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Congressional Enactment of CERCLA Lender Liability Relief

October 22, 1996

In September 30, 1996, President Clinton signed the omnibus spending bill H.R. 3610, averting another government shutdown. This "continuing resolution" included a substantive act introduced by Senator D'Amato entitled the "Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996" (the "Act"). The Act:

  1. clarifies the exclusion of lenders from liability under the Comprehensive Environmental Response, Compensation & Liability Act, 42 U.S.C. ¤ 9601, et seq. (CERCLA);
  2. creates a similar exclusion for lenders regarding liability as owners and operators of underground storage tanks;
  3. reinstates the EPA lender liability rule, 40 CFR ¤ 300.1105, promulgated April 29, 1992 and overturned by the U.S. Court of Appeals for the D.C. Circuit in 1994; and
  4. creates an exclusion from personal liability under CERCLA for actions taken or failed to be taken by fiduciaries, including trustees and executors of estates.

Congress finally Clarifies Exclusion For Lenders Under CERCLA Using substantially the same language and analysis found in EPA's 1992 lender liability rule, the amendment defines the scope of the safe harbor from CERCLA liability for lenders. The amendment retains the existing exclusion from the definition of the term "owner or operator" found in CERCLA Section 101(20) for a lender that, "without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect the security interest" in the vessel or facility. (New CERCLA Section 101(20)(E)). The amendment includes new language defining the term "participate in management" to mean "actually participating" in operations of the borrower's facility, not "merely having the capacity to influence, or the unexercised right to "control" such operations. (New CERCLA Section 101(20)(F)). In that regard, the amendment legislatively overturns the highly criticized ruling of the Eleventh Circuit in United States v. Fleet Factors, 901 F.2d 1550 (11th Cir. 1990), cert. denied, 111 S.Ct. 752 (1991), that a lender's capacity to control its borrower's waste disposal activities was sufficient to hold the lender liable.

The amendment provides further that during the life of a loan, liability may be imposed only where the lender: exercises decisionmaking control over the environmental compliance related to the vessel or facility, such that the [lender] has undertaken responsibility for the hazardous substance handling or disposal practices related to the facility; or exercises control at a level comparable to that of a manager of the vessel or facility such that the [lender] has assumed or manifested responsibility -- (aa) for . . . day-to-day decisionmaking with respect to environmental compliance; or (bb) over all or substantially all of the operational functions (as distinguished from financial or administrative functions) . . . other than environmental compliance.(New CERCLA Section 101(20)(F)(ii)). This language is consistent with the EPA rule.

If the lender forecloses or obtains title by deed in lieu of foreclosure, and did not "participate in management" prior to foreclosure, the lender is excluded from liability as an owner or operator so long as the lender "seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest [itself] 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." (New CERCLA Section 101(20)(E)(ii) (emphasis added)). This latter provision is taken from the EPA lender liability rule, modified subtly to benefit lenders by substituting "earliest practicable commercially reasonable time" for "reasonably expeditious manner." (See 57 Fed. Reg. 18344, 18384 (Apr. 29, 1992)). The lender liability rule, now codified by statute, further clarifies that a lender is protected from loss of its exemption from CERCLA liability as to its post-foreclosure ownership of the property if it begins to list the property with a broker, or advertise it for sale, within twelve months after acquiring marketable title. (57 Fed. Reg. 18344, 18378 (Apr. 29, 1992)). Thereafter, the lender may continue to hold title provided that the lender did not reject any bona fide offer of "fair consideration," (defined favorably to lenders as the lender's basis n the property, plus any cleanup costs or other improvements or expenses). (Id.)

Another noteworthy provision of the amendment is a list of activities that do not constitute "participation in management," including loan documentation that relates to environmental compliance, monitoring or inspecting the facility, and requiring cleanup prior to, during or after the term of the loan, provided that the actions do not rise to the level of "participation in management." (New CERCLA Section 101(20(F)(iv)). Also included in this list is conducting cleanup at the facility "under section 107(d) or under the direction of an on-scene coordinator appointed under the NCP." This raises a significant issue as to the degree to which a lender may become involved in site remediation activities where cleanup would be undertaken without EPA approval. Such "voluntary" cleanups appear to fall outside the Safe Harbor.

The amendment is deemed effective on September 30, 1996 and is intended to apply to any claim that has not been finally adjudicated as of that date. (Act Section 2505).

The effect of this amendment as it relates to the CERCLA liability of lenders is primarily to bolster and codify existing law, as every court that has examined the issue -- other than the Eleventh Circuit in the Fleet Factors decision -- has accepted the EPA's lender-friendly interpretation of the statute. As a result, the amendment should have little practical effect on lending practices, other than to provide greater security for the lending officer. However, lenders seeking maximum protection may be well advised to review the language of the amendment and to incorporate key provisions into their loan covenants. For example, lenders may wish to require borrowers to notify lenders immediately upon obtaining knowledge of releases and to conduct prompt remediation of such releases. Of course, the law is federal only and has no effect on state and local environmental enforcement or cost recovery actions. Therefore, state laws must still be reviewed with respect to each transaction.

Congress Clarifies Limited Liability Of Fiduciaries

Adopting the line of analysis followed by a majority of courts, the amendment limits the liability of fiduciaries under CERCLA in two ways. First, the amendment limits the liability of any fiduciary to the amount of the assets held in its fiduciary capacity, unless the release was caused by the negligence of the fiduciary. (New CERCLA Section 107(n)(1)).

Second, the fiduciary exclusion creates a safe harbor from personal liability of fiduciaries for a number of activities, including: undertaking or directing another person to undertake any lawful means of addressing a hazardous substance, incorporating terms relating to environmental compliance in a fiduciary agreement, monitoring or inspecting a facility, and administering a previously contaminated facility. (New CERCLA Section 107(n)(4)). Also included in this list of protected actions is declining to take any of the actions listed above, except for a failure to take action directed by EPA or a State. (Id.)

The fiduciary exclusion does not limit any party's rights against the assets of the estate or trust administered by the fiduciary, or against an independent contractor retained by a fiduciary. (New CERCLA Section 107(n)(8)).

The amendment includes an unusual provision that reinstates the EPA's 1992 lender liability rule, 40 CFR ¤ 300.1105. (Act Section 2504). Specifically, this section of the Act states that effective September 30, 1996, the lender liability rule "shall be deemed to have been validly issued under authority of [CERCLA], and to have been effective according to the terms of the final rule." Id. This section of the Act also expressly prohibits any judicial proceedings regarding the effectiveness of the EPA rule, and even revokes the jurisdiction of any court to review the rule, while preserving judicial review over any subsequent rules or amendments to the rule. Id. Whether this provision can withstand constitutional muster remains to be seen.

Application of Lender/ Fiduciary Exclusion to Tank Ownership

Finally, Section 2503 of the Act amends Section 9003(h) of the Solid Waste Disposal Act (or RCRA), 42 U.S.C. ¤ 6991b(h), to incorporate the previously discussed exclusions under CERCLA for lenders and fiduciaries in determining a person's liability as an owner or operator of an underground storage tank. (New RCRA Section 9003(h)(9)(A)). This provision in effect codifies the rule issued by EPA on this issue. (60 Fed. Reg. 46,692 (Sept. 7, 1995)). Indeed, the amendment states that any inconsistent provisions of the EPA rule shall prevail over the terms of the statute, provided that amendments to that rule, if any, shall conform to the statutory language. (New RCRA Section 9003(h)(9)(C)). This provision is ripe for constitutional challenge.

This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.