Managing Transactions to Minimize Risk: The Buyer's Perspective

INTRODUCTION

In sports, every athlete recognizes that to gain the winning edge, preparation and knowing the competition are key. Prospective purchasers should approach acquisitions with the same philosophy. Effective transaction management begins with understanding how environmental obligations arise and then identifying such potential obligations through the due diligence process. The prospective purchaser also needs to be cognizant of the seller's goals and objectives. While there is no universal "magic formula" for entirely insulating either the unwitting asset purchaser or the entity acquiring the stock of or merging with an existing entity from "assuming" responsibility for pre-closing matters, the educated buyer can structure the transaction to minimize incurring such responsibility.

Regulatory developments and agency initiatives may further limit post-acquisition obligations or at least provide a potential purchaser a certain level of comfort that it is not acquiring an unmanageable environmental nightmare. For example, at both the federal and state levels there are "brownfield" programs designed to promote the reuse and redevelopment of contaminated sites. Additionally, legislative developments providing protection for secured creditors with respect to environmental matters should allay certain concerns lenders historically have had when financing acquisitions.

Because each transaction is unique, this paper presents general information which may be used to develop an overall transaction management strategy. The objective is to outline potential issues of concern from a buyer's perspective and provide practical guidance to minimize the risk of incurring the environmental obligations of a seller.

1. The potential liabilities of a seller
2. 1. CERCLA Liability
   2. 1. Owner/Operator Liability

      2. Under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§9601-9675 ("CERCLA"), four classes of "persons" (often referred to as "potentially responsible parties" or "PRPs") may be held responsible for the costs of remediation of contaminated sites. One class of PRPs is current owners/operators of contaminated property. Under CERCLA's strict liability regime, the purchaser (or occupant) of contaminated property is liable, typically jointly and severally with other PRPs, for the cost of remediating such property, regardless of whether it caused the contamination. Thus, the purchase of contaminated property results, in essence, in "assumption" of the cleanup obligations of the seller.

         One way to minimize the risk of incurring CERCLA cleanup obligations is to establish the "innocent landowner defense." However, those contemplating the acquisition of real property should realize that courts do not often find a landowner who can successfully assert the defense. One reason for this is that the landowner must be able to establish not only that the contamination existed when the property was acquired, but also that at the time of purchase it did not know, and had no reason to know, that the property was contaminated. To demonstrate the second prong, the landowner must prove that at the time of acquisition it undertook "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability."

         CERCLA obligates courts to apply the following factors when determining whether a landowner satisfied the "all appropriate inquiry" requirement: (1) any specialized knowledge or experience of the landowner; (2) a comparison of the purchase price to the market value of the property in the absence of contamination; (3) the landowner's ability to identify contamination through inspection of the property; (4) whether the presence or likely presence of contamination is obvious; and (5) whether there is any commonly known or reasonably ascertainable information regarding the property. Once due diligence reveals the presence of contamination, the "innocent landowner" defense is lost.

      3. "Successor Liability"

      Because CERCLA liability may be imposed retroactively, it is not uncommon that the "person" who engaged in the activity giving rise to CERCLA liability is no longer in existence or now exists in a different form. Understandably, those seeking to allocate or recover remediation costs attempt to hold a "successor" entity responsible for its predecessor's share of such costs.

      While courts almost uniformly have interpreted CERCLA to authorize the imposition of liability on successor entities, they have not been consistent in determining whether a particular entity is in fact a successor to a PRP. For example, stock acquisitions and mergers typically result in successors, but when does an asset acquisition, which normally would not create a successor for other purposes, transform into a mechanism for imposition of CERCLA liability for the activities of the prior owner of the assets? In answering this question, courts have employed various tests. However, these tests in essence boil down to a fundamental question: does the asset acquisition "look like and smell like" a stock purchase. The more closely the asset acquisition resembles the purchase of stock, the more likely the acquiring entity will be held liable as a successor.

