By Baxter Dunaway
and Andrew C. Cooper

Congress has removed much of the uncertainty regarding lenders' and fiduciaries' potential liability for environmental claims by its recent adoption of the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996, Pub. L. No. 104-208, 110 Stat. 1344 (to be codified at 42 U.S.C. 6991b(h), 9601(20) and 9607) (Act). The Act is very significant and resulted from a seven year lobbying effort by lenders and fiduciaries. The Act does not eradicate lender and fiduciary liability. Nevertheless, if lenders and fiduciaries keep to their roles, they generally should not be liable for hazardous waste contamination on properties with which they are involved. The Act amends the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601-9675 (CERCLA), and clarifies the situations in which lenders and fiduciaries will be liable for cleaning up hazardous waste. 110 Stat. at 1344-60. The Act similarly limits liability for leaking underground storage tanks (USTs) under the Resource Conservation and Recovery Act, 42 U.S.C. 6901-6992k (RCRA). 110 Stat. at 1360-62. The Act is applicable to any claim that has not been finally adjudicated as of its effective date of September 30, 1996. Id. at 1363.

The Act provides the circumstances under which lenders, as broadly defined, will be liable for the contamination of property they hold as collateral. The law follows the EPA lender liability rule, 40 C.F.R. pt. 300(L) (removed from C.F.R. pursuant to 60 Fed. Reg. 33,912-13) (EPA Rule), and essentially codifies a portion of it. In promulgating the EPA Rule, EPA attempted to interpret the secured lender exemption contained in CERCLA 101(20)(A). In Kelley v. EPA, 15 F.3d 1100, 1108-09 (D.C. Cir. 1994), cert. denied sub nom American Bankers Ass'n v. Kelley, 115 S. Ct. 900 (1995), the court held that EPA exceeded its authority in promulgating the EPA Rule. The Act also limits the potential liability of fiduciaries, such as trustees and receivers. The EPA Rule had not addressed the liability of fiduciaries, and CERCLA did not contain a liability limitation for fiduciaries that was equivalent to the secured lender exemption. Therefore, fiduciaries were more at risk than lenders.

Key CERCLA Provisions
With limited exceptions, CERCLA 107(a)(1) makes "the owner and operator of . . . a facility" strictly liable for the government's cleanup costs. 42 U.S.C. 9607(a)(1). A "facility" is broadly defined to include any place where hazardous substances have "otherwise come to be located." 42 U.S.C. 9601(9). "Owner or operator" is defined in CERCLA 101(20)(A) as any person owning or operating a facility, but "such term does not include a person, who, without participating in the management of a . . . facility, holds indicia of ownership primarily to protect his security interest in the . . . facility." 42 U.S.C. 9601(20)(A)(ii). This provision is known as the secured lender exemption. The Act does not change this definition but does define what is meant by "participating in the management."

Participating in Management
A lender loses the secured lender exemption if it participates in management. Under CERCLA, as amended by the Act, to participate in management "means actually participating in the management or operational affairs of a vessel or facility; and does not include merely having the capacity to influence, or the unexercised right to control, vessel or facility operations." 110 Stat. at 1352 (to be codified at 42 U.S.C. 9601(20)(F)(i)). This definition nullifies the decision in United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990), cert. denied, 111 S. Ct. 753 (1991) (mere capacity to assert control sufficient for lender liability). One who is a lender and holds indicia of ownership primarily to protect a security interest in a vessel or facility will be considered to participate in management only if, while the borrower is still in possession of the vessel or facility encumbered by the security interest, the person:

(I) exercises decisionmaking control over the environmental compliance related to the vessel or facility, such that the person has undertaken responsibility for the hazardous substance handling or disposal practices related to the vessel or facility; or
(II) exercises control at a level comparable to that of a manager of the vessel or facility, such that the person has assumed or manifested responsibility_
(aa) for the overall management of the vessel or facility encompassing day-to-day decisionmaking with respect to environmental compliance; or
(bb) over all or substantially all of the operational func-tions (as distinguished from financial or administrative functions) of the vessel or facility other than the function of environmental compliance.

110 Stat. at 1352-53 (to be codified at 42 U.S.C. 9601(20)(F)(ii)). The term "participating in management" does not include performing an act or failing to act before a security interest is created in a vessel or facility. The term also does not include holding a security interest; abandoning or releasing a security interest; or including in the terms of an extension of credit (or in a contract or security agreement relating to the extension) a covenant, warranty or other term or condition that relates to environmental compliance. In addition, the lender does not lose the secured lender exemption by:

  • monitoring or enforcing the terms and conditions of the extension of credit or security interest;
  • monitoring or undertaking one or more inspections of the vessel or facility;
  • requiring a response action or other lawful means of addressing the release or threatened release of a hazardous substance in connection with the vessel or facility before, during or on the expiration of the term of the credit extension;
  • providing financial or other advice or counseling;
  • restructuring, renegotiating or otherwise agreeing to alter the terms and conditions of the extension of credit or security interest or exercising forbearance;
  • exercising other remedies that may be available under applicable law for the breach of a term or condition of the extension of credit or security agreement; or
  • conducting a response action under CERCLA 107(d) if the action does not rise to the level of partici- pating in management as otherwise specifically defined in the Act.

