeleton of the necessary showing of lack of "actual or constructive knowledge that the property was used prior to the acquisition for the generation, transportation, storage, treatment, or disposal of any hazardous substance" contained in Rep. Frank's original language. Id. at H11158.

18. CERCLA § 101(35), 42 U.S.C. § 9601(35), ELR STAT. CERCLA 007.

19. This made explicit what courts had concluded, that owner liability need not depend on fee title but can include a lesser interest in the property. See Caldwell v. Gurley Ref. Co., 755 F.2d 645, 15 ELR 20316 (8th Cir. 1985); United States v. South Carolina Recycling & Disposal, Inc., 653 F. Supp. 984, 14 ELR 20272 (D.S.C. 1984), aff'd, 858 F.2d 160, 19 ELR 20085 (4th Cir. 1988).

20. CERCLA § 101(35)(A), 42 U.S.C. § 9601(35)(A), ELR STAT. CERCLA 009.

21. Although the "placement" element seems unnecessary in that the liability accrues as a result of a release or disposal, placement is relevant to the due care the owner must exercise after he learns of a hazardous substance at the facility. See notes supra 14-15 and accompanying text.

22. CERCLA § 101(35)(A)(1), 42 U.S.C. § 9601(35)(A)(1), ELR STAT. CERCLA 007. The innocent purchaser defense also applies to a government entity that acquires the facility by an involuntary transfer or by eminent domain, id. § 101(35)(A)(2), 42 U.S.C. § 9601(35)(A)(2), ELR STAT. CERCLA 007, and an acquisition by inheritance or bequest, id. § 101(35)(A)(3), 42 U.S.C. § 9601(35)(A)(3), ELR STAT. CERCLA 007. The foregoing circumstances are discussed at infra notes 39 and 61.

23. Id. § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 007. Although the individual elements have not been specifically litigated, it is generally accepted that a buyer must comply strictly with the foregoing litany to qualify for the innocent purchaser defense by use of the environmental due diligence investigation.

24. Id.

25. H.R. REP. No. 962, 99th Cong., 2d Sess. 187 (1986), reprinted at 1986 U.S. CODE CONG. & ADMIN. NEWS 3276, 3280.

26. See supra notes 14-15 and accompanying text.

27. 687 F. Supp. 529, 18 ELR 21376 (W.D. Wash. 1988).

28. 858 F.2d 160, 19 ELR 20085 (4th Cir. 1988). This decision was the appeals court culmination of several district court decisions on a variety of issues, all of which were captioned with South Carolina Recycling & Disposal, Inc. as the defendant. See 653 F. Supp. 984-1013, 14 ELR 20272, 20895, 17 ELR 20843, 20845, 20847 (D.S.C. 1984-86).

29. 858 F.2d at 169, 19 ELR 20088.

30. 706 F. Supp. 346, 19 ELR 20828 (M.D. Pa. 1988).

31. Obviously, the Environmental Protection Agency (EPA) did not agree with the court's decision. See Guidance on Landowner Liability Under § 107(a)(1) of CERCLA, De Minimis Settlements Under Section 122(g)(1)(B) of CERCLA, and Settlements With Prospective Purchasers of Contaminated Property (June 6, 1989), ELR ADMIN. MAT. 35187, 35189 n.11 [hereinafter June 1989 EPA Guidance]. Nonetheless, it reinforces Congress' view that the standard for due diligence must be weighed against standards at the time of acquisition. See supra note 25 and accompanying text. EPA at least feels that the standard for due diligence is "evolutionary [in] nature." Id.

32. 19 ELR 20855 (N.D. Cal. 1988).

33. As discussed below, see infra note 65 and accompanying text, the buyer should have negotiated a resolution regarding the liability. The court also indicated that the knowledge of the environmental problems at the site in the hands of the buyer's consultants and lawyers could be imputed to the lawyers.

34. No. 86-5947 (E.D. Pa. Sept. 30, 1988).

35. See, e.g., International Clinical Laboratories, Inc. v. Stevens, 20 ELR 20560 (E.D.N.Y. 1990); Nunn v. Chemical Waste Mgmt., Inc., 856 F.2d 1464, 19 ELR 20183 (10th Cir. 1988).

36. See also Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 18 ELR 21026 (3d Cir. 1988), cert. denied, 109 S. Ct. 837 (1989) (although the innocent purchaser defense was not discussed by the court, the buyer had done an inspection, noting the existence of the asbestos waste, and had apparently included the possibility of an environmental risk in the price paid; the appeals court rejected the seller's defense of "caveat emptor," essentially making the buyer an innocent purchaser and upholding the contribution action).