   3. Other Potential Obligations

   One area of potential environmental obligations which may be overlooked does not arise under CERCLA, but rather as a result of unresolved pre-closing permit violations or violations of environmental laws. If apportioning financial responsibility for pre- and post-closing permit violations or correction of outstanding violations of environmental laws is not adequately addressed, the buyer may find itself defending a litigation or paying fines and penalties for conditions it did not create. Similarly, a suit brought by a neighboring landowner for damages (which may include personal injury or property damage) resulting from migratory contamination may become the buyer's obligation to defend.

   Similarly, while most prospective purchasers are aware of the dangers resulting from CERCLA, many do not realize that they may assume remedial obligations under the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. §6901-6992, when acquiring real property. The requirements imposed by RCRA are often referred to as "cradle-to-grave" because they govern the hazardous waste management practices of generators, transporters and owners and operators of hazardous waste storage, treatment or disposal facilities ("TSD facility"). Even if a site is not a RCRA-permitted TSD facility, if the property has been used for the disposal of RCRA hazardous wastes or solid wastes, there may be remedial obligations under RCRA. In addition, RCRA governs underground storage tanks ("UST") used for both hazardous substances and petroleum products. UST regulations promulgated under RCRA address design, construction, installation, removal or closure, leak detection, reporting, recordkeeping, corrective action and financial assurances.

3. the due diligence process
4. 1. Introduction

   2. Whether environmental obligations arise under CERCLA or as a result of some preclosing violation of environmental law, the buyer cannot begin to minimize the risk of incurring financial responsibility for such obligations until it knows the compliance history of the seller and the condition of any property to be acquired. The due diligence process should be a tool to not only identify potential obligations, but also assess the likelihood of assuming financial responsibility for such obligations.

      While a general understanding of how environmental obligations arises helps to define the scope of due diligence to be performed, due diligence should be viewed as transaction-specific. Whether a Phase I Environmental Site Assessment ("Phase I") alone will suffice or whether further investigation is warranted depends not only upon the nature of the transaction, but also upon the operations of and property owned or operated by the seller. Occasionally, a Phase I should be coupled with an environmental/health and safety compliance audit ("EHS Audit"). Moreover, if the Phase I reveals either a reasonable basis to suspect contamination or known contamination, a Phase II investigation (i.e., soil and/or groundwater sampling) is recommended.

      Additionally, the adage "timing is everything" is particularly apt when it comes to environmental due diligence. Waiting until the last minute to commence or otherwise not allowing sufficient time to complete due diligence may unduly prolong closing. The buyer should begin its environmental due diligence as early as practical so that if problems are discovered, it can decide what options are available to minimize its exposure postclosing. Further, if the acquisition is to be financed, the lender may have its own environmental due diligence requirements, which it will expect its borrower to satisfy.

      In any transaction potentially involving issues of environmentally related concerns, the focus of due diligence falls into two basic categories, namely "operational/compliance" and "liability." Some specific considerations relative to each category are discussed below.

   3. Operational Considerations

   4. Operational issues include matters such as recordkeeping and reporting, permitting, pollution control equipment and the handling and disposition of hazardous substances and wastes. The due diligence process should reveal enough information to evaluate whether the seller's compliance history may adversely affect business operations postclosing. A standard Phase I may not sufficiently address issues relating to operations or compliance history. Hence, when such issues are of greater concern, an EHS Audit also should be performed.

      The buyer should determine whether the seller holds all permits, licenses or other authorizations necessary for the operation of the business and whether such permits are transferable. The due diligence process should include gaining an understanding of how raw materials are handled, the nature of any manufacturing process, the nature of any air emissions or wastewater discharges, the various waste streams generated and how those waste streams are managed. Investigation of these various aspects of the seller's operations may reveal compliance deficiencies or other indicators of potential liability. Further, unless the company or facility to be acquired has state-of-the-art equipment, the need for improvements or pollution control devices should be assessed. The lack of required pollution control equipment may be a significant concern not only because of the risk of violations, but also because of the capital expenditures necessary to purchase and install such equipment. Moreover, depending on the construction date of a facility, other potential issues of concern include the presence of asbestos-containing materials, lead-based paint, lead in the drinking water and PCBs.

