Categories: Environmental Liability
June 24, 2020
The past few months have been a very challenging time on many different levels. However, one of the themes I am seeing is that lenders are ignoring the tried and true environmental due diligence protocols at a higher rate than I have ever seen before. This is very perplexing. At a minimum, adequate environment due diligence on commercial real estate typically consists of conducting a Phase I Environmental Site Assessment/Preliminary Site Assessment report – assuming the property is in NJ (“Phase I/PAR”). This includes a visual site inspection and review of aerial photographs, Sanborn Maps, historical regulatory records and databases. The Phase I/PAR identifies what one would consider routine environmental issues such as past manufacturing operations, former gas stations with underground storage tanks or other features that could adversely impact the subsurface or air quality of the property in question.
We see lenders providing environmental questionnaires to borrowers asking detailed questions with respect to various environmental conditions at the property. However, as the borrower/buyer, they are not in a position to properly answer those questions as they do not have any knowledge or experience with the property. Regardless, some lenders are making decisions based on those uninformed answers to the questionnaires as to whether or not to even require the borrower to conduct a Phase I/PAR. Again, something is amiss.
The rationale, in general, is that an owner of a property is strictly liable for any contamination that is present on site. That means owners of properties are responsible for any and all environmental issues, irrespective of whether they caused the contamination, identified at the property. However, certain defenses are available to owners if they perform adequate environment due diligence prior to purchase. That includes the completion of the Phase I/PAR. If a Phase I/PAR is completed and no contamination is identified, the new owner will be eligible to assert the Federal and State Innocent Purchase Defense to environmental liabilities should pre-existing contamination be discovered in the future. While we recognize that in most States, the lender may have its own environmental liability protection under the secured creditor exemptions to liability, those liability protections don't help the lender in disposing of an asset with environmental issues, if they elect to foreclose. Thus, requiring the borrower to conduct appropriate environmental due diligence benefits both the borrower and the lender. If environmental issues are identified, we can effectively manage the environmental risks associated with the collateral [see our Environmental Blog article: Lending on Environmentally Challenged Real Estate.]
Thus, regardless of the size of the deal, it behooves all interested parties to conduct adequate environmental due diligence with the assistance of counsel and savvy environmental professionals. Taking the ostrich approach does not put the parties in a better position to assess and allocate the environmental risks and responsibilities associated with the collateral to successfully close the current transaction or any disposition in the future.
March 26, 2020
Last week the NJDEP issued a Compliance Advisory reminding the regulated community that, despite the COVID-19 concerns, all of the requirements to notify NJDEP remain in effect.
The reason for the reminder is so that the regulated community continues to be diligent in their efforts to notify NJDEP in accordance with applicable environmental statutes, rules and their operating permits. As these are unpredictable times, there could be operational disruptions, shutdowns or other failures that unintentionally cause permit exceedances or additional concerns that may require notification to NJDEP, such as spills or discharges of hazardous substances. These notifications are critical to inform NJDEP as well as other specified governmental agencies about potential impacts to the environment and human health and safety.
As such, there is no reprieve to notify NJDEP if notification obligations are triggered by circumstances, whether or not a true emergency exists. NJDEP has indicated that they may pursue enforcement action and penalties against those entities that fail to comply with the NJDEP mandated notification requirements. Although it is unclear how aggressive NJDEP will be in enforcing these notification requirements, it would be prudent to continue to effectively monitor your business’s reporting and notification obligations during this chaotic time. If you need assistance in evaluating whether a reporting obligation exists for your business, please feel free to reach out to one of our environmental attorneys.
