21 ELR 10464 | Environmental Law Reporter | copyright © 1991 | All rights reserved

The Law of Environmental Lender Liability

Editors' Summary: The principle of environmental lender liability holds that in certain instances a creditor may be found liable for damages to the environment caused by his debtor. Despite the simplicity of this definition, the application of this principle has proven to be very complex. Courts that have addressed environmental lender liability issues have not agreed on what a creditor must do to become liable. In CERCLA litigation, environmental lender liability has had a major impact on the lending industry, making it virtually impossible in many industries to obtain a loan without paying for an environmental audit and agreeing to numerous conditions. The author surveys the current state of the law of environmental lender liability and examines legislative and regulatory proposals addressing this form of liability. The author also examines common law lender liability and concludes that, in order to make some sense of environmental lender liability, courts, litigants, and commentators should approach environmental lender liability cases from the perspective of common law lender liability.

The authors are all associated with the law firm of Kirkpatrick & Lockhart. Mr. Burcat, Ms. Shorey, and Mr. Chadwell are located in the Harrisburg, Pennsylvania, office, and Mr. O'Connell is located in the Pittsburgh, Pennsylvania, office. The views expressed in this Article are the authors' and should not be attributed to any of the law firm's clients.

[21 ELR 10464]

The principle of environmental lender liability holds that in certain instances a creditor may be found liable for damages to the environment caused by his debtor. The creditor may be a secured creditor, a lender, a mortgagee, a judgment creditor, or a factor. The debtor may be the current or former owner of an environmentally contaminated facility, the generator of hazardous substances, or a transporter of such substances. What connects the creditor to the environmental damage at a particular facility is a mortgage, a judgment, a security agreement, or some other indicia of ownership of the collateral and some degree of management of the facility by the creditor. Courts that have utilized this principle have not agreed on what a creditor must do to become liable; however, there is general agreement that the creditor must have taken — or failed to take — some action relating to the environmental damage.¹

The principle of environmental lender liability did not exist prior to 1980. It arose from the enactment of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund).² The first court opinion to specifically address environmental lender liability was issued in 1984.³ Subsequent decisions of a number of U.S. District Courts and two Circuit Courts have transformed the original theory into a significant reality, resulting in profound changes to the lending industry and to parties involved in disputes over the cleanup of environmentally contaminated sites. The cost of resolving the environmental damage may run from thousands of dollars to millions of dollars.⁴ In many instances, [21 ELR 10465] the cost of cleaning up the contamination far exceeds the value of the collateral.⁵

Banks, businesses, and government take this new form of liability very seriously. Environmental lender liability has changed the secondary mortgage market.⁶ In many industries, it is virtually impossible to obtain a loan without paying for an environmental audit and agreeing to numerous conditions to protect the lender. The American Bankers Association estimates that "75 percent of all banks have changed their lending practices to businesses, such as gasoline stations, because of potential environmental hazards…."⁷ Not surprisingly, new legislation and administrative regulations have been proposed to deal with this problem.

No articles were written on environmental lender liability prior to 1986. This is not surprising, as few cases had been decided utilizing environmental lender liability as a theory of liability. In a few cases, government agencies brought environmental actions against creditors; however, those cases were not based on environmental lender liability theories.⁸ Today, virtually every environmental law and professional banking journal includes articles on this subject.⁹ The Wall Street Journal lets hardly a week go by without commenting on some aspect of environmental lender liability.¹⁰ This Article discusses the origin of environmental lender liability, its current status, and its future.

General Background

Environmental lender liability was first applied in cases interpreting CERCLA.¹¹ Thus, to understand environmental lender liability, the relevant language and liability mechanisms of CERCLA must be analyzed.

CERCLA establishes four categories of persons, known as "responsible persons," who may be held responsible for the cost of cleaning up environmentally contaminated sites.¹² These categories include the current owners and operators of the site, the owners and operators of the site when hazardous substances were disposed of there, the generators of hazardous waste disposed of at the site, and the persons who transported hazardous waste to the site.¹³ Under CERCLA, the government or a private party is permitted to recover from responsible persons certain costs incurred in responding to releases or threats of releases of hazardous substances from such sites.¹⁴

CERCLA grants creditors a special exception from liability, known as the "security interest exemption."¹⁵ The security interest exemption to the definition of owner or operator establishes the parameters of environmental lender liability under CERCLA. That definition provides that "[the] term ['owner or operator'] 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."¹⁶ Because a lender that holds such indicia of ownership and participates in the management of such facility is potentially liable under CERCLA, environmental lender liability litigation has focused on what constitutes such participation in management.

Ironically, a provision that seems to exempt some creditors from liability suggested to the courts and some litigants that creditors could be held liable for environmental damages caused by their debtors. Subsequent court decisions [21 ELR 10466] have solidified the theory of environmental liability of creditors.¹⁷

Apart from the exemption for secured creditors, CERCLA contains three separate defenses to liability.¹⁸ These provide responsible parties with statutory defenses to liability for acts of God, acts of war, and the acts of third parties (third-party defense). These defenses were used infrequently during the early years of the Act.¹⁹

In 1986, Congress amended CERCLA by enacting the Superfund Amendments and Reauthorization Act of 1986 (SARA).²⁰ SARA did not change the language of the security interest exemption, but it did add additional, and very stringent, requirements for establishing the third-party defense.²¹ To obtain the benefit of this defense, a defendant is required to prove that the contamination was caused by a third party who did not have a "contractual relationship" with the defendant,²² that the defendant exercised due care with respect to the hazardous substances, and that the defendant took precautions against foreseeable acts or omissions of the third party.²³ If the contamination occurred before the defendant owned the property and the defendant had a contractual relationship with the third party who caused the contamination, the defendant must establish that he did not know and had no reason to know of the contamination at the time he acquired the facility.²⁴ Proof that the defendant had no knowledge of the contamination includes evidence of an "appropriate inquiry,"²⁵ which may include an environmental audit.²⁶

The Key Environmental Lender Liability Cases

There are six federal cases that must be discussed to understand the current status of environmental lender liability under CERCLA. They are (1) United States v. Mirabile,²⁷ (2) United States v. Maryland Bank & Trust Co.,²⁸ (3) [21 ELR 10467] Guidice v. BFG Electroplating & Mfg. Co.,²⁹ (4) United States v. Fleet Factors Corp. ("Fleet Factors I"),³⁰ (5) United States v. Fleet Factors Corp. (" Fleet Factors II,"³¹ and (6) United States v. The East Asiatic Co., Ltd. (In re Bergsoe Metal Corp.).³² Because most state statutes dealing with hazardous waste cleanup are based on CERCLA, these cases also impact on liability under state statutes.

These cases primarily address the security interest exemption to the definition of "owner or operator" in section 101(20)(A) of CERCLA.³³ They focus on the availability of the exemption to a lender and the actions constituting participation in the management of the facility that exclude a lender who would otherwise qualify for the exemption. Of these cases, Mirabile and Fleet Factors II are perhaps the most important, as they contain two different tests for determining what activities exclude a lender from the exemption. The tests are based on different interpretations of the purpose of the security interest exemption.

United States v. Mirabile³⁴

Mirabile was the first significant environmental lender liability case. It was also the first case to address the issue of what constitutes participation in the management of a facility resulting in loss of the security interest exemption.

In Mirabile, the United States brought suit against the current owners of a contaminated site, the Mirabiles, to recover cleanup costs incurred there. Three lenders were joined as third-party defendants. The court granted summary judgment in favor of two of the lenders, American Bank & Trust Co. (American Bank) and the Small Business Administration (SBA), but denied summary judgment for the third lender, Mellon Bank.

The previous owner of the site operated a paint manufacturing business there and was allegedly one of the parties responsible for the hazardous wastes that were the subject of the cleanup.³⁵ The lenders provided financing to the previous owner, for which they received security interests in either the realty or the personalty at the site.

American Bank held a first mortgage on the realty on which it foreclosed after operations at the site ceased. American Bank successfully bid on the property at the foreclosure sale but assigned its successful bid to the Mirabiles prior to the issuance of the sheriff's deed and within four months of the sheriff's sale. Between the time of the sale and the assignment of its bid, American Bank "secured the building against vandalism by boarding up windows and changing locks, made inquiries as to the approximate cost of disposal of various drums located on the property, and … visited the property on various occasions for the purpose of showing it to prospective purchasers."³⁶

The SBA had a second mortgage on the property, a second lien on inventory and accounts receivable, and a pledge of the previous owner's stock. The loan documents entitled representatives of the SBA to provide management assistance to the previous owner and to approve the execution of contracts for management consulting services. There was no evidence that the SBA did either. During the time assets were being liquidated, the SBA visited the site three times "to monitor" the liquidation. The loan documents also placed financial restrictions on the previous owner.³⁷

Mellon Bank's predecessor, Girard Bank (Girard) had a security interest in the assets and inventory of the previous owner of the site. A loan officer of Girard served on an advisory board that was established to oversee the previous owner's business operations at the site. While the previous owner was under the jurisdiction of the Bankruptcy Court, Girard, with the consent of American Bank and the court, disposed of inventory through private sales and a public auction.³⁸

While the court did not rule out the possibility that there might be situations where a lender's involvement in the financial aspects of management might constitute participation in management that would remove a lender from the ambit of the security interest exemption, the court stated that a lender "must, at a minimum, participate in the day-to-day operational aspects of the site."³⁹ The court noted that, although the imposition of liability on lenders would "enhance the government's chances of recovering its cleanup costs" and might "help ensure more responsible management of such sites," "[t]he consideration of such policy matters, and the decision as to the imposition of such liability, however, lies with Congress."⁴⁰ The test the court applied to the activities and alleged activities of each lender to determine whether summary judgment was appropriate was whether such activities constituted participation in the day-to-day operational aspects of the site.

The court found that American Bank's foreclosure on the site, after operations had ceased, was "an effort to protect its security interest in the property," and that American Bank's post-foreclosure activities were "prudent and routine steps to secure the property against further depreciation."⁴¹ The court held that none of American Bank's actions constituted participation in the facility's day-to-day operations.

The court found that the SBA was not involved in day-to-day operational decisions at the site, although the SBA's loan documents would have permitted such involvement. In considering the financial restrictions in the loan agreement and the claim that such restrictions "may have failed to prevent [the previous owner] from disposing of alleged hazardous substances on the site," the court held that "nothing in the language of the statute or the case law under it [21 ELR 10468] … suggests that a lender must ensure that its loan proceeds are applied to clean up costs."⁴²

By contrast, the court found that Girard's loan officer, a member of the previous owner's advisory board, might have become involved in the day-to-day operations at the facility.⁴³ The court held that deposition testimony that Girard "demanded 'additional sales efforts be made and whatnot,'" that Girard's attorney told the previous owner it would have to accept day-to-day supervision by a specific individual, and that Girard's loan officer "came to the site frequently and insisted on certain manufacturing changes and reassignment of personnel"⁴⁴ might lead to a finding that Girard undertook activities constituting participation in day-to-day operations. However, the court noted that deposition testimony of Girard's loan officer that he was involved in "monitoring the cash collateral accounts, ensuring that receivables went to the proper account, and establishing a reporting system between the company and the bank," was the "sort of activity [that] would not give rise to CERCLA liability."⁴⁵

United States v. Maryland Bank & Trust Co.⁴⁶

The United States brought suit against Maryland Bank & Trust Co. (Maryland Bank) for cleanup costs incurred at a site owned by the bank. Maryland Bank obtained title to the site after foreclosing on the mortgage it held on the site and purchasing the site at the foreclosure sale. EPA cleaned up hazardous waste at the site after Maryland Bank refused to do so.

