Lender Liability in the United States

Lender Liability in Environmental Law

In environmental law, the term refers to a lender becoming a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) or responsible for cleanup under the Resource Conservation and Recovery Act (RCRA). Of the two statutes, Superfund figures more prominently.

A bank or other lending institution that holds a security interest in property (such as a mortgage) or a business (such as a lien against the inventory) may become the owner of the secured property if the borrower defaults on the loan. Before Superfund, lenders’ only concern with the property was its value. Once Superfund was enacted, however, owners and operators of contaminated property were thrown into the group of people who can be forced to clean up the site. Therefore, a bank must plan both its lending and foreclosure activities carefully to avoid cleanup responsibility.

The limited defenses to the broad liability include “an act of a third party,” but the third party may not be a person with whom the current owner has a contractual relationship. Since a written agreement is typically executed when a loan is granted, a lender cannot rely on the third party defense. However, the law specifically excludes lenders from being owners or operators under one condition: that they do not participate in management of the vessel or facility. They may hold indications of ownership, though, to protect the security interest, such as the paperwork associated with a mortgage.

Lender liability under the Resource Conservation and Recovery Act has focused on the underground storage tank provisions. The owner or operator of an underground tank has numerous responsibilities: meeting technical standards, reporting releases, cleaning up in the event of a release, and proving financial responsibility. See storage tank. In RCRA, the security exemption language is similar to that used in Superfund. It applies, by its words, only to exempt lenders as owners from cleanup. It does not address meeting technical standards or financial responsibility.

The Lender as Owner

As is typical in legal cases, the plain language of the statute has not obliterated lender liability. In the 1990 case United States v. Fleet Factors, an appellate court included language that indicated that a lender could be liable if it had the capacity to control hazardous waste disposal, even though it did not exercise it. The Fleet Factors case sent panic through the financial community. Lenders were afraid to foreclose on properties or intervene in a lesser way to protect their financial interest. After they made enough noise to be heard, the Environmental Protection Agency (EPA) created a rule about lender liability. In it, the agency provided some tests for lenders to follow to retain the security interest exemption in the statute.

But before the rule was promulgated, other cases made it to appellate courts. Taken together, they spelled out much of what was in the rule. For example, a lender could not be involved in hazardous waste handling decisions. Day-to-day management of operations was also action that would cost the lender the exemption. The lender could, however, participate in financial decisions and could even exercise some control over the company’s management personnel. If the lender took title to the property, it was expected to attempt to resell it within a reasonable time. Failure to do so changed the character of the transaction from security interest to investment property.

Fleet Factors turned out to be a bad representative case in any event. Four decisions were published over time, as the case bounced from court to court and motion to motion. But the defendant had taken some egregious actions at the site. Fleet Factors had foreclosed on a business. After the foreclosure, its agents went to the site and removed asbestos from pipes in an uncontrolled manner and crushed drums containing hazardous waste with a forklift. The court held, ultimately, that the post foreclosure activities of the lender eliminated the protection of the lender exemption. Fleet Factors seemed determined to be an owner of the property.

Attack against the Lender Liability Rule

The EPA published its lender liability rule for Superfund liability in April 1992, and it was immediately challenged by a number of parties. Their attack was successful, and the rule was declared invalid in the case of Kelley v. Environmental Protection Agency, decided 4 February 1994.

The reasons for a heavy assault are apparent: people who still remained in the pool of responsible parties felt it was unfair to give lenders more protection than the statute already gave them, and state governments and public interest groups felt the agency had gone too far to remove a potential funding option for cleanups. The D.C. Circuit Court of Appeals was split in its opinion in the case (two voted for the majority opinion and one dissented). Interestingly enough, the decision turned entirely on administrative law and not on the substance of the rule. The EPAhad argued through reference to a number of separate provisions that Congress had intended for it to define the terms of the law and that the EPA had authority to create the rule. The EPA contended that the rule was interpretative and not legislative in nature and should be given deference.

The D.C. Circuit rejected all of the agency’s arguments. It decided that Congress had not given the EPA power to limit liability, define it, or set up a “comprehensive regulatory regimen to address the liability problem facing secured creditors.” Determining what the statute said and meant was not the EPA’s job, but the duty of the judicial officer. The court suggested that the EPA go back to Congress and ask for an amendment to the law to allow what it wanted to do.

During the period before the rule was struck down, cases involving lenders continued to be heard. Some courts used the EPA rule to determine the result; some referred to the rule and also to cases to back their decision; and some explicitly refused to use the rule, relying on case law and the statute as authority.

For some time the financial community has been pressuring Congress to amend the Superfund law to provide more protection for it. A variety of approaches have been put forward in the reauthorization bills that are pending. The easiest solution for Congress, though, is to explicitly delegate the power to the EPA to create the rule.

On 13 June 1994, the EPA proposed a rule under the Resource Conservation and Recovery Act to protect lenders who have security interests in underground storage tanks. It is similar in many ways to the Superfund rule. But since a different statute is involved, a court will have to determine whether the EPA has sufficient authority under RCRA to promulgate this rule.

Under RCRA, the lender is protected from liability as an owner if it does not exercise day-to-day control. However, if it forecloses on property with a storage tank and allows the tank to remain in service, the lender becomes an operator and will be required to follow the regulations. The proposed rule specifies that a lender can avoid liability under certain conditions. First, before foreclosure, the lender may not control the borrower’s compliance with the environmental rules applicable to the tank. Second, it may not operate the borrower’s enterprise and simply refuse to handle the environmental implications of the business. The EPA does not forbid inquiry about the borrower, however. The lender ma
y investigate the tank and site before it loans money, and it may also require compliance with environmental laws and check on the property from time to time.

Like the Superfund rule, the proposed RCRA rule puts emphasis on resale: the lender must list the property within 12 months of foreclosure. To avoid becoming an operator, the lender must also empty the tank within 15 days after foreclosure. Lenders must report releases, but they are not required to clean up contamination or meet the technical requirements for tanks if they have emptied them. If a lender does not empty the tank, the lender loses the exemption.
Based on “Environment and the Law. A Dictionary”.

Defense of Lender Liability Litigation

This section examines the Defense of Lender Liability Litigation subject in its related phase of trial. In some cases, other key elements related to trials, such as personal injury, business, and criminal litigation, are also addressed.

Lender Liability for Contamination of Property by Hazardous Substances

This section discusses generally the subject of Lender Liability for Contamination of Property by Hazardous Substances, how to determine the facts essential to Lender Liability for Contamination of Property by Hazardous Substances, and, to some extent, how to prove it in litigation and defense. Related topics are also addressed.

Lender Liability