Direct Governmental Review, Restriction, and Prohibition of Private Sector Transactions and Property Transfers: Panel Discussion

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.

[18 ELR 10374]

JIM SINCLAIR, Vice President, New Jersey Business and Industry Association, Trenton, New Jersey

GEORGE J. TYLER, Esquire, Giordano, Halleran & Ciesla, Middletown, New Jersey

BEN WILES, Assistant Counsel to the Governor, State of New York, Albany, New York

MICHAEL P. LAST, Esquire, Moderator, Gaston Snow & Ely Bartlett, Boston, Massachusetts

JIM SINCLAIR: I handle environmental matters for the New Jersey Business and Industry Association. We have about 11,000 corporate members, and we represent the breadth of New Jersey industry. We also represent a special fraction of that industry: manufacturers that are covered by New Jersey's ECRA.¹ I have received many phone calls over the last two years about this law. From company environmental specialists to chairmen of the board, they have all called to express their dismay and disbelief at what ECRA requires of them.

Let me share some of the concerns people have about ECRA. First, the problem with ECRA in New Jersey is not the public policy behind the act. The policy purports to deal with immediate health and environmental effects on the neighbors of waste sites, long-term cleanup of the sites and a concept called "buyer protection."

The first case I would like to describe concerns one of the trustees of our Association. This company bought a property that fell under ECRA at its outset in 1984. It was a business that they tried to save, but, despite their best efforts, it failed. They would now like to sell the property, but ECRA has imposed long-term liability upon them with respect to something they thought was a shaky business from the start.

The chairman of this company, a good-sized New Jersey concern, tried to determine its obligations under ECRA. The state officials involved, however, were not available to answer his phone calls. One day, after repeated attempts, he [18 ELR 10375] finally discovered that the person in charge of ECRA, the bureau chief, was in Pennsylvania testifying before a state committee about what a great program ECRA was. This story inspired me to appear at today's conference, to testify to the opposite.

One cannot place a government bureaucracy in the middle of real estate transactions. It can stand on the side, inspect, regulate and interpret, it can do many things that government does moderately well, but it cannot move quickly, and cannot make decisions of vital importance. The fundamental problem with ECRA is that the government is asked to declare a property for sale to be absolutely clean and to provide such assurance to the buyer. The state officials do not know when to stop conducting tests and acquiring data. They cannot be sure that Mike Wallace will not visit their offices some day with television cameras asking them how they let one case slip through. Bureaucrats have to be safe, they have to be conservative, and this trait is inimical to real estate transactions.

When I worked at New Jersey's Department of Environmental Protection (DEP), people used to tell me that environmental regulations would shut down business in the state. At DEP, we knew that such talk was hyperbole. With ECRA, on the other hand, 35 percent of the industrial facilities that have gone through the process have now been converted to nonindustrial purposes.

One might attribute this shift to market conditions, to some larger trend in New Jersey. Perhaps the Hudson River waterfront development is responsible, assigning to commercial reuse a higher value. For my part, I see the acceleration of the decline of New Jersey's industrial base, which will hurt the state in its long-term competitive situation in the world. In addition, one can only speculate how many transactions ECRA has discouraged from ever taking place.

While most would agree that there is a stewardship requirement, not only of industrial land but of all land, there must be a limit. In one case, a Swedish company bought a rubber manufacturing company in New Jersey. After dealing with ECRA, they have now declared that they will never attempt such a project again in New Jersey.

The solution, in my view, is to place a sunset provision in the ECRA legislation. Over the last seven months, we have held public hearings approximately twice a month to attempt to fix ECRA. The assembly committee's recommended changes now represent perhaps twice the volume of the original act, and still it will not be satisfactory. The bottom line, after all the improvements, is that if you don't have a problem at all, the state will guarantee that you can probably get through the process in four months. For all others, it takes a lot longer. For a mid-sized company, it might take four years.

In closing, ECRA is a law in need of repair in New Jersey, and it certainly should not serve as a model for other states. Even from an attorney's viewpoint, the billing time required will cause the loss of clients in the long run, because the people reach a level of frustration with the process and refuse to go any further. ECRA as it is currently structured is a process that is doomed to failure.

GEORGE J. TYLER: It is always an interesting experience to be the guest speaker from New Jersey at an environmental law conference. Having worked for many years in New Jersey's Department of Environmental Protection, I have been in this position on more than a few occasions. Nevertheless, the experience never ceases to be intriguing. Being from New Jersey and dealing in environmental issues, you are at first admired for your presumed expertise, given the state's incredible wealth of environmental law and regulation and, at the same time, you receive sympathy for living in a place that needs so many environmental statutes.

