Category: Environmental Law

EPA, Clean Air Act & Climate Change: Consider the Facts

This week’s guest blogger at the National Law Review is Jon D. Sohn of  McKenna Long & Aldridge LLP.  Jon provides a great overview of some recent hearings and proposed legislation impacting greenhouse gas regulations at both the state and federal levels:

The U.S. Environmental Protection Agency (EPA) has taken a lot of hits from those opposed to greenhouse gas regulations in the past week.  In the House of Representatives, tough hearings led by U.S. Rep. Ed Whitfield, (R-KY), Chairman of the House Subcommittee on Energy, were held with EPA Administrator Lisa Jackson. Jackson’s testimony followed that of lead witness Senator James Inhofe (R-OK) who promoted his upcoming book, “The Hoax,” which takes aim at the science of climate change.  The House subsequently passed an amendment to the proposed Continuing Resolution that would strip EPA of its authority to regulate GHG emissions and significantly decrease funding for environmental and clean energy programs. Meanwhile, outside of Washington, D.C., the first two permits considered by EPA suggest cleaner facilities and job creation can be compatible with new regulations as opposed to some of the concerns expressed in the hearings and continuing resolution.

This past week, South Dakota issued a draft permit for Best Available Control Technology for greenhouse gases under the Clean Air Act (CAA) to the Hyperion Energy Center. Project owners describe the facility as a “HEC is a 400,000-barrel per day (BPD) highly-complex, full-conversion refinery which will produce clean, green, transportation fuel such as ultra-low sulfur gasoline (ULSG) and ultra-low sulfur diesel (ULSD).” South Dakota regulatory officials found that significant energy efficiency improvements to the refinery were the most cost-effective manner to move forward.  The officials considered carbon capture & storage as an alternative path, but decided that while the technology is technically feasible it is not cost-effective or environmentally appropriate in this instance.  EPA will now have 30-days to review the decision, but don’t expect any radical changes to the State-level decision. Construction will create an estimated 4,500 jobs and when finished, 1,826 permanent jobs will be created for the ongoing operation of the refinery and associated utility plant according to company officials.

In Louisiana, State regulators recently approved an air quality construction and operating permit that includes emissions control requirements for greenhouse gases as well.  The permit clears the way for an iron production facility, the initial phase of the construction of a larger Nucor iron and steelmaking facility in St. James Parish. Under the permit granted, the greenhouse gas limits rely on energy efficiency measures and set a 13 million British thermal units of natural gas per metric ton of direct reduced iron. State regulators estimate the plant will emit 3.39 million metric tons of carbon dioxide per year.  500 construction jobs and 150 permanent jobs will be created according to Nucor, although they would like the facility to be larger and note regulatory uncertainty as a cause of concern. On the other hand, some environmental groups including the Tulane Law Clinic may challenge that the permit is not strict enough. EPA will now conduct a review here as well.

Congress would be well-advised to consider these case studies as it moves forward in its deliberations.

© 2011 McKenna Long & Aldridge LLP

EPA and Corps Issue Draft Guidance on Waterways and Wetlands That Fall Under Federal Jurisdiction as Part of Obama Administration’s Just Released Clean Water Framework

Recently posted by Linda H. Bochert of  Michael Best & Friedrich LLP – details about the recent draft guidance issued about when a wetland is subject to federal jurisdiction: 

Five years after the US Supreme Court issued the decision that was supposed to – but didn’t – clarify when a wetland is subject to federal jurisdiction, the United States Environmental Protection Agency (“EPA”) and Army Corps of Engineers (“Corps”) are seeking public comment on draft guidance intended to explain how such decisions are to be made.

The Draft Guidance on Federal Jurisdiction

On April 27, 2011, EPA and the Corps issued “Draft Guidance on Identifying Waters Protected by the Clean Water Act” (“Draft Guidance”). The Draft Guidance interprets two key Supreme Court decisions, often referred to as Rapanos and SWANCC. Rapanos is the 2006 Supreme Court decision in the consolidated cases of Rapanos v. United States and Carabell v. United States Army Corps of Engineers, 547 UW 715 (2006); SWANCC is the 2001 Supreme Court decision in Solid Waste Agency of Northern Cook County v. Army Corps of Engineers, 531 U.S. 159 (2001). The Draft Guidance addresses both wetlands and waterbodies and is limited to whether the federal Clean Water Act applies; it does not determine what state laws or regulations might apply.

