Category Archives: Liability

BP’s Criminal Fines

The US Department of Justice announced yesterday that it had reached a landmark settlement with BP Oil for its massive oil spill 2 years ago.

BP has agreed to pay $4.9 billion in criminal fines and plead guilty to criminal charges of manslaughter resulting from the deaths of 11 employees on the drill rig. A vice president of BP has been indicted for lying to Congress when he allegedly provided false information about the amount of oil spilled to the government. He told Congress the amount spilled was about 5000 barrels a day when he had knowledge that it was almost 10 times that amount, according to the indictment.

Two drill rig supervisors (the most senior persons on the platform when the incident occurred) were also indicted for manslaughter. The government alleged in the indictment that they ignored repeated danger signs that the rig was about to blow up and failed to consult with company experts prior to the incident.

The maximum amount of criminal fine under the Clean Water Act could be as high as $20 billions based on findings of criminal negligence.

Advertisements

EPA reached largest Clean Water Act settlement in the Gulf Oil Spill case

EPA just announced the first major settlement with a company connected with the BP oil spill in the Gulf.

MOEX Offshore 2007 LLC has agreed to settle its liability in the Deepwater Horizon oil spill in a settlement with the United States valued at $90 million, announced the Department of Justice, the U.S. Coast Guard and the U.S. Environmental Protection Agency (EPA) today.  Approximately $45 million of the $90 million settlement is going directly to the Gulf in the form of penalties or expedited environmental projects.

According to the terms of the settlement, MOEX will pay $70 million in civil penalties to resolve alleged violations of the Clean Water Act resulting from the spill and agreed to spend $20 million to facilitate land acquisition projects in several Gulf states that will preserve and protect in perpetuity habitat and resources important to water quality and other environmental features of the Gulf of Mexico region.  At the time of the spill, MOEX was a minority investor in the lease for the Macondo well. It no longer owns any share of the lease.

This is the largest Clean Water Act penalty to-date. MOEX owned 10% interest in the Macondo well and settled for $90 million. Just imagine how much BP will pay in final settlement.

Caveat Emptor!

In the aftermath of the Love Canal dump site debacle in 1980, Congress enacted the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) – commonly known as the Superfund Law. Under this law, any owner or operator of a contaminated site is held strictly liable for cleaning up the site.  Strict liability means all government has to do is to show that you are the land owner.

This law put landowners who unknowingly purchased contaminated property at risk for the clean up costs. In 1992, Congress amended the Superfund Law to include an “innocent Land Owner” defense (ILO) against Superfund liability. ILO defense basically says that if a purchaser conducts environmental due diligence BEFORE completing the sale, he will get some protection from Superfund liability if the commercial property he purchases turns out to be contaminated.

 

The due diligence process for the prospective land owner is codified in the Federal Regulations as All Appropriate Inquiries (AAI). AAI is also commonly referred to as Phase 1 Environmental Assessment. To qualify for the exemption, the AAI must be performed by an Environmental Professional (EP) or under his direct supervision. The qualifications of an EP are also codified in the federal regulations.

The AAI requires the following:

  • Interviews with past and present owners, operators and occupants;
  • Reviews of historical sources of information;
  • reviews of federal, state, tribal and local government records;
  • visual inspections of the facility and adjoining properties;
  • obtain commonly known or reasonably ascertainable information; and
  • degree of obviousness of the presence or likely presence of contamination at the property and the ability to detect the contamination.
  • searches for environmental cleanup liens;
  • assessments of any specialized knowledge or experience of the prospective landowner;
  • an assessment of the relationship of the purchase price to the fair market value of the property, if the property was not contaminated; and
  • commonly known or reasonably ascertainable information.

A professionally prepared Phase 1 report that meets the AAI requirement will general cost the prospective landowner several thousand dollars or more depending on the size and history of the commercial property.

Unfortunately, due to the economic downturn and various other reasons, Phase 1 mills are popping up everywhere. These are firms or sole proprietors that charge $800 or less to “perform” a Phase 1 assessment for a commercial site. Many buyers, lenders (banks) and sellers are hiring these mills because of the low costs.