Maryland Bank moved for summary judgment, arguing that it was protected from liability under CERCLA by the security interest exemption. The bank cited Mirabile. The court denied the bank's motion, holding that "[t]he exclusion does not apply to former mortgagees currently holding title after purchasing the property at a foreclosure sale, at least when, as here, the former mortgagee has held title for nearly four years, and a full year before the EPA cleanup."⁴⁷ In light of the extended period of time that the bank had owned the site, the court declined to consider whether "a secured party which purchased the property at a foreclosure sale and then promptly resold it would be precluded from asserting the section 101(20)(A) exemption."⁴⁸

The court's decision was not based on a determination that Maryland Bank had participated in the management of the facility so as to exclude it from the exemption. Rather, it was based on the conclusion that the security interest exemption was not available to a mortgagee once it foreclosed and purchased the property. The court concluded that Congress intended the exemption to protect mortgagees in those states where a mortgagee is considered to hold title to the mortgaged property during the term of the mortgage.⁴⁹ The court explained that "[Maryland Bank] purchased the property at the foreclosure sale not to protect its security interest, but to protect its investment."⁵⁰

The court in Maryland Bank & Trust Co. also discussed the third-party defense in CERCLA § 107(b)(3)⁵¹ and the possibility that Maryland Bank may have been entitled to that defense.⁵² Interestingly, the third-party defense was not discussed in Mirabile.

The Maryland Bank & Trust Co. decision appears to be carefully written so as not to appear to conflict with the treatment of American Bank in Mirabile. In Maryland Bank & Trust Co., the court twice points out the factual distinctions between American Bank's foreclosure and the almost immediate assignment of the property in Mirabile, on the one hand, and Maryland Bank's retention of the property in Maryland Bank, on the other. The court further limited its opinion by stating that it was "not consider[ing] the issue of whether a secured party which purchased the property at a foreclosure sale and then promptly resold it would be precluded from asserting the section 101(20)(A) exemption."⁵³ Despite the court's attempt to distinguish these holdings, Maryland Bank casts doubt on the availability of the security interest exemption to a mortgagee that forecloses on real estate. However, the decision does not detract from the Mirabile test of liability based on a security holder's participation in the day-to-day operations of a facility.

Guidice v. BFG Electroplating & Mfg. Co.⁵⁴

In October 1986, residents of the Borough of Punxsutawney, Pennsylvania, sued BFG Electroplating & Mfg. Co. (BFG) for, among other things, response costs under CERCLA. BFG joined as third-party defendants the current and former owners of property (the Berlin property) adjacent to BFG's electroplating plant, on which metal polishing operations had been conducted. One of the third-party defendants named was the National Bank of the Commonwealth, which held a mortgage on the Berlin property for a number of years prior to foreclosing on the property in 1981 and [21 ELR 10469] purchasing the property at a foreclosure sale in 1982. The bank sold the property eight months after purchasing it. The bank moved for summary judgment, claiming that it had no liability under CERCLA.

The issue addressed by the court was whether the bank, as an owner or operator of the Berlin Property at the time hazardous waste was disposed of there, was potentially responsible for cleanup costs.⁵⁵ The court divided this issue into two parts: liability prior to foreclosure and liability after foreclosure. The court concluded that the bank was not liable under CERCLA prior to foreclosure and purchase of the site, because the bank qualified for the security interest exemption. However, the court concluded the bank was not protected by the exemption after foreclosure.

Citing Mirabile, the court ruled that "prior to foreclosure, a mortgagee is exempt from CERCLA liability under 42 U.S.C. § 9601(20)(A) so long as the mortgagee did not participate in the managerial and operational aspects of the facility."⁵⁶ According to the court, the question was "whether the Bank had passed the point of protecting its security interest and was participating in the management or control of Berlin Metals."⁵⁷ The court concluded that, prior to foreclosure, the bank had not passed this point.

The court held that the activities of the bank prior to foreclosure did not void the security interest exemption. The bank held a mortgage on the Berlin property from October 1975 to April 1982, when it foreclosed on the property. During that time, the bank issued several additional loans and lines of credit secured by additional mortgages on the Berlin facility or Berlin Metals' accounts receivable. The bank received periodic financial statements. After Berlin Metals defaulted on its loans, the bank met with Berlin officials, who informed the bank of the status of Berlin accounts, personnel changes, and the presence of raw materials. Bank officials subsequently assisted Berlin in its application for an SBA loan. The bank initiated communications with the Pennsylvania Department of Environmental Resources and Borough officials to assist Berlin with wastewater discharge compliance. After operations at the Berlin Property ceased, a bank agent visited the property and reported the results of his inspection to the bank. The bank and the property's owners, the Runcos, held a series of meetings on restructuring Berlin Metals' loans. The bank also referred a potential lessee to the attorney representing the Runcos. In January 1982, the bank and the Runcos agreed that the bank would provide financing if Columba Runco purchased the property at a subsequent foreclosure sale.

The court concluded that there was no evidence that the bank controlled "operational, production, or waste disposal activities" at the site. The court held that "[t]he actions of the Bank prior to its purchase of the Berlin Property at the foreclosure sale were prudent measures undertaken to protect its security interest in the property."⁵⁸ The court added that

[t]here are policy reasons for exemption of secured creditors in the Bank's position from CERCLA liability prior to the secured creditor's purchase of the property at foreclosure. A goal of CERCLA is safe handling and disposal of hazardous waste. To encourage banks to monitor a debtor's use of security property, a high liability threshold will enhance the dual purposes of protection of the banks' investments and promoting CERCLA's policy goals. Conversely, a low liability standard would encourage a lender to terminate its association with a financially troubled debtor and expedite loan payments in an effort to recover the debts.⁵⁹

The court then turned to the bank's activities after it foreclosed and purchased the property. The court contrasted the approaches taken by the Mirabile and the Maryland Bank & Trust courts:

The Mirabile court found that regardless of the nature of title [that the first lender] received, the actions after foreclosure were undertaken merely to protect its security interest in the property and did not constitute an attempt to participate in the management of the site…. The Maryland Bank & Trust court held that when a mortgagee becomes an owner of the property, the security interest exemption is lost.⁶⁰

The court concluded that, with respect to mortgagees that foreclose on secured property, the Maryland Bank & Trust decision was correct. The court explained its reasoning as follows:

We find the concern expressed in Maryland Bank & Trust, that an exemption for landowning lenders would create a special class of otherwise liable landowners, and the failure of the 1986 amendments to specifically exempt mortgagees-turned-landowners persuasive. When a lender is the successful purchaser at a foreclosure sale, the lender should be liable to the same extent as any other bidder at the sale would have been.⁶¹

United States v. Fleet Factors Corp. (Fleet Factors I)⁶²

The United States brought suit against Fleet Factors to recover response costs incurred in removing toxic substances from a former cloth printing facility. Fleet Factors had provided financing to the owner/operator of the facility. The government claimed that Fleet Factors was an owner/operator of the site responsible for cleanup costs by virtue of its activities there.

Fleet Factors had obtained a security interest in the facility's equipment, inventory, and fixtures, and a mortgage on the realty as collateral for loans made to the facility's owner/operator. The owner/operator of the facility filed a Chapter 11 bankruptcy petition in 1979. Fleet Factors continued its financing arrangement with the owner/operator until just prior to February 1981, when operations at the plant ceased. Fleet Factors never foreclosed on the real property. However, after obtaining bankruptcy court approval, Fleet Factors did foreclose on some of the inventory and equipment. Fleet Factors engaged a liquidation company to conduct a public auction and arranged with another [21 ELR 10470] company, Nix Riggers, to remove those items of equipment not sold at the auction and to leave the premises in "broom clean" condition.

Fleet Factors argued that it was not liable under CERCLA as an owner/operator of the site, because it qualified for the security interest exemption. The United States argued that Fleet Factors was not entitled to the exemption, because its activities at the site constituted participation in the management of the facility.

The court divided the issue of Fleet Factors' liability into two parts: liability before Fleet Factors engaged the auctioneer and liability after it engaged the auctioneer.⁶³ It described the test that it applied to determine whether Fleet Factors was protected by the security interest exemption as follows:

I interpret the phrases 'participating in the management of a … facility' and 'primarily to protect his security interest,' to permit secured creditors to provide financial assistance and general, and even isolated instances of specific, management advice to its debtors without risking CERCLA liability if the secured creditor does not participate in the day-to-day management of the business or facility either before or after the business ceases operation.⁶⁴

The court concluded, as a matter of law, that Fleet Factors' activities prior to engaging the auctioneer did not constitute participation in the management sufficient to impose CERCLA liability.⁶⁵ However, the court held that the actions that Fleet Factors and its agents allegedly took after engaging the auctioneer could constitute participation in the management of the facility.

The government had alleged that the auctioneer moved the barrels that allegedly contained hazardous substances before the auctioneer conducted the public auction. The government had further alleged that the auctioneer auctioned some, but not all, of the machinery and equipment and permitted the purchasers to remove the equipment and machinery that they had purchased. The government had asserted that, after the auction, Fleet Factors signed a document that permitted Nix Riggers to have access to the facility for 180 days and to remove any remaining machinery and equipment that was neither sold at the auction nor removed by the purchaser. The government had further asserted that friable asbestos was knocked loose from the pipes connected to the machinery and equipment either by Nix or by persons purchasing the equipment at the auction. Finally, the government had maintained that the condition of the chemicals and the asbestos in the facility after the auctioneer, Nix, and the purchasers concluded their business constituted an immediate risk to public health and the environment for which it incurred response costs.⁶⁶

Concluding that a genuine issue of material fact existed, the district court denied the cross motions for summary judgment. In order to resolve the significant legal issue that existed, the district court certified the matter for an immediate appeal to the circuit court.

United States v. Fleet Factors Corp. (Fleet Factors II)⁶⁷

Fleet Factors II arose from an appeal of the district court's decision in Fleet Factors I. In rendering its opinion in Fleet Factors II, the Eleventh Circuit became the first appellate court to interpret the security interest exemption. In its opinion, the court expressly rejected the Mirabile test and held that a lender would be held liable as an owner of a contaminated site if it participated in the financial management of its debtor and could influence decisions relating to hazardous waste.⁶⁸ The Eleventh Circuit's opinion is controversial and has raised great concern within the lending community as a result of the apparent extension of environmental lender liability to lenders in numeroussituations.⁶⁹

The Fleet Factors II court described its test for lender liability as follows:

It is not necessary for the secured creditor actually to involve itself in the day-to-day operations of the facility in order to be liable — although such conduct will certainly lead to the loss of the protection of the statutory exemption. Nor is it necessary for the secured creditor to participate in management decisions relating to hazardous waste. Rather, a secured creditor will be liable if its involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions if it so chose.⁷⁰

The court rejected the district court's determination that the alleged activities of Fleet Factors prior to engaging the auctioneer did not constitute participation in management sufficient to impose CERCLA liability on the lender.⁷¹ The appellate court found that the following facts, if proven, were sufficient to constitute participation in the management of the facility:

Fleet required SPW [the owner/operator of the facility] to seek its approval before shipping its goods to customers, established the price for excess inventory, dictated when and to whom the finished goods should be shipped, determined when employees should be laid off, supervised the activity of the office administrator at the site, received and processed SPW's employment and tax forms, controlled access to the facility, and contracted with Baldwin [the auctioneer] to dispose of the fixtures and equipment at SPW.⁷²

[21 ELR 10471]

However, the court agreed with the district court that Fleet Factors' alleged activities after engagement of the auctioneer were sufficient to establish participation in the management of the site's owner/operator.⁷³

The Eleventh Circuit described generally the activities it found permissible. It said:

Nothing in our discussion should preclude a secured creditor from monitoring any aspect of a debtor's business. Likewise, a secured creditor can become involved in occasional and discrete financial decisions relating to the protection of its security interest without incurring liability.⁷⁴

The only alleged activities of Fleet Factors that the court found to be within the secured creditor exemption were advancing funds to the owner/operator of the site with owner/operator's accounts receivable as security, paying and arranging for security deposits for owner/operator's utility services, and informing the owner/operator that Fleet Factors would not advance more money after Fleet Factors determined that its advances exceeded the value of the owner/operator's accounts receivable.⁷⁵

Anticipating that its decision would be scrutinized, the court explained its rationale as follows:

Our ruling today should encourage potential creditors to investigate thoroughly the waste treatment systems and policies of potential debtors. If the treatment systems seem inadequate, the risk of CERCLA liability will be weighed into the terms of the loan agreement. Creditors, therefore, will incur no greater risk than they bargained for and debtors, aware that inadequate hazardous waste treatment will have a significant adverse impact on their loan terms, will have powerful incentives to improve their handling of hazardous wastes.