After years of confusion, the 2006 decision in Rapanos was widely anticipated to provide a clear test for when a wetland is subject to federal jurisdiction. It failed to do so. The court split three ways, with no point of view supported by a majority of the justices. The prevailing view since Rapanos has been that a wetland is subject to federal jurisdiction if it satisfies either of two tests:  1) the wetland must be immediately adjacent to a navigable body of water that has a relatively permanent flow; or 2) there is a “significant nexus” between the wetland and a body of water that was, is, or could be made navigable. But stating the tests and applying them are two different things – and application of that two-part test has been anything but clear-cut.  For more on Rapanos andSWANCC, see our June 29, 2006 Client Alert: Wetlands and Water Bodies Must Have “Significant Nexus” with a Navigable Water to Fall Under the Jurisdiction of the Clean Water Act.

The EPA and the Corps are taking another run at it. The Draft Guidance is carefully described as “consistent with Supreme Court decisions and existing agency regulations” – presumably to combat anticipated criticism that it either overreaches or underreaches the current state of the law, although the critics have already begun to weigh in. 

Under the Draft Guidance, federal jurisdiction would apply to wetlands that:

  • are adjacent to either traditional navigable waters or interstate waters
  • directly abut relatively permanent waters
  • are adjacent to jurisdictional tributaries to traditional navigable waters or interstate waters if there is a “significant nexus”

    And federal jurisdiction would apply to waterbodies that are:

  • traditional navigable waterbodies
  • interstate waterbodies
  • non-navigable tributaries to traditional navigable waters that are relatively permanent (contain water at least seasonally)
  • tributaries to traditional navigable waters or interstate waters if there is a “significant nexus”
  • in the category of “other waters” – including some that are physically proximate to other jurisdictional waters and some that are not, based on fact specific circumstancesFollowing the 60-day public comment period, EPA and the Corps intend to finalize the Guidance and then initiate formal rulemaking.  The message of that process is that the agencies want to identify as much of the anticipated controversy about their interpretation as possible before drafting a federal regulation implementing that interpretation.

    Effect in Wisconsin

    Implementation of the Draft Guidance is not likely to have a significant impact in Wisconsin.   As far as waterbodies are concerned, Wisconsin has historically taken a broad view of navigability for purposes of state jurisdiction.  With respect to wetlands, as explained in our June 2006 Client Alert following the SWANCC decision the Wisconsin Legislature extended the jurisdiction of the Wisconsin Department of Natural Resources (“WDNR”) to include “nonfederal wetlands”.  Wis. Stat. §. 281.36(1m). Thus, a nonfederal wetland may still be subject to state water quality standards and permit requirements implemented by WDNR, even if it does not come within federal jurisdiction under the Clean Water Act. 

    The Clean Water Framework

    The Draft Guidance is part of the Obama Administration’s national Clean Water Framework also released on April 27, 2011. The Clean Water Framework “recognizes the importance of clean water and healthy watersheds to our economy, environment and communities” and is composed of the following initiatives:

    • promoting innovative partnerships
    • enhancing communities and economies by restoring important water bodies
    • innovating for more water-efficient communities
    • ensuring clean water to protect public health
    • enhancing use and enjoyment of our waters
    • updating the nation’s water policies – this initiative includes the Draft Guidance
    • supporting science to solve water problems

     

    © MICHAEL BEST & FRIEDRICH LLP

Superfund Recycling Equity Act (SREA) Fee Shifting: PRP Group Liable for Third-Party Defendants’ Attorneys' Fees

Recent Guest Blogger at the National Law Review   Thomas A. Barnard  of  Taft Stettinius & Hollister LLP   explains a recent federal district court ruling that a PRP group seeking contribution under CERCLA must pay the attorneys’ fees incurred by a mining company targeted by the PRP group for contribution:  

The Superfund Recycling Equity Act (“SREA”) fee shifting provision puts PRP groups seeking contribution under CERCLA from generators of “recyclable material” at risk of paying the generators’ attorneys’ fees if the generator’s defense succeeds.  A federal district court recently ruled that a PRP group seeking contribution under CERCLA must pay the attorneys’ fees incurred by a mining company targeted by the PRP group for contribution.  Evansville Greenway and Remediation Trust v. Southern Indiana Gas and Electric Co., Inc.., No. 07-00066 (S.D. Ind. Feb. 25, 2011), Dkt. 917.