Related Practice: Environmental Law
Category: Environmental Liability, Environmental Remediation, Real Estate Development, Environmental Regulatory Compliance, Contaminated Property Transactions, Environmentally Sensitive Businesses
February 4, 2019
Recently, in Terranova v. General Electric Pension Trust, __ N.J. Super. __, 2019 WL 149440 (N.J. Super. Ct. App. Div. Jan. 4, 2019), the Appellate Division held that the doctrine of “judicial estoppel” is a valid defense to Spill Act contribution claims. Judicial estoppel is an equitable doctrine that prevents a party from asserting a position inconsistent with one it successfully advanced previously during litigation. The doctrine protects the integrity of the judicial process. Because judicial estoppel is an equitable defense created by the Judiciary and not by the Legislature, the Terranova panel reasoned that the defense was not eliminated by the section of the Spill Act that limits defenses to “an act or omission caused solely by war, sabotage, or God, or a combination thereof.” To reach that conclusion, the panel relied on the Supreme Court’s prior recognition, in Morristown Associates v. Grant Oil Co., 220 N.J. 360 (2015), that the Spill Act does not deprive parties of unlisted defenses established by court rule under the jurisdiction of the Judiciary.
The Appellate Division, therefore, affirmed summary judgment in favor of the Spill Act contribution defendants based on the judicial estoppel defense. Several years prior, the plaintiff arbitrated a Spill Act contribution claim against other parties, contending that those other parties alone were solely responsible for the contamination, a contention that ignored findings by its own expert report that there were potentially other responsible parties. Having successfully advanced that position and obtained an arbitration award, the plaintiff could not now bring a claim against new defendants for contribution by contending that they were also responsible for the contamination.
To be sure, the Terranova panel’s decision was couched in terms of the judicial estoppel defense. But much of the panel’s concluding language and reasoning sounds an awfully lot like application of the entire controversy doctrine: the prospect of judicial estoppel “compels owners to pursue, in a single action, dischargers which are known or reasonably knowable from the circumstances.” Plaintiffs, the panel continued, are “are precluded from floating a lazy cast toward one discharger and then shooting a second line toward others, seeking contribution for clean-up of the same property.” Indeed, the panel acknowledged these policy objectives are shared by other doctrines, including the entire controversy doctrine.
So why was this not an “entire controversy doctrine” case from the get-go? Early on in the decision, the panel waded through the procedural morass of the case, which ultimately led it to the conclusion that the trial court relied only on judicial estoppel to grant summary judgment—though several defendants had also asserted the entire controversy doctrine. It appears, then, that the Appellate Division took something akin to the path of least resistance to reach the same equitable result it likely would have under the entire controversy doctrine.In any event, based on Terranova, it is a near-certainty that the “entire controversy doctrine” likewise survives as an equitable defense to a Spill Act contribution claim. If anything, that equitable doctrine has an even more rock-solid case for survival because it is embodied in Rule 4:30A, and Morristown Associates already held that defenses established by court rule are not subject to legislative abrogation.
January 17, 2019
Like its federal counterpart CERCLA, the New Jersey Spill Compensation and Control Act (“Spill Act”) imposes strict liability for environmental cleanup costs. But on whom? The legal test used to answer that question has drastic consequences on the potential personal liability of corporate owners and officers. Though New Jersey courts have relied upon the more stringent “veil piercing” test, a recent decision of the Appellate Division departed therefrom, opting to utilize a test that makes it substantially easier to tag corporate owners and officers with personal Spill Act liability. That departure was likely incorrect. The conflict may ultimately require the Supreme Court of New Jersey to weigh in.
Since the decision of the U.S. Court of Appeals for the Third Circuit in Witco Corp v. Beekhuis, 38 F.3d 682, 692 (3d Cir. 1994), corporate owners and officers in New Jersey have faced potential personal liability as “operators” under CERCLA, notwithstanding the corporate form. Personal liability is a function of the corporate owner or officer’s participation in the conduct resulting in a release of a hazardous substance. As distinguished from potential CERCLA “operator” liability, the Appellate Division’s decision in State, Department of Environmental Protection v. Arky’s Auto Sales, 224 N.J. Super. 200, 207 (App. Div. 1988), requires there be grounds to “pierce the corporate veil” before personal liability can be imposed on a corporate owner or officer under the Spill Act. The Arky’s Auto decision rejected the imposition of personal liability on the two shareholders and officers of a junkyard business because they “were acting for the corporation, not for themselves individually” and there was no evidence supporting that the company’s “corporate veil should be pierced,” which requires that a plaintiff first show fraud or injustice. Several federal district courts recognize the Spill Act veil piercing requirement. Veil-piercing, in fact, has been a staple of Spill Act liability analysis since State, Department of Environmental Protection v. Ventron Corp., 94 N.J. 473, 500-02 (1983). However, a recent decision of the Appellate Division discarded the traditional Spill Act veil-piercing requirement, replacing it with something closely resembling the Witco “operator” liability analysis for CERCLA liability.
