Environmental Diminution Of Property Value And The Creative Plaintiff Valuation Expert

When a homeowner brings a multi-count toxic tort case alleging that a corporate defendant’s discharge of toxic substances from its facility contaminated his property, the diminution of property value claim is often the only element of damages subject to objective determination. Or is it? 

In case after case, the testimony of plaintiff property valuation experts is being rejected for failing to comply with Federal Rule of Evidence 702.  There is often little or no dispute that homeowners living adjacent to an area involved in ongoing remediation may have difficulty selling their homes at full market value. And yet, despite the apparent stigma, plaintiff experts in these matters often stumble on their way to the courthouse.  

One recent such case is Michael Leese, et al. v. Lockheed Martin Corp., Civ. No. 11-5091, decided by the Hon. Jerome B. Simandle, Chief U.S. District Judge for the federal district court in New Jersey on March 18, 2014. In that case, Judge Simandle granted summary judgment to Lockheed Martin after concluding that the expert report and deposition  testimony of plaintiffs’ valuation expert, Jerome McHale, should be excluded as unreliable. 

The property valuation reports at issue concerned the Leese property at 5 Victoria Court and the Linkler property at 7 Victoria Court, in Moorestown, New Jersey. Both properties sit across the street from a Lockheed Martin’s research, development and manufacturing facility. When plaintiffs purchased their respective properties, they admittedly were aware that groundwater underneath their properties was contaminated with TCE, a volatile organic compound. 

After several years, plaintiffs brought suit against Lockheed Martin alleging personal injury on behalf of the Leese children and diminution of property value. In late 2013, the court dismissed the personal injury claims due to lack of proof of causation, but permitted plaintiffs to furnish a new expert valuation report. 

McHale’s valuation report concluded that each property was worth $295,000 “as is” and $600,000, “if clean.” Therefore, he calculated the loss of value for each property as $305,000. Yet, when Judge Simandle began to dig into McHale’s methodology and rationale, he discovered a jumble of unexplained arithmetic, unreliable methodology, and internal inconsistencies. 

As is often the case, a valuation expert does not have difficulty establishing the “if clean” valuation. In this case, McHale used a “sales comparison” approach by averaging the sale prices of four comparable properties in the plaintiffs’ residential development to obtain the “if clean” valuation. It was when McHale attempted to analyze the “as is” value of the properties that he ran into serious difficulty. 

McHale used three different techniques to estimate the “as is” value and took the averages of the three valuations to arrive at a final “as is” figure. The court evaluated each of these three techniques in turn. 

 The first technique, called “cost to cure,” subtracted from the “if clean” valuation the cost of environmental remediation. McHale obtained an estimate of remediation costs from a non-testifying expert. The problem was that NJDEP did not require or recommend that any of this non-testifying expert’s proposed remedial measures be implemented on plaintiffs’ properties. 

The court analyzed the “cost to cure” approach this way: 

“The most significant problem with McHale’s cost-to-cure analysis is that he may not reasonably rely on Rogers’ unsupported, subjective analysis of what remedial measures are “required” on the property. Rogers himself states that his estimate describes “measures [that] are prophylactic as opposed to curative in nature.” …In other words, Rogers, by his admission, does not intend his letter to address the costs to cure for a contamination on plaintiff’s property. Rather, Rogers expressed his opinions about what prophylactic measures are required without explaining the basis for such an opinion.”

Judge Simandle found that the “cost to cure” technique suffered from a Daubert “fitness” problem as well. Because plaintiffs admitted that they knew the groundwater under their properties was contaminated with TCE when they bought their homes, remediating the property to “if clean” levels would improve the property beyond what plaintiffs purchased and give them a windfall. According to the court, the proper valuation analysis should take into account what plaintiffs knew of the condition of the property at the time of purchase. 

The second technique applied a “paired sales” analysis. A “paired sales” analysis looks to sales of other stigmatized properties, estimates “if clean” valuations for those properties, and calculates a “percentage discount” for the environmental stigma for each property. The average percentage discount is then applied to the “if clean” valuations of plaintiffs’ properties. 

Two of the four comparative properties used by McHale were inappropriate because NJDEP required remediation on them, by contrast, but did not require remediation on plaintiffs’ properties. Moreover, the cost of remediation on those properties was modest as compared to the hundreds of thousands of dollars proposed for plaintiffs’ properties. 

