Natural Resource Damages Loom Large in New Jersey

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Natural Resource Damages Loom Large in New Jersey
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The Metropolitan Corporate Counsel
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The New Jersey Department of Environmental Protection has begun aggressively prosecuting claims for natural resource damages in an unprecedented way.  For years these claims, known as "NRD," have been called the "sleeping giant." NJDEP recently transformed this sleeping giant into an 800-pound gorilla.  Companies doing business in New Jersey and elsewhere are taking note.  Elements of New Jersey's NRD program are likely to be exported to other states. 

NRD are compensation to the State for injury to natural resources, above and beyond those monies or work required to cleanup a release of hazardous substances.  Natural resources are defined broadly under New Jersey law to include all land, air, water, flora and fauna owned, held in trust or otherwise controlled by the State. As the "trustee" of natural resources in New Jersey, NJDEP typically relies on the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq. (the "Spill Act"), the Water Pollution Control Act, N.J.S.A. 58:10A-1 et seq., and the common law Public Trust Doctrine to seek recovery of NRD from parties responsible for contamination.  The Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. ("CERCLA"), and other federal statutes also establish causes of action for NRD by federal and state trustees.  Damages may be recovered for the assessment of injury to natural resources, restoration or replacement of the damaged resources, the value of the natural-resource services lost as a result of the release (use value), or the value of the lost resources, whether or not they serve any public use (non-use or bequest value).  Determining the monetary value of these claims can be exceedingly difficult.

Over recent weeks, NJDEP has announced the following two major initiatives with regard to NRD:    

The Lower Passaic River

NJDEP is seeking $950 million in NRD from sixty-six companies responsible for contamination located along the lower Passaic River. Although the agency acknowledges that the amount likely to be recovered will be less than that, NJDEP nevertheless has publicly allocated the money: $680 million to enhance public access to the waterway, e.g., docks and walkways; $200 million for research, dredging and cleanup of the river, and $70 million to restore marshes and wetlands.  The correlation between the actual natural resource injury and the $950 million claim has thus far not been provided.  The companies are directed to undertake a natural resource damage assessment and then propose interim compensatory restoration of natural resource injuries.  See NJDEP Directive No. 1, In the Matter of the Lower Passaic River, Sept. 19, 2003 ("Directive").  NJDEP has not required "remediation" of the river as that term is defined by relevant law, nor has any previously been done.

The federal Environmental Protection Agency separately has issued a "Notice of Potential Liability for Response Actions" to many of the same companies, approximately forty PRPs, inviting them each to become "a cooperating party" to share the cost to investigate and remediate the lower Passaic River pursuant to CERCLA. Unlike NJDEP's Directive, the focus of EPA's effort appears directed to investigation and remediation of the contamination, rather than the immediate collection of NRD.  Not surprisingly, it was reported in the October 21, 2003 The Star-Ledger newspaper that industry favors EPA's approach to study the lower Passaic River, whereas environmental citizen groups support NJDEP's effort to collect NRD. 

NJDEP's NRD Policy Directive

On September 24, 2003, NJDEP also issued Policy Directive 2003-07, Natural Resource Damages, which sets forth a dramatic plan to collect NRD for groundwater and other natural resources impacted by 4,000 of the state's 12,000 contaminated sites.  For example, the agency recently collected $1 million in NRD for a contaminated groundwater site in East Hanover Township.  Similarly, NJDEP has just announced a $17 million settlement with three companies responsible for chromium sites in Jersey City.  NJDEP sources have estimated the overall value of NRD for the 4,000 contaminated sites at $500 million to $750 million, while industry estimates set the number higher at $1 billion dollars or more.

NJDEP's policy establishes a screening process by which the agency's Site Remediation Program ("SRP") will evaluate both open and closed cases and refer potential NRD claims to NJDEP's Office of Natural and Historic Resources.  To add teeth to the process, SRP will defer issuing a No Further Action letter for remediation of any site for which an NRD claim has been identified but not resolved.  NJDEP has publicly identified a formula to value and settle groundwater NRD claims, which takes into account the square footage of the contaminant plume, the water recharge rate, the public water rate and the duration that the ground water will be impacted.  In an effort to obtain quick settlements, NJDEP Commissioner Bradley Campbell has stated that in January 2004, the agency will begin using a "more robust" formula to calculate NRD for groundwater that will result in larger claims.  NJDEP has publicly expressed a preference that the damages calculated using the formula be applied to actual restoration projects, rather than the payment of money to the state.  NJDEP will settle claims using land swaps to conserve aquifer recharge areas, water reuse and recycling projects, storm water infrastructure projects, reforestation and other similar projects.

