New Jerseys Natural Resource million dollars. In addition, there are - - PDF document

AS PUBLISHED IN THE NOVEMBER 15, 2004 ISSUE OF BUSINESSWEEK special advertising section

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Environmental Solutions: 2004

Progressive Ideas and Leading Technologies

New Jersey’s Natural Resource Damage Program Initiative

A Novel Program That Could Change The Site Remediation Process How much are natural resources such as wetlands, wildlife and drinking water worth? New Jersey is addressing this question through a novel natural resource damage (“NRD”) initia- tive aimed at quantifying such losses and then recovering damages from responsible parties. NRDs were once reserved for catastrophic

• spills. However, New Jersey intends to make

these damages a routine part of every clean-up. This initiative is not the result of any new law. Rather, New Jersey’s program relies upon a controversial new settlement formula which calculates a dollar value for every gallon of groundwater alleged to have been impacted. Potentially responsible parties face some diffi- cult choices. In the typical case, they must pay for the clean-up then settle on the replacement value of any impacted groundwater, otherwise their clean-up will not get approved and they will face a lawsuit. Since last fall, New Jersey has collected over $18 million dollars in NRDs. New Jersey has also issued a directive regarding the lower Passaic River that may cost industry $950 million dollars. In addition, there are approxi- mately a dozen NRD lawsuits now pending and perhaps as many as 4,000 sites in the pipeline. New Jersey has added a profit motive to the NRD equation. The Attorney General has enlisted outside private law firms to prosecute NRD claims. These firms will be paid a percent- age of every dollar they help recover. If New Jersey is successful NRDs will be here to stay and the trend will spread. T wenty-six

• ther states may have legal authority to seek
• NRDs. However, it remains to be seen whether

states can successfully manage this challenge or if this poorly charted course slows the cleanup, approval and redevelopment of industrial and commercial property. Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P .C. is a full-service law firm with more than 170 attorneys based in New Jersey (Newark and Trenton) and New York. Gibbons’ Real Property & Environmental Department assists in all aspects of environmental law with an emphasis on transfer and redevelopment of contaminated property. Gibbons presently represents the New Jersey Chamber of Commerce on a challenge to the New Jersey NRD program. For more information please contact Edward F . McTiernan, E EM Mc cT Ti ie er rn na an n@ @g gi ib bb bo

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GIBBONS, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE

A PROFESSIONAL CORPORATION ATTORNEYS AT LAW

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An Overview Of New Jersey’s Natural Resource Damage Program

Edward F . McTiernan, Esq., Arthur J. Clarke, Esq., Susanne Peticolas, Esq.

How much are natural resources such as the land, air, wildlife and drinking water worth and who should pay for the damages that these resources have sustained from years of industrial neglect? These are the questions that the State of New Jersey is attempting to address through its novel Natural Resource Damage Program

• a program aimed at quantifying such damages and then restoring natural resources. This effort will be paid for by corporations and other responsible parties.

The fact that New Jersey was once one of the nation’s most industrialized states is no surprise. Moreover, like many other northeastern states, the industrial land- scape of New Jersey has changed dramatically over the past two decades. Gone are the smokestack industries of yesteryear, replaced by high technology , warehous- ing, retailing and other service sector businesses. Yet the scars left by the past activities still stretch across much of the State in the form of contaminated industrial sites and landfills. The primary impacts of these sites on the environment are well-known and have resulted in costly and seemingly interminable remediation proj- ects paid for by the government and private parties. However, the secondary impacts of New Jersey’s long industrial legacy , including the degradation of its rivers, streams and ground water, have not been systematically addressed. This is changing as the new Natural Resource Damage Program sweeps across the State. It is no accident that New Jersey Department of Environmental Protection ("NJDEP") Commissioner Bradley Campbell used Newark’s Passaic River, one of the most industrialized rivers in the State, as his back drop to announce a bold new initiative. Campbell, a Democrat who has a flair for media coverage, was Director of the United States Environmental Protection Agency’s Regional Office in Philadelphia and a personal environmental advisor to former President Bill Clinton. He is a long- time environmental advocate and a shrewd environmental regulator. Some experts say that New Jersey’s Natural Resource Damage Policy Directive, the regulatory doc- ument that outlines the State’s methodology for pursuing NRDs claims, is written with Campbell’s personal touch. The Directive calls for the coordinated efforts of many State programs to help identify sites where natural resources have been impacted, quantify their damages, and repair or replace them. While NJDEP’s policy directive uses certain kinder, gentler tenets including voluntary restoration efforts and the cash settlement, Commissioner Campbell has also seen to it that litigation and penalties, long-time components of the Department’s notorious “command and control” enforcement policy , are still at NJDEP’s disposal. Commissioner Campbell has also promoted the use of outside legal counsel that specialize as plaintiff’s trial attorneys to pursue NRD claims through settlement and, where necessary , litigation.