   5. "Liability" Considerations
   6. 1. Cleanup Obligations

      2. Typically, the focus of assessing potential environmental obligations relates to either on-site or off-site cleanups. In the absence of either concealment of or unknown disposal areas or other indications of potential remedial obligations, a Phase I, and, when necessary, a Phase II investigation, should be sufficient to reveal potential on-site issues of concern. Similarly, the potential for combined on-site/off-site remedial obligations as a result of migratory contamination may be revealed by a Phase I and then confirmed by intrusive testing. However, evaluating the potential for assuming purely off-site cleanup obligations is not quite as simple.

         To determine the potential for off-site CERCLA remedial obligations and the likelihood of assuming financial responsibility for such obligations requires the seller to identify for the buyer all sites to which the seller sent hazardous substances, solid wastes and hazardous wastes for storage, treatment or disposal. Whether the seller also should identify sites to which it sent raw materials for processing into finished goods depends in part upon the contractual relationship between the seller and the processor. Once all sites have been identified, a database search and/or interviews of regulatory agency personnel will reveal whether any is the subject of governmental investigations, remedial activities or otherwise has a history of violation indicative of possible problems.

      3. Liens

   Due diligence may not include determining whether any liens for the costs of cleanup have attached to any property to be acquired. Under CERCLA, the costs and damages for which a PRP is liable to the United States under Section 107 constitutes a lien in favor of the United States upon all real property belonging to the PRP which is subject to or affected by a removal or remedial action. While CERCLA liens are not "super liens," i.e., those which take priority over valid existing liens, a purchaser of the property receives only the protections available under state law against a judgment lien which arises out of an unsecured obligation. Most states also have provisions for the imposition of liens on property under environmental statutes. In Pennsylvania, such liens may be imposed not only for the costs and damages associated with the cleanup of a contaminated site, but also for the failure to pay fines and penalties assessed for violations. While none of the lien provisions under Pennsylvania environmental statutes are "super liens," some states do have such lien provisions.

5. structuring and documenting the transaction
6. 1. Introduction

   2. Ideally, due diligence should be completed prior to the document negotiation phase. But more often than not, due diligence parallels negotiations concerning the purchase agreement and other documents required to consummate the acquisition. During the negotiation phase, the buyer therefore may not have all information necessary to fully evaluate the extent of the seller's actual or potential environmental obligations. However, a buyer armed with an understanding of the seller's objectives and the available "risk-shifting" mechanisms can structure the transaction so as to minimize its risk of incurring responsibility for the seller's obligations or otherwise being forced to incur expenses to address environmental problems created by the seller.

   3. Representations, Warranties and Covenants
   4. 1. Representations and Warranties

      2. There are certain generalizations that dictate both a buyer's and seller's posturing during negotiations of the terms and conditions of an acquisition and the documents required to memorialize the "business deal." When making representations, a seller's primary goal is to limit the potential for breaches. Generally, this is realized by having representations include qualifiers such as "materiality" and "knowledge" and the use of "exception" scheduling. Buyers, on the other hand, prefer unqualified, broad representations that will preserve any claim which the buyer may have against the seller for undisclosed matters. Moreover, sellers ordinarily want a specific time for the expiration of warranties and covenants. Once the buyer understands the objectives of its seller, it can better evaluate whether or not any requested limitations or qualifiers are, in fact, reasonable.

         The representations and warranties should be drafted with due consideration of the nature of the business or assets to be acquired. It also is important to carefully draft the definitions upon which specific provisions in the purchase agreement will be based. Form documents should be used only as a template and the specifics tailored to the individual transaction.

