Title: An Overview of Transactional Environmental Audits
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 Material Information
Title: An Overview of Transactional Environmental Audits
Physical Description: Book
Language: English
 Subjects
Spatial Coverage: North America -- United States of America -- Florida
 Notes
Abstract: An Overview of Transactional Environmental Audits, by Frank L. Hearne
General Note: Box 7, Folder 1 ( Vail Conference 1987 - 1987 ), Item 99
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
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Bibliographic ID: WL00000706
Volume ID: VID00001
Source Institution: Levin College of Law, University of Florida
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An Overview of Transactional Environmental Audits
by Frank L. Hearne


Environmental audits are a growing
part of the environmental lawyer's prac-
tice. Frequently real property, cor-
porate, and security practitioners also
will encounter situations which call for
an environmental audit. With increas-
ingly complex environmental laws, this
trend probably will continue. This
article 1) provides a brief overview
of two general types of comprehensive
environmental audits and 2) provides
a little more detail regarding the type
of audit undertaken in the context of
real property and business transactions.
In reality, each audit involves specific
issues and can become quite complex.
A thorough treatment of the topic is
beyond the scope of this article.
The first major type of audit is the
"Transactional Audit" which is under-
taken in connection with a real prop-
erty or business transaction and focuses
on the transfer of potential liability.
Transactional audits are complicated
by the presence of multiple parties with
adverse interests. For example, in the
sale of real property, buyer, seller, and
N lender must focus on very different
liabilities.
The second major type of audit is
the "Operational Audit". This type of
audit is often undertaken by a present
owner or operator who is concerned
that all legal environmental require-
ments are being properly fulfilled. The
focus here is on fulfilling obligations
to 1) allow continued operations within
the law and 2) avoid enforcement
actions. More and more frequently,
senior management is the source of
the audit request. Intercompany ten-
sions are involved here because the
audit may indicate bad news and could
result in assigning blame to responsible
management. Obviously, both types of
audits can occur in a specific case.
The buyer of an industrial facility is
equally concerned that I) the real prop-
erty is not contaminated and 2) the
facility is properly licensed and can
continue operating, hopefully at a profit.
Some states require an environmental
audit of certain types of property when
it is transferred. For example, New
r,, Jersey's Environmental Cleanup Respon-
S sibility Act ["ECRA" N.J. Stat. Ann.
13:1K-1 et seq. (West Supp. 1985)]
requires that defined types of industrial
property be investigated and a plan
developed for cleanup when operations
are closed, sold, or transferred. The


transaction may not close until financial
assurances have been provided to fund
the cleanup. If the statutory provisions
are not followed, the sale can be voided.
Under New Jersey ECRA and other
state laws, should the state be required
to clean up the property, the state
can obtain a "superlien" against the
property for cleanup costs. The lien
is superior to all other liens including
prior liens. Such statutes are receiving
the full attention of the lenders involved
in those states. Other states with
ECRA-like statutes include Connect-
icut, Massachusetts, New Hampshire,
Tennessee, and Arkansas. Similar legis-
lation is being considered in New York.

The Lender
Generally, CERCLA (the Compre-
hensive Environmental Response, Com-
pensation and Liability Act of 1980)
provides that owners, operators, and
certain other parties may be held strictly
liable for certain specified cleanup costs
at CERCLA sites subject to very lim-
ited defenses. 42 U.S.C. 9607(a).
Should the site conditions be serious
enough to warrant federal or state
involvement funded by CERCLA, one
recent case provided extremely bad
news for lenders. United States v.
Maryland Bank & Trust Co.. No. N-84-
4026, slip op. (D. Md. April 9, 1986).
Excepted from the definition of "owner"
under CERCLA are those persons "hold-
ing indicia of ownership primarily to
protect his security interest." 42 U.S.C.
9601(20)(A). In Maryland Bank &
Trust, the bank had made several loans,
some secured by the property to the
owner of a waste site. In 1981, the
bank foreclosed and took title at the
foreclosure sale in 1982. EPA spent
some $551,000 on cleanup at the site
and sued the bank under CERCLA
for payment. Among other things, the
bank defended on the basis of the
exception mentioned above. The court
held that the exception applied until
the bank bought the property at the
foreclosure sale. The banker was owner
during cleanup and was, therefore, liable
to EPA.
The lender liability battle under
CERCLA is probably far from finished,
and the case leaves lenders some room
to maneuver. See United States v.
Mirabile 15 Envtl. L. Rep. (Fnvtl. L.
Inst.) 20,992 (E.D. Pa. Sept. 4. 1985.)

.0


distinguished by the Maryland Bank
& Trust court on the basis that the
bank in the former case held the prop-
erty for four months while in the latter
case the bank held the property for
four years. There are also possibilities
under these cases that a lender can
become a responsible party under
CERCLA where the lender becomes
involved in management of the facility.
For an extensive review of lender liabil-
ity and related matters, the reader
should consult Berz, D.R. and Sexton,
R.C., Lending into Hazardous Sub-
stance Liability: The Secured Creditor
as "Owner" Under Superfund 12 Chem-
ical Waste Litigation Reporter 34 (June,
1986) and Murphy, M., The Impact
of "Superfund" and other Environ-
mental Statutes on Commercial Lend-
ing and Investment Activities 41 Bus.
Law. 1133 (August, 1986).

The Seller
Frequently, the seller doesn't know
and may not care to find out what
problems may exist. After all, if a
serious problem is discovered he may
well be left with the property and,
in certain circumstances, a legal obliga-
tion to report the contamination
detected. For this reason, the seller's
lawyers must first consider how the
investigation should be conducted in
order to protect the information from
disclosure.
The lawyer should become familiar
with the extensive literature and case
law associated with protecting the
information. A good starting point
would be two articles. These are: 1)
Earl, W.L., Environmental Auditing:
What Your Client Doesn't Know Hurts
the Most, Fla. Bar J. January, 1986
47-50; and 2) Weiss, M., Issues of
Confidentiality and Disclosure in Envi-
ronmental Auditing, report to the U.S.
Environmental Protection Agency, 1984
Publication No. PB85-239259.

