Straight Talk: Targeting Natural Resource Damages

Straight Talk: Targeting Natural Resource Damages
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(See also our article, posted with permission from the September 2003 issue of <I>Real Estate New Jersey</i>. Click on the PDF icon above to view.)

Making good on the promise it has made repeatedly during the last few years, the New Jersey Department of Environmental Protection ("DEP") recently announced several new initiatives to recover natural resource damages ("NRD") with respect to 4,000 contaminated sites and brownfields in New Jersey.  The enormous cost of these NRD claims will be borne by New Jersey business, at a time when business can ill-afford a new tax. 

NRD can simply be described as compensation to the State for natural resources that have been damaged by a discharge of hazardous substances.  In practice, however, dealing with DEP's new NRD initiatives will be far from simple.  In its first wave of NRD enforcement, DEP recently contacted approximately one hundred businesses that are responsible for the remediation of contaminated sites.  DEP  has "invited" these companies to meet and to settle the State's NRD claims, principally with regard to ground water damage.  The claims for damages are in addition to the parties' obligation to remediate the ground water.  DEP has demanded a response within ten (10) business days of receipt of the agency letter, 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.

In a novel approach, the State Attorney General's office has retained special outside counsel to assist DEP in prosecuting and settling these NRD claims.  This "flamboyant" plaintiff's attorney from New Orleans will be compensated on a tiered contingency basis that is based on the value of the NRD recovery or settlement.  For example, special counsel 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.  DEP says that these 100 NRD cases are merely the first wave of prosecution.  Many additional "invitations" to companies to settle NRD claims are anticipated.

On September 19th, DEP also issued a Directive pursuant to the Spill Compensation and Control Act to sixty-six (66) entities that may be responsible for NRD relating to the lower Passaic River.  "Directive No. 1" requires these businesses responsible for sites along the river to enter into an Administrative Consent Order with DEP, to identify injured natural resources and to estimate the monetary value of the State's NRD claims.  "Interim restoration" of the lower Passaic River also will be required in order to restore wetlands, recreational and commercial fishing, swimming, and boat access.  In a similar action, the federal Environmental Protection Agency has given notice to many of the same companies of their responsibility to pay for a federal study of environmental impacts to a seventeen (17) mile stretch of the river.  The cost of all of this work in the lower Passaic River will be staggering.

Finally, on September 24th, Commissioner Campbell signed Policy Directive 2003-07, which describes DEP's new NRD program.  This policy explains, among other things, that DEP will use a formula to calculate the monetary value of NRD for ground water.  DEP prefers, however, that responsible parties actually conduct restoration projects in lieu of monetary payments to the State.  For example, acquisition of aquifer recharge areas, water reuse or recycling projects, and enhancements to public access to natural resources will be considered by DEP.  Significantly, DEP has stated that it will no longer issue a No Further Action letter for ground water at a site until any NRD claims are resolved.  DEP also has announced that it will refrain from pursuing certain NRD claims, including those against small businesses with a limited ability to pay, certain classes of low risk sites, and parties that can establish the "innocent purchaser" defense to liability, not an easy task to accomplish.

DEP's enforcement of NRD is likely to have far-reaching impacts, as the first wave of NRD cases are litigated or settled and additional waves of NRD enforcement are undertaken.  After all, DEP has issued NRD demands with respect to only about 100 sites, leaving approximately 4000 additional sites to be addressed.  DEP encourages parties responsible for NRD at these sites to voluntarily contact DEP to settle their NRD claims.

Riker Danzig advises its clients and friends to consider the impact of NRD on their businesses.  Parties required to clean up contaminated sites, developers and real estate trusts, lenders, insurors 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 DEP.  If you would like to discuss the implications of DEP's NRD initiatives, please feel free to contact us.