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By: Nicholas C. Rigano, Esq. RIGANO LLC
Under the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.) (CERCLA), current owners and operators of real property are strictly liable for costs to clean up environmental contamination regardless of whether the contamination existed prior to their ownership. Upon closing, a purchaser becomes a current owner under the statute and, therefore, has strict liability for such costs.1
THIS RESULTS IN ENVIRONMENTALLY CONTAMINATED properties typically having a significantly reduced market value and may render them completely unsellable. The rarely used Bona Fide Prospective Purchaser (BFPP) defense, however, may completely shield a prospective purchaser from CERCLA liability stemming from preexisting contamination and may facilitate the alienability of the contaminated property. The BFPP defense shields a prospective purchaser from liability relating to contamination existing at the time of purchase even where the purchaser has knowledge of the contamination prior to closing. To avail itself of the BFPP defense, the prospective purchaser must meet the requirements of 42 U.S.C. §§ 9601(40), 9607(r). Most notably the prospective purchaser must (1) complete “all appropriate inquiries” (typically, a Phase I Site Assessment and sometimes a Phase II Site Assessment); (2) not cause the contamination at issue; (3) provide legally required notices with respect to the release of hazardous materials or contamination at the property; (4) provide appropriate care with respect to the contamination, including taking steps to stop any continuing release and prevent any threatened future release; (5) comply with government requests in connection with the cleanup; and (6) not be affiliated with any party that is potentially liable for the contamination.2
The standards discussed above require an extremely factspecific inquiry and make it difficult for a prospective purchaser to acquire property with comfort that it is protected from environmental liabilities without a prior judicial determination. Since courts are hesitant to provide advisory opinions, the BFPP defense has rarely provided assurance to prospective purchasers.
A prospective purchaser, however, may find a way to avail itself of the protections of the BFPP defense through a bankruptcy sale. Upon a debtor’s bankruptcy filing, the bankruptcy court retains jurisdiction over the debtor’s assets. A debtor or bankruptcy trustee may sell the debtor’s assets pursuant to Section 363 of the Bankruptcy Code (11 U.S.C. § 363). A Section 363 sale may only close after the bankruptcy court authorizes the sale to proceed by court order either upon motion on 21 days’ notice to all interested parties or pursuant to a Chapter 11 plan, which requires a slightly longer timeframe but may provide other benefits such as exempting the transaction from transfer taxes.3
To read the full practice note in Lexis Practice Advisor, follow this link.
Nicholas C. Rigano is a partner at Rigano LLC. Mr. Rigano regularly represents clients in Chapter 7 and Chapter 13 bankruptcy, as well as clients facing environmental issues associated with real property, subsurface contamination, and cost recovery. He can be reached at firstname.lastname@example.org.
For additional information about environmental due diligence, see
> ENVIRONMENTAL DUE DILIGENCE IN REAL ESTATE TRANSACTIONS
RESEARCH PATH: Real Estate > Commercial Purchase and Sales > Due Diligence > Practice Notes > Environmental Due Diligence
For more information on bankruptcy in real estate transactions, see
> WHEN A PURCHASER OR SELLER OF REAL PROPERTY GOES BANKRUPT
RESEARCH PATH: Real Estate > Commercial Purchase and Sales > Bankruptcy Considerations > Practice Notes > Bankruptcy Considerations
Other LexisNexis Resources:
> 1-1 ENVIRONMENTAL LAW IN REAL EST. & BUS. TRANSACTIONS § 1.03
1. 42 U.S.C.S. § 9601 and 1-1 Environmental Law in Real Est. & Bus. Transactions § 1.03. 2. See 42 U.S.C. § 9601(40). 3. See 11 U.S.C.S. §§ 363, 1146(a).