I.
Introduction §8.1
Environmental audits are an essential part of
transactional due diligence and corporate environmental compliance programs. Environmental
audits in transactions enable a buyer to understand environmental liability
risks before acquiring the target company or assets. Use of an environmental
audit as part of a business’s compliance program can help the business identify
violations and other risks and take corrective action. Other environmental
aspects of transactions are discussed in Chapter 7.
Perhaps the most significant factor that causes
prospective buyers to perform environmental audits as part of their
pre-acquisition due diligence is the fear that they will unknowingly assume
liability under environmental laws such as CERCLA, 42
USC 9601 et seq, and state analogues such as Part 201 of NREPA. MCL 324.20101 et seq. CERCLA and Part 201 are discussed in Chapter 5.
B. “All Appropriate
Inquiry” §8.3
When it was enacted in 1980, CERCLA provided that the
current owner or operator of contaminated real property was liable for the
contamination regardless of fault. In 1986, Congress added an “innocent
landowner” defense that provides that a person who acquires contaminated
property but who did not know or have reason to know of the contamination will
not be liable for the contamination. 42
USC 9607(b) and 42
USC 9601(35). A similar defense is available under Part 201. MCL 324.20126(3)(h).
To demonstrate that one did not have reason to know of
contamination, the buyer must undertake, at the time of the acquisition, “all
appropriate inquiry” (AAI) into the previous ownership and uses of the property
consistent with good commercial or customary practice. 42
USC 9601(35)(B).
Congress did not define AAI in the 1986 CERCLA amendments.
But Congress did set forth five factors for courts to consider in interpreting
the meaning of AAI:
· Defendant’s
specialized knowledge or experience.
· Purchase
price relationship to property value if uncontaminated.
· Commonly
known or reasonably ascertainable information about the property.
· Obviousness
of contamination’s actual or likely presence.
· Ability
to discover the contamination by appropriate inspection.
42
USC 9601(35)(B)(iv). To help guide businesses through the uncertainties
created by these broad factors, ASTM International (formerly known as the
American Society for Testing and Materials) published recommended best
practices for what have become known as “Phase I environmental site
assessments” (ESAs) to meet the requirements of AAI, known as ASTM Standard
E1527, which has been revised various times over the years. The revisions can
be identified by the addition of the final two digits of the year to the
reference. For example, the 1997 version of the standard is known at ASTM
E1527-97. Following versions are E1527-00 and E1527-05. Most environmental consultants
have followed Standard E1527 when performing Phase I ESAs, either voluntarily
or because their clients or their lenders require it.
In 2002, Congress amended CERCLA in what are known as the
“Brownfield Amendments.” Among other things, Congress more fully addressed the
meaning of AAI and added two new defenses to CERCLA liability: the bona fide
prospective purchaser and contiguous property owner defenses (discussed in
Chapter 5). The Brownfield Amendments include the following significant
provisions:
· A
buyer must perform AAI on or before the acquisition to be able to claim the
innocent landowner, bona fide prospective purchaser, or contiguous property
owner defenses.
· Other
“continuing obligations” are now required for these defenses to remain valid.
· EPA
must promulgate rules to more fully define AAI by January 11, 2004.
42
USC 9601(35). Congress set forth ten specific criteria for EPA’s AAI
definition, which are summarized in the discussion of the EPA’s AAI rule in §8.5 and following.
The 2002 amendments also set forth the “interim” AAI
standards applicable to transactions that occurred before EPA would promulgate
its AAI rule. For properties bought before May 31, 1997, the five factors
listed in the 1986 CERCLA amendments (discussed in §8.3) were the applicable AAI standard. For
properties bought on or after May 31, 1997 and until the effective date of
EPA’s AAI rule, buyers would be considered to have met AAI if they followed
ASTM E1527-97. EPA later added the -00 and -05 versions as acceptable interim
standards. EPA added the -00 version as an acceptable interim AAI standard by a
rule published at 68 Fed Reg
24888 (May 9, 2003). EPA added the -05 version as an acceptable interim AAI standard. 70 Fed Reg. 66070, 66081 (Nov. 1, 2005).
1. In General
§8.5
In 2005, EPA promulgated its AAI
rule (AAI Rule) to implement Congress’s requirements in the 2002 CERCLA
amendments. 70
Fed Reg 66070, promulgated at 40
CFR Part 312. The AAI Rule applies to persons seeking to establish the innocent landowner defense pursuant to CERCLA 42 USC 9601(35) and 42 USC 9607(b)(3), the bona fide prospective purchaser liability protection pursuant to CERCLA 42 USC 9601(40) and 42
USC 9607(r), and the contiguous property owner liability protection pursuant to 42 USC 9607(q). 40
CFR 312.1(b). The AAI Rule also applies to persons conducting site characterization and assessments with the use of a grant awarded under 42 USC
9604(k)(2)(B). Persons seeking to establish one of these liability protections must conduct investigations as required by the AAI Rule to identify conditions that indicate releases or threatened releases of hazardous substances. 40
CFR 312.1(c)(1).
An “environmental professional” (EP) must perform many
elements of an AAI investigation. EPA defines an EP as “a person who possesses
sufficient specific education, training, and experience necessary to exercise
professional judgment to develop opinions and conclusions regarding conditions
indicative of releases or threatened releases … on, at, in, or to a property,
sufficient to meet the objectives and performance factors of [the AAI Rule].” 40
CFR 312.10(b). In addition, the EP must:
· Hold
a current professional engineer’s or professional geologist’s license or
registration from a state, tribe, or U.S. territory or the Commonwealth of Puerto
Rico and have the equivalent of three years of full-time relevant experience;
or
· Be
licensed or certified by the federal government, a state, tribe, or U.S.
territory or the Commonwealth of Puerto Rico to perform environmental inquiries
as defined in the AAI rule and have the equivalent of three years of full-time
relevant experience; or
· Have
a baccalaureate or higher degree from an accredited institution of higher
education in a discipline of engineering or science and the equivalent of five
years of full-time relevant experience; or
· Have
the equivalent of ten years of full-time relevant experience.