Similarly, creditors' awareness that they are potentially liable under CERCLA will encourage them to monitor the hazardous waste treatment systems and policies of their debtors and insist upon compliance with acceptable treatment standards as a prerequisite to continued and future financial support…. Once a secured creditor's involvement with a facility becomes sufficiently broad that it can anticipate losing its exemption from CERCLA liability, it will have a strong incentive to address hazardous waste problems at the facility rather than studiously avoiding the investigation and amelioration of the hazard.⁷⁶

The court noted that Fleet Factors's alleged activities could establish operator liability under CERCLA, making it unnecessary to determine whether Fleet Factors' participation in facility management established owner liability.⁷⁷ As a result, the court's test to determine participation in management sufficient to exclude a lender from the secured interest exemption and its explanation of that test are, arguably, dicta.⁷⁸

United States v. The East Asiatic Co., Ltd. (In re Bergsoe Metal Corp.)⁷⁹

In 1979, Bergsoe Metals Corporation bought 50 acres of land from the Port of St. Helens (Port), a municipal Oregon corporation. In 1981, Bergsoe built a lead recycling facility on the land. The Port and a bank financed the project through interlocking financial transactions. The Port's name was on the deed to the land.

Shortly after being built, the facility began to experience financial difficulty. In 1983, the bank declared a default. A workout agreement was negotiated among the bank, the Port, and Bergsoe. It provided for another entity to operate the facility. However, the plant's performance did not improve, and the plant ceased operations in 1986. The bank subsequently put Bergsoe into involuntary Chapter 11 bankruptcy.

By the time of the bankruptcy, it was determined that the plant site was contaminated with hazardous substances. In 1987, the bank and the bankruptcy trustee sued Bergsoe's owners and for reimbursement of cleanup costs. The owners joined the Port as a third-party defendant and counterclaimed against the bank, asserting that the Port and the bank were liable for cleanup costs under CERCLA. The Port moved for summary judgment on the basis that it did not own the facility. The district court granted the motion. On appeal, the Ninth Circuit affirmed.

The Ninth Circuit concluded that the Port held indicia of ownership in the facility primarily to protect a security interest, thereby qualifying it for the security interest exemption. On the issue of participation in the management of a facility sufficient to exclude a party from the exemption, the court stated:

We leave for another day the establishment of a Ninth Circuit rule on this difficult issue. It is clear from the statute that, whatever the precise parameters of 'participation,' there must be some actual management of the facility before a secured creditor will fall outside the exception. Here there was none, and we therefore need not engage in line drawing.⁸⁰

The owners of the facility claimed that the Port participated in the management of the facility, because of its rights under the leases, such as the right to inspect the premises and to reenter and take possession upon foreclosure and because it allegedly "negotiated and encouraged" the building of the Bergsoe plant.⁸¹ The court noted that these were normal secured creditor activities and typical rights of secured creditors. The court stated, "If this were 'management,' no secured creditor would ever be protected."⁸² The court held that reservation of rights does not put a secured creditor "in a position of management."⁸³ "What is critical is not what rights the Port had, but what it did."⁸⁴

[21 ELR 10472]

The owners of the facility also claimed that the Port participated in management of the facility because of its involvement in the workout agreement that resulted in another entity being placed in control of the plant. The court noted that no evidence was offered that the Port participated in any of the negotiations resulting in that entity being placed in control. The court criticized the owner's argument that the bank acted as the Port's agent when the bank placed another entity in control of the facility. The court stated:

This assertion is belied by the terms of the mortgage and indentures of trust between the Port and the Bank, wherein the Port assigns to the Bank 'all right, title and interest of the [Port] in the Lease[s].' … Thus, to the extent the Bank was attempting to enforce the lease terms, it did so pursuant to its own rights under the leases. More to the point, it was not the leases that the Bank was worried about, but the bonds. As trustee for the bondholders, the Bank had a duty to try to keep the plant running so that Bergsoe could pay the principal and interest under the bonds. In negotiating the workout, the Bank was acting not as the Port's agent but as the bondholders'.⁸⁵

The Current State of the Law

As the preceding discussion illustrates, a lender holding indicia of ownership to protect a security interest may lose the protection of the security interest exemption if it exercises rights under its loan documents to influence the operation of the facility. The Mirabile test for participation sufficient to exclude a lender from the exemption requires activities constituting actual involvement in the day-to-day operations of the facility. The Fleet Factors II test is broader. It prohibits a lender wishing to avoid CERCLA liability from exercising most of its reserved rights when a loan is in default.

As a result of the Maryland Bank and Guidice decisions, a lender holding a mortgage on real property must carefully evaluate the property for environmental concerns before foreclosing on it. After foreclosure, the lender will probably not be entitled to the security interest exemption. If the lender purchases the property, it may assert the third-party defense. However, this defense requires the lender to establish lack of a "contractual relationship" and due diligence prior to purchase.

The Eleventh Circuit is the only appellate court to have interpreted the security interest exemption and developed a test for applying it. The Ninth Circuit declined to do so when offered the opportunity. If proven, the activities alleged in Fleet Factors appear to constitute participation in the management of the facility even under traditional lender liability principles. The activities alleged in In re Bergsoe should not have constituted participation in the management of a facility even under the Fleet Factors II test.

At best, the case law on environmental lender liability offers examples of specific conduct that courts have determined constitute participation in the management of a facility sufficient to exclude a lender from the security interest exemption. The case law cannot be construed as defining the limits of CERCLA lender liability until more appellate courts, or the United States Supreme Court, have addressed this issue.⁸⁶

CERCLA and the Law of Lender Liability

Statutory Construction

The judicial opinions dealing with lender liability under CERCLA have not addressed the lender liability standards that existed prior to the enactment of CERCLA. The U.S. Supreme Court has established rules of statutory construction that favor retaining such standards.⁸⁷ Courts have established that changes in common-law standards affected by statute must be clearly evidenced in the language of the statute and legislative history.⁸⁸

[21 ELR 10473]

In Midlantic National Bank v. New Jersey Department of Environmental Protection,⁸⁹ the U.S. Supreme Court applied this rule of statutory construction in a case involving bankruptcy and environmental law. A bankruptcy trustee sought to abandon an environmentally hazardous property in contravention of New Jersey state statutes and regulations. Holding that the trustee did not have the right to abandon the property, the court stated that "when Congress enacted § 554 [of the Bankruptcy Code], there were well-recognized restrictions on a trustee's abandonment power…. The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific."⁹⁰

In Tarlton v. Saxbe,⁹¹ the U.S. Court of Appeals for the District of Columbia Circuit applied this rule of statutory construction to a case involving an individual's attempt to expunge inaccurate information from his Federal Bureau of Investigation (FBI) criminal file. The court examined the statute that provides the FBI with the authorization for the maintenance of criminal records,⁹² and noted that, if the FBI did have the authority to collect and disseminate inaccurate information, the FBI would in effect have the authority to libel individuals. The court concluded that it could not "absent the clearest statement of Congressional policy, impute to Congress an intent to authorize the FBI to damage the reputation of innocent individuals in contravention of settled common law principles."⁹³

In St. Paul Fire and Marine Insurance Co. v. Cox,⁹⁴ the U.S. District Court for the Northern District of Alabama applied this rule of statutory construction in a case involving whether a pension fund established under the federal Employee Retirement Income Security Act of 1974 (ERISA)⁹⁵ could be invaded pursuant to a garnishment proceeding under Alabama state law. The court stated that "[t]he common law is the foundation upon which the laws of the state of Alabama have been constructed. When called upon to declare the legal effect and meaning of a legislative or Congressional enactment, the courts must read the statute in light of the common law."⁹⁶

There is no language in CERCLA that indicates that Congress intended to "enter and abrogate" the existing common law of lender liability.⁹⁷ It has been said over and over again that because CERCLA's legislative history is scant, Congress intended for the courts to develop common law that would further define the meaning of the concepts found in CERCLA.⁹⁸ There is no indication, however, that Congress intended to change the well-established, existing common law of lender liability. Therefore, the concept of lender liability should be defined in a manner consistent with established common law principles, not in a manner at odds with those principles.

Based on the rules of statutory construction, no clear evidence exists that Congress intended to alter the common-law standards of lender liability. Neither CERCLA nor its legislative history contains any specific reference to a congressional intent to alter these standards. In fact, if anything, the legislative history supports the view that Congress recognized that a creditor must have a control relationship with a debtor before CERCLA liability can be imposed on the creditor.

Although scant and vague, the legislative history of CERCLA's definition of "owner or operator"⁹⁹ suggests that an "owner" must possess some evidence of ownership other than a security interest.¹⁰⁰ Likewise, an "owner" may not hold legal title in all instances. The report of the House of Representatives Committee on Merchant Marine and Fisheries on an early draft of CERCLA stated:

"Owner" is defined to include not only those persons who hold title to a vessel or facility but those who, in the absence of holding a title,possess some equivalent evidence of ownership. It does not include certain persons possessing indicia ofownership (such as a financial institution) who, without participating in the management or operation of a vessel or facility, hold title either in order to secure a loan or in connection with a lease financing arrangement under the appropriate banking laws, rules, or regulations.¹⁰¹

The committee further stated that "a financial institution which held title primarily to secure a loan but also received tax benefits as a result of holding title would not be an 'owner' as long as it did not participate in the management [21 ELR 10474] or operation of the vessel or facility."¹⁰² However, the legislative history contains no specific discussion of the phrase "participation in the management of the facility."

The legislative history suggests that an "operator" must be totally responsible for the operation of the facility. The House of Representatives Committee on Merchant Marine and Fisheries Committee Report stated:

Operators of vessels do not include those individuals who are not totally responsible for the operation of a vessel. To fall within the definition, the individual must have assumed the full range of operational responsibility. For example, a pilot might be in charge of navigation of a vessel for a short duration, yet he does not meet the definition of "operator," since he neither mans nor supplies the vessel. In the case of a facility, an "operator" is defined to be a person who is carrying out operational functions for the owner of the facility pursuant to an appropriate agreement.¹⁰³

The language of these statements is similar to that used by courts in describing liability under the debtor-creditor instrumentality theory.¹⁰⁴ The instrumentality theory and the other common law and statutory concepts of lender liability all require that a lender holding a security interest in a facility must exert a high degree of actual control over the management of that facility in order to be held liable for acts and omissions in the operation of the facility.

The legislative history suggests that Congress did not intend to abrogate the existing body of lender liability law. If anything, the legislative history suggests that Congress specifically incorporated this body of law into the security interest exemption. Consequently, this Article examines the current status of traditional lender liability law.

