Toxic Waste Sites: Peril of Liability : Appeal Court Holds Realtors Responsible for Risk Disclosure

It was a bright, sunny day this fall in downtown Los Angeles when a contractor unearthed something that could have resulted in immediate death and destruction.

Luckily, it didn’t, but it became part of the hazardous-waste liability cloud hovering over real estate.

It was a 10,000-gallon tank filled with gasoline.

Frank Goss cringed. “If the forks of the forklift had punctured the tank, the gasoline in it could have exploded like a bomb.”

Goss is president of Building System Evaluation Inc., a consulting firm, of Sierra Madre. The tank had been buried on a site owned by one of his clients.

The contractor was grading the site for construction of a storage facility when he discovered the tank, which he picked up with the forklift and set aside.

“The fact that the guy is alive today is a miracle,” Goss said, “and in that crowded metropolitan area?” He grimaced.

Other construction workers stuffed dry ice through the fuel port of the tank to lower the temperature of the gasoline and minimize the explosiveness of the vapor content. Then the chilled flammable liquid was pumped out and transported by tanker truck to a disposal site elsewhere for incineration. “The situation was neutralized,” Goss explained.

But the question remains:

Who would have been responsible if an explosion had occurred? Who would have paid the damages? The contractor? Property owner? Lessee? Government? Insurance company? Real estate broker involved in the sale of the site to Goss’s unknowing client?

Potential broker liability in such cases has state and national trade groups concerned. “We have a subcommittee investigating it,” Clark Wallace, a Moraga, Calif., real estate broker and president-elect of the National Assn. of Realtors, said, “and we hope to have some tentative recommendations for members drafted at our convention in New Orleans.” The convention, where Wallace will be installed, is under way now and ends Tuesday.

Realtor concern stems mainly from a 1984 California Court of Appeal ruling holding real estate brokers responsible for disclosing “reasonably discoverable facts (those that the broker should have known)” as well as known material facts affecting the value or desirability of a property for sale.

“Nothing has gone as far in other states,” Wallace said, “but in most cases, California leads, and the rest of the nation follows.” So the ruling is of concern to real estate brokers and salespeople nationwide.

A landmark case (Easton vs. Strassburger) involved a home on a landfill. New buyers took possession. There was a massive earth movement and the residence was destroyed. The seller, contractor and listing agents were held liable.

Charles S. Vogel, an attorney with Sidley & Austin in Los Angeles and president of the Los Angeles County Bar Assn., told a group of industrial realtors meeting in Century City that the ruling was “significant because it was the first time that a broker was held liable for simple negligence . . . the broker discovered red flags, nets on the embankment and uneven floors, but didn’t perform a soils test, and the seller didn’t reveal prior earth movement to the broker.

“This had nothing to do with misrepresentation. The broker revealed all that was known to him, but ignorance is no defense. The broker must be able to demonstrate that he made a reasonable and competent inspection.”

The California Assn. of Realtors initiated legislation specifying that the Easton ruling apply “only to residential properties of one to four units.” The bill--SB 453, introduced by Sen. Alan Robbins (D-Van Nuys)--has just been signed into law.

“Easton does relate to residential real estate, but it probably has some precedental aspects that are subject to more interpretation,” Wallace said.

Vogel added:

“The standard of care shouldn’t be any different with commercial/industrial properties. In fact, if you hold yourself up as a specialist, you might be held up to a higher standard of care.”

What most concerns the real estate brokerage community about the Easton ruling are the words “reasonably discoverable facts” and such uncertainties as those that frequently involve hazardous wastes.

Even the term “hazardous waste” causes confusion. Legal definitions are complicated. For laymen, Angelo Bellomo, chief of the Southern California Section, Toxic Substances Control division of the state Department of Health Services, defines “hazardous or toxic waste” as “any chemical substance that if handled improperly can present a hazard to public health and our environment.”

However, as a scientist, he concedes that “any chemical” could mean simple table salt.

“We don’t know what hazardous waste is. So how can we know what our liability is?” Wallace questioned. “How can we defend ourselves when we can’t even define toxic waste? Is it something that seeps into a property from a mile away or 600 yards away? Is it in the air? Is it a liquid? We don’t know.

“Twenty years ago, ‘asbestos’ was a wonderful word. Now there’s a lot of latent liability involving it. Latent liability questions are really of concern to us. The obvious facts we ought to disclose and, hopefully, the broker will deal with these up front. The ones we’re worried about are the unknowns. We fear the unknown.”

So do insurance companies. “The insurance industry is in a state of siege,” Wallace observed. “Errors-and-omissions carriers for us have nearly disappeared from the market.”

With the proliferation of lawsuits against doctors, lawyers and other professionals, including people in real estate, and the frequency of high awards, insurance companies have increased their premiums. “Costs of errors-and-omissions insurance can be high,” Tim Dove of the Insurance Information Institute in San Francisco, acknowledged.

Liability insurance for property owners or developers and lessors has also gotten more expensive, if it can be gotten.

