The New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq., was amended to provide an innocent-purchaser defense to persons who purchased contaminated property prior to Sept. 14, 1993. Although the amendment provides criteria necessary to be met to establish the defense, it leaves open-ended the level of due diligence and inquiry necessary to have been performed by a past purchaser.
For those persons who clean up and remove a discharge of a hazardous substance, the Spill Act provides, in addition to any common-law claims a person may have against other parties that may have contaminated or been responsible for the contamination of property, a private right of action for contribution in favor of those persons who clean up or remove a discharge of a hazardous substance, and against dischargers and persons who are in any way responsible for the discharge of a hazardous substance.
The act identifies three separate categories of potential contribution defendants: (other) dischargers, persons in any way responsible for a discharged hazardous substance and other persons who are liable for cleanup and removal costs.
The act further provides that "Any person who has discharged a hazardous substance or is in any way responsible for any hazardous substance, shall be strictly liable, jointly and severally, without regard to fault, for all cleanup and removal costs. Again, this section at least implies that a person may be "in any way responsible" and therefore liable for a hazardous substance without having discharged same.
Innocent-Purchaser Status
The New Jersey Statute, N.J.S.A. 58:10-23.11g (d), provides for certain defenses in addition to the following limited defenses: "an act or omission caused solely by war, sabotage, or God, or a combination thereof." Focusing on the difference in criteria necessary to establish innocent-purchaser status, as between pre- and post-Sept. 14, 1993 acquisitions of contaminated property may be significant.
To establish innocent purchaser status for both pre- and post-Sept. 14, 1993, acquisitions, the person acquiring the property must establish by a preponderance of the evidence tha:
- the property was acquired after the discharge of a hazardous substance at the property;
- that at the time of the acquisition, the person "did not know and had no reason to know" that any hazardous substance had been discharged at the real property;
- that the person did not discharge the hazardous substance, is not in any way responsible for the hazardous substance and is not a corporate successor to the discharges or to any person in any way responsible for the hazardous substance or to anyone liable for cleanup and removal costs pursuant to the Spill Act; and
- that the property owner gave notice of the discharge to the Department of Environmental Protection (DEP) on discovery of the discharge.
The criteria to establish liability protection for pre- and post-Sept. 14, 1993, purchases of property are essentially the same. However, the criteria to establish whether a person had "no reason to know that any hazardous substance had been discharged" are significantly different for pre- and post-Sept. 14, 1993, acquisitions of contaminated property.
For both, to establish that a person had no reason to know that any hazardous substance had been discharged, "the person must have undertaken, at the time of acquisition, all appropriate inquiry on the previous ownership and uses of the property." However, for post-Sept. 14, 1993, acquisitions, all appropriate inquiry "shall mean the performance of a preliminary assessment, and site investigation if the preliminary assessment indicates that a site investigation is necessary, as set forth in the Brownfield and Contaminated Site Remediation Act (N.J.S.A. 58:10B-1 et seq.).
Preliminary assessment and site investigation are defined terms pursuant to the act, and detailed requirements appear in DEP regulations establishing the specific and technical recipe for compliance. For pre-Sept. 14, 1993, acquisitions, the burden is softened as the person is required to have taken, at the time of acquisition, only "all appropriate inquiry" on the previous ownership and uses of the property, "based upon generally accepted good and customary standards."
Assuming the person acquiring property either pre- or post-Sept. 14, 1993, was not a discharger of a hazardous substance, the critical area of inquiry seems to be whether the person is or was "in any way responsible for the hazardous substance" by virtue of whether that person "had no reason to know that any hazardous substance has been discharged." Although the Spill Act and case law seem to be clear in terms of the due diligence necessary to avail oneself of the innocent-purchaser defense and establish that the property owner is not in any way responsible for post-Sept. 14, 1993 acquisitions, the pre-1993 acquisition scenario is not so clear.
What proof may be necessary to show that all appropriate inquiry was taken and that such inquiry was taken based on generally accepted good and customary standards could very well turn on appraisers and environmental consultants establishing a standard based on the circumstances present and the climate of environmental opinion and regulation at the time of acquisition, if any.
Further confusing the issue is recent case law bearing on who may be in any way responsible. In Marsh v. the Dept. of Envtl. Protection, 152 N.J. 137 (1997), the Court announced that the Industrial Site Recovery Act established a "new defense to Spill Act liability for land owners who acquired their property after it had been contaminated and who could prove that they conducted" diligent inquiry into the condition of their property.