In Morris Plains Holding VF, LLC v. Milano French Cleaners, Inc., A-604-16, 2018 WL 1882956, at *2 (N.J. Super. Ct. App. Div.), certif. denied, 236 N.J. 109 (2018),a panel of the Appellate Division affirmed the trial court’s imposition of Spill Act liability on the sole shareholder of a dry-cleaning business operating as a corporation. Rejecting the shareholder’s contention that there were no grounds to pierce the corporation’s veil, the panel instead focused on the fact that he was “everything” to the business: it’s only shareholder, its operator, the person responsible for overseeing and handling the chemical that contaminated the site, and the person in charge of compliance with legal regulatory obligations. Finding this sufficient, the panel held that the Spill Act’s language imposing liability on persons “in any way responsible” for a release evidenced the Legislature’s intent to impose expansive liability “without regard for corporate veils and the like.” The statutory language, the panel believed, did not contemplate that a “shareholder of a close corporation could contaminate property, put his corporation in bankruptcy, and walk away from the problem.” Notably, the Supreme Court denied certification.
The Milano analysis is also inconsistent with the Appellate Division’s decision only two years prior in New Jersey Department of Environmental Protection v. Navillus Group, A-4726-13, 2015 WL 9700541, at *8-9 (N.J. Super. Ct. App. Div. Jan. 14, 2016), wherein the panel assessed corporate owner and officer liability using a veil-piercing analysis. Reversing the trial court’s imposition of Spill Act liability on the corporation’s owner and officer, the panel utilized a veil piercing analysis. The plaintiff had not adduced sufficient evidence on summary judgment to demonstrate the appropriateness of veil piercing, which is to be utilized to avoid a perpetration of fraud, a crime, evade the law, or where an individual is abusing the corporate form as an alter ego.
The veil piercing test is both more consistent with precedent and with the language of the Spill Act itself. Veil piercing is endorsed by the published Arky’s Auto case directly concerning personal liability of a corporate owner or officer. But other analogous precedent is also instructive on this issue. In Allen v. V and A Brothers, Inc., 208 N.J. 114, 130-33 (2011), the Supreme Court addressed the potential for personal liability of corporate owners and employees under the strict liability New Jersey Consumer Fraud Act (“CFA”). The Court emphasized that the statute’s definition of “person” refers not only to a natural person, but also “include[es] individuals who are acting through or on behalf of corporations and other business entities,” i.e. “any agent, employees, salesman, partner, officer, director, member, stockholder, associate, [or] trustee . . . thereof.” This “breadth” and “expansive sweep of the definition” of the term lent strong support to imposition of direct personal liability under the CFA. Veil piercing was unnecessary to impose personal liability.
The Spill Act, however, stands in marked contrast. While it holds “any person” strictly liable for their discharge of a hazardous substance or if they are in any way responsible therefor, N.J.S.A. 58:10-23.11g(c)(1), and also strictly liable for contribution, N.J.S.A. 58:10-23.11f(a)(2)(a), the Spill Act defines “person” only as “public or private corporations, companies, associations, societies, firms, partnerships, joint stock companies, individuals, the United States, the State of New Jersey and any of its political subdivisions or agents.” N.J.S.A. 58:10-23.11b. Thus, unlike the CFA, the Spill Act conspicuously omits any reference to individuals acting on the behalf of corporate entities. This difference lends further credence to the conclusion that Arky’s Auto veil piercing, rather than Witco/Milano “operator” liability is appropriate to determine the potential personal liability of a corporate owner or officer.