Previously, district courts have refrained from awarding defense fees under SREA on the grounds that it would result in “manifest injustice” because the retroactive application of SREA (enacted in 1999) would impose a fee-shifting component that did not exist when the contribution actions were initiated.  See, e.g., RSR Corp. v. Avanti Development Inc., 2000 WL 1449859 at *4 (S.D. Ind. 2000) (“The plaintiffs made their decisions about whom to sue at a time when CERCLA did not allow a prevailing party in a contribution action to obtain costs and fees from its burden.  To burden that decision now with the imposition of the attorney and expert fees of any defendant that prevails under the SREA seems inconsistent with the ‘familiar considerations of fair notice, reasonable reliance, and settled expectations’ mentioned by the Supreme Court.”); see also U.S. v. Mountain Metal Co., 137 F.Supp.2d 1267, 1282 (N.D. Ala 2001).

In Evansville Greenway, the court determined that the third-party defendant, Solar Sources, Inc., qualified for an exemption to CERCLA liability established by SREA.  Specifically, the court found that Solar Sources had “arranged for recycling” because it sold scrap metal that met a “commercial specification grade for which a market existed,” and that a “substantial portion of the scrap was made available for use in the manufacture of a new product.  This satisfied the SREA requirements for scrap metal generators set forth in 42 U.S.C. 9627(d). 

Having determined that Solar Sources prevailed in its SREA defense, the court then awarded attorney and expert fees under the statute’s fee-shifting provision, 42 U.S.C. 9627(j).  Without referring to the prior case law interpreting this section, the court matter-of-factly awarded the fees “as we are required to do under the statute.”  The third-party complaint against Solar Sources was filed by the PRP group in 1999, after SREA was enacted, but the court did not discuss this timing in awarding defense fees.

Accordingly, PRP groups must carefully consider the risk of liability for defense fees and expenses prior to filing contribution actions against generators of material that potentially falls within the scope of SREA’s exemption.

Copyright © 2011 Taft Stettinius & Hollister LLP. All rights reserved.

EPA Redefines “Solid Waste” to Incentivize Creative Fuel Technology: Garbage to Gold

Recent Guest Blogger at the National Law Review  Kim K. Burke  of  Taft Stettinius & Hollister LLP highlights how the EPA recently changed the definition of Solid Waste and how this can lead to new fuel technology: 

Since the Resource Conservation and Recovery Act (RCRA, 42 U.S.C. §6901, et seq.) first became law, consternation among the regulated community has grown as a principal purpose of RCRA, namely, to encourage discarded material reuse as fuel, appears to have been ignored in EPA’s rulemaking.  Perhaps that discouraging trend is coming to an end.  On February 21, 2011, EPA released a pre-publication version of a proposed Final Rule amending the definition of “solid waste.”  What is particularly encouraging about the Final Rule is that innovative technologies for creating fuels from materials that would have previously been characterized as a “solid waste” are excluded from the definition.  This opens the door to creative technologies to transform municipal garbage into useable fuels for utilities and industrial boilers.  Not only does this technology reduce the amount of precious landfill space being consumed by valuable organic material, but it also offers the prospect of reduced and more easily controlled emissions from industrial boilers and fossil-fueled electric utilities that promise to be large consumers of this significantly cheaper, high BTU content fuel.

In this Final Rule, EPA spells out how previously discarded non-hazardous secondary materials may be used in combustion units for fuel.   40 CFR §241.3(b)(4).  The Final Rule is careful to spell out the criteria for assuring the “legitimacy” of the non-hazardous secondary materials which are used as “fuel” or “ingredients” in combustion units.  40 CFR §§241.3(d)(1) and (d)(2).  With this change in approach by EPA to encourage development of fuels from discarded materials, entrepreneurs in the wings with off-the-shelf recycling technologies are now given EPA’s blessing to pursue a green solution to some of our country’s energy and emission reduction problems.

Copyright © 2011 Taft Stettinius & Hollister LLP. All rights reserved.