What they do not understand is that they are putting themselves in great jeopardy in terms of Superfund liability. They may think that the $800 Phase 1 report will provide the necessary shield against future cleanup cost. But they would be wrong.

Here is what could happen when these low cost phase 1 mills are involved:=

  1. If the seller gives the buyer one of these deficient reports as evidence of “clean health” on the property, the seller can be sued in court for misrepresentation.
  2. If a lender pays for one of these reports and gives it to the buyer and approves the loan, the lender can be sued by the buyer if the property turns out to have contaminations that were missed in the report.
  3. The buyer may not be able to use his $800 report to claim his ILO exemption because the AAI procedures were not followed.

Just how bad can some of these Phase 1 mill reports get? Here is an example:

A consultant was hired to perform an AAI on a commercial property located in the state of Illinois. His report consists of the following:

6 pages of scope of work and limitations
5 pages from the Illinois Soil Conservation Transect Survey Summary
11 photos without any annotations
13 pages of definitions including one that states that UST means underground storage tank!
17 pages of hydrogeology data from a county in Wisconsin bearing the same name as the county (where the site is located) in Illinois.

The meat of the report consists of ONE single page of record review and HALF a page on site reconnaissance. It was capped off by one  page of recommendation and final opinion and a signature. The investigation completely missed the presence of a leaking underground storage tank. There were no review of Sanborn maps and hardly any review of agency records.

This entire report could have been written in an hour with a 15-minute coffee break thrown in.

The adage “you get what you paid for” is never more true. It is highly doubtful that the new owner would be able to claim his ILO defense. To obtain exemption from Superfund liability, you cannot have a deficient Phase 1 report. It simply will not get you the protection that you want.

There are also a growth of database companies offering banks and buyers “desk top” reviews of historical environmental records. There is nothing wrong with these desk top reviews as long as they are done as part of the site investigation. It is a mandatory requirement under AAI that the EP conducts a physical site visit. No Phase 1 report is complete without that.

Always remember this: Extremely low price = shoddy work = deficient report = huge liability.

A note of caution here. Just because you pay a lot of money for a report does not necessarily mean your report will not be deficient. You may be paying a lot of money to a big consulting firm that employs recent college graduates to do most of the work. On any given day, you will see advertisements from large consulting firms looking for “environmental professionals” with zero to 2 years of experience to work on environmental site assessment projects.

No person with zero to 2 years of experience (even with a college degree) can qualify under the federal definition of an EP within the AAI program. The key question is: are these individuals being properly supervised?

A recent Michigan case illustrates the risks associated with the failure to conduct proper due diligence. In Alfieri v. Bertorelli, 2011 Mich. App. LEXIS 1796 (Mich.Ct. App. 10/18/11), the buyers purchased a condominium unit in a former factory building as an investment. The factory had been impacted with trichloroethylene (“TCE”) from its former use.  A newspaper article and the real estate agent’s sales brochure indicated the site had been remediated despite the fact that the state agency had advised the realtors that the sales brochure was inaccurate and misleading. The buyers relied on the newspaper article and the sales brochure and did not perform their own due diligence before closing the deal.

The property turned out to be heavily contaminated. The buyers subsequently filed a lawsuit against the real estate agents on theories of silent fraud and negligent misrepresentation. The jury found that the agents engaged in negligent misrepresentation. However, the jury also determined that the buyers were partially responsible for their damages because they had failed to perform their own due diligence. The jury assigned the buyers 35% fault on the negligent misrepresentation claim.

According to noted New York environmental attorney and law professor Larry Schnapf: “An owner could lose its ILO defense and be on the hook for a cleanup if the phase 1 did not identify contamination”. His website http://www.schnapflaw.com/ lists many recent cases where courts ruled against land owners because of poorly prepared due diligent reports.

Moral of the story: Buyers beware and hire qualified EP to do due diligence.