The ostensible unsettled nature of the law governing the personal liability of corporate owners and officers likely means that the Supreme Court will ultimately have to intercede. In the meantime, it is paramount in Spill Act litigation to develop and be armed with the facts ready to prosecute or defend a Spill Act claim utilizing both legal tests—perhaps with an eye to review by the high court. This is particularly true given that the standard for owner/officer liability under CERCLA is settled and is invariably involved in a Spill Act case.
The firm’s Environmental Law Department welcomes any opportunity to assist you with your environmental counseling and litigation needs
January 17, 2019
The New Jersey Legislature is in the process of proposing an Environmental Rights Amendment to the State constitution, based on an existing amendment to Pennsylvania’s constitution. Concurrent resolutions, ACR85 and SCR134, are pending before the Assembly and Senate of the State legislature. The amendment provides that every person has a constitutional right to a clean environment, including the right to clean air, pure water and healthy habitats. The amendment would require the State to preserve public natural resources, including preventing others from destroying or damaging them. If adopted by a three-fifths majority of both the Senate and Assembly, or by a majority of both houses of the legislature in two consecutive years, it would be submitted to the people at the next general election. If approved by a majority of the voters, the New Jersey Constitution would be so amended. Presently, the earliest it could appear on the ballot is November 2019. New Jersey, already among the most pro-environmental states in the union, would use the proposed constitutional amendment to guarantee two separate rights to the people in the State.
Right of Citizens to the Preservation of Environmental Values. First, the proposed constitutional amendment grants the right of citizens to the preservation of certain values in the environment. Specifically, this clause requires the State to consider the effect of any proposed action on pure water, clean air and ecologically healthy habitats, and on the preservation of the natural, scenic, historic and aesthetic qualities of the environment before taking action. The State may rely on its administrative agencies to interpret “clean air,” “pure water,” and other technical benchmarks. However, following such agency interpretation does not automatically guarantee constitutional compliance if the agency interpretation and implementation fall below reasonable standards. The clause does not call for an end to new economic development, or the sacrifice of other fundamental values like constitutionally-protected property rights. Instead, it preserves environmental values, and states that governmental action cannot take place without reasonable effort to address the environmental effects of development.
Common Ownership of the People in Public Natural Resources. Second, the proposed constitutional amendment guarantees the common ownership of the people, including future generations, of New Jersey’s public natural resources, with the State serving as trustee of those resources. This second clause applies to a narrower category of “public natural resources” than the first clause, and includes waters, air, flora, fauna, climate and public lands of the State. The term “public natural resources” is not exclusively defined and is amenable to change over time to conform to the development of new legal and societal concerns. The term is flexible and intended to capture the full array of resources implicating the public interest.
State as Trustee. The State would serve as trustee of these public natural resources, with the people as named beneficiaries of the trust. “Trust” is used as a term of art to carry specific legal implications. The trust is more than a statement of government power to use public property for public purposes. It is an affirmative duty of the State to protect the people’s common environmental heritage. The State may only surrender that right of protection in rare cases when the abandonment of that right is consistent with the purposes of preserving the trust. The explicit terms of the trust require the State to conserve and maintain the principal of the trust (i.e.-public natural resources) and impose a duty to prevent and remedy the degradation, diminution or depletion of the public natural resources. The State has the obligation to carry out these trust responsibilities, whether through direct action or restraining private parties from acting.
The State’s duties to conserve and maintain public natural resources are tempered by legitimate development tending to improve the lot of the citizenry, with the goal of promoting sustainable development. The amendment does not prohibit de minimis damage to the environment that does not impact the health of public natural resources. The beneficiaries of the trust are all of the people of New Jersey, including generations to come. The State, as trustee, has the obligation to deal impartially with all beneficiaries, and must balance the interests of present and future beneficiaries. Future beneficiaries are entitled to equal access and distribution of the resources, thus the State cannot manage public resources in a manner that would deprive future generations of the same uses available to present generations. This proposed amendment offers protection equally against both actions with immediate severe impact on public natural resources and actions with insignificant present consequences that are actually or likely to have significant or irreversible effects when compounded over the long term.
