C. EPA's Role in and Perspectives on Property Transfer and Financing Liabilities

Gene A. Lucero

Editors' Summary: Although NEPA requires the preparation of an EIS for every major federal action significantly affecting the environment, federal agencies often decide in particular cases that compliance with NEPA is satisfied by preparation of EAs. The decision not to prepare an EIS is usually based on a finding of no significant impact. When an agency's threshold NEPA decision is challenged in court, what is the appropriate standard of review? The federal courts of appeals answer this question in at least two different ways: some circuits use the "arbitrary and capricious" standard, while others inquire into the "reasonableness" of the agency's decision. Several courts have expressed doubt that there is any genuine distinction between the rival standards, and the Supreme Court has so far declined to settle the issue. The author of this Article surveys the federal case law on this question, exploring the approach of each circuit and taking issue with those who maintain that the difference between the standards is illusory. The vital difference, the author argues, is that courts using the reasonableness standard are more likely to substitute their own judgment for that of the agency, while courts adopting the arbitrary and capricious standard tend not to second-guess an agency's decision. Because he sees an important difference between these two approaches, the author urges the Supreme Court to grant certiorari to resolve the circuit split.

Gene A. Lucero is Director, Office of Waste Programs Enforcement at the U.S. Environmental Protection Agency in Washington, DC.

[18 ELR 10366]

At the EPA, we begin with the assumption that people who never expected to be will find themselves involved in toxic-waste cases. Generally, we will seek out everyone associated with the contaminated property and send them a notice letter of potential liability. Thereafter, many questions will be raised about the fact of — and the extent of — liability, and those who are contacted will be invited to join in the relevant decisions. At a minimum, these people will experience the irritation of considering whether they are liable and perhaps seeking out advice. With few exceptions, the Agency strives to make no distinctions when it gives notice, in part because we often lack the information necessary to determine liability with precision.

Our objective is to clean up sites. Thus, we take broad, sometimes ambiguous provisions of the law and constantly seek to expand them to further that end. In certain areas, the result is that potentially responsible parties will encounter considerable difficulty, in a way that they might not now suspect.

One area in which we have sought change is our definition of "hazardous substances." At a given site, the Agency is far less concerned with the presence of pollutants and contaminants than it is with hazardous substances. Nonetheless, we have never established a de minimus level of hazardous substances. When we send the notice letters out, we are often looking only for some connection, some evidence of a hazardous substance at a site. Some substances that are not deemed hazardous wastes under RCRA are nonetheless deemed hazardous substances. For example, paint sludges with metal pigments that might not fail the tox test may still be considered hazardous substances.

There is probably contamination at a number of sites in which most people would doubt the Agency had an interest. While we often will not be interested in a site unless asked to look at it, once we do look, the levels that concern us are considerably lower than one might expect.

For example, in property located near freeways, the lead-deposit contamination from resulting normal combustion is equivalent to that we found at lead sites in Dallas that we subjected to a cleanup.

In addition, the EPA is under pressure from Congress to pursue more bankruptcy cases and more of the potentially responsible parties to collect as much money as possible. As a result, once other federal agencies take control of a waste site under foreclosure or repossession, they too become a responsible party. While we have not determined the policy on who will compete and who will get the money, we hope to achieve an amicable settlement. The Small Business Administration has encountered this policy, and the Department of Housing and Urban Development will be similarly affected. The Department of Interior has been held responsible as a lessor for the cleanup of a battery-buster site.

We are also reading the defenses narrowly.

PARTICIPANTS: Has EPA developed any rule of thumb regarding the allocation of liability between viable owner-operators who are not innocent and other potentially responsible parties, PRPs?

LUCERO: Nothing has been formalized directly on that point. In the preamble to our national priority listing, we have acknowledged that there is alternative authority to regulate or control cleanup under RCRA for facilities subject to that law. Although it is not expressly stated there, we will look first to the owner-operator, provided they are not innocent and can handle the particular problem.