New Jersey has long been a trend-setter in the environmental field. In the mid-70s the state legislature had already passed a broad and comprehensive package of environmental bills that were looked upon with envy by environmental activists in other states and, at the same time, drove many representatives of the state's industrial community to label the economic climate of New Jersey as anti-business. In the early 80s, the New Jersey Spill Compensation and Control Act laid the foundation for later congressional action in passing the first Superfund bill.

Many thought that by 1982, the legislative phase was over and a long period of regulatory fine-tuning was ahead. Instead, to the surprise of many, another rush of environmental legislation was passed. Major amendments to the state's Safe Drinking Water Act leading to the nation's first standards for a wide variety of toxics in drinking water; the New Jersey Right-to-Know Program, which dwarfs the national program; and the topic of my talk today, the New Jersey Environmental Clean-Up Responsibility Act which, when passed, was one of the most far-reaching and powerful pieces of environmental law yet enacted anywhere in the nation, all became law in the early 1980s.

ECRA, as the law is known, became law on September 2, 1983 (effective date, January 1, 1984). In my personal opinion, ECRA was in concept inevitable in Jersey and at the same time with respect to its most important specific provisions a quirk of fate.

ECRA was inevitable because of the unique characteristics New Jersey possesses. New Jersey is a state blessed with a wide variety of natural resources. From the mountains of its skylands region in the northern Delaware Valley, to its 100 mile-plus coastline, and across the Pinelands land preserve, New Jersey's outdoor and recreational resources are second to none. At the same time, despite a tremendous growth in service industries, New Jersey still counts the chemical and the pharmaceutical industries as its second and third largest employers. In short, while times are changing, we are still a state of heavy, and sometimes less than clean industry coupled with a very fragile coastal ecology. These features overlay a small land area, a dense population and an intelligent and aroused citizenry; thus, continuous and progressive environmental legislation becomes almost inevitable. In the early 1980s, the legislative climate in New Jersey shifted from business versus government regulation to a debate amongst politicians who all claimed that their environment was cleaner than anyone else's. That combination of factors produced a bill which permits government agency review and evaluation of most industrial and many commercial real estate transactions. Incredibly, it also permits that agency, the New Jersey Department of Environmental Protection, to void those transactions where it finds that ECRA has not been satisfied. Perhaps less startling, but nevertheless innovative, is the power of a purchaser to void a sale on the same grounds.

The quirk of fate I mentioned earlier was the complete absence of the financial community in the legislative debate that produced the bill, so traumatic in their eyes.

[18 ELR 10376]

ECRA requires that the owners or the operators of industrial establishments as defined by the statute identify and alleviate environmental problems as a precondition to the closure, sale or transfer of the business operations. When first enacted, the bill optimized the "ounce of prevention" that happily avoided the "pound of cure." Today, it is often viewed as the "ton of paperwork" that significantly outweighs the "ounce of benefit." ECRA requires that all industrial establishments obtain New Jersey Department of Environmental Protection approval in the form of a "negative declaration" that the site is free of contamination by hazardous substances or alternatively to obtain cleanup plan approval, as a precondition of sale. Any owner or operator of an industrial establishment which plans to close or to sell its operations must notify the Department no more than five days after the execution of an agreement of sale or within five days of the announcement of its decision to close or to cease operations. The industrial establishment must submit a general information submission (ECRA 1) within a five day time period. A more complete and thorough site evaluation submission (ECRA 2) must be filed within thirty days of the aforementioned events. The ECRA 2 form requires detailed information concerning all aspects of an industrial establishment's emissions, discharges, and historical contamination problems. Detailed site maps, inventories of materials (including all hazardous substances and hazardous wastes), federal and state environmental histories (both permit and enforcement), and any and all available sampling data for soil, groundwater, surface water, emissions and discharges must be submitted. The site evaluation submission is a prerequisite to Department approval of a sampling plan. A proposed sampling plan is normally included with the site evaluation submission and must be implemented in order to characterize fully a site so that a cleanup plan can be developed.

