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Federal Court Finds Environmental Assessor May Be Liable To Future Property Owners Who Rely On Its Phase I Assessment, Notwithstanding Assessor's Attempts To Limit Such Reliance


In a recent decision that may well be a harbinger of lawsuits to come, the United States District Court for the District of New Jersey recently held that an environmental-consulting firm could be liable not just to those who commissioned their report, but to subsequent purchasers who obtained and relied upon that report without the firm’s consent. This decision -- Bonnieview Homeowners Ass'n, LLC v. Woodmont Builders, LLC -- has important legal implications both for those who perform environmental assessments, and for those who rely upon them. Although Bonnieview is unpublished, the new Federal Rules of Civil Procedure provide that unpublished opinions may be cited to federal courts as of December 1, 2006.

The Case

Bonnieview involved a 131-acre tract of New Jersey real estate that had previously been used as an orchard (the "Parcel"). In 1997, the Morris County Open Space and Farmland Preservation Trust Fund ("County Trust Fund") agreed to purchase and dedicate the Parcel as open space. In connection with this purchase, the County Trust Fund hired the environmental consulting firm Post, Buckley, Schug & Jemigan, Inc. ("PBS&J") to perform a Phase I assessment.

PBS&J set forth the Report’s Phase I objectives: "to determine if current or past land use practices have adversely impacted the site, to identify any other potential environmental concerns, and to determine if additional field investigations are warranted." The Report further cautioned that PBS&J’s ability to achieve these broad objectives was limited, because Phase I assessments do not include: (i) soil sampling; or (ii) any verification of current or former owners’ compliance with environmental regulations. Finally, PBS&J sought to limit reliance on the Report by stating that it had been written "for the exclusive use of the [County Trust Fund] as it applies to an evaluation of [the Parcel]."

The Bonnieview Court noted that PBS&J’s Report appears to have been adequate for the purposes for which it had been commissioned – i.e., there was no allegation that the Report failed to provide the County Trust Fund with the information that it needed to evaluate the Parcel’s suitability for open space.

But the County Trust Fund did not limit its use of the Report to this purpose. Instead, the Fund forwarded the Report to a private developer during the due-diligence phase of a subsequent sale of a 30-acre slice of the Parcel. This developer and its environmental consultant relied on the Report to purchase the Parcel, submitted it to various government agencies in support of the developer’s building-permit applications, and gave it to the homeowners’ association whose members purchased the houses that the developer built.

A few years later, another environmental consultant performed a soil analysis of the Parcel, and discovered significant contamination -- most likely caused by pesticides that had been used by the farmers who had used the Parcel as an orchard several decades before. When the homeowners’ association learned that it had been sold contaminated real estate, it sued the developer and the developer’s environmental consultant. The developer cross-claimed against PBS&J, claiming that PBS&J had negligently performed and prepared its Phase I Report.

PBS&J moved for summary judgment, arguing that: (i) PBS&J’s Report specifically said that it was for the "exclusive use" of the County Trust Fund, so the developer and its environmental consultant should not have relied upon it in the first place; and (ii) in any event, the contamination at issue could not be detected unless soil samples were tested and/or previous owners’ compliance with environmental regulations was verified, and the Phase I Report explicitly stated that PBS&J had not performed either of these tasks.

While the Court acknowledged that these were "powerful arguments" against finding PBS&J negligent, the Court declined to dismiss them from the lawsuit. The Court held that when PBS&J agreed to do the assessment it assumed a duty, to "determine if current or past land use practices have adversely impacted the site, [and] to identify any other potential environmental concerns." The Court explained that the practical limitations of the Phase I Report were relevant to the issue of how well PBS&J performed its obligations, but these limitations could not narrow the scope of the duty itself. Moreover, PBS&J owed this duty to all foreseeable users of its Report – including subsequent purchasers of the Parcel -- even though the Report stated that it was for the "exclusive use" of the County Trust Fund.

Lessons Learned

This case teaches two major lessons – one for those who perform environmental assessments, and one for those who rely upon them. Environmental assessors cannot rely upon stock contract provisions to limit their liability. Instead, they must assume that their reports will be relied upon by people other than those for whom they were written, and in transactions different from those for which their reports were prepared. They must make "all reasonable inquiries" for all of the purposes to which their reports might foreseeably be used. In Bonnieview, PBS&J knew that the Parcel had been used as an orchard, and that it was possible that the soil contained residual pesticide contamination. Given real estate sellers’ broad due-diligence disclosure obligations, PBS&J should have foreseen that its Report would find its way into the hands of a future purchaser who would rely upon its conclusion that evidence of contamination was not found.

Those who receive environmental-assessment reports, on the other hand, should not rely upon them without carefully analyzing each report’s scope and limitations. A developer who wants to build residential housing, for example, should take reasonable steps to confirm the findings of environmental assessments that it receives from others, and to supplement them as necessary where the developer’s purposes are different from those for which the initial report was prepared.

Bonnieview Precedes, But May Anticipate, The EPA’s All Appropriate Inquiry Rule

Bonnieview is not likely to be an isolated case, as the United States Environmental Protection Agency recently released new regulations to assist developers and consultants determine the scope and extent of environmental assessments. Dubbed the "All Appropriate Inquiry Rule," it is codified in Part 312 of Title 40 of the Code of Federal Regulations, and took effect on November 1, 2006. This Rule refines the federal standards for performing Phase I environmental site assessments and modifies the requirements for landowner liability relief from the federal Superfund law. Please keep an eye out for Nossaman’s upcoming E-Alert about this new "All Appropriate Inquiry Rule."

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