Periconi, LLC

Sellers Beware: Unauthorized Petroleum Tank Repair Ruled a Breach of Environmental Warranty

Everyone's heard of the phrase, "Be careful what you wish for," but Sunoco, Inc. might be ready to coin a new phase, "Be careful what you warrant."

In 2009, Sunoco, Inc. sold an Oneida County-based Marcy Terminal to Superior US Holdings, Inc. Given that it was an oil terminal with 400,000 gallons or more of storage capacity, the New York State Department of Environmental Conservation classified the Marcy Terminal as a "Major Oil Storage Facility," and subjected it to strict regulation. Accordingly, Sunoco agreed to sign an Environmental Agreement as part of the sale, in which it warranted that the terminal was "in compliance with all applicable environmental laws," including its environmental permits and licenses.

The only problem was that the terminal wasn't in compliance.

Three years after the sale, the DEC discovered that Sunoco had modified some of the tanks at the terminal without the necessary approvals required in the Terminal's license. Since Sunoco no longer owned the facility, the DEC issued Superior a notice of violation, and Superior entered into a consent order where it agreed to have the tanks brought up to DEC standards.

Given the large volume of the tanks at the Marcy Terminal, this was a time- and resource-intensive task, and Superior sought indemnification from Sunoco. Sunoco declined to indemnify Superior, and Superior sued. Sunoco argued that it had notified the DEC of the tank modifications before carrying them out, but the court rejected the argument that the agency's silence was tantamount to approval. In his decision, District Judge Griesa explained that "the Department's failure to object does not amount to actual approval" of the tank modifications.

The court granted summary judgment to Superior, and Sunoco could be obligated to indemnify Superior for up to $4.125 million in tank repair costs. Superior Plus HS Holdings, Inc., v. Sunoco, Inc. (R&M) and Sunoco, Inc., 13-cv-7740 (TPG) (S.D.N.Y.) (May 30, 2014).

The Superior Plus decision underscores the importance of environmental due diligence in transactions involving environmentally sensitive operations. Environmental counsel are indispensible in identifying potential liabilities, and crafting appropriate representations, warranties and indemnities to fairly allocate risk.

If your business is considering a merger, acquisition, or sale, the environmental attorneys at Periconi, LLC are well suited to assist and advise in the due diligence process and help craft terms that will protect your interests.

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