The two kinds--environmental impairment insurance for gradual pollution such as a slow leak from a storage tank and sudden accident insurance to cover incidents like the cloud of toxic gas from the Union Carbide chemical plant that immediately killed about 1,700 residents of Bhopal, India--are “becoming very difficult to get,” Bruce P. Howard, another attorney with Sidley & Austin in Los Angeles, said. “It’s not easy to get liability insurance anymore, especially for new clients.”

For an insurance company’s existing clients, costs have soared from 2% or 3% of a new construction project a few years ago to 20% now, Goss estimated. Title insurance doesn’t cover liability. It deals with claims of ownership and right to use.

A panelist at the industrial realtors’ meeting in Century City observed that “most insurance companies have pollution exclusions” in liability insurance policies. “They’re trying to get off the hook” in paying some potentially enormous awards and settlements, he added. The exclusions also apply to hazardous-waste dump operators.

Ai Woodward, an attorney in the law offices of Herbert Hafife (who represents hundreds of the families suing the BKK Corp., operator of a controversial dump in West Covina) said, “The California Health and Safety code requires operators of dump facilities to have insurance, but as a practical matter, they won’t write liability insurance without a lot of exclusions.”

There may be some hearings in West Covina to condemn properties around the dump and force the dump owner to buy a pollution easement, he added, “and that could be a good way to get a valuation for damages over smell.” Pollution easements are sometimes added to properties involved in airport noise or nuisance cases so that potential new owners of the properties are alerted to the problems.

Increasing incidences of hazardous-waste problems, along with litigation, have led to the higher insurance premiums, and John McCann, regional vice president of the Insurance Information Institute, has been quoted as saying that the insurance companies’ “high premium charges are necessary for survival of the insurance industry.”

There are so many questions when the subject of hazardous or toxic waste comes up that traditional insurance underwriting is difficult. Often it is impossible to determine what caused the problem in the first place and who was initially responsible. The numbers of people affected might be endless. “Hazardous waste is like Frankenstein’s monster. It never dies,” Woodward said. “You can bind some hazardous wastes with salt, but if it is then mixed with water, the chemical comes back again, and the manufacturer is back on the hook.”

A company might be held legally responsible for what other parties dumped on a site years earlier.

A textbook example of how courts are ruling on fault occurred last February, when former owners of a house were held liable by a California appellate court in a case concerning a 2-year-old who was visiting the current owners and suffered brain damage when he fell into a backyard pond.

When it comes to hazardous waste, federal and state laws have held transporters, generators and property owners--current and past--liable.

Attorney Stephen D. Ramsey, also with Sidley & Austin, told the industrial realtors in Century City that even people with ownership interests might be held responsible. “They’re not liable by Superfund (the federal Comprehensive Environmental Response Compensation and Liability Act, passed in 1980), but the courts are reaching to pull in folks within a universe of responsible people,” he said. This would include shareholders and corporate officers.

“So the typical corporate shield against liability of the past is not good in a hazardous-waste situation.”

So many people could be held liable, and the penalties--besides the cost of clean-up--can be severe. As Ramsey told the realtors, “There are statutes out there that have substantial importance to people you do business with on a day-to-day basis--people who own dirt, sell dirt, want to buy dirt, want to buy industrial facilities where substantial manufacturing processes have been carried on over time.

“Any one of these people is subject to a vast scheme of federal and state regulations, and with these regulations may come substantial financial responsibilities and liabilities as well.”

There are criminal and civil penalties, even for people who simply discover a toxic waste and fail to report it to governmental authorities. There are fines of up to $50,000 a day until a site is cleaned up, and jail sentences of up to two years per count.

“Most buyers don’t want to buy trouble. They want to buy a clean site. So even indemnification should be used as a last resort,” attorney Howard said.

Indemnification, which he termed “a major response to the Easton case,” can protect a buyer, seller, real estate broker or agent through language in the contract of sale stipulating that any of these people will not be liable for toxic substances spilled or put in the ground by any of the others. However, as Howard elaborated, “the person who indemnifies you might have moved or may not be that rich.” So the protection is limited.

The wisest course for brokers and agents is to simply make a “reasonably good-faith effort” to discover whatever they can and disclose it, he said. “They had an ethical duty already, so this just adds a legal duty,” he concluded.

The wisest course for owners is to clean up toxic wastes before the government mandates it, he added. He told the industrial brokers: “If the owner of a property doesn’t clean it up, he’s liable anyhow, and the government could clean it up at his expense. The seller is liable and will be for costs to clean up a site even after the site’s sale.

“Neighbors, the buyer and the government could come after the seller.” Mounds of litigation that have sprung from this have become known as “toxic torts.” “So the owner should just clean it up,” Howard said.

Superfund and other governmental monies are used to clean up sites designated as some of the worst, and then only when the private, responsible parties can’t be found or aren’t solvent enough to fund the clean-up.