Under the ECRA process, a sampling plan normally includes, at a minimum, a detailed map with sampling locations, a description of sampling methodologies, a description of the laboratory analysis that will be performed, and most importantly, a detailed quality assurance/quality control program. It is, in fact, an environmental consultant's (and some say lawyer's!) paradise. Carrying out a sampling plan leads to either a cleanup plan, or what is known as a negative declaration. Certain negative declarations, that is, claims that no cleanup is necessary, can be obtained even without carrying out a sampling plan provided an inspector from the DEP concurs that no sampling is needed at a particular site. In the case of a site with some degree of contamination, the cleanup plan is submitted and a schedule for its implementation is developed. At that point, the transaction that triggered the statute in the first instance can go forward, provided that sufficient financial security to guarantee completion of the cleanup program is established.

The DEP has developed a wide variety of model financial forms, that is, performance bonds or letters of credit that it deems acceptable to establish such guarantees. If certain financial tests are met, self-bonding is acceptable.

Not every business in New Jersey is subject to ECRA. There are three chief threshold tests that trigger the statute, two of which define the type of industrial establishment covered. The first threshold is the act of closing, terminating or transferring an industrial establishment. The industrial establishment must fall within certain specified standard industrial classifications published by the Office of Management and Budget in their annual SIC manual. Most general manufacturing facilities are included; but food or tobacco processing is exempt. Pipelines are included, but natural gas pipelines are exempt. Transportation services are included; however, railroads are excluded. Electric, gas and sanitary public services are included. Agricultural production and associated services are not. While these examples may imply a detailed analysis and careful legislative craftsmanship, we are in reality dealing with the vagaries of the OMB SIC manual, which, of course, was not indexed on environmental parameters. Thus, when the bill was first enacted, gas stations with their underground tankage and continual flow of gasoline, oil and other potentially hazardous materials were exempted yet travel agencies were somehow drawn into the statutory net. Much of that original silliness was eliminated in 1985 when rules were enacted exempting certain classes of facilities that simply did not belong in the process.

The second threshold test that defines which facilities are covered and which are not, is the historical use, or lack thereof, of hazardous substances or hazardous wastes. ECRA relies upon, first, the New Jersey regulations that parallel the federal Resource Conservation and Recovery Act (RCRA) rules for the definition of hazardous waste, and secondly, the New Jersey Spill Compensation and Control Fund rules that include a list of hazardous substances. If a material is included on either list and it was used, stored, spilled, discharged or otherwise handled at an industrial establishment that falls within the prescribed SIC Code, the industrial establishment is then subject to ECRA.

If the measure of ECRA's success is the volume of activity it generates in transactions voluntarily submitted to the New Jersey DEP for ECRA approval, then the law has been an overwhelming success. In the first three years of operation, more than 2,000 initial notices have been filed with the DEP. This has generated some 1,500 inspections and more than 250 individual cleanup plans. Nearly 100 cleanup plans have now been completed, although these range from small spill remediation to major industrial facility cleanups. Only a handful of the completed cleanups fall into the major category; however, of the 250 or more cleanup plans filed, at least 50 or 60 would easily qualify as "Superfund"-class sites. In many cases, unless a significant problem had arisen prompting the DEP to inspect and sample at these sites, these industrial facilities would have continued to operate for many years without any remedial action being taken to remedy soil or groundwater contamination. This is the true measure of success of the ECRA program. However, it comes at a very high price. In addition to the nearly 2,000 initial notices that have been filed, at least another 2,000 "Letters of Non-Applicability" have been applied for and for the most part granted. That means that, over the past three years, in New Jersey more than 4,000 separate financial or real estate or business transactions have been subject to some form of environmental regulatory agency scrutiny. This is, to say the least, unprecedented, and has driven many a real estate attorney or a mortgage banker to the edge of despair and frustration. Put another way, if a site is potentially subject to ECRA but is free of environmental problems, then a four or five month delay is necessary to certify that the transaction can go forward. If there are environmental problems, the time frames lengthen proportionate to the degree of the problem. In many cases, whether or not [18 ELR 10377] there is a problem, an enormous additional expense is associated with the implementation of the Act.

Obviously, at least in substance, ECRA is not unique. I say obviously, because this entire conference is devoted to the now clear understanding among businessmen, financiers, real estate professionals, and the like, that environmental issues can very often be "deal breakers." Equally obvious, however, is the incredible uniqueness of the form of the ECRA process. The intimate involvement of government agency officials in ordinary commercial and industrial real estate transactions has placed an enormous strain on the business of financial communities in New Jersey.