In evaluating the “paired sales” technique, the court found that McHale’s report had irreparable flaws. First, McHale could not articulate a reliable basis for weighting the comparator percentages, and he did not consult any authority to arrive at his average. More significantly, the court found that McHale had no reliable basis for adding 10% to the weighted average discount. In his deposition, when pressed, McHale admitted that he came up with an extra 10% derived from a “market based opinion from me” after gathering opinions from unspecified “other people in the market.”

The third technique employed by plaintiffs’ expert was “realtor and broker surveys.” McHale surveyed eleven area realtors to come up with an appropriate discount for residential property faced with a stigma. Although the plaintiffs’ homes did not have any operational remediation system on their premises, McHale asked the realtors to assume that the homes had a subsurface depressurized remediation system in the basement. 

Based upon the realtors’ survey, he concluded that 20% would be an appropriate discount off the listing price. He then added another 5% because properties without stigma had sold for below 5% market over the past two years due to poor real estate conditions.  He then added another 15% because of additional marketing time and effort, and the difficulty of a buyer finding financing. All of these calculations resulted in the final discount of 40%.

In examining the “interviews/surveys” approach, the court questioned why McHale doubled the discount from 20% to 40% without explaining why the realtors would not have taken into consideration the other factors McHale discussed when giving their responses. Presumably, the discounted selling price already took into consideration any difficulty in obtaining financing and any increased marketing costs. Therefore, these considerations should not be counted twice in coming up with a discount. 

In addition, it made no sense why the realtors were asked to assume that they should expect to sell a house with a subsurface remediation system when the plaintiffs’ own homes did not have such a system. In summary, the court concluded:

“Although some methodological flaws go to weight, here the methodology is unreliable at each step: fact gathering, percentage averaging, percentage doubling. The entire formulation of the survey seems to invite unreliability…”

Leese is instructive for the toxic tort defense practitioner because it provides a primer on how to pick apart the opinions of a plaintiff property valuation expert in deposition and, later, in a Daubert motion.  Opinions that at first glance might seem reasonable at first glance fail to hold up and careful analysis.  In Leese, the plaintiff valuation expert utilized three separate techniques for determining plaintiffs' "as is" value and failed to pass Daubert scrutiny in every instance.

Comcast Corp. v. Behrend's Impact In Toxic Tort Litigation

I have written about how the U.S. Supreme Court's decision in Comcast v. Behrend has had the practical result of raising the bar for class certification and leveling the playing field for corporate defendants. Until recently, however, it was unclear what impact this anti-trust decision would have on toxic tort litigation. 

On January 17, 2014, the Seventh Circuit issued a groundbreaking decision in Parko v. Shell Oil Company, which was an appeal from the Illinois district court's certification of a class of property owners in Roxana, Illinois, who had filed suit against Shell Oil Company which (together with various subsidiaries) had owned and operated an oil refinery from 1918 to 2000 adjacent to the village where the 150 class members reside. Although multiple claims were alleged, Parko was  largely a diminution of property value case.

 In Parko, the class action plaintiffs were successful in obtaining class certification in the district court without having to provide evidence. Typically, plaintiffs seek to reserve any discussion of the merits of their claims until after class certification.  Plaintiffs are well aware that the certification of a class creates enormous pressure on defendants to settle regardless of the merits of the case.

The plaintiffs alleged that the refinery had leaked benzene and other contaminants into the groundwater under the class members' homes.  The Seventh Circuit found it particularly significant that the groundwater was not being used as a drinking water supply.  As such, it was unclear whether the contamination had caused any diminution of property value at all.

In addition, the Seventh Circuit noted defendants' contention that the contamination alleged by plaintiffs occurred over a 90-year period and involved acts and omissions charged against the six defendants, and maybe other polluters as well.  The defendants had identified sources of pollution in the area that were attributable to the operations of non-parties.  As a consequence,  class members could have experienced different levels of contamination from multiple sources over many years. 

Relying on the language in Comcast Corp. v. Behrend, the Court reversed the district court, holding that a trial judge may not "refuse to entertain arguments against respondents' damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination."  