Self-Executing Amendment. The amendment is self-executing, and therefore does not require affirmative legislative action to take effect. This would somewhat insulate the amendment from the ebb and flow of political change. The rights in the proposed amendment are in addition to any rights available under the public trust doctrine (i.e.-a doctrine created by judicial decisions requiring the State to protect the public’s right in certain, limited natural resources) and common law (i.e.-law created by judges in judicial decisions). This constitutional amendment seeks to broaden the types of lawsuits that citizens may bring against the State (and any of its acting political subdivisions) in order to enforce environmental values.
It is difficult to say how this amendment would function if enacted. Its wording is strong but vague. Certainly, it would result in litigation. Those court cases would ultimately determine the true meaning of this amendment. Only time would tell whether that meaning results in positive environmental benefits for the citizens of New Jersey.
January 17, 2019
Recently, in Morris Plains Holding VF, LLC v. Milano French Cleaners, Inc., the New Jersey courts held the sole shareholder of a corporation personally liable for the cost to clean up the property on which his business operated. The defendant operated a dry cleaning business in a shopping center. When dry cleaning solvents were discovered in 1999, the defendant spent $140,000 over 10 years remediating the property before closing its business and filing for bankruptcy in 2012. At that point, the corporate defendant had no assets to complete the cleanup. Plaintiff, who owned the shopping center and assumed responsibility for the remediation, sued the dry cleaner’s sole shareholder, individually, and the trial court found he was personally liable under the New Jersey Spill Compensation and Control Act. Thus, the corporate shareholder was required to spend his own money on the cleanup costs.
Defendant argued that the facts proven at trial did not show that he was a “discharger” as defined in the Spill Act, was responsible for the discharge of hazardous substances or that there was a basis for piercing the corporate veil to hold him personally liable. The Appellate Division affirmed the trial court’s decision that there was no need for a “smoking gun witness” who had seen the sole shareholder actually discharge the solvents onto the property, since the dry cleaning business used 15 gallons of dry cleaning solvent annually for 25 years, was the only dry cleaning business ever on the property, the machinery sat on a concrete floor with no drains, and the soil located directly beneath the machinery was contaminated with the dry cleaning solvents. The Appellate Division agreed that the evidence supported holding the sole shareholder personally liable because he was ”everything” vis-à-vis this business: its sole shareholder, the operator of the business, responsible for handling the dry cleaning solvents and charged with ensuring legal and regulatory compliance. The court concluded that by imposing liability on persons “in any way responsible,” the New Jersey legislature intended to expand the scope of liability under the Spill Act “without regard for corporate veils and the like.” Thus, the court concluded that a shareholder of a close corporation could not contaminate property, put his corporation in bankruptcy and walk away from the problem.
This case expands the liability of corporate shareholders under the Spill Act. Previously, courts had required that the test for corporate veil piercing must be met to hold shareholders, officers or directors personally liable under the Spill Act for cleanup costs. Basically, those cases refused to hold shareholders personally liable where they were acting for the corporation, not for themselves individually, so that they would not be personally liable unless the corporation was used to perpetrate fraud, to accomplish a crime or to otherwise evade the law. Previously, under the federal Comprehensive Environmental Response, Compensation and Liability Act which was modelled after New Jersey’s Spill Act, the most significant exception to the rule that the shareholders, officers and directors could not be held personally liable absent veil piercing was where the shareholder, officer or director was shown to have personally participated in the hazardous substance disposal activities so that he or she was held to be an “operator.” The court in the Morris Plains Holding held that New Jersey’s Spill Act imposes the same liability on shareholders as “operators,” without the need to pierce the corporate veil. Those operating businesses that involve hazardous substances should take affirmative steps to insulate themselves from liability arising either from being an “operator” or the piercing of the corporate veil, including by buying environmental insurance to protect their businesses and personal assets.