In Marsh, the Court rejected a property owner's claim that it was entitled to Spill fund monies, finding that the property owner was a responsible party pursuant to the Spill Act based on the continued existence of leaking tanks during the plaintiff's ownership of property. The Court specifically left for another day "the issue of whether a land owner who took title to (her) property before ISRA's enactment and who at that time had neither actual or constructive knowledge of preexisting contamination, may be liable under the Spill Act for the cost of cleaning up that preexisting pollution."
This announcement from the Supreme Court preceded by four years the July, 2001 amendment to the Spill Act adding the criteria for establishing an innocent purchaser defense for pre-1993 acquisitions of contaminated property. Interestingly, the due diligence requirement found by the Court in Marsh was premised on the regulations promulgated pursuant to the Spill Act (N.J.A.C. 7:1J2.7b).
The issue left for another day by the Court in Marsh surfaced in White Oak Funding, Inc. v. Winning, 341 N.J. Super 294 (App. Div. 2001). In that case, the court opined that a person could only be "in any way responsible" (as set forth in the Spill Act for purposes of triggering liability) if the person who has acquired contaminated property was in any way responsible for the discharge that caused the contamination.
The Appellate Division specifically held that lack of due diligence did not bring the property owner within the ambit of the Spill Act's "in any way responsible" provision. The White Oak court drew a distinction between migration and leaking of contaminants, the former not constituting a discharge. The White Oak court, therefore, absolves post discharge property owners in the chain of title from liability for contamination based apparently on the lack of a direct nexus to the discharge representing a cleanup.
The date of the White Oak decision was July 6, 2001. The legislation establishing criteria for pre-Sept. 14, 1993, liability protection for persons acquiring contaminated property became effective on July 13, 2001. White Oak does not appear to square with either the Supreme Court's decision in Marsh or the July 2001 amendment to the Spill Act establishing the criteria for a property owner to avail himself of the innocent-purchase defense for a pre-1993 acquisition of contaminated property. Until the Supreme Court takes up this issue specifically, it continues to be a gray area as to whether any owner of property acquired prior to Sept. 14, 1993, will be liable for cleanup and removal costs, if that property owner did not discharge (or own the property at the time of the discharge of) hazardous substances.
Quantum of Damages Is Limited
As noted above, the Spill Act imposes strict liability for cleanup and removal costs on dischargers and parties in any way responsible for the existence of hazardous substances. Such parties are, therefore, legally obligated to pay damages arising from the discharge of a hazardous substance onto the property.
The strict liability for cleanup and removal costs imposed by the Spill Act is not dependent on the DEP's knowledge of the discharge or any enforcement efforts it may have undertaken or may undertake in the future. A question, therefore, arises as to what is the statutory quantum of damages that a liable party is legally obligated to pay in a private party contribution action brought pursuant to the act.
Cleanup and removal costs are defined in the act as "all costs associated with a discharge incurred by the State or its political subdivisions or their agents or any person with a written approval from the Department ... and shall include costs incurred by the State for the indemnification and legal defense of contractors"
Oftentimes, a property owner will discover contamination on the property, either in conjunction with a potential sale of the property or otherwise, and, without having received a directive from the DEP, remediate the property without entry into a document providing for the oversight of remediation activities by the DEP.
In other circumstances, a property owner may embark on remediation of property to a point, realize that the remediation necessary may be more extensive than originally anticipated and thereafter enter into a document providing for oversight by the DEP (memorandum of agreement, administrative consent order, etc.) and complete the remediation.
Obviously, when operating pursuant to an oversight document, any remediation conducted by an applicant will be authorized at various stages by the DEP.
The Spill Act embodies the State's overall statutory scheme of encouraging the sufficient cleanup of contaminated property. A key element of the statutory scheme to encourage prompt remediation of contaminated property is the State's involvement in the facilitation and coordination of activities and functions designed to clean up contaminated sites.
The avoidance of DEP involvement (although it may be a strategy pursued by certain property owners that have not received directives from the DEP) by conducting a cleanup without either notice to or approval from the DEP does not permit the State to make a determination as to the extent of cleanup necessary to protect the public health, safety and welfare. Nor does such a cleanup give notice to the world, as contemplated by the act, of the existence of contamination.
Last, conducting an expensive at-risk cleanup, without approval from the DEP of the methodologies being implemented creates a risk that the type of cleanup conducted will be either insufficient or inappropriate under the circumstances. It is perhaps for these purposes that the Spill Act requires written approval from the DEP of the particular remediation to be conducted and specifically conditions remediating parties' recovery of cleanup and removal costs on the receipt of written approval from the DEP.