         Like due diligence, environmental representations usually fall within certain basic categories and are often dictated by the nature of the transaction and the "property" to be acquired. Typically, environmental representations include the following general topics: (1) permitting, reporting and recordkeeping; (2) current on-site activities or conditions; (3) historical on-site activities or conditions; (4) adjacent or nearby site activities or conditions; and (5) potential off-site cleanup obligations.

         The basic concepts which may be necessary for each category of a seller's environmental representations include:

         Permitting, reporting and recordkeeping. Does the seller hold all permits necessary for the operation of the business? Are all such permits in full force and effect? Are the permits transferable? Is the seller in compliance with all required permits? Has the seller received any notice that a permit may be revoked or suspended or otherwise have a reason to believe that it may receive such a notice? Has the seller filed all required reports and notices? Has the seller maintained all reports? Are there any notices of violation? Are there any uncorrected violations?

         Current on-site activities or conditions. Have all activities by the seller (and any tenant, occupant or the like) been conducted in accordance with required permits? Have all activities by the seller (and any tenant, occupant or the like) been conducted in accordance with environmental laws? Have all activities by the seller (and any tenant, occupant or the like) been conducted in accordance with any governmental directives? Are any lawsuits pending or threatened relating to the activities of the seller (and any tenant, occupant or the like) or the condition of the target property? What remedial obligations currently exist? Are there any "environmentally sensitive" areas (e.g., wetlands, historic or archeologically significant sites, habitats of endangered or threatened species and the like) present on the target property which may preclude or restrict construction or expansion? Are there any use restrictions on the target property as a result of environmental issues? Have any liens attached, or is there any reason to suspect that any liens may be attached, to the target property?

         Historical on-site activities or conditions. The issues to be addressed are essentially the same as for current conditions and activities but relate to the activities of or conditions created by prior owners, operators or occupants of the target property.

         Adjacent or nearby property conditions. What activities or conditions exist on adjacent or nearby properties which may result in contamination migrating to the subject property?

         Potential off-site cleanup obligations. Have any sites or facilities to which the seller, either directly or indirectly, sent wastes or materials been listed on any federal or state lists of contaminated properties or properties which are the subject of governmental investigation or remedial activities? Has the seller complied with environmental laws in sending wastes or materials to any sites or facilitates? Have any activities on the target property resulted in contamination of adjacent or neighboring properties? Has the seller received any request for information from a governmental authority indicating that it may be a PRP? re any lawsuits pending or threatened relating to any sites or facilities to which the seller sent materials or wastes?

         Miscellaneous. Is the seller aware of any statutes or regulations which are to be passed or amended which would effect operations or activities? What, if any, improvements to equipment or structures are required to ensure compliance with environmental laws or permits? Are site activities governed by any judicial or administrative orders or settlements?

      3. The "AS IS" Clause

      4. Instead of providing specific environmental representations, sellers occasionally want to use an "as is" clause which explicitly states that the seller is not making any representations and that the buyer is relying solely on its own due diligence. Historically, these clauses enabled a seller to claim "caveat emptor" when a buyer sought to recover damages for property defects which existed at the time of sale. While "as is" clauses may still insulate a seller from claims based on breaches of warranty or certain other causes of action arising under state common or statutory law, most courts have agreed that such clauses, standing alone, will not protect a seller from CERCLA liability.

         From a practical standpoint, both buyers and sellers benefit from having the agreement specifically delineate the allocation of statutory and common law rights, particularly if an "as is" clause is to be used for this purpose. The agreement should explicitly state whether contractual representations, warranties and the rights and remedies of the parties are in lieu of or supplement statutory and common law rights. Having such issues clearly defined in the agreement minimizes the risk of litigation for both parties.