This approach is probably more a philosophy than a rule of thumb. It is not always evident, however, since frequently it is determined that the owners or operators cannot handle the full cleanup by themselves.

PARTICIPANT: Has the lender liability exception been the subject of discussion or internal memorandum at EPA? We are finding that more sophisticated lending relationships do not necessarily fit into the simple mortgagee/mortgagor situation contemplated in the statute.

LUCERO: There has been neither a discussion nor a memorandum. If a problem arises, the Agency will likely focus on it at that time.

PARTICIPANT: Does the Agency have a suggested practice for lenders to use in deciding whether to conduct an investigation before making loans or foreclosing? Does EPA simply expect that it be done at both times?

[18 ELR 10367]

LUCERO: The Agency has not focused clearly on how to offer guidance. In general, however, we hold lenders to a higher standard than others. The Small Business Administration — SBA — made a loan to a gentleman who was engaged in battery busting. When he could not make payments, they foreclosed on the property and took steps to sell it. In our view, the SBA had an obligation at the time of the loan to consider that such an activity might give rise to environmental liability. There is a responsibility both when the loan is made and before the lender forecloses and attempts either to sell or to take title.

PARTICIPANT: In your last example, were you suggesting that the SBA was obliged not only to identify that the loan was going to a bad actor in the battery business, but also to see to it that bad actor cleaned up its act?

LUCERO: I would not have read what I said quite that far. There is probably no responsibility to manage or oversee the debtor's activities. Lenders should be aware of the risk when they make the loan, and they should be aware of the liability if they seek to foreclose. If they choose to exercise some responsibility over the activity for which they have provided a loan, they are free to do so. Ultimately, they must consider whether they actually want to take the property.

PARTICIPANT: Does EPA have any policy with respect to the retrospective applicability of the new diligence standards in SARA with respect to current landowners? What can people do who now own property?

LUCERO: While it may appear to many that SARA defined new standards of due diligence, the Agency and the Department of Justice always felt that they were implicitly contained within 107(b)(3). We simply never faced the issue of how we would deal with prior innocent landowners on more than an informal basis.

PARTICIPANT: Suppose they did not know to make all the appropriate inquiries twenty years ago when they bought the farm. Is there now no third party defense under 107(b)?

LUCERO: I think we would focus on what they have done since then. Did they become aware of the problem? If so, did they take steps to exercise due care? I think that they would get the benefit of a lesser standard, or perhaps no standard regarding their duty to inquire twenty years ago.

PARTICIPANT: The innocent landowner provision was inspired by a specific situation, in which a company acquired property prior to enactment of Superfund, and then found that it was contaminated. They reported it to the governmental agencies. Response was undertaken, yet further contamination remained. Our client then sued previous owners and attempted to propose a settlement of its liabilities under the procedures prior to SARA, only to find the settlement provisions did not really address the landowner whose liability stemmed solely from ownership. Around this time, the third-party defense was questioned by the courts. Legislation soon clarified the availability of the de minimus defense to innocent landowners. Rep. Barney Frank offered a floor amendment to establish and clarify the third party defense. This proposal evolved into a clarification of the contractual relationship, and a political judgment was made that this resolution be placed in the definitional sections of SARA because Congress did not want to change the Section 107 liability standards.

In addition, the legislative history is very clear that there is a different due diligence standard for acquisitions that occurred prior to enactment of Superfund than for subsequent ones. One of the objectives was to establish a clear, higher standard of due diligence post-CERCLA.

The act also provides that someone in the chain of title who failed to disclose the presence of a hazardous substance, while they may not have been the owner-operator at the time of disposal, would be considered an owner and not have a third-party defense available to them. In my view, this provision raises constitutional questions of retroactive liability for transactions that occurred prior to enactment of SARA.