The Court held that "mere assertion by class counsel that common issues predominate is not enough. That would be too facile. Certification would be virtually automatic. And so Rule 23 does not set forth a mere pleading standard....Rather, when factual disputes bear on issues vital to certification (that is, to whether the suit should be allowed to be litigated as a class action), such as predominance, the court must receive evidence . . . and resolve the disputes before deciding whether to certify the case."  (emphasis added)  In reviewing the record below, the court stated that it was not even clear that plaintiffs "have identified a common issue."

The Parko decision is short and pithy, and contains a trove of valuable nuggets of good language for the class action  toxic tort defense practitioner. 

On proof of diminution of property value:   

Real estate values have taken a drubbing in recent years, with the collapse of the housing bubble and the ensuing financial crisis. It can't be assumed that a decline in the value of residential property in Roxana (if in fact there's been a decline) is the result of proximity to a refinery that for all one knows has been leaking contaminants for the last 95 years without causing detectable harm. There are many things commonly found in soil beneath rural or suburban houses that homeowners would very much like not to enter their home (such as earthworms, fungi, ants, beetles, slugs, radon, chemical residues, thousands of different types of microbe— and groundwater), but as long as there is no danger of such unwanted visitors their underground presence should not affect property values. Benzene in the water supply is one thing; benzene in groundwater that does not feed into the water supply is quite another. (emphasis added)

On Rule 23's predominance requirement post-Comcast:  

The district judge did not explore any of these issues. He treated predominance as a pleading requirement. He thought it enough at this stage that the plaintiffs intend to rely on common evidence and a single methodology to prove both injury and damages, and that whether the evidence and the methodology are sound and convincing is a question going to the strength of the plaintiffs' case and should be postponed to summary judgment proceedings or trial. But if intentions (hopes, in other words) were enough, predominance, as a check on casting lawsuits in the class action mold, would be out the window. Nothing is simpler than to make an unsubstantiated allegation. A district judge may not "refus[e] to entertain arguments against respondents' damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination."

 On the appropriate level of judicial inquiry pre-certification:

The judge should have investigated the realism of the plaintiffs' injury and damage model in light of the defendants' counterarguments, and to that end should have taken evidence. For if the defendants are right, there is no common issue, only individual issues that will vary from homeowner to homeowner: is there benzene in the groundwater beneath his home at a level of concentration that if the groundwater were drunk would endanger health (and is there any possibility it would enter the water supply); what is the source of the benzene in the groundwater beneath a given home (that is, who is the polluter who caused the groundwater to become polluted); could the presence of the benzene in that concentration cause any other form of harm; has the presence of the benzene reduced the value of his property; if so, how great has the reduction been. It is difficult to see how these issues can be managed in the class action format. But in any event they must be engaged by the district judge before he can make a responsible determination of whether to certify a class.

Benzene in the water supply is one thing; benzene in groundwater that does not feed into the water supply is quite another."  Amen!

 

 

Hydrofracking And The Debate Over Municipal Infrastructure

On February 11, 2013, the IADC conducted a lively, interactive panel discussing the risks and benefits of shale oil and gas extraction at the IADC Mid-Winter Meeting. The panel represented the spectrum of political, regulatory and scientific views on the issue and debated perceived potential risks to human health and the environment.

In addition to me,  the panel consisted of Blaine D. Edwards, Assistant General Counsel at Superior Energy Services, Inc.; Raymond G. Mullady, Jr., a partner at Blank Rome LLP in Washington, D.C.; and Niall A. Paul and Nathan D. Atkinson, partners at Spilman Thomas & Battle PLLC. Eric Lasker at  Hollingsworth LLP in Washington, D.C. assisted in the preparation and coordination of the event.

Ray Mullady presented his paper, “Defending Marcellus Shale Groundwater Contamination Claims: The Case Against Class Actions and Other Theories of Liability,” which he co-authored with other lawyers at his firm. I presented my paper titled, “Shale Oil and Gas Development: The Stakeholder Perspective.”

My paper concerning stakeholder perspectives was presented against the backdrop of the debate in New York concerning whether to permit fracking to occur. In researching this issue, I learned that some stakeholders representing county and municipal interests expressed deep concern regarding perceived secondary societal impacts of fracking, including diminution of property value; increased demands placed on community infrastructure, particularly roads; increased crime rates and rental prices associated with an influx of out-of-state workers; and the fragmentation of rural landscapes with pipelines, roads and staging areas. Surprisingly, for these stakeholders, these concerns outweighed environmental or health concerns.