April 8-10 the First Annual Young Professionals in Energy International Summit takes place in Las Vegas, Nevada

Young Professionals in Energy (“YPE”) is the first and only interdisciplinary networking and volunteer organization for people in the global energy industry – a place where bankers can connect with engineers, accountants with geologists and so on.  Their mission is to provide a forum for knowledge sharing and camaraderie among future leaders of the energy industry. This April 8-10, the first annual YPE International Summit takes place in Las Vegas, Nevada at the Tropicana Hotel, bringing together over 10,000 members and over 40 chapters for the energy’s industry’s biggest networking event of the year.  

The Young Professionals in Energy International Summit has been approved by the Nevada Board of Continuing Legal Education for 6.0 credits Continuing Legal Education  Attorneys and judges who attend this activity may claim up to the maximum credits indicated based on actual attendance at the event, to be held April 8-10, 2011 .

March 1st is the last day to save $50 on registration! For more information and to register – please click here:


A Brave New World for Commercial Buildings: ASTM's "BEPA" Standard

Recently posted at the National Law Review by Douglas J. Feichtner of Dinsmore & Shohl LLP –   ASTM BEPA standard is expected to become the standard for building energy use data collection. 

On February 10, 2011, ASTM formally published its Building Energy Performance Assessment (BEPA) Standard – E 2797-11. This standard will enable users to measure the energy performance of a commercial building in connection with a real estate transaction. Regulatory drivers spurred the development of the BEPA standard, even in the midst of a construction recession. In the past few years, several states and local governments passed mandatory building energy labeling and transactional disclosure regulations. These disclosure regulations, combined with some building codes that are now requiring specific energy-efficiency improvements, triggered the development of a standardized methodology to assess and report on a commercial building’s energy use. The BEPA’s passage arrives at a crucial time when building certification standards face increased scrutiny, both in the market and the courtroom.

The ASTM BEPA standard includes the following five components: (1) site visit; (2) records collection; (3) review and analysis; (4) interviews; and (5) preparation of a report. ASTM is not creating or implying the existence of a legal obligation for the reporting of energy performance or other building-related information. Rather, the BEPA offers certain guidelines to the industry to promote consistency when collecting (and perhaps reporting) buildings’ energy usage data, such as:

 

  • collecting building characteristic data (i.e., gross floor area, monthly occupancy, occupancy hours)
  • collecting a building’s energy use over the previous three years (with a minimum of one year) – including weather data representative of the area where the building is located;
  • analyzing variables to determine what constitutes the average, upper limit, and lower limit of a building’s energy use and cost conditions;
  • determining pro forma building energy use and cost; and
  • communicating a building’s energy use and cost information in a report

One of the options available to users of the BEPA standard is to identify government-sponsored energy efficiency grant and incentive programs that may be available for any energy efficiency improvements that could be installed at the building (thereby increasing its value, and making it more attractive to potential buyers).

Building benchmarking (i.e., comparing a building’s energy output to its peers) is not part of the ASTM BEPA standard’s primary scope of work, but rather a “non-scope consideration.” The BEPA certainly could be used in conjunction with building certification tools already in the marketplace, such as ASHRAE, Green Globes, and U.S. Green Building Council (LEED), to name a few.

However, as the economic noose has tightened in recent years, green building standards have received increased scrutiny. Indeed, builders and landlords who sell their properties with the promise that they have some green certification (which can be expensive to obtain), and that promise for whatever reason fails to translate to the economic savings contracted for, could face liability.

The Gifford v. USGBC lawsuit currently pending in the United States District Court for the Southern District of New York crystallizes the debate over green building certification (in this case – LEED). The core allegations in the lawsuit prompt this author to see significant value for stakeholders to use ASTM’s BEPA as a supplement to applying rating and benchmarking systems like LEED.

Gifford’s primary complaint is that LEED-certified buildings are not as energy-efficient as advertised. Support for this contention rests on Gifford’s analysis of a 2008 New Buildings Institute (NBI) study comparing predicted energy use in LEED-certified buildings with actual energy use. In the study, NBI concluded that LEED buildings are 25-30% more energy-efficient compared to the national average. To the contrary, Gifford concluded that LEED-certified buildings use 29% more energy than the national average. He further emphasized that the NBI results were skewed in part because the NBI study compared the median energy use of LEED buildings to the mean energy use of non-LEED buildings.