The legislative history on the de minimus defense states that the settlement can be reached without the completion of a Remedial Investigation Feasibility Study. I am led to ask: Where in the process does the Agency expect that a de minimus settlement will occur? As I understand you, if the person seeking the settlement does the factual inquiry for the agency, provides a reopener and convinces the agency that he (a) was innocent at the time of acquisition and (b) has not done anything to exacerbate the problem, the question of how serious the contamination is nonetheless remains. It is still a question of timing for the sellers.

LUCERO: The de minimus defense can be raised at any time that one has notice or has an idea that one is potentially liable. If the provision is raised too early, even if one can establish innocence, it is often unclear what one should settle for. The de minimus provision is intended to encourage the parties to come forward together, if possible, and at a time when the Agency can roughly estimate the costs and identify the share. We recognize that many de minimus parties want to get out before the RIFS phase, which can take as long as two years. With that in mind, we are developing proposals for structuring a deal with uncertainty as to the ultimate amount. There would be two kinds of reopeners: one for new or unknown facts, or a reassessment with some limitation, and one where the costs on which the share was calculated have changed dramatically. We know that some bounds must be placed on how much could be later reassessed. To the extent one wishes to get out earlier, one must contend with more uncertainty, and the deal will not be precisely as one would like.

PARTICIPANT: There is a fact situation I just don't understand that I am not sure you have addressed: A client tells me he has been offered the chance to buy a property that is an apparently properly closed, reclaimed landfill area. He wants to build an office building on it. What do I advise him about his liability?

LUCERO: What knowledge does he have about the site conditions?

PARTICIPANT: He knows only that the site was apparently properly reclaimed.

LUCERO: Everybody can make decisions with risk; much will depend upon your client's comfort in the face of the risk. In general, though, if the reclaimed area was exposed to any solid or hazardous waste practices in the past, that situation is riskier than others. In such a case, I would recommend at minimum some type of environmental audit to assess the degree of risk. While you are not obligated to do so, I would encourage you to ask the government whether you've got a problem.

Of course, if the site is on a national priorities list, or if it is in the national inventory of such sites, the government will undoubtedly respond. If it's not in the inventory, you have to make a judgment based on your audit.

[18 ELR 10368]

PARTICIPANT: You seem to be saying that these properties are essentially unsalable; yet, from a standpoint of public policy, it seems there should be a rule declaring that if obvious environmental damage has not shown up after a certain length of time, the property can be purchased without fear of risk.

PANELIST: I would have to differ with your assessment that the property is unsalable. I think it would depend on where that property is and what the cost of the cleanup would be. As I understand Mr. Lucero, he is saying merely that one cannot buy that property without doing an environmental assessment and making a decision on what it will cost to clean up. It may be that if the property is across the bay from a desirable downtown development area, the cost of cleaning up that site will not detract prohibitively from its value.

PARTICIPANT: Consider the case in which the potential purchaser conducts a due diligence investigation. If he discovers the presence of hazardous substances, it seems clear under SARA that he must choose either to buy the liability along with the property or to forego the acquisition. Those are his only available choices.

LUCERO: Why?

PARTICIPANT: The standard under the innocent landowner provision is that he must have neither knowledge nor any reason to know. If he acquires knowledge and then goes through with the acquisition, he is certainly going to be thereafter liable.

LUCERO: Does your hypothetical preclude his investigating, discovering the problem, and conducting a cleanup?

PARTICIPANT: If he does something by way of cleanup, he has implicitly assumed the liability for the property. Assume that he elects to forego the acquisition. Does he upon discovery of the presence of the hazardous substances have a duty to report it to the state or federal authorities? What is his risk at common law?

LUCERO: I am unaware of EPA enforcing a common law duty to report. There may be one nonetheless. Under both CERCLA and RCRA, only the owner-operator has a duty to report.

PARTICIPANT: Assume the owner-operator is aware of a quantity less than the reportable amount? Does he then have a duty to report it?

LUCERO: You would have to check Section 103 to determine whether he had the duty at the time he discovered the waste.