An Overview of the Law of Lender Liability

This section surveys some of the more common theories of lender liability that have gained acceptance through statutes or court decisions. The relevance of these theories in establishing the limits of lender liability under CERCLA is supported by the principle that, where cases decided under the statute in question do not provide direct guidance on the proper result to be reached, "a court may look for guidance to the analogies that may appear under other statutes…."¹⁰⁵ This section does not provide a complete list of lender liability theories, and the following discussion of representative theories is not exhaustive.¹⁰⁶

The term "lender liability" includes many statutory provisions and common law theories under which a creditor can, as a result of its relationship with its debtor, become liable for damages to the debtor, the debtor's bankruptcy estate or creditors, or other third parties.¹⁰⁷ In lender liability cases, damages may be awarded well in excess of the amount of the loan to the borrower. They may include punitive damages, damages for the borrower's lost business opportunities, and damages for the harm to other creditors resulting from the creditor's conduct.¹⁰⁸ Many lender liability theories share common elements. Most notable among them are the concepts of a creditor's "control" of its debtor and the implied obligation of good faith in the creditor's dealings with its debtor. Perhaps the most common theme of these theories is targeting the creditor's "deep pockets," especially where no other source of recovery is available.

Control of Debtor's Management or Operations. A creditor who becomes too involved in the management or day-to-day operations of its debtor risks adverse consequences under a number of theories.¹⁰⁹ This concept of lender control is central to liability for environmental costs.

Every prudent creditor will include provisions in its loan documents that, on their face, grant the creditor the ability to influence the borrower's conduct or grant the creditor access to the borrower's operations and financial management to a degree not enjoyed by other creditors. For example, such provisions may entitle a lender to review the borrower's business plans and financial statements and inspect collateral to verify its existence and condition. Such provisions may also include negative covenants that limit the borrower's ability to take action prejudicing the value of the collateral or the prospects of repayment.¹¹⁰ Such activities are part of the proper administration and monitoring of a creditor's loan relationship. However, liability may result if the lender goes beyond these activities and manipulates the borrower in order to gain an advantage over other creditors.

An example of inordinate lender control occurred in In re American Lumber Co.¹¹¹ In that case, a bank held a security interest in the accounts receivable of its borrower, American Lumber Co. When American Lumber defaulted on its loan to the bank, the bank foreclosed on its security interest, so that payments from American Lumber's account debtors were paid directly to the bank. The borrower's employees were fired, and security guards were hired and directed by the bank to limit access to American Lumber's [21 ELR 10475] property.¹¹² A small staff remained to conduct a liquidation, controlled and funded by the bank, in order to maximize recovery on the accounts receivable.¹¹³ In a subsequent bankruptcy proceeding, the bank's claims were subordinated to the claims of all other creditors. The court held that the bank's conduct had prejudiced other creditors.¹¹⁴

In Krivo Industrial Supply Co. v. National Distillers and Chemical Corp.,¹¹⁵ the Fifth Circuit explored the "instrumentality" theory. The court held that a lending corporation may be held liable for the acts and omissions of a debtor corporation if the lender's involvement with the debtor amounts to active management of the debtor's affairs.¹¹⁶ Under the "instrumentality" theory, there must be "a strong showing that the creditor assumed actual, participatory, total control of the debtor. Merely taking an active part in the management of the debtor corporation does not automatically constitute control, as used in the instrumentality doctrine, by the creditor corporation."¹¹⁷ The court concluded that "the control required for liability under the 'instrumentality' rule amounts to total domination of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation."¹¹⁸

Lender liability for improper control may arise in a variety of contexts. It may arise in cases involving corporate governance, as when a lender improperly coerces a borrower's board of directors to change management policies,¹¹⁹ or it may arise in cases involving agency and alter ego theories.¹²⁰ Recently, liability based on unlawful acquisition of control or collection of an unlawful debt has become a common allegation in cases under the Racketeer Influenced and Corrupt Organizations Act.¹²¹ Control concepts may also apply when a lender is alleged to have had a role in a borrower's violation of federal or state securities law, either by aiding and abetting the borrower's primary violation,¹²² or by controlling a borrower who violates the securities laws.¹²³ Likewise, such control concepts have arisen in non-CERCLA environmental cases.¹²⁴

Liability Under the Bankruptcy Code. When proceedings under the Bankruptcy Code¹²⁵ are commenced by or against a debtor, the creditor often faces a loss of part or all of its debt. Those losses can be dramatic if the creditor runs afoul of certain provisions of the Bankruptcy Code designed to protect the debtor's bankruptcy estate and the interests of other creditors. Three representative examples are summarized below.

a. Fraudulent Conveyances. Both the Bankruptcy Code¹²⁶ and state law applicable to bankruptcy cases¹²⁷ provide for the invalidation of liens granted as security to lenders by insolvent borrowers who receive less than a reasonably equivalent value in exchange for these liens.¹²⁸ Fraudulent [21 ELR 10476] conveyance actions are becoming a popular tool of bankruptcy trustees and other creditors as the number of failed leveraged buyouts (LBOs) increases. In one typical LBO structure, an acquiring company pledges the target company's assets as security for the loan that the acquiring company obtains to make the acquisition. If the loan cannot be repaid from the target company's earnings and a bankruptcy results, the lender's liens are subject to attack because no direct benefit to the target company resulted from the loan to the acquiring company.¹²⁹

Mortgage foreclosure sales, even if "noncollusive," may also be subject to attack under fraudulent conveyance law if the lender purchases the property from an insolvent borrower for a price (usually the amount of the debt) less than the "reasonably equivalent value" of the property.¹³⁰ Once the foreclosure sale is avoided, the property transferred or the value of the debtor's equity in the property can be recovered from the lender.¹³¹

b. Preferences and Insider Status. Under the Bankruptcy Code, a transfer of a debtor's property to a creditor can be avoided if it is made on account of antecedent debt while the debtor is insolvent and the transfer permits the creditor to obtain more than the creditor would have received in a liquidation proceeding had no transfer occurred.¹³² Transfers that occur within 90 days prior to the bankruptcy filing can be avoided this way. If the creditor is an "insider" of the debtor, transfers within one year prior to the filing can be avoided.¹³³ Insiders include directors, officers, and shareholders of the debtor, as well as any other entity that is "in control" of the debtor.¹³⁴

"Lender liability" also arises under the Bankruptcy Code's preference provisions. Creditors who receive payment on the eve of bankruptcy are not entitled to profit from their improved position to the detriment of unpaid creditors. They are liable for the value of a preferential transfer regardless of whether they had an intent to gain an advantage over other creditors. Similarly, in some cases involving environmental response costs, a lender's "fault" may not be a prerequisite for liability.¹³⁵

c. Equitable Subordination. The doctrine of equitable subordination, which is relevant only in bankruptcy cases, empowers the bankruptcy court to subordinate a creditor's claim to those of other creditors or to invalidate the creditor's liens under equitable principles when justified by conduct resulting in an unfair advantage to the creditor or in prejudice to the debtor or other creditors.¹³⁶ Such conduct could include control over the borrower (which resulted in equitable subordination as the remedy in American Lumber)¹³⁷ or fraudulent misrepresentations to other creditors to induce them to ship goods to the debtor.¹³⁸ Although the creditor in an equitable subordination case is not liable for damages, the practical effect of equitable subordination leaves the secured creditor, who formerly enjoyed a senior position, with a large loan loss, because there are insufficient funds in the borrower's bankruptcy estate to pay unsecured creditors.¹³⁹

The Implied Covenant of Good Faith and Other Contract Law Principles. Creditors have been taught by courts and juries that they are no different from any other party to a contract and thus have a duty when entering into loan documents to act in good faith towards their borrowers. This principle is not new,¹⁴⁰ but only in the past ten years has it become commonplace to see large verdicts rendered against lenders who act precipitously in a loan relationship. While there is no single definition of a lender's "good faith," many of the cases have involved a lender's abuse of broad discretion granted by theloan documents over the borrower's activities.

K.M.C. Co. v. Irving Trust Co.¹⁴¹ is perhaps the leading example of a lender liability verdict based on straightforward contract law principles. In that case, the loan agreement provided that Irving Trust would make loans in its discretion in an aggregate amount not to exceed $ 3,500,000 and limited by a formula based upon K.M.C.'s eligible inventory and accounts receivable.¹⁴² All of K.M.C.'s accounts receivable were paid into a lockbox under the lender's control, and Irving Trust made loan advances each day based on the amount necessary to honor checks presented to the lender that day for payment from K.M.C.'s operating account.¹⁴³ On one day, K.M.C. required $ 800,000 to cover its checks, an amount within the applicable formula limits. Nevertheless, because Irving Trust's loan officer was dissatisfied with K.M.C.'s management, he relied on the "discretionary advance" clause and notified K.M.C. that [21 ELR 10477] the advance for that day would not be made.¹⁴⁴ Even though financing resumed a few days later, the business effects of the $ 700,000 of bounced checks due to Irving Trust's refusal to lend eventually forced K.M.C. into liquidation.¹⁴⁵

K.M.C. successfully asserted in its suit against Irving Trust that the duty of good faith required Irving Trust to give K.M.C. reasonable notice before terminating financing.¹⁴⁶ In its defense, Irving Trust asserted that the discretionary advance clause gave it a unilateral right to determine whether the lending relationship would continue.¹⁴⁷ As a result of the $ 7,500,000 verdict rendered against Irving Trust,¹⁴⁸ lenders now, as a matter of policy, require loan officers to send written notices that further loans will not be made and allow their borrowers a reasonable time (i.e., 30 to 90 days) in which to obtain alternative financing before that decision takes effect.¹⁴⁹

The duty to act in good faith and to honor the contract terms agreed to by the borrower applies from the commitment letter and loan negotiation stage, through closing and the administration of the loan, to a subsequent "workout" if the borrower is unable to meet its loan obligations. Because of the contractual relationship between the lender and the borrower, many cases involving lender liability for bad faith address contract interpretation questions concerning the existence, or breach, of a contract to lend money.

In pre-closing cases, lawsuits arise from differences of opinion on whether the bank committed to extend a loan.¹⁵⁰ After closing, lenders sometimes attempt to back out of loan commitments. The lender may have discovered adverse information after closing, and the loan commitment may contain inadequate contingency language. Troubles may have arisen within the bank, such as an inability to obtain other lenders to participate in the loan and thus share the lending risk.¹⁵¹ Following closing, a lender may damage a borrower by failing to make an advance called for by the loan documents. Construction company borrowers are especially vulnerable, because the success of a construction project often depends on the lender's advancing funds as scheduled to pay contractors and other creditors.¹⁵² In the troubled loan context, many liability cases have attacked the manner in which the lender realizes on its collateral to obtain repayment.¹⁵³ Simply put, the lender at each phase of its loan relationship must act reasonably toward its borrower and avoid taking precipitous actions except when clearly justified under the circumstances.