The Spill Act unequivocally limits a plaintiff's right of contribution to that portion of cleanup and removal costs, as defined by the statute, conducted with a written approval from the DEP. Further, the statute and case law establish that in a private party contribution claim brought pursuant to the Spill Act, a contribution plaintiff is only entitled to contribution toward cleanup and removal costs as defined in the Spill Act and not to recovery of all costs that may be associated with a cleanup.
It follows, then, that a contribution plaintiff would not be entitled to damages allegedly attributable to either cleanup activities conducted without DEP written approval or for damages that may be attributable to diminution in value of property. As noted by the court in Analytical Measurements, Inc. v. Keuffel & Esser Co., 843 F. Supp. 920 (D.N.J. 1993), "there is no indication in the legislative history that the legislature intended to expand the right of contribution under the Spill Act to include other expenses or damages."
A contribution plaintiff always has the opportunity, prior to initiating cleanup and removal activities, for entry into an oversight agreement with the DEP. Effective May 17, 1993, the DEP adopted regulations formalizing procedures for entering into voluntary agreements to clean up contaminated sites. See 25 N.J.R. 2002, 2095; N.J.A.C. 7:26C-3.1 et seq.
Memorandum of Agreement
At the core of the voluntary cleanup program is the memorandum of agreement. The memorandum of agreement allows a party to voluntarily investigate and remediate a contaminated site with the DEP's approval and oversight, and without the threat of punitive provisions such as stipulated penalties or the necessity to post financial assurances. The memorandum of agreement program provides the DEP the ability to balance its need to conserve its resources with the needs of the private sector for timely transactions. Under an agreement, the remediating party pays the DEP for the costs of overseeing the work in exchange for the department's review and approval.
If a contribution plaintiff timely notifies the DEP and advises a contribution defendant of the existence of contamination, or initiates the process to effect a DEP-approved cleanup, the Spill Act's prime purpose of prompt containment and removal of hazardous substances, potentially without the necessity for litigation, may be realized.
The Spill Act provides for a much larger quantum of cost recovery by way of the Spill Fund than in a private party contribution action. The act includes the potential recovery of "direct and indirect damages, in addition to cleanup and removal costs in conjunction with a claim for reimbursement from the Spill Fund."
The Legislature, in providing for a right of contribution, has indicated a limitation on the scope of recovery in a private party contribution claim. As only cleanup and removal costs are statutorily available to a contribution plaintiff, contribution defendants should focus discovery accordingly. Contribution plaintiffs should add to their cost-benefit analysis the ramifications of conducting any cleanup without DEP approval.
Grantee Beware
The Brownfield and Contaminated Site Remediation Act establishes a Hazardous Discharge Site Remediation Fund administered by the DEP and the New Jersey Economic Development Authority. The monies in this remediation fund are to be dedicated for the provision of, among other things, grants to individuals, corporations, partnerships and other private business entities for the purpose of financing remediation activities at sites at which there is, or is suspected of being, a discharge of hazardous substances or hazardous waste.
Presently, only limited funds, if any, are available in the Hazardous Discharge Site Remediation Fund for the provision of grants to private parties that may qualify for same. Bill number S-696, which seeks to appropriate $30 million dollars from the Hazardous Discharge Fund of 1986 to the Hazardous Discharge Site Remediation Fund, is pending in the Senate.
To qualify for a grant an applicant must be an innocent party pursuant to the Brownfield and Contaminated Site Remediation Act. An applicant qualifies for an innocent-party grant if:
- that person acquired the property prior to Dec. 31, 1983;
- the hazardous substance or waste that was discharged at the property was not used by the person at that site; and
- that person certifies that he did not discharge any hazardous substances or hazardous wastes at an area where a discharge is discovered. Many innocent-party grants have been given to qualifying parties, to date.
Pursuant to the Brownfield and Contaminated Site Remediation Act, the remediation fund was to have been credited with money appropriated by the Legislature; money deposited into the fund as repayment of principal and interest on outstanding loans made from the fund; return on investment of money deposited in the fund; and money deposited into the fund from cost recovery subrogation actions. N.J.S.A. 58:10B-8 (a)(4) provides that the New Jersey Economic Development Authority shall require that a grant to a private party be conditioned on the subrogation to the DEP of "all rights of the recipient to recover remediation costs from the discharges or other liable parties. All monies collected in a cost recovery subrogation action shall he deposited into the remediation fund."
