Foreclosure and United States v. Maryland Bank & Trust Co.: Paying the Piper or Learning How to Dance to a New Tune?

Joel R. Burcat

Mr. Burcat is an associate with the law firm of Rhoads & Sinon, Harrisburg, Pennsylvania.

In his Comment¹ on United States v. Maryland Bank & Trust Co.,² Phillip Reed suggests, "[L]ike other landowners and hazardous waste generators who have learned too late just how broad CERCLA's liability scheme can be, they [banks and other creditors] may simply have to pay the piper."³ Without intending to be contentious, I believe the contrary is true. Banks and other creditors will only have to dance to a new tune. The public will end up paying the piper.

Two district courts have held that bank creditors could be liable under the Comprehensive Environmental, Response, Compensation, and Liability Act (CERCLA)⁴ for the cost of cleanup of hazardous waste facilities created and maintained by their debtors. In rendering their decision, these courts analyzed the so-called "security interest exception"⁵ under CERCLA to find that the banks were "owners or operators" of the facilities. The exception was incorporated into CERCLA by Congress to protect creditors holding security interests in hazardous waste facilities, where the creditor did not dominate the debtor or manage the hazardous waste facility.⁶ Mr. Reed, in discussing Maryland Bank & Trust Co. and an earlier case that also relied on the security interest exception,⁷ states that the results in the cases "may be reconciled"⁸ and that the "reasoning" of the court in Maryland Bank & Trust Co. is "persuasive."⁹ While the ultimate decisions in both cases may be correct, the reasoning of both is erroneous. The reliance by both courts on public policy arguments is also misplaced.

The Bank Trap

In Maryland Bank & Trust Co., it was ruled on a motion for summary judgment that the security interest exception of CERCLA did not apply to a bank that became the owner of a hazardous waste facility through a foreclosure sale.¹⁰ The bank had bought the property at a foreclosure sale when the mortgagor defaulted on the loan that was secured by the property.¹¹ The evidence, however, was insufficient to determine whether the bank in fact had any knowledge of the presence of hazardous waste on the site.¹² The court consequently allowed the case to proceed to trial on the issue of the bank's statutory defenses to CERCLA liability.

In a similar case, United States v. Mirabile,¹³ Mellon Bank's motion for summary judgment as to its liability was denied, thereby forcing the case to trial.¹⁴ In Mirabile, Mellon Bank's predecessor had attempted to assist the owner and hazardous waste generator out of his financial problems by assigning to a bank employee the daily supervision of the operation, and otherwise becoming entangled in the affairs of the debtor.¹⁵ Mellon Bank never foreclosed on the property or took possession of any collateral of the debtor. The court did allow, however, that the bank could seek protection from liability under CERCLA [17 ELR 10099] § 107(b)(3).¹⁶ A motion for summary judgment made by another bank mortgagee, American Bank & Trust Co., was granted by the court. American Bank had bought the property at a foreclosure sale, but had transferred its right to the title prior to accepting the sheriff's deed.

In Maryland Bank & Trust Co., the court scolded banks and other mortgagees for arguing they should not be required to pay the costs of cleaning up a mortgaged property that was contaminated with hazardous wastes by the mortgagor:

Under the scenario put forward by the bank, the federal government alone would shoulder the cost of cleaning up the site, while the former mortgagee-turned-owner, would benefit from the clean-up by the increased value of the now unpolluted land. At the foreclosure sale, the mortgagee could acquire the property cheaply. All other prospective purchasers would be faced with potential CERCLA liability, and would shy away from the sale. Yet once the property has been cleared at the taxpayers' expense and becomes marketable, the mortgagee-turned-owner would be in a position to sell the site at a profit.¹⁷

The Maryland Bank & Trust Co. court further admonished the bank for seeking to turn CERCLA into an "insurance scheme for financial institutions, protecting them against possible losses due to the security of loans with polluted properties."¹⁸ The court advised that mortgagees should protect themselves by making "prudent loans" and conducting environmental audits on a "routine" basis.¹⁹ Mr. Reed appears to approve of the court's conclusion, noting that "CERCLA imposes this kind of retroactive liability on other categories of responsible parties who are no more closely connected with a particular site."²⁰

The Incentive Not to Foreclose

Where banks have already made loans to companies with hazardous waste liability, such as in Maryland Bank & Trust Co., they may be able to protect themselves from CERCLA liability by not foreclosing on property on which hazardous wastes have been disposed. Other banks, such as Mellon bank in the case of United States v. Mirabile will avoid assisting the debtor in any appreciable manner for fear of acquiring CERCLA liability.²¹

