Property Transfers Among Family Members Do Not Negate Innocent Party Status For Remediation Funding Grants

October 26, 2017 | No Comments
Posted by Steven M. Dalton

The cost to remediate contaminated sites can be significant and the scope of liability under environmental laws is deliberately broad.  In many cases under theories of strict, joint and several liability, property owners inherit liability for environmental contamination caused by predecessor owners.  The affirmative innocent purchaser defense is intended to provide a mechanism to limit such liability exposure.  However, under New Jersey law, innocent purchasers must complete all appropriate inquiry prior to property acquisition and complete remediation of known contamination to limit liability exposure with respect to later discovered environmental conditions.  Funding from the State may be an option in some cases to assist persons who qualify as innocent parties in completion of remediation activities.  The Hazardous Discharge Site Remediation Fund Innocent Party Grant is available to persons who acquire property prior to December 31, 1983, who continue to own that property until grant monies are released to them, and who did not cause the environmental condition or use the types of substances that require remediation.

The recent case of Cedar Knolls 2006, LLC v. NJDEP addressed the question of whether intrafamilial transfers occurring after 1983 negate the ability to qualify for innocent party grant funding for remediation. The Appellate Division held that the transfer of property among family members prior to distribution of the grant monies and after 1983 did not negate the ability of the applicant to qualify as an innocent party for purposes of an innocent party grant.

The property in question was acquired in 1977 by Robert Higginson and then was transferred several times from parents to children, including transfers via intrafamilial trusts that occurred after 1983.  Ownership of the property ultimately was established in Cedar Knolls 2006, LLC, an entity created by Higginson’s son.  DEP denied the LLC’s application for innocent party grant funding for remediation of the property.  The Appellate Division reversed the denial interpreting the legislative history of both the Brownfield Act and ISRA in favor of the applicant.  Intrafamilial transfers of property constitute an exception to a “change in ownership” that would otherwise trigger ISRA with respect to an industrial use and are exempt from ISRA compliance.  The court construed the statutes together finding that ISRA and the Brownfield Act are part of a unified legislative strategy for remediation of contaminated sites.  The court was not dissuaded by the fact that the “change in ownership” definition under ISRA is not expressly part of the Brownfield Act.  “Innocent party grants were clearly intended to help the owners of a contaminated property defray the costs of remediation if they were not responsible for the contamination and had acquired the property prior to enactment of [ISRA], assuming they satisfied the other requirements.”  The legislature was more concerned with the substance and continuity of ownership than with technicalities of the legal form and concluded DEP improperly denied the grant request.

It is not uncommon for environmental issues to go undiscovered for extended periods in the context of long-held, family owned properties.  Transfers are more likely to occur among family members without the typical level of due diligence completed by an outside purchaser.  Discovery of preexisting environmental conditions can result in time consuming, difficult and expensive remediation.  The potential availability of innocent party funds notwithstanding intrafamilial transfers may prove to be extremely beneficial.  It is also likely that attempts will be made to extend the application of this decision outside of the context of intrafamilial property transfers.  Certain corporate transfers and reorganizations are not considered to be a transfer of ownership or operations under ISRA, and it will be interesting to follow whether DEP and/or the courts apply the same legislative interpretation in different factual scenarios.

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