Lender Foreclosing on Former Dry Cleaner Not LIable under Vt Law

Vermont Supreme Court held that a purchaser could rely on a negligently prepared phase 1 to assert the state innocent purchaser defense. In an earlier round of litigation, the lower court had ruled that the foreclosing bank that held title for seven months was not liable because the state had failed to prove that there had been a release during the time that the bank held title.

In State v Howe Cleaners, the property had been used as a dry cleaner from 1974-1996. The property was then conveyed to purchaser who converted it to a bakery. When the bakery failed, Granite Savings Bank and Trust (Granite) foreclosed and sold the property seven months later to a pizzeria. The sale was "as is" and before acquiring the property, the purchaser reviewed a phase 1 prepared for the bank.Sometime after taking title, an EPA inspector spoke with former employees of the dry cleaner and visited the property. When he raised some floor boards, he observed two tanks in the crawl space that had apparently been used to store PCE and that had leaked.

Vt then implemented response actions and sought cost recovery under the state Waste Management Act. The state argued that the successor to Granite, TD BankNorth, was liable as a person who owned the site at the time of a release. TD BankNorth argued it could not be liable because the state did not have any evidence that there had been a release during its ownership.

The state responded that it did not have to prove there was a new release but simply migration of an initial release.The trial court found that the CERCLA caselaw was not dispositive because liability under CERCLA was triggered by ownership at time of "disposal" whereas liability under the state Waste Management Act was linked to a "release". Moreover, the court found that the state definition of release was narrower than CERCLA and seemed to require an actual spill or discharge during ownership.Because there was a triable issue of fact if there was a release during the ownership of the bank, the court denied the bank's motion for summary judgment. The bank then sought to depose the state's expert on the timing of the release. However, the state refused to make its expert available. After several conferences with the court, the state still declined to make its staff available. As a result, the court issued a sanction prohibiting the state from introducing evidence of the timing of the release which effectively resulted in judgment for the bank.

The case illustrates the importance of understanding the scope of the state superfund or hazardous waste law as well as the extent of the secured creditor exemption. In other states, the bank could have been liable as a past owner and the failure of its consultant to identify the tanks could have exposed the bank to liability.