Environmental UPDATE June 2011

Title:
Environmental UPDATE June 2011
Publication:
The June 2011 Riker Danzig Environmental UPDATE
Attorneys:
Practice:
Nexus Between Discharge and Damage Required for Liability Under the Spill Actt

Take Remediation Timeframes Into Consideration When Structuring Transactions

Proposed Changes to Endangered Species List Will Decrease Amount of Land Subject to Restriction

One More Step Towards Off-Shore Wind Power in New Jersey

Legislative Update

New Jersey Appeals Court Reinstates NFA Letter

State UST Remediation, Upgrade and Closure Fund has Insufficient Funding

EPA Update

Parties with Contribution Claims May Be Out of Luck

 

Nexus Between Discharge and Damage Required for Liability Under the Spill Act

Under the New Jersey Spill Compensation and Control Act (the "Spill Act"), a person who is in any way responsible for the discharge of a hazardous substance is strictly liable for cleanup and removal costs. N.J.S.A. 58:10-23.11g(c)(1). On March 18, 2011, the Superior Court, Appellate Division affirmed the Law Division's ruling that a finding of liability under the Spill Act requires a nexus between the discharge of a hazardous substance and the resultant damage to the environment and need for remediation. New Jersey Dept. of Envt'l Prot. v. Dimant, Docket No. A-3180-09T2, Superior Court of New Jersey, Appellate Division (March 18, 2011).

In Dimant, the New Jersey Department of Environmental Protection (the "NJDEP") brought a claim for contribution for cleanup and removal costs under the Spill Act, alleging that defendant, Sue's Clothes Hanger, a laundromat and dry cleaner, was responsible for perchloroethylene ("PCE") contamination to groundwater on various properties in Bound Brook, New Jersey. Although there were at least three dry cleaners in the area and other possible sources of PCE, the NJDEP focused its investigation on the defendant, which was a relatively short-term operator of one dry cleaning facility. Following a bench trial, the trial court made several findings of fact which demonstrated that defendant's discharge of PCE did not cause or contribute to the contamination of the groundwater. The trial court noted that the NJDEP's expert failed to take into account the presence of PCE contamination that preceded the defendant's operations, as well as other possible sources of the contamination. Accordingly, the trial court found that the NJDEP "did not establish by a preponderance of the direct and circumstantial evidence that there [was] a nexus between any discharge by defendant Sue's Clothes Hanger and the groundwater contamination at issue."

On appeal, the NJDEP contended that the trial court misapplied the Spill Act by not finding the defendant strictly liable for a PCE discharge from an exterior pipe, even if it was a de minimus discharge. In support of its argument, the NJDEP cited to the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. ("CERCLA"), which it claimed requires no direct causal connection between a defendant's release or threatened release of hazardous substances and the plaintiff's incurrence of response costs. The Appellate Division, however, determined that the NJDEP's reliance on CERCLA's less stringent standard for liability was misplaced.

Unlike CERCLA, the Spill Act requires some nexus between the discharge of a hazardous waste and the resultant damage to the environment. The Appellate Division found that:

 

Spill Act cases determining issues of liability have generally focused on the necessary connection between the offending discharge and the discharger and/or owner of the property, broadly construing the statutory standard of 'in any way responsible' as encompassing either ownership or control over the property at the time of the damaging discharge, or control over the hazardous substance that caused the contamination.

Although none of the earlier Spill Act cases expressly state that a "nexus" between the discharge and the resultant damages to the environment is required, the Appellate Division found that it was implicit in these prior holdings. The Court also found that the "nexus" requirement was guided by the definition of "discharge" under the Spill Act, which explicitly refers to resultant "damage[s]." As a result, the Appellate Division held that a "nexus between the use or discharge of a substance and its contamination of the surrounding areas is needed to support a finding of Spill Act liability."

In Dimant, the NJDEP failed to prove that defendant's discharge of PCE caused or contributed to the contamination of groundwater at issue. Accordingly, the Appellate Division affirmed the trial court's ruling that the defendant was not liable under the Spill Act. This case is significant because it demonstrates that a party seeking contribution for cleanup costs under the Spill Act must establish that the defendant's discharge of a hazardous substance caused or contributed to the resultant damage to the environment and need for remediation.