In the 10,000-gallon tankful of gasoline situation described by Goss, the contractor or person operating the forklift probably would have been responsible if an explosion had occurred, but he probably would have been killed. “These contractors are usually small entities anyway,” Goss said, “so if he didn’t have proper insurance, responsibility might fall on the owner, who had no knowledge of the tank before it was unearthed.

“After all, it was buried six feet under ground.” No matter, he added, “if the owner is a big entity with deep pockets and even if he had no blame, he has the ability to pay.”

However, most big entities don’t want to risk national or even international headlines linking the companies to disasters, especially those involving hazardous wastes. As Goss observed, major hotels can’t afford the press attention received by Union Carbide in Bhopal.”

So the answer, he figures, is for owners to clean up toxic wastes before disasters occur and for buyers of real estate to be aware.

If a buyer or even a seller isn’t sure if a property has hazardous wastes, look for clues.

As a starter, attorney Vogel told industrial brokers to “solicit answers to a questionnaire” they or their companies prepare to find out about permits, licenses and uses. A disclosure statement for sellers of residential property of one to four units was outlined in S.B. 1406, introduced by Sen. Nicholas C. Petris (D-Oakland), instigated by the California Assn. of Realtors and just signed into law.

Vogel also suggested that brokers and agents “be familiar with the neighborhood and sensitive to its environmental history. Was it formerly used for oil exploration? Was it a military base? If it was a base, industrial solvents might have been used.”

Railroad tracks, transmission lines, lack of vegetation and dead trees are other possible clues of the presence of hazardous wastes. “Walk the property and notice chemicals and products,” he urged. “Be sensitive to places like print shops and metal treatment plants.

“Look on the floor, notice the bolts. They probably mean that a machine was there that was probably cleaned with industrial solvents. Look at the earth and cement for stains. Stains could be a tip-off about chemical disposal. If you see tanks or drums used to store substances, you know you have a property that justifies some form of environmental audit.”

Howard likens an “environmental audit” to an accountant’s audit. “First, you look at the historical level. You ask what sort of chemicals were brought on the site, how they were used, what processes were utilized.

“You interview people who worked there 20 years ago. When doing the audit, you keep in mind all of the regulations.”

If a seller isn’t inclined to perform the audit, “you can bet that the buyer will want one,” he continued, “and there is a substantial risk to have the buyer do it because he might turn everything over to the government. Better to have the seller conduct the audit.” Better yet to have a professional consultant (like Goss) do it and involve an attorney in the process, he added.

The state Department of Health Services keeps a list of consultants that it recommends on a regular basis. In Los Angeles, it can be reached at 213/620-2380.

Consultants don’t come cheap. “One company I know charges a $1,500 minimum for four hours,” Bellomo said. An average project at Goss’s firm costs a client $20,000 in consulting fees.

One survey cost a client $30,000, and not one thing negative was found, Goss said, “but when you’re talking about a real estate transaction in the tens of millions of dollars, our fee becomes justifiable.” For a single home, he noted, there are residential inspectors who charge less.

Even if a site is 100% clean of toxic waste, it could be what is called a “border-zone property.” A section of the state’s Health and Safety code defines that as “any land within 2,000 feet of an area in which there may have been significant disposal of hazardous waste.”

The idea of this is to protect people, especially residents, of new buildings from contamination seeping from nearby hazardous-waste dumps and facilities.

Howard explained how the regulation ideally works:

“Local governments are notified of certain properties where there is disposal of hazardous wastes, so that when a building permit is requested, say for a hospital or a housing project, local government says that the developer needs Department of Health Services clearance first. So only those people planning to build something trigger the process.”

The law reads: “Any owner, lessor or lessee that reasonably suspects a property may be hazardous-waste property must request a determination from the Department of Health Services before engaging in any construction. . . . If the property is then determined to be a hazardous-waste property, the developer is required to obtain a specific variance in order to make any new use of the land not involving or related to the existing facilities.”

The requirement is the same for an owner who believes that his property might be considered “border-zone.” If the department determines that it is border-zone property, the owner or lessee may not build “a residence, hospital, school or any permanently occupied human habitation other than those used for industrial purposes without a specific variance.”

Trouble is, local governments don’t know all of the places where there are significant deposits of toxic waste, and--as Howard observed--”a lot of people may not even know that they have a duty to notify the department if they suspect that their property has or is near hazardous waste. So they may have something under construction within 2,000 feet of a disposal site and not even know that they might have a problem.”

Suppose a property owner knows he has a problem. All is not necessarily lost. Even at the Manville Corp. asbestos plant in Carson, there is hope.

Rick Notini of the state Department of Health Services said, “The plant is to be sold for $20 million, and the owners are in the process of demonstrating to us that there is no health hazard.”

Old buildings are being demolished in preparation for new industrial ones, he added. So even there, the toxic situation is capable of being handled.

“You can manage toxic materials just as other facets of a business,” Goss said.

In managing toxic materials, they are usually removed, but the question is increasingly becoming: Moved where? This is a growing concern even for household hazardous wastes.