Section 404 violation undisclosed in Favero

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USACE Section 404 Permit

Section 404 violation undisclosed in Favero

Section 404 of the Clean Water Act (“CWA”) sets forth a program to regulate the discharge of dredged or fill material into the waters of the United States (“WOTUS”), including wetlands.  Section 404 regulates a number of activities in the WOTUS, including fill development, water resource projects (such as dams and levees), infrastructure development (such as highways and airports) and mining projects.  Before dredged or fill material may be discharged into the WOTUS a permit must be obtained, unless the activity is exempt from Section 404 regulation.

Premise of the Section 404 Program

The Environmental Protection Agency (“EPA”) has said, “The basic premise of the program is that no discharge of dredged or fill material may be permitted if: (1) a practicable alternative exists that is less damaging to the aquatic environment or (2) the nation’s waters would be significantly degraded.”  This means that when a permit is applied for, the applicant “must first show that steps have been taken to avoid impact to wetlands, streams and other aquatic resources; that potential impacts have been minimized; and that compensation will be provided for all remaining unavoidable impacts,” the EPA has said.

Any proposed activities are regulated through a permit review process.  The EPA sets forth that “[a]n individual permit is required for significant impacts,” and that “[i]ndividual permits are reviewed by the U.S. Army Corps of Engineers [“USACE”], which evaluates applications under a public interest review, as well as the environmental criteria set forth in the CWA Section 404(b)(1) Guidelines.”

General Permit Process

The EPA has iterated that for most discharges of dredged or fill material that will only have “minimal adverse effects,” a “general permit” may suffice.  Those general permits are “issued on a nationwide, regional, or state basis for particular categories of activities.”  By way of the general permit process, individual review is limited while at the same time certain activities are allowed to proceed with little to no delay, so long as “the general or specific conditions for the general permit are met.”  For example, minor road activities, utility line backfill, and bedding are activities that can be considered for a general permit. States also have a role in Section 404 decisions, through State program general permitswater quality certification, or program assumption.”

Favero Farms, LC v. Baugh

A recent case from the Utah Court of Appeals underscores the importance of the Section 404 permit process and what can happen to a seller or land that fails to obtain such a permit and/or fails to disclose a Section 404 violation to a buyer.  In Favero Farms, LC v. Baugh, the Utah Court of Appeals affirmed the lower district’s determination that the sellers had breached their contract with the buyer, as well as breached the covenant against encumbrances and the implied covenant of good faith and fair dealing.

The property at issue in Favero was approximately 20 acres of land in Weber County, Utah.  The sellers met with a wetlands consultant in 2004 who told the sellers that their property contained wetlands, and, as a result, the sellers needed to obtain a permit from the USACE before they could use fill dirt on their property.  However, even though the sellers had already placed some fill dirt on the property prior to that time, and placed additional fill dirt on the property after they met with the wetlands consultant, they never obtained a Section 404 permit for any of the fill dirt.

In 2005, a representative from the USACE inspected the sellers’ property and advised them that the fill dirt on their property constituted a Section 404 violation.  The USACE representative instructed the sellers to remove the fill dirt from their property and to install a silt fence up against the wetlands.  Again, the sellers failed to comply.

In August 2009, the sellers sold the property.  The real estate purchase contract (“REPC”) between the parties required the sellers to disclose “conditions known to [the sellers] relating to environmental problems and building or zoning code violations.”  Pursuant to the REPC, the buyer had a right to object to the disclosures or cancel the contract if it did not acquiesce to what was revealed by the disclosures.  Even still, the sellers never delivered any disclosures to the buyer and never informed the buyer of the existence of the wetlands or the wetlands violation.

After the sale of the property closed, the buyer became aware of the Section 404 violation and learned that it could not use the property for agricultural purposes “without extensive work and repairs” and that it would need to restore or relocate the wetlands in order to comply with federal requirements.  Accordingly, the buyer sued the sellers alleging  breach of contract, breach of the covenants in the warranty deed, breach of the covenant of good faith and fair dealing, negligence, and fraudulent misrepresentation.  Following a bench trial, the trial court dismissed the buyer’s negligence and fraudulent misrepresentation claims but granted judgment in favor of the buyer on its other three claims.  The lower district court awarded the buyer  awarded damages in the amount of $200,000 based on testimony that it would “cost between $197,850 and $287,850 to restore or mitigate the damages to the wetland property.”  The court also ordered that the sellers pay the buyer’s attorney fees in the amount of $32,853.63, based on the provisions of the REPC.  The sellers subsequently appealed.

Warranties Made by Sellers in REPC Survived Closing

On appeal, the sellers made several arguments, which the Utah Court of Appeals roundly rejected.  First, the sellers argued that the buyer’s representation in the Escrow Instructions that it accepted the property “in its present condition” amounted to an as-is acceptance that the property would be delivered in “generally accepted agricultural condition.”  The Court of Appeals disagreed.

There, the Court of Appeals concluded:

Because the Escrow Instructions indicated that warrants made in the REPC would survive closing if not specifically deleted, the “generally accepted agricultural condition” promised by the [the sellers] was part of the “present condition” in which [the buyer] believed it was accepting the property.  Thus, the trial court did not err in concluding that the [sellers] breached the REPC and the Escrow Instructions by failing to deliver the property in generally accepted agricultural condition.

Sellers Violated Covenant Against Encumbrances by Failing to Disclose Section 404 Violation

Second, the sellers argued that the trial court erred in determining that their failure to disclose the wetlands violation constituted a breach of the warranty deed’s covenant against encumbrances.  Again, the Court of Appeals rejected the sellers’ arguments, concluding:

The [sellers] were aware of the wetlands violation and, in fact, committed it themselves. Furthermore, the Army Corps of Engineers had informed the [sellers] that their improvements violated the wetlands restrictions and had ordered them to remove the fill dirt and construct a silt fence.  Because the [sellers] were aware of the wetlands violation and the Army Corps of Engineers had taken action to compel compliance with the wetlands regulations prior to the time the warranty deed was conveyed, the violation is an “interest in a third person” that “constitutes a burden or limitation upon the rights of the fee title holder.”  Accordingly, the trial court did not err in concluding that the [sellers] had breached the covenant against encumbrances by conveying the property without disclosing the existence of the wetlands violation.

Sellers Violated Implied Covenant of Good Faith and Fair Dealing by Failing to Disclose Section 404 Violation

Finally, the sellers challenged the trial court’s determination that they breached the implied covenant of good faith and fair dealing by failing to disclose the wetlands violation.  The Court of Appeals determined:

The trial court’s findings support its determination that the [sellers] breached the covenant of good faith and fair dealing.  By failing to make the disclosures, the [sellers] misled [the buyer] concerning the existence of environmental problems on the property and thereby deprived it of the opportunity to object or cancel the contract in accordance with its rights under the REPC.  Thus, the trial court did not clearly err in concluding that the [sellers] breached the covenant of good faith and fair dealing by failing to disclose the existence of the wetlands violation.

Buyers Entitled to Attorney Fees Under REPC

Having determined the substantive issues on appeal, the Court of Appeals turned to the issue of attorney fees.  There, the Court of Appeals upheld the district court’s attorney fee award, which was made pursuant to the explicit language of the REPC that provided that  “[i]n the event of litigation . . . to enforce [the REPC], the prevailing party shall be entitled to costs and reasonable attorney fees.”

* Photo Cred.: ebay.com


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