Id. EPA defines “relevant experience” as: “participation
in the performance of all appropriate inquiries investigations, environmental
site assessments, or other site investigations that may include environmental
analyses, investigations, and remediation which involve the understanding of
surface and subsurface environmental conditions and the processes used to
evaluate these conditions and for which professional judgment was used to
develop opinions regarding conditions indicative of releases or threatened
releases to the subject property.” Id.
A non-EP may assist in performing an AAI investigation as
long as he or she is under an EP’s supervision or responsible charge. 40
CFR 312.10(b). The AAI Rule requires that an EP “should” remain current in
his or her field through continuing education or other activities. 40
CFR 312.10(b). Despite the use of the word “should” in the AAI Rule, EPA’s preamble to the final rule calls this provision a “requirement” and adds
that an EP must be able to “demonstrate” these efforts. 70
Fed Reg 66080.
3. The AAI
Investigation: Basic Elements §8.7
An AAI investigation must include the following elements (42
USC 9601(35)(B)(i)(I) and (B)(ii); 40
CFR 312.21):
1. Interviews with past and
present owners, operators, and occupants. 40
CFR 312.23. In the case of abandoned properties, the interviews must include interviewing one or more owners or occupants of neighboring or nearby properties who may have been able to observe uses of or releases at the property. 40
CFR 312.23(d).
2. Review of historical sources
of information, such as chain of title documents, aerial photos, building
department records, and land use records, to determine past uses. 40
CFR 312.24. The rule does not require that any specific type of historic information be collected. In particular, the rule does not require that a chain of title be obtained for the property. 70 Fed Reg 66091-92.
3. Searches for recorded
environmental cleanup liens. 40
CFR 312.25. If the buyer chooses to obtain this information, the EP may, but is not required to, provide it.
4. Reviews of federal, state,
tribal, and local governmental records. 40
CFR 312.26. This review should include a search for institutional controls. Institutional controls are non-engineered instruments, such as administrative and legal controls that, among other things, can help to minimize the potential
for human exposure to contamination and protect the integrity of an existing
remedy by limiting land or resource use. 40
CFR 312.10(b). An example of institutional controls would be a prohibition
on the drilling of a drinking water well in a contaminated aquifer or
disturbing contaminated soils. Institutional controls may also be referred to
as land use controls or activity and use limitations. 70 Fed Reg 66087.
5. Visual inspection of the
property and adjoining properties. 40
CFR 312.27. According to EPA, this “may be the most important aspect” of AAI “and the primary source of information regarding the environmental conditions on the property.” 70
Fed Reg at 66095. EPA states that “[i]n all cases, every effort must be made to conduct an on-site visual inspection of a property when conducting all appropriate inquiries.” Id. In the rare case when an owner refuses to
grant access for a site inspection, “good faith” efforts must still be made to
gain access, and visual inspection is still required by other legal means, such
as observation from the nearest vantage point or aerial photography. 70
Fed Reg at 66095-96. The EP must document efforts made to obtain access and why they were unsuccessful. 70 Fed Reg at 66096. The visual inspection need not be performed by the EP, but must be performed by a person who is under the supervision or responsible charge of an EP. 70
Fed Reg at 66097. EPA still “recommends” that the EP perform the site inspection as the person “best able to interpret such observations of a property and ascertain the probability of conditions indicative of releases or threatened
releases of hazardous substances being present at the property.” Id. Adjoining
properties may be visually inspected from nearby vantage points, although EPA
recommends actual on-site access and inspection of adjoining properties. 70 Fed Reg at 66096.
6. The owner’s specialized
knowledge or experience. 40
CFR 312.28. The AAI Rule provides little guidance as to what this concept means. EPA’s preamble refers to several cases in which courts held that persons with extensive commercial real estate or environmental experience were denied
“innocent landowner” status because they had specialized knowledge or
experience that should have alerted them to the potential for contamination. 70
Fed Reg at 66098.
7. The relationship of the
purchase price to the value of the property value if the property was not
contaminated. 40
CFR 312.29. The AAI Rule does not require that a real estate appraisal be conducted; only a general determination is necessary. 70
Fed Reg at 66099.
8. Commonly known or reasonably
ascertainable information about the property. 40
CFR 312.30. Generally, this means information about a property that is generally known to the public within the community where the property is located and can be easily sought and obtained from persons familiar with the property or
from easily attainable public sources of information. 70
Fed Reg at 66099-100. An example is an abandoned property as to which little documentation exists, but as to which the community knows was used for “midnight dumping” or other unrecorded contaminating purposes.
9. The degree of obviousness of
the presence or likely presence of contamination at the property and the
ability to detect the contamination by appropriate investigation. 40
CFR 312.31. This requires the EP to consider all the information gathered through performance of AAI elements 1 through 8 above and “assess whether or not an obvious conclusion may be drawn” about the likely presence of contamination
based on the “totality of [the] information collected.” 70
Fed Reg at 66101. The EP must include as part of the results of his or her inquiry “an opinion regarding additional appropriate investigation, if necessary.” 40
CFR 312.31(b).
10. The EP must perform or
supervise the investigation. The EP is responsible for the investigation of
foregoing elements 1, 2, 4, 5, 8, and 9. The owner is responsible for elements
3, 6 and 7 but the owner may share results with the EP. Alternatively, the EP
may do them. 40
CFR 312.21(b).
The AAI Rule states that the procedures of ASTM Standard E1527-05 may be used to comply with AAI elements 1 through 9 above. 40 CFR 312.11(b). In the AAI Rule’s preamble, EPA states that it is “recognizing the E1527-05 standard as consistent with today’s final rule. The Agency determined that this voluntary consensus standard is
consistent with today’s final rule and is compliant with the statutory criteria
for all appropriate inquiries. Persons conducting all appropriate inquiries may
use the procedures included in the ASTM E1527-05 standard to comply with
today’s final rule.” 70
Fed Reg at 66081.
