The Impending Expansion of Interim Owner Environmental Liability

The Impending Expansion of Interim Owner Environmental Liability

Source: https://www.law.com, December 8, 2017
By: Matthew A. Karmel

The logical application of the Spill Act may suggest that the liability it imposes on someone who “owns” real property may extend to an interim owner that fails to qualify as an innocent purchaser.

environmental contamination industrial pollutionA prior owner of environmentally contaminated real property may soon face liability under New Jersey law for historical contamination which it did not contribute to or cause. New Jersey courts previously seemed to agree that the New Jersey Spill Compensation and Control Act (Spill Act) exempted a prior owner of contaminated property from liability for hazardous substances that were discharged on its property before its ownership, unless the prior owner caused or contributed to the contamination. See, e.g., White Oak Funding v. Winning, 341 N.J. Super. 294, 300-01 (App. Div.), certif. denied 170 N.J. 209 (2001). A prior owner that did not cause or contribute to contamination is often referred to as an “interim owner” because it purchased the property after the discharge of contamination took place thereon and has since sold the property to a new owner.

Several years ago, two New Jersey courts held that a current owner of contaminated property is liable for contamination that predates its ownership, even if it did not cause or contribute to it. The courts based this liability on the failure of the current owner to qualify as an “innocent purchaser” who is statutorily exempt from liability under the Spill Act if it conducted appropriate due diligence prior to acquisition of the property and, as a result, had no reason to know of contamination thereon. In embracing such liability, these courts may have opened the door to imposing similar liability for preexisting contamination on an interim owner if the interim owner similarly fails to qualify as an innocent purchaser. If the courts were to impose liability on an interim owner where it fails to qualify as an “innocent purchaser,” it would represent a significant expansion in New Jersey law under the Spill Act and would expose many additional parties to liability.

In the recent cases noted above, the courts evaluated whether a current owner nonetheless was liable for a discharge of hazardous substances that occurred prior to its ownership on the grounds that the owner failed to qualify as an innocent purchaser under the Spill Act. See New Jersey Schools Development Authority v. Marcantuone, 428 N.J. Super. 546 (App. Div. 2012), certif. denied 213 N.J. 535 (2013); State Farm Fire and Cas. Co. v. Shea, Docket No. A-4124-10 (App. Div. Sept. 28, 2012), certif. denied 213 N.J. 386 (2013). In order to obtain innocent purchaser protection upon acquisition of property, a prospective purchaser must establish, among other things, that it “did not know and had no reason to know that any hazardous substance had been discharged at the real property” following an appropriate evaluation of the property’s environmental condition. See, e.g., N.J.S.A. 58:10-23.11g(d)(2)(b)(i).

In Marcantuone and Shea, the current property owner acquired real property without first conducting an appropriate environmental evaluation. In each instance, a third party sought to impose liability on the owner for contamination that pre-dated its acquisition. The current property owners argued that they were not responsible for this contamination even though they did not quality as “innocent purchasers” because, among other reasons, they did not cause or contribute to the contamination.  The appellate courts, however, ultimately held that the defendants were liable for discharges that occurred prior to their ownership because they did not qualify as “innocent purchasers.”

The question posed in this article remains unaddressed under New Jersey law: Does the Spill Act impose environmental liability on an interim owner of real property who also fails to qualify as an innocent purchaser?

In Marcantuone and Shea, for example, the courts did not address whether a current owner would become immune from liability for a discharge that occurred prior to its ownership had it sold the property before suit was commenced (i.e., if it had become an interim owner). Indeed, in Marcantuone, the court went to great lengths to determine that the defendant qualified as a current owner. In that case, a condemnation action, the defendant argued that it was no longer a current owner because the condemnation proceedings had reached the point where ownership vested with the condemning authority. The court rejected this position and held that, “for purposes of Spill Act liability, we consider condemnees to be the ‘current owners’ of property.  [The] [d]efendants may face liability for remediation costs unless they can establish the elements” of the innocent purchaser defense. Marcantuone, 428 N.J. Super. at 562. As a result, the court did not address the liability of an interim owner that fails to qualify as an innocent purchaser.

In evaluating whether an interim owner will face liability under the Spill Act for the failure to qualify as an innocent purchaser, we look first to the language of the Spill Act. As interpreted in Shea, the Spill Act imposes liability on a “person who owns real property acquired on or after September 14, 1993,” unless such person qualifies for the innocent purchaser defense. N.J.S.A. 58:10-23.11g(c)(3) (emphasis added).  Marcantuone holds similarly for a person who owns real property acquired prior to Sept. 14, 1993. As a result, one question appears to be whether an interim owner will be interpreted to be a person who “owns” real property. If so, the interim owner may be subject to liability unless it qualifies for the innocent purchaser defense.

