Natural Resource Damage Claims: A Transactional Perspective

Natural Resource Damage Claims: A Transactional Perspective
New Jersey Law Journal

New Jersey has long been in the forefront nationally in the adoption and aggressive enforcement of innovative environmental laws. Starting in the early 1980s, with the passage of the Industrial Site Recovery Act (then known as the Environmental Cleanup Responsibility Act) and other environmental laws, New Jersey transactional lawyers have been required to have a strong familiarity with such laws. Such environmental laws could impose conditions on transactions and also impose significant ongoing environmental liabilities. Lawyers involved in mergers and acquisitions, the purchase and sale of businesses and financing transactions quickly developed a detailed list of environmental representations and warranties as well as ongoing environmental covenants and indemnities. Recently, the New Jersey Department of Environmental Protection (DEP) announced a new initiative designed to compel responsible parties to compensate the State of New Jersey for the value of injury to the State's natural resources. These so called "natural resource damage" (NRD) claims will provide an additional source of concern for New Jersey's business community and counsel.

What is a Natural Resource Damage Claim

As described by DEP, NRD claims are claims that arise from "releases of hazardous substances that have resulted in injuries to natural resources (loss or impairment of ecological function) or the deprivation of natural resource services (e.g., water supply, recreation, ecological services) with respect to resources owned by, managed by, or otherwise within the trusteeship or co-trusteeship of the State of New Jersey." See, Policy Directive 2003-07; New Jersey Department of Environmental Protection (September 24, 2003). Natural resources are defined by existing DEP statutes and regulations as "all land, biota, fish, shellfish, and other wild life, air, waters and other such resources." See, N.J.A.C. 7:26E-1.8 and N.J.S.A. 58:10-23.11(b). Based on the initial efforts of DEP, it appears that the main focus of the initiative will be on natural resource damages resulting from groundwater contamination. As outlined in DEP's September 24, 2003 policy directive, a process of addressing more than 4,000 potential claims for natural resource damages has begun. DEP has issued approximately 100 demand letters requesting that responsible parties meet with DEP to settle claims. This effort has already borne fruit as $16.9 million was agreed to be paid by 3 parties in connection with damage caused by chromium contamination in Essex and Hudson Counties. See, The Star-Ledger, November 13, 2003, page 1. Another thrust of DEP is against 66 potentially responsible parties who were ordered to "assess and restore natural resource injuries to the Passaic River caused by 18 contaminated sites within its watershed". See, Directive of Department of Environmental Protection dated September 19, 2003. The total amount sought by DEP for the lower Passaic River is $950 million dollars. See, The Star Ledger, October 29, 2003, page 13. It is important to note that these NRD claims are in addition to any obligation that responsible parties may otherwise have to remediate under other New Jersey environmental statutes. DEP's authority to recover natural resource damages may be traced to several sources. One source is the New Jersey Spill Compensation and Control Act, NJSA 58:10-23.11 et seq., (Spill Act) where "[T]he State is the trustee for the benefit of its citizens of all natural resources within in its jurisdiction." NJSA 58:10-23.11(a). Collection of NRD claims is viewed as a logical offshoot of the State's role as trustee. Additional support for the State's authority may be found in the so called "public trust" doctrine, as well as in various administrative regulations that impose an affirmative obligation on parties to conduct assessments of damage to natural resources. See, N.J.A.C. 7:26(e)-3.11(a)(2)-(4) and Marchetti, "Pursuing Natural Resource Injury Compensation," New Jersey Law Journal, October 20, 2003. In any event, the ultimate authority and legitimacy of DEP's NRD initiative will likely be subject to judicial scrutiny. What all of this means for transactional lawyers is an evolving question. It is clear, however, that the potential of an NRD claim could be of great concern to a buyer of a business, a merger partner and to a lender contemplating a loan transaction. A lender will have concerns that any potential exposure could impact adversely on the credit-worthiness of its borrower. A buyer of a business and a potential merger partner will be concerned that they might also be liable for the NRD claim. Even a lender could share such concerns although it appears a foreclosing lender would be shielded from a potential NRD claim by virtue of the Spill Act's lender liability exclusion found in N.J.S.A. 58:10-23.11g5, as long as the lender does not participate in the management of the contaminated facility.

Documentation Issues

Virtually all standard merger agreements, purchase and sale agreements, credit agreements and mortgage documentation used in New Jersey transactions already include detailed representations and warranties relative to environmental matters as well as ongoing covenants as to continued environmental compliance. The extent to which a preexisting environmental claim may be subject to an indemnity is also frequently a heavily negotiated provision of New Jersey transactions. It would seem that specific representations and warranties as to the existence of known NRD claims would be appropriate. Such information could be fleshed out through a general representation to the effect that there are no pending or threatened environmental claims, but it would be advisable to also expressly include representations as to any potential NRD claims. In the event an NRD claim is either pending or threatened, the details as to that claim should naturally be specifically disclosed. Interestingly, the DEP, in its various pronouncements on NRD claims, has advised that even if a party has received a No Further Action (NFA) letter as to a prior environmental remediation, it should not be assumed that the NFA letter will preclude DEP from asserting a NRD claim which emanates from the same facts and circumstances. If there has been a NFA letter relative to a transactional party's property, consideration should be given to a specific representation that the party has considered and addressed with DEP whether an NRD claim may still exist. Loan and other transactional documentation often contain financial and other reporting requirements designed to make sure that the lender or other interested party is fully apprised of the ongoing financial condition of the obligated party. Also, notice of future litigation and other claims must typically be disclosed. It would be prudent to add to the list of disclosure items, any notice which the party receives from DEP as to any potential NRD. Most loan documentation will identify a material adverse change as an event of default. Often, these events must potentially result in damages above a particular threshold and it may be that an NRD should be an independent event of default. This may be preferable to leaving it to a "material adverse change" event of default and the vagaries of those clauses in the courts.

Due Diligence Considerations

What may be particularly frustrating to the business and legal community is an inability to, in the due diligence stages of a transaction, discover with any degree of certainty whether a potential transaction has any hidden NRD claims. At this stage in the NRD program, there does not appear to be any data base or other third party resource which clearly would disclose whether a party is a "target" of DEP's NRD enforcement actions. Data bases such as the Known Contaminated Site List, which is a New Jersey resource, and CERCLIS, which is a federally reported list, frequently do not distinguish between soil and groundwater contamination. In that most New Jersey NRD claims will likely emanate from situations where there has been groundwater contamination, parties looking at transactions involving such problems should be on high alert. Given the absence of readily available information on possible NRD claims, it may be advisable for parties to transactions to require that inquiry be made of DEP under New Jersey's Open Public Records Act for confirmation as to whether a party or site present a potential NRD claim. What type of information would be made public by DEP remains to be seen. Further useful information may be obtained from DEP's website. On that website is a data base entitled "I-mapnj", which contains information about properties with contaminated groundwater. While lacking specific information about NRD claims, the site will confirm that a site has groundwater contamination, which should be a starting point for further detailed inquiry.



DEP's NRD claim program is in its earliest stages but it is clear that it raises serious exposure concerns which will have to be considered by transactional lawyers and their clients. Defining the scope of liability and allocating the liability amongst the parties will be an evolving process which will be, it is hoped, aided by future DEP directives and, eventually, court decisions. In the meantime, lawyers will need to develop due diligence procedures and documentation accordingly.