4. Level of
Effort Required §8.8
The AAI Rule does not require exhaustive and costly
efforts to be made to access all available sources of data and find every piece
of data and information about a property. 70
Fed Reg at 66086. Rather, the EP must seek to gather the required information “that is publicly available, obtainable from its source within reasonable time and cost constraints, and which can practicably be reviewed.” 40
CFR 312.20(f)(1). Data gaps, which are “a lack of or inability to obtain information required by [AAI]”, are acceptable as long as the EP or other person used good faith efforts to obtain the missing information. 40
CFR 312.10(b); see also discussion at 70
Fed Reg at 66088-89. “Good faith” is defined as “the absence of any
intention to seek an unfair advantage or to defraud another party; an honest
and sincere intention to fulfill one’s obligations in the conduct or transaction
concerned.” 40
CFR 312.10(b).
Simply because a data gap is permissible, however, does
not mean an inquiry with data gaps necessarily meets the AAI Rule. The EP must
provide an opinion about the significance of the data gap on the EP’s ability
to provide an opinion as to whether the inquiry has identified conditions
indicative of releases or threatened releases of a hazardous substance on, at,
in or to the property. 40
CFR 312.20(g) and 40
CFR 312.21(c)(2).
EPA is emphatic that the AAI Rule does not require
sampling and analysis. 70
Fed Reg at 66089, 66101-02. Although the AAI Rule does not require testing, it states that one way to address data gaps may be to conduct sampling and analysis. 40
CFR 312.20(g); see also 70 Fed Reg at 66089. Further, EPA cautions that the fact that the AAI Rule does not require testing “does not prevent a court from concluding that, under the circumstances of a particular case, sampling and analysis should have been conducted to meet ‘the degree
of obviousness of the presence or likely presence of contamination at the
property, and the ability to detect the contamination by appropriate
investigation’ criterion and obtain protection from CERCLA liability.” 70
Fed Reg at 66101.
The EP must document in a written report the results of
the AAI investigation under his or her supervision or responsible charge. 40
CFR 312.21(c). The report must include the EP’s opinion on whether the AAI investigation identified conditions that indicate releases or threatened
releases of hazardous substances on, at, in, or to the subject property. 40
CFR 312.21(c)(1). As noted in §8.8, the AAI investigation must also identify
data gaps that affect the EP’s ability to render the opinion, and the EP must
comment on the significance of the data gaps. 40
CFR 312.21(c)(2).
The EP who conducts or oversees the AAI investigation must
sign the report. The report must include a declaration that he or she meets the
definition of an EP and provide his or her qualifications. It must also include
a declaration that the EP performed the investigation in conformance with the
AAI Rule. 40
CFR 312.21(c)(3) and (d).
The AAI Rule imposes no specific requirements on the
length, structure, or format of the report, and it may be similar to past
reports on the property. The AAI Rule also does not require the report to be
submitted to EPA or otherwise to be disclosed, nor that the report be
maintained on-site or even that it or any related documentation be retained at
all, although EPA notes that the retention of the report “may be helpful should
the property owner need to assert protection from CERCLA liability after
purchasing a property.” 70
Fed Reg at 66077.
“De minimis” contamination. The report is not
required to identify “quantities or amounts, either individually or in the
aggregate,” of contaminants that “because of said quantities and amounts”
“generally would not pose a threat to human health or the environment.” 40
CFR 312.20(h).
An AAI investigation must be conducted within one year
before the date of acquisition of the property. 40
CFR 312.20(a). An even shorter time frame applies to certain information. The following components of an AAI investigation must be conducted or updated within 180 days prior to the date of acquisition:
· Interviews
with past and present owners, operators, and occupants.
· Searches
for recorded environmental cleanup liens.
· Reviews
of federal, tribal, state, and local government records.
· Visual
inspections of the facility and of adjoining properties.
· The
declaration by the EP.
40
CFR 312.20(b). Information collected more than a year before the date of acquisition may be used, but it must have been obtained in a manner required by the AAI Rule, and it must be updated as required to meet either the one year or 180 day
requirements described above, as applicable. 40
CFR 312.20(c).
The “date of acquisition” or “purchase date” means “the
date on which a person acquires title to the property.” 40
CFR 312.10(b). Practitioners should note that when determining whether a
report is still valid for use in a transaction, the AAI Rule contains not one,
but two traps for the unwary – one each on both ends of the “report validity”
clock, as follows:
· First, the one year or 180-day report validity clock starts ticking not on the date of the prior report, but on the date on which the information was collected or updated. This date can be months earlier than the date of the report. Therefore, information that may, at first glance, appear to still be valid based on the date of the report in which it is presented may, in fact, have passed its expiration date under the AAI Rule.
· Second,
the validity of information expires not on the date on which the purchase
agreement is signed, but on the date on which the purchaser takes title to
the property. It is not uncommon for the closing to occur six months to
more than a year after the purchase agreement was signed. This highlights the
importance of performing an AAI investigation at the right time (i.e., not too
early) and in performing updated AAI in the event of a delay in closing. EPA
discusses this issue at 70
Fed Reg at 66083-84. Where a closing may occur more than six months after AAI-required information is obtained, the buyer should negotiate in the purchase agreement the right to update the investigation.
An AAI investigation may also include the results of
report(s) prepared by or for other persons for the same property, provided that
the report(s) meet the AAI standards, and the person seeking to use the previously
collected information reviews the information and conducts the additional
inquiries to meet AAI elements 6, 7 and 8 described in §8.7, and updates any other information as
necessary. 40
CFR 312.20(d). See also the discussion at 70
Fed Reg at 66084-85. Note that, even though the AAI Rule allows AAI to be conducted by one person and transferred to another person without any specific documentation, it may be advisable for the new person to obtain a “reliance letter”
from the performing consultant. Such a letter typically provides that the
consultant has given the new person permission to rely on its work, and allows
recourse (albeit typically very limited) against the consultant for errors. The
incoming person’s lender may also require a reliance letter.
AAI focuses solely on releases and threatened releases of
hazardous substances on, at, in, or to the subject property. Of course, these
matters are not the only potential environmental risks at a property. Prospective
purchasers may also wish to include the following other non-AAI matters of
potential environmental liability in their pre-acquisition Phase I ESAs (this
is not intended to be an exhaustive list):
· Compliance
of operations with permits and regulatory requirements (often referred to as an
“environmental compliance audit”)
· Asbestos-containing
materials
· Lead-based
paint
· Radon
· Wetlands
· Drinking
water quality
· Threatened
or endangered species
· Cultural
and historic resources
· Mold
· Indoor
air quality
· Health
and safety
· Ecological
resources
· Biological
agents
Persons retaining consultants should review the
consultant’s audit proposal carefully to be sure that the proposal contains or,
just as importantly, excludes non-AAI tasks per the client’s wishes. Lenders
should be consulted when retaining a consultant, as they often want to be
involved in selecting the consultant and determining the scope of audits.