Tort Law Theories of Lender Liability. The application of tort law in lender liability cases seems limited only by the imagination of plaintiffs' lawyers and the ill-advised conduct of lenders. For example, every lender liability case rests in some respect on an allegation that the lender has deceived the borrower and/or other creditors. Thus, many cases are brought based specifically on fraudulent misrepresentation,¹⁵⁴ negligent misrepresentation,¹⁵⁵ or constructive fraud¹⁵⁶ theories. Allegations that a lender owes a fiduciary duty to its borrower or to other creditors are also common. Actions seeking to impose specific obligations on a lender, such as an obligation to disclose accurate credit information in response to an inquiry concerning a borrower,¹⁵⁷ have met with more success than actions alleging lender liability based on a "special relationship" between a lender and its customer, whether based on the borrower's [21 ELR 10478] lack of sophistication or the long-standing relationship of trust between lender and borrower.¹⁵⁸ Other tort cases run the gamut from defamation¹⁵⁹ to infliction of emotional distress.¹⁶⁰

Statutory Construction Principles as Applied to Lender Liability Under CERCLA

Nothing in the common law or statutes enacted prior to CERCLA suggests that a lender may be held liable for merely participating in the financial management of its debtor and merely having the power to influence the debtor's decisions. CERCLA does not clearly evince a congressional intent to change the common law on this point.¹⁶¹ In this regard, the Eleventh Circuit's reasoning in Fleet Factors II appears to be faulty.¹⁶² Lenders should only be held liable under CERCLA if their control would have made them liable under the common law and statutes that existed when CERCLA was enacted.¹⁶³

Congressional and Regulatory Alternatives to the Status Quo

As a result of cases such as Mirabile and Fleet Factors II, the lending industry has lobbied Congress for protective legislation. Bills have been introduced in Congress over the past year that would protect lenders foreclosing on property from liability under CERCLA. Representative John J. LaFalce (D-N.Y.) introduced a bill in the House of Representatives,¹⁶⁴ and Senator Jake Garn (R-Utah) introduced a bill in the Senate.¹⁶⁵

The LaFalce bill would amend CERCLA § 101(20)(D),¹⁶⁶ which contains exclusions to the definition of "owner or operator," by adding provisions protecting lenders that acquire ownership or control of a facility pursuant to the terms of a security interest. The bill would also protect certain lenders that acquire ownership of facilities in connection with leases regulated by governmental banking authorities.

The Garn bill would add a new subtitle to the Federal Deposit Insurance Act.¹⁶⁷ This subtitle would exempt insured depository institutions and mortgage lenders from liability

under any law imposing strict liability for the release, threatened release, storage or disposal of hazardous or potentially dangerous substances from property —

(1) acquired through foreclosure;

(2) held in a fiduciary capacity; or

(3) held, controlled or managed pursuant to the terms of an extension of credit.¹⁶⁸

The bill would also exempt from such liability the Federal Deposit Insurance Corp. (FDIC), the Resolution Trust Corporation, the Board of Governors of the Federal Reserve System, any Federal Reserve Bank, the Federal Housing Finance Board and any Federal Home Loan Bank, the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, and the Farm Credit Administration.

Under the Garn bill, those exempted from liability would lose their exemptions if they (1) caused the release or threatened release or disposal of hazardous material resulting in a removal, remedial, or similar action, or (2) had knowledge that a hazardous substance was on the property [21 ELR 10479] and did not take reasonable action to prevent its release or threatened release. In addition, insured depository institutions and mortgage lenders would not be permitted to benefit from any cleanup action.

These bills are supported by the American Bankers Association (Bankers Association). The Bankers Association has been represented as taking the position that without a change in the current law. "Major segments of the business community, particularly small business, will be unable to get financing on environmentally risky property … because most small businesses put their property up as collateral, and if banks risk CERCLA liability through foreclosure, they aren't going to make loans on that basis."¹⁶⁹

The bills are opposed by the Natural Resources Defense Council (NRDC) and the Chemical Manufacturers Association. The NRDC has been reported as opposing any legislative amendment of CERCLA, because it "would risk opening ever greater holes in Superfund's liability net, as more and more groups sought exemptions in their particular circumstances."¹⁷⁰ The Chemical Manufacturers Association opposes the legislation, because it would allegedly give "preferential treatment to lending institutions."¹⁷¹ A group of major environmental organizations also opposes the proposed statutes saying that such lender liability provisions could "create a new generation of Love Canals by encouraging loans to polluting businesses."¹⁷²

The Bush administration is opposed to both the LaFalce and Garn bills.¹⁷³ The administration "would be open to a narrow legislative solution," if EPA efforts to resolve the lender liability issue fail.¹⁷⁴ As an alternative, the administration supports the issuance by EPA of administrative regulations to deal with this situation.¹⁷⁵

If promulgated, EPA's proposedrule might provide lenders with some of the protection they seek through legislation, but this is not certain. The problem in relying on EPA's "administrative fix" is a legal one. Courts are not required to follow an agency's interpretation of a statute's meaning.¹⁷⁶ In fact, if judicial reliance on prior EPA interpretations of CERCLA is any indication, courts may not feel obligated to even consider EPA's interpretation.¹⁷⁷

EPA's proposed rulemaking, while considered "a 'positive first step'" has not been embraced by secured lenders.¹⁷⁸ "The banking industry still believes that legislation is necessary because the proposed EPA rule offers no protection from suits by third parties."¹⁷⁹ As previously noted, there is also no guarantee that the courts will uphold EPA's interpretation should the rule be promulgated.¹⁸⁰ At press time, EPA was in the process of redrafting the proposed rule in response to numerous comments received from both private entities and government agencies.¹⁸¹

Conclusion

This Article began with a simple definition of environmental lender liability. Environmental lender liability is simply a legal principle holding that in certain instances a creditor may be held liable for damage to the environment caused by his debtor. However, despite this simple definition, it should now be clear that environmental lender liability is a complex, multi-faceted topic.

In order to make some sense of this evolving area of the law, courts, litigants, and commentators should analyze cases involvingenvironmental lender liability from the perspective of common law lender liability. The common law principles of lender liability, even as they evolve, have been ingrained in our legal system for generations and are well understood and accepted. The analysis of environmental lender liability should include consideration of the underlying environmental problems and the relevant environmental laws; however, this should be only part of the analysis. Well-accepted principles of stare decisis and precedent should permit creditors, regulated parties, government, and private parties to use the existing, well-established body of case law on traditional lender liability to anticipate and litigate environmental lender liability cases.

By considering environmental lender liability cases solely from the perspective of environmental laws, without reference to principles of common law lender liability, courts subject creditors to extreme uncertainty in making loans and stifle the credit market. As the environmental lender liability cases discussed in this Article demonstrate, courts analyzing environmental lender liability cases only from the perspective of environmental laws have been required to create law out of whole cloth. This has forced parties to speculate wildly on the next mutation in the development of environmental lender liability.¹⁸²

[21 ELR 10480]

The public policy benefits, alleged by some courts to justify such "judicial legislation," are highly speculative. It is doubtful that the courts' attempt to make creditors "police" the environmental activities of their debtors will appreciably reduce environmental contamination. Banks and other creditors are ill-equipped to carry out this function, which clearly belongs to the government. Borrowers, be they large corporations or homeowners, would not tolerate the kind of intrusiveness into their private affairs that would be necessary in order to accomplish this form of private regulation.

It is hoped that a common sense view of environmental lender liability will prevail and that the courts will allow parties to sort out their potential liabilities on the basis of well-established legal principles. The alternative is a chaotic case-by-case and jurisdiction-by-jurisdiction analysis of the law.

1. Articles discussing environmental lender liability include: Burcat & Shorey, Lender Liability Under Pennsylvania Environmental Law, 28 DUQ. L. REV. 413 (1990); Dominick and Harmon, Lender Limbo: The Perils of Environmental Lender Liability, 41 S.C.L. REV. 855 (1990); Marzulla and Kappel, Lender Liability Under the Comprehensive Environmental Response, Compensation and Liability Act, 41 S.C.L. REV. 705 (1990); Geiser, Federal and State Environmental Law: A Trap for the Unwary Lender, 1988 B.Y.U. L. REV. 643; Burcat, Environmental Liability of Creditors: Open Season on Banks, Creditors and Other Deep Pockets, 103 BANKING L.J. 509 (1986); Comment, Interpreting the Meaning of Lender Management Under Section 101(20)A of CERCLA, 98 YALE L.J. 925 (1989); Comment, The Liability of Financial Institutions for Hazardous Waste Cleanup Costs Under CERCLA, 1988 WIS. L. REV. 239. For an excellent survey of the topic of general lender liability, see Note, The Doctrine of Lender Liability, 40 U. FLA. L. REV. 165 (1988).

2. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 007-075. For general discussions of recovery of environmental cleanup costs by the government under CERCLA see Annotation, Governmental Recovery of Cost of Hazardous Waste Removal Under Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. §§ 9601 et seq.), 70 A.L.R. Fed. 329 (1984); Note, Misery Loves Company: Spreading the Costs of CERCLA Cleanup, 42 VAND. L. REV. 1469 (1989).

3. United States v. Mirabile, No. 84-2280, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985).

4. See Klotz & Siakotos, Lender Liability Under Federal and State Environmental Law: Of Deep Pockets, Debt Defeat and Deadbeats, 92 COMM. L.J. 275, 275-76 (1987).

5. See Burcat, Foreclosure and United States v. Maryland Bank & Trust Co.: Paying the Piper or Learning How to Dance to a New Tune?, 17 ELR 10098 (1987).

6. An unforseen irony is that banks have become reluctant to approve mortgages for decontaminated homesin the Love Canal, New York, area "because the secondary market has said they might not purchase the mortgages and mortgage insurers have refused to provide private mortgage insurance." Silverman, Love Canal: Financing the Resettlement, 5 TOXICS L. REP. 957, 958 (1991).

7. Bankers Seeking to Limit Liabilities at Toxic Waste Sites, The Pittsburgh Press, Sept. 4, 1990, at D4, col. 1.

8. See Ford Motor Credit Co. v. S.E. Barnhart & Sons, 664 F.2d 377 (3d Cir. 1981); Associates Commercial Corp. v. DER, 1979 Pa. Envtl. Hearing Bd. 158.

9. The vast majority of these discussions deal with lender liability as it attaches to security interests in real estate. For a discussion of liability under CERCLA where a lender has lent funds to a lessee of real estate see Feder, The Undefined Parameters of Lessee Liability Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA): A Trap for the Unwary Lender, 19 ENVTL. L. 257 (1988). For a discussion of the possibility that lender liability could arise where a lender holds a security interest in personal property, see Pennsylvania Environmental Agency Protects Lender Foreclosing on Equipment, Secured Lending Alert, May 1990 at 8, which discusses the Pennsylvania Environmental Hearing Board's Opinion in Pennbank v. Commonwealth of Pennsylvania, Department of Environmental Resources, 9 U.C.C. Rep. 2d 772 (Pa. Envtl. Hearing Bd. 1989).

10. See, e.g., Toman, Environmental Worries Slow Loans to Small Businesses: Concerned About Liability for Cleanups, Banks Shun Many Borrowers, Wall St. J., Oct. 4, 1990, at B2, col. 2; Superfund Whacks the Banks, Wall St. J., Aug. 28, 1990, at A10, col 3.

11. Environmental lender liability is not restricted to cases arising from CERCLA. A recent district court opinion demonstrates that environmental lender liability is a theory that is limited only by the imaginations of litigants. In O'Neil v. Q.L.C.R.I., Inc., 750 F. Supp. 551 (D.R.I. 1990), the district court refused to dismiss a claim against a lender for "aiding and abetting" a party accused of violating the Federal Water Pollution Control Act (FWPCA), FWPCA § 505, 33 U.S.C. § 1365, ELR STAT. FWPCA 062. With respect to the aiding and abetting counts, the court ruled that the plaintiff had "alleged sufficient involvement and possible control on the part of [the lender] to present a viable claim of aiding and abetting." O'Neil v. Q.L.C.R.I. 750 F. Supp. at 555. The plaintiff also claimed that a cause of action existed against the lender, arising from the mere possibility that the lender would foreclose on the mortgaged — and contaminated — property. The court ruled, however, that such a claim did not present a justiciable case or controversy and dismissed counts from the complaint on that issue. Id. at 554.

