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The Phase 1-2 Punch: Seventh Circuit Affirms Strict Enforcement of All Appropriate Inquiries (AAI) and ASTM Issues Revised Standard for AAI-Compliant Due Diligence

November 2, 2021

At the same time that Federal courts are strictly enforcing the requirements for All Appropriate Inquiries, ASTM International (“ASTM”) has issued additional, potentially challenging revisions to the E1527 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (“Phase I Standard”). The revisions to the Phase I Standard were approved by ASTM on Nov. 1 and publication is anticipated shortly thereafter. Although most environmental professionals generally follow the Phase I Standard when performing Phase I Environmental Site Assessments (“Phase I ESAs”), a more rigorous compliance with the ASTM standard and the U.S. Environmental Protection Agency’s (“EPA”) regulations is required to establish that they performed “all appropriate inquiries” for their clients to qualify for statutory landowner liability protection as an “innocent landowner” or “bona fide prospective purchaser” under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). EPA’s regulations provide that the 2013 version of the Phase I Standard (E1527-13) may be used to comply with all appropriate inquiries requirements. Inasmuch as EPA was an active participant in the latest ASTM revision process, it is anticipated that EPA’s regulation will be revised to incorporate the updated Phase I Standard (E1527-21).

A recent case from the Seventh Circuit, Von Duprin LLC v. Major Holdings, LLC, et al., 2021 WL 4025150 (7th Cir., September 3, 2021), highlights the importance of strict compliance with CERCLA’s all appropriate inquiries requirements to establish the bona fide prospective purchaser (“BFPP”) defense. In Von Duprin, the Seventh Circuit affirmed the District Court’s holding that one of the defendants was not entitled to assert the BFPP defense because the Phase I ESAs conducted for the defendant at two different properties did not comply with the statutory “all appropriate inquiries” requirements. The fatal flaws found by the District Court, and affirmed by the Seventh Circuit, with respect to one of the properties were the failure to include the environmental professional’s certifications in the Phase I report and the environmental professional’s failure to make the necessary and required inquiries with the owner of the parcel.

As to the other property, the District Court found that although an environmental professional performed a timely Phase I ESA prior to the defendant’s purchase of the property in 2013, the defendant had been leasing the property since November 2007.  Because the BFPP defense applies to owners and operators, and the defendant became an operator in 2007 when it commenced its 99-year lease, the District Court found that the defendant had to establish that it conducted all appropriate inquiries prior to signing the lease. Although the defendant produced a Phase I ESA report from Sept. 6, 2006, the District Court noted that the Sept. 6, 2006 Phase I ESA did not satisfy all appropriate inquiries requirements because it was not completed or updated within 180 days of and prior to the commencement of the lease on Nov. 16, 2007.

Therefore, environmental professionals, as well as prospective purchasers (and lessees) and their advisors, should familiarize themselves with the recent revisions to the Phase I Standard to ensure that Phase I ESAs satisfy the CERCLA all appropriate inquiries requirements as reflected in the Phase I Standard and the EPA’s regulations.

The ASTM E50 Committee’s goal was to improve the Phase I Standard by ensuring consistency with the CERCLA requirements, incorporating current best practices for performing Phase I ESAs, and addressing perceived deficiencies in the completion of Phase I ESAs under the prior standard (E1527-13) during the past seven years. Some of the more important revisions are as follows:

  1. The definition of recognized environmental condition (“REC”) was refined, including a new definition of “likely” as used in the context of “the likely presence of hazardous substances or petroleum products.”
  2. The definition of controlled recognized environmental condition (“CREC”) was substantially revised and now requires the environmental professional to identify in the report’s Findings and Opinions section the environmental professional’s rationale for concluding that a finding is a CREC. However, the revised Phase I Standard notes that the environmental professional’s determination that the recognized environmental condition is subject to implementation of required controls “does not imply that the environmental professional has evaluated or confirmed the adequacy, implementation, or continued effectiveness of the control(s).”
  3. Similarly, the definition of historical recognized environmental condition (“HREC”) now explicitly requires the environmental professional to include in the report’s Findings and Opinions section the rationale for concluding that a finding is an HREC as well as whether an HREC still qualifies as an HREC (i.e., have new conditions or information been identified such as a change in regulatory criteria or a subsequently identified migration pathway that was not previously known or evaluated).
  4. The revised Phase I Standard includes a new Appendix X4 with a REC logic flow chart along with guidance and examples of RECs, CRECs, and HRECs.
  5. The provision on the continued viability (i.e., shelf life) of the Phase I ESA has been expanded to emphasize that specified components (interviews, searches for environmental liens, reviews of government records, visual inspections, and the environmental professional’s declaration) must be conducted or updated within 180 days prior to the date of acquisition of the property to qualify for CERCLA landowner liability protection (and all other components must be conducted or updated within one year prior to the date of acquisition of the property).
  6. The section on User Responsibilities for reviewing land title records and judicial records for environmental liens and activity and use limitations (“AULs”) was substantially revised and clarified.
  7. There are important revisions to the provisions on historical research and review of records. For example, the environmental professional is now required to review four specific sources of historical information (aerial photographs, fire insurance maps, local street directories, and topographic maps) for adjoining properties if those sources have been researched for the subject property (or to indicate in the report why such a review was not conducted).
  8. The environmental professional must now discuss the impact of significant data gaps in the Findings and Opinions sections of the Phase I ESA report (in addition to listing significant data gaps in the Conclusions section).
  9. The Phase I Standard will now require the inclusion of photographs of features, activities, uses, and conditions indicative of RECs and de minimis conditions. Although many environmental professionals have been including photographs in their Phase I ESA reports for years, it will no longer be optional for the report to satisfy the revised Phase I Standard.
  10. Finally, the list of non-scope items was expanded to clarify that emerging contaminants such as PFAS (per- and polyfluoroalkyl substances) are non-scope until they are classified as a CERCLA hazardous substance. However, the Appendix on non-scope issues (now Appendix X6) was revised to include a discussion of emerging contaminants, which notes that the environmental professional should consider and discuss these substances if they are considered hazardous under applicable state law and where the Phase I ESA is performed to satisfy both federal and state requirements. (In its recently issued PFAS Strategic Roadmap: EPA’s Commitments to Action 2021-2024, the EPA announced its intent to issue a proposed rulemaking in Spring 2022 to designate two PFAS chemicals, Perflourooctanoic acid (“PFOA”) and Perfluorooctane sulfonic acid (“PFOS”), as CERCLA hazardous substances.)

ASTM’s E1527 Task Group has been meeting since early 2018 to review and consider revisions to the Phase I Standard. The consensus process has not always been easy, but the resulting revised Phase I Standard should improve the quality and content of future Phase I ESA reports for the benefit of all involved parties (i.e., prospective purchasers and lessees, lenders).

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