ByJames Campbell Kean, JD, LLMMaster of Laws, Energy, Environment & Natural Resources

Van Rooyan, Kean & Prestage, LLP

Avoiding Harm’s Way

Case Studies in Professional Liability

Case Study # 1:

Mount Glassmore

Commercial Recycling Facility

* Traditional Recycling

* Source Separated

* Multiple containers

* Glass, Paper, Plastic, Aluminum Cans

* Requires more effort

‘Single Stream’ Recycling

* Glass, Paper, Plastic, Aluminum Cans

* Source separated, but co-mingled

* Difficult to find markets for ‘three-mix’ glass

Law and Environmental Regulation

Legitimate Recycling vs. ‘Sham’ Recycling.

In substance, if you claim to be engaged in recycling, you are generally required to prove:

1. That the materials you are accepting for recycling have a proven market for resale, reuse; and

2. That you are turning over the inventory in a regular manner.

Motivated Seller/Motivated Buyer

Seller engaged consultant to conduct Phase 1 ESA.

Buyer in a hurry, relied upon Seller’s Phase 1 ESA.

Following performance of a records check and site visit; Seller’s consultant

found:

* No RECs;

* No mention of glass pile;

* Nothing found with regard to compliance problems;

* Publicly available information at State regulatory agency clear; and

* Relied upon Seller’s explanations (‘recycling’) and disclosures (none).

Property Purchased and Continued in Operation

Seller retained as facility manager.

Twelve months later:* Management audit led to visit with state environmental

agency.* Agency revealed that the site had been under investigation

for years with regard to glass piles; internal enforcement files.

* Buyer sues Seller for failure to disclose agency investigation.

* Seller counterclaims against Buyer.

* Buyer wins case against Seller. Seller loses.

* Seller files lawsuit against Consultant for failure to discover.

Seller’s Contention?

1. Consultant should have advised Seller of the issues.

2. Problems with that position:* Enforcement issues were uniquely known to Seller;* Failed to reveal same to anyone; and* ASTM (AAI) standard does not require Consultant to

conduct compliance review, access confidential state records, and/or address matters unrelated to hazardous materials or petroleum products.

Lessons Learned:

1. If you are the Buyer, always conduct your own Phase 1 and consider Non-Scope considerations (compliance) and risks unrelated to hazardous materials and petroleum products.

2. Consultant should have familiarity with the nature of the business being examined.

* These facilities are unique.* Recycling regulations regarding ‘sham’ recycling are

tricky.

Case Study # 2:

“Bombs Away”

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“Bombs Away”

Scenario:

* Consultant hired by Lender; did not want a full Phase 1.

* Wanted Consultant to ‘interpret’ Seller’s Phase 1.

* Consultant’s engagement written very carefully to spell out limits of work.

* Provided a ‘statement of work’ acceptable to lender.

* Relied upon statements made in existing Phase 1.

Significant Findings:

* Buyer received construction loan.

* Began permitting activity to commence construction.

* Nearby school district coincidentally began excavation.

* Discovered WW2 munitions dump.

* Turns out a large portion of the city had been used as a bombing range in WW2.

Data Gaps:

* Original Phase 1 included a “Formerly Used Defense Site” (FUDS).

* Bombing range was not included in FUDS report.

* Many, but not all FUDS or extent of FUDS boundaries and activities have been added to the database.

Lessons Learned:

1. There is risk associated with doing ‘less than’ Phase 1.

2. If you must, for business reasons, be sure that your engagement documentation is crystal clear and understandable about what you are going to do, and what you are not going to do.

3. Professional liability insurance is a must have when you need it, despite the high costs.

4. Databases are changing all the time.

5. There is risk associated with issuing ‘right to rely’ letters, especially with the passage of time.

Case Study # 3:

“You Have the Right to Remain Silent”

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Case Study #3“You Have the Right to Remain Silent”

1. Landfill operator maintained water tank for dust suppression.

2. Pumper truck hydraulic system malfunctioned, spewed.hydraulic fluid over a large area.

3. Adjacent to a drainage ditch.

4. Truck driver fails to report incident to management.

5. Local police environmental crimes unit coincidentally happened to be inspecting adjoining property, viewed evidence of release of hydrocarbon on ground next to water tank.

6. Rather than alert the company, police continued to visit the property (across fence line) for several months.

7. Police take pictures of condition on each visit.

8. A month later, condition still existed, management had not discovered it. Police arrived and requested tour of facility.

9. Management allowed tour.

10. Police go straight to location of spill and commence taking samples.

11. Case referred to environmental crimes unit and investigation opened.

12. Grand jury convened.

13. Resolution negotiated with prosecutors, no indictment issued.

14. Prosecutors close case file.

Criminal Enforcement

1. Often local criminal enforcement agencies do not coordinate with or publish in traditionally available public documentation.

2. Environmental laws feature criminal enforcement tools.

3. A company can be pursued via the grand jury process and nothing may be reflected in commonly relied upon records.

“You Have the Right to Remain Silent”

Lesson Learned:

* Local criminal enforcement activities are often never reported in databases that matter to Phase 1 projects.

Professional Liability: Standard of Care

Each person is required to act with the same degree of care as a ‘reasonable and prudent person would act,

considering all of the facts and circumstances.

Professional Liability – Standard of Care

Three Simple Rules:

1. Do the right thing

2. Perform to the best of your abilities

3. Care about others

From “Winning Every Day” – Lou Holtz

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Questions