Sliding Scale or Slippery Slope? The New ASTM's Standard Practices for Environmental Site Assessments

James W. Conrad Jr.

James W. Conrad Jr., a member of the ASTM's committee that created the standard practices discussed in this Dialogue, is an associate with the Washington, D.C., office of Davis, Graham & Stubbs, where he specializes in transactional work, among other things. He received a J.D. with high honors from George Washington University's National Law Center in 1985 and a B.A. from Haverford College in Pennsylvania in 1981. The author would like to thank Richard D. Jones, chair of the ASTM's committee, for his review and helpful comments on an earlier draft of this Dialogue.

[23 ELR 10181]

The twentieth-century equivalent of the Holy Grail — at least in U.S. environmental law — is the status of "innocent landowner" under the Comprehensive Environmental Response, Compensation, and Liability Act¹ (CERCLA or Superfund). Intent on preserving the fear of God, as it were, among the flock, the government argues that this exalted status is unreachable: if one finds contamination, one is no longer innocent; if one misses it, one did not look hard enough. The degree of grace associated with innocent landownership, however, continues to draw aspirants in droves, each striving to conduct "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice."²

Given that "good commercial or customary practice" sounds, on its face at least, like something that mere mortals are capable of determining, roughly three years ago a number of interested persons formed a committee, under the aegis of the ASTM (formerly the American Society for Testing and Materials), to begin seeking redemption through their own good works, by cataloging what the phrase described. Divided equally into "producers" (mainly consultants) and "users" (mainly industrial companies, governmental entities, lenders, and insurers), the committee was inherently schismatic. One producer's perspective on the issues, midway through the process, is set out in Phillip B. Rarick's 1991 Dialogue, The Superfund Due Diligence Problem: The Flaws in an ASTM Committee Proposal and an Alternative Approach.³

The committee's work has finally been unveiled, in a pair of standard practices for environmental site assessments (ESAs).⁴ Although the ASTM's consensual method of decisionmaking greatly protracted the committee's work, the result was a remarkable agreement of producers and users and, more important, workable standards for ESAs. While other conscious attempts have been made to set a standard for ESAs and the innocent landowner defense,⁵ the ASTM's standard practices are unprecedented in their breadth of sponsorship and level of detail. This Dialogue briefly describes the principal features of the standard practices and their legal background. It then addresses the major issues they raise, responding to Rarick's Dialogue in the process.

Background

The CERCLA innocent landowner defense is part of the catechism any environmental lawyer learns. Any current owner of a facility is liable under Superfund.⁶ One of the owner's few defenses is that the release or threatened release of hazardous substances was caused by a third party. But this defense fails if the third party's act or omission occurred in connection with a contractual relationship it had with the owner, such as under a deed for the property.⁷ "Contractual relationship," however, excludes transactions where the owner undertook, among other things, "all appropriate inquiry … consistent with good commercial or customary practice."⁸ This exclusion has, almost by itself, given rise to the near-universal practice of conducting ESAs.

In an effort to specify exactly what constitutes good commercial and customary practice in conducting ESAs for commercial real estate transactions, the ASTM's committee has created two standard practices, one for performing Phase I ESAs,⁹ and a more controversial one for [23 ELR 10182] performing a simpler "transaction screen."¹⁰ Each is followed by a Legal Background appendix containing the ASTM committee's explanation and interpretation of CERCLA's innocent landowner defense and its relation to the ASTM standard practices.

Significantly, it is unclear whether the standard practices create a safe harbor for purposes of the innocent landowner defense, or whether the simpler transaction screen constitutes the minimum inquiry necessary to establish the defense.¹¹ The Legal Background appendix, while not binding, clearly states that "to do no specialized inquiry, such as the Transaction Screen or Phase I ESA, is not enough for commercial real estate transactions …. The … Transaction Screen … actually raises the average level of inquiry that should be performed where the parties want to come within the protection of the innocent landowner defense."¹²

From the perspective of limiting liability, the standard practices are addressed only to CERCLA's innocent landowner defense; they are not intended to affect liability that may arise under any other legal authorities (or indeed under other aspects of CERCLA, such as generator liability). They also do not address environmental compliance; in fact, they define "environmental audit" (as opposed to "environmental site assessment") as the process of assessing compliance.¹³

On the other hand, the standard practices are intended to reach more broadly than the innocent landowner defense, as they are designed to describe generally what constitutes good commercial or customary practice for ESAs. Thus, for example, they address petroleum products,¹⁴ notwithstanding CERCLA's petroleum exclusion.¹⁵

Phase I Standard Practice

In broad outline, the Phase I document resembles many of the ESA's checklists that consultants and lawyers develop. It comprises records review, site reconnaissance, interviews with current owners, occupants, and local governmental officials, and an evaluative report. Each of these component steps is highly detailed, however, with a multitude of defined terms, many imbedded within others. In some instances, bright-line rules are set (for example, information that cannot be obtained within 20 days is not "reasonably ascertainable").¹⁶ More commonly, however, issues (such as the time interval employed in investigating prior uses of a property) are left to the judgment of the "environmental professional" required to conduct the ESA.¹⁷

The environmental professional must prepare a report containing his opinion of the effect on the property of "recognized environmental conditions," a term discussed below.¹⁸ The report must not contain more detailed conclusions or recommendations for further work unless the user so requests.