The innocent landowner defense relies, in addition to
conducting an AAI-compliant investigation, on compliance with “continuing
obligations” if contamination is discovered. In the event of the discovery of
contamination, to maintain the defense, the owner must take “reasonable steps”
to:
· Stop
any continuing release;
· Present
any threatened future release; and
· Prevent
or limit any human, environmental, or natural resource exposure to any
previously released hazardous substance. The AAI Rule does not attempt to
define what constitutes “reasonable steps.”
70
Fed Reg at 66072. The owner must also:
· Cooperate,
assist and provide access to persons authorized to conduct response activities
at the property.
· Comply
with any land use restriction.
· Not
impede the effectiveness or integrity of any institutional controls.
· Exercise
due care with respect to the contamination.
· Take
precautions against foreseeable third party acts or omissions and the
foreseeable consequences of such acts or omissions.
42
USC 9601(35); 42
USC 9607(b)(3). “Bona fide prospective purchasers” must do all the
foregoing and, in addition, must:
· Provide
all legally required notices with respect to the discovery or release of any
hazardous substance at the property.
· Comply
with any EPA request for information or administrative subpoena under CERCLA.
· Not
have an affiliation with a person responsible for the contamination, including
familial, contractual, corporate, and financial affiliations.
42
USC 9601(40); 42 USC 9607(r).
Persons claiming liability protection under the “contiguous property owner”
defense are subject to similar requirements. 42
USC 9607(q).
ASTM is preparing a “continuing obligations” guidance,
currently entitled “New Guide for Identifying and Complying with Continuing
Obligations on Real Property Impacted by Chemicals of Concern.” According to ASTM’s website,
“this Standard Guide intends to suggest actions and procedures that, if
completed, would help users to satisfy some of the requirements to qualify for
the innocent landowner, the contiguous property owner, and the bona fide
prospective purchaser protections from CERCLA liability.”
EPs are required to be involved in an AAI investigation.
Most buyers’ staffs lack a person who meets the definition
of an EP and, therefore, most buyers must use outside consultants to establish
innocent landowner another defense.
Persons hiring consultants should make sure the consultant
will have an EP performing or supervising the investigation. If an EP does not
play the required role, the client risks dire consequences, especially
ineligibility to assert a defense to CERCLA or Part 201 liability.
Client and the EP must agree on which of them will perform
the several AAI tasks that the AAI Rule allows either one to perform.
Michigan has not adopted rules similar to the EPA AAI
rule. Until that occurs, Michigan regulators and courts are likely to use the
EPA AAI rule as persuasive guidance as to whether a person has met the AAI
requirements of Part 201.
To encourage improved compliance with environmental laws,
Michigan has enacted an environmental audit privilege statute under which the
results of an environmental audit are protected from disclosure to the
government and other third parties if certain conditions are met. In addition,
immunity from civil and criminal sanctions may be obtained when advance notice
of an audit is given to the DNRE and the violations found during the audit are
promptly and voluntarily disclosed and corrected. Both the privilege and
immunity are subject to stringent conditions and exceptions.
On March 18, 1996, the Michigan Legislature enacted Part
148 of NREPA to create a limited evidentiary privilege for information
generated as a result of “environmental audits” and limited immunity from
administrative, civil and criminal penalties and fines for violations of NREPA.
1996
PA 132, codified as MCL 324.14801 et seq. The purpose of Part 148 is to encourage businesses, municipalities and other regulated entities to conduct environmental audits and to promptly correct any violations found. On November 13, 1997, in response to criticism from EPA and environmental groups regarding the extent of the evidentiary privilege and immunity offered by Part 148, the legislature amended the law to limit the
availability of the evidentiary privilege and to create more exceptions from
immunity. 1997
PA 133 and 1997
PA 134. In addition to Michigan, at present approximately 25 other states have enacted some form of environmental audit or immunity law, with several others having administrative policies designed to encourage voluntary environmental auditing and self-disclosure. Further details are available at the Region
V website for enforcement.
Under Part 148, an “environmental audit” is a voluntary,
internal evaluation of a facility or activity regulated under NREPA, conducted
after March 18, 1996. MCL
324.14801(a). To be covered by Part 148, the environmental audit must be conducted within a reasonable time, not to exceed six months, and be designed to: (1) identify past or current noncompliance; (2) prevent noncompliance; (3) improve compliance; (4) identify an existing or potential hazard, contamination, or
adverse environmental condition; or (5) improve an environmental management
system or process. Id. Persons conducting environmental compliance audits should note ASTM
has published ASTM E-2107-06, "Standard Practice for Environmental Regulatory Compliance Audits.”
An “environmental audit report” is a document or set of
documents created as a result of an “environmental audit.” Documents included
in the environmental audit report must be labeled “Environmental Audit Report: Privileged
Document” when created. MCL
324.14801(b). The environmental audit report includes supporting information, such as field notes, records of observations, findings, opinions, suggestions, conclusions, drafts, memoranda, follow-up reports, drawings, photographs, computer generated or electronically recorded information, maps, charts, graphs,
and surveys, if the supporting information or documents are created or prepared
for the primary purpose and in the course of or as a result of an environmental
audit. Id. An environmental audit report may also include an
implementation plan that addresses correcting past noncompliance, improving
current compliance, improving an environmental management system, or preventing
future noncompliance. Id.
To be covered by Part 148, the owner or operator of the
facility or an employee or agent of the owner or operator must perform an
environmental audit. MCL
324.14802(1)
An environmental audit report is privileged and protected
from disclosure unless the report comes within one of the following exceptions
or unless the privilege is waived:
· Documents,
communications, data, reports or other information required to be collected,
maintained or made available or reported to a regulatory agency or any other
person by statute, rule, ordinance, permit, order, consent agreement, or as
otherwise provided by law. MCL
324.14802(3)(a).
