Bona Fide Prospective Purchaser Defense: Why Has It Failed To Deliver?

The goal of the Bona Fide Prospective Purchaser Defense,1 enacted in January 2002, was to lessen the harshness of the Comprehensive Environmental Response, Compensation, and Liability Act's (CERCLA)2 strict liability scheme by allowing purchasers of contaminated property to avoid liability provided certain pre-acquisition diligence standards and post-acquisition obligations were met. Ten years later, the defense has not delivered on its promise. As discussed below, many limitations and uncertainties limit the effectiveness of the defense.

Introduction

Passed in 1980, CERCLA was Congress' response to the public health and environmental threats posed by the legacy of over a century of haphazard'and largely unregulated'disposal of hazardous materials at industrial sites and waste disposal facilities. CERCLA addressed this legacy by introducing a radically new liability scheme with respect to the cleanup of contaminated sites. Under CERCLA, with limited exceptions, cleanup liability was imposed on a variety of parties, including current owners and operators, without regard to fault or the legality of the conduct that gave rise to the conditions.

CERCLA presented prospective purchasers of contaminated property with the risk of cleanup liabilities arising from pre-existing conditions. To mitigate this risk, purchasers could often conduct extensive pre-acquisition environmental diligence designed to identify potential contamination conditions. Potential buyers faced with diligence findings revealing actual or potential contamination could then decide to (1) not proceed with the transaction, or (2) proceed with the transaction and either assume the environmental risks or mitigate these risks through contractual protection from the seller or, if available, insurance.

This situation was far from perfect. First, environmental conditions are often hidden beyond the reach of the standard environmental diligence tool, the Phase I site assessment.3 Second, sellers

are not necessarily willing to provide indemnities for pre-closing environmental liabilities, and, even if they are, they may ultimately fail to honor such obligations. These factors also contributed to the existence of "brownfields," or heavily contaminated former industrial properties that were financially impractical to redevelop due to the risk of CERCLA liability.

The defense was enacted in 2002 and provided that a purchaser would be protected against CERCLA liability for pre-closing releases of hazardous substances, whether discovered during pre-acquisition environmental diligence or post-closing, if a purchaser satisfied three basic requirements:

1. All Appropriate Inquiries. The purchaser must conduct an appropriate level environmental diligence prior to the acquisition, referred to as "all appropriate inquiries" (AAI). Pursuant to Environmental Protection Agency regulation, the standards set forth in the ASTM E1527-05 Phase I Environmental Site Assessment Process generally satisfy the statutory requirements for conducting AAI.4

2. Continuing Obligations. The purchaser must comply with a number of post-closing obligations, including (1) making legally required notices with respect to the discovery or release of any hazardous substances; (2) taking reasonable steps to stop any continuing release, prevent any threatened future release and prevent or limit human, environmental, or natural resource exposure to any prior release; (3) cooperating with and assisting other parties conducting response actions; (4) complying with any institutional controls implemented in connection with any response actions; and...