APRIL 15, 2016
General partners held individually liable due to failure to perform proper environmental due diligence prior to acquisition of property in New Jersey.
A recent Appellate Division case has confirmed that in order for a party buying property in New Jersey to be eligible to assert the state innocent purchaser defense (“IPD”), they must perform a Preliminary Assessment in accordance with New Jersey’s Technical Requirements for Site Remediation (N.J.A.C. 7:26E-1 et seq.) (“Tech Regs”). DEP v. Navillus Group, App. Div. Dkt. No. A-4726-13T3 (decided Jan. 14, 2016).
The site at issue was purchased in 2001 by the Navillus Group, a general partnership (“Navillus”) through a tax foreclosure judgment. Subsequently, title was transferred to James Sullivan, Inc. (“Sullivan”), who subsequently leased the property to a daycare facility (“Kiddie Kollege”). In 2006, the NJDEP raised concerns about environmental contamination on-site. Kiddie Kollege was shut down and litigation commenced. In May of 2014, a Court awarded NJDEP treble damages against the former owner, who filed bankruptcy in 1994, and its owner, who did not appeal. The Court Order approved summary judgment against Navillus and its general partners, and Sullivan and its sole shareholder, all of which appealed.
The Appellate Court’s decision discusses three main issues: 1) whether Navillus and Sullivan are innocent purchasers; 2) whether the corporate veil of Sullivan should be pierced; and 3) whether the general partners of Navillus are individually liable.
As previously stated, the Court affirmed denial of the state innocent purchaser defense focusing on the fact that a Preliminary Assessment Report consistent with the Tech Regs was not completed prior to acquisition of the property. The Court emphasized that merely relying on prior reports was not enough to establish the innocent purchaser defense under NJ’s Spill Act.
Piercing The Corporate Veil & Personal Liability for GPs
As Sullivan complied with general corporate formalities, such as adequate capitalization, observance of corporate and organizational formalities and maintenance of separate corporate records, the Court failed to pierce the corporate veil. However, based on general principles of NJ corporate law, the Court affirmed personal liability for the general partners of the Navillus Group Partnership.
This case is a solid reminder for real estate professionals to perform adequate environmental due diligence prior to purchasing property in New Jersey (or elsewhere for that matter). Further, one should avoid taking title to such property as a general partnership or individually and utilize a properly formed and maintained corporate entity.