Although mostly unsuccessful, state environmental agencies have attempted to hold lenders responsible under theories other than those of traditional "lender liability." Such attempts have been made pursuant to very specific state statutes and regulations. See Ford Motor Credit Co. v. S.E. Barnhart & Sons, 664 F.2d 377 (3d Cir. 1981) (Ford Motor Credit Co. could not be prevented from repossessing equipment at a strip mining site until reclamation work was completed); Pennbank v. DER, No. 88-281-M (Pa. Envtl. Hearing Bd. Feb. 15, 1989) (unsuccessful attempt by Pennsylvania Department of Environmental Resources (DER) to order a secured lender to plug oil and gas wells); Associates Commercial Corp. v. DER, 1979 Pa. Envtl. Hearing Bd. 158 (DER could not prohibit Associates Commercial Corp. from repossessing equipment located at surface mining operations).

12. 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024.

13. Id.

14. Id.

15. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

16. Id. (emphasis added).

17. In re Bergsoe Metal Corp., 910 F.2d 668, 20 ELR 21229 (9th Cir. 1990); United States v. Fleet Factors Corp., 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991); Guidice v. BFG Electroplating & Mfg. Co., 732 F. Supp. 556, 20 ELR 20439 (W.D.Pa.1989); United States v. Nicolet, Inc., 712 F. Supp.1193, 19 ELR 21192 (E.D. Pa. 1989); Coastal Casting Serv., Inc. v. Aron, No. H-86-4463 (S.D. Tex. Apr. 8, 1988); United States v. Fleet Factors Corp., 724 F. Supp. 955, 19 ELR 20529 (S.D. Ga. 1988), aff'd, 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991); United States v. Maryland Bank & Trust Co., 632 F. Supp. 573, 16 ELR 20557 (D. Md.1986); United States v. Mirabile, 15 ELR 20994 (E.D. Pa. 1985). See Polger v. Republic Nat'l Bank, 709 F. Supp. 204, 19 ELR 20938 (D. Col. 1989) (bank's motion to dismiss CERCLA claim granted in part, no reference made to security interest exemption); see also Silresim Site Trust v. State St. Bank & Trust Co., No. 88-1324-K (D. Mass.) (motion for summary judgment filed by customers of hazardous waste site against bank that allegedly was in control of facility) reported in 5 TOXICS L. REP. 1050 (Jan. 23, 1991).

18. 42 U.S.C. § 9607(b), ELR STAT. CERCLA 025.

19. See New York v. Shore Realty Corp., 759 F.2d 1032, 1049, 15 ELR 20358, 20366 (2d Cir. 1985) (third-party defense dismissed by court).

20. Pub. L. No. 99-499, 100 Stat. 1613 (1986). For an in-depth examination of SARA and its effect on the lending industry see Comment, The Impact of the 1986 Superfund Amendments and Reauthorization Act on the Commercial Lending Industry: A Critical Assessment, 41 U. MIAMI L. REV. 879 (1987).

21. 42 U.S.C. §§ 9601(35) and 9607(b), ELR STAT. CERCLA 009 and 025. See Marcus, The Price of Innocence: Landowner Liability Under CERCLA and SARA, 6 TEMP. ENVTL. L. & TECH. J. 117 (1987).

22. It should be noted that EPA is currently attempting to take the "contractual relationship" definition and turn it into the basis for relief from liability for creditors through their recently proposed regulation. EPA Draft Proposal Defining Lender Liability Issues Under the Secured Creditor Exemption of CERCLA (Sept. 14, 1990), 21 ENV'T REP. (BNA) (Oct. 11, 1990). EPA is already providing limited relief to prospective purchasers of some contaminated properties by offering covenants not to sue. Concerns About Waste Liability, Superfund Receive Bulk of Attention at ABA Conference, 21 ENV'T REP. (BNA) 791. Prospective purchasers who wish to seek a covenant not to sue from EPA should "'make the agency an offer it can't refuse' in proposing to participate in the cleanup of a site." Id. at 792.

23. 42 U.S.C. § 9607(b), ELR STAT. CERCLA 025.

24. 42 U.S.C. § 9601(35)(A), ELR STAT. CERCLA 009. An individual claimant may be entitled to the defense if he can establish that he acquired the facility by inheritance. A governmental claimant may escape liability if it establishes that it acquired the facility through escheat, involuntary transfer, or eminent domain. Id.

25. The full text of the CERCLA provision requiring an appropriate inquiry takes into consideration the relative level of sophistication of the claimant:

To establish that the defendant had no reason to know, as provided in clause (i) of subparagraph (A) of this paragraph, the defendant must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability. For purposes of the preceding sentence the court shall take into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property, and the ability to detect such contamination by appropriate inspection.

42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 010.

26. Environmental audits are the best way to protect against unforeseen liability. Such audits, however, are expensive and fallible. See BCW Assoc., Ltd. v. Occidental Chem. Corp., No. 86-5947 (E.D. Pa. Sept. 30, 1988) (plaintiff and former owners not entitled to assert third-party defense even though two environmental audits had been conducted that failed to show the presence of hazardous lead). Creditors, purchasers of real estate, and lessors may find added protection through the use of indemnification agreements, representations and warranties contained in loan documents, agreements to allocate cleanup costs, escrowing funds, and other means. See Davidson, Environmental Considerations in Loan Documentation, 106 BANKING L.J. 308 (1989); Burcat, Environmental Liability of Creditors under Superfund (with Forms), PRAC. LAW., Mar. 1987, at 13, 19-23; D.L. Rome, Business Workouts Manual § 5.08, at 5-19 - 5-20 and supp. at 55-2 (1985 & Supp. 1990). Environmental audits "should be welcomed by buyer, seller and financiers and used to guide the final terms and conditions of a deal," according to George Whitmer, head of the Pittsburgh Urban Redevelopment Authority. Spice, Investors Urged to Use Contaminated Land, Pittsburgh Post-Gazette, Oct. 3, 1990, at B-1.

For a full discussion of environmental audits and general environmental assessments see Karlssen, Understanding Environmental Site Asessments, BANKERS MAG., Nov./Dec. 1990, at 42-27; Lenders: Beware of Environmental Risks, LEGAL INTELLIGENCER, Oct. 25, 1990 at 4; Kuno, Screening Real Estate for Environmental Problems, J. COM. BANK LENDING, July 1990, at 4-12.

For a discussion of a variety of safeguards for lenders against hazardous waste liability, including environmental audits, insurance, and warranties and representations see Note, Viable Protection Mechanisms for Lenders Against Hazardous Waste Liability, 18 HOFSTRA L. REV. 89 (1989). For comprehensive discussions of protective measures lenders can use to safeguard against general lender liability and environmental lender liability, see Chaitman, The Ten Commandments for Avoiding Lender Liability, 22 U.C.C.L.J. 3 (1989); King, Lender Liability for Cleanup Costs, 18 ENVTL. L. 241 (1988).

27. No. 84-2280, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985.

28. 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986).

29. 732 F. Supp. 556, 20 ELR 20439 (W.D. Pa. 1989).

30. 724 F. Supp. 955, 19 ELR 20529 (S.D. Ga. 1988), aff'd, 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

31. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

32. 910 F.2d 668, 20 ELR 21229 (9th Cir. 1990).

33. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

34. No. 84-2280, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985).

35. The underlying facts surrounding ownership at the site and the conditions at the site that resulted in cleanup are set forth in United States v. Mirabile, No. 84-2280, 15 ELR 20992 (E.D. Pa. Sept. 4, 1985).

36. 15 ELR at 20996.

37. Id.

38. Id.

39. Id.

40. Id.

41. Id.

42. Id. In United States v. The East Asiatic Co., Ltd. (In re Bergsoe Metal Corp.), 910 F.2d 668, 673 n.3, 20 ELR 21229, 21231 n.3 (9th Cir. 1990), the court agreed that "[m]erely having the power to get involved in management, but failing to exercise it, is not enough" to confer liability.

43. The court dismissed the argument that Girard should have provided "sufficient financial resources to allow the officers of [the previous owner] to properly dispose of the waste." 15 ELR at 20996. The court stated, "No authority is cited to support the proposition that a lender has an affirmative obligation to advance funds specifically for the purpose of hazardous waste cleanup." Id.

44. Id.

45. Id.

46. 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986).

47. Id. at 579, 16 ELR at 20559 (footnote omitted).

48. Id. at 579 n.5, 16 ELR at 20559 n.5.

49. 632 F. Supp. at 579, 16 ELR at 20559. A minority of commentators have agreed with the district court's position that the security interest exemption was designed to protect mortgagees in title theory mortgage states so that they would not be placed in a worse position than mortgagees in lien theory mortgage states. See, Note, Cleaning up the Debris After Fleet Factors: Lender Liability and CERCLA's Security Interest Exemption, 104 HARV. L. REV. 1249 (1991); Burkhart, CERCLA Lender/Owner Liability, 25 HARV. J. ON LEGIS. 317 (1988). No language in CERCLA and none of CERCLA's legislative history supports this position. In fact, the Chief of EPA's Lender Liability Rule Workgroup has recently taken the position that the security interest exemption was designed to provide "substantial protection" for all lenders. Fogarty, The Legal Case Against Lender Liability, 21 ELR 10243 (1991).

50. 632 F. Supp. at 579, 16 ELR at 20559.

51. 42 U.S.C. § 9607(b)(3), ELR STAT. CERCLA 025.

52. 632 F. Supp. at 581-82, 16 ELR at 20563.

53. Id. at 579 n.5, 16 ELR at 20559 n.5.

54. 732 F. Supp. 556, 20 ELR 20439 (W.D. Pa. 1989).

55. Id. at 561, 20 ELR at 20440.

56. Id.

57. Id.

58. Id. at 562, 20 ELR at 20441.

59. Id. at 561-62, 20 ELR at 20441 (citations omitted, footnote omitted).

60. Id. at 563, 20 ELR 20441 (citation omitted).

61. Id.

62. 724 F. Supp. 955, 19 ELR 20529 (S.D. Ga. 1988), aff'd, 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

63. 724 F. Supp. at 960-61, 19 ELR at 20533.

64. Id. at 960, 19 ELR at 20533 (emphasis in original).

65. Id. at 960, 19 ELR at 20533.

66. Id. at 960-61, 19 ELR at 20533-34.

67. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

68. Id. at 1557-58, 20 ELR at 20837. Curiously, Judge Newcomer, the judge in Mirabile, has recently observed that "[t]he 'nuts-and-bolts' management standard used in Mirabile was cited with approval in [Fleet Factors II]." FMC Corp. v. United States Department of Commerce, 20 ELR 21403, 21405 n.6 (E.D. Pa. 1990). This statement directly conflicts with the language of Fleet Factors II rejecting Mirabile: "We, therefore, specifically reject the formulation of the secured creditor exemption suggested by the district court in Mirabile." Fleet Factors II, 901 F.2d at 1558, 20 ELR at 20835-36.

69. An enormous number of legal journals and law report services have published articles warning lenders of the consequences of the Eleventh Circuit's opinion in Fleet Factors II. At least one commentator has argued, however, that the concern over the opinion in Fleet Factors II is overblown and that the opinion is a part of "a generally uniform approach" that has been adopted by courts examining the security interest exemption. Fogarty, supra note 49, at 10244.

70. 901 F.2d at 1557-58, 20 ELR at 20835 (footnotes omitted).