Sometimes…less is better

One of the attorneys I met on LinkedIn posted this little story. I am reproducing it here as a great teachable moment.

During the French revolution three prominent, but very unfortunate, professionals were condemned to beheading by the guillotine: a priest, a doctor, and an engineer. The three were conveyed to the scaffold together in an old ox cart and were marched up to the guillotine together amidst amass of cheering blood thirsty spectators. The priest was the first to meet his fate. The executioner very politely asked the priest if he preferred to avoid seeing the blade fall by lying face down rather than face up. The priest replied, “I’ve led a good life, have nothing to regret, and want to meet my maker face-to-face.” So the priest lied down facing the blade. The executioner pulled the cord releasing the blade and it plummeted toward the priest’s exposed neck. But within a half inch of reaching its fatal destination the blade stopped literally in its tracks. The crowd roared with delight and many of the onlookers fell to their knees in prayer. Not wanting to put any victim to double jeopardy the authorities released the priest, to the great delight of the crowd. Then came the doctor’s turn. He was asked the same question and thought “if it worked for the priest maybe it will work for me too,” so he requested to take the blade face up. Again the blade stopped a half inch from the target, and as with the priest, the authorities released the doctor. Now was the engineer’s turn and, being no one’s fool, he also opted to take the blade face up. As he lay with his neck firmly placed in the crook of the guillotine and looked up to his maker, and to the blade, he exclaimed, “Ooh, I think I see your problem.”

Moral of the story: Only answer the question that’s asked, and don’t volunteer information, your neck may be at stake, and in the case of this discussion, your client’s neck!

Remember this story next time when you are being deposed or when you are speaking with an inspector.

An auditor’s conundrum – an update

Since I posted my article on auditor’s conundrum a week ago on LinkedIn, I received many comments – from consultants, auditors and attorneys. Here is a summary of their comments:

Many consultants are concerned with breaching the confidentiality agreement with the client – even in the face of a continuing criminal act.  They seem to think that very bad things will happen to them and the criminal client will sue them. Some are concerned that word will get out and no one will hire them again. Here is my take: First of all, the client is not likely to sue the auditor for breach of confidentiality. Why? Because the client will have to show damages in court as a result of the breach. And there is NO damage. Now, if the auditor had disclosed proprietary information about the the client’s manufacturing process to his competitors, there would be damages. But in the case of notifying authorities of an on-going criminal act, where is the damage to the client? A thief cannot sue his friend for turning him in even if he swears him to secrecy.

As to the concern about the auditor’s reputation for breaching the confidentiality agreement, my take is that the auditor will have a better reputation as a result of stopping an on-going criminal act and protecting the general public. If a company is hesitant about hiring such an auditor who would stop a criminal act, you would not want such company as a client anyway.

The downside of NOT reporting an on-going criminal act (dumping of toxic wastes) for the auditor is great. What do you think the injured parties (people who end up drinking the contaminated water) will do to the auditor? Here is an environmental professional under contract with a client who is dumping toxic wastes and he fails to take action to stop the client. They are going to think the criminal act was done with a wink and a nod from the auditor.

Here is what the auditor should do: As soon as he discovers the illegal activity, he must tell the client to stop immediately. And if the client refuses, he should notify the authority to protect the general public regardless of the confidentiality agreement. At the same time, he should sever his relationship with the client immediately in order to protect himself from possible future action by the injured parties. The underlying reason for the auditor’s action is IMMINENT HARM to the general public.

Some have suggested that the confidentiality clause should include language that reads “except as required by law”. I would expand it to read “except as required by law or in the event of imminent harm to the general public.”

For those who are Professional Engineers, the incident as described in my article would require them to report to the authorities immediately. The overriding duty of a PE is to protect the general public. That duty overrides the confidentiality clause in the face of imminent danger to the public.

A classic example: A PE is hired by a building owner to inspect a building for structural integrity. The owner swears the PE to secrecy. PE discovers that the building is structurally unsound and may collapse any time. The owner proceeds to sell the building even with that knowledge. The PE now has the ethical duty to stop the sale by notifying authorities. Failure to do so may cost him his license and subject him to countless lawsuits by people injured by the collapsed building.