      5. Covenants

      Another mechanism to reduce the likelihood of assuming responsibility for preclosing matters is for the buyer to require the seller to remediate known contamination, abate violations discovered during due diligence or otherwise retain responsibility for undiscovered contamination or violations or unknown matters of noncompliance. Ordinarily, sellers are more inclined to assume remedial or correctional obligations for known problems than for those which have not been identified. However, there are options available to buyers for either situation.

      If the buyer seeks a covenant requiring the seller to address environmental matters, there are several issues which the buyer must first consider. First, is the goal to acquire "clean" property or simply property in a condition which satisfies current environmental standards. If the goal is to have the property free of any contamination, then the covenant must require that the remediation be performed to the satisfaction of the buyer based upon specified environmental standards. On the other hand, if the covenant only requires the seller to perform a remediation in accordance with applicable environmental laws, the remediation may not involve removal of all contamination. Many states permit remediations to be performed using risk-based standards or allow for selection of one of various standards which may or may not include use restrictions and engineering controls to prevent migration of contamination left in place.

      Next, the buyer must decide if the remediation is to be completed pre- or postclosing. Optimally, the buyer should require that remediation be performed preclosing; otherwise, it must include provisions in the covenant that address access, business interruption, repair and the like. Additionally, if the seller performs the remediation, the buyer is not the "arranger" under CERCLA. If time is of the essence, requiring the remediation to be completed preclosing may not be possible.

      Regardless of when the seller is to perform any remediation, the buyer also must consider whether it will insist on being provided with some form of agency approval once the seller completes remediation. Should the buyer require evidence of such approval, it should be aware that it may be months following completion before an agency issues any letters or certifications. Moreover, most agency approvals are limited by statements indicating that the agency reserves its rights of enforcement if conditions change. Further, an agency approval does not necessarily foreclose the possibility of a private-party lawsuit, nor does it indicate that all contamination has been removed.

      If the seller is lacking a required permit or there are outstanding violations, the buyer should consider including a covenant that obligates the seller to obtain the permit or abate the violation. Here again, timing will be an issue. The period of time between when a permit application is submitted until the permit is issued may be several months or longer. Likewise, if the covenant is to include abatement of noncompliances, the buyer should seek to set time limitations for the completion of necessary tasks. A seller, however, may resist the buyer's attempt to impose deadlines, especially if the involvement of a regulatory agency is required.

      The more difficult situation is including a covenant requiring the seller to correct any violations or noncompliances which originated preclosing but were not discovered during due diligence or otherwise known to the seller prior to closing. Clearly, buyers do not want to assume the responsibility to remedy conditions which they did not create. On the other hand, sellers have no desire to have continuing obligations postclosing, particularly for potentially "open-ended" issues. Additionally, it may be difficult for the buyer to demonstrate to the seller that the facts and circumstances resulting in the noncompliance actually occurred preclosing. Often this type of situation is more manageable if, rather than having a covenant requiring the seller to correct a violative condition, the agreement contains a reserve, escrow or indemnification provision.

   5. "Risk-Shifting" Mechanisms
   6. 1. Introduction

      2. There is a major distinction between legal "liability" and the financial burden which accompanies liability. However, the term "liability" is often used as a shorthand reference for payment responsibility. For example, under CERCLA's strict liability regime, the current owner of contaminated property is a PRP irrespective of whether it caused the contamination. And while that owner cannot contractually disclaim its CERCLA liability, it is now well-settled that private parties may contract to transfer the responsibility for the ultimate payment of cleanup costs. The same theory may be applied to circumstances other than remediation obligations such as fines and penalties which may be assessed for outstanding permit violations or costs incurred to remedy noncompliance.

      3. Purchase Price Reduction

      4. The following illustrates when a purchase price reduction may be the appropriate mechanism to allocate cleanup obligations. Buyer identifies property which is for sale and because of its location would be ideal for the buyer's business. The buyer's initial due diligence reveals that the property historically has been used for industrial purposes and may have "pockets" of contamination. Soil and groundwater sampling is performed, the results of which indicate that some corrective action will be required. The buyer has its environmental consultant prepare an estimate of costs to conduct a remediation. The buyer is willing to assume the risk of potential "liability" in exchange for an up-front reduction in transaction costs, and the seller is willing to accept a reduced price in exchange for the ability to "walk away" from any future responsibility for the contamination.