There are many different ways of satisfying the goal established by this ECRA. The real questions it poses are not the kind set forth in its legislative purpose sections, which state that the legislature finds and declares a need to accelerate the overall progress of the State of New Jersey in dealing with its hazardous sites, and that there is a commendable purpose served in avoiding the purchase of contaminated property by an innocent purchaser. Answering those questions results in unanimity amongst all the actors. The real question is whether or not this program is the best way to accomplish that goal, and whether the current program is working. These are questions that will produce a wide variety of loud and acrimonious answers. While ECRA was slightly ahead of its time (effective in January of 1984) in terms of the kind of information it requires sellers to provide buyers (and the government), at least in the case of small and mid-size industrial sites, it really is little more than what the more astute were already seeking in real estate transactions with respect to environmental concerns as long as ten or fifteen years ago. And in those cases where there is a significant amount of contamination and yet there is also a ready, willing and able purchaser for an industrial site, the law is a tremendous incentive for good.

In mid-1984, a cleanup plan was approved for a major industrial site in Elizabeth, New Jersey. There is no doubt in my mind that the site would have stayed abandoned and contaminated for many, many years except that a buyer showed an interest in the site, and, in order to convey the property (even for salvage value), a cleanup program was necessary. The end result was a major new economic development project coupled with a non-superfund, and therefore unheralded, major environmental cleanup.

Prior to that enactment of the statute, a very serious groundwater contamination problem was identified in a large, abandoned Northeastern New Jersey manufacturing plant. The ordinary environmental enforcement process was set into motion, and I trust that eventually a full site remedial action program would have been carried out. Fortunately for all concerned, however, shortly after the effective date of ECRA, a potential buyer for the facility arrived on the scene, and again, the end result is a restored industrial property and, in this case, the creation of hundreds of new jobs. Also included was a rapid completion of an otherwise long and arduous regulatory and technical effort.

But there are also horror stories. I have alluded to some of them when I talked about the unprecedented intrusion of government into ordinary day-to-day business transactions. When the purpose served is laudable and the benefits are clear and tangible, as in the two cases I have just noted, there may be some grumbling, but overall there is an acceptance of a process, and in many sectors, outright support. However, when a small business must expend all of the capital gain of the lifetimes of its owners to prove that a site is not contaminated so that it can be closed, in turn leaving its owners as candidates for the welfare rolls, some reexamination is necessary.

The problem here is a classic one. The meshing of hundreds of dissimilar situations into one systematic bureaucracy is certainly not unique to ECRA. Because of the tremendous leverage provided by the law, however — the power to void real estate or commercial business transactions — and because the law is implemented by bureaucrats who must attempt to put all transactions on an equal footing, the discretion that could be employed to make the statute flexible and therefore workable is, as a rule, discouraged, if it exists at all.

The final question then becomes how long a program can survive that is increasingly unpopular with an ever growing number of ordinary citizens, who perceive it much more as harassment than as consumer protection. How long can that program survive? Indeed, yesterday's New Jersey Register contained massive new regulatory changes proposed by the State Department of Environmental Protection. Those changes are a direct response to, and in fact compete with, legislation which would also alter the original statute in an attempt to soften some of its more pointed areas.

The jury is still out, though, with respect to the issue, and will be even if these regulatory and statutory proposals are adopted. Certainly, clarifying definitions and eliminating obvious egregious over-reaching by the original regulatory program are welcome, and will help the program function. Whether or not it changes the overall situation is another question, and one I can't answer today with any degree of certainty.

I will make a prediction, however: environmental laws are never repealed, at least not in my state. So, I don't think it will go away. I do think, however, that it is a program destined for massive change.

BEN WILES: In the last two years, Governor Mario Cuomo of New York has suggested to the Legislature that they adopt an ECRA¹ statute. During this time, my job has been first to draft a proposed ECRA statute, and then to try to convince the Legislature to pass it or to find out why it is impossible for the bill to be passed. I would like to describe the opposing points of view in New York, and then I would like to return to some of the issues that are fundamental to a discussion of ECRA, such as a cleanliness standard, the timeliness issue, staffing, and the use of rescission as a remedy.

Legislation is by nature an agreement. In New York, right now, there is no agreement. The reason, in my view, is that the buyers, sellers, and lenders are confident that they can solve their problems primarily with contractual remedies such as indemnities and warranties. They see them as sufficient for the time being and do not think that they need to be exposed to a new regulatory process.

On the other side of the issue are people whose primary interest is environmental protection, and they have had considerable success as of late. The governor has established a community right-to-know program that has generated a great deal of information. A $ 1.25 billion hazardous waste cleanup program was proposed and adopted last year. This [18 ELR 10378] year, we have doubled the number of personnel who will be running that program. In addition, SARA² has provided emergency response. Soon, a chemical risk management program should be in place. These improvements are quite extensive, and it is difficult for the environmental community to digest them and to move on to a new issue such as ECRA.

