Environmental Liability Breakthrough

Congress finally decided to end the confusion surrounding potential liability for lenders in the environmental arena in 1996 when it included provisions in the Asset Conservation, Lender Liability and Deposit Protection Act of 1996 which established a safe harbor for lenders. In effect Congress validated the action taken several years ago by the EPA when it adopted its Lender Liability Rule which gave wide latitude to lenders regarding dealing with borrowers and environmentally impacted properties. The new legislation reinstated the EPA Rule (described in the January 1996 Hot Topics) which had been struck down by the DC Circuit.

Protected Activities

Lenders will not be found to have participated in the management of a debtor which has environmental problems and therefore not liable for those problems so long as the lender can show that it did not exercise management type control over the debtor’s business operations. A lender would be free to take a security interest in the debtor’s assets or to require environmental audits and actual clean up of property as a condition to obtaining financing without the lender incurring liability. If the debtor becomes financially troubled the lender will be able to enter into workout negotiations and offer general advice to the debtor all without incurring potential liability. The lender would also be permitted to foreclose on the contaminated property so long as proceeds to market the property in a prompt fashion.

Risk Minimization.

Lenders should continue to exercise environmental screening on new loans as well as on property which they are considering foreclosing on. The new legislation 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. Furthermore, the protection afforded lenders does not protect a lender from liability for improper disposal of hazardous wastes if the lender does have to clean up a site. Finally, as with the EPA Lender Liability Rule, the protection does not flow over to third party purchasers from the lender thereby making contaminated property difficult to sell.

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Copyright (C) 1995, Gerald Blanchard
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