Property Seller’s Failure to Disclose Environmental Cleanup Actionable, Even For “As Is” Sale

On August 18, 2016, a New Jersey appellate court ruled that a property seller’s failure to disclose environmental contamination and cleanup could expose the seller to liability for fraud. In Catena v. Raytheon Co. the Appellate Division reversed a trial court’s decision which had granted summary judgment based on the statute of limitations. The Appellate Division found that the “discovery rule” applied to claims asserting fraud and that Catena, the purchaser of commercial property, was not time barred in his lawsuit which was brought more than a decade after his purchase. The “discovery rule” delays the commencement of the limitations period, i.e., a plaintiff’s claim does not accrue until the plaintiff discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an action claim. In a real estate setting, intentional nondisclosure of a material defect which is not observable by a Buyer can give rise to a finding of fraud by the Seller and the statute of limitations will not bar a suit many years after the sale if the Buyer, after appropriate due diligence, had no reason to know of the defect.

9-13In this case, the Seller, individually or through his partnership, owned the property since 1983. When the Seller defaulted on its mortgage in 1987, Seller’s mortgage lender (“Lender”) took possession of the property and began making efforts for its sale. Lender engaged a consultant to take soil samples; it was discovered that the property was contaminated with perchloroethylene (“PCE”). In June 1988, the Lender and Seller arranged for the excavation and removal of the known contaminated soil. The environmental consultant specifically warned that it could not guarantee that all the contaminated soil had been removed. Neither the Lender, the Seller, nor the environmental consultant notified the New Jersey Department of Environmental Protection (“NJDEP”) of the contamination.

Catena entered into a contract to purchase the property “as is” later in June 1988. There were no representations or warranties made by the Seller. On the day before the closing, the Lender provided Catena’s attorney with a 1987 affidavit submitted to the NJDEP which stated that, on information and belief, the only occupants on the site had been a dry wall construction contractor, a bank, and a trucking concern, and that they had not engaged in operations which involved hazardous substances. This form affidavit was commonly used in the 1980s to demonstrate the non-applicability of the Environmental Cleanup Responsibility Act (“ECRA”), a statute that required remediation prior to property transfers in certain circumstances. The Seller also provided Catena with a copy of the 1988 affidavit that Seller submitted to the NJDEP which included the same information as the Lender’s affidavit. This later submission was to confirm that the sale to Catena was not subject to ECRA. Neither affidavit mentioned the discovery of contamination or the soil removal that had been undertaken.

After the closing of title in November 1988, Catena retained a consultant to perform an environmental assessment which found that the past uses of the property were far more extensive than those stated in the affidavits, including production of aircraft parts, assembly of mechanical electrical parts, a textile knitting and dyeing operation, the manufacture of prefabricated exterior building facades, and a distribution center for screen-printing inks and related supplies. These prior uses would likely have caused the sale to Catena to require compliance with the ECRA statute. The Assessment recommended that Catena investigate the possible presence of contamination, but Catena did not investigate. Instead, nearly ten years later when Catena sought to refinance the property, his prospective lender hired a consultant to conduct an investigation. That investigation found PCE contamination, which it reported to the NJDEP. The consultant opined that the likely cause of the contamination was the historical use of the property in airplane-related industries.

Beginning in 1998, Catena proceeded with a robust but intermittent investigation of his property. In the early 2000s, groundwater and stream contamination was discovered.

Catena sued the Seller, and the prior owners and operators of the property, including those who likely caused the PCE contamination, pursuant to the NJ Spill Act. Through discovery in the litigation, Catena obtained reports and communications between the Seller and the Lender concerning the partial cleanup of soil that they had performed but did not tell him about. Catena amended his complaint to assert claims of common law fraud and violations of the Consumer Fraud Act against the Seller and Lender. Catena testified at his deposition that he did not know of the contamination before his purchase and admitted that he did not ask the Seller or Lender whether there were any environmental issues. He also did not investigate the past uses of the property prior to the purchase.

The Seller and Lender moved for summary judgment with regard to the fraud claims, alleging that more than six years (the statute of limitations for fraud claims) had passed since these claims accrued. The trial court agreed with the Seller, finding that Catena should have been aware of the fraud when he entered into an administrative agreement with the NJDEP in June 1998 to conduct the investigation of his property. Catena appealed, arguing that the fraud was not discovered until December 2007 during Seller’s deposition.

The Appellate Division reversed the trial court’s ruling and found that even though Catena learned of the contamination in the late 1980s, he wasn’t aware (and could not have become aware) of the fraud until he learned of it in discovery. The court explained the importance and general acceptance of the discovery rule in cases involving fraud: the victim’s lack of awareness of the fraud is the wrongdoer’s very object. The rule thus prevents the wrongdoer from benefiting from his own deceit.

The court concluded that when Catena first became aware of contamination, he had no reason to believe that the Seller or the Lender knew about these site conditions. They had not made any representations and their affidavits to NJDEP did not show any suspicious prior users (which were only required to be identified back to 1984). Indeed, Catena’s consultant concluded that the contamination was caused by “airplane related industries” and none of the prior users in the Seller’s and Lender’s affidavits were involved in that industry.