37. 94 Bankr. 924 (E.D. Mich. 1989).

38. 19 ELR 20897 (D. Idaho 1989).

39. See supra note 22. The court may have been too generous with the inheritance exception allowing the innocent purchaser defense. The Conference Committee report on what became CERCLA § 101(35)(A)(3) notes that a person who inherits the property "without actual knowledge" of the contamination may use the innocent purchaser defense "if [he] engage[s] in a reasonable inquiry . . . ." H.R. REP. No. 962, supra note 25 at 187. There is no evidence that either the children or the widow made a reasonable inquiry.

40. Cadillac Fairview/Calif., Inc. v. Dow Chem. Co., 19 ELR 20965 (C.D. Cal. 1989).

41. CERCLA § 101(35)(C), 42 U.S.C. § 9601(35)(C), ELR STAT. CERCLA 007.

42. Id. § 107(a)(2), 42 U.S.C. § 9607(a)(2), ELR STAT. CERCLA 025.

43. Ecodyne v. Shah, 17 F. Supp. 1454, 20 ELR 20172 (N.D. Cal. 1989); In re Diamond Reo Trucks, Inc., 115 Bank. 559 (Bankr. W.D. Mich. June 20, 1990). But cf. Tanglewood East Homeowners Ass'n v. Charles-Thomas, Inc., 849 F.2d 1568, 18 ELR 21348 (5th Cir. 1988); United States v. Waste Indus., Inc., 734 F.2d 159, 14 ELR 20461 (4th Cir. 1984).

44. June 1989 EPA Guidance, supra note 31.

45. 42 U.S.C. § 9622(g), ELR STAT. CERCLA 058.

46. This could be applied to response activities, and the amount may include the amount of a preexisting EPA cleanup lien. CERCLA § 107(1), 42 U.S.C. § 9607(1), ELR STAT. CERCLA 026.

47. 101st Cong., 1st Sess., June 28, 1989. Rep. Weldon's comments on the bill are found at 135 CONG. REC. E2367-68 (daily ed. June 28, 1989).

48. See CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 007.

49. In fact, it has not even been the subject of a hearing in the House Energy and Commerce Committee, to which it was referred.

50. For example, the real estate industry, in cooperation with the American Society of Testing and Materials, is developing a standard-setting process to define "due diligence." Personal communication with Dorothy Stucke, Director of Legislation, National Apartment Association (Apr. 13, 1990).

51. Not every state has adopted the New Jersey law, which essentially requires an investigation and state governmental approval of a transaction involving real estate in New Jersey. New Jersey Environmental Cleanup Responsibility Act, N.J. STAT. ANN. § 13:1K-6 et seq. (1983). There is a clear tension between the interests of an entity seeking to resolve environmental problems internally, see, e.g., EPA's Self-Auditing Policy, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MAT. 35001, and an entity seeking comfort from a regulatory/enforcement agency regarding environmental liabilities.

52. Inside EPA, Mar. 9, 1990, at 4.

53. For example, the increasing sophistication of measuring equipment may reveal that trace elements of contaminants do not violate actionable standards.

54. In this respect, perhaps the most important consideration is the initial scope of work for the consultant's investigation. The buyer's lawyer should prepare the scope of work with knowledge of what it must legally include to qualify for "all appropriate inquiry." Similarly, an environmental lawyer should review the final report to determine whether it meets the criteria.

55. In Arizona, for example, the Department of Environmental Quality has published a description of 17 databases that can be consulted for information about specific properties. The databases include facilities for which (1) hazardous waste notifications have been filed with EPA, (2) community right-to-know filings have been made, and (3) investigations by EPA or the state are ongoing or proposed.

56. In 1989, the Consulting Engineers Council of Metropolitan Washington, Inc., published exceptionally useful guidelines for environmental site assessments for all parties involved in a transaction. The American Society of Testing Materials (ASTM), a national industrial standards writing association, is currently drafting standards for due diligence investigations for banks. ASTM is working with a number of industries and has included EPA in the discussions. The ASTM approach is similar to the phase concept outlined in Rep. Weldon's bill. ASTM expects to circulate a draft in the fall and to finalize its standards in 1991.

57. Even if the buyer does not pay for the investigation, the report must state expressly that the buyer may rely on it. Consultants' warranties are carefully limited, however, and the buyer must be satisfied as to the scope of the report.