· Information
obtained by a regulatory agency by observation, sampling, or monitoring. MCL 324.14802(3)(b).
· Pretreatment
monitoring results that a publicly owned treatment works or control authority
requires to be reported for facilities that discharge wastewater to a municipal
sewer system. MCL
324.14802(3)(c).
· Information
legally obtained from a source independent of the environmental audit or from a
person who did not obtain the information from the environmental audit. MCL
324.14802(3)(d).
· Machinery
and equipment maintenance records. MCL 324.14802(3)(e).
· Information
in instances where the privilege is asserted for a fraudulent purpose. MCL 324.14802(3)(f).
· Information
in instances where the material shows evidence of noncompliance and the owner
or operator failed to either take prompt corrective action or eliminate any
violation within a reasonable period of time, but not exceeding three years
after discovery of the noncompliance, unless DNRE formally agrees to a longer
period. MCL 324.14802(3)(g).
In addition to the foregoing, the privilege created by
Part 148 does not apply in criminal investigations or proceedings. MCL 324.14805. Where an audit report is obtained, reviewed or used in a criminal proceeding, the privilege created by Part 148, to the extent applicable to administrative or civil proceedings, is not waived or eliminated. Id.
The exceptions to the environmental audit privilege do not
limit already existing protections that may be available under other common law
privileges, such as the attorney-client privilege or attorney work product
doctrine. MCL
324.14808. Likewise, the availability of the privilege under Part 148 does not limit any existing rights to challenge privilege under Michigan law. Id.
Unless subject to an exception or the privilege is waived,
a person who conducts an environmental audit and a person to whom the
environmental audit results are disclosed may not be compelled to testify
regarding any information obtained by that person solely through the
environmental audit (MCL
324.14802(4)), and the privileged portions of an environmental audit report are not subject to discovery and are not admissible as evidence in any civil, criminal or administrative proceeding. Id.
The person for whom the environmental audit report was
prepared may waive the privilege under Part 148. MCL 324.14803(1). The waiver applies only to the portion(s) of the environmental audit report as to which the privilege is specifically waived. Id.
Disclosure of an environmental audit report and
information generated by the environmental audit by the person for whom the
environmental audit report was prepared or by the person’s employee or agent to
any of the following does not waive the privilege under Part 148: (1) an
employee of the person; (2) a legal representative of the person; and (3) an
agent of the person retained to address issue(s) raised by the environmental
audit. MCL
324.14803(2).
Disclosure of the environmental audit report or any
information generated by the environmental audit under either of the following
circumstances does not waive the privilege:
· A
disclosure made under the terms of a confidentiality agreement between the
person for whom the environmental audit report was prepared and a partner or
potential partner, a transferee or potential transferee, a lender or potential
lender, or a trustee of or for the business or facility audited, or a
disclosure made between a subsidiary and a parent corporation or between
members of a partnership, joint venture, or other similarly related entities. MCL
324.14803(3)(a).
· A
disclosure made under the terms of a confidentiality agreement between
governmental officials and the person for whom the environmental audit report
was prepared. MCL
324.14803(3)(b).
Part 148 establishes a procedure by which state or local
law enforcement authorities may seek disclosure of privileged material. To
obtain privileged information, the authorities must make either a written
request delivered by certified mail or a demand by lawful subpoena. MCL 324.14804(1). The person asserting the privilege has 30 days to make a written objection to the disclosure. Id. Failure of a person to make such an objection waives the privilege as to that person. Id. After receipt of such an objection, the authorities may file with the circuit court, and serve upon the person asserting the privilege, a petition requesting an in camera
hearing on whether the environmental audit report or portions thereof are
privileged or subject to disclosure. Id. Upon the filing of such a
petition, the person asserting the privilege must provide a copy of the
environmental audit report to the court and must demonstrate in the in
camera hearing all of the following: (1) the year the environmental audit
report was prepared; (2) the identity of the person conducting the audit; (3)
the name of the audited facility or facilities; and (4) a brief description of
the portion(s) of the environmental audit report for which privilege is
claimed. MCL 324.14804(2).
A person asserting the privilege under Part 148 has the
burden of proving a prima facie case as to the privilege. MCL 324.14806(1). A person seeking disclosure of an environmental audit report has the burden of proving by a preponderance of the evidence that privilege does not exist under Part 148. Id.
The court, after the in camera review, must require
disclosure of material for which privilege is asserted if the court determines
that either of the following exists: (1) the privilege is asserted for a
fraudulent purpose; or (2) even if otherwise subject to the privilege, the
material shows evidence of noncompliance with state, federal, regional or local
environmental requirements and the owner or operator failed to either take
prompt corrective action or eliminate any violation identified within a
reasonable time, but not exceeding three years unless DNRE formally agrees to a
longer period. MCL
324.14804(4).
In addition to an evidentiary privilege, Part 148 offers
immunity from administrative and civil penalties and fines and from criminal
penalties and fines for negligent acts or omissions related to a violation of
NREPA Article II (pollution control) and Chapters 1 (habitat protection) and 3
(management of nonrenewable resources) of Article III of NREPA for certain
violations discovered as a result of an environmental audit, provided that all
of the following conditions are met:
· The
person gives prior notice to DNRE of his or her intent to perform an
environmental audit. MCL
324.14809(7). The notice should be on a form that is available from DNRE at their
website pages on Environmental Audit. The notice must specify: (1) the
facility or portion of the facility to be audited; (2) the anticipated time the
audit will begin; and (3) the general scope of the audit. The notice may
provide notification of more than one scheduled environmental audit at a time.
· The
person makes a voluntary disclosure of the violations to the appropriate state
or local agency.
MCL
324.14809(1). To be considered a “voluntary” disclosure, all of the following conditions must be met:
· The
disclosure of the information arises out of an environmental audit.
· The
audit occurred before the person was aware that he or she was under
investigation by a regulatory agency.
· The
disclosure was made promptly after knowledge of the violation was obtained by
the person.
· The
person initiates an appropriate and good-faith effort to achieve compliance,
pursues compliance with due diligence, and promptly corrects the violation
after its discovery. If the noncompliance is the failure to obtain a permit,
the person must submit a complete permit application within a reasonable time.