The purpose of this article is not to comment on the merits of the Gifford lawsuit or criticize LEED. But this apples-to-oranges argument articulated by Gifford magnifies the proverbial elephant in the “green” room – the need for sufficient objective data to accurately compare the energy use and energy cost of buildings against their relevant peer groups. With such data in hand, the benchmarking and rating systems already in place can be buttressed with a greater measure of consistency and transparency (a big issue for detractors of green building certification, like Gifford). Furthermore, the more stakeholders in the real estate industry (buyers, sellers, lenders) understand how a building’s energy performance was determined, the better equipped they will be to put a price on the economic and environmental benefits of green buildings.

In sum, the ASTM BEPA standard is expected to become the standard for building energy use data collection. It can be used to quantify a building’s energy use as well as its projected energy use and cost ranges, factoring in a number of independent variables (i.e., weather, occupancy rates), by way of a transparent process. Finally, the BEPA building energy use determination can complement compliance reporting under applicable building energy labeling or disclosure obligations. In the end, ASTM’s BEPA can provide the foundation by which an apples-to-apples comparison can take place in evaluating commercial building energy performance determinations and certifications.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Not Your Father's Insurance Coverage: Using Transactional Insurance to Drive Business Opportunities

Posted at the National Law Review last week by Daniel J. Struck and Neil B. Posner of Much Shelist – a review of different type of insurance products that can be helpful in facilitating certain types of financial transactions: 

Insurance coverage as a commercial risk management tool has been around for centuries, but there are a number of newer transactional insurance products that can actually help drive business opportunities and close deals. Developed in the last decade or so and becoming more widely available, these products—including representations and warranties (R&W), tax liability, litigation liability and environmental stop-loss insurance—are decidedly not your father’s insurance coverage. Rather, these less traditional types of coverage can help facilitate the purchase or sale of a business or a significant business asset by reducing the uncertainties associated with potential indemnification obligations and liability exposures.

Traditional Insurance Coverage: Still an Important Corporate Asset

For many businesses, standard commercial insurance is treated as a routine expense in which premiums are the deciding factor in evaluating largely interchangeable form policies. In previous articles, we have discussed why this approach is often short-sighted.

The types of insurance coverage purchased by most businesses are predictable. General liability insurance protecting against liabilities owed to third parties resulting from bodily injury, personal injury and property damage is a given. Some kind of first-party property coverage for loss to owned or rented premises, damage to inventory and equipment, and resulting business interruptions also is generally necessary. Because most businesses have employees, insurance related to workers’ compensation and employee benefits programs is essential. Depending on the particular business, additional lines of insurance—such as management liability, employee dishonesty/fidelity, fiduciary liability, cyber-liability and professional liability—may be necessary as well.

For all their differences, these types of coverage all serve as a means to manage risk and reduce the exposure to potential “fortuitous” first-party losses or third-party liabilities, ranging from slip-and-fall accidents at a retail location to a devastating explosion at a factory or an alleged breach of duty by a company’s directors. Although traditional insurance coverage may help protect the financial health and solvency of a business and its individual partners, officers or directors, it does not often operate as an actual driver of business opportunities.

Transactional Insurance: A Tool for Facilitating Corporate Transactions

Transactional insurance policies, on the other hand, generally insure against risks that fall outside the scope of more traditional coverage and have the potential to drive, or at least facilitate, certain corporate transactions. Examples include:

  • R&W insurance, which provides coverage for the contractual indemnification obligations resulting from breaches of the representations and warranties of a specific agreement (often a contract for the purchase/sale of a business or a significant corporate asset);
  • Tax liability insurance, which provides coverage for an identified potential tax liability or penalty, or for the liability resulting from an adverse determination in a specified ongoing tax dispute;
  • Litigation liability insurance, which may provide coverage if an award of damages in an identified piece of litigation exceeds a threshold specified in the insurance policy; and 
  • Environmental stop-loss insurance, which may provide coverage for the costs of an ongoing environmental remediation project that exceeds a specific cost threshold.