In addition, much of the current emphasis is on cleaning up the worst sites and reaching true environmental hazards. ECRA is not a worst-sites-first statute. It makes no distinction between a relatively innocuous site and a seriously contaminated site. For the environmentalists to support an ECRA statute requires a shift in the way they advocate their case.

Both sides, then, have been unable or unmotivated to support a statute.

This situation, however, will change. From the industry's point of view, while they can solve many problems with covenants and the contract itself, eventually they will require some estimate of their exposure. In my view, the only way they can reasonably obtain an estimate is to bring the regulator to the table. Right now, ECRA is the only suggested method for doing so.

From an environmental standpoint, there is a need for a program to reduce the number of sites and to prevent the creation of new ones. At present, there are so many disincentives to using a dirty site for one's new project that industries simply move from one clean site to another, leaving behind an increasing stock of contaminated sites. Dirty sites must be either recycled or removed from concern. ECRA could do this.

I would add that from the industry point of view, ECRA would indeed be a new program; yet industry is now so heavily regulated that it is hard to characterize this as a greater burden. If one is already subject to hazardous waste manifesting requirements, the federal Superfund statute, a state hazardous waste program, and a community right-to-know order, then the added impositions of an ECRA statute are probably minimal. Over time, members of industry will come to recognize this fact.

Let me turn now to some of the substantive issues in ECRA.

How clean is clean? This ubiquitous problem will likely never be addressed in an ECRA statute, probably because it is applicable to almost any hazardous waste program. Similarly, the notion of time limits is not part of the central purpose in developing an ECRA statute. Timeliness, therefore, will always be the subject of administrative rulemaking or even administrative practice. Other issues unlikely to appear in an ECRA statute include reopener (revoking a certification), adequate funding for staff, and criminal sanctions.

Other matters, however, must be addressed in the statute. The first of these is applicability: Which transactions will be covered by ECRA, and which will not? Industry cannot allow the statute to fail to specify whom it addresses, and environmentalists cannot support it if so many transactions are removed from the scope of the statute that it has no effect.

Another issue that must be resolved is the impact of the statute on the relationship between the buyer and the seller. Currently, both come to the table and, from different perceptions of economic strength, negotiate. Who will be held responsible, and what will be the extent of the liability? An ECRA statute will likely change the calculation of who is responsible. It is a fundamental issue, and neither the New Jersey statute nor the New York statute addresses it as well as it could.

Another issue is the role of the regulator. Once the state environmental agency is given a role in the transaction, how are they to carry it out? While it is fundamentally inconsistent, bureaucratically, for an existing regulatory agency to be a facilitator of transactions, the ECRA program is premised on all parties playing such a role. How the agency can be eased into that role without damaging its credibility as a regulator is a problem the statute will likely have to address.

Turning to an issue that may be too inchoate for the legislature yet to address, what role will ECRA play in economic development? In Buffalo, a city with great economic problems and a huge inventory of unused or underutilized industrial sites, a significant barrier to redevelopment of those sites is an uncertainty about who is responsible for what — uncertainty that an ECRA statute could resolve. Unfortunately, the legislators involved do not perceive it in these terms.

Another question is whether one can have an ECRA without a cleanup. New Jersey's prototype, of course, requires one. It is one possible approach. Another alternative would be an ECRA without rescission. What does a rescission remedy really provide, particularly if the remedies of CERCLA³ or its state counterparts are available?

In New York we have tried twice to enact ECRA. People are only now beginning to realize that the statute has benefits for everybody, and that it has a rightful place in any hazardous waste program.

DISCUSSION

PARTICIPANT: What do you mean by ECRA without cleanup and ECRA with or without rescission?

WILES: Perhaps the most powerful argument in favor of ECRA from an environmental standpoint is the large number of cleanups generated in New Jersey by this three-year-old program. One might ask, nonetheless, whether one could have an ECRA statute that did not require a cleanup. It might require a complete disclosure, submission to jurisdiction, and everything short of the final order to clean up, then leave it to the existing hazardous waste law to allow the remaining parties to work out the final consent order after the transaction goes forward. Politically, though, it may be difficult to meet enough people's interests to pass the statute without requiring cleanup. I just don't know if cleanup is a key issue, or a collateral, insignificant one. The same holds true for rescission. Is it really necessary to provide rescission of the transaction as a remedy for failure to comply with the statute?

