Business law and environmental law are such divergent areas of practice that one might think they are mutually exclusive. However, due to the potentially significant implications that environmental laws can have upon certain business deals, businesses and their lawyers must be able to spot environmental issues that may arise in the transactional setting. Failure to spot these environmental issues could result in various calamities, including the unwitting assumption of joint and several liability for a cleanup, the ability of one of the parties to the transaction to void it, the assessment of hefty fines and penalties, and even the threat of criminal prosecution in certain egregious instances.
This article focuses on just two of these heavy-hitting environmental laws and the general issues that an effective business lawyer must be able to spot before negotiating (and certainly before agreeing upon) the terms of the deal. While there are numerous environmental laws that pack an equally significant punch, of which the business lawyer should be informed, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)1 and the Resource Conservation and Recovery Act (RCRA),2 the body of law is expansive, and such a discussion would surpass the scope of this article. Therefore, this article is meant to be utilized as a basic primer to the New Jersey Spill Compensation and Control Act (Spill Act) and the Industrial Site Recovery Act.
New Jersey Spill Compensation and Control Act:
In for a Penny, In for a Pound
Corporate and other business transactions often involve the conveyance of ownership interests in real property that is deemed an asset. In those cases, recognizing the potential environmental issues is relatively straightforward. The envi ronmental integrity of the real property that is being trans
ferred becomes extremely important, since the liability for any preexisting environmental contamination and its requi site cleanup will be on the negotiation table. The Spill Act establishes the strict liability of any person who has discharged a hazardous substance or is in “any way responsible” for the discharge of a hazardous substance.3 Anyone deemed in any way responsible for a discharge may include owners and operators of a given property, among others, even if the owners and operators took ownership or control of the property after a discharge occurred and otherwise had no knowledge of it.4 Since the strict liability under the Spill Act is also joint and several, if a responsible party in the chain of title is in for a penny, it is in for a pound, as they say. In the long run, if there is any contribution to be collected from any other party that is in any way responsible for the discharge, the legal pursuit of such a claim would be at the remediating party’s own expense. In short, each party in the chain of title, as well as current and former operators of certain industrial facilities, is potentially responsible for the entire cost of a cleanup of all discharges. As such, any purchaser of assets or stocks, or any corporation or other business entity that is a party to a transaction that results in its ownership of real property, will likely (read should) strive to obtain the everimportant “innocent purchaser” status under the Spill Act. Surely everyone has heard the old saying that curiosity killed the cat. No other idiom has less of a place in a corporate or other business transaction, at least from an environmental lawyer’s perspective. Pursuant to the Spill Act, a purchaser of real property, including a corporation or other business entity that partakes in a transaction that results in its ownership of real property, can avoid the imposition of strict liability for preexisting contamination by obtaining innocent purchaser status. In order to obtain this status, and thus be in a position to rely upon it as a defense to Spill Act liability should the need ever arise, a purchaser must conduct the appropriate environmental due diligence into the property at issue by performing a preliminary assessment, as well as a site investigation (PA/SI) if necessary. If executed correctly, a PA/SI will reveal the current and historic environmental condition of the property so the liability, and thus the cost, for the cleanup can be allocated contractually among the parties, thereby leaving no potential surprises for the future. Importantly, a PA/SI will also describe the business operations that have historically been conducted upon a given property, as well as the materials that were utilized in those business operations. The parties to the transaction can rely upon that information in order to consider whether the Industrial Site Recovery Act (ISRA)5 applies. 50 NEW JERSEY LAWYER | October 2014 NJSBA.COM
ISRA: Determining Applicability and Identifying the Trigger Considering, and ultimately determining, whether ISRA is applicable to a particular transaction requires not only astute lawyering and attention to detail but also hard facts about the current use of the property, the historic uses of the property, and the details about any business operations that have been and/or are conducted upon it, among other things. In sum, the ISRA analysis revolves around two seminal issues, as follows: 1) whether the real property at issue is a facility that constitutes an “industrial establishment” under the law such that ISRA is applicable to the transaction, and 2) whether the transaction will trigger ISRA.
What is an Industrial Establishment for Purposes of ISRA?
An industrial establishment is defined by the statute, in pertinent part, as “any place of business engaged in operations which involves the generation, manufacture, refining, transportation, treatment, storage, handling, or disposal of hazardous substances or hazardous wastes onsite…”6 Somewhat nebulous, the New Jersey Administrative Code provides more clarity than the statutory definition, stating that in order to be deemed an industrial establishment within the purview of ISRA, a place of business must meet all three of the following requirements:
1. operated in New Jersey at any time on or after Dec. 31, 1983;
2. has a North American Industrial Classification System (NAICS) code listed in Appendix C of the ISRA regulations;7 and
3. use(d), handle(d), or store(d) “hazardous substances”8 onsite.
If the property or facility meets all three of these requirements, it would be deemed an industrial establishment for purposes of ISRA. Therefore, if the corporate or other business transaction at issue would trigger ISRA, then ISRA compliance is another environmental issue to be negotiated and allocated contractually as part of the deal.
Will the Transaction Trigger ISRA?
