In HICKS FAMILY LIMITED PARTNERSHIP v 1ST NATIONAL BANK OF HOWELL, 2008 Mich. App. LEXIS 1444 (7/15/08, Ct. App. Mi), a state appeals court ruled that a bank that had foreclosed on property formerly operated by a defunct paint manufacturer in 1983. Defendant bank sold the property to the predecessor of the plaintiff estate.When the defendant bank acquired the property, it was contaminated with buried drums of paint and paint thinners. . The purchase agreement provided in part that "Sellers agree to have all equipment inside and out, all stock, debris and residue removed from premises at time of closing, in compliance of E.P.A. Rules & Regulations."
Defendant bank performed remedial activities from 1983 to 1996. There was evidence that a contractor hired by the defendant had damaged a barrel during remedial activities that led to another discharge. In 1997, the defendant bank requested that the site be delisted but the state of Michigan refused. In 2004, plaintiff began developing the property and discovered several additional buried drums and additional groundwater and soil remained contaminated. In December 2004, plaintiff then sought to recovery its cleanup costs from the defendant under the state superfund law and common law claims. The trial court looked to CERCLA caselaw to determine if the plaintiff PRP had a right to bring a contribution action under the state superfund law since that right was modeled after CERCLA section 113. The trial court rules that based on the then split of authority under CERCLA, the plaintiff did not have a statutory right of contribution and also dismissed the common law claims. The common law claims were dismissed because the plaintiff failed to exercise reasonable diligence in monitoring defendant's [*28] performance of the cleanup operation. The court said that even if the plaintiff did not know the particular facts concerning the buried drums or the ruptured barrel, it had sufficient grounds for knowing no later than 1997 that defendant may not have been adequately fulfilling its alleged cleanup obligations. In the absence of evidence that plaintiff made reasonable efforts to ascertain the condition of the property, the trial court determined that it was not appropriate to apply the discovery rule in this case
The appeals court affirmed the dismissal of plaintiff's various common-law claims, but reversed the dismissal of the state superfund cost-recovery claim and remanded for further proceedings. The trial court then granted defendant's motion for summary disposition because as a PRP, plaintiff was legally barred from maintaining a cost recovery claim, and even if plaintiff could properly bring an action, the evidence established that defendant was neither an 'operator' nor an 'arranger' under the state superfund law since there was no causal nexus between defendant's alleged conduct and plaintiff's response costs.
On appeal, the court ruled that the trial court had erred when it granted defendant's motion for summary disposition because of the U.S. Supreme Court ruling in United States v Atlantic Research Corp, 127 S. Ct. 2331; 168 L. Ed. 2d 28 (2007) that PRPs could bring contribution actions.
However, the appeals court held that the defendant bank was not an 'operator' or 'generator' at the site. While the defendant bank exercised control over the site when carrying out its remedial actions, the court said that plaintff had to show that the defendant must have had authority to control the operations or decisions involving the disposal of the hazardous substance, or must have assumed responsibility or control over the disposition of the hazardous substance. Since the defendant's only connection to the site was its remedial clean-up effort, the court said this was insufficient to establish the requisite nexus required for liability as an operator.
On the arranger theory of liability, the plaintiff had introduced evidence that a contractor hired by defendant ruptured a barrel during the cleanup operations in 1984 and that this was sufficient to show that defendant disposed of a hazardous substance and was responsible for an activity causing a release. However, the court ruled that defendant could not be held liable as an arranger as it did not intend the 1984 disposal.
Comment 1:
Perhaps the bank did not comply with the foreclosure rules set forth in the state secured exemption or felt it did not act retroactively. In any event, the bank was forced to defend itself as a former landowner of the property without the extra layer of protection that is provided by the expansive state secured creditor defense.
Comment 2
Lenders encounter their greatest risk of liability during post-foreclosure activities, and the HSBC case highlights the importance of a lender exercising extreme caution when winding down operations at a borrower’s manufacturing facilities. Under the 1996 Asset Conservation, Lender Liability Deposit Insurance Act, also known as the Lender Liability Amendments, a lender may maintain business operations, wind down operations, take measures to preserve, protect and prepare the vessel or facility for sale or disposition, and even undertake response actions under section 107(d) (l) of CERCLA so long as the lender seeks to sell or re-lease (in the case of a sale/leaseback transaction)and complies with certain foreclosure requirements.