71. Id. at 1559, 20 ELR at 20836.

72. Id.

73. Id. at 1559-60, 20 ELR at 20836.

74. Id. at 1558, 20 ELR at 20836.

75. Id. at 1559, 20 ELR at 20836.

76. Id. at 1158-59, 20 ELR at 20836 (citations omitted). For a discussion of possible fallacies in the court's reasoning see Bolstein and Reznick, Lender Liability After Fleet Factors, ENVTL. L. (ABA), Fall 1990 at 1, 3-4.

77. 901 F.2d at 1156 n.6, 20 ELR at 20835 n.6.

78. For an analysis of Fleet Factors II including the possibility that the "capacity standard" may be dicta, see Bolstein and Reznick, supra note 76, at 1, 3 and Hathaway, Bergsoe Metal Case Helps Clarify Problematic Fleet Decision, Real Estate Finance Today, Aug. 24, 1990, at 2, col. 1.

79. 910 F.2d 668, 20 ELR 21229 (9th Cir. 1990).

80. 910 F.2d at 672, 20 ELR at 21229 (emphasis in original).

81. Id. at 672, 20 ELR at 21229.

82. Id.

83. Id.

84. Id.

85. Id. at 673, 20 ELR at 21229 (citation omitted). For other discussions of the Bergsoe opinion, see Rodenhausen, Secured Creditor Exemption Basis for Second Court Ruling, HAZARDOUS WASTE & TOXIC TORTS L. STRATEGY, Nov. 1990, at 1; "Owner" Under CERCLA; Security Interest Exception, 20 CHEMICAL WASTE LIT. REP. 767 (1990); Ninth Circuit Limits CERCLA Owner Liability, LENDER LIABILITY L. REP., Oct. 1990, at 1.

86. Fleet Factors filed a petition for certiorari to the Supreme Court following the ruling of the Court of Appeals. 59 U.S.L.W. 3278 (U.S. Sept. 21, 1990) (No. 90-504). The petition urged review "because of the disruption to 'normal and prudent commercial practices' caused by the decision below." Fleet Factors Files in Supreme Court, Says Ruling Disrupts Commercial Lending, 5 TOXICS L. REP. 588 (1990). Fleet Factors Corporation asserted in its petition that the Supreme Court should review Fleet Factors II to resolve a conflict in the circuits.

The American College of Real Estate Lawyers submitted a friend of the court brief supporting Fleet Factors' petition. The brief stated that Fleet Factors II "deprives most lenders of the ability to rely on a statutory exemption to avoid liability for environmental cleanup costs." Trade Groups Urge Review of Ruling in Fleet Factors, LENDER LIABILITY NEWS, Nov. 14, 1990, at 3; see also, Widespread Impact, 'Havoc' Argued by Amici Supporting 'Fleet Factors' Review, 5 TOX. L. REP. 713 (1990).

The American Bankers Association and the California Bankers Association also submitted a brief in support of the petition in which the groups stated that "review was necessary to undo the havoc Fleet Factors [II] has wreaked on 'commercial practice and the relationship between secured creditors and their borrowers.'" Id.

For a full text of the amicus briefs filed by the American College of Real Estate Lawyers and the New England Legal Foundation see INSIDE EPA'S SUPERFUND REPORT, Nov. 7, 1990, at 11-22. The petition for certiorari was denied on January 14, 1991, by the Supreme Court, 111 S. Ct. 752 (1991).

87. "Statutes which invade the common law … are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident." Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952). See also Midlantic Nat'l Bank v. New Jersey Dep't of Environmental Protection, 474 U.S. 494, 16 ELR 20278 (1986); United States v. Cox, 593 F.2d 46, 49 (6th Cir. 1979); United States v. Monasterski, 567 F.2d 677 (6th Cir. 1977); Williams v. American Broadcasting Companies, Inc., 96 F.R.D. 658, 665 (W.D. Ark. 1983). See generally SUTHERLAND STATUTORY CONSTRUCTION §§ 50.04-05. Further, the U.S. Supreme Court has recently stated that "[a] party contending that legislative action changed settled law has the burden of showing that the legislature intended such a change." Green Bock Laundry Machine Co., U.S. , 109 S. Ct. 1981, 1991, 104 L. Ed. 2d 557, 572 (1989).

88. See generally United States v. Bowman, 358 F.2d 421, 423 (3d Cir. 1966); Carpel v. Saget Studios, Inc., 326 F. Supp. 1331, 1333 (E.D. Pa. 1971). In United States v. Tilleraas, 709 F.2d 1088 (6th Cir. 1983), the U.S. Court of Appeals for the Sixth Circuit stated that "[c]hanges in or abrogation of the law must be clearly expressed by the legislature…. Even where such an intention is explicit, the scope of the common law will be altered no further than is necessary to give effect to the language of the statute." In IUE AFL-CIO Pension Fund v. Baker & Williamson, Inc., 788 F.2d 118 (3d Cir. 1986), the Third Circuit espoused a rule of statutory construction that is particularly germane to defining the limits of lender liability under CERCLA. The court stated that it was necessary to borrow from traditional common law to develop the necessary federal common law for interpreting federal statutory language. Id. at 124-25.

89. 474 U.S. 494, 16 ELR 20278 (1986). For a full discussion of the Midlantic National Bank case see Note, Developments in the Law — Toxic Waste Litigation, 99 HARV. L. REV. 1458, 1585-1601 (1986); Note, Creditors' Rights when Federal Bankruptcy Laws Conflict with State Environmental Agency Enforcement Powers After Midlantic National Bank, 48 U. PITT. L. REV. 879 (1987); Comment, Bankruptcy Trustee's Abandonment of Burdensome Estate Property and State Environmental Protection Laws: Midlantic Bank v. New Jersey Department of Environmental Protection, 55 U. CIN. L. REV. 853 (1987); Comment, Midlantic National Bank: The Supreme Court Abandons Creditors, 40 U. MIAMI L. REV. 1299 (1986).

90. 474 U.S. at 501, 16 ELR at 20280.

91. 507 F.2d 1116 (D.C. Cir. 1974).

92. 28 U.S.C. § 534.

93. 507 F.2d at 1222-23.

94. 583 F. Supp. 1221 (N.D. Ala. 1984).

95. 29 U.S.C. § 1001 et seq.

96. St. Paul Fire and Marine Insurance Co., 583 F. Supp. at 1227.

97. Id.

98. Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 18 ELR 21026 (3d Cir. 1988); see also United States v. Kayser-Roth Corp., 724 F. Supp. 15, 20 ELR 20349 (D.R.I. 1989), aff'd, 910 F.2d 24, 20 ELR 21462 (1st Cir. 1990).

99. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

100. See Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 91, 18 ELR 21026, 21029 (3d Cir. 1988) ("It is not surprising that, as a hastily conceived and briefly debated piece of legislation, CERCLA failed to address many important issues…. The meager legislative history available indicates that Congress expected the courts to develop a federal common law to supplement the statute.") Philadelphia v. Stepan Chem. Co., 544 F. Supp. 1135, 1142, 12 ELR 20915, 20917 (E.D. Pa. 1982) (CERCLA "is vague and its legislative history indefinite").

101. 2 CERCLA LEGISLATIVE HISTORY 546 (emphasis added); see United States v. Maryland Bank & Trust Co., 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986). CERCLA defines "facility" as:

(A) any building, structure, installation, equipment pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located; but does not include any consumer product in consumer use or any vessel.

42 U.S.C. § 9601(9), ELR STAT. CERCLA 007.

102. H.R. REP. NO. 172, 96th Cong. 2d Sess., at 36, reprinted in 1980 U.S. CODE CONG. & ADMIN. NEWS 6181.

103. Id. (emphasis added).

104. See Krivo v. Industrial Supply Co. v. National Distillers and Chemical Corp., 483 F.2d 1098, 1108-1111 (5th Cir. 1973), modified and petition for reh'g denied, 490 F.2d 916 (5th Cir. 1974).

105. Morici Corp. v. United States, 491 F. Supp. 466, 480-81 (E.D. Cal. 1980).

106. More thorough treatments of the entire field can be found in H. CHAITMAN, THE LAW OF LENDER LIABILITY (1990), and Note, The Doctrine of Lender Liability, 40 U. FLA. L. REV. 165 (1988).

107. Not all "lender liability" cases involve damage payments to third parties. In many situations, the end result is that the lender is unable to recover the full amount of its loan due to the loan being deemed unsecured instead of secured, or junior to the claims of other creditors.

108. See, e.g., K.M.C. Co. v. Irving Trust Co., 757 F.2d 752 (6th Cir. 1985) ($ 7,500,000) judgment, including $ 6,000,000 punitive damages award, resulted from lender's refusal to advance under a $ 3,500,000 line of credit); State Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. App. 1984) (approximately $ 19 million was awarded to the borrower as a result of the lenders' conduct in a $ 22,000,000 loan transaction).

109. See generally Lundgren, Liability of a Creditor in a Control Relationship With Its Debtor, 67 MARQ. L. REV. 523 (1984).

110. Typical loan document provisions include those that restrict additional indebtedness, additional liens, mergers, or changes in control, and sales of assets outside the ordinary course of business.

111. 7 Bankr. 519 (Bankr. D. Minn. 1979), aff'd, 5 Bankr. 470 (D. Minn. 1980).

112. 7 Bankr. at 522-23.

113. Id. at 523. For example, payments to creditors were approved and made, but only in cases where the payment would enhance the lender's position.

114. Id. at 529. The lender can prevail in cases where the evidence of wrongful control is less compelling, but often only after expensive trials and appeals. See Clark Pipe & Supply Co., 893 F.2d 693 (5th Cir. 1990).

115. 483 F.2d 1098 (5th Cir. 1973), modified and petition for reh'g denied, 490 F.2d 916 (5th Cir. 1974). One commentator has stated that Krivo Industrial Supply Co. defines the "outer limits of legitimate creditor control of a debtor." Chaitman, The Equitable Subordination of Bank Claims, 39 BUS. LAW. 1561 (1984).

116. 483 F.2d at 1105.

117. Id.

118. Id. at 1106.

119. State Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. App. 1984) (lenders wrongfully coerced installation of management acceptable to lenders and board of directors complied; lenders liable as they had not decided whether to act on their threat to call the loan if an unacceptable management change was made); see also Credit Managers Ass'n v. Superior Court, 51 Cal. App. 3d 352, 124 Cal. Rptr. 242 (1975) (because a business consultant was installed at creditor's insistence and over borrower's objections, the control exerted by the consultant over business operations created a fiduciary duty to the borrower, its stockholders, and its creditors).

120. See RESTATEMENT (SECOND) OF AGENCY § 140 (1957) ("a creditor who assumes control of his debtor's business for the mutual benefit of himself and his debtor, may become a principal, with liability for the acts and transactions of the debtor in connection with the business.") Cases decided on an alter ego theory typically involve two businesses, one of which is controlling the other, rather than a lender and a borrower. See, e.g., A. Gay Jenson Farms Co. v. Cargilll, Inc., 309 N.W.2d 285 (Minn. 1981).

121. 18 U.S.C. §§ 1961-1968 (1986); see, e.g., Citibank, N.A. v. Data Lease Fin. Corp., 828 F.2d 686 (11th Cir. 1987), cert. denied, 484 U.S. 1062 (1988).

122. Typically, a purchaser of the borrower's securities alleges that the lender knowingly assisted in the borrower's fraudulent misrepresentation or omission of material facts in connection with the offering; the borrower is sued under § 10-(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and the lender is named as a secondarily liable codefendant. See, e.g., Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert. denied, 474 U.S. 1057 (1986).

