By Erin K. Tenner, attorney with contributions from Wallace A. Jensky, JHA Environmental Inc.
It can be challenging to keep up with all the laws that affect auto dealerships. There are times, however, when even complying with all the laws isn’t enough to protect you from potential liability.
That is especially true in the area of environmental liability. Dealerships are awash with potential environmental issues because of the many hazardous materials used in the business of selling and repairing vehicles. From broken hoists — which typically leak — to cracked or malfunctioning clarifiers, to abandoned underground gasoline tanks, all can expose a dealer to potential legal trouble.
Two little known laws provide that anyone who has ever stored or disposed of hazardous waste can be sued in civil court for contribution to the cost of cleaning up the disposal site even if the disposal was completely licensed and legal, and done by a licensed and qualified company you contract with to haul your waste away. If you are not careful, you could even become liable for waste disposed by the previous owner.
The liability arises under two federal statutes: the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Resource Conservation and Recovery Act of 1976 (“RCRA”). This liability is joint and several, retroactive, strict and unending. In simple terms, that means whoever has the deepest pockets of all the businesses that dumped at the site, will pay the most and could end up paying much more than their share.
So how do you protect yourself from liability?
- Don’t assume the company that is handling your environmental compliance within the dealership is also handling proper waste disposal. Ask them and check to make sure.
They will typically do a compliance audit, but they will not necessarily tell you if you have a spill or if your manifests regarding disposal are being handled accurate.
- Make sure the manifests given to your hauler are properly classifying the hazardous waste. For example, new oil and used oil are handled differently. Handling requirements are also different under federal regulations and state regulations.
- To minimize exposure, the waste needs to be classified with the lowest hazardous classification that correctly fits the waste. You also pay an annual fee based on your manifests for hazardous waste. You could be paying more than what is required if you are classifying new oil as a hazardous waste.
- Make sure your current hauler is delivering any hazardous waste that can be recycled to a licensed recycling facility for hazardous waste. If they are, you should not have any future liability for that waste disposal.
- Check your pollution liability coverage to see if it includes disposal sites or locations that you do not own. If it does, it should clearly say so. If not, contact your insurance broker to see about having the coverage added.
If you bought the dealership from someone else, make sure the retroactive date, if there is one, goes back to the very beginning of operations. The older the dealership is, the greater exposure you have to potential liability.
If you are buying a dealership, make sure you have obtained an indemnification agreement from the seller covering any such liability. In my experience most attorneys representing buyers or sellers of car dealerships are unaware of these potential issues and do not include protections against them in their agreements.
If left unaddressed, the buyer of the dealership could be sued for, and stuck with, the liability. The risk of this can be minimized or eliminated by a properly drafted purchase agreement and by taking steps after closing to make sure the buyer is not seen as a successor of the seller. However, an indemnity agreement from the seller is the best protection.
Property transfer environmental liability insurance may also be available when you are buying a dealership provided you have a clean Phase I Environmental Site Assessment. This is a report that you can order which will search the public and aerial photograph records for past uses, environmental permits, tank removal closure reports, and that complies with the American Standard for Testing and Materials (“ASTM”) standard guidelines.
If all else fails, and you find yourself facing a demand for contribution to the cleanup cost, remember that these demands, like any other, are often negotiable.
Erin Tenner is a buy/sell attorney in Los Angeles, California. She can be reached at erin@cardealerattorney.com or 818-707-8410.
Wallace A. Jensky is a Professional Geologist at JHA Environmental, Inc. in Ventura, Calif. He can be reached at 1-805-504-6166 or wjensky@jacobandhefner.com.