         In determining whether a discounted purchase price is a viable option, the buyer should first consider whether potential cleanup costs, or other potential liability associated with owning contaminated property, can be sufficiently quantified. Once any potential obligation or liability is reasonably quantified, the appropriate amount of the price discount can be determined. When negotiating the discount, the buyer should remember that in the event it would later seek contribution, under CERCLA, from the seller for its "fair share" of cleanup costs, a court would likely view the discount as part of the seller's share to prevent the buyer from receiving any windfall.

         If the parties intend a purchase price reduction to serve as an allocation of cleanup costs, the acquisition agreement should explicitly reflect this intention. The agreement should not simply state that the price has been reduced. Rather, it should expressly state the specific obligations the buyer will assume as a result of the discount. Similarly, both the amount of the purchase price and the amount of the discount should be clearly stated in the agreement. Carefully spelling out the terms of the price reduction will make resolution of any future disputes as to whether the discount was intended to allocate, and to what extent, the cost of cleanup or other environmental obligations an easier task.

      5. Indemnification

      6. Environmental indemnification obligations generally are triggered by either breaches of representations and warranties or conditions/liabilities which exist prior to or as of the closing. The duration and extent of such obligations, notification of a "triggering event," and enforcement of the obligations should all be addressed in the agreement. Further, it is best to specifically state that the right to indemnification survives closing.

         Because environmental obligations may be difficult to discover, buyers should seek the longest indemnification period possible. When negotiating the duration of the indemnification period, the buyer must consider whether the potential obligations relate to either on-site issues or off-site issues or a combination thereof. Longer indemnification periods should be requested when potential off-site cleanup obligations are present. Sellers, on the other hand, have an interest in negotiating for short survival periods as a means of limiting their indemnification obligations. The shorter the indemnification period, the less money the seller will be required to pay the buyer.

         Sellers also may seek to limit their indemnification obligations by requiring "caps" or "baskets." In certain transactions, the indemnity may involve a combination of a cap and a basket. Understanding how these limitations work is a must for the buyer to ensure that it is minimizing its risk of incurring out-of-pocket expenses.

         A cap, in other words, a maximum dollar amount, is a fairly straightforward concept. The seller agrees to indemnify the buyer for all losses up to a specified sum and then the buyer assumes the risk of all additional losses. Unless the buyer is fairly certain about the extent of the potential liabilities of the seller, agreeing to a cap or too low of a cap may result in the buyer unwittingly assuming more financial obligations than it expected.

         With the basket option, the seller agrees to indemnify the buyer, but only after the losses incurred by the buyer exceed a minimum dollar amount. In theory, this option operates just as an insurance deductible. Again, if the buyer does not correctly estimate the cost of the seller's actual or potential obligations, and therefore agrees to a higher "deductible," it may be forced to expend significant sums before seeking indemnification from the seller.

      7. Other Risk-Shifting Mechanisms

      If the financial viability of the seller is questionable or if the seller is to be dissolved upon closing, an indemnification agreement may be worth only the paper on which it is written. If the buyer suspects, for whatever reason, that it may not be able to enforce an indemnification agreement, it should consider whether to request other "risk-shifting" mechanisms such as guarantees (from corporate parents or solvent principals), reserves, escrows or irrevocable letters of credit ("ILC"). Guarantees, however, are used more often with an indemnification agreement than with reserves, escrows or ILCs.

      To the extent a reserve, escrow or ILC is preferred, the buyer should consider including a "premium," reflective of the potential risk of the unknown, in the final amount requested. For instance, if the buyer believes potential costs associated with environmental obligations total approximately $1 million, an additional $250,000 (or other reasonable and defensible amount) would provide a cushion to ensure the availability of sufficient funds. The more comfortable the buyer is that it has sufficiently quantified potential costs, the less the need for a premium.

