CHAPTER 3 ENVIRONMENTAL MANAGEMENT AND THE FINANCIAL COMMUNITY
| Jurisdiction | United States |
(Feb 1994)
ENVIRONMENTAL MANAGEMENT AND THE FINANCIAL COMMUNITY
Hutcheson & Grundy, L.L.P.
Houston, Texas
A. Lender Financial Exposure.
1. Source of Lender Concerns
(a) Exposure under environmental laws goes beyond worthless collateral and insolvent borrower.
(b) Possibility of direct "owner or operator" liability.
(i) Arising through foreclosure. See United States v. Maryland Bank & Trust Co., 632 F. Supp. 573 (D. Md. 1986).
• In Maryland Bank, a court found that a lender forfeited the secured creditor exemption under CERCLA when it foreclosed and held title to the property in question for an extended period of time (in that case, four years). The court concluded that the lender was attempting to maximize the value of its collateral instead of merely protecting its security interest.
(ii) Arising through financial management of facility. See United States v. Fleet Factors, 901 F.2d 1150 (11th Cir. 1990).
• Prior to Fleet Factors, the test used to determine whether a lender was participating in management was whether the lender participated in the day-to-day operational, production or waste-disposal activities of the borrower.
• Under Fleet Factors, participation in financial management even only to a degree indicating a capacity to influence the borrower's treatment of hazardous wastes was the "participation in management" necessary to void the secured creditor exemption under CERCLA.
• The Ninth Circuit declined to follow the Fleet Factors interpretation of the secured creditor
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exemption. In Re Bergsoe Metal Corp., 910 F.2d 668 (9th Cir. 1990)
(c) Possibility of "aider and abettor" liability. See O'Neil v. Q.L.C.R.I., Inc., 750 F. Supp. 551 (D.R.I. 1990).
(i) In O'Neil, the court ruled that the common law concept of aiding and abetting could be used to determine a lender's liability under the Clean Water Act if such lender had sufficient involvement with and control over the principal polluter.
(d) "Innocent landowner" exemption. See 42 U.S.C. § 9607(b).
(e) Potential liabilities arising from lender's property ownership in ordinary course of business (e.g. asbestos in roof or building, underground storage tanks in parking garage).
2. Credit risk issues.
(a) Difficulty of assessing borrower's contingent environmental liabilities.
(b) Impaired ability of borrower to repay loan.
(i) Compliance costs.
(ii) Liabilities for noncompliance.
(iii) Remedial liabilities for off-site and on-site disposal (including previously divested property or assets).
(iv) Operational restrictions.
(v) Financial assurance obligations.
(c) Diminished value of collateral and future marketability of property.
(d) Subordination of security interest to environmental lien (note that applicable Superfund and Texas lien provisions are not "superliens" that take priority over prior recorded liens).
(e) Successor liability or parent liability of borrower.
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(i) Borrower liability for remedial obligations of company from which it purchased assets. See United States v. Distler, 741 F.Supp. 637 (W.D. Ky. 1990).
(ii) Borrower liability for remedial obligations of subsidiary as its owner or operator. See United States v. Kayser-Roth Corp., Inc., 910 F.2d 24 (1st Cir. 1990).
B. Economic Impact of Lender Concerns.
1. Availability of credit to businesses with hazardous waste connection: permitted transfer, storage or disposal facility, generator or transporter of waste, owner of contaminated property.
2. Financial ability of borrower to incur costs involved in diligence/documentation process: audit, insurance, indemnification, opinions.
3. Lenders' reluctance to render management or financial advice to borrowers.
4. "Suspect" properties are considered worthless in collateral calculation or as a negative in asset valuation.
C. EPA Lender Liability Rule (40 C.F.R. Part 300 Subpart L).
1. EPA issued final rule (the "Rule") on lender liability on April 29, 1992. 57 Fed. Reg. 18,382 (codified at 40 C.F.R. Part 300 Subpart L).
(a) The Rule, promulgated in large part in response to lenders' concerns resulting from Fleet Factors and Bergsoe Metals ostensibly clarifies the meaning of certain statutory elements of CERCLA §101(20)(a), known as the "secured creditor exemption", which provides a specific exclusion from the definition of "owner or operator" for "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."
(b) Security Interest Exemption
(i) A person who maintains " indicia of ownership" primarily to protect a security interest and who does not participate in management is not an "owner or operator" under CERCLA §107(a)(1) and (2). 40 C.F.R. § 300.1100 .
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(ii) Indicia of ownership include mortgages, deeds of trust (covering both title and lien theory jurisdictions), liens, surety bonds and guarantors of obligations, sale and lease back transactions, trust receipt transactions, certain assignments, factoring agreements, accounts receivable financing arrangements and some forms of lease or consignments. Id. §300.1100(a).
(iii) Indicia of ownership must be held "primarily for the purpose of securing payment for performance of an obligation." If held primarily for "investment purposes," the exemption does not apply. Id. §300.1100(b).
(c) Loan Origination Activities
(i) Lenders may require prospective borrowers to perform environmental audits and may utilize loan covenants or warranties requiring compliance with environmental laws.
(ii) Lenders may require cleanup or a commitment to come into compliance.
(iii) Lenders may provide financial advice and other guidance to prospective borrowers regarding the structure and terms of the loan.
(iv) The rule states that CERCLA does not mandate that a lender must require or undertake an environmental audit in order to qualify for the secured creditor exemption, and a creditor's liability cannot be premised on its failure to undertake or require such an audit.
*Note: Actions taken or not taken prior to loan execution do not affect exemption because they occur prior to existence of "indicia of ownership." Id. §300.1100(c)(2)(i).
(d) Loan Administration Activities.
The Rule...
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