PARTICIPANT: In New Jersey, with regard to rescission, what happens if this process takes a long time? If the buyer has already gone into business or otherwise engaged in considerable reliance, can the state still rescind the transaction?

[18 ELR 10379]

TYLER: Yes, according to the statute. The state has never attempted to exercise that authority, however, and it is an open question how a court would react. In a difficult fact situation of the sort you suggest, a court would likely not grant the state the right to void the sale. With simpler facts, they might. If the state ever attempts to bring such a case, it will have to pick that case very carefully.

WILES: It is precisely these hypothetical twists that make it a difficult legislative issue.

PARTICIPANT: In drafting an ECRA, are there alternatives to rescission in the event of nonconformance? Is there a more imaginative alternative?

WILES: It is easy to be more imaginative; it is not so easy to be as effective. It is hard to find something that people are more comfortable with than rescission that would achieve the same result. Currently, the legislature appears comfortable with the notion of rescission as the end result. For my part, I would like to have the legislature pass a statute that the governor can sign. If they want to pass a rescission statute, I am not going to object.

PARTICIPANT: If your job is to come up with a statute that the governor will want to sign, are you not concerned about whether a major provision such as rescission is viable?

WILES: The governor's proposal includes rescission as the remedy just as the New Jersey statute does.

PARTICIPANT: Connecticut's ECRA statute does not have a right of rescission. I am curious why, in your drafting of the New York statute, you elected to go with a rescissionary right.

WILES: We proposed rescission because our objective was to bring a whole new set of actors into the process and maximize cleanups.

MICHAEL P. LAST: I practice both environmental and real estate law, and I have found many environmental statutes and regulations to be useful action-forcing tools that have improved the environment and helped to eliminate nasty surprises in real estate transactions. Nonetheless, I also believe that injecting pre-clearance and other bureaucratic techniques into real estate transactions is generally undesirable and in many cases fatal to transactions.

There are basically three categories of environmental law and regulation that affect real estate transactions and that are designed to implement environmental enforcement. First are the lien provisions, including superliens. In Massachusetts, our initial version of the superlien covered all property and allowed a 90-day delay in recording (which has since been changed). It applied to both real and personal property, and a very broad range of parties were potentially liable, as in CERCLA.¹ As a result, FANNIE MAE² and FREDDIE MAC³ threatened to withdraw from Massachusett's mortgage market, which constituted eighty percent of the residential secondary loan market at that time. The Massachusetts law was changed, and the priority lien now applies only to contaminated land and excludes residential real estate. Such lien provisions certainly force action, and, to a degree, they have had some beneficial effect upon real estate transfers in Massachusetts.

The second category consists of notice provisions. Several states, including Massachusetts, require that where a property has been a disposal site for hazardous wastes or is otherwise contaminated, a notice to that effect must be recorded at the registry of deeds to alert subsequent buyers. This device, too, forces action. Unfortunately, though, our statute is so broadly worded that even if the property has been cleaned up, one might still have to record a notice before the property is transferred. Such a construction would pose serious continuing implications for that property's marketability.

This problem raises two subsidiary questions. First, should there be a state sign-off provision, certifying that a property is no longer deemed contaminated, that would appear in the chain of title along with the original notice? Second, can insurance coverage affirming marketability be provided to address notice-related concerns? I am unaware of such coverage, and I doubt that it would appeal to title insurers. Nonetheless, it is one possible approach to the problem.

The last category is the advance-clearance or pre-transfer approval process provided in ECRA⁴ and which is now under consideration in Massachusetts.

Under the proposal now before the Massachusetts state legislature, prior to transfer, a state-approved cleanup plan must be submitted along with financial guarantees or other security. Alternatively, a state-approved site investigation report can be submitted to the state environmental agency. A transfer is then permitted, provided that the projected cleanup can be adequately priced and the money to secure performance is placed in escrow (or sufficient alternative security provided). If the cleanup cost cannot be estimated, the entire market value of the real estate — as if it were clean — is placed in escrow (or alternative security provided).

Those who deal regularly with real estate transactions know that it is virtually impossible in a real estate transaction to put up the entire price in escrow, if for no other reason than that there is usually an outstanding mortgage to be paid off from the proceeds of the sale.

While the advocates of ECRA-type legislation claim that such problems will be rare, I submit that they will happen more often than not. Based upon a site investigation submitted to a state regulator whose primary concern is for the environment, it will be very difficult at that stage to price adequately all the variables involved in a cleanup. Without a study of the most feasible cleanup remedy and the development of a cleanup plan, such an estimate is virtually impossible. The result will be extremely conservative pricing and, in some cases, refusal to set a price.

