A recent holding from the federal district court for the Southern District of Indiana now gives prospective purchasers of contaminated property even more reason to cross their t’s and dot their i’s when working towards claiming the bona fide prospective purchaser (BFPP) defense to Superfund liability based on a Phase I Environmental Site Assessment (ESA).

The case, Von Duprin LLC v. Moran Elec. Serv. No. 16-cv-01942 (S.D. Ind., March 30, 2020), gives important guidance dealing with the “all appropriate inquiries” portion of the BFPP defense, and when a Phase I ESA will not be found satisfactory. Specifically, the court held:

• A “stale” Phase I ESA will not satisfy “all appropriate inquiries”—meaning that the assessment must be completed or updated within 180 days of and prior to the lease or purchase—anything older is not acceptable. Further, if a tenant who leased the property with a stale ESA subsequently purchases the property, a second, timely Phase I ESA prior to purchase still does not satisfy “all appropriate inquiries.”
• Phase I ESA’s must comply with all the requirements listed in 40 CFR §§ 312.21 and 312.22. Although many rely on the ASTM International Standard E2247 to complete their assessments, these standards may not incorporate all requirements listed in the code, and should not be considered the “gold standard” for a Phase I ESA that satisfies “all appropriate inquiries.”

Plaintiff Von Duprin, LLC (Von Duprin) initiated this Comprehensive Environmental Response, Compensation, and Liability Act action in an effort to allocate responsibility for a chlorinated solvent plume in Indianapolis, Ind. and to allocate financial responsibility for the cleanup. Releases occurred between 1965 and 1986 when Von Duprin owned the property, making Von Duprin a potentially responsible party. After spending $1,700,000 on investigation and cleanup, Von Dupin sought contribution from prior owners and operators. Two of these defendants’s relief hinged on the BFPP defense, but the court held they failed to satisfy the “all appropriate inquiries” requirement.

A “stale” Phase I Environmental Site Assessment does not satisfy “all appropriate inquiries”

The first property in question — the Ertel property — was contaminated prior to 2002 when it was abandoned. As part of a brownfield redevelopment plan, the City of Indianapolis leased the property to Major Tool and Machine, Inc. (Major) in November 2007.

The Major defendants relied on a September 2006 Phase I ESA to satisfy the “all appropriate inquiries” requirement for the BFPP defense. However, a Phase I ESA must be completed or updated within 180 days prior to the lease. The Major defendant’s Sept. 8, 2006 Phase I ESA was completed well over 360 days prior to the lease and thus did not satisfy the “all appropriate inquiries” requirements.

The court also concluded that another Phase I ESA conducted prior to purchase, but after the lease, of a property did not retroactively fix a deficient Phase I ESA prior to lease. Although the major defendants conducted a second Phase I ESA prior to purchasing the property in 2013, the damage was done with their initial stale Phase I ESA prior to the 2007 lease.

Phase I ESA’s should include all requirements found in 40 CFR §§ 312.21 and 312.22 to satisfy “all appropriate inquiries”

The second property — the Zimmer property — was acquired by Major Holdings, LLC (Major Holdings) in 2007 and also had historical evidence of hazardous waste contamination. On summary judgment, the court found a Phase I ESA conducted by Major Holdings prior to the acquisition was insufficient to satisfy “all appropriate inquiries;” while the Phase I ESA may have followed the ASTM engineering practice guide, it did not follow all of the codified requirements, which include making the required inquiries with the owner of the parcel and including the required environmental Professional certifications.

Although some guidance on achieving BFPP status seems to indicate that adhering to the procedures of ASTM engineering practice guide would satisfy “all appropriate inquiries,” this holding indicates that is not necessarily the case. Parties must follow the exact federal standard and practices for conducting “all appropriate inquiries” spelled out directly in 40 CFR §§ 312.21 and 312.22 rather than relying solely on the ASTM standards.

Conclusion

This case should serve as a warning for prospective purchasers looking to breeze through or save a few dollars on their Phase I ESAs. Conducting a Phase I ESA to satisfy “all appropriate inquiries” is not the time to skimp on a more affordable environmental consultant, as courts are taking a harder look at the statutory requirements for satisfaction. A consultant who fully understands all the regulations surrounding “all appropriate inquiries,” not simply the ASTM standards, is a prospective purchaser’s best bet for successfully establishing the BFPP defense.