Moreover, Catena would not have learned about the partial cleanup by conducting a public records search, as the contamination and remediation was not reported to NJDEP. Thus, there was no evidence that a more diligent pre-suit investigation would have led to the information about the fraud.

Given these facts, the court concluded that the fraud and Consumer Fraud Act claims were not time barred. The court made clear that the application of the discovery rule is fact and case sensitive and requires a careful analysis of when the purchaser became aware of facts that would alert a reasonable person to the possibility of an actionable claim.

The inescapable conclusion for real estate sellers is that they will face viable claims by purchasers years after a sale if sellers fail to disclose known environmental conditions and remediation activities even in “as is” sale transactions with no affirmative representations or warranties.

When Is A Cleanup “Voluntary” Under CERCLA?

 Nothing in §107(a)(4)(B) references “voluntary” cleanups, and nothing in that section restricts its application to “voluntary” cleanups or actors. Sections 107(a) and 113(f) of CERCLA allow private parties to recover expenses associated with cleaning up contaminated sites. Similarly, nothing in Atlantic Research and its progeny restricts the application of cost recovery actions under CERCLA §107(a)(4)(B) to “voluntary” cleanups.  If that is the case, what is the basis for the contention that only PRPs that perform cleanups voluntarily are entitled to pursue §107 cost recovery claims?

Section 107(a) defines four categories of PRPs and makes them liable for, among other things, “(A) all costs of removal or remedial action incurred by the United States Government or a State or an Indian tribe not inconsistent with the national contingency plan” and “(B) any other necessary costs of response incurred by any other person consistent with [such] plan,” §§107(a)(4)(A)-(B). This is the language on which the Supreme Court relied in its decision in Atlantic Research.Similarly,  Atlantic Research is best understood in the context of the development of the law of recovery of CERCLA response costs. Historically, some courts interpreted §107(a)(4)(B) as providing a cause of action for a private party to recover voluntarily incurred response costs and to seek contribution after having been sued. However, after the enactment of §113(f), which authorizes one PRP to sue another for contribution, many courts held §113(f) to be the exclusive remedy for PRPs. In Cooper Industries, Inc.,  the Supreme Court demonstrated the limitations of §113, and held that a private party could seek contribution under §113(f) only after being sued under §§106 or 107(a).  In Atlantic Research, the Supreme Court held that §107(a)(4)(B)’s plain language allows a PRP to recover costs from other PRPs, providing a cost recovery remedy to PRPs that had not been sued under §§106 or 107(a).

The Atlantic Research decision uses the term “voluntary” at times, but does not define the term or use it literally.  After all, only parties that do not have liability under CERCLA or other regulatory schemes truly engage in “voluntary” response actions. Rather, in Atlantic Research and its progeny the term “voluntary” is simply used to draw a contrast with private parties who have been sued under CERCLA §§106 or 107(a) and, therefore, pursuant to Cooper Industries, qualify to seek contribution from other liable parties under CERCLA §113.  Despite the Court’s use of the terms “voluntary” and “involuntary” to distinguish between payments recoverable under §107(a) and those recoverable under §113(f), the operative principle appears to be that §107(a) is available to recover payments only in cases where §113(f) is not. This is what a federal district trial court concluded recently in Appleton Papers Inc. v. George A. Whiting Paper Co., No. 08-C-16, 2008 WL 3891304 (E.D.Wis. Aug. 20, 2008).  In E.I. Dupont de Nemours & Co. v. United States, 508 F.3d 126 (3d Cir. 2007), the Third Circuit distinguished between “those who voluntarily admitted their responsibility” and those who have “in fact been held responsible (via adjudication or settlement with the EPA)” in discussing who may bring an action under CERCLA §107(f). Id at 133. Therefore, a PRP who conducts a dialog with a regulatory agency concerning how best to clean up a site does not make the PRP who admits liability and accepts responsibility any less a volunteer under CERCLA and applicable case law. In Champion Laboratories, Inc. v. Metex Corp., No. 02-5284, 2008 WL 1808309 (D.N.J. Apr. 21, 2008), the Hon. William H. Walls held that a plaintiff undergoing an ISRA  cleanup in New Jersey could pursue a CERCLA §107 claim.. The New Jersey district court clearly  did not find the pendency of an ISRA cleanup any impediment to plaintiff’s pursuit of a CERCLA §107 claim. The whole point of the Atlantic Research decision is that PRPs may, without regard to their own disposal activity, avail themselves of CERCLA §107.

Nothing in CERCLA §107(a)(4)(B) or any decision post-Atlantic Research conditions a party’s eligibility to bring a cost recovery action under CERCLA §107(a)(4)(B) on that party’s response action having been purely voluntary. Any other interpretation of “voluntariness” under CERCLA, if adopted, would have the anomalous result of barring the doors of the courthouse to CERCLA plaintiffs who cannot bring a CERCLA §113 claim (having not been the prior subject of a §106 or §107 claim by the United States), but whose cleanup may not have been “voluntary” in the strictest sense. It was clearly not the intention of Atlantic Research to limit access to the courthouse to only a restricted sub-class of CERCLA §107 plaintiffs.