A problem with the approach adopted by the courts in Maryland Bank & Trust Co. and Mirabile is that banks and other creditors will merely postpone foreclosure or other activity at potential hazardous waste sites until after EPA has completed its cleanup. The EPA may obtain its lien against the property pursuant to the recent amendment to CERCLA.²² However, the CERCLA lien will not take priority to any prior perfected security interest in the property. In fact, the lien will be the equivalent of a judgment lien²³ which may be discharged upon the sale of the property in foreclosure by the prior mortgagee.²⁴ The CERCLA lien could also be discharged by a judicial sale.²⁵ As well, under limited circumstances, a sale authorized by a bankruptcy court may clear all liens and discharge the CERCLA lien.²⁶

In the end, the public will suffer while the EPA and creditor maneuver to limit the amount of money each will be required to spend. Certainly, no mortgagee in its right mind would knowingly foreclose on a site with expensive hazardous waste liability, unless the value of the property, less the cost of cleanup, equals or exceeds the amount of the loan. As a careful mortgagee will not be the owner, it will not be required to clean the site. Hazardous waste sites will remain hazardous until the government dips into the Superfund to clean the site.

Attempting to trap banks, lenders, and other creditors into unwittingly financing CERCLA clean-up activities misconstrues the basic common law protections afforded creditors, the intent of Congress in drafting the security interest exception, and the policy behind CERCLA.²⁷ Pursuant to the common law, creditors are afforded protection from other creditors of a common debtor so long as the creditor avoids dominating the debtor or turning the debtor into his agent.²⁸ The legislative history of CERCLA indicates absolutely no intent on the part of Congress to alter these long standing legal standards.²⁹ The reach of CERCLA is already broad enough, casting its net of liability upon owners of the site at the time of the disposal of the hazardous waste, current owners, and generators and transporters of hazardous material.³⁰ Nothing in CERCLA indicates that Congress intended to go beyond the vast number of parties already caught up in the CERCLA net. There is no legislative history in CERCLA or the Superfund Amendments and Reauthorization Act of 1986³¹ that indicates a desire on the part of Congress to force those who finance business entities also to finance, at their expense, CERCLA cleanups where those financiers are not "owners" of the property.³²

It may be recalled that CERCLA was enacted to provide [17 ELR 10100] a "comprehensive response" to the problem of hazardous substance release.³³ The "dual purpose of CERCLA [is] to promote rapid response to hazardous situations and to place the financial burden on the responsible parties."³⁴ Congress has already made its determination as to who are the responsible parties,³⁵ and attempts by courts to expand liability defeat the twin purposes of CERCLA. By attempting to force a party, such as a creditor, into conducting a cleanup, the government will become a party to further delays in achieving a cleanup of releases of hazardous substances. Also, by attempting to trap a creditor into paying for such cleanups, the government and the creditor will become inexorably entangled in needless and expensive litigation.

Public Policy Considerations

The court in Maryland Bank & Trust Co. presents a weak public policy argument to support the reluctant bankfinanced cleanup of hazardous waste. The court is concerned that the bank will make a profit at the expense of the public, once the government has cleaned the property. However, the court's argument is inaccurate because it is more likely that the bank will actually lose money on the site. First, the debtor-mortgagor is presumably insolvent (otherwise the government would be pursuing him) and is probably not repaying his loan. The bank will lose the interest payments on the property from the time of the insolvency through the sale of the property. Second, the price of a previously contaminated property will not be the same as if the property were never contaminated. The bank will, therefore, lose money as a result of the sale of the devalued property.³⁶ Third, the bank will have to spend more money on the site for administrative and legal costs it would not otherwise have spent. Moreover, it is speculative, at best, to declare that a former hazardous waste facility will be sold for more than the amount of the loan. It is likely that, under the usual circumstances, the bank would break even on the sale of the cleaned-up property.

The results in both Maryland Bank & Trust Co. and Mirabile appear to be correct. What is troubling is the analysis of the law utilized by the courts and their reliance on "public policy" to render their determinations. A bank that has taken title to a site contaminated with hazardous wastes should be liable under CERCLA, unless it can establish a defense under CERCLA. The court in Maryland Bank & Trust Co. could have reached this conclusion through an analysis of basic principles of the law of mortgage foreclosure, rather than speculative public policy arguments. Likewise, a bank that has dominated a debtor may incur CERCLA liability unless it, too, can establish a CERCLA defense. The court in Mirabile could have reached this conclusion through an analysis of basic principles of debtor-creditor law. The failure of the courts to address these basic legal principles clouds, rather than clarifies, the ongoing controversy regarding the CERCLA liability of creditors.

The courts should force the owners, generators, and transporters of hazardous waste to clean it up. Where the bank is the "owner" of a site through foreclosure and cannot meet its defenses under CERCLA, it, too, should be liable. The public interest is best served by forcing those who have had direct responsibility for the creation or maintenance of a hazardous waste facility into cleaning it up. If those responsible cannot be found, then the public — through the Superfund — should clean the site. Public policy arguments should be raised only to clarify indefinite statutory arguments. CERCLA, as it interacts with commercial law, does not require the imposition of public policy arguments. An unambiguous message should be sent by the courts to facilitate the speedy cleanup of hazardous waste sites and to put creditors on notice of the actual liability they face.