Transaction Screen Standard Practice

As its name suggests, the transaction screen is an initial tool for determining whether a Phase I ESA is required for a property. It tracks the Phase I Standard Practice in overall structure, comprising a questionnaire and instructive guide for questioning site owners and occupants, conducting a site visit, and checking a limited list of records. Anyone can conduct a transaction screen, as it purports not to require the exercise of professional judgment.¹⁹ Rather, the transaction screen is designed to flag potentially problematic conditions, and is biased toward calling for further inquiry when those conditions are observed. For example, if an adjoining property has been used as a gasoline station, further inquiry is required into the possibility of releases from it.²⁰ The user then must determine, in the exercise of its reasonable business judgment, what further inquiry is sufficient.²¹ The user does not prepare a report, but simply completes the questionnaire.

Major Issues

Legal Adequacy of the Transaction Screen

The single greatest controversy within the ASTM committee, and the major criticism of Rarick's Dialogue, was (and is) whether the "all appropriate inquiry" standard requires a Phase I ESA conducted by an environmental professional, or whether something less suffices. By substantial majorities that included producers, the committee concluded the latter, for reasons largely spelled out in the Legal Background appendix.

As the committee correctly observed, CERCLA establishes a sliding scale of environmental due diligence, from large-scale, intrusive investigations to, "in some instances, no environmental site assessment."²² This conclusion follows fairly easily from the key statutory language: "all appropriate inquiry."²³ Defined as "[s]uitable [23 ELR 10183] for a particular person, condition, occasion, or place; proper; fitting,"²⁴ "appropriate" necessarily implies a range of inquiry tailored to suit the circumstances of a transaction. The criteria specified in the statute for judging appropriateness support this interpretation; they direct a court to consider "any specialized knowledge or experience on the part of the [buyer]," "reasonably ascertainable information about the property" and "the ability to detect … contamination by appropriate inspection."²⁵ If it wished, Congress could have set a more demanding standard, such as all "necessary" or "feasible" inquiry, or it might have mandated a Phase I ESA by an environmental professional. But it did not.

The few courts that have addressed the issue have adopted this reasoning. For example, in refusing to find, as a matter of law, "that 'no inquiry' can never constitute 'all appropriate inquiry,'" the court in United States v. Pacific Hide & Fur Depot, Inc.²⁶ observed:

It would have been easy to draft into the statute the very requirements sought by the Government: Congress could have simply said that some inquiry must be made in every case. But Congress did not do so. Instead, Congress used terms like "appropriate" and "reasonable" in describing the necessary inquiry. The choice of such terms indicates to this Court that Congress was not laying down the bright line rule asserted by the Government. Rather, Congress recognized that each case would be different and must be analyzed on its facts.²⁷

All other available decisions²⁸ evaluating claims of innocent landowner status are consistent with Pacific Hide & Fur's sliding scale approach: each inquired into what constituted good commercial or customary practice at the time, and location, of the deal.²⁹ This implies that the most probative evidence, if a court ever addresses the validity of the ASTM transaction screen, would be the extent of its adoption — if most people are using it, then ipso facto it should meet the "all appropriate inquiry" standard.

Two objections to the transaction screen raised by Rarick and some other producers on the ASTM's committee relate to lenders: lenders assertedly will not trust transaction screens performed by borrowers, and will invariably contract with third parties to avoid liability for performing a faulty inquiry.³⁰ The transaction screen is principally a device to protect the person performing it, rather than others who might rely on it. It is still highly valuable, however, as it affords lenders (and others) great savings and flexibility over having to perform a Phase I in every instance. And lenders themselves are now performing transaction screens (or their equivalent). Economics dictates as much: the costs associated with Phase I ESAs, particularly those performed by third parties, may wipe out the financial value of a transaction to either lender or borrower. And some thirdparty reliance may evolve over time; for example, some insurance companies now rely on transaction screen equivalents performed by lenders.

