Continuing our third theme on lender liability, this post will discuss post-foreclosure liability. Our prior posts discussed the scope of the liability protection during the life of the loan and during foreclosure.
The secured creditor exemption of CERCLA, RCRA and many state environmental laws provide that 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)(1) of CERCLA or under the direction of an OSC so long as the lender seeks to sell or re-lease (in the case of a sale/leaseback transaction) and complies with the foreclosure requirements set forth above....
Lenders have encountered their greatest risk of liability when in post-foreclosure activities. Aside from the Fleet Factors case, there are a number of unreported situations where lenders have been issued administrative orders by governmental agencies and have had to pay to perform a cleanup because of the actions they took following foreclosure. 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 take title to the property because of fear that it will lose its exemption, but instead hires an auction to conduct the sale of the personal 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. In order 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. In some cases, the bidders are actually allowed to cherry-pick barrels containing useful raw materials. After the auction is conducted, the drums and barrels are then left in the abandoned facility. At some point, government authorities find out that there are abandoned drums at the facility and order the lender to pay for the removal of the materials.
Lenders will often argue that the drums containing the wastes were not part of its collateral or that the lender never exercised control over the drums because neither it nor its auctioneer ever touched or moved them. However, 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.
Moreover, the CERCLA Lender Liability Rule provided that while lenders were not required to take response actions in order to retain their immunity from liability, they had to comply with the law, and any actions that they did take had to comply with the NCP. Abandonment of drums or equipment would not be consistent with the requirements of the NCP and could cause a lender to lose its immunity even where it has complied with all of the aspects of the CERCLA Lender Liability Rule.
The Lender Liability Amendments, however, did not expressly address this issue of post-foreclosure NCP compliance. Thus, financial institutions should exercise extreme caution when conducting auctions and should consult with environmental counsel prior to 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 arranging for the auction and probably even before taking control of the facility in order to evaluate the possible environmental liabilities that might be associated with the auction.
If the lender decides to have the hazardous wastes removed, it should try to have a representative of the borrower execute the waste manifests so that the bank would not be considered the generator of the waste. However, if no such representative is available, the bank or one of its agents would have to execute the waste manifests. Since the bank would be considered a generator of the waste under these circumstances, the lender should have its consultant select a reputable disposal or treatment facility. 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.
More more detailed information on lender liability, please visit my website at http://www.environmental-law.net/
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