58. See, e.g., BCW Assocs., No. 86-5947 E.D. Pa., Sept. 30, 1988; Wickland, 19 ELR 20855.

59. See note 25 supra and accompanying text.

60. MULTI-FAMILY GUIDE, ch. 5 (Environmental Hazards Management Procedures) (adopted Aug. 1988).

61. Notice of Proposed Rulemaking, 55 Fed. Reg. 6283 (Feb. 22, 1990).

62. CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 007. This issue and an analysis of the lender exemption could potentially apply to trustees and other fiduciaries.

63. See cases cited at supra note 3. H.R. 2085, 101st Cong., 1st Sess., introduced by Rep. LaFalce (D-N.Y.) on April 25, 1989, would exempt foreclosing private lenders and trustees from Superfund liability. The bill has had several hearings and acquired many co-sponsors, but it has made little additional progress. On April 4, 1990, Rep. LaFalce introduced an updated version, H.R. 4494. See generally When the Sleaze Meets the Slime, Legal Times, July 2, 1990, at 1.

64. A buyer should not rely exclusively on the seller's investigation. CERCLA due diligence requires that the buyer conduct his own investigation to minimize his own liability. Thus, an investigation with the central focus of protecting the buyer's interest is essential.

65. A gift must be accepted to be effective.

66. As noted in supra note 39, all who acquire by inheritance or bequest should conduct some level of "environmental due diligence."

67. See CERCLA § 101(20)(A)(iii) & (35)(A)(ii), 42 U.S.C. § 9601(20)(A)(iii) & (35)(A)(ii), ELR STAT. CERCLA 007.

68. The exemptions apply to involuntary acquisitions, such as through abandonment or bankruptcy, as well as to voluntary acquisitions by eminent domain. The voluntary acquisition exemption seems inconsistent with other exemptions, but it has not been tested in court. The legislative history states clearly that "a government authority acquiring property by such methods shall notify, in a timely manner, the United States Environmental Protection Agency and the Department of Justice upon discovering the existence of a hazardous substance on the property." H.R. REP. No. 962, supra note 25, at 187. If the government were to be exempt as a result of an eminent domain proceeding, the liability would remain with the previous owner.

69. Although it apparently takes the position that it is not an owner, the Resolution Trust Corporation (RTC) has recognized that it must conduct environmental investigations. S. 2827, 101st Cong., 2d Sess., introduced by Sen. Garn (R-Utah) on June 27, 1990, would amend the Superfund lender exemption to exempt the RTC and similar federal agencies from Superfund liability. Garn's bill would also exempt foreclosures by private lenders. See supra note 57; see also H.R. 4076, 101st Cong., 2d Sess., introduced by Rep. Conte (R-Mass.) on Feb. 22, 1990.

70. But see Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 18 ELR 21026 (3d Cir. 1988), cert. denied, 109 S. Ct. 837 (1989).

71. Although a party can not transfer Superfund liability, an agreement whereby, for example, the seller agrees to indemnify the buyer for any environmental problems discovered within a certain time after the sale will be honored. See Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049, 15 ELR 20370 (D. Ariz. 1984), aff'd, 804 F.2d 1454, 17 ELR 20209 (9th Cir. 1986); CERCLA § 107(e), 42 U.S.C. § 9607, ELR STAT. CERCLA 025. Furthermore, several courts have held that an "as is" clause in a sales contract will insulate the seller only from a breach of warranties but not from statutory (i.e., Superfund) liability. International Clinical Laboratories, Inc. v. Stevens, 710 F. Supp. 466, 19 ELR 21084 (E.D.N.Y. 1989); Channel Master Satellite Sys., Inc. v. JFD Elec. Corp., 702 F. Supp. 1229, 19 ELR 20839 (E.D.N.C. 1988). Similarly, a general "release" of future liability claims will not be effective against a CERCLA claim, although the release may be effective against state law claims. AM Int'l, Inc. v. International Forging Equip. Corp., No. C88-2037 (N.D. Ohio, June 29, 1990).

72. CERCLA § 101(9) defines "facility" to include "any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located . . ." (emphasis added).

73. See supra note 40 and accompanying text.

74. Compare Pacific Hide & Fur, 19 ELR 20897, with Wickland, 19 ELR 20858.

75. A good starting point might be the discovery of the problems at New York's Love Canal and the 1980 enactment of Superfund.

76. Just as lawyers do not want consultants to practice law, lawyers who attempt substantively to second-guess the environmental consultant may be out of their depth. There is a difference between conceptual understanding and an educated conclusion. For liability purposes, the lawyer should want to rely on the consultant's opinion.