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Inheriting Trouble

Posted on - 08/29/2007
by JHP

Your grandfather started a family business almost 80 years ago called Coaters, Inc. Although much more automated and modernized, the company still manufactures the same products, using the same chemicals as when your grandfather founded the company. Forty years ago, your father inherited the business from your grandfather. In 1975, your father moved the business to a new location. Six years ago, you inherited the business from your father after working for the business all of your adult life. Before your father passed away, you had to prove yourself capable of operating the business by being responsible for each major division, including environmental compliance.

The plant is currently located on a 42 acre parcel of land owned by the corporation. However, the land where the corporation was founded by your grandfather was still in your father's name at the time of his death, and you inherited this land also. You inherited the corporation by receiving all the stock that your father owned in the company. The real estate on which the company had formerly operated was transferred directly to your name from your father's estate since it was not held by the corporation.

Recently, you learned that the company disposed of hazardous wastes at its former location before you inherited the property. From at least 1930 through 1970, the company disposed of spent solvents used in the company's coating operations in an old company owned and operated landfill on the property. You were totally unaware of the company's prior disposal methods at the time you inherited the property and the business. The municipal water company discovered the hazardous waste landfill on your property when solvents started showing up in the city's water wells located approximately one mile away from the property. After an investigation, U.S. EPA traced the plume of contamination in the groundwater back to the former company location. U.S. EPA has notified you that your company and you personally are responsible for the cost of remediating the contamination of the groundwater emanating from the old company location.

When U.S. EPA notified you of the contamination emanating from your property, you launched an investigation into the origin of the contamination. You interviewed your oldest employees and learned of the prior disposal practices. You learned through reviewing old corporate documents that the company operated the landfill on the former location until 1975, just before the Resource Conservation and Recovery Act (RCRA) made such private landfills illegal. Before RCRA's implementation, the company discontinued the landfill operation, and until U.S. EPA notified you and the company, the landfill was for the most part simply forgotten.

Now, U.S. EPA wants your company and you personally to pay for the remediation. You understand how the corporation might be liable for the release since the company placed the wastes into the landfill. The U.S. EPA's assertion that you could be personally liable for the release is confusing. All the company's solvent disposal activities on the property stopped over twenty years ago, long before you became affiliated with the company, and long before you inherited the property. You believe that you are innocent of any wrongdoing, and therefore, you intend to fight U.S. EPA's assertion that you are personally liable for the contamination.

You contact an environmental attorney who explains that you may be liable for part of the remediation. Your attorney explains that in the event of a release or threatened release of a hazardous substance, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) states that owners of property where such substances have been "deposited, stored, disposed of, or placed, or otherwise come to be located" are strictly liable for the costs of response. 42 U.S.C. § 9607. This strict liability provision caused many inequitable results to landowners who had not been involved in hazardous substance disposal activities. In response, as part of the 1986 Superfund Amendment and Reauthorization Act (SARA), Congress provided an additional statutory exemption from CERCLA liability: Congress passed the so-called "innocent landowner" exemption to give landowners a defense to the harsh liability provisions of Superfund. However, to qualify as an innocent landowner, a person must have acquired the property after the disposal of hazardous substances at the property. 42 U.S.C. § 9601(35)(A). Furthermore, the person asserting the innocent landowner defense must also establish by a "preponderance of the evidence" that at the time he acquired title to the property, whether by purchase or inheritance, he did not know, nor did he have reason to know of the disposal of any hazardous substances on the property. 42 U.S.C. § 9601(35(A)(i) and (iii).

You explain to your attorney that this is exactly what happened to you. You inherited the property with no knowledge of the prior disposal of wastes on the property. Therefore, you believe that the government should not be able to hold you personally liable for the contamination. However, your attorney explains that for the defense to be applicable, you must also establish, by a "preponderance of the evidence," that at the time you acquired title to the property, you "must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property, consistent with good commercial or customary practice in an effort to minimize liability." 42 U.S.C. § 9601(35)(B). Congress further directed the court to "take into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property, and the ability to detect such contamination by appropriate inspection." 42 U.S.C. § 9601(35)(B). Your attorney further explains that the "all appropriate inquiry" requirement is applicable to inherited property. When passing the law, the Congressional Conference Committee stated:

[T]hose who acquire property through inheritance or bequest without knowledge may rely on this section if they engage in a reasonable inquiry, but they need not be held to the same standard as those who acquire property as part of a commercial or private transaction, and those who acquire property by inheritance without knowing of the inheritance shall not be liable, if they satisfy the remaining requirements of section 107(b)(3). (emphasis added)

Conference Committee Report, pp. 187-188.

Your attorney explains to you that it will be difficult, if not impossible, for you to argue under 42 U.S.C. § 9601(35)(B), that you should not be liable, even though you inherited the property without knowledge of the contamination. At the time you inherited the property, you possessed specialized knowledge of the environmental laws and regulations because of your employment with the company as its environmental compliance officer. You performed absolutely no investigation of the property even though you knew of the property's prior industrial usage. Furthermore, you knew of the types of hazardous substances being used on the property, by virtue of the fact that those same hazardous substances are being used by the company today. Your attorney tells you quite frankly, you never should have taken title to the property. By doing so, under CERCLA, with the knowledge that you possessed and the lack of investigative effort done by you before acquiring title, you also acquired liability for the remediation of the property.

You ask your attorney if this means that your company will have to pay the entire amount for the remediation. Your attorney informs you that your company will not have to pay for the entire remediation -- you and your company will have to pay for the entire remediation. Since the you personally own the property, if the remediation bankrupts your company, U.S. EPA will require you to use your own personal assets to continue funding the remediation. Simply put, your family business, everything you own, and everything you ever worked for is at risk of being lost because you inherited a contaminated piece of property.

My advice to clients is to be careful with environmentally impaired property when doing estate planning. In this example, if the company had owned the contaminated property when the father died, it would have been much more difficult, if not impossible, for the U.S. EPA to reach the son's personal assets. Do not allow yourself or someone you love to become the unwilling heir of contaminated property. If you own contaminated property, have your attorney evaluate your options for limiting the risk to those you leave behind. Furthermore, just because someone leaves you something upon death, does not mean that you are required to take title. If you inherit property that could have environmental problems, at a minimum, you must have an environmental consultant perform an evaluation of the property to the extent necessary based upon the property's prior history and use. I have advised clients on multiple occasions to refuse to accept real estate with environmental problems from a loving person who has died -- or maybe the person who died was not a "loving" person, and I prevented the dead person from having the last laugh at his enemy's expense.

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