Jan 09, 1996
On September 30, lenders finally received some legislative protection from liability for the cleanup of secured contaminated properties under federal environmental laws. Congress enacted the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996 (the "Act"), which is intended to reinstate the lender liability protection that the U.S. Environmental Protection Agency initially attempted to provide by regulations in 1992,1 only to have them vacated by the U.S. Court of Appeals for the District of Columbia Circuit two years later.2 The Act also, for the first time, provides legislative protection from cleanup liability for fiduciaries (e.g., trustees, executors, administrators and receivers) of estates that hold contaminated property.
The Act essentially clarifies the type and amount of involvement a lender may have with secured, contaminated property while still benefitting from liability exemptions provided under the federal Comprehensive Environmental Response, Compensation and Liability Act (commonly known as "CERCLA" or "Superfund") and the federal Resource Conservation and Recovery Act (commonly known as "RCRA"). Both CERCLA and the provisions of RCRA dealing with underground storage tanks exempt from cleanup liability persons who, "without participating in the management" of property (or, in the case of RCRA, an underground storage tank), hold "indicia of ownership" in the property or tank primarily to protect a security interest.3 In connection with preforeclosure activities, the Act clarifies that the lender is considered to be "participating in the management" of secured property only if it does one of the following:
Exercises decision making control over the environmental compliance of the property such that it has undertaken responsibility for hazardous substances handling or disposal practices.
Exercises control comparable to that of a manager of the property, either in terms of day-to-day decision making on environmental compliance matters, or in terms of management of all or substantially all nonenvironmental operational functions.
The lender will not be "participating in management" by participating in only the financial or administrative functions of the secured property or by performing acts that are routine to its capacity as lender such as: requiring the borrower to commit by contract to environmental compliance; monitoring or enforcing the terms of the credit or loan agreement; inspecting the property; requiring or performing a cleanup of the property by lawful means; or restructuring or renegotiating the terms of the loan or credit.
With respect to post-foreclosure activities, the Act makes clear that the lender may take title to the secured property and conduct post-foreclosure activities with respect to the property without losing the liability exemption, as long as the lender tries to divest itself of the property at the earliest practicable, "commercially reasonable" time, on "commercially reasonable" terms (taking into account market conditions and legal and regulatory requirements). Permissible post-foreclosure activities include maintaining business activities; winding up operations; and performing or directing a cleanup by lawful means.
As for fiduciaries, neither CERCLA nor RCRA has, until now, expressly provided fiduciaries with protection from personal liability for the cleanup of contaminated property that makes up the fiduciary estate. The Act makes clear that, under these statutes, the liability of a fiduciary for such cleanup will be limited to the assets held in the fiduciary capacity unless (i) the fiduciary can be held liable independent of its status as fiduciary, or (ii) the fiduciary negligently causes the property in the fiduciary estate to become contaminated. As with the lender, the fiduciary does not risk losing this protection from personal liability if it conducts certain routine activities such as: performing or directing a cleanup of the property by lawful means; requiring environmental compliance at the property under the fiduciary agreement; inspecting the property; providing financial or other advice to parties to the fiduciary relationship; and terminating the fiduciary relationship.
The Act provides some welcome relief for fiduciaries whose personal liability for the cleanup of contaminated assets in the fiduciary estate had been left unclear by court decisions.4 As for lenders, the Act fills a major gap that was left when the D.C. Circuit vacated the 1992 EPA regulations. Prior to promulgation of the EPA regulations, a number of federal courts had eroded the ability of lenders to determine their CERCLA liability, particularly by holding that a lender lost the exemption by foreclosing on secured, contaminated property.5 While, after the D.C. Circuit decision, the EPA continued to exercise its enforcement discretion to direct cleanups consistent with its own regulations, the regulations were no longer binding on the federal courts, leaving lenders subject to inconsistent court rulings in CERCLA actions initiated by private parties. The Act gives the substance of the EPA regulations the force of law so that it is effective in EPA and private actions alike.
Nonetheless, the Act does not close some important gaps. For starters, it applies only to specific liability provisions under CERCLA and RCRA. Other federal statutes, such as the Clean Water Act, arguably could subject a lender or fiduciary to liability in a manner inconsistent with the Act. In addition, the Act does not preempt state and local governments from promulgating new laws, or preserving already existing laws, that more expansively impose cleanup liability on lenders and fiduciaries.
This memorandum is intended only as a general discussion of the Act. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. For more information on or a copy of the Act, please contact Margaret Murphy or Mehran Massih of this Firm at (212) 848 4000.
 . 57 Fed. Reg. 18,344 (April 29, 1992), codified at 40 C.F.R. § 300.1100 et seq.
. Kelley v. Environmental Protection Agency, 15 F.3d 1100 (D.C. Cir. 1994).
. 42 U.S.C. § 9601(20)(A) and 42 U.S.C. § 6991b(h)(9).
. See, e.g., City of Phoenix v. Garbage Services Co., 816 F. Supp. 564 (D. Ariz. 1993) (Banktrustee holding bare legal title to contaminated property as part of administering an estate liable as CERCLA "owner").
[5. See, e.g., United States v. Maryland Bank & Trust Co., 632 F. Supp. 573 (D. Md. 1986) (lender who purchased property at foreclosure sale and held title for nearly four years prior to and during the time of an EPA cleanup was not entitled to the exemption), and Guidice v. BFG Electroplating & Manufacturing, 732 F. Supp. 556 (W.D. Pa. 1989) (lender who purchased property at foreclosure sale and held title for eight months before resale to a party affiliated with the borrower not entitled to the exemption).