Id. The person making the voluntary disclosure must
provide information showing that the foregoing conditions are met. Id. Disclosure
of the environmental information to DNRE waives the privilege otherwise
available under Part 148 unless the disclosure is made under the terms of a
confidentiality agreement. To preserve the availability of the privilege for
the disclosing person, DNRE Office of Pollution Prevention and Compliance
Assistance has created a “nonwaiver of privilege confidentiality agreement,”
which is available from the DNRE for such disclosures. DNRE also has prepared a
“voluntary disclosure” form, the use of which is not mandatory but which may
assist persons in making disclosures properly and to the correct DNRE office. Both
forms are currently available on DNRE’s
website and should be reviewed carefully before being submitted. .
There is a rebuttable presumption that a disclosure made
in compliance with Part 148 is “voluntary.” MCL 324.14809(2). The state or local agency bears the burden of rebutting such presumption. Id. An agency determination that a disclosure was not voluntary is considered "final agency action" subject to judicial review. Id.
No immunity applies to any criminal fines and penalties
for gross negligence or to any criminal penalties or fines for violations of
Parts 301 (inland lakes and streams), 303 (wetlands protection), 315 (dam
safety), or 325 (Great Lakes Submerged Lands) or Sections 3108 (use of
floodplains, stream beds or stream channels), or 3115a (alteration of
floodplains) of NREPA. Id.
In addition, immunity does not apply if any of the
following is found to exist by the trier of fact:
· The
person has knowingly committed a criminal act.
· The
person has committed significant violations that constitute a pattern of
continuous or repeated violations within the three-year period prior to the
date of the disclosure.
· The
violation has resulted in a substantial economic benefit which gives the
violator a clear advantage over its business competitors.
· The
noncompliance resulted in serious harm or in imminent and substantial
endangerment to human health or the environment.
· The
noncompliance is a violation of the terms of an administrative or judicial
order.
MCL 324.14809(4). Where the conditions of a “voluntary disclosure” are not fully met but a good faith effort was made to voluntarily disclose and resolve a violation found as a result of a voluntary environmental audit, the state and local environmental and law enforcement authorities must consider the nature and extent of
any good faith effort in determining their enforcement response and must
mitigate any civil penalties based on a showing that one or more of the
conditions for “voluntary disclosure” have been met. MCL 324.14809(5).
Part 148 does not provide immunity from federal or local
laws or regulations. Where federal law is involved, the EPA environmental audit
policies may apply: “Incentives for Self-Policing: Discovery, Disclosure,
Correction and Prevention of Violations,” 65 Fed Reg 19618 (Apr. 11, 2000) (the “Audit Policy”); and EPA’s “Small
Business Compliance Policy”. EPA publishes periodic "audit policy updates" listing disclosures and settlements under the Audit Policy and EPA's Office of Regulatory Enforcement has prepared an “Audit Policy Interpretive Guidance,” dated
January 1997 and a 2007 Frequently Asked Questions. Both documents are
available at links on EPA’s auditing
website. Nor does immunity under Part 148 eliminate or affect a person's
duties to correct violations, conduct any necessary remediation, or pay damages
for injury to person or property.
The EPA has published an audit policy (Audit Policy)
providing that EPA generally will not seek civil penalties for violations found
as a result of a voluntary environmental audit, which are voluntarily reported
and promptly corrected, and provided that certain other conditions are met. Significant
exceptions exist which may render the policy inapplicable, in whole or in part,
depending on the facts.
Unlike Michigan’s Part 148, EPA’s Audit Policy does not
provide environmental audits with privilege or other protection from
disclosure. To the contrary, the Audit Policy offers potential penalty relief
only if, among other conditions, violations discovered through an environmental
audit are disclosed to the agency.
The Audit Policy is intended by EPA to provide incentives
for regulated entities to detect, promptly disclose, and expeditiously correct
violations of federal environmental requirements. The Audit Policy, both in its
original form (60
Fed Reg 66706 (Dec. 22, 1995)) and as subsequently revised and still in force (65 Fed Reg 19618), contains nine conditions, and entities that meet all of them are eligible for 100% mitigation of any
gravity-based penalties that could otherwise be assessed. “Gravity-based”
refers to that portion of the penalty over and above the portion that
represents an entity’s economic gain from noncompliance. The Audit Policy
offers no mitigation of the “economic gain” portion of any penalty.
The nine conditions in the Audit Policy for full
mitigation of gravity-based penalties are:
1. Systematic Discovery:
The violation must be discovered through an environmental audit, which is
defined as a “systematic, documented, periodic and objective review of facility
operations and practices related to meeting environmental requirements,” or
through a “compliance management system,” which is defined in the Audit Policy.
2. Voluntary Discovery:
The violation must be discovered voluntarily and not through a legally mandated
monitoring or sampling requirement prescribed by statute, regulation, permit,
judicial or administrative order, or consent agreement. EPA clarifies that
violations discovered pursuant to an audit or compliance management system may
still be considered voluntary if required under an EPA “partnership” program in
which the entity voluntarily participates or even if required under a
settlement agreement with EPA. 65
Fed Reg 19621. Further, EPA states that “any violation that is voluntarily discovered is generally eligible for Audit Policy credit, regardless of whether reporting of the violation was required after it was discovered.” Id.
Special discovery rule for Title V permits. Generally,
Clean Air Act (CAA) violations discovered during activities supporting Title V
certification requirements would not be eligible for penalty mitigation under
the Audit Policy because EPA regulations impose a legal duty for permit holders
to comprehensively analyze their compliance status and certify annually as to
CAA compliance. This certification would render the discovery not “voluntary.” In
1999, EPA stated that the “voluntary discovery” requirement would be relaxed in
the Clean Air Act Title V context prior to issuance of a Title V permit. This
policy is incorporated into the Audit Policy’s preamble. Id.