In attempting to predict a judicial answer to this question, we look first to a decision of the Supreme Court of New Jersey, which recognized that the word “owns,” in a related environmental context, refers only to a current owner. This decision involved interpretation of the requirements applicable to grants available to an innocent owner of contaminated property for remediation (i.e., Innocent Party Grants or IPGs). See TAC Assocs. v. New Jersey Dept. of Envt’l Prot., 202 N.J. 533 (2010). At the time of the events giving rise to TAC Associates, the relevant statutes provided that IPGs “may be made … to persons who ownreal property on which there has been a discharge of a hazardous substance or a hazardous waste and that person qualifies for an innocent party grant pursuant to N.J.S.A. 58:10B–6.” N.J.S.A. 58:10B-5(d) (emphasis added). This language is nearly identical to the language of the Spill Act interpreted in Marcantuone and Shea. The agency responsible for administering these grants interpreted this statutory language as requiring an applicant to establish that it “continue[s] to own the real property.” N.J.A.C. 19-31-8.2. When an applicant challenged the agency’s interpretation, the Supreme Court stated that the statutory language “brooks no confusion—it declares that to apply for an IPG, an applicant must own the contaminated property.” TAC Assocs., 202 N.J. at 544. When applied to the question at hand, it would seem that the Supreme Court of New Jersey may determine that the Spill Act, which uses nearly identical language in imposing liability on those who fail to qualify as innocent purchasers, imposes liability for historical contamination on only a current owner of property that fails to qualify as an innocent purchaser.

Nonetheless, another decision holds that similar language applies to both prior and current owners, thereby supporting a future determination that liability for historical discharges should fall on interim as well as current owners. See R&K Assocs. v. New Jersey Dept. of Envt’l Prot., Docket No. A-4177-14 (App. Div. Apr. 10. 2017).  In R&K Associates, the Appellate Division was interpreting a provision of the New Jersey Industrial Site Recovery Act (ISRA) that applies to “any person who owns [certain] real property.” The court began its analysis of this language by recognizing that “the present tense for the word ‘own’ provides some indicia of an intent to limit the definition of ‘owner’ to only current owners of the property.” R&K Assocs., (slip op. at 9). Ultimately, however, the court determined that the practical and logical application of ISRA required that the definitions of “own” and “owner” include an interim owner. R&K Assocs., (slip op. at 13). In contrast to TAC Associates, discussed above, this holding suggests that the Spill Act’s imposition of liability on a person who fails to qualify as an innocent purchaser may apply to an interim owner.

As in R&K Associates, the logical application of the Spill Act may suggest that the liability it imposes on someone who “owns” real property may extend to an interim owner that fails to qualify as an innocent purchaser. The Spill Act involves liability, and, once it attaches, it stands to reason that a person remains liable following conclusion of the circumstances that gave rise to liability. That is, if a person negligently causes a car accident, that person plainly remains liable for the car accident after the negligent activity has ended. The same may be true for liability under the Spill Act. If a current owner fails to qualify as an innocent purchaser, it may make sense for that person to remain liable for pre-existing contamination even after selling the contaminated property to a new owner. New Jersey courts have shown in the past that they are willing to interpret environmental statutes liberally in order to reach a logical conclusion, including in R&K Associates and Marcantuone. As a result, the New Jersey courts may well impose liability on an interim owner who fails to qualify as an innocent purchaser.

Another potential basis for imposing liability for historical contamination on an interim owner comes from a lesser known provision of the Spill Act. This provision states that an innocent purchaser loses its innocent purchaser protection and becomes liable under the Spill Act if it sells its property to a new owner without disclosing known contamination. N.J.S.A. 58:10-23.11g(d)(3). This provision illustrates that it is possible for the Spill Act to impose liability on an interim owner even if it did not cause or contribute to the contamination. Even more interestingly, the provision does not impose affirmative liability on an innocent purchaser that fails to disclose contamination, but simply revokes the innocent purchaser protection. In other words, the provision suggests that an interim owner is liable under the Spill Act for historical contamination if it fails to qualify as an innocent purchaser—that is, whether it failed to qualify as an innocent purchaser upon acquisition of the property or lost its innocent purchaser status by failing to disclose known contamination.

Against this backdrop, and in light of other historical precedent, including White Oak Funding, it is difficult to say with certainty whether a New Jersey court faced with this issue would extend Spill Act liability to an interim owner who does not qualify as an innocent purchaser. Still, the possibility of such an extension of the law remains likely present, especially because New Jersey courts have broadly interpreted liability under the Spill Act. As a result, those who advise owners or buyers of contaminated real estate should be careful to assess how this potential expansion of liability might affect their clients. For a party remediating contaminated property, the potential expansion of liability as discussed herein may give rise to a contribution claim against a prior owner that did not cause or contribute to the contamination. For anyone selling real property or advising a seller of real property, this expansion of liability may require reevaluation of the allocation of risks in a given transaction, possibly through enhanced environmental indemnity provisions if the buyer has agreed to take on environmental liabilities, or through environmental insurance if more robust indemnities are not an option.

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