Interestingly, a specific conveyance of real property from one party to another is not the only transactional mechanism that can potentially trigger ISRA. Certain ‘standalone’ corporate or other business events or transactions can also potentially trigger ISRA. Identifying the potential for environmental issues in those instances is not as straightforward as knowing that when a deal includes the specific conveyance of real property as an asset from one party to another ISRA might be triggered. A strong working knowledge of corporate and business law, as well as the transactions and practices of the particular corporation or other business entity, is essential. Events in the lifecycle of a corporation or other business entity that can trigger ISRA are: 1) closing operations; 2) transferring ownership or operations; or 3) change in ownership. Although these terms may seem redundant on their faces, each category of these ISRA triggers includes specific descriptions of ISRAsubject business affairs.
The first category of ISRA triggers is closing operations. The following events amount to closing operations for purposes of ISRA:
• the cessation of operations resulting in at least a 90 percent reduction in the total value of the product output from the entire industrial establishment, as measured on a constant, annual datespecific basis, within any fiveyear period, or, for industrial establishments for which the product output is undefined, a 90 percent reduction in the number of employees or a 90 percent reduction in the area of operations of an industrial establishment within any fiveyear period;
• any temporary cessation of operations of an industrial establishment for a period of not less than two years;
• any judicial proceeding or final agency action through which an industrial establishment becomes nonoperational for health or safety reasons;
• the initiation of bankruptcy proceedings pursuant to Chapter 7 of the federal Bankruptcy Code or the filing of a plan of reorganization that provides for a liquidation pursuant to Chapter 11 of the federal Bankruptcy Code;
• any change in operations of an industrial establishment that changes the standard industrial classification (SIC)9 number to one that is not subject to ISRA; or
• the termination of a lease unless there is no disruption in operations of the industrial establishment, or the assignment of a lease.
Transferring Ownership or Operations
The second category of ISRA triggers is transferring ownership or operations. The following events amount to transferring ownership or operations for purposes of ISRA:
• the sale or transfer of more than 50 percent of the assets of an industrial establishment within any fiveyear period, as measured on a constant, annual, datespecific basis;
• the execution of a lease for a period of 99 years or longer for an industrial establishment; or
• the dissolution of an entity that is an owner or operator or an “indirect owner”10 of an industrial establishment, except in certain instances.
Change in Ownership
The third category of ISRA triggers is change in ownership. A change in ownership, for purposes of ISRA, occurs in connection with the following events:
• the sale or transfer of the business of an industrial establishment or any of its real property;
• the sale or transfer of stock in a corporation resulting in a merger or consolidation involving the direct owner or operator or indirect owner of the industrial establishment;
• the sale or transfer of stock in a corporation, or the transfer of a partnership interest, resulting in a change in the person holding the controlling interest in the direct owner or operator or indirect owner of an industrial establishment; or
• the sale or transfer of a partnership interest in a partnership that owns or operates an industrial establishment, that would reduce, by 10 percent or more, the assets available for the remediation of the industrial establishment.
If any of these events are to occur, then ISRA may be triggered. Again, the analysis must begin with whether the establishment, business, facility or real property in question is an ‘industrial establishment’ for purposes of ISRA. If it is not, then ISRA is not applicable and ISRA compliance need not be a consideration in the negotiation of the deal (unless, of course, the establishment, business, facility, or real property is to become ISRAsubject, in which case, the future obligation for compliance may be on the table). Finally, it should be noted that certain corporate and business transactions are specifically excepted from ISRA while others, such as the sale or transfer of a partnership interest, will only trigger ISRA when the result is a reduction of the assets that are available for costs associated with the environmental remediation of the industrial establishment at issue.11
In conclusion, simply spotting the potential environmental issues in a corporate or other business transaction, or other corporate or business event, is half the battle. Crafting the appropriate contractual protections or taking authorized action on behalf of the business client, as applicable, is the other half. Because the consequences of failing to do so can be stiff, the business lawyer would be well advised to have a partnership of sorts with a trusted environmental lawyer. Doing so up front might avoid the expenditure of significant time and expense later.
1. 42 U.S.C. 9601, et seq.
2. 42 U.S.C. 82, et seq.
3. N.J.S.A. 58:1023.11, et seq.
4. N.J.A.C. 7:1E1.6.
5. N.J.S.A. 13:1K6, et seq.
6. N.J.S.A. 13:1K8.
7. N.J.A.C. 7:26B1.
8. “Hazardous substance” means any substance defined as such pursuant to the Discharges of Petroleum and Other Hazardous Substances Regulations, N.J.A.C. 7:1E, et seq., which, specifically includes petroleum and petroleum byproducts or breakdown products.
9. In 1997, North American industrial classification system codes replaced SIC codes.
10. “Indirect owner” means any person who holds a controlling interest in a direct owner or operator, holds a controlling interest in another indirect owner, or holds an interest in a partnership which is an indirect owner or a direct owner or operator, of an industrial establishment. “Direct owner or operator” means any person that directly owns or operates an industrial establishment. A holder of a mortgage or other security interest in the industrial establishment shall not be deemed to be a direct owner or operator of the industrial establishment unless or until it obtains title to the industrial establishment by deed of foreclosure, by other deed, or by court order or other process.
11. See DEP Guidance at state.nj.us/dep/ srp/isra/isra_applicability.htm.
Joanne Vos is a partner at Maraziti, Falcon, & Healey, LLP in Short Hills. She focuses her practice in the area of environmental law and routinely counsels clients on matters related to environmental due diligence, limiting environmental liability in transactions, and ISRA compliance.