BACKGROUND

Natural resources are “ land, fish, wildlife, biota, air, water, ground water, drinking water supplies and other such resources.” 42 U.S.C. 9601(16). Natural Resource Damages are the injury to, destruction of, or loss of natural resources. 42 U.S.C.9607(a)(4)(c). New Jersey is authorized by statute to recover the “cost of restoration and replacement of any natural resource . . .” N.J.S.A. 58:10-23.11u.b.(4). The combination of these broad definitions and sweeping statutory authority gives the State considerable discretion. Until now , New Jersey had generally only exercised this authority in cases involving extraordinary events or catastrophic spills. However, the new initiative integrates NRDs into the routine site remediation process.

NEW JERSEY’S SCREENING PROCESS

The number of potential NRD claims in New Jersey is staggering. New Jersey has 112 sites on the Superfund National Priorities list, over 9,000 sites on a state sponsored “Known Contaminated Site” List and an estimated 10,000 sites with leaking underground storage tanks. The initial step in the New Jersey’s NRD program is claim identification. Claim identification involves the review of properties and on-going clean-up cases through a screening review . NJDEP will implement a phased process for screening sites by completing a screening form that evaluates NRD-related issues. The screening process is akin to a mini-preliminary assessment and are coordinated by NJDEP’s Natural and Historic Resources and Site Remediation Programs. Outside legal counsel and their experts have also been involved in screening sites. The screening determines whether a Baseline Ecological Evaluation or Ecological Risk Assessment are required. The screening process often focuses on the identification of contaminant plumes that may have impacted surface and ground water. The screening process also concentrates on whether the plume is “co-mingled.” Presumably , the search for co-mingled plumes is a way to widen NJDEP’ s search for additional Potentially Responsible Parties (“PRPs”).

EXCLUSIONS

Certain classes of cases are excluded early-on in the screening process. Excluded involve sites where the cost of pursuing the NRD claim will exceed the poten- tial benefit from restoring the resource or recovering damages. NJDEP will also exclude the following classes of cases from the NRD program:

• Sites or claims for which the only responsible parties are residential homeowners residing at the site at which the claim arises.
• Sites or claims for which the only PRPs are small businesses with a limited ability to pay

.

• Sites that meet the qualifying criteria for DEP's "Cleanup Star" Program.

Parties responsible for these sites may , in theory , request written assurance that they are not subject to an NRD claim. However, the criteria for these exemp- tions, and especially the definition of small business, are highly unsettled.

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Environmental Solutions: 2004

RESTORATION

As the Department has repeatedly stated during the development of the NRD program, the program’s will emphasize restoration of natural resources and settlement of damage claims, not litigation. Natural resource restoration will involve two critical factors: the creation of substitute resources and the enhance- ment/preservation of resource services. Substitute resources involve compensatory restoration projects that provide the creation of equivalent habitats as substitutes for damaged resources. Newly created or enhanced resources must provide equivalent resource services to those that were damaged. For example, to assure the enhancement/preservation of ground water resource services, the Department envisions the acquisition of aquifer recharge areas, water re-use or recycling projects, infrastructure improvements to control stormwater and enhance ground water recharge, reforestation efforts to improve infiltration and water retention and other methods to enhance the water resource. For lost recreational uses, enhancements to public access, creation of or improvements to state or local parks, or the provision of other alternate recreational opportunities may be considered an acceptable restoration project.

NRD VALUATION

Perhaps the biggest question the regulated community has regarding the New Jersey’s NRD program is valuation. Specifically , how will the Department quan- tify NRDs in terms of dollars and cents? One of NJDEP’s most straight-forward - and controversial - calculations is used to estimate ground water damages. For parties willing to engage in settlement discussions, the Department will apply a novel settlement valuation formula developed and applied by the Office of Natural Resource Restoration. This formu- la has never been formally promulgated as a regulation. Nevertheless, the groundwater damage formula is intended to be widely used as a settlement tool. The formula determines ground water damages by using a volumetric calculation of the extent of the contamination and a temporal factor to consider the number

• f years that the ground water has been impacted. A dollar amount is then assigned on the per gallon replacement cost of finished waster. In essence, New

Jersey assumes that any contamination equals damage and then measures that damage to the raw water reserve based upon the price of water at the tap.