The Buyer
Aside from the direct liability in-
volved, buyers (and lenders) should
be aware that hazardous substance con-
tamination can completely destroy the
value of the mortgaged property. Even
if a cleanup is not required, the discov-
ery of drums, underground tanks, or
contamination could delay building
plans at possibly catastrophic costs.


Page 18







Even if the contamination is the fault
of the seller, the agencies will come
to the current owner and it will be
his operations which are disrupted. The
buyer must also be concerned with
f( liability to third parties under common
law based on contamination of neigh-
boring wells, employee exposure, and
other factors.
Despite these potential dangers, many
buyers are not necessarily anxious to
spend a geat deal of money on investi-
gations or lose what they see as a
"good deal" by pushing too hard for
an investigation. When contamination
is found, depending on the buyer's
degree of sophistication in such mat-
ters, he may prefer to estimate cleanup
cost and I) reduce the purchase price,
or 2) provide for an escrow fund to
cover cleanup. Sometimes, the buyer
may rely on an indemnity from the
seller if the lender is also satisfied.

An Example
Let us consider a parcel which is
being sold. The parcel was once occu-
pied by a trucking company and con-
tains paved areas and an old office
building. The parcel is bordered by
a small stream. The transaction will
be financed by a bank and will be
r, secured by a mortgage on the real
f estate. The buyer intends to clear the
property and build apartments. Some.
but certainly not all, of the issues from
the buyer's point of view would be:
1. Is the property properly zoned?
2. Is the soil or ground water conta-
minated by fuels, solvents, or other
materials connected with the trucking
operation or the cargo?
3. Is there asbestos in the building?
4. Are there wetland areas in con-
nection with the stream which would
limit the buyer development plans?
5. Are there abandoned underground
tanks on the site?

An Approach
One device which is both cost
effective and helpful in reducing the
tension between the parties is a phased
approach. During Phase I, the buyer
or his consultants will visit the site,
research agency and title records regard-
ing the site, review the seller's records
(if so agreed). and interview people
involved in the operation on site if
they are available. It may be that the
buyer discovers enough during this pro-
cess to determine he is no longer inter-
ested (for example, agency records
indicate a large xylene spill which was


never corrected). If the parties are still
comfortable, during Phase 11 soil and
groundwater sampling efforts can be
focused on the specific chemicals one
would expect based on the records
investigation and site visit. Lastly, if
contamination is detected the parties
may do further testing to estimate
cleanup costs in Phase Ill.
In the example above, there would
probably be an audit of soil and ground
water, of the building for asbestos and
a check to locate any unknown under-
ground tanks. An analysis of federal
and state wetlands jurisdiction would
also be appropriate to determine the
areas which can be developed. If the
property available for development is
too small, the buyer's entire develop-
ment plan could be jeopardized.

Conclusion
An extensive literature base is devel-
oping with regard to transactional


audits. Lawyers involved in real estate
and business transactions should ac-
quaint themselves with the issues in-
volved. The Florida Bar Environmental
and Land Use Law Section is planning a
presentation next year to discuss the
topic.


Frank Hearne is environmental coun-
sel to Environmental Science and Engi-
neering. Inc.. and is located in the
Gainesvillk, Florida office. He received
a B.S. in engineering in 1972 and an
M.S. in zoology in 1977 from the
University of Florida. His J.D. was
awarded in 1981 by the University of
Florida College of Law and he was
admitted to The Florida Bar in 1982.
The opinions expressed in his article
are entirely his own and do not reflect
those of ESE or its clients.


Agency Update

Compiled by Kent A. Zaiser, Mary Hansen, Beth Ross

St. Johns River Water Management District


Relative quiet prevails on the rule-
making front at the St. Johns River
Water Management District. The
District has enacted its conceptual
approval rule, Section 40C-1.132,
Florida Administrative Code. This rule
is an addition to conceptual approval
procedures found in Chapters 40C-4
and 40C-42, Florida Administrative
Code, which deal with the management
and storage of surface waters. The new
rule 40C-1.132 is an addition to those
rules and is available only to projects
that constitute developments of regional
impact. The rule became effective on
July 1, 1986.
With no firm promulgation sched-


ules available, several proposed rules
are being drafted at the District. They
include amendments to Chapters 40C-4
and 40C-40, the District's management
and storage of surface water rules.
The revisions are expected to clarify
certain terms, definitions and proce-
dural operations of those rules. A
revision to Chapter 40C-41 to provide
for more stringent permitting criteria
and for greater protection of the Wekiva
River Basin are also in the works.
However, again no adoption date has
been set. Finally, the District is work-
ing on a handbook describing its wet-
lands policies, particularly with regard
to mitigation.


Southwest Florida Water Management District


The Southwest Florida Water Man-
agement District has amended its rules
on management and storage of surface
waters (Chapter 40D-4, F.A.C.) to
include regulation of phosphate mining
and mining-related surface water man-
agement systems, effective October 1.
1986. Phosphate mining and related
activities may qualify for exemption
from the District's permitting require-
ments provided certain conditions are
met. The District is presently negoti-


(.o5


ating memoranda of understanding with
the Department of Environmental Reg-
ulation and Department of Natural
Resources to implement the exemption
process.
The District also amended its Water
Shortage Plan (Chapter40D-21.F.A.C.),
effective July 2, 1986. The amend-
ments are based on the District's
experience in implementing the Plan
during water shortages since 1984.
continued ..
Page 19




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