Rarick and others also contend that the transaction screen is unlikely to screen out any properties "[e]xcept for possibly a few isolated plots of tundra in the Alaskan Yukon Peninsula [sic] …."³¹ Hyperbole aside, this statement is just wrong. Sites on previously undeveloped land, or whose uses have not changed in decades, frequently will pass the screen because they simply do not warrant further inquiry. Our legal system has already burdened transactions unnecessarily — it would be unfortunate if a Phase I ESA became a mandatory requirement for every transaction.

Who Performs an Assessment

Two of Rarick's other attacks on the transaction screen relate to who performs them. He objects to the lack of any qualification requirement, and contends that assessments performed by interested persons are inherently biased.³²

Both of these issues go beyond the transaction screen, and are handled correctly by the new ASTM's standard practices. As to qualifications, the transaction screen is designed to avoid the exercise of professional judgment — issues raising judgment calls generally become triggers for a Phase I. Phase I ESAs in turn must be performed by an "environmental professional," defined as:

A person possessing sufficient training and experience necessary to conduct a Site Reconnaissance, Interviews and other activities in accordance with [the Phase I Standard Practice], and from the information generated by such activities, having the ability to develop conclusions regarding Recognized Environmental Conditions ….³³

While admittedly somewhat circular, this definition is at least a fair description of the desired concept, and avoids creating specific mandatory training or certification processes. Again, our economy is better off freed of the anticompetitive and expensive effects of a system typically controlled by those already certified.

To correct the bias problem he perceives, Rarick proposes that environmental assessors be subject to disqualification for personal or organizational conflicts of interests, implicitly restricting the field to independent third parties.³⁴ The [23 ELR 10184] ASTM's committee wisely chose otherwise. Parties to deals are amply aware that assessments performed for one party are likely to favor that party's interests, regardless of whether they are performed by the party itself or the "independent" contractor it is paying. The other parties can and do obtain their own peer reviews, perform their own assessments, or simply take the assessment with appropriate grains of salt. As to assessments done by oneself, obviously one's interest is in having a quality job performed. Many large companies have perfectly qualified personnel inhouse, and should not be required to hire outside contractors.

Recognized Environmental Conditions

The goal of the ASTM's standard practices is to disclose "recognized environmental conditions," defined as:

The presence or likely presence of any Hazardous Substances or Petroleum Products on a Property under conditions that indicate an existing release, a past release, or a material threat of a release of any Hazardous Substances or Petroleum Products into structures on the Property or into the ground, groundwater or surface water of the Property. The term includes Hazardous Substances or Petroleum Products even under conditions in compliance with laws. The term is not intended to include de minimis conditions that generally do not present a material risk of harm to public health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies.³⁵

The most significant feature of this definition is its last sentence, which provides a "reality check" to prevent assessors from enumerating every minor spill or release at a facility, no matter how inconsequential. (The definition also prevents assessors from speculating about possible releases that are not at least "likely" to have occurred.) Due to its central role in the assessment process, the definition is likely to be used in transactional documentation. In that regard, it would tend to favor sellers and borrowers, because it already contains a reasonable concept of materiality that is frequently lacking from buyer and lender boiler plate.

Also important, the Phase I Standard Practice requires environmental professionals to express opinions regarding the impact of recognized environmental conditions on a property, rather than simply reciting the facts.³⁶ Fore xample, it would be insufficient to list how many leaky underground storage tanks are located within a half mile of a property, without making some statement about the tanks' significance to the site. On the other hand, these opinions are not envisioned as having any legal component, except perhaps implicitly (by their exclusion of conditions not likely to be the subject of enforcement action if disclosed to regulators). Also, the exclusion of legal compliance from the scope of the standard practices should avoid the common occurrence of nonlawyers incorrectly opining that particular observed practices were in violation of some law.

Findings and Conclusions

Relatedly, the Phase I Standard Practice permits the assessor to opine only as to evidence of recognized environmental conditions, and specifies that "more detailed conclusions, liability/risk evaluations, recommendation for Phase II testing, remediation techniques, etc. are beyond the scope of this Standard Practice …."³⁷ Such additional conclusions often complicate Phase I reports and the deals for which they are prepared. Users are free to contract for these broader results, but otherwise may now justifiably require that they not be included in a report.

Conclusion

The new ASTM's standard practices are not without shortcomings, the most significant of which may be their confusing (and incomplete) exclusion of asbestos. This exclusion is based on CERCLA's prohibition on response actions for asbestos in buildings,³⁸ even though asbestos is frequently viewed as being part of an environmental site assessment.³⁹ Nonetheless, overall they represent a reasonable balance between the interests of users and producers, and a practical interpretation of CERCLA's due diligence standard in light of commercial reality. Those who seek salvation in the form of innocent landowner status may now have a Bible to follow.

1. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 007-075.

2. CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 010.

3. Phillip B. Rarick, The Superfund Due Diligence Problem: The Flaws in an ASTM Committee Proposal and an Alternative Approach, 21 ELR 10505 (Sept. 1991).

4. TRANSACTION SCREEN PROCESS, Standard E.50.02.01 (ASTM 1993) [hereinafter TRANSACTION SCREEN STANDARD PRACTICE]; PHASE I ENVTL. SITE ASSESSMENT PROCESS, Standard E.50.02.02 (ASTM 1993) [hereinafter PHASE I STANDARD PRACTICE].

5. See, e.g., CONSULTING ENG'RS COUNCIL OF METRO. WASH., INC., GUIDELINES — ENVIRONMENTAL SITE ASSESSMENTS (1989).

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

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

8. CERCLA § 101(35), 42 U.S.C. § 9601(35), ELR STAT. CERCLA 009-010.

9. See PHASE I STANDARD PRACTICE, supra note 4.

10. See TRANSACTION SCREEN STANDARD PRACTICE, supra note 4.

11. See PHASE I STANDARD PRACTICE, supra note 4, § 4.1; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 4.1.

12. PHASE I STANDARD PRACTICE, supra note 4, app. at X6; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, app. at X6.

13. PHASE I STANDARD PRACTICE, supra note 4, § 3.3.10; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 3.3.10.

14. PHASE I STANDARD PRACTICE, supra note 4, § 1.1.3; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 1.1.3.

15. CERCLA § 101(14), 42 U.S.C. § 9601(14), ELR STAT. CERCLA 008.

16. PHASE I STANDARD PRACTICE, supra note 4, § 7.1.4.2.

17. PHASE I STANDARD PRACTICE, supra note 4, § 7.3.2.

18. See infra note 35 and accompanying text.

19. TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 4.3.2.

20. TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 8.3.1.2.

21. TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, §§ 5.6-5.7.

22. See PHASE I STANDARD PRACTICE, supra note 4, § 4.1; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 4.1.

23. CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 010 (emphasis added). This subsection states that to take advantage of the innocent landowner defense, one must, among other things,

have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability. For purposes of the preceding sentence the court shall take into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property, and the ability to detect such contamination by appropriate inspection.

Id.

24. AMERICAN HERITAGE DICTIONARY 64 (New College ed. 1981); see also WEBSTER'S THIRD NEW INT'L DICTIONARY 106 (unabridged ed. 1976) ("specially suitable; FIT, PROPER").

25. CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 010.

26. 716 F. Supp. 1341, 19 ELR 20897 (D. Idaho 1989).

27. Id. at 1348-49, 19 ELR at 20901.

28. Search of LEXIS, Genfed library, Courts file (Dec. 29, 1992).

29. See United States v. A & N Cleaners & Launderers, Inc., 788 F. Supp. 1317, 1330 (S.D.N.Y. 1992) (triable issue of fact whether good commercial or customary practice in Putnam County, New York, in 1979 was for purchaser not to inquire into disposal activities of dry cleaner subtenant, to ask whether subtenants were in violation of environmental laws, or to communicate with state and local health and environmental agencies); United States v. Serafini, 791 F. Supp. 107, 108 (M.D. Pa. 1990) (depositions of defendants' real estate experts showed that customary practice in Scranton, Pennsylvania, in 1969, was at least to view land before buying); United States v. Nat'l Bank of the Commonwealth, No. 89-2127, 1990 U.S. Dist. LEXIS 18925, at * 15-16 (W.D. Pa. Apr. 23, 1990) (triable issue of fact whether good commercial or customary practice in Punxsutawney, Pennsylvania, in 1982, was for prospective lessee to conduct environmental audit or to inspect public records to determine previous ownership and uses of property).

30. Rarick, supra note 3, at 10507.

31. Rarick, supra note 3, at 10507.

32. Rarick, supra note 3, at 10507.

33. PHASE I STANDARD PRACTICE, supra note 4, § 3.3.11.

34. Rarick, supra note 3, at 10510.

35. PHASE I STANDARD PRACTICE, supra note 4, § 3.3.28; TRANSACTION SCREEN STANDARD PRACTICE, supra note 4, § 3.3.30.

36. PHASE I STANDARD PRACTICE, supra note 4, § 11.5.

37. PHASE I STANDARD PRACTICE, supra note 4, § 11.9.

38. CERCLA § 104(a)(3)(B), 42 U.S.C. § 9604(a)(3)(B), ELR STAT. CERCLA 013.

39. Work has begun on ASTM's standard for asbestos and ASTM's standard for Phase II ESAs. Persons interested in participating in these or other ASTM projects may contact Rose Tomasello at ASTM, telephone number (215) 299-5400.