    110 Stat. at 1354-55 (to be codified at 42 U.S.C. 9601(2)(F)(iv)).

    Lender's Right to Foreclose
    Before the Act, some courts had held that if a lender foreclosed and took title, it could lose the secured lender exemption. See Guidice v. BFG Electroplating & Mfg. Co., 732 F. Supp. 556, 562-63 (W.D. Pa. 1989). By refining the definition of who is an "owner and operator" subject to CERCLA liability, the Act gives guidance on what a foreclosing lender can do without losing the secured lender exemption. As revised by the Act, an owner or operator:
    does not include a person that is a lender that did not participate in management of a vessel or facility prior to foreclosure, notwithstanding that the person _ (I) forecloses on the vessel or facility; and (II) after foreclosure, sells, re-leases (in the case of a lease finance transaction), or liquidates the vessel or facility, maintains business activities, winds up operations, undertakes a response action under section 9607(d)(l) of this title or under the direction of an on-scene coordinator appointed under the National Contingency Plan, with respect to the vessel or facility, or takes any other measure to preserve, protect, or prepare the vessel or facility prior to sale or disposition, if the person seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest the person of the vessel or facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.

    110 Stat. at 1350-51 (to be codified at 42 U.S.C. 9601(20)(E)(ii)) (emphasis added). These provisions overrule the much-criticized Fleet Factors decision in which the Eleventh Circuit held that a lender could be liable as an "owner" if it participated in the financial management of its debtor and had the ability to influence decisions on hazardous waste management. 901 F.2d at 1558. The provisions of the Act also overrule cases, such as Guidice, holding that the secured lender per se loses the secured lender exemption when it forecloses and takes title.

    Adoption of Part of EPA Rule
    In 1992, to alleviate the uncertainty in the financial industry that resulted from the Fleet Factors decision, EPA issued the EPA Rule to clarify the standards for lender liability under CERCLA. In Kelley, the court held that EPA exceeded its authority in promulgating the EPA Rule. Section 2504 of the Act specifically states that 40 C.F.R. 300.1105 is deemed to have been validly issued under the authority of CERCLA and to have been effective according to the terms of the EPA Rule. 110 Stat. at 1362. Section 300.1105 relates to "[i]nvoluntary acquisition of property by the government." Further, judicial review of the EPA Rule, as enacted, was preempted, but the Act is not to be construed to preclude judicial review of any amendment to the EPA Rule. 110 Stat. at 1362-63.

    The Act does not adopt 40 C.F.R. 300.100, which is the secured lender exemption. Thus, Congress did not adopt the most important provision of the EPA Rule. Was it because of the pressing need to exempt governmental acquisitions or because Congress was rejecting the more specific provisions of the EPA Rule's secured lender exemption? Another possibility is that Congress considered the language of the Act to be more permissive than the EPA Rule.

    The EPA Rule's secured lender exemption is very similar to the lender liability provisions of the Act, and obviously the Act was drafted with the EPA Rule as a guide. With regard to foreclosure, however, the provisions of the EPA Rule are more specific than the Act. As noted above, under the Act the security holder will not be liable after foreclosure "if the person seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest the person of the vessel or facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms." 110 Stat. at 1351. In contrast, under the EPA Rule, a holder of a security interest could avoid being considered an "owner or operator" after foreclosure by listing and advertising the property for sale within 12 months after foreclosure. The EPA Rule also provided that the holder of an interest would lose the exemption if, within six months following foreclosure, it rejected or failed to act within 90 days on a written, bona fide offer of fair consideration for the property. As to EPA's authority to readopt the omitted portion of the EPA Rule, the legislative history is confusing.