3. Prompt Disclosure: The
regulated entity must fully disclose the specific violation in writing to EPA
within 21 days (expanded from ten days under the original Audit Policy) after
the entity discovered that a violation has, or may have, occurred. In the
preamble to the revised Audit Policy, EPA provides guidance on when the
disclosure clock starts ticking, explaining that the 21-day disclosure period
begins “when any officer, director, employee or agent of the facility has an
objectively reasonable basis for believing that a violation has, or may have,
occurred.” EPA states that “[t]he ‘objectively reasonable basis’ standard is
measured against what a prudent person, having the same information as was
available to the individual in question, would have believed.” EPA cautions
that the standard “is not measured against what the individual in question
thought was reasonable at the time the situation was encountered.” If in doubt
as to whether a violation exists, EPA advises that “the recommended course is
for the entity to proceed with the disclosure and allow the regulatory
authorities to make a definitive determination.” In the multi-facility context,
EPA states that it “will ordinarily extend the 21-day period to allow
reasonable time for completion and review of multi-facility audits where: (a)
EPA and the entity agree on the timing and scope of the audits prior to their
commencement; and (b) the facilities to be audited are identified in advance.” In
the acquisition context, EPA states that it “will consider extending the prompt
disclosure period on a case-by-case basis. The 21-day disclosure period will
begin on the date of discovery by the acquiring entity, but in no case will the
period begin earlier than the date of acquisition.”
4. Discovery and Disclosure
Independent of Government or Third-Party Plaintiff: The regulated entity
must discover and disclose the violation to EPA prior to a government
inspection, investigation or information request, notice of a citizen suit, the
filing of a complaint by a third party, the reporting of the violation to the
government by a “whistleblower,” or imminent discovery of the violation by the
government. EPA states that the “independent discovery” condition does not
automatically preclude Audit Policy credit in the multi-facility context. As
noted above in condition 3, the Audit Policy does not apply where the regulated
entity discovers and discloses a potential violation where the violation has
been or is about to be discovered by the government or other third parties. The
Audit Policy states, however, that “[f]or entities that own or operate multiple
facilities, the fact that one facility is already the subject of an
investigation, inspection, information request or third-party complaint does
not preclude [EPA] from exercising its discretion to make the Audit Policy
available for violations self-discovered at other facilities owned or operated
by the same regulated entity.”
5. Correction and
Remediation: The regulated entity must correct the violation within 60 days
and certify such correction in writing, subject to extension, in advance of the
deadline expiring, in certain circumstances.
6. Prevention of Recurrence:
The regulated entity must agree in writing to take steps to prevent a
recurrence of the violation.
7. No Repeat Violations:
The specific violation, or a closely related violation, must not have occurred
within the past three years at the same facility, or within the past five years
as part of a pattern at multiple facilities owned or operated by the same
entity. However in the acquisition context, EPA states, “if a facility has been
newly acquired, the existence of a violation prior to acquisition does not
trigger the repeat violations exclusion.”
8. No Serious Harm or Risk
and No Violation of Order or Consent Agreement: The Audit Policy does not
apply where the violation: (a) results in serious harm or “may have presented
an imminent and substantial endangerment;” or (b) violates a judicial or
administrative order or consent agreement.
9. Cooperation: The
regulated entity must cooperate as requested by EPA and provide such
information as is necessary and requested by EPA to determine the applicability
of the Audit Policy.
If all conditions are met except for the first one
(systematic discovery), EPA will still reduce gravity-based penalties by 75%. EPA
in the Audit Policy also reiterates that it will not recommend that violations
disclosed in accordance with the Audit Policy be subject to criminal
enforcement as long as EPA determines that the violation is not part of a
pattern or practice involving a “prevalent management philosophy or practice
that conceals or condones environmental violations” or “[h]igh-level
corporation officials’ or managers’ conscious involvement in, or willful
blindness to, violations of Federal environmental law.” In the Audit Policy,
EPA further repeats that it generally will not request or use an environmental
audit report to initiate a civil or criminal investigation, and clarifies that
this “no recommendation” policy applies even where the facility has not met the
“systematic discovery” condition, but has met all other conditions (the
original Audit Policy required all nine conditions to be met for the “no
recommendation” policy to apply).
Penalty relief may be available even where the disclosing
entity does not meet any of the conditions of the Audit Policy. For example, an
entity that does not qualify for penalty relief under the Audit Policy may
still be entitled to relief under other EPA media-specific enforcement policies
that recognize good-faith efforts.
EPA’s 2007 Frequently Asked Questions document states as
follows:
· For
violations of federal law for which the state is not authorized, disclosures
should be made to EPA. This is because the states possess no legal authority to
resolve violations under those statutes. Of course, if the state has a similar
law (albeit not authorized as a means to implement the federal program), the violator
should determine whether it should also disclose the violation to the state.
· For
violations of federal statutes for which a state-authorized program exists
(e.g., the Clean Water Act), the violator may choose to disclose to either or
both the federal and state regulators. If a resolution of the federal claim for
the violation is desired, however, EPA states that disclosure to EPA is the
only means to obtain it.
· EPA
and states may enter into reciprocal agreements under which each generally
agrees to defer to the other’s resolution of disclosed violations. In such
cases, disclosure to one or the other agency, instead of both, may suffice.
EPA has published an “Interim Approach to Applying the
Audit Policy to New Owners” (New Owner Interim Audit Policy).
73 Fed Reg 44991 (Aug. 1, 2008). EPA published the New Owner
Interim Audit Policy “to encourage new owners to look
closely at compliance issues at their recently acquired facilities,
self-disclose and, most importantly, fix the environmental problems they find.”
As described more fully in §8.26, these
incentives include penalty mitigation beyond what the Audit Policy offers and
an expanded range of violations that may be eligible for Audit Policy
consideration.
To benefit from the New Owner Interim Audit
Policy, an eligible new owner must certify that:
· Prior to the transaction, it was not responsible for environmental
compliance at the facility which is the subject of the disclosure, did not
cause the violations being disclosed and could not have prevented their
occurrence;
· The violation that is the subject of the disclosure originated with the
prior owner; and
· Prior to the transaction, neither the buyer nor the seller had the
largest ownership share of the other entity, and they did not have a common
corporate parent.
2.