Although commercial insurance policies of every type should be tailored to the particular needs of the insured, the levels of detail and specific underwriting and negotiation involved in placing transactional insurance are generally even greater. For example, the process tends to be fact specific and often involves extensive manuscripting (i.e., the negotiation of customized coverage terms applicable to the specific risks insured against).

But how can transactional insurance facilitate the completion of corporate transactions? Even in the best of times, potential buyers and sellers may find it difficult to agree on price. In the current economic environment, however, distressed sellers may be reluctant to discount the value of their businesses in hopes of a return to better days, while value-conscious purchasers are determined to buy at a substantial discount. Assuming that agreement can be reached on price, the parties must still negotiate the representations and warranties provided by both the buyer and the seller, and then reach acceptable indemnity terms for breaches of those representations. But the challenges don’t end there. A buyer with concerns about the ability of the seller to satisfy its indemnification obligations naturally will want the indemnification provision to be backstopped by a substantial escrow. A seller, however, likely will not want a substantial portion of his or her personal wealth tied up in an escrow account to pay for liabilities related to a business with which he or she is no longer associated.

In this challenging context, R&W insurance might help bridge differences and facilitate the successful closing of the transaction. For example, a potential buyer can use R&W insurance as a means to avoid relying solely on the seller for indemnification. A potential buyer might be able to make an offer more appealing by incorporating R&W insurance into its bid to reduce the portion of the purchase price that will be held in escrow. Similarly, for a seller that is eager to divest a business and minimize the scope of its continuing obligations relating to that business, a carefully tailored R&W insurance policy may provide a greater level of comfort that the seller will not be forced to pay out of pocket to satisfy potential indemnification obligations.

The following scenarios illustrate some of the ways in which transactional insurance might be used effectively to facilitate a transaction or to make a particular proposal more financially appealing.

Scenario One: Show Me the Money

After spending 25 years building a successful manufacturing business, Jacob Marley has decided to retire and tour the world on a yacht purchased with the proceeds from the sale of his company. He retains an investment banker to put the business up for auction and receives interest from a number of private equity firms, including HavishamCo. Rather than grossly over-bidding its competitors, Havisham distinguishes its offer by including an escrow requirement that is dramatically lower than would normally be expected (subject only to Havisham’s ability to secure R&W coverage). While putting its bid together, Havisham negotiated terms of an R&W insurance policy to insure over the seller’s representations and warranties. The bid prices from the various private equity firms were roughly equivalent, but Havisham’s escrow holdback was several million dollars lower than in any of the competing bids. Thanks to this creative use of R&W insurance, Marley accepts Havisham’s bid and sails off into the sunset.

Scenario Two: Good Intentions and a Token Will Get You on the Subway

CogswellCorp is experiencing financial difficulty because its “visionary” CEO has begun expanding the company beyond its core cog-manufacturing business. In order to finance its ambitious growth strategy, Cogswell decides to sell its cog-manufacturing operations. SpacelyCo seizes the opportunity to purchase the operations of a longtime competitor, and the parties easily agree on price. In an effort to close the deal quickly, Spacely proposes a modest escrow of only $1 million. However, the cap on Cogswell’s indemnification obligations for breaches of its representations and warranties is significantly higher at $30 million. Although Spacely believes it is purchasing the fundamentally sound operations of one of its largest competitors at a bargain price, Spacely’s management team fears that Cogswell’s expansion efforts will fail, leaving the company unable to honor its indemnification obligations if called upon to do so. In order to address this concern, Spacely obtains an R&W policy that provides coverage above a retention amount equal to the escrow of $1 million, and the deal closes successfully.

Scenario Three: The Long Goodbye

Forty years ago, ApexCo was the world’s largest electronics manufacturer. The company also maintained one of the foremost R&D departments in the world and now holds patents for inventions that are widely used in data storage devices, computer chips and consumer electronics. Over time, Apex discovered that the licensing of its patents was far more lucrative than its manufacturing operations. After being acquired by a private equity firm, Apex shut down its manufacturing and marketing operations in order to focus on licensing its patents and vigorously protecting its intellectual property. Today, the company continues to own a number of shuttered manufacturing facilities and distribution centers in populous suburban locations. There is extensive environmental contamination at several of these sites, which makes them difficult to sell without providing broad, open-ended indemnifications to the buyers. In an effort to control the financial obligations associated with these facilities, Apex seeks the placement of stop-loss insurance that will apply to each of the properties. The underwriting process requires significant due diligence, testing and the preparation of estimates for the remediation cost at each property. Ultimately, Apex is able to secure a stop-loss policy that generally covers remediation costs above a threshold specified for each site. As a result, Apex is now able to market the properties knowing that its financial obligations will be fixed but that buyers will enjoy a level of assurance that additional remediation costs will be paid for under the stop-loss policy.