    On September 30, 1996, Senator Alphonse D'Amato, chairman of the Banking Committee, and Senator Robert Smith engaged in a colloquy in the Senate. Senator D'Amato confirmed that "title V [of the bill] does not in any way disturb the central holding in the Kelley case, namely that absent a specific delegation, that CERCLA, today, or as amended by this act, does not authorize EPA to issue rules defining the scope of CERCLA liability." 142 Cong. Rec. S11886, S11896 (daily ed. Sept. 30, 1996). On October 3, 1996, however, Senator Frank Lautenberg, ranking member of the Superfund Committee, and Senator Max Baucus, ranking member of the Environment Committee, engaged in another Senate colloquy disavowing the earlier colloquy and in which Senator Lautenberg responded that "this legislation recognizes EPA authority to promulgate rules in this area." 142 Cong. Rec. S12292 (daily ed. Oct. 3, 1996). The Act was sent to the President on September 30, 1996 and he signed it on that day. Thus, the October 3 colloquy was after the date of enactment. Nevertheless, the Act itself recognizes EPA's authority to amend the EPA Rule. As noted above, the section of the Act adopting a portion of the EPA Rule precludes judicial review of any amendment by EPA made after the date of the Act. 110 Stat. at 1363.

    Conforming Amendment to UST Rule

    The Act also contains a conforming amendment to the UST provisions of RCRA. Section 9003b(h) of the Solid Waste Disposal Act, 42 U.S.C. 6991b(h), is amended so that "the terms owner and operator do not include a person who, without participating in the management of a UST and otherwise not engaged in petroleum production, refining or marketing, holds indicia of ownership primarily to protect a security interest." 110 Stat. at 1360 (to be codified at 42 U.S.C. 6991b(h)). The amendment also conforms to the definition of "security interest holders" and fiduciaries in CERCLA 101(20) and 107(n), as amended by the Act. Nothing in the amendment is to be construed as modifying or affecting the final rule on USTs issued by EPA on September 7, 1995 and codified at 40 C.F.R. pts. 280-81. See 110 Stat. at 1361 (to be codified at 42 U.S.C. 6991b(h)(9)(C)).

    Fiduciary Protection
    Before the Act, fiduciaries were greatly concerned about CERCLA liability because of the broad definition of "owner and operator." See City of Phoenix v. Garbage Services Co., 827 F. Supp. 600 (D. Az. 1993) (discussing personal liability of a trustee for response costs). Although it was fraught with interpretational difficulties, at least secured lenders had their exemption. Fiduciaries had no such exemption. Congress remedied this by limiting the liability of fiduciaries, which are broadly defined in the Act. 110 Stat. at 1345-50 (to be codified at 42 U.S.C. 9607(n)).

    The critical issue for fiduciaries is whether the fiduciary can be personally liable for environmentally affected property after the trust assets are exhausted. Congress amended CERCLA 107 to add subsection (n)(1), which provides that the fiduciary's liability will not exceed the assets held in a fiduciary capacity.

    110 Stat. at 1345 (to be codified at 42 U.S.C. 9607(n)(1)). Additionally, a fiduciary is not liable for administering a "facility that was contaminated before the fiduciary relationship began." Id. at 1345-46 (to be codified at 42 U.S.C. 9607(n)(4)(H)). By contrast, if a lender is liable as an owner or operator, the liability can encompass pre-existing hazardous waste. The exemption excludes one who acts as a fiduciary for a trust or other fiduciary estate organized for the primary purpose of, or engaged in, actively carrying on a trade or business for profit or one who acquires ownership or control of a vessel or facility for the purpose of avoiding liability of that person or of any other person. 110 Stat. at 1348 (to be codified at 42 U.S.C. 9607(n)(5)(A)(ii)). Also, the Act does not protect a fiduciary whose negligence causes or contributes to a release or threatened release. Id. at 1345 (to be codified at 42 U.S.C. 9607(n)(3)). The safe harbor for fiduciary activities is similar to the permitted activities of lenders under the definition of "participating in management." Compare 110 Stat. at 1345-46 (to be codified at 42 U.S.C. 9607(n)(4)) with 110 Stat. at 1352-60 (to be codified at 42 U.S.C. 9601(20)(F)).

    The Act provides guidance for secured parties and fiduciaries in avoiding liability under CERCLA and RCRA. The Act gives relief to fiduciaries who have been concerned over choosing between acts that might impose personal environmental liability and acts that carry out their obligations as a fiduciary. The lenders did not get everything they wanted. They would prefer to avoid joint and several liability when they do not qualify for the secured lender exemption. Also, lenders and others are still concerned about the retroactive effect of CERCLA.

    The Act does not eliminate the risk of lending to a borrower subject to environmental liability or the risk of foreclosing on contaminated property. The incentive to conduct due diligence is not reduced, but at least guidance now exists on how to avoid triggering CERCLA liability. Fiduciaries must still be wary of holding contaminated property. Unless the fiduciary is negligent, however, personal liability is unlikely.

    Baxter Dunaway is a professor at Pepperdine University School of Law in Malibu, California. Andrew C. Cooper is a lawyer with Arent Fox Kintner Plotkin & Kahn in Washington, D.C.

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