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Environmental Due Diligence Boot Camp
 
 
Lesson 6:  Lender Liability  
 
 

 
 

Lenders are potentially exposed to contamination cleanup liability by virtue of the fact that they often secure loans with the title to real property (i.e., a "security interest"). 

 

As originally enacted, CERCLA exempts parties holding a security interest in a property from liability for investigation and cleanup of environmental damages providing that they have not participated, and do not participate, in the management of the facility which has caused or is associated with the environmental contamination.

 

However, even with this exemption, courts across the United States, in the 1980s and early 1990s, often ruled that creditors were strictly liable for the costs associated with cleanup of contamination that was located on property in which they held a security interest.  There are many stories of owners who in this time period walked away from contaminated sites, leaving a lender holding the mortgage to the property.  When the lender foreclosed, they sometimes inadvertently and effectively became responsible for investigation and cleanup of the contaminated site by virtue of the way they had allowed themselves to be involved with the borrower's activities, and/or the way they managed the property post-foreclosure.

 

 

 

The banking industry aggressively lobbied for clarification of the lender liability rules, and was granted additional protections by a U.S. Environmental Protection Agency (EPA) rule that was promulgated in September 1992.  The new rule clarified the security interest exemption, specifically defined what was meant by "participation in the management of a facility", and stipulated a number of requirements that the lender had to fulfill in the post-foreclosure period.  However, this rule was vacated in 1994 when the U.S. Supreme Court ruled that EPA had over-stepped its authority in issuing it.

 

The subject of lender liability was re-visited by Congress in the 1996 Asset Conservation, Lender Liability and Deposit Insurance Protection Act ("Asset Conservation Act"), and EPA finalized its interpretation of, and policies based upon, this Act in 1997.  The 1997 EPA policies (which, in revised form, are still in effect) follow very closely from the ill-fated 1992 lender liability rules.  Specifically, lenders are generally exempt from CERCLA liability if: 

  • the lender's ownership of the impacted property is primary to protecting a security interest in the property 
  • the lender has not, and does not participate in management of the facility which caused or is associated with the contamination (with "participation in management" defined and clarified) 
  • the lender attempts to divest itself of the involved property in a reasonably expeditious manner (with specific requirements, limitations, and restrictions stipulated) 
 
 
So, that's where it stands right now.  If they follow some relatively simple and straight-forward rules, lenders are generally not liable, under federal laws, for the costs associated with investigating and remediating an environmentally-distressed property.  Many (if not most) state environmental liability laws have also been revised to offer similar protections under state programs.
 
And it also is interesting to note that lenders are not required by CERCLA to complete "all appropriate inquiries".  
 
 
Note on underground storage tanks:
As discussed in Lesson 1, underground tanks used to store petroleum products are regulated under the Resource Recovery and Conservation Act (RCRA), not CERCLA.  In 1995, the U.S. Environmental Protection Agency promulgated rules under RCRA that extend liability exemptions to lenders, for properties impacted by underground storage tanks, or releases from underground tanks, that are very similar to the exemptions provided in CERCLA. 
 
It is noted that some state laws may still impose lender liabilities for petroleum-containing underground tanks.  Furthermore, in some states, a security interest in a property may include an interest in and underground storagetanks that arelocated on th property unless the tanks are specifically excluded as collateral in loan documents. 
 

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This is something to remember when you are looking to hire someone to conduct an environmental site assessment.  Use extreme caution if you are directed by a lender to use their “preferred” or “approved” environmental consultant, or if you are considering retaining the lowest-priced consultant to prepare you a report “just to satisfy the bank”.  

 
    • A lender, in most cases, has virtually no statutory environmental liability
    • When a lender does request an environmental assessment, there is a good chance that it is because they need some paper to stuff into the file to satisfy the requirements of their corporate loan management policies
    • If a lender does conduct environmental due diligence, it is for their protection, not yours (i.e., to protect themselves from loan-losses that might result from devaluation of the property they are holding as collateral)
 
 
You on the other hand, if you are buying a property, potentially face significant environmental liability.  That is why you should always demand the highest-quality environmental assessment you can obtain, from most-competent environmental consultant that is available in your geographical area.
 

 

Remember, in terms of your liability as a property owner or operator, a poor-quality environmental assessment is just as bad as no assessment at all (Lesson 2).   

 

 
 
 
                                                                                                                                                                                                                           
 
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POSTED:  28 December 2010