Penalty Mitigation §8.26
Penalty mitigation is available to new
owners who, within nine months of the transaction closing promptly disclose
violations to EPA or enter into an audit agreement with EPA, and meet all the
conditions of the Audit Policy, as modified for new owners, as follows:
· No penalties will be assessed against the new owner for the period
before the date of acquisition;
· Penalties for economic benefit associated with avoided operation and
maintenance costs will be assessed against the new owner, but only from the
date of acquisition; and
· No penalties for economic benefit associated with delayed capital
expenditures or with unfair competitive advantage will be assessed against the
new owner if the violations are corrected in accordance with the Audit Policy
(i.e., within 60 days of discovery or another reasonable timeframe to which EPA
has agreed).
Modifications, in the new owner context, to
the following five of the nine conditions of the Audit Policy will make more
violations eligible for Audit Policy penalty mitigation, as applied to new
owners:
Systematic Discovery – Condition 1: Because EPA recognizes that a new owner's pre-closing due diligence
is by its nature a one-time event, EPA stated that it will waive the “periodic”
element of this condition for violations discovered through pre-acquisition due
diligence, and allow such disclosures to be considered for full penalty
mitigation.
Voluntary Discovery – Condition 2: EPA stated that it will expand its interpretation of the voluntary
discovery condition in the new owner context, currently limited to compliance
with Title V of the Clean Air Act, to allow consideration of all violations
which would otherwise be ineligible for Audit Policy consideration because they
are already required to be identified through a legally mandated monitoring,
sampling or auditing protocol, and thus not “voluntarily discovered.” New
owners that enter into an audit agreement or disclose violations before the first
instance when the monitoring, sampling or auditing is required, would not be
disqualified based on this condition.
Prompt Disclosure – Condition 3: The
Audit Policy provides that violations must be promptly disclosed in writing,
within 21 days of discovery. For violations discovered pre-closing, a new owner
would have up to 45 days after closing to disclose violations. For violations
discovered post-closing, a new owner would have to disclose violations within
21 days after discovery or within 45 days after the transaction closing,
whichever time period is longer. EPA stated that, in the busy period just after
acquisition, this will give new owners a little more time to decide and prepare
to come forward with due diligence findings.
Other Violations Excluded – Condition 8: The Audit Policy excludes violations that resulted in serious actual
harm or may have presented an imminent and substantial endangerment. Where
violations that gave rise to serious actual harm or an imminent and substantial
endangerment began before the new owner acquired the facility, EPA will allow
such violations to be eligible under the New Owner Interim Audit Policy, absent
a fatality, community evacuation, or other seriously injurious or catastrophic
event. EPA stated that this should encourage new owners to come forward and
correct significant violations, which is one of the goals of this approach.
Cooperation Condition – Condition 9: EPA modified the cooperation condition of
the Audit Policy only to make clear that the disclosing entity must cooperate
with EPA in determining whether all Audit Policy conditions – as they have been
modified by the New Owner Interim Audit Policy – have been met. Further information about the New Owner Interim Audit Policy is available at the
new owners incentive summary page on the EPA website .
EPA’s audit
website, contains useful information and links regarding matters including
the following:
eDisclosure
– EPA’s electronic Audit Policy Self-Disclosure System. This is a web-based system to allow companies to electronically self-disclose
violations under EPA’s Audit Policy. eDisclosure makes it easier and faster to
self-report environmental violations. It also speeds up EPA’s processing of
self-disclosures by ensuring that each disclosure contains complete
information.
Corporate
Audit Agreements. A Corporate Audit Agreement
allows an entity (such as corporation, university or other organization with
many facilities or facility locations within its authority) to plan a
corporate-wide or facility-wide audit with an advanced understanding between
the entity and EPA regarding schedules for conducting the audit and disclosing violations
beyond the current 21-day disclosure requirement for single-facility
disclosures. In return for the advanced agreement of an audit and disclosure
schedule, the facility would receive the benefits of EPA’s Audit Policy as
applicable.
Audit Protocols. Audit protocols assist the regulated community in developing programs at individual facilities to evaluate their compliance with environmental requirements under federal law. The protocols are intended solely as guidance. The regulated community’s legal obligations are determined by the terms of applicable environmental facility-specific permits, underlying statutes and applicable state and local law.
Audit
Policy Self-Disclosure and Regional Contacts. Once
a violation has been discovered, a company has 21 days from the time of that
discovery to disclose in writing the violation to EPA. The initial disclosure
should identify the means of discovery, type of violation, and facility
location.
“Audit Policy Update” Newsletter. The Audit Policy Update Newsletters, published between 1996-2001 by EPA’s Office of Regulatory Enforcement, Office of Enforcement and Compliance Assurance, provide information on the changes to the Audit Policy and other information relating to its use.
“Enforcement Alert” Newsletter. This informational newsletter is published by EPA’s Office of Civil
Enforcement, Office of Enforcement and Compliance Assurance. The newsletter is
intended to inform and educate the public and the regulated community about
important environmental enforcement issues, recent trends, and significant
enforcement actions. It calls attention to such matters as the need for
voluntary corporate audits.
Sample
Status Report. Some companies have used the Sample Status Report to provide
information to EPA during the course of conducting an audit. The initial report,
and subsequent periodic progress reports, have helped identify issues early in
the auditing process and assisted in the overall progress of the audit.
Sample
Disclosure Follow-up Letter. This sample letter is
an example of what the Agency sends a company after receiving a self disclosure
pursuant to EPA’s Audit Policy. The letter provides companies with guidance on
the kind of information needed by EPA to better understand the potential
violations and determine whether a company’s disclosure meets the conditions of
the Audit Policy.
Disclosure of a violation pursuant to the EPA Audit Policy
is reviewed by enforcement personnel and may trigger an inquiry into whether
all of the policy’s applicable conditions were met. This may result in a
burdensome and costly process that may, in effect, be as or more punitive as
the penalty that is sought to be avoided. If the disclosing company declines to
participate in the process, an enforcement action seeking penalties may result.
The Audit Policy applies only to EPA, not to other federal
agencies or state or local regulators, who may have independent enforcement
authority over a disclosed violation.
The Audit Policy is only a guidance. It creates no legal
rights and is not enforceable against EPA.
The Audit Policy, more information and forms are available
on EPA’s auditing
website. EPA Region 5’s
auditing website also contains links to additional documents.
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