[18 ELR 10380]

In conclusion, I would argue that well-crafted lien provisions are useful, because they can force site evaluations that help both buyers and lenders. Notice provisions are also useful, provided they do not impede the clearing of title in the event of cleanup.

Pretransfer clearance procedures, however, are disasters in the making. In the long run, we will be faced with a runaway bureaucracy that will not be able to keep up with the demand.

DISCUSSION

PARTICIPANT: I have a question regarding your last point. As I understand it, the placing of money in escrow is an alternative. If it turns out to be impossible, if one simply cannot raise the money, doesn't one simply return to the current system in New Jersey?

LAST: Yes, one returns to a cleanup plan. In Massachusetts, however, where site assessments on all properties have become the norm — except for small-scale residential — the inspectors cannot keep up with the demand. Since ECRA has not yet been enacted, the current system is informal. The original informal sixty-day review and approval period has increased to between six months and a year. If we enact this kind of provision before the State can muster the necessary staff, they will be so inundated that everything will grind to a halt.

Another recent event in Massachusetts was the passage of a referendum mandating the identification of hundreds of sites — 400 the first year, 600 the next year, etc., until all of them are identified. Within certain "hammer" periods, these identified sites must be assessed and cleaned up with interim, and then permanent, solutions. To conduct this program, it is estimated that over 400 people must be hired this year and integrated into the state system. This program is distinct from the preclearance of real estate transfers, and the burden created by the conjunction of these two programs will be mind-boggling.

PARTICIPANT: It has been claimed that ECRA works in New Jersey. Do you think that it is inherently less workable in Massachusetts? Or do you claim that it really has not worked in New Jersey either?

SINCLAIR: In New Jersey, there are 478 active cases and 119 that have been closed since the program began. Thus, 119 cleanups are complete and ready for administrative consent orders (ACOs).

On the other hand, with regard to negative declarations — in which the owners conduct the cleanups themselves and then seek state approval — 150 have been processed out of 450 in the last four months. Some of the companies concerned have been awaiting clearance for three and a half years. Once it grants an ACO, the Department views the recipient as "in the system" and no longer a priority. As a result, the required bond or letter of credit languishes while cases considered to be higher in priority are addressed. Perhaps with enough staff this problem could be corrected, but it hardly seems worthwhile.

TYLER: In our experience, whether one has an ACO or not, the client who bangs on the door is the one who will get the attention. Thus, a lot of ACO cases have gone forward because people are pushing them; others have not, because some clients actually prefer the delay. Overall, though, I have not found the ACO to be a mechanism for delay. In general, more active sites receive the most attention.

LAST: Let me explain why I do not think ECRA will work in Massachusetts.

In the time frame contemplated (even if the legislature provides sufficient funds), qualified staff are simply not available.

In my view, we need to create private sector incentives to try to achieve the same results without the bureaucratic intrusion.

PARTICIPANT: While states considering ECRA legislation tend to view New Jersey as the model, I would recommend that Connecticut be considered as well. Whatever its shortcomings, the Connecticut ECRA does not have some of the burdens found in New Jersey's statute. Rather than delay the transaction, Connecticut requires the seller to sign on for the liability. If he is willing to do so, all that is required is the filing of a certificate.

Unfortunately, Connecticut, too, lacks sufficient staff. As a result the seller must negotiate at length with the Connecticut Department of Environmental Protection. Nonetheless, the Connecticut approach, coupled with private sector remedies, would appear to be a better solution.

PARTICIPANT: How does the Connecticut certificate compare with New Jersey's Administrative Consent Order?

PARTICIPANT: In Connecticut, one need merely sign a form stating, in essence, "I, the seller, hereby am obligated to clean up any hazardous waste problem on the site." It's that simple. While there is apt to be delay, it is tied to the present allocation of resources. The cleanup proceeds after the transaction.

TYLER: Isn't that system identical to New Jersey's: i.e., an Administrative Consent Order is signed, the seller incurs liability, and the closing occurs?

PARTICIPANT: New Jersey has some inherent pretransaction delays.

SINCLAIR: We should remove the hammers found in ECRA and permit market forces to operate by themselves. Once the seller has signed on for liability, he will strive to clean up the site. It may not happen overnight, but such speed is unnecessary. A lot of these problems simply do not warrant the urgency with which an ECRA statute treats them.

PARTICIPANT: I agree. The problem with ECRA is that it picks up everything, and it lacks a good filter.

LAST: Cleanups should not be triggered by transactions. Instead, the states should strive to clean up the high priority sites.

