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The new EPA lender liability regulation.

Since the Environmental Protection Agency released its final regulation on the liability of secured lenders under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in April, the agency may well have expected investors in real estate to breathe a collective sigh of relief. After all, the new regulation clarifies some aspects of the secured-creditor exemption from liability under CERCLA, a change that could be expected to ease worries for many real estate investors.

However, the new rule hardly relieves investors of all of the financial burden of a potential environmental cleanup. In fact, the new ruling is likely to pave the way for more confusion.

In addition, many observers caution that the EPA might be sued by environmentalists and manufacturers in the coming months because the new regulation far exceeds the statutory exemption for secured creditors. Thus, investors should keep a close eye on both the EPA and the rest of the federal government over the coming months for possible changes in the law.


As most real estate professionals know, the new CERCLA regulation was passed in response to the widespread reaction against U.S. v. Fleet Factors Corp. and other federal cases, which effectively have turned the financial community into environmental policemen and insurers. Those cases held secured creditors in certain situations strictly liable for the costs of cleanup of contaminated property of their borrowers.

Under CERCLA, present owners and operators of contaminated property and those who owned or operated the property at the time of release of the substances are liable for the property's cleanup. Liability is strict--no fault or negligence is necessary--and responsible parties are held jointly and severally liable for the entire costs of cleanup.

CERCLA provides an exemption from liability for a secured lender who, "without participating in management of a vessel or facility, holds indicia of ownership primarily to protect his security interest." However, the exemption was not explained in the original statute, and some courts have interpreted it narrowly.

The new rule

The new regulation clarifies this exemption. It states that participation in management means "actual participation" and does not include the unexercised capacity to control. (However, a secured creditor will be liable if it exercises control of the borrower's environmental compliance or engages in day-to-day decision-making activities.)

The regulation provides examples of activities in which a secured lender can safely engage at the inception of the loan, during policing and workout, and during and after foreclosure. Some examples are listed below:

* The lender can conduct most activities prior to the loan, including an environmental inspection. Requiring cleanup, whether prior to or subsequent to the loan, also is safe. Policing activities made at any time that do not constitute participation in management also are allowed.

During a loan workout, the lender can monitor or inspect the secured property, restructure and renegotiate terms, require payment of additional rent and interest, exercise forbearance, and provide financial and other advice.

* The secured creditor also can foreclose on a property or purchase a property at a foreclosure sale without CERCLA liability, so long as it holds the property temporarily. (Foreclosure includes any formal or informal manner by which the creditor acquires title to or possession of the secured property, such as purchase at a foreclosure sale, acquisition or assignment of title in lieu of foreclosure, termination of a lease, or other repossession.)

After foreclosure, the secured-creditor may sell or re-lease property held pursuant to a lease financing transaction; liquidate; maintain business activities; wind up operations; and undertake response actions.

However, within 12 months following foreclosure the creditor must list the property with an agent who deals with the type of property in question, or advertise the property as being for sale or disposition on at least a monthly basis in an "appropriate publication." The 12-month period begins at the time the creditor acquires marketable title.

Loss of exemption

The creditor will lose its secured creditor exemption if, within 90 days of receipt, it outbids, rejects, or fails to act upon a written, bona fide firm offer of fair consideration for the property at any time six months after foreclosure.

The term "fair consideration" means the value of the security interest, calculated according to a variety of elements set forth in the regulation, that includes the sum of the outstanding principal owed, unpaid interest, rent and penalties, costs of workout and foreclosure, sums spent maintaining the business enterprise prior to disposition of the property, and any response costs incurred under CERCLA.

The creditor also must deduct certain income and payments from the calculation of fair consideration, including net revenues and amounts received from the borrower after acquisition.

The creditor also will be liable under CERCLA if, after foreclosure, it arranges for treatment or disposal of hazardous substances or accepts hazardous substances for transportation to a disposal facility that it selects. Thus, the creditor will incur off-site CERCLA liability for the disposal of hazardous waste.


Regardless of the EPA's intentions, the new lender liability regulation does not relieve a lender of environmental liabilities. The lender still will be liable to third parties under other federal statutes (such as the regulations requiring cleanup of leaking underground storage tanks under the Resource Conservation and Recovery Act) and under state law.

The new regulation also leaves ample room for ambiguity and confusion. Thus, perhaps the best resolution of lender liability would be acheived through federal legislation.

[Kay L. Pick is a partner in environmental law at Altheimer & Gray in Chicago. She represents a variety of clients on regulatory compliance, transactional, and litigation aspects of environmental law. She also is a member of JPM's legislative advisory board.]
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Title Annotation:Investment Insights
Author:Pick, Kay L.
Publication:Journal of Property Management
Date:Sep 1, 1992
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