Scenario Four: Death and Taxes

Holding company Jarndyce & Sons consolidated a number of its subsidiaries into a new subsidiary, BleakCo. Based on the tax opinion of its law firm, Kenge & Carboy, Jarndyce believed that the roll-up had been accomplished through a series of tax-free transactions. Eventually, Jarndyce decided to sell Bleak and entered into negotiations with private equity firm PickwickPip. During due diligence, however, PickwickPip’s law firm, Dodson & Fogg, raised concerns about whether the roll-up transactions had indeed been tax free. Despite these concerns, PickwickPip felt strongly that Bleak would be a valuable addition to its portfolio. Because it disagreed with the tax position taken by PickwickPip’s counsel, Jarndyce was unwilling to place the full amount of the potential tax liability in escrow or to provide a full indemnity. Jarndyce, however, was willing to pay a portion of the premium for a tax insurance policy that would cover PickwickPip for any tax liability above an escrow amount agreed to by the parties in the purchase agreement.

A Strategic Solution

As these scenarios illustrate, transactional insurance can be used strategically by both buyers and sellers to overcome obstacles that might otherwise make it difficult to complete an acquisition or divesture. It is not, however, an off-the-shelf product. The underwriting often requires its own due diligence, and the terms under which coverage is provided frequently require intense negotiations. Accordingly, whether transactional insurance products might be useful in bridging obstacles to a transaction should be an early strategic consideration. Given the myriad issues and financial interests at stake, it is important that a potential purchaser of transactional insurance pay close attention to the risks for which coverage is sought, the extent to which the proposed coverage terms respond to those risks and the legal effects of the negotiated coverage terms.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

Lender Liability and the Exception to CERCLA

Recently posted at the National Law Review by Joanne M. Schreiner and Matthew A. Whitlow of Dinsmore & Shohl LLP – explain possible liability under CERCLA for lenders in certain situations: 

Lenders are making loans again. Lenders are much more cautious about the loans they are making and much more thorough with their due diligence on every piece of property. Perhaps the biggest concern for a lender (aside from whether its borrower will default) is the environmental condition of the property. Now more than ever, lenders are fearful (and rightfully so) of exposure to liability for violations of environmental laws following foreclosure and transfer of possession of a commercial property. Generally, Lenders are insulated from such liability; however, they must be careful not to overstep the boundaries of the protections afforded them.

What is CERCLA?

It is mentioned in many commercial real estate loan documents, typically in connection with a representation by a borrower that they are in material compliance with it. “CERCLA” is an acronym for the Comprehensive Environmental Response, Compensation and Liability Act of 1980. This is the primary piece of federal legislation governing events related to the exposure of real estate to hazardous materials in the United States. Most state environmental laws are based on this law. When it comes to commercial real estate (or any real estate for that matter), the last place anyone wants to be is on the wrong side of CERCLA because CERCLA imposes strict liability upon “owners and operators” of real property for penalties and costs related to hazardous waste contamination and clean up. A lender can become an “owner and operator” of real property under CERCLA in several ways, with potential exposure to CERCLA strict liability. There are three exceptions to CERCLA strict liability: (i) an Act of God; (ii) an Act of War; or (iii) Secured Creditor Safe Harbor.

Initially, the Secured Creditor Safe Harbor allowed that a lender who owned or possessed real property for the sole purpose of protecting its security interest in the real property, and who did not “participate in the management of the real property,” was excluded from strict liability under CERCLA. Unfortunately, courts disagreed on how to interpret the Secured Creditor Safe Harbor (specifically, when did a lender “own or possess” the real property and what constituted “participating in the management” of the real property?). The Secured Creditor Safe Harbor was later narrowed and more clearly defined.