The public will eventually pay for the cost of inappropriate interpretations of CERCLA either through higher costs of loans or from being forced to tolerate hazardous waste releases for longer periods of time until a remedial action is taken. While a few financier-wallflowers may "pay the piper," most banks will simply learn some new steps to avoid this inappropriate expansion of liability.

1. Reed, Fear of Foreclosure: United States v. Maryland Bank & Trust Co., 16 ELR 10165 (July 1986).

2. 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986) (summary judgment granted in favor of United States and against bank-mortgagee that foreclosed on property containing hazardous waste).

3. Reed, supra note 1, at 10169.

4. 42 U.S.C. §§ 9601-9675, ELR STAT. 44001. CERCLA was recently amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), Pub. L. No. 99-499, 100 Stat. 1613.

5. 42 U.S.C. § 9601(20)(A), ELR STAT. 44006. The security interest exception limits the definition of owner or operator, "[s]uch term does not include a person, who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility." Id. It should be noted that the exception is alive and well. At least one reporting service published a preliminary draft of CERCLA following recent amendments that inadvertently deleted this language.

6. Burcat, Environmental Liability of Creditors: Open Season on Banks, Creditors, and Other Deep Pockets, 103 BANKING L.J. 509, 514 (1986).

7. United States v. Mirabile, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985) (summary judgment denied for bank that may have participated in the management of its debtor; summary judgment granted for another bank that foreclosed on hazardous waste facility but transferred right to title before accepting sheriff's deed).

8. Reed, supra note 1, at 10169.

9. Id.

10. 632 F. Supp. at 582, 16 ELR at 20561.

11. Id. at 575, 16 ELR at 20558.

12. Id. at 581, 16 ELR at 20560.

13. 15 ELR 20994 (E.D. Pa. Sept. 4, 1985).

14. The case was subsequently settled. Andresky, Cover your Assets, FORBES, Mar. 24, 1986, at 117.

15. 15 ELR at 20997.

16. 42 U.S.C. § 9607(b)(3), ELR STAT. 44024.

17. 632 F. Supp. at 580, 16 ELR at 20560.

18. Id.

19. Id.

20. Reed, supra note 1, at 10168.

21. Where creditors are sued to recover costs of cleanup under CERCLA, they will, no doubt, assert the defenses enumerated in the law. CERCLA § 107(b), 42 U.S.C. § 9607(b), ELR STAT. 44024. The defense presented in CERCLA § 107(b)(3), 42 U.S.C. § 9607(b)(3), ELR STAT. 44024, has been limited by SARA § 101(f) regarding knowledge and due diligence of the defendant. CERCLA § 101(35), 42 U.S.C. § 9601(35), ELR STAT. 44008.

22. CERCLA § 107(l), 42 U.S.C. § 9607(l), ELR STAT. 44029.

23. Id.; see Atkeson, et al., An Annotated Legislative History of the Superfund Amendments and Reauthorization Act of 1986 (SARA), 16 ELR 10360, 10409-10 (Dec. 1986).

24. See Albert J. Grosser Co. v. Rosen, 436 Pa. 311, 317, 259 A.2d 679, 681 (1969) (generally, a sheriff's sale discharges lien for which sale was ordered and all subsequent junior liens).

25. See Petition of City of Pittsburgh, 376 Pa. 447, 451, 103 A.2d 721, 723 (1954) (generally, a judicial sale of real estate divests all prior and subsequent liens on the property sold, unless such liens are preserved by statute).

26. 11 U.S.C. § 363(f); see In re Stroud Wholesale, Inc., 47 Bankr. 999 (Bankr. E.D.N.C. 1985) (discussing when a bankruptcy court may authorize a sale of property free and clear of liens).

27. See Burcat, supra note 6, at 509.

28. Id. at 528-31.

29. Id. at 532-33.

30. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. 44024. Where a bank has already taken title to a property through foreclosure, it is an owner pursuant to CERCLA. Burcat, supra note 6, at 536.

31. Pub. L. No. 99-499, 100 Stat. 1613.

32. An exception exists for the "environmental tax" imposed on all medium and large corporations. SARA, Pub. L. No. 99-499, § 516, 100 Stat. 1770 (amending scattered sections of 26 U.S.C.).

33. Wickland Oil Terminals v. ASARCO, Inc., 792 F.2d 887, 890, 16 ELR 20754, 20755 (9th Cir. 1986).

34. Jones v. Inmont Corp., 584 F. Supp. 1425, 1430, 14 ELR 20485, 20486 (S.D. Ohio 1984).

35. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. 44024.

36. See Brown, Superfund National Contingency Plan: How Dirty is "Dirty"? How Clean is "Clean"?, 12 ECOLOGY L.Q. 89 (1984) (Superfund cleanups will not require responsible parties to return site to a completely "clean" condition).