IMPACT ON NFAs AND BROWNFIELDS

Another major concern of the regulated community is the impact that NRDs will have on the issuance and reliability of No Further Action letters (NFAs) and the State’s Brownfields Program. As far as NFAs are concerned, the impact could be substantial. Under the new NRD policy , ecological injuries should be assessed and resolved prior to the issuance of an NFA. This type of assessment could slow the NFA process to a crawl To alleviate some of the prob- lems, NJDEP apparently expects to issue “soils-only” NFAs. Nevertheless, the Department has set a new course for obtaining a NFA that is poorly charted and destined to run aground unless the process for assessing and calculating NRDs can be streamlined. As far as Brownfields projects are concerned, the new NRD policy directive seems, on its face, to be less harsh. Consistent with Policy Directive 2002-03, the NRD directive will be applied in a manner that encourages and supports the cleanup and redevelopment of Brownfields sites. The NJDEP has committed not to assert claims for damages or compensatory restoration against Brownfields developers that meet the innocent purchaser defense requirements under New Jersey law at sites where there is an historical natural resource injury . However, the Department points out that the NRD policy shall not diminish responsi- bility for restoration actions that are inherent in remedial activity . Nevertheless, the Department appears to be moving its Brownfields agenda forward in spite

• f the NRD directive. If an NRD claim is viewed as an impediment to cleanup or redevelopment, the Department has created a special exception to eliminate

the impediment. The Department has stated that it will resolve such issues within ten (10) business days of becoming aware of the issue.

PASSAIC RIVER NRDs

Among the first targets of the State’s new policy directive are 66 companies at 18 sites located along the Passaic River in Essex and Passaic Counties. These PRPs were issued a joint NRD directive to assess NRDs in the River. The Directive compels the ordered parties to implement two tasks: the “assessment of natural resource injuries,” and the “interim compensatory restoration” of the River. Failure to comply with the Directive will result in the Department performing the required actions and then suing the ordered parties for up to three times the “cost of arranging for the cleanup and removal of hazardous substances that were discharged.” Although the Directive clearly mandates action, it appears to mix metaphors. Parties are being ordered to provide an “assessment” of the River and then per- form “interim compensatory restoration.” At first glance, these actions appear to be a departure from the traditional Spill Act directive that mandated the cleanup and removal of hazardous substances. Thus, the Directive suffers from an inherent inconsistency raising the suspicion that the purpose of the Directive is as a “cash cow,” not a tool for compelling parties to actually replace damaged natural resources.

CHALLENGES TO NJDEP’s INITIATIVE

Shortly after Commissioner Campbell announced the NRD initiative, a collection of trade organizations representing business and industry filed suit. New Jersey Society for Environmental & Economic Development et al v. Bradley M. Campbell et al, (New Jersey Superior Court, Mercer County Docket No. MER-L-343-04). The trade groups basically allege that New Jersey failed to duly promulgate its NRD program as a formal rule. In June, 2004, this challenge was transferred to New Jersey’s Appellate Division and is not expected to be resolved until next year. However, in the interim, the Superior Court imposed restrictions on the way New Jersey uses specially appointed outside counsel to recovery NRDs. The New Jersey case has been compared to State of New Mexico v. General Electric Company, Civ . 99-118 (D.N.M. 2004). Starting in 1999, New Mexico attempted to recover damages based upon contamination of a regional aquifer. Initially New Mexico claimed that the impacts to this drinking water resource would constitute

• ver $1 billion in damages. New Mexico calculated its damages using a formula that relies on many of the same volumetric factors found in New Jersey’s NRD set-

tlement formula. Like New Jersey , New Mexico also used market value of finished water as an indication of damages. After years of expensive litigation, New Mexico’ s claims were dismissed because the trial court found that the state could not prove an actual loss of a resource and failed to establish that even the admittedly impact- ed portions of the aquifer had lost all beneficial uses.

FUTURE LITIGATION ISSUES

Under Federal environmental laws, principally the Comprehensive Environmental Response Compensation and Liability Act, 42 USC 9601 et seq. (“CERCLA”) and the Oil Pollution Control Act, 33 USC 2701 et seq. (“OPA”), government trustees can recover damages for: (i) the cost of restoring, rehabilitating, replacing

• r acquiring the equivalent of damaged resources; (ii) diminution in value of natural resources; and (iii) the reasonable cost of assessing natural resource dam-
• ages. New Jersey’s environmental statutes are less precise. Nevertheless, NJDEP believes that the Spill Compensation and Control Act and the Industrial Site

Recovery Act, as well as state common law, all provide independent authority to protect natural resources. The primary goal of the NRD liability scheme in each

• f these statutes is to allow the government to recover funds to restore or replace an injured environmental resource.