Take Remediation Timeframes Into Consideration When Structuring Transactions

When the Industrial Site Recovery Act ("ISRA") is triggered, the owner or operator of the industrial establishment must perform a preliminary assessment ("PA") and, if necessary, a site investigation ("SI") and/or initial receptor evaluation ("IRE"). The Administrative Requirements for Remediation of Contaminated Sites ("ARRCS") impose upon both buyers and sellers a new affirmative obligation to submit the PA, SI, and IRE within two years from an event triggering the requirements of ISRA. N.J.A.C. 7:26C-3.3(a). Failure to comply with the mandatory timeframes may result in direct oversight by the NJDEP. N.J.A.C. 7:26C-3.3(c). Such oversight includes the NJDEP making all decisions regarding how the sampling and cleanup work is to be conducted at the property. To avoid this scenario, careful coordination of the sequence of events in a real estate transaction may become an important consideration.

In a real estate transaction involving an industrial establishment, the mandatory timeframes for submitting the PA and/or SI, or IRE commence once ISRA is triggered by, among other things, the signing of an agreement of sale or the exercise of an option to purchase an industrial establishment. N.J.A.C. 7:26B-3.2(a)(3), (6). An interesting timing issue arises if the parties wish to close the transaction more than two years after the signing of the sale agreement. For example, the parties may wish to obtain real estate development approvals (e.g., government approvals and permits) prior to conducting any environmental investigation and/or remediation on the property. These development approvals may take several years to obtain, leaving the person responsible for conducting the remediation with a dilemma_ whether to expend the money to investigate and, if necessary, remediate the property even if the closing is dependent upon obtaining the development approvals that ultimately may not be obtained.

One way to address this concern is through the use of an option agreement. ISRA is triggered upon the exercise of an option agreement, but the regulation does not address whether ISRA is triggered by the signing of an option agreement. The use of the word "exercise" suggests, however, that simply signing an option agreement may not trigger the requirements of ISRA, including the mandatory timeframes set forth in the AARCS rules. For transactions with long lead times prior to closing, and given that failure to comply with the mandatory timeframes may result in direct NJDEP oversight, it is important to consider the nature and structure of the transaction, and the impact that the new NJDEP mandatory timeframes may have on it.

Proposed Changes to Endangered Species List Will Decrease Amount of Land Subject to Restriction

The NJDEP has proposed amendments to the current Endangered, Nongame and Exotic Wildlife Rules, N.J.A.C. 7:25-4, including the state’s list of endangered species. The proposed amendments would, among other things, change the status of several species, based on the Department's analysis of the latest available information. As a result of these proposed changes, those areas in the state deemed "habitat" for threatened and endangered species will change, with an overall net decrease. Areas that are documented as "habitat" are subject to regulatory restrictions on land use.

Currently the rules use several defined terms to describe the status of various species: endangered, threatened, special concern, declining, extirpated, increasing, introduced, peripheral, special case, stable and undetermined. The proposed changes would streamline the descriptions by eliminating all defined categories except for endangered and threatened, and by adding the categories Special Concern, Secure-stable and Undetermined-Unknown. "Special Concern" species warrant special attention by the Department because of inherent vulnerability to environmental deterioration or habitat modification. In addition, the proposed changes would make a distinction between "breeding population[s]" and "non-breeding population[s]" of bird species, based on each species’ respective nesting season, and will assign different statuses where necessary. For example, breeding populations of bald eagles will continue to be classified as endangered, but the status of non-breeding populations will be changed from endangered to threatened.

The NJDEP is also proposing to amend the endangered species list to add 11 species as either endangered or threatened, downgrade the classification of five species from their current listed status to either threatened or endangered, and upgrade the current status of eight species from their current endangered or threatened status to a category of lesser concern. When a species is listed as either endangered or threatened, its habitat is subject to regulatory protection, including restrictions on permissible land use and disturbances.