   7. Insurance

   In addition to being able to contractually allocate the costs of potential environmental obligations, buyers may be able to further reduce the risk of incurring such costs through insurance. There are various products currently available to protect against many risks buyers may face, including third-party claims, cleanup cost overruns and even preexisting contamination. Just as the buyer seeks to understand the potential liabilities it may incur, an insurance company will not issue a policy unless it has some level of comfort concerning the nature of the risk against which it will provide insurance. Thus, the buyer contemplating this option must ensure that its due diligence addresses the insurance company's concerns. Additionally, since purchasing insurance always involves a certain amount of "gambling," the buyer must weigh the cost of premiums, which typically cannot be paid over time, against the need to obtain insurance. Further, most of the insurance is available only on a "claims-made" basis, rather than as an occurrence policy, and must be renewed annually to maintain coverage. Finally, because the policies must be approved by state insurance regulators, coverage may not be available in a particular state.

7. overview of Regulatory developments
8. 1. "Brownfield" Programs
   2. 1. Federal Initiatives

      2. The Environmental Protection Agency ("EPA") has, since 1989, entered into agreements with prospective buyers whereby in exchange for the buyer's commitment to remediate contaminated property, the EPA provides a covenant not to sue. The initial guidance addressing these "purchaser agreements" was revised in 1995 to reflect the EPA's willingness to expand the circumstances under which it would issue the agreements. To date, there have been approximately 50 purchaser agreements, the majority of which were entered into after the 1995 revisions to the initial guidance policy.

         The Brownfields Action Agenda, first announced in 1995, enabled the EPA to empower states, communities and those involved in economic redevelopment to combine their efforts to address brownfields. Through this initiative, grants, up to $200,000, have been awarded to more than 120 cities to perform site assessments and prepare response plans. Similarly, the Brownfields National Partnership Action Agenda, announced in 1997, is designed to provide assistance to communities for the cleanup and revitalization of brownfields through the participation of various organizations, including federal agencies such as the Department of Transportation and the Department of Housing and Urban Development ("HUD"). Both the EPA and HUD have requested substantial budget increases for brownfield purposes.

         In January 1997, the EPA issued a policy statement regarding its position with respect to the cleanup and reuse of brownfields which includes the issuance of "Comfort/Status Letters" that describe the EPA's intentions with respect to exercising its response or enforcement authority relative to a particular piece of property. ^{According to the policy statement, the letters are provided for informational purposes only and are to be reserved for real estate transactions involving the cleanup and redevelopment of brownfields. The policy statement includes four sample letters under the following categories: (1) no previous federal Superfund interest; (2) no current federal Superfund interest; (3) federal interest; and (4) state action. While issuance of an apparently favorable letter does not guarantee that enforcement actions will never be taken, a buyer may be able to achieve a greater sense of comfort relative to potential agency interest in a particular piece of property that may not otherwise be available during the course of due diligence.}

         The Taxpayer Relief Act of 1997 includes a tax incentive designed to encourage the cleanup and reuse of brownfields in distressed rural and urban communities. The "Brownfields Tax Incentive" makes cleanup costs fully deductible (rather than having to capitalize the costs) in the year in which such costs are incurred. In order for costs to be eligible for deduction, the remediated property must satisfy certain use, contamination and geographic and demographic criteria. Additionally, the taxpayer must obtain a certification from the state environmental agency, indicating that the property is in a "target" area.

         On November 21, 1997, the EPA and the General Services Administration signed a Memorandum of Understanding ("MOU") reflecting the coordination of the policies and activities of both agencies which support the assessment and cleanup of brownfields and promote community revitalization and economic development. The MOU describes various ways the agencies can work together to address brownfield issues.