These stakeholders express deeply held fears – whether rational or not – that gas exploration will be detrimental to their established way of life in rural upstate New York.
The natural gas industry possesses both the science and the practical know-how to be confident that fracking can be performed without causing the contamination of groundwater and surface water. However, social concerns raise questions beyond purely environmental issues. In a largely rural region that is unaccustomed to the perceived sprawling industrial impact of natural gas drilling, unlike other parts of the country, there is apprehension that adverse societal effects may outweigh the predicted economic benefits.

There are a number of tools an industry can utilize to address concerns over infrastructure impacts of hydrofracking. Better public relations to win over the hearts and minds of upstate New Yorkers is paramount.  Perhaps because public relations efforts have not been necessary in other areas of the country long accustomed to natural gas exploration, there may not have been a perceived need for PR in upstate New York.  

Explaining how horizontal drilling works is an important first step in reassuring folks that gas exploration will not bring about an end to their semi-agrarian way of life.  For example, there is a superb animation that explains how horizontal drilling works on the website of the Oklahoma Oil & Natural Gas Producers & Royalty Owners.  In the immediate vicinity of drilling operations, companies can provide, among other things, Value Assurance Programs (“VAPs”) to homeowners to protect them against diminution of property value as a result of their living in an area where industrial activity is taking place. As discussed in other articles on this blog, a VAP is a contractual commitment to the community that assures homeowners that the proposed activity will not result in loss of investment in their homes.  

Any day now, the blue ribbon panel appointed by NYS Health Commissioner, Dr. Nirav Shah, to assist in the NYSDOH's consideration of the health risks of fracking, will issue its report.  The panel experts – Lynn Goldman, dean of George Washington University’s School of Public Health and Health Services; John Adgate, chair of the Environmental and Occupational Health Department at the Colorado School of Public Health; and Richard Jackson, chair of the Department of Environmental Health Sciences at UCLA’s Fielding School of Public Health – are among the foremost experts in the country in their respective fields and in the field of health impact assessment. Environmental advocacy groups, including NRDC, were extremely pleased with these appointments. It is likely that the issuance of the panel's report will re-energize the hydrofracking debate.

Value Assurance Plan Protects Canadian Property Owners

We have written in the past concerning Value Assurance Plans (or “VAPs”), which should be considered as a significant component of a corporate response to homeowner concerns over property values due to environmental issues. Mass tort diminution of property value litigation often results when panic selling by homeowners drives down property values across an entire community due to the emergence of a perceived environmental risk. The liability exposure in these cases can be enormous.

In essence, a VAP is a contractual promise made to assure homeowners that the equity in their homes will be protected if they sell their homes and realize less than full value from the sale due to an environmental concern. The VAP is designed to reduce panic selling by assuring homeowners that their home equity will be protected if they stay in the community during an extensive remediation.  The world’s largest VAP has been operating successfully for several years in Port Hope, Ontario, which is located on the north shore of Lake Ontario. 

In the 1930’s, a radium manufacturing facility opened in Port Hope, Ontario, which generated uranium as a waste byproduct. After uranium’s critical role in the development of nuclear weapons became understood, the Port Hope operation was purchased by the Canadian government in 1942. Consistent with waste disposal practices at the time, waste from the uranium operation, which contained Radium-226, uranium, arsenic and other contaminants resulting from the refining process, was discarded around the former plant site; swept into Port Hope harbor; disposed of in local dump sites; or distributed throughout the community as fill.

On October 1, 2001, the Canadian government introduced the Port Hope Area Initiative  to address the remediation and long-term management of low-level radioactive waste in the Port Hope area. Because thousands of homeowners reside in and around the proposed waste management facilities, or along the route that would transport waste to the facilities, the Canadian government had the foresight to protect home values by establishing a VAP, which Canada refers to as a Property Value Protection Program or “PVP” The PVP was offered as part of the Port Hope Area Initiative to compensate property owners who suffered financial loss on the sale of their property, loss of rental income or mortgage renewal difficulties as a result of the plans or activities of the Initiative.