Although the NJDEP's proposed amendments to the list of species would increase the total number listed as either endangered or threatened, the amendments would result in a net decrease of approximately 31,000 acres of land presumed to comprise habitat for those species. This is due in part to the overlap of habitat for listed species. Therefore, while the applicable regulatory restrictions on some land will increase if the proposed regulatory changes are adopted, the total amount of land in the state subject to such restrictions will decrease.

One More Step Towards Off-Shore Wind Power in New Jersey

Governor Christie and the NJDEP recently demonstrated their continued commitment to the development of offshore wind power by issuing a formal request, known as a Call for Information and Nominations ("Call"), for firms interested in acquiring off-shore leases for construction of wind farms. The Call appeared in the Federal Register and was issued through the U.S. Department of Interior's Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”). This is the first step in the commercial renewable energy leasing process. While this is not an announcement of available leases, the responses will be evaluated to determine if there is a viable commercial interest in off-shore leasing, including in leases off the coast between Barnegat Light and Avalon, New Jersey. The delineated area for the leases has been identified as a Wind Energy Area under the Secretary of the Interior's "Smart from the Start" initiative, meaning it is an "[Outer Continental Shelf] area that appears to be suitable for the consideration for wind energy development." The Call also seeks information about "site conditions, resources, and multiple uses" related to this off-shore area. The responses are due June 6, 2011 and will help guide the next steps in the off-shore wind development process.

This announcement builds upon the 2009 issuance of leases to three companies to install and operate facilities to characterize wind and environmental resources. It also builds upon a series of additional actions taken by New Jersey to support off-shore renewable energy development. One such measure was New Jersey's 2010 enactment of the Offshore Wind Economic Development Act. The Act directs the Board of Public Utilities to create an Offshore Wind Renewable Energy Certificate (“OREC”) program, a program which calls for a percentage of electricity sold in the state to come from offshore wind energy. To make this a reality, the Act also provides financial assistance and tax credits to businesses that construct, manufacture, assemble and provide water access facilities to support the development of qualified offshore wind projects. State and local officials have been working closely to redevelop the Port of Paulsboro as a hub for this business. This is part of the current Administration's economic platform that New Jersey should be a national leader in the development of wind and solar energy.

Legislative Update

SIGNED INTO LAW BY THE GOVERNOR

A2720 (Substituted for S2014) - Establishes new procedures in the Administrative Procedure Act to allow substantial changes to agency rule-making without filing a new notice of proposal.

A2501 - Requires the State Soil Conservation Committee to adopt standards concerning soil restoration measures within one year of the enactment of this law.

A2853 - Consolidates review of State and local agency-issued business permits for the purpose of accelerating the issuance of permits and reducing redundancy among levels of State and local government.

A2721 (Substituted for S2013; passed in Both Houses) - Amends the current law concerning state agency rule-making by changing the chapter expiration dates of rules from five years to seven years and establishes a new procedure for the re-adoption of rules without substantive changes.

VETOED BY THE GOVERNOR

S2126 (Conditional veto from Governor) - Permits the development of solar facilities and structures on closed landfills and quarries, provided no environmental controls are disturbed.

PASSED IN ASSEMBLY

A2722 - Implements recommendations of the Governor's Red Tape Review Committee regarding modifications to the process followed by the Office of Administrative Law ("OAL") for contested case hearings. The bill proposes a change to OAL procedures regarding telephone and video conferences, delegation of final decision authority, oral decisions, electronic filings and settlements.

INTRODUCED IN SENATE

S349 - Establishes an Environmental Science Review Board within the NJDEP. The Board will have the power to review any rule or regulation proposed by the NJDEP for scientific soundness and consistency.

S791 - Requires agency approval of remedial actions for structures intended for residential use; modifies approval requirements for structures to be used for child care or educational purposes and for sites formerly used for agricultural purposes.

S2847 - Amends the 2008 Permit Extension Act. This bill would lengthen the "extension period" currently provided for in the 2008 law from December 31, 2012 to December 31, 2014.

INTRODUCED IN ASSEMBLY

A675 -Authorizes the NJDEP to require comparative studies of alternative remedies for cleanup of contaminated property to be used for residential purposes or as a school and allows the NJDEP to choose the appropriate remedy.

