Legislation CCIM Feature

Wind Resistant

Environmental liability risks persist despite change in administration.

Environmentalism is so deeply embedded into the U.S. culture - including its business culture - that even a radical change in U.S. presidential administrations won't set it off course. Some good business practice that commercial real estate professionals have adopted are susceptible to the political winds. 

However, several significant trends in the purchase and sale of commercial real estate will be largely unaffected by political change. These trends include the many sources of environmental liability, the utility of environmental insurance, the risk of criminal liability, after bankruptcy liability, and the movement toward disclosure and transparency.

Beyond Federal Statutes

When deal makers consider the environmental liability risks that could arise in their transactions, blockbuster federal statutes may come to mind first. Remedies under those federal statutes, however, are limited.

The statute commonly referred to as the Superfund law allows recovery of only response costs incurred through prescriptive rules. The federal cleanup statute that applies to underground petroleum storage tanks provides only injunctive relief - orders to remove a leaking tank and contaminated soil - not monetary damages.

Under common law theories, damages include compensatory damages, lost profits, and stigma damages. That's why, despite the federal statutes, there remain frequent negligence, trespass, and nuisance claims.

A few years ago, the U.S. Supreme Court ruled that there could be no federal public nuisance claims directed at carbon emissions contributing to climate change. Because the U.S. Environmental Protection Agency indicated its intent to regulate carbon emissions comprehensively, no federal common law claims, such as public nuisance, would be allowed.

The Federal Clean Air Act, however, preserves common law actions brought under state law. Since the Supreme Court's decision, several lower federal courts have ruled that the federal statute does not bar state public nuisance claims. As a result, injured parties can bring state nuisance actions seeking to recover the losses they suffer from air pollution emissions from power plants, refineries, or whiskey distilleries.

Just as common law claims provide forms of relief beyond those found under federal statutes, state environmental statutes also may provide a wider range of relief. 

Risky Safety Net

During the past 30 years of practice, many changes have occurred to environmental insurance products covering the costs of soil and groundwater contamination. For years, environmental insurance polices excluded the greatest risks.

While at least one major carrier has retreated from the environmental insurance market, the market seems pretty robust now. With sufficient site characterization, insurance coverage is available without the types of exclusions that, essentially, gut the policy. With the surges and retreats in the market, however, it is difficult to predict a continuing robust environmental insurance market.

Criminal Liability

The past year was one of mixed signals for prosecuting corporate officers individually for criminal violations of environmental law. The U.S. Department of Justice continued to stress the need for corporations facing criminal liability to identify culpable individuals in exchange for leniency from corporate criminal punishment.

Courts continue to abide by several doctrines to facilitate criminal prosecutions of corporate officers based on their position and imputed knowledge of those they supervise. The primary doctrines used are respondeat superior, which holds an employer legally responsible for the wrongful act of an employee, if such acts occur on the job; responsible corporate officer; and corporate collective knowledge. Yet in 2016, federal criminal enforcement of environmental laws was at an all-time low.

Post-Bankruptcy

Under Section 363 of the U.S. Bankruptcy Code, the purchaser acquires the asset unencumbered by its associated liabilities - including its environmental liabilities. That can be a meaningful form of environmental liability relief when buying a facility that, for decades, sent its hazardous waste for off-site management.

The purchaser will acquire the facility but will avoid taking the liability for all that facility's past off-site waste management. What about the environmental condition of the acquired facility itself ? That is, what about soil and groundwater contamination on the property on which the facility is located? 

For these purchasers to avoid federal liability for the environmental contamination on the acquired property, they have to qualify for the bona fide prospective purchaser defense to hazardous substance release liability. Qualifying for that defense requires preparation of an environmental assessment before the acquisition and exercising appropriate care after the purchase. The Bankruptcy Code protection will not exonerate the purchaser for the on-site environmental liability.

Transparency Trend

It will be interesting to see how - and how soon - the Trump Administration effects public companies' climate change and conflict mineral disclosures. The Obama Administration pursued its policy objectives by pressing for public company disclosure on both fronts.

Conflict minerals disclosure - reports on companies' supply chain diligence to ensure the tantalum, tin, tungsten, and gold they use doesn't originate from smelters in the Congo - seems likely to endure. For one thing, conflict minerals disclosures are rooted in statute - the Dodd Frank financial reform legislation.

The Trump Administration can roll back Dodd Frank, but at least it's statutorily grounded. Leading consumer electronics companies, however, have embraced efforts to keep conflict minerals out of their products. Of course, many public companies also have embraced a transparent approach to disclosure of the physical effects climate change on their businesses.

The Securities Exchange Commission's 2010 guidance on climate change is, however, its new interpretation of broad, decades-old statutory disclosure edicts. The Trump Administration may not want to devote its energies to re-writing the SEC's 2010 guidance.

The guidance's fairly loose descriptions of what companies should disclose about how severe weather might affect them or the costs of complying with foreseeable new laws, allows subject companies a fair amount of latitude. With that latitude, many companies still report that it is simply impossible to predict long-term effects.

Proponents of disclosure decry the throwing-up-their-hands approach. Yet, it is hard to imagine disclosures getting any more stringent during the next four years.

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Tom Mounteer

Tom Mounteer is a partner at Paul Hastings in Washington, D.C., and an instructor at George Washington University Law School. Contact him at tommounteer@paulhastings.com.

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