The U.S. EPA adopted guidelines (which were later codified in CERCLA) to test whether a lender and a lender’s actions were protected by the Secured Creditor Safe Harbor. These guidelines attempted to clarify what “participating in the management” of a property means. A two-part test was established to determine whether lenders met this factor:

  1. Did the lender exercise control over the management of the borrower’s environmental compliance program? In other words, did the lender tell the borrower what to do to comply with applicable environmental laws?
     
  2. Did the lender participate in the Borrower’s day-to-day decision-making process with respect to environmental compliance and other business operations? Simply collecting rent from tenants or advising the borrower on financial matters related to the property is not considered “participation in management.” Other lender activities that do not satisfy this second part include: (i) pre-loan investigations; (ii) loan servicing; (iii) loan workouts; and (iv) foreclosures.

 

If a lender can prove that: (i) it holds a security interest in real property to secure repayment of money or some other obligation; and (ii) it did not actually participate in management of the property, then the lender is protected by the Secured Creditor Safe Harbor.

What happens after a lender forecloses and becomes the actual owner of the property?

Under CERCLA, a lender must establish it has made commercially reasonable efforts to divest itself of the real property in a commercially reasonable time and on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements. CERCLA does not define “commercially reasonable;” however, lenders can look to the EPA for guidance. The EPA provides that a lender makes “commercially reasonable” efforts to divest the property when the lender lists the property with a broker or advertises the property for sale in an “appropriate publication” (publication of general circulation) within 12 months of foreclosure. It is important to note that lenders who were not protected by the Secured Creditor Safe Harbor pre-foreclosure cannot be protected by the Secured Creditor Safe Harbor after foreclosure. A lender’s own acts or omissions during ownership or control of the real property are not protected by the Secured Creditor Safe Harbor provision.

A lender considering making a commercial real estate loan should consider the following “best practices” to avoid CERCLA liability: 

  • document everything;
     
  • avoid active participation in the operational affairs of the Borrower and the property;
     
  • if practical, have a receiver appointed to manage the property during default and foreclosure;
     
  • conduct pre-foreclosure environmental due diligence;
     
  • ensure good environmental management post-repossession or post-foreclosure; and
     
  • carefully document efforts to market the property for sale

© 2011 Dinsmore & Shohl LLP. All rights reserved.

EPA Defers GHG Permitting Requirements for Biomass Industries

An update from the National Law Review’s friends at Michael Best & Friedrich, LLP – Linda Bochert, Michelle Wagner & Anna Wildeman:  

In a move designed to encourage clean energy and the use of biomass as a fuel, on January 12, 2011, the U.S. Environmental Protection Agency (“EPA”) announced a 3-year deferral of the newly enacted Greenhouse Gas (“GHG”) permitting requirements for biomass-burning industries and other biogenic sources.

Effective January 2, 2011, large GHG emitters – e.g., power plants, refineries – must obtain air permits and implement energy efficiency measures or cost-effective technologies to reduce GHG emissions when building new facilities or making major modifications to existing facilities.  EPA plans to complete the rulemaking to implement the deferral of the GHG permitting requirements for biomass-burning industries and other biogenic sources by July 2011. To cover the six-month gap until the deferral rule becomes effective, EPA is expected to issue guidance allowing state and local permitting authorities to conclude that the use of biomass is the best available control technology for GHG emissions.

EPA is implementing the deferral to enable it to seek and consider scientific research on carbon dioxide (“CO2”) emissions from biomass sources, including evidence that biomass based energy generation can be carbon-neutral. During the deferral period, EPA will seek input from other governmental agencies as well as from independent experts. EPA will also consider more than 7,000 comments it received from its July 2010 “Call for Information,” requesting public comment on approaches to account for GHG emissions from biomass-burning sources. Before the three year deferral ends, EPA expects to develop a second rulemaking that addresses how GHG emissions from biomass-burning and other biogenic sources should be treated under the Clean Air Act GHG permitting requirements.

In a separate, but related matter, EPA notified the National Alliance of Forest Owners (“NAFO”) that the agency will grant NAFO’s petition to reconsider the portion of EPA’s “Tailoring Rule,” finalized this past May 2010, which addresses the treatment of biomass carbon emissions. The biomass industry at large, including NAFO, was taken aback when EPA finalized its Tailoring Rule without any exemption for biomass-burning facilities.

© MICHAEL BEST & FRIEDRICH LLP