A1012 - Establishes the California fine particle standard as the New Jersey State standard for regulation of air pollutants.

A1662 - Requires the NJDEP to issue a report and hold a public hearing prior to recommending a particular site for inclusion on the Environmental Protection Agency's National Priorities List.

A2310 - Limits the scope of public notification regarding contaminated site remediation to those property owners and tenants that live within 200 feet of an area of concern located within the contaminated site.

New Jersey Appeals Court Reinstates NFA Letter

A New Jersey appeals court recently overturned the NJDEP’s rescission of a no further action ("NFA") determination. This decision, Morgan Stanley Services Co. v. New Jersey Dep't of Envt'l Prot, A-5703-08T1 (App. Div. January 26, 2011), reaffirms the Department's duty to provide and articulate its reasoning and conclusions before rescinding an NFA determination previously issued by the agency.

During the 1990s, Levolor Corporation conducted a cleanup at a property it previously owned. The NJDEP-approved remediation plan included the installation of an impermeable asphalt cap and use of a deed notice. The cleanup was performed in 1997, and the NFA approval was issued by the NJDEP in 1998. The property owner took over responsibility for maintenance of the engineering and institutional controls, and Levolor had no further involvement with the property. Levolor's corporate parent eventually merged with Morgan Stanley.

In 2002, the NJDEP approved a subsequent owner's petition to remove the impermeable cap to permit redevelopment of the property. Although the Department required that the owner agree to remediate any contamination encountered after removing the asphalt cap, it did not require any financial assurance for the obligation. The owner removed the cap, but became insolvent and filed for bankruptcy protection before adequately addressing the contamination, leaving the property uncovered. The NJDEP did not participate in the owner's bankruptcy case to recover funds to reinstall the cap, but the NJDEP simply - and with no prior warning or explanation for its reasoning - rescinded the 1998 NFA determination. The NJDEP also ordered Morgan Stanley to perform a further cleanup at the site, without apparent regard to the bankrupt owner's culpability and removal of the site cap, an otherwise effective remedial action.

On appeal, the Appellate Division reversed the agency action and reinstated the NFA, adopting Morgan Stanley's argument that the NJDEP failed to perform necessary factfinding and adequately support its conclusions as to why rescission of the NFA was warranted. The Court also held that State counsel's arguments in the litigation were post-hoc rationalizations, and not a substitute for the Department's own reasoning and explanations of its action. The court ultimately remanded the issue to the NJDEP for further consideration of the unique facts of the case, and to afford Morgan Stanley the opportunity to submit supplemental information.

The opinion makes clear that any conflict between an NFA-holder's interest in finality or repose and the State's interest in obtaining further remediation of contaminated property "may only be resolved by a process that is fair and just, and by a determination based on specific factfinding reasonably supported by sufficient credible evidence in the administrative record." Thus, the NJDEP is required to provide well-reasoned factual support for its findings and determinations, especially when taking action as severe as rescission of an NFA.

State UST Remediation, Upgrade and Closure Fund has Insufficient Funding

The NJDEP announced that, effective May 3, 2011, new applications for underground storage tank ("UST") project funding will not be reviewed or processed due to insufficient funding of the program. The program is funded by a dedicated portion of the New Jersey Corporate Business Tax. The amount dedicated has been approximately $12-15 million annually, depending on the amount of Corporate Business Tax collected.

According to the NJDEP staff, additional funding for new projects may become available after July 1, 2011. However, applications that already are approved but not yet funded and supplemental funding requests for projects already in the program will have a level of priority for funding over applications for new projects. The Department has a significant backlog of requests for funding. Thus, new applications will be date-stamped by the Department and, as sufficient funding becomes available, the applications will be reviewed and processed in the order of receipt by the NJDEP.

In its announcement, the NJDEP also advised contractors that advertise the availability of funding and that tank remediation can be completed at no cost to homeowners should be aware that there is no guarantee of funding for these UST remediation projects.