NJDEP is the designated trustee for New Jersey’s natural resources. NJDEP’s Office of Natural Resource Damages (ONRD), formed in 1993, serves as the pri- mary state clearinghouse on natural resource issues. However, NJDEP’s Site Remediation Program and the Department of Law are also involved in this program. NJDEP’s Technical Requirements for Site Remediation, NJAC 7:26E., establish a two step process to assess whether a discharge has adversely impacted natural

• resources. The initial step is a resource inventory or “baseline ecological evaluation.” If this threshold evaluation indicates the presence of ecological concerns,

an ecological risk assessment is required. Based upon the outcome of the ecological risk assessment, a restoration plan may be required. The environmental cleanup statutes used as the basis for the recovery of NRDs also authorize third party lawsuits for contribution. These lawsuits operate under the theory that liable parties who pay more than their fair share should be able to sue other PRPs who did not. Although the State has been quite selective in picking

• ut the initial ordered parties in the Directives issued thus far, avoiding municipalities, sewerage authorities, Brownfields developers, and current tenants and prop-

erty owners that were not ostensibly responsible for the discharge, will the ordered parties be as selective when they seek to spread the liability to other parties? Most likely not. Thus, a rash of third-party lawsuits can be anticipated, especially in the Passaic River basin where hundreds of companies that were not named in the Directive have historically operated. Another interesting litigation issue relates to insurance carriers. There has been a plethora of insurance claims over the past two decades involving the cleanup of hazardous

• sites. Some of the claims were paid by carriers, while others were litigated. In either event, policy limits may have been reached in the claims related to prior cleanups leav-

ing insureds with no coverage for NRDs. Previous coverage settlements may also have released the carriers from future coverage in a policy buy-back or broad-form release

• language. This potentially leaves many PRPs without viable insurance funding.

Lastly , will cases that have received NFAs be re-opened to address NRDs? Unless the NFA is absolutely clear on this subject, lawsuits can be envisioned to deter- mine the scope of any release from NRDs that were previously obtained.

NRDs BEYOND NEW JERSEY

At the Federal level, the Department of the Interior (DOI), not the EPA, is the primary federal agency charged with developing procedures for assessing damages or injury to natural resources from oil spills and releases of hazardous substances. Between 1986 and 1994, DOI promulgated a series of regulations governing Natural Resource Damage Assessments. These regulations are found at 43 CFR 11 and can be used by federal and state trustees. This assessment procedure is optional and establishes simplified guidelines for standard or ‘T ype A ’ assessments and alternative protocols for complex or ‘T ype B’ sites. Because of legal restrictions and limitations periods, the use of these Federal authorities is rather limited. However, the states could act to fill this void. According to a 1997 survey by the Association of State and Territorial Solid Waste Management Officials, at least 26 states have independent legal authority to recover NRDs. Several states, including Illinois and South Carolina, are reportedly following the lead of New Jersey and New Mexico and are developing methodologies to measure damages to groundwater resources. If New Jersey is successful in recovering substantial damages for contamination to groundwater without the cost or risk of proving that the resource was other- wise suitable for use, other states are certain to adopt similar programs.

CONCLUSION

NJDEP’s present NRD program raises many more questions than it answers. The regulated community needs to prepare for the potential of administrative and legal actions that are likely to occur. This can be best accomplished by researching the historical operations at sites in New Jersey , reviewing insurance coverage and contrac- tual indemnity provisions, and developing its legal and factual defenses to potential NRD claims. In ongoing cleanups, a proactive approach to addressing NRDs should be considered . Regardless of the approach taken by the regulated community one thing is clear: NRDs promise to be around for a long time, and the reality is, no mat- ter how hard a party toiled to cleanup a contaminated site, there could be more damages to be paid.

GIBBONS, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE, P .C.

The Environmental Department at Gibbons has diverse, broad-based experience capable of supporting our clients' litigation, regulatory and transactional needs. Our Department is comprised of attorneys with both public and private sector experience that has served to develop strong working ties with the regulatory agen- cies affecting our clients. We have been extensively involved in the defense of potentially responsible parties in Comprehensive Environmental Response Control and Liability Act of 1980 (CER- CLA) cases in New Jersey , Pennsylvania, Delaware, Maryland and New York. The Department also represents clients in companion personal injury and property dam- age cases emanating from these CERCLA cases. In addition, the Department represents clients in private party environmental and toxic tort litigation involving a variety

• f statutory and common law theories of liability for property damage due to environmental contamination. We have handled, for numerous clients, environmental insur-

ance coverage actions for both Superfund and private party matters. The Environmental Department has strong regulatory experience before administrative boards and agencies. We handle administrative hearings on air, hazardous waste, water and noise pollution matters, as well as on issues involving a variety of permitting questions. In addition, the Department provides assistance in air and water per- mitting matters, as well as matters concerning coastal zones, wetlands, stream encroachments and waterfront development permits. The Department assists clients on a wide array of general regulatory compliance questions including issues relating to RCRA, TSCA, OSHA, Clean Air Act, Clean Water Act, Community Right to Know Laws and asbestos regulations, and also conducts site audits and compliance evaluations. W e regularly work with our clients on compliance manuals and internal audits.