123. See Securities Act of 1933 § 15, Securities Exchange Act of 1934 § 20(a), 15 U.S.C. § 78t(a) (1982).

124. In O'Neil v. Q.L.C.R.I., Inc., 750 F. Supp. 551 (D.R.I. 1990), a federal district court refused to dismiss counts in a complaint against a lender that allegedly "aided and abetted" a party accused of violating the Federal Water Pollution Control Act. In ruling on a motion to dismiss, the court focused on the activities of the lender and stated that "[m]ost importantly, plaintiff alleges that [the lender] had 'influence and control' over the principal polluters because [the lender] knew of the sewage problem and could have conditioned the loans on the fixing of the sewage problem." Id. at 554. The court dismissed counts raised in the complaint arising from the mere possibility that the lender could foreclose on the mortgaged property, as these counts did not present a justiciable case or controversy. Id.

125. 11 U.S.C. §§ 101 et seq. (1986) (hereinafter referred to as the "Bankruptcy Code").

126. Section 548 of the Bankruptcy Code, 11 U.S.C. § 548, provides for the avoidance of obligations incurred or property transfers made by a debtor within one year prior to its bankruptcy filing if (in addition to transactions involving actual fraud) the debtor received "less than a reasonably equivalent value" in exchange for the transfer or obligation, and the debtor was insolvent at the time of the transaction, was left with unreasonably small capital to carry on its business thereafter, or intended to incur debts that the debtor could not repay when they matured.

127. Although fraudulent conveyance laws vary from state to state (particularly with respect to statutes of limitations, which generally are longer than the one-year period established by § 548 of the Bankruptcy Code), many states have adopted either the Uniform Fraudulent Conveyance Act, 7A U.L.A. 427 (1985), or its successor, the Uniform Fraudulent Transfer Act, Id. at 639. Such a state law claim can be raised in a bankruptcy case, even if a § 548 claim would not succeed due to the statute of limitations or substantive differences from state law, because the "strong arm" powers granted by § 544(b) of the Bankruptcy Code, 11 U.S.C. § 544(b), enable a debtor in possession or bankruptcy trustee to avoid fraudulent conveyances under state law.

128. See, e.g., Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir. 1981); see generally ALCES, THE LAW OF FRAUDULENT TRANSACTIONS (1989).

129. See United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986) (affirming a series of complex cases that operated to unwind a lender's financing arrangements in a leveraged buyout), cert. denied, 483 U.S. 1005 (1987).

130. There is an unresolved split among the circuits on this issue. Compare Durret v. Washington Nat'l Ins. Co., 621 F.2d 201 (5th Cir. 1980) (lender bid amount of debt at foreclosure sale; amount bid was 57 percent of property's market value and sale set aside for not being a "fair equivalent"), with In re Madrid, 21 Bankr. 424 (Bankr. 9th Cir. 1982) (rejecting Durrett's "rule of thumb" that at least 70 percent of property's value must be bid by lender at foreclosure sale; any consideration received at noncollusive foreclosure sale should satisfy the "reasonably equivalent value" standard), aff'd, 725 F.2d 1197 (9th Cir. 1984).

131. Bankruptcy Code § 550(a), 11 U.S.C. § 550(a).

132. Bankruptcy Code § 547, 11 U.S.C. § 547. The property transferred, or its equivalent value, is then recoverable pursuant to § 550(a) of the Bankruptcy Code, 11 U.S.C. § 550(a).

133. Bankruptcy Code § 547(b)(4), 11 U.S.C. § 547(b)(4).

134. Bankruptcy Code § 101(25)(B), 11 U.S.C. § 101(25)(B). This is another example of the relevance of the concept of a lender's control of its borrower. See e.g., In re F&S Cent. Mfg. Corp., 53 Bankr. 842, 848 (Bankr. E.D.N.Y. 1985) (creditor having a special relationship with debtor through which it can compel payment of its debt held subject to one-year insider preference period because creditor could effectively control the dates on which a property interest is transferred and the bankruptcy petition is filed).

135. See supra notes 27-32 and accompanying text.

136. Bankruptcy Code § 510(c), 11 U.S.C. § 510(c).

137. See supra notes 109-124 and accompanying text.

138. See e.g., Gulf Oil Trading Co. v. Creole Supply, 596 F.2d 515 (2d Cir. 1979); In re Osborne, 42 Bankr. 988 (W.D. Wis. 1984).

139. See In re Process-Manz Press, Inc., 236 F. Supp. 333 (N.D. Ill. 1964), rev'd on other grounds, 369 F.2d 513 (7th Cir. 1966), cert. denied, 386 U.S. 957 (1967).

140. See, e.g., U.C.C. § 1-203, 1 U.L.A. 109 (1989) ("[e]very contract or duty within [the U.C.C.] imposes an obligation of good faith in its performance and enforcement"); RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981).

141. 757 F.2d 752 (6th Cir. 1985).

142. Id. at 754.

143. Id. at 759.

144. Id. at 761-62.

145. Id. at 762.

146. Id. at 759-60.

147. Id.

148. The verdict was based on the difference between K.M.C.'s value as a going concern immediately before the advance was refused and the value after that date. Id. at 764.

149. Thus, a promissory note which on its face is payable "on demand" may not really be a demand note, particularly if the loan documents contain elaborate covenants that contemplate an ongoing relationship, and events of default that specify particular instances when the loan would be called in. See, e.g., Shaughnessy v. Mark Twain State Bank, 715 S.W.2d 944 (Mo. Ct. App. 1986) (note payable "on demand, and if no demand is made, then on February 16, 1980," read in connection with other loan documents containing events of default, was not callable on demand). Even when lenders are careful not to state a specific maturity date, a discretionary line of credit cannot be terminated unless reasonableadvance notice is given. See Carrico v. Delp, 141 Ill. App. 3d 684, 490 N.E.2d 972 (1986).

150. See, e.g., Runnemede Owners, Inc. v. Crest Mortgage Corp., 861 F.2d 1053 (7th Cir. 1988) (a "commitment letter" did not bind the lender to make a loan where numerous contingencies existed, including loan committee approval and review of financial information, despite oral assurances by loan officer that the loan would be made); Kruse v. Bank of America, 202 Cal. App. 3d 38, 248 Cal. Rptr. 217 (1988), cert. denied, 488 U.S. 1043 (1989); but see 999 v. C.I.T. Corp., 776 F.2d 866 (9th Cir. 1985) (handwritten proposed terms on back of letter transmitting a loan application fee found to be a binding agreement to lend).

151. See Penthouse Int'l, Ltd. v. Dominion Fed. Sav. & Loan Ass'n, 665 F. Supp. 301 (S.D.N.Y. 1987) (opinion awarding approximately $ 130 million to borrower excoriates lender and its counsel for taking any actions possible to prevent loan closing due to inability to obtain participation commitments), aff'd in part and rev'd in part, 855 F.2d 963 (2d Cir. 1988) (appellate court held that borrower had not proven its ability to comply with express closing conditions), cert. denied, 109 S. Ct. 1639 (1989).

152. See, e.g., First Nat'l State Bank v. Commonwealth Fed. Sav. & Loan Ass'n, 610 F.2d 164 (3d Cir. 1979); Lincor Contractors, Ltd. v. Hyskell, 39 Wash. App. 317, 692 P.2d 903 (1984).

153. See, e.g., Alaska State Bank v. Fairco, 674 P.2d 288 (Alaska 1983) (lender who routinely accepted late payments repossessed collateral without notice at a time when the borrower was actively negotiating a workout; lender was estopped by its course of conduct from relying on contractual right to repossession without notice).

154. See, e.g., Sanchez-Corea v. Bank of America, 38 Cal. 3d 892, 701 P.2d 826, 215 Cal. Rptr. 679 (1985) (statement to borrower that further credit would be extended if additional collateral was given was fraudulent because bank had previously decided not to extend additional funds; $ 4,000,000 punitive damage award upheld); State Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. App. 1984) (lenders' threats to accelerate loan if certain managers were installed were fraudulent because lenders had not decided to carry out the threat).

155. See, e.g., Berkline Corp. v. Bank of Miss., 453 So. 2d 699 (Miss. 1984) (response to credit inquiry may be actionable not only as actual fraud, which was not proven, but also under a negligence theory; case remanded).

156. See, e.g., Barrett v. Bank of America, 183 Cal. App. 3d 1362, 229 Cal. Rptr. 16 (1986) (bank held to be borrower's fiduciary, liable under constructive fraud theory for falsely promising to release guarantors following a proposed merger).

157. Central States Stamping Co. v. Terminal Equip. Co., 727 F.2d 1405 (6th Cir. 1984) (lender gave positive response to credit inquiry from another creditor regarding distressed borrower, then applied funds advanced by second creditor to reduce its loan; lender had a duty to respond completely to inquiry and was thus held liable for fraudulent misrepresentation); Barnett Bank v. Hooper, 498 So. 2d 923 (Fla. 1986) (bank knew of possible check kiting scheme by one of its customers, a tax shelter promoter; failure to disclose this fact to another bank customer borrowing money to invest in such tax shelters could result in liability). But see Tokarz v. Frontier Fed. Sav. & Loan Ass'n, 33 Wash. App. 456, 656 P.2d 1089 (1982) (lender providing no services other than mortgage loan had no duty to advise homeowner of difficulties involving the home builder, which was another of the lender's customers).

158. See, e.g., Centerre Bank v. Distributors, Inc., 705 S.W.2d 42 (Mo. Ct. App. 1985) (ordinarily, no fiduciary relationship exists between a lender and borrower). But see Deist v. Wachholz, 678 P.2d 188 (Mont. 1984); Credit Managers Ass'n v. Superior Court, 51 Cal. App. 3d 352, 124 Cal. Rptr. 242 (1975).

159. Alaska State Bank v. Fairco, 674 P.2d 288 (Alaska 1983).

160. Sanchez-Corea v. Bank of America, 38 Cal. 3d 892, 701 P.2d 826, 215 Cal. Rptr. 679 (1985) ($ 100,000 emotional distress damages awarded as a result of lender's intentional or reckless conduct, including public ridicule of borrower, laced with profanity).

161. Commentators disagree on whether Congress intended by enacting CERCLA to hold liable mortgagees that foreclose on contaminated sites. See Note, Interpreting the Meaning of Lender Management Participation Under Section 101(20)(A) of CERCLA, 98 YALE L.J. 925, 926 (1989) (Congress intended that mortgagees that foreclosed on real property would be liable); Tupi, Guidice v. BFG Electroplating: Expanded CERCLA Liability for Foreclosing Lenders, 4 TOXICS L. REP. (BNA) 844, 848 (1989) (Congress intended that mortgagees that foreclosed on real property would not be liable). At least one commentator has argued that "SARA cripples the foreclosure process." Comment, SARA Slams the Door: The Effect of Superfund Amendments on Foreclosing Mortgagees, 34 Wayne L. Rev. 223, 239 (1987).

162. One commentator has stated flatly that "[t]he Eleventh Circuit's analysis goes awry at the outset by misinterpreting the language of the CERCLA secured creditor exclusion." Berz & Gillon, Lender Liability Under CERCLA: In Search of a New Deep Pocket, 108 BANKING L.J. 4, 22 (1991).

163. See SUTHERLAND STAT. CONST. § 50.04 (4th Ed). For a discussion that concludes that total control amounting to ownership is what exposes a creditor to liability under CERCLA see Note, Interpreting the Meaning of Lender Management Participation Under Section 101(20)(A) of CERCLA, 98 YALE L.J. 925 (1989). For a discussion of lender liability under CERCLA that reaches the opposite conclusion, see Burkhart, Lenders/Owners and CERCLA: Title and Liability, 25 HARV. J. ON LEGIS. 317 (1988). The author's argument is based partly upon statements of individual congressmen. The usual rule of statutory construction, however, is that such statements should not be accepted as