Toward a Safer Harbor for Lenders-the Secured Creditor Exemption Under Cercla
| Publication year | 1993 |
| Pages | 18 |
| Citation | Vol. 62 No. 11 Pg. 18 |
62 J. Kan. Bar Assn. November, 18 (1993). TOWARD A SAFER HARBOR FOR LENDERS-THE SECURED CREDITOR EXEMPTION UNDER CERCLA
November, 1993
Copyright (c) 1993 by the Kansas Bar Association, Topeka, Kansas; Robert J. Vincze
INTRODUCTION
After enactment of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) [FN1] lenders were often trapped in its dragnet of liability with seemingly little chance to swim to a safe harbor. The vast net of environmental liability cast by CERCLA was ominous. Lenders stood not only to lose the outstanding principal on loans related to contaminated facilities, but were subject to virtually unlimited liability for environmental cleanups if they foreclosed on or became involved to any extent in the operation of such facilities. Like a leviathan with an ever-growing appetite, [FN2] environmental laws were used to seek out, and frequently consume, both property owners and lenders who had the misfortune to be associated with contaminated property.
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Lenders battled the leviathan with a shield created from its own words, but the shield offered little protection because its constituent words were loosely and carelessly interpreted. [FN3] The shield is found in the security interest exemption in section 101(20)(A) of CERCLA, which ostensibly exempts from liability those who own property primarily to protect a security interest and who do not participate in the management of the property. [FN4] What little protection remained was lost in a wave of fish tales.
In response to the tales of this sea of environmental liability, the EPA issued a rule on April 29, 1992 which, in part, clarified the secured creditor exemption under CERCLA (Rule). [FN5] The Rule caused the leviathan to suffer indigestion and produced a tempest which has not yet subsided. Nevertheless, the Rule has created a safer harbor for lenders who heretofore felt besieged and adrift.
LENDER AS OWNER-RESULT OF FORECLOSURE PRIOR TO THE RULE
In United States v. Maryland Bank & Trust Co., [FN6] Maryland Bank & Trust (MB & T), the lender, was found liable for the cleanup costs of a contaminated property as an owner [FN7] under CERCLA. [FN8] MB & T held a mortgage on the subject property from 1980, instituted a foreclosure action in 1981, and took title to the property in 1982 by purchasing it at the foreclosure sale. [FN9] After testing disclosed contamination, the EPA notified MB & T to institute corrective action, which MB & T declined. [FN10] The EPA completed the cleanup and successfully brought suit against MB & T for its costs.
The concept of control was not in issue in the suit. The lender was held liable because it acquired title to the contaminated property at the foreclosure sale and seemingly held the property as an investment rather than as security for a loan. If MB & T was not required to contribute to cleanup costs, it would receive a windfall from the sale of the property after the cleanup was completed. This made MB & T ineligible for the secured creditor exemption, which is found in Section 101(20)(A) of CERCLA: "Such term [owner or operator] does not include a person who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility."
In a footnote, the court distinguished Maryland Bank & Trust Co., [FN11] from an earlier case, United States v. Mirabile, based on the amount of time the property was held after foreclosure. [FN12] MB & T held the property for four years and was held liable. American Bank & Trust Company (ABT), in Mirabile, was exonerated from liability when it assigned the property after holding it for four months. The presumption appears to be that property held for a long period of time is being held for investment purposes rather than to protect a security interest. It is interesting to note, however, that there was no other deep pocket in the Maryland Bank & Trust case while there was in Mirabile.
As recounted in the Mirabile opinion, ABT made a loan in 1973 to a company which operated a paint manufacturing facility. The loan was secured by a mortgage on the facility. In 1981 ABT foreclosed on the property and purchased it at the sheriff's sale. Again, for all intents and purposes, control was not in issue. [FN13] Except for the length of time the property was held, the facts regarding the actions taken by ABT and MB & T are the same.