HIGHLAND: The argument on behalf of ECRA, though, is that it draws everyone's attention to the need for a cleanup. If one chooses a priority site and pursues it, resources are devoted to protracted litigation and a debate over whether the cleanup will ever occur. With ECRA, there is a real impetus to cooperate because of the desire to complete the transaction.

SINCLAIR: Nonetheless, the result is economic loss for the state.

TYLER: There are programs in all these states to prioritize sites on a rational basis. In every case, ECRA is one more tool — or one more problem, depending on your perspective — that is being added to the equation.

PARTICIPANT: While there may be rational priorities for approaching the problems, doesn't the public tend to demand that everything be cleaned up now, and completely? And doesn't ECRA tend to respond to such a demand?

[18 ELR 10381]

PARTICIPANT: You're suggesting that the public is being appeased and that after five years, perhaps, we'll move on to something else.

PARTICIPANT: ECRA strikes me as politically motivated panic legislation that responds to pressures that have nothing to do with the hazard and introduces a layer of bureaucracy that totally distorts the decisionmaking process in real estate transactions. It is a legalized shake-down.

SINCLAIR: It is inequitable for the government to make decisions on the basis of whether or not there are deep pockets.

TYLER: That decision was made long before the enactment of ECRA; namely, that discharges of hazardous substances are to be remediated. The balance that ECRA strikes is that some cleanups that otherwise would not have occurred will now take place because there are parties available with deep pockets. On the other hand, some transactions that would have otherwise happened fall through.

SINCLAIR: New Jersey's ECRA was passed virtually in secret while everybody's attention was focused on the right-to-know issue. It was passed without an open debate, and it is an example of bad governmental policy. Regardless of one's view of its merits, its procedural orgins were bad.

ECRA, though, is not the worst thing on the environmental agenda in New Jersey. We have a toxic-catastrophe prevention act, and, worse, a program known as environmental health risk assessment, which we in industry refer to as the "no-knock strip-search bill." It allows the state to come in at its pleasure and conduct studies inside an industrial facility.

PARTICIPANT: With respect to New York and other states that have not yet enacted ECRA statutes, is it possible that there is less need for them, now that lenders are refusing to make loans without assurances of site cleanups and parties generally are more aware of their risks?

WILES: There is more reason than ever to pass an ECRA, because lenders, buyers and sellers will not be satisfied with transactions in which they cannot clearly define their own liability. The only way now for them to do so is through an ECRA statute.

PARTICIPANT: It is worth noting that, in the case of environmental liability impairment insurance, when the private sector had the opportunity to make judgments about risk, it failed terribly. The insurance claims that are going to arise are staggering. In that case, the private sector was too concerned with selling the policy and obtaining the premium.

LAST: In Massachusetts, that very question has been debated. After three years of site assessments and attempts to underwrite risk, the developers and banks have unanimously agreed that the proposed legislation is undesirable. They are quite willing to attempt to evaluate risk and price it into their transactions in a private sector system.

PARTICIPANT: Is there any conceptual difference between pricing environmental impairment and mortgage insurance premiums?

LAST: Given what happened to mortgage insurers, such a distinction provides little comfort. To be sure, site assessments are not one hundred percent foolproof. As a result, rather than resorting to pure nonrecourse lending, lenders are seeking alternatives such as supplemental collateral and partial recourse on a given issue.

PARTICIPANT: Lenders rely upon immediate appraisals. Is it not conceivable that, eventually, environmental appraisers will appear? Instead of relying completely on mortgage insurance, environmental insurance premiums would be added at a cost. If one cleaned up the site ahead of time, one would not have to pay the additional premium.

LAST: I agree wholeheartedly. However, I thought of that idea a couple of years ago, and I tried to interest the casualty insurers. I thought perhaps I had some strange communicable disease, because they were simply not interested. The problem, for now at least, is that there is not enough experience in the industry for them to gauge these phenomena accurately.

1. Environmental Cleanup Responsibility Act, N.J.S.A. 13: 1K6 et seq.

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

3. Comprehensive Environmental Response, Compensation and Liability Act (Superfund), 42 U.S.C. §§ 9601-9657, ELR STAT. 41941.

1. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, popularly known as Superfund), 42 U.S.C. §§ 9601-9657, ELR STAT. 41941.

2. The Federal National Mortgage Association.

3. The Federal Home Loan Mortgage Corporation.

4. Environmental Cleanup Responsibility Act, N.J.S.A. 13:1K6 et seq.