The regulations promulgated by the New Jersey Economic Development Authority to implement the Brownfield and Contaminated Site Remediation Act are located at N.J.A.C. 19:31-8.10, titled, "Disbursement of Financial Assistance and Grants." The Administrative Code mimics the language of the Brownfield Act. However, "remediation" or "remediate" are defined broadly as "all necessary actions to investigate and clean up or respond to any known, suspected, or threatened discharge of contaminants, including as necessary, the preliminary assessment, site investigation, remedial investigation and remedial action."
Construing the Brownfield and Contaminated Site Remediation Act pursuant to its clear language in this regard, one who accepts a grant from the New Jersey Economic Development Authority following approval of a proposal to the DEP for funding from the Hazardous Discharge Site Remediation Fund may lack standing to recover remediation costs or seek contribution therefore from a contribution defendant, inasmuch as the grantee has subrogated to the DEP all rights to recover remediation costs.
Indeed, the form of financial assistance agreement provided by the New Jersey Economic Development Authority specifically sets that disbursement of the grant is conditioned on the subrogation to the DEP of all rights of the grantee to recover remediation costs. It appears that the Brownfield and Contaminated Site Remediation Act, if to be enforced, would bar a contribution plaintiff from seeking cleanup and removal costs pursuant to the Spill Act.
In New Jersey, subrogation rights do not arise spontaneously, nor are they free-floating or open-ended. Subrogation rights are created in one of three ways:
- an agreement between an insurer and an insured;
- a right created by statute; or
- a judicial device of equity to compel the ultimate discharge of an obligation by the one who, in good conscience, ought to pay it. See Culver v. Insurance Company of North Am ., 115 N.J. 451 (1989).
Obviously, the subrogation right at issue here is created by statute. In one case this author is aware of, despite the clear language of the statute and a holding by a Superior Court judge that the subrogation requirement is clear, the trial judge found authority in the Brownfield and Contaminated Site Remediation Act for the New Jersey Economic Development Authority to waive the subrogation requirement provided for in the act. That case was settled, and the issue as to whether the requirement of the statute is waivable, therefore, was not resolved by the Appellate Division.
The Hazardous Discharge Site Remediation Fund specifically calls for monies to be deposited into that fund from cost recovery subrogation actions that the DEP prosecutes. As such, a subrogation action by the DEP could be a revenue-raising device that replenishes the fund. The continuing replenishment of the fund, in turn, could be a basis for effecting one of the legislative purposes of the Brownfields Act; the provision of financial incentives to encourage the cleanup of contaminated sites and to obtain finality in the process.
However, to date, it seems that there have been no subrogation actions brought by the DEP to replenish the fund. Interestingly, the DEP website, in describing the Hazardous Discharge Site Remediation Fund, notes that monies are provided to the fund through appropriations from the Legislature and repayment of principal and interest on loans. It fails to note the potential for replenishment of the fund through subrogation actions brought by the DEP.
Pursuant to the Brownfield and Contaminated Site Remediation Act, no lien attaches to a grant (as does to a loan). In light of the fact that grant monies doled out will not be repaid (or at least there is no mechanism for repayment), allowing a contribution claim to be pursued by a private party who has been the recipient of a grant could provide a windfall to a contribution plaintiff.
Conversely, the grant of up to $500,000 to an innocent party pursuant to the Brownfield and Contaminated Site Remediation Act could provide a windfall to the DEP should it be successful in a subrogation action in which the DEP seeks to recover all remediation costs (at least in a circumstance where considerably more than half a million dollars are spent on remediation).
Perhaps this is the trade-off envisioned by the Legislature. In return for accepting grant monies, an innocent party gives up his right to seek remediation costs in a private party contribution action pursuant to the Spill Act.
The limitation on the quantum of damages recoverable pursuant to the Spill Act, and the subrogation of the right of an innocent party receiving a grant from the Hazardous Discharge Site Remediation Fund of all rights to remediation costs to the DEP, provide fertile ground for potential defenses to defendants to a contribution claim brought by a private party pursuant to the Spill Act. Perhaps, the proof will be in the pudding.
If the right to bring subrogation actions contemplated by the statute were used, perhaps more funding would be available for the development and redevelopment of contaminated sites. In any event, these potential defenses should become part of the attorney's arsenal when defending contribution claims pursuant to the Spill Act and, for contribution claimants, considered carefully in advance of seeking any such claim.
Reprinted by permission of the New Jersey Law Journal, July 8, 2002.