Under the PVP, eligible property owners may apply for compensation if they have realized any of three types of financial loss: (1) their property sold for less than its fair market value because of activities relating to the Initiative; (2) their rental property was unable to rent units for fair market value because of the Initiative; or (3) they had difficulty renewing a mortgage at fair market value as a result of the Initiative. The purpose of the PVP is to ensure that anyone selling a property in a defined area would not be financially disadvantaged by the activities of the Port Hope Area Initiative.

As a result of the PVP, real estate within the Port Hope Area Initiative has remained remarkably stable. There was no panic selling by homeowners rushing to get out the door before property values fell precipitously. During the first ten years of the program, some 83 claims were filed, resulting in payments of approximately $2,500,000. Given that some 5,800 properties could potentially be affected by the projects, the Program appears to have been very successful at reasonable cost

Studies have shown that Port Hope and environs is a safe place to live. The radiation levels in Port Hope are reportedly lower than in the average Ontario community and about the same as in Toronto. Nine years of independent public attitude surveys have shown that residents feel well informed and support the project. These surveys show that 80 per cent of residents are confident that the project can be done safely.

According to Judy Herod, who authored an Abstract titled, “Evolution of the Property Value Protection Program – A Study of How a Compensation Plan to Address Project – Related Diminution has Evolved to Meeting Changing Needs,”  since  inception, the PVP Program has continued to build stakeholder confidence by mitigating the risk of economic vulnerability of current and prospective property owners, thereby contributing to stability in the local real estate market. Ms. Herod is the highly regarded Acting Manager, Communications & Stakeholder Relations, for the Port Hope Area Initiative Management Office. 

To be successful, it is vital that a VAP (or PVP) does not take place in a vacuum. At Port Hope, some important early decisions defined the "zone of influence" that was key to establishing homeowner eligibility for the program; determined the scope of benefits that could be applied for; and devised conservative predictions for potential nuisance effects, such as increased noise, dust or traffic within zones established for each, specific remediation activity.  For example, it was estimated that approximately 80,000 to 90,000 trucks transporting waste would travel over the life of the project. 

Increasing awareness of the PVP Program and communicating its requirements to potential claimants were primary communications objections.  Key stakeholders include all owners with the PVP zone and professionals working in the real estate sector. To be successful, all VAPs must incorporate a strong communications component that serves to keep homeowners informed and maintains the transparency of the remediation process. 

 

Value Assurance and Diminution of Property Value Claims

People living near manufacturing plants increasingly seek judicial solutions to environmental issues.  In the wake of an environmental incident (such as a release of contaminants into the air or groundwater), fear and suspicion hinder constructive dialog and problem solving by manufacturers and their communities.  Environmental issues, as much as any other corporate concern, tend to have a ripple effect, often causing repercussions with far-reaching impact on company business.  An accidental release may result in adverse public relations, worker safety disputes, boycott of company products in the market place, adverse regulatory consequences and bad feeling in the community.  How a company responds to media attention at the outset has an important effect on how the community, including elected officials, health authorities, regulatory agencies and prospective jurors, react to the issues presented.  Accordingly, a company must plan in advance how it will respond to an environmental crisis and what steps it will take to minimize the fallout from such a crisis. 

A Value Assurance Plan should be considered as one significant component of a corporate response to homeowner concerns over property values.  A Value Assurance Plan, sometimes referred to as a "VAP", is a contractual promise to assure  homeowners that the equity in their homes will be protected if they sell their homes and realize less than full value from the sale due to an environmental concern in the community.  A VAP promises to compensate those homeowners who sell (or have sold) their homes by paying them the difference between the property's sale price and its fair market value prior to the discovery of possible contamination.  As part of the arrangement, the company may also offer to reimburse the closing costs and the moving expenses of residents who leave the community.  Often, the reassurance that a VAP provides is successful in preventing the panic selling (the rush to the door) that often strikes communities shortly after public disclosure of an environmental problem. 

To implement a Value Assurance Plan, a company needs  creative lawyering and a consultant who has a strong understanding of the economic dynamics driving the property diminution claims and who can accurately assess the potential exposure to the company of taking alternative courses of action, including taking no action at all.  Two such high qualified consultants are Jerry Dent  at Alvarez & Marsal in Birmingham, Alabama, and  Dwight Duncan at EconLit in Phoenix, Arizona.