Court Sets Limits on “Innocent Owner” Claims by Individual Members of a Partnership who Buy Real Property from the Partnership

Court Sets Limits on “Innocent Owner” Claims by Individual Members of a Partnership who Buy Real Property from the Partnership

On December 18, 1998, the U.S. District Court of New Jersey held in Grand Street Artists v. General Electric Co., that general partners with knowledge of property contamination who still move forward to acquire title to that property from the partnership, cannot later avail themsleves of the "innocent owner" defense to avoid CERCLA liability, even if the property was not known to be contaminated at the time when the partnership itself first acquired the property.

In this case, Grand Street Artists ("GSA"), a New Jersey partnership formed by artists, purchased a building in Hoboken, New Jersey, which formerly had been used for industrial purposes. The intention of GSA was to convert the premises into residential condominium units and sell the units to the partners in their individual capacities. Prior to completing the sale and transfer of ownership of the individual units from GSA to each partner, however, the partners became aware of the presence of mercury in the building. GSA and the individual partners nonetheless completed the transfers. The artists were ultimately forced to evacuate the premises.

GSA and the individual artists (the "Owners") then brought suit against a number of defendants alleging, among other things, that the defendants were liable under CERCLA. Defendant General Electric ("GE") counterclaimed and moved for summary judgment against the Owners, seeking a finding that they are liable under CERCLA. The Owners in turn sought declaratory judgments holding that they are entitled to the "innocent owner" defense and not liable under CERCLA.

A party asserting the "innocent owner" defense must demonstrate the following:

  1. Another party was the sole cause of the release of hazardous substances and the damages caused thereby;
  2. The purchasing landowner did not actually know or have reason to know of the presence of hazardous substances at the time of the acquisition (emphasis added);
  3. The purchasing landowner undertook appropriate inquiry at the time of acquisition, in order to minimize liability; and
  4. The purchasing landowner exercised due care once the hazardous substance was discovered.

The Owners asserted that since GSA, the partnership, acquired the premises before the presence of mercury was detected, the individual owners can avail themselves of the "innocent owner" defense. GE opposed the Owners' position because each individual owner acquired title to his or her unit from GSA after becoming aware of the mercury contamination and, therefore, GE asserted that the Owners could not avail themselves of this defense. The Court agreed with GE and found that the individual artists acquired the premises when GSA transferred title to each of the Owners, not when GSA originally obtained title to the premises.

The Court reasoned that in New Jersey, individual partners hold no real interest in real property owned by a partnership and that "t is only when a partner, in his or her individual capacity, chooses to purchase the real property from the partnership and title is transferred to said individual that he or she can be said to own, in a legal sense, and thus have acquired that real property." In other words, the Owners, as partners in GSA, did not acquire an individual real property interest in the premises until title to each unit passed from GSA to the individual owners. Therefore, the individual Owners had knowledge that mercury was at the premises before they acquired the property and could not avail themselves of the "innocent owner" defense. Grand Street Artists v. General Electric Co., 28 F. Supp. 2d 291 (D.N.J. 1998).