Environmental Risks of Acquiring Property by Foreclosure

Date01 December 2010
Author
12-2010 NEWS & ANALYSIS 40 ELR 11211
Environmental Risks of Acquiring
Property by Foreclosure
by James Brennan and omas A. Utzinger
James Brennan is Corporate Counsel of 1031 Exchange Solutions Group. omas A. Utzinger is an environmental attorney practicing
in New Jersey, New York, and Washington, D.C., with experience in regulatory compliance and environmental issues in transactions.
Lenders, bondholders, and other holders of interests
in commercial and industria l real estate, beware the
decision to foreclose on properties contaminated by
hazardous substances. e “long claws” of environmental
laws can threaten real estate lenders and securitized bond-
holders alike. e laws and policies governing the meaning
of what constitutes “ownership” or “operation” for the pur-
pose of environmental liability must be carefully understood,
as foreclosure may alleviate troubled loan portfolios but, in
turn, may lead to a broader set of troubles. is topic is ripe
for review during this current economic climate, as the need
to address above-average numbers of foreclosures in a timely
manner can compromise full compliance with environmen-
tal laws.
As if the myriad challenges in real estate today, with credit
market troubles, tightened lending standards, and a maturity
cli veering troublingly close, were not enough, the lending
and nancial community must also be aware of certain envi-
ronmental laws that can sweep in a broad cast of parties lack-
ing the intention or desire to be responsible for signicant
cleanup costs. is cast of “responsible parties” includes not
only past and present property owners, but also lenders and
even securitized bondholders.
I. Federal Law Governing Environmental
Liability for Foreclosures
While the list of environmental laws regulating property
owners is abundant, only a few laws are broad enough in
reach to impact nonowners, especially lenders who, as a mat-
ter of course, regularly threaten to “take back the keys” to
properties. e most prominent environmental law wield-
ing this power is the federal Comprehensive Environmen-
tal Response, Compensation, and Liability Act (CERCLA),1
also known as the Superfund law, intended to impose lia-
bility on responsible parties for properties contaminated
by hazardous substances and to require site cleanup or the
payment of cleanup costs.2 Other releva nt laws include state
1. 42 U.S.C. §§9601-9675, ELR S. CERCLA §§101-405.
2. e reader should note that while the universe of CERCLA “hazardous sub-
stances” is quite broad, it does not include petroleum, crude oil or fractions
laws analogous to CERCLA and/or addressing lender liabil-
ity. is type of forced-hand liability makes most rea l estate
lenders exercise due caution, as certain actions before or after
foreclosures can unknowingly trigger liability for the cleanup
of contaminated properties.
CERCLA, as originally enacted, and to the most extent
as it functions today, notoriously leads to examinations of
chain of title and holds multiple parties jointly and sever-
ally liable for site cleanups. In particular, CERCLA §107(a)
identies four broad categories of potentially responsible
parties (PRPs) that are strictly liable (regardless of actual
fault) for cleanup costs when the federal government, state
government, or a private party brings suit.3 e rst two cat-
egories include present, and past, “owners and operators” of
properties contaminated by hazardous substances.4 e third
category includes persons who arranged for the disposal of
hazardous substances.5 e nal category includes persons
who transported the haza rdous substances and selected dis-
posal sites.6 e issue of lender liability applies to the rst two
categories of PR Ps, present owners and operators and past
owners and operators.
As originally passed in 1980, CERCLA set forth an impor-
tant “security interest exemption” from “owner or operator”
PRP status for those persons or entities who, without “par-
ticipating in the management of ” a property, hold indicia
of ownership in the property primarily to protect a security
interest.7 Not long afterward, the nancial and lending com-
munity expressed uncertainty as to the exact meaning of this
exemption, especially what constituted “participating in the
management” of properties. To misinterpret it and engage in
thereof, natural gas, natural gas liquids, liqueed natural gas, or synthetic natu-
ral gas usable for fuel. 42 U.S.C. §9601(14). For a complete list of CERCLA
hazardous substances, see 40 C.F.R. §302.4, tbl. 302.4. Due to this important
exception, the U.S. Environmental Protection Agency (EPA) has issued lender
liability rules for properties containing certain types of petroleum underground
storage tanks (USTs). ese rules may be found at 40 C.F.R. §§280.200 et seq.
See also U.S. EPA, Underground Storage Tanks—Lender Liability; Final Rule,
60 Fed. Reg. 46691 (Sept. 7, 1995).
3. 42 U.S.C. §9607(a).
4. 42 U.S.C. §9607(a)(1)-(2).
5. 42 U.S.C. §9607(a)(3).
6. 42 U.S.C. §9607(a)(4).
7. 42 U.S.C. §9601(20)(A) (1980).
Copyright © 2010 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.

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