To date, NJDEP has issued approximately 100 demand letters to companies responsible for contaminated sites, inviting them to settle NRD claims for groundwater pursuant to the Policy Directive.  Managers within the SRP have been instructed to evaluate each of their cases to identify NRD claims.  NJDEP is using data provided by the responsible parties themselves during site remediation.  DEP seeks a response to its demand letter within ten days of receipt of the demand, as well as an agreement to toll any applicable statute of limitations that would be a defense to NRD liability.  Failure to respond within this time is treated as a rejection, inviting civil prosecution.

Private Attorneys General

et seq., permits such suits has not been tested.

Counsel's contingency fees are tiered and based upon the value of the NRD recovery or settlement and other claims brought as a result of the entire controversy doctrine, e.g., cleanup costs. For example, Kanner will receive at least 20% of the first $10 million recovered, 17.5% of the next $15 million recovered and 15% of any amount recovered over $25 million for each NRD case that is settled after the state has initiated a lawsuit.  The state will seek to recover attorneys fees as part of any settlement that consists of a restoration project.  This new agreement sets up private economic incentives to maximize NRD that otherwise would not exist if the Attorney General's office were handling these cases.  Companies doing business in other states be forewarned.  It has been reported that Allan Kanner is negotiating with several other states and Indian Tribes to pursue NRD on a contingency basis.

Litigation and Defenses

One NRD case is currently being litigated by the State, NJDEP v. ExxonMobil, Sun Refining, Arco Petroleum, et al., Docket No. L-002933-02.  The situs is a local street intersection in Ewing Township with gasoline service stations located on three corners that allegedly discharged petroleum to groundwater.  NJDEP brought this case before publishing its NRD policy, seeking approximately $250,000 in response costs and $250,000 in NRD for ground water.  Answers and cross-claims have been filed, and the case currently is in discovery.  This matter likely will be vigorously prosecuted and defended.  The major-oil-company defendants and the State each have interests in the result that are far greater than the $500,000 at risk.

Defenses and other challenges to NRD do exist.  Statutory defenses, like the innocent-purchaser defense, are provided by the Spill Act and CERCLA.  Site-specific circumstances give rise to other defenses, such as statutes of limitation, prohibitions on double recovery and speculative damages, and other statutory limits on NRD.  Broader challenges to NJDEP's policy also should be evaluated, e.g., the extent to which it is inconsistent with the Brownfield and Contaminated Site Remediation Act, N.J.S.A. 58:10B-1 et seq., the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq., or constitutional due process and separation of powers.  Causation for NRD, including whether there is any actual loss at all, will be an issue at many sites.

Impacts on Brownfields, Transactions, and Insurance

The new NRD program is likely to impact brownfield redevelopment, transactions and insurance.  Although NJDEP says that it will not seek NRD from "non-liable brownfield redevelopers,"  given NJDEP's aggressive NRD posture, establishing to the agency's satisfaction a legal entitlement to the innocent-purchaser defense will be very difficult, requiring thoughtful pre-acquisition planning.  Transactions are likely to be complicated by the dearth of publicly available information to identify NRD sites during due diligence, as well as by the need to address NRD in representations, warranties and indemnities.  Although some newer environmental insurance policies may cover NRD, many remediation cost-cap and pollution legal liability policies do not.  Insurance coverage also may exist for NRD under pre-absolute-pollution-exclusion policies.  Many companies, however, have already settled with their insurers through buy-backs or releases.

Corporate counsel and managers are advised to consider the impact of NRD on their businesses.  Parties required to clean up contaminated sites, developers and real estate trusts, lenders, insurers and other portfolio managers all should evaluate existing NRD risk and consider NRD when transacting new matters.  Various defenses and settlement strategies should be considered when addressing NRD with natural resource trustees.  With its aggressive new initiatives, NJDEP has again broken new ground in environmental enforcement, which is sure to catch on in other states.