N.J. Appellate Court Clarifies That Owners of Pre-1993 Property Must Prove Due Diligence During Acquisition Under the Innocent Purchaser Defense Codified in the Spill Act

On October 29, 2012, as Hurricane Sandy began its assault on the State, a New Jersey Appellate Court in New Jersey Schools Development Authority v. Marcantuone created its own “storm” in Spill Act jurisprudence by holding that purchasers of contaminated property prior to September 14, 1993, can be liable under the Spill Act if they failed to conduct due diligence prior to purchase. In reaching this conclusion, the Appellate Division held that the long-standing 2001 decision in White Oak Funding, Inc. v. Winning had been superseded, in part, by the 2001 amendments to the Spill Act (“2001 Amendments”), which had been adopted a few weeks before the White Oak decision and became effective a week after the decision.

The Appellate Division noted that White Oak addressed two key issues. White Oak held that a property owner who did not own the property at the time of a discharge of hazardous substance at the property, could not be held liable for the “passive migration of pre-existing contamination.” As well, the White Oak Court held that the post-contamination owner’s failure to perform environmental due diligence, though it was aware of the property’s prior use as a fuel oil distribution business, did not make the defendants “in any way responsible” under the Spill Act for the contamination. According to the Marcantuone Court, the viability of this determination was superseded by the 2001 Amendments which extended the “innocent purchaser” defense to pre-1993 acquisitions.

The 2001 Amendments provided that a property owner who had purchased their property post contamination but, prior to September 14, 1993 (the effective date of the New Jersey Industrial Site Recovery Act), must prove by a preponderance of the evidence that an inquiry of the prior ownership and use of the property had been undertaken. This extension of the “innocent purchaser” defense made it clear that there was potential Spill Act liability for the pre-1993 purchaser that did not qualify for the defense. The adequacy of the inquiry — due diligence — would be determined by “the good and customary standards” at the time of the purchase.

The defendants in White Oak acquired the property prior to 1993 when the Spill Act was amended to provide that a purchaser has a duty to conduct an appropriate environmental inquiry for only post-1993 acquisitions. As discussed, the 2001 Amendments extended this duty to pre-1993 acquisitions. The Appellate Division in Marcantuone essentially held that the 2001 Amendments constituted a clarifying or remedial amendment that put upon the acquiring party a due diligence standard commensurate with the standard of environmental inquiry at the time of acquisition.

In Marcantuone, the New Jersey School Developments Authority had acquired the subject property through a condemnation action. Pursuant to the Supreme Court’s direction in Housing Authority Of City Of New Brunswick v. Suydam, a portion of the condemnation award had been placed in a trust until the final cost of remediating the property was known and liability determined in a separate action. In the liability determination litigation in Marcantuone, the Trial Court granted the defendant’s motion for summary judgment. Specifically, the Trial Court relied on the White Oak Court’s holding that failure to perform due diligence did not make the post contamination owner in “any way responsible” under the Spill Act. In reversing the Trial Court, the Appellate Division clarified that the 2001 Amendments had, in fact, superseded this portion of the White Oak opinion and that a post-contamination owner claiming a “innocent purchaser” defense must prove by a preponderance of the evidence that due diligence had been undertaken when purchasing the property to ascertain prior ownership and use of the property. The Appellate Division reversed the Trial Court and remanded the matter to the Trial Court to determine whether the post contamination property owner could establish the elements for the “innocent purchaser” defense as set forth in N.J.S.A. 58:10-23.11g(d)(5).

Property owners secure in the knowledge that they have no Spill Act liability because they have done nothing to contaminate their pre-1993 acquisitions are now on notice that they may be “in any way responsible” for contamination under the Spill Act if they failed to perform appropriate environmental due diligence at the time of the acquisition. The decision may have ramifications for alleged corporate successors with little evidence of what due diligence was done more than twenty years ago in connection with contaminated property in their portfolios. Accordingly, they would do well to review their acquisition portfolios for such potential problems rather than discovering them in the midst of litigation.