EPA Update

EPA Grant to Help Newark Community Target Environmental Problems

On March 11, 2010, EPA announced its award in the sum of $100,000 to the Ironbound Community Corporation ("ICC") under its Community Action for a Renewed Environment ("CARE") program. ICC will utilize these funds in the identification of pollution problems in the Ironbound community.

Former and existing chemical plants, waste industries and trucks, airplanes and ships are sources of pollutants in the Ironbound, the risks of which will be considered by this project. Under the CARE project, local residents, business and community group representatives, members of the academic and governmental sectors will come together through the ICC to compile information concerning the present and potential environmental issues affecting this community.

EPA Signs Sustainability Agreement With Major New Jersey Company

On March 11, 2010, EPA and Hartz Mountain Industries signed an agreement to take steps to reduce the environmental impact of Hartz's retail and commercial properties statewide.

Under the new agreement, Hartz will join EPA's Energy Star and Waste Wise programs, cut water use by utilizing a variety of low-flow tools, maximize recycling and reuse of municipal solid waste, construction waste and debris, implement idling reduction measures, require that heating, ventilation and air conditioning meet EPA Energy Star performance guidelines, meet LEED standards in constructing the Edison Town Square project in Edison, NJ, and consider use of solar energy on both its buildings and on brownfield sites. Hartz will submit a status report to EPA annually from which the environmental benefits from the aforementioned activities will be determined.

EPA Administrator Highlights Importance of Agency's Science Laboratory in New Jersey; Announces New Resources For National Environmental Response Team Lab Facilities

On August 3, 2010, EPA Administrator Lisa Jackson toured the EPA's Edison Environmental Center to highlight EPA’s commitment to science, protecting human health and the environment. Administrator Jackson announced new trailers at the center will be equipped with state-of-the-art technology to enhance the ability of the Environmental Response Team to quickly analyze samples and to respond during emergencies.

Equipped with several laboratories where key analysis and scientific information is gathered to support environmental programs, the Edison Environmental Center is also home to a national emergency operations center that allows EPA to efficiently coordinate with field personnel during emergencies and to run a 24-7 operation during major emergencies. The Environmental Response Team's laboratory resources include two specialized mobile labs, which support EPA's air monitoring efforts during emergencies. EPA's National Risk Management Research Laboratory is also housed in the center, which examines innovative, green approaches to control and treat contamination from stormwater runoff and also studies ways to address aging water infrastructure.

Parties with Contribution Claims May Be Out of Luck

Two recent decisions by the Bankruptcy Court in New York addressed the disposition of contribution claims against a company that has been designated a potentially responsible party ("PRP”) when the company files for bankruptcy. In these two cases, the Court found the contribution claims of the co-liable PRPs for environmental remediation costs were contingent and thus disallowed under the Bankruptcy Code, until the claimant actually pays for the cleanup or otherwise expends funds supporting the claim. In re Lyondell Chemical Co., Case No. 09-7023 (Bankr. S.D.N.Y., January 4, 2011) and In re Chemtura Corp., Case No. 09-11233 (Bankr. S.D.N.Y., January 13, 2011).

CERCLA provides a party who funds remediation a cause of action to seek contribution from other PRPs under specific circumstances. Section 502(e)(1)(B) of the Bankruptcy Code, however, disallows certain contingent contribution or reimbursement claims asserted against the debtor by parties who are co-liable with the debtor. The recent decisions addressed whether an environmental remediation contribution claim pursuant to CERCLA is "contingent" and thus disallowed.

In both cases, the debtors were identified as PRPs for past and future cleanup costs prior to filing for bankruptcy protection. Other PRPs filed contribution claims against the debtors in their respective bankruptcy cases for past and future remediation costs. The debtors objected to the claims for future (not past) cleanup costs on the basis that the future costs were contingent and should be disallowed under Section 502(e)(1)(B). The Court looked to whether the claimants had actually expended funds for the investigation and cleanup, finding that because there had been no expenditure on the estimated future costs for cleanup, those claims remained both contingent and unliquidated and thus were disallowed. Accordingly, under the holdings in these decisions, contribution claims against a bankrupt PRP will remain contingent, and thus subject to disallowance, if the claimant co-PRP has not actually paid funds for the cleanup.