Environmental Issues in Commercial Transactions: Lessons Learned 1 - PDF document

Environmental Issues in Commercial Transactions: Lessons Learned 1 Walter G. Wright, Jr. Mitchell Williams Law Firm wwright@mwlaw.com The measures an attorney advises a client to undertake to address an environmental issue in a transactional context will obviously depend on: • Type of transaction (lease, buy/sell/financing, asset v. stock, etc.) • Party represented (buyer, seller, lessor, lessee, secured creditor, investor, etc.) • Type and materiality of the environmental issue in the context of the transaction • Relative leverage of the Client • Tools reasonably (cost-effective?) available to allocate responsibility and/or quantify issue The viability of any commercial transaction is dependent upon the resolution of a variety of operational, tax, financial and/or legal issues. Nevertheless, transactions such as the redevelopment or transfer of an improved property may also trigger environmental liability and/or regulatory concerns of varying importance. A typical scenario might involve a potential purchaser that is reluctant to acquire an inactive industrial facility for commercial redevelopment because of the perceived risks related to the presence of low levels of soil contamination. Further, regardless of the purchaser’s fortitude, potential lenders and/or investors may be hesitant to participate in a transaction unless two issues are addressed. First, they will seek some quantification of the potential regulatory responsibilities and/or legal liabilities associated with the property. In addition, they will need some assurance that only the loan/investment amount will be forfeited in the event of default failure or a claim. Properties with current or historical industrial or commercial uses that are part of a transaction often pose a dilemma. Potential purchasers or lessees must assess the possibility that certain environmental statutes might impose responsibility on them for contamination that is present at the time of the acquisition or lease. They will typically consider the probability that contamination is present and, if so, the cost to definitively delineate and/or remediate it. Related issues could include the likelihood of third-party claims resulting from site conditions, ability to obtain financing and availability of definitive cleanup standards. I. Understanding Transactional Environmental Issues 1 A blog addressing this and other issues – Arkansas Environmental, Energy, and Water Law Blog – http://www.mitchellwilliamslaw.com/category/environmental-blog – Three posts five days a week 1 3265684.1

A. What are the potential risks/liabilities? 1. Are there human health risks and if so, what type? By way of example, contaminated soil and groundwater health issues differ from vapor intrusion. Soil and groundwater will typically only impact human health through direct contact. In contrast, vapor intrusion health potentially arises from inhalation. 2. Are there environmental risks and if so, what type? 3. Are there non-regulatory environmental issues? a. Did Bank’s collateral include water rights? Natural resource transactional issues can be just as important as environmental in some instances. An example in the transactional context is a case addressing whether an Arkansas bank’s deed of trust on a property includes related water rights. An Arkansas bank filed a lawsuit to quiet title to disputed waters rights and stock relating to a residential development project (“the Project”) in Utah. See First Nat. Bank of Wynne v. Twin Creeks Special Service Dist. 2 Arkansas National Bank (“ANB”) made three successive loans, in exchange for three deeds of trust, to a company for the Project. These loans were made to WS Sleeping Indian Ranch (“Sleeping Indian”). In 2006, Sleeping Indian signed a deed of trust in favor of ANB which secured a loan in the initial amount of $7,494,011 to purchase the property. Sleeping Indian bought the Project land, consisting of 295 acres, for $5,300,000. A few months later ANB extended another line of credit to Sleeping Indian to purchase more water shares and for other project expenses. The second loan was for $2,347,500. A third deed of trust was executed to secure a third loan from ANB which was obtained in late October 2007 for $2,700,000. Each of these loans were secured by identical collateral which included “all water and riparian rights, wells, ditches, reservoirs, and water stock…..that may now, or at any time in the future, be part of the real estate….” After the execution of the deeds of trust, ANB and Sleeping Indian both failed. The FDIC negotiated the sale of its acquired interest in the first of the ANB/Sleeping Indian deeds of trust to First National Bank of Wynne (“FNB”). FNB subsequently foreclosed on its collateral under the first deed of trust. The question was whether the water rights and water stock acquired by Sleeping Indian are part of the collateral FNB now possesses. First, the question is whether the water rights and stock obtained subsequent to the first deed of trust are “part of the real estate” securing the initial loan from ANB. If so, the next 2 2013 WL 5427528. 2 3265684.1

question was whether FNB obtained those rights in first position when it purchased the deed of trust from the FDIC. Under Utah law, deeds of trust are analyzed similarly to contracts. Utah law states: “If the language within the four corners of the contract is unambiguous, the parties’ intentions are determined from the plain meaning of the contractual language, and the contract may be interpreted as a matter of law.” First Nat. Bank of Wynne v. Twin Creeks Special Service Dist. 3 The court concluded that the first deed of trust governed the ownership of the disputed properties. Under the agreement between FNB and the FDIC-R, FNB purchased the collateral secured by the first deed of trust and other items listed in the loan documents. The court felt compelled by the plain language of the deeds of trust. Each contract identified the same collateral in exchange for the respective loans. Furthermore, the court concluded that when FNB purchased FDIC’s interest in the first deed of trust, it became first in line to collect any collateral identified. FNB was first in line for all water rights and stocks. Since FNB foreclosed on that collateral, it is the owner of any rights identified in the first deed of trust. The court noted that the parties can only contract based on the law and their agreed risk. Next, the court decided that the disputed water properties were “part of the real estate” as defined as collateral under the first deed of trust. The FDIC first argued that because the waters rights at issue are not “appurtenant to the land’ then they cannot be part of the real property under the first collateral argument. In addition, the FDIC argued that the water stock was not transferred in the manner required by Article Nine of the Utah Code. However, the court rejected both of FDIC’s arguments. The court concluded the parties’ agreements were clear and the interpretation of the relevant language enabled the court to give effect to all of the agreements in the first deed of trust. FNB’s title to the water rights and water stock shares were quieted, and FNB became the lawful owner. b. Are there Potential Third Party/Common Liabilities Even if the Property or Facility’s Contamination has been Determined as Requiring No Further Action by an Agency? A facility may have contamination at levels an agency has determined warrant no further action. It is important to recognize that the movement of this contamination off-site could still generate common law bodily injury or property damage claims regardless of this agency approval. c . Did An Appraisal Consider Material Environmental Issues? 3 2013 WL 5427528 at *7 (D. Utah September 26, 2013). 3 3265684.1