Real
Estate Finance Notes
*LATE*
Environmental liability –
CERCLA
The
Comprehensive Environmental Response, Compensation and Liability Act imposes liability
for the cost of cleanup, health assessment and health effect studies. Owners and operators can avoid liability for
cleanup costs if they are innocent purchasers, but that doesn’t mean you get
off scot-free: you bought a dirty site, and the next purchaser will have to
clean it up. This will greatly reduce
the value of the land. Liability is
imposed on hazardous waste generators and transporters as well as the current
owner and operator when any dumping of hazardous material occurred. This is strict
liability, and it’s joint and several liability. This is a very harsh statute!
Super
fund is different from super liens.
There are certain states that have their own miniature versions of
CERCLA. Cleanup costs are said to be not
only a lien against the property, but also that there is a super lien. That is, the
lien for cleaning up the environmental costs takes priority over all or some of
the other liens on the property. In
particular, they take priority over mortgages.
Why
do we talk about this when a lender is not responsible for the physical
condition of the real estate in which it has a security interest? “Owner and operator” is defined to exclude mortgagees. Normally, you would say that as a lender, you’re
not an owner or operator and thus do not have CERCLA liability. But the lender loses the exemption if the
lender participates in management. But
just what does that mean? Fleet Factors defines it very broadly: participation
in management is said to mean having the capacity
to influence management. If the
lender could affect hazardous waste
disposal conditions, then the lender could be liable. This is very
broad! Almost every mortgage
requires the mortgagor to comply with all applicable laws, including CERCLA. That means you’re in default of the mortgage
as soon as you violate CERCLA. The
lender can threaten to make the borrower pay off the whole loan. Maryland
Bank and Trust held that the security exemption existed only while the
security interest existed.
In
1992, the EPA issued regulations designed to protect lenders. These regulations define participation in
management as “actual participation” and limit post-foreclosure liability as
long as the lender is not itself a
polluter. The regulations set up a safe
harbor: so long as within twelve months of becoming the purchaser the lender
makes serious efforts to sell it, the lender will be able to take advantage of
the general exemption that says lenders are not owners. However, the 1994 case of Kelley v. EPA invalidated the regulation,
saying the EPA exceeded its authority in promulgating it. Then Congress passes a statute that basically
codifies the 1992 regulation. But Congress
goes further: the lender liability exemption continues to exist and goes on to
define what participation in management is for purposes of CERCLA liability. Congress defines management in two stages:
pre-foreclosure and post-foreclosure.
Hypotheticals
What
if prior to making the loan, the lender requires an inspection of the
premises? 42 U.S.C. § 9601(20)(F)(iii)
says that any action or non-action before a security interest is created doesn’t
count as management.
What
if the lender requires the borrower to comply with all laws before making the
loan? Same thing. But what about after? This is where we got into trouble with Fleet Factors. 42 U.S.C. § 9601(20)(F)(iv)(II) says that
including conditions related to environmental compliance doesn’t constitute participation
in management.
What
if the lender finds something bad on the land and tells the borrower to clean
it up? That’s not management under §
9601(20)(F)(iv)(V).
What
if the lender reviews the borrowers financial statements after making the
loan? That’s not participation in management.
What
if the lender inspects the real estate?
Nope. Inspections and monitoring
of the facility won’t constitute participation in management. What if the lender exercises decision-making
authority over environmental compliance?
That seems like the case where the lender could be liable. § 9601(20)(F)(ii)(I) talks about exercising decision-making
authority.
What
if the lender takes over day to day management of the company? Then they’re participating in management
according to § 9601(20)(F)(ii)(II)(aa), even if they’re not specifically in
charge of environmental decisions.
After
default, what if the lender renegotiates the loan? That won’t result in liability. If the lender provides advice, that won’t
result in liability either.
What
if the lender becomes the owner of the property through foreclosure or deed in
lieu or foreclosure?
What
if the lender becomes the owner and continues to operate the business?
What
if the lender becomes the owner, continues to operate, and continues to
pollute?
What
if the lender becomes the owner but does not seek to resell until 18 months
later? If you go over the 12 month period,
you’re out of safe harbor, but you
still could be safe if there’s a reason that you waited a year and a half
before trying to market the property other than wanting to be the owner of the
facility instead of just holding collateral.
When
you take these together, so long as you act the way lenders usually act you’ll
be exempt from CERCLA liability. Is that
a windfall to lenders? Should they get
that exemption, or should they be forced to pay and then collect from their
borrower? What’s the lender going to
sell the property for? If the lender is
exempt, does it mean that the lender will sell the property for the same price
that you would get if there was no CERCLA liability? No way!
The lender is not an owner or operator, but whoever purchases from the
lender will be an
owner-operator. They won’t be able to
take advantage of the innocent purchaser defense. The realization on the collateral will be
reduced, and the lender suffers anyway.
Braunstein thinks that you’re just allowing the loan to proceed and
letting the lender escape cleanup liability, but the lender still has a strong
incentive to protect the collateral.
When the lender goes to sell the collateral, any purchaser is going to
deduct the cleanup costs from what they paid.
Edwards v.
First National Bank of North East
How
should you advise lenders who fear liability to adjoining landowners or third
parties? You decide how much liability
you have. Then you have a receiver appointed. You escape tort liability when you don’t
become a possessor of the property. Don’t
forget that there are two options open to the lender: the lender can either
foreclose on the mortgage or sue on the note.
If you have a solvent borrower, you can forget the collateral and just
sue on the note, forgetting about the mortgage.