In Mirabile, Mellon Bank was ultimately found liable as an operator for exercising significant control over the day-to-day operations of the borrower. [FN14] If Mellon had not been involved, would ABT have been found liable? Possibly, based on Maryland Bank & Trust. Certainly, under the case law, a lender is not completely insulated from liability merely because it holds a property for four months or less.
As a practical matter, under Maryland Bank & Trust a lender should not commence any foreclosure without obtaining a thorough environmental assessment of the
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collateral. If such an assessment turns up contamination, the lender may not wish to take title.
In In Re Bergsoe Metal Corp., [FN15] the secured creditor, the Port Authority (Port), received warranty deeds as a part of a transaction the sole purpose of which was to provide financing for a plant. The court stated that holding paper title to the plant did not make the Port an "owner" of the plant under CERCLA. [FN16] "Under the security interest exception, the court must determine why the Port holds such indicia of ownership." [FN17] If title is held primarily to protect its security interest, the Port comes within the secured creditor exemption. This is a desirable approach. Liability should not be premised on title alone.
LENDER AS "OPERATOR" PRIOR TO THE RULE: TALES FROM THE DEEP
Lenders must be cautious when dealing with problem loans. Cases under CERCLA have held lenders liable for cleanup costs of a contaminated facility for exercising too much control over their borrowers in work-out situations, especially when the lenders are involved with decisions that adversely impact the environment.
Under CERCLA, an "owner" or "operator" of a contaminated facility may be liable for cleanup costs. A lender may be deemed an operator by virtue of the degree of control it exercises over its borrower's facility. In United States v. Mirabile, [FN18] the lender closely supervised the operations of the company and went so far as to insist on manufacturing changes and the reassignment of personnel. This lender was ultimately found liable under CERCLA as an operator for exercising control over the day-to-day operations of the borrower.
It is significant that the Mirabile court found nothing in the language of the statute or case law to hold a lender liable if it places restrictions on loan proceeds which may prevent the borrower from using them for cleanup costs. Under Mirabile, mere financial ability to control waste disposal practices is not sufficient to incur liability for cleanup costs. [FN19] Nevertheless, a lender may be liable for exercising financial control over a borrower once default has occurred if the borrower is thereby prevented from remedying an environmental problem.
In United States v. Fleet Factors, [FN20] Fleet was sued after asbestos was dislodged during the removal of equipment that Fleet had foreclosed on under the UCC. Moreover, drums of chemicals were moved around the plant to prepare for an auction at the lender's direction and nothing was done to seal leaking drums. Cyanide and caustic soda were present on the site.
The district court denied Fleet's preliminary motion to dismiss it from the case in part because Fleet controlled expenditures by or on behalf of its borrower in such a fashion as to realize the most value from its security interest, but in a way that contributed to environmental hazards at the borrower's facility as well.
The district court's ruling in Fleet Factors was appealed to the Eleventh Circuit Court of Appeals. The Court of Appeals affirmed the judgment of the district court but in so doing added a new dimension to lender liability under CERCLA. [FN21]
The Court of Appeals suggested that a lender may be liable under CERCLA if it controls the financial management of its borrower to such an extent that it can be inferred that the lender could affect decisions regarding the borrower's hazardous waste. [FN22] The limits of acceptable involvement by the lender are difficult to discern from the opinion.
Under the original Fleet Factors decision it was arguable that a mere inference that a lender could have affected decisions regarding waste disposal was enough for a lender to incur liability. A lender may have been liable even if it did not seek to directly affect such decisions. This does not mean, however, that a lender with sufficient financial leverage to affect the borrower's operations is liable without regard to other factors. Even in Fleet Factors, the Court of Appeals held the lender was protected from liability by the secured creditor exemption up to the point the printing operations ceased at the facility. [FN23] Again, CERCLA excludes from the definition of "owner or operator" any "person defined broadly to include banks and corporations , who, without participating in the management of a ... facility, holds indicia of ownership primarily to protect his security interest in the ... facility borrower's place of business ." [FN24] Thus, CERCLA protects secured creditors who do not participate in management. But among other things, Fleet advanced funds against the assignment of accounts receivable (served as a factor), paid and arranged for security deposits for...
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