      3. State Initiatives

      The majority of states have created voluntary cleanup or brownfield programs. While the specific entities who may take advantage of such programs and the types of eligible sites vary from state to state, some of the common features include relaxed cleanup standards, releases from liability, contribution protection and expedited cleanup and agency review. Such programs offer not only direct benefits to a purchaser, but also provide potential bargaining chips when the transaction involves a financed acquisition. For example, a lender who may not otherwise be inclined to fund the acquisition for fear of its own potential liability or the borrower's ability to repay the loan or that the value of the collateral in a contaminated state does not support the loan may be more willing to provide financing.

      One of the more successful state "brownfield" programs is under Pennsylvania's Land Recycling Program which is comprised of three companion pieces of legislation, commonly referred to as Acts 2, 3 and 4. Act 2, the cornerstone of the Land Recycling Program, is the Land Recycling and Environmental Remediation Standards Act; Act 3 is the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act; and Act 4 is the Industrial Sites Environmental Assessment Act. Together these acts promote the reuse of abandoned industrial sites by shielding lenders who may otherwise be reluctant to finance the acquisition of such sites, offer certain liability protections for those who clean up such sites (whether pre- or postclosing), provide for selection of cleanup standards and offer incentives to redevelopment authorities to acquire contaminated sites for rehabilitation.

   3. Protection of Lenders

As originally enacted, CERCLA included an exemption from the strict liability scheme relating to owners and operators for secured creditors who did not participate in the management of their borrowers' businesses. Because courts interpreting this exemption did not consistently interpret the statutory language, lenders faced the risk of CERCLA liability when they acquired an interest in a facility, whether through foreclosure or otherwise, or when they affected operational activities at a facility. Similar issues arose when RCRA was amended in 1984 to impose obligations upon owners and operators of USTs and UST facilities. Again, courts failed to clearly articulate what lenders could do to protect their investments without themselves becoming liable parties. The EPA's attempt to address the concerns of lenders with respect to CERCLA through a regulatory initiative was invalidated by the Court of Appeals for the District of Columbia Circuit.

In response to the need for federal legislation specifically to define the contours of the "secured creditor exemption" under both CERCLA and RCRA, Congress enacted the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 (the "Act") as part of the 1997 Omnibus Appropriations Bill. The Act amends certain definitions and liability provisions of CERCLA and RCRA, specifically identifies the types of lenders and fiduciaries to which the amendments apply and explicitly enumerates activities in which secured creditors and fiduciaries may engage without being deemed PRPs. However, the Act does not affect potential obligations or liability which may arise under other federal environmental laws or common law theories of liability.

Pennsylvania's Act 3, passed as part of the Commonwealth's brownfields program, is broader than simply a means to facilitate the reuse and development of former industrial sites. It specifically states that it preempts and eliminates all current liability standards and that the burden of proof is upon the one seeking to hold a lender, fiduciary or economic development agency liable for response actions and damages. In fact, Act3 preempts all state statutory provisions and common law theories under which environmental liability may be imposed upon a lender, fiduciary or economic development agency and purportedly preempts federal statutes and regulations pertaining to employees, occupational safety and health, public safety, natural resources or the environment which may be asserted to impose liability upon a lender, fiduciary or economic development agency.

Accordingly, under the current regulatory regimes, secured creditors and fiduciaries now have statutory maps to chart their courses when engaging in transactions involving contaminated properties. These changes in the "lender liability" arena can be used by prospective purchasers who must finance an acquisition to convince a lender that it need not be as concerned about assuming environmental cleanup obligations.

CONCLUSION

While transactions should not be viewed as an "assembly line" product, there are certain basic principles which may govern how a buyer approaches an acquisition. There are various options available to a buyer to minimize the risk of incurring financial responsibility for the obligations of its seller. But in order to take full advantage of such options, prospective purchasers must manage the acquisition based on an understanding of the obligations arising under environmental statutes, appropriate due diligence and careful tailoring of the documents necessary to consummate the transaction.