Banks continue to find themselves subject to environmental issues because of the actions they took during workouts or following foreclosures. Many of these enforcement actionsinvolve administrative orders or lawsuits that are quietly settled by governmental agencies. These situations have typically taken place when a borrower has gone out of business and the bank takes control of the facility in order to sell off the inventory, fixtures, machinery and equipment of the borrower subject to the bank’s lien. The bank typically does not taketitle to the property because of fear that it will lose its exemption, but instead hires an auction house to conduct the sale of the property. Usually, there are barrels or drums of hazardous waste strewn about the facility and the equipment that is being auctioned off may even contain hazardous wastes. To avoid any suggestion that the bank or the auction had any control over hazardous wastes, the auction will often rope off the area where the drums or barrels are found. After theauction is conducted, the drums and barrels are then left in the abandoned facility. At somepoint, government authorities discover that there are abandoned drums at the facility and order the lender to pay for the removal of the materials.
Lenders should be aware that the definition of 'release' under CERCLA includes abandonment of drums. Thus, a lender who has taken control of a facility to conduct an auction and leaves behind drums or equipment containing hazardous wastes could be deemed to have caused a threatened release of hazardous substances. EPA has consistently taken the position that such action constitutes abandonment of hazardous wastes (when the borrower is insolvent) and creates generator liability for the lender. As a result, financial institutions should consult with environmental counsel prior to taking possession of a former borrower’s facility or conducting any auction at a manufacturing facility. It would also be advisable for lenders to retain an environmental consultant or environmental attorney to inspect the facility prior to taking control in order to evaluate the possible environmental liabilities that might be associated with the auction.
The financial institution could have its environmental consultant or attorney perform a regulatory review of the facility to minimize the possibility that the lender could incur liability for releases of hazardous substances at that treatment or disposal facility.
This case can be contrasted to the enforcement action in State of New York vs. HSBC where the bank agreed to pay $850,000 in fines and reimburse environmental agencies for response costs involving a facility that was abandoned by a borrower. In this case, HSBC extended a $4.1 million loan to Westwood Chemical Corp. After the borrower defaulted, HSBC established a lockbox and directed customers to forward payments to that account. A few months later, HSBC seized Westwood’s operating funds and asked the company to prepare a plan for an orderly shutdown. As part of this request, Westwood requested approximately $60,000 to properly dispose of hazardous materials in drums, containers and wastewater tanks as well as raw materials and work in process. HSBC refused this request and also declined to follow the recommendations of its consultants to winterize the facility. During the winter, pipes from the fire suppression system burst as well as many of the containers storing hazardous materials. The contents of the drums mixed with water when the weather warmed. At some point, the local code enforcement officer became aware of the conditions and notified the New York State Department of Environmental Conservation (NYSDEC), which then referred the matter to EPA. The bankruptcy trustee then got into the act, filing a motion under section 506(c) of the bankruptcy code seeking to subordinate the bank's lien. EPA, DEC and the town also filed administrative claims seeking reimbursement of their response costs. In the fall of 2006, HSBC arranged for the sale of the property for $3 million. Approximately $2.3 million of the sales price was used to reimburse some of the costs incurred by the regulatory agencies. In its lawsuit against HSBC, the New York Attorney General asserted that HSBC was not entitled to the secured creditor exemption because it had become involved in the management of the facility when it seized the operating funds, refused to allow money to be used to properly dispose of the hazardous materials or otherwise enable the borrower to comply with its closure obligations, and failed to properly winterize the facility when it had assumed control of the building and constructive possession of the hazardous materials. The attorney general also charged that the bank had an obligation to notify the NYSDEC of the conditions at the facility.It is interesting that the defendant did not try to assert the secured creditor exemption under the Michigan superfund law which appears to be broader than the CERCLA secured exemption . In particular, foreclosing lenders may asset the exemption if they take certain steps to dispose of the property and has taken reasonable care in maintaining and preserving the real estate and permanent fixtures; provides to the department all environmental information related to the facility that is available to the lender; has complied with any order issued by the state environmental agency and if conditions on the property pose a threat of fire or explosion or present an imminent hazard through direct contact with hazardous substances, the lender has undertaken appropriate response activities to abate the threat or hazard.
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