Prosecutorial discretion – a tale of 2 companies

In my last blog, I discussed the factors an agency such as EPA would use to determine if it wants to proceed with criminal investigation. That’s step one of a two-step process. Once an agency completes its investigation, it may then refer the case to the prosecutors for prosecution.

Will the prosecutor exercise its prosecutorial discretion? That’s the second step.

The best way to demonstrate how a prosecutor decides whether to prosecute a case or not is by the following example of a tale of two companies.  The US Department of Justice issued a memo some time ago outlining the factors a US Attorney should consider in targeting a company for criminal prosecution of environmental crimes.

The memo gives the examples of two companies – Company A and Company Z. A tale of two companies.

Here is what Company A does:

1. It regularly conducts a comprehensive audit of its compliance with environmental requirements.

2. The audit uncovered as information about employees disposing of hazardous wastes by dumping them in an unpermitted location.

3. An internal company investigation confirms the audit information. (Depending upon the nature of the audit, this follow-up investigation may be unnecessary.)

4. Prior to the violations the company had a sound compliance program, which included clear policies, employee training, and a hotline for suspected violations.

5. As soon as the company confirms the violations, it discloses all pertinent information to the appropriate government agency; it undertakes compliance planning with that agency; and it carries out satisfactory mediation measures.

6. The company also undertakes to correct any false information previously submitted to the government in relation to the violations.

7. Internally the company disciplines the employees actually involved in the violations, including any supervisor who was lax in preventing or detecting the activity. Also, the company reviews its compliance program to determine how the violations slipped by and corrects the weakness found by that review.

8. The company discloses to the government the names of the employees actually responsible for the violations, and it cooperates with the government by providing documentation necessary to the investigation of those persons.

According to DOJ, Company A would stand a good chance of being favorably considered for prosecutorial leniency, to the extent of not being criminally prosecuted at all.

At the opposite end of the scale is Company Z, which does the following:

1. Because an employee has threatened to report a violation to federal authorities, the company is afraid that investigators may begin looking at it. An audit is undertaken, but it focuses only upon the particular violation, ignoring the possibility that the violation may be indicative of widespread activities in the organization.

2. After completing the audit, Company Z reports the violations discovered to the government.

3. The company had a compliance program, but it was effectively no more than a collection of paper. No effort is made to disseminate its content, impress upon employees its significance, train employees in its application, or oversee its implementation.

4. Even after “discovery” of the violation the company makes no effort to strengthen its compliance procedures.  For example, If the company had a long history of noncompliance, the compliance audit was done only under pressure from regulators, and a timely audit would have ended the violations much sooner, those circumstances would be considered.

5. The company makes no effort to come to terms with regulators regarding its violations. It resists any remedial work and refuses to pay any monetary sanctions.

6. Because of the noncompliance, information submitted to regulators over the years has been materially inaccurate, painting a substantially false picture of the company’s true compliance situation. The company fails to take any steps to correct that inaccuracy.

7. The company does not cooperate with prosecutors in identifying those employees (including managers) who actually were involved in the violation, but it resists disclosure of any documents relating either to the violations or to the responsible employees.

Under these circumstances, leniency by the DOJ is unlikely.

The only positive action by Company Z is the so-called audit, but that was so narrowly focused as to be of questionable value, and it was undertaken only to head off a possible criminal investigation. Otherwise, the company demonstrated no good faith either in terms of compliance efforts or in assisting the government in obtaining a full understanding of the violation and discovering its sources.

Which company are you? Company A or Company Z?

Here is what happens when you store chemical improperly

There was a chemical accident at a hazardous waste storage facility a number of years ago that released a massive amount of chlorine gas and caused the town to be evacuated.

The chemical Safety Board conducted an investigation and the following is some of its findings.

When you stack chlorine chemical on top of some strong oxidizer, you get yourself an explosive mixture.