The spectre of environmental liability for lenders has been lurking around since the mid 1980's when courts first held that a foreclosing lender could be liable under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") for environmental contamination caused by a borrower or fomer owner of the foreclosed property. See United States v. Maryland Bank & Trust Co., 632 F Supp 573 (D Md 1986). Later cases extended this liability to situations where the lender was found to be in control of the borrower and more disturbingly to situations where the lender could be found to have been in a position to have affected decisions relating to the disposal of hazardous materials. See United States v. Fleet Factors Corp., 901 F2d 1550 (11th Cir 1990).
These decisions were based on the "owner or operator" provisions of CERCLA which provide that such a party may be found liable for cleanup costs even if that party had nothing to do with causing the contamination. This was so in spite of a section in CERCLA which provides that a party who holds indicia of ownership to protect a security interest is not to be considered an owner or operator so long as it does not participate in the management of the facility. 42 USC Section 9601(20)(A). The EPA responded to the confusion surrounding the liability of lenders by adopting a Lender Liability Rule in 1992. See 57 Fed Reg 18382 (daily ed. April 29, 1992). The Rule provided a safe harbor for lenders and made it clear that lenders could safely engage in a wide variety of activities including requiring environmental audits; requiring compliance with state and federal environmental laws; engaging in loan workout activites and foreclosing on the property where necessary. While the Rule was not a perfect solution for lenders it was well received in the lending community. The Rule was subsequently struck down in Kelley v. EPA, 15 F3d 1100 (DC Cir), reh denied, 25 F3d 1088 (DC Cir 1994), cert denied, American Bankers Association v. Kelley, 115 S Ct 900 (1995) on the basis that the EPA had attempted to limit the scope of a statute which only Congress had the right to do so.
Lenders must adopt a rigorous environmental screening policy on new loans as well as on property which they are considering foreclosing on. The joint EPA/DOJ memo is helpful but it will not protect lenders from state common law claims such as for continuing trespass or nuisance or from state statutory environmental protection laws and the protection afforded lenders does not flow over to third party purchasers from the lender thereby making contaminated property difficult to sell.
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