Vol. 8, No. 6, Pg. 24. Congress Clarifies Lender Liability for Polluted Property.

• Author: By Ben A. Hagood Jr.

South Carolina Lawyer

1997.

Vol. 8, No. 6, Pg. 24.

Congress Clarifies Lender Liability for Polluted Property

24CONGRESS CLARIFIES LENDER LIABILITY FOR POLLUTED PROPERTYBy Ben A. Hagood Jr.On September 30, new federal legislation provided long awaited clarity to the liability of lenders and fiduciaries for environmentally contaminated property. The Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (1996 Lender Liability Act or Act) amended the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund) to limit the environmental liability of lenders and fiduciaries, such as trustees, receivers and executors.

The Act also extended these limitations to lender and fiduciary liability for contamination from leaking underground storage tanks. This article will trace the development of lender and fiduciary environmental liability under federal law from the enactment of CERCLA, the judicial expansion of liability and the Environmental Protection Agency's (EPA) policy response to the courts. This article will then summarize the key provisions of the 1996 Lender Liability Act.

CERCLA's Original Secured Lender Exemption

Congress enacted CERCLA in response to the national problem of contaminated property resulting from the disposal of hazardous substances. CERCLA created a sweeping, strict liability scheme holding all parties potentially responsible for the release of hazardous substances jointly and severally responsible for the costs of cleaning up hazardous substances that have been released into the environment.

CERCLA allows the recovery of not only clean up costs but also the costs of responding to the actual or threatened release of hazardous substances into the environment. These "response costs" can include significant costs for investigating and evaluating the presence or extent of contamination, as well as costs for cleaning up or remediating the contamination. Natural resource damages may also be recovered under CERCLA for harm to fish, wildlife and other resources.

CERCLA allows the federal government, states and private parties to recover response costs from four different categories of potentially responsible parties: owners and operators of the property (or facility) where the hazardous substances were released; owners or operators of the property at the time the hazardous substances were disposed of; those who arranged for the disposal of the hazardous substances at the property; and transporters of the hazardous substances who selected the property for disposal of the substances.

CERCLA, as originally enacted, contained a liability exemption for secured lenders. 42 U.S.C. § 9601(20)(A). The definition of "owner or operator" included any person or entity that owned the facility from which a release of hazardous substances occurred. However, the definition excluded anyone who held indicia of ownership primarily to protect a security interest and who did not participate in the management of the facility. Thus the original language of Superfund seemed to exempt from liability a lender who held a mortgage on a manufacturing plant that released hazardous substances, as long as the lender did not participate in the management of the plant or foredose on its mortgage.

Judicial Expansion of Liability

One of the first cases interpreting the security interest exception, United

25States v. Mirabile, 15 Envtl. L. Rep. (Envtl.L.Inst.) 20992 (E.D. Pa. Sept. 4, 1985), broadly construed the exception. The district court found no liability for a creditor who foreclosed on contaminated property after all operations ceased and then took prudent steps to secure the property against further depreciation.

Likewise, the court found no liability for a second creditor who had the authority to participate in the management of a paint facility on the property but who did not actually exercise control over the operations of the facility. The court did deny summary judgment to a third creditor who sent advisors to the facility, one of whom may have participated in daily operational decisions.

Then courts began to narrowly interpret the security interest exception. The District Court of Maryland held that by taking title to contaminated property through foreclosure and holding title for several years, a lender became strictly...