Environmental Due Diligence for Corporate Transactions: The Bona Fide Purchaser and the All Appropriate Inquiry Rule

A few months ago we posted our first blog on environmental due diligence, and as promised, we will continue to post on this important subject. This week we will focus on the popular, yet oft-mistaken, bona fide purchaser exception and the all appropriate inquiries rule (AAI rule) under CERCLA. In purchasing property, a buyer will conduct an assessment to determine whether a parcel (or property connected to an entity being acquired) has potential environmental contamination concerns and whether any issues may necessitate remedial action in the future. In executing this process, a buyer will want to ensure that its interests are protected down the road. One way of limiting future liability is to follow the AAI rule, which may entitle a purchaser to the bona fide purchaser defense, and also provide beneficial facts and development to defend against other future actions, such as negligence claims.

The statutory scheme set forth in CERCLA promotes the expeditious remediation at contaminated sites and the imposition of accountability — the latter of which is accomplished with strict liability. But CERCLA exempts from liability those who in good faith purchased a property they did not contaminate if certain conditions are satisfied. CERCLA states that a “bona fide prospective purchaser whose potential liability for a release or threatened release is based solely on the purchaser’s being considered to be an owner or operator of a facility shall not be liable if the prospective purchaser does not impede the performance of a response action or natural resource restoration.” The statute further provides, however, that a defendant must meet various criterion to qualify as a bona fide prospective purchaser, including that it took “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice”  (See 42 U.S.C. Section 9607(b)(3); 42 U.S.C. Section 9601(35) A-B).

The AAI rule is met through a demonstration that reasonable inquiries were made to determine if the subject property was previously contaminated. This inquiry focuses on contamination risks, gauged towards determining current and past property uses of hazardous substances, waste management practices, corrective actions taken, engineering and other controls adopted at the property, and the environmental conditions of surrounding land. Notably, many of these tasks must be performed by an “environmental professional” defined at 40 C.F.R. Section 312.21. To wit, a search for environmental clean-up liens, as well as the review of historical records dating back to when the property was first put to use, and reviewing government records concerning releases or threatened releases (e.g., records, licenses, agreements, reports, notices, complaints, and permits concerning disposal, storage tanks, hazardous wastes, government site lists and spill reports, the CERCLIS database, adjoining properties, and records on other potentially problematic sites in the vicinity) are all tasks to be performed by a professional.  The purchaser itself also must perform certain tasks to satisfy the AAI rule, including: making disclosures about the property to the environmental professional (i.e., information about the property, its uses, its history, and its surroundings), and a consideration of the property’s purchase price and whether it suggests past contamination.

So long as the “all appropriate inquiry” has been conducted, and the purchaser meets the other requirements of the bona fide purchaser defense, the purchaser will not be responsible for contamination at the property. Although the AAI rule should be followed, it does have its limitations (e.g., that it might not be relevant or meet higher standards set under state law, and does not apply to liability allocations under a stock transaction). And there are dozens of other inquiries that should be evaluated to fully understand the risks associated with a particular transaction and the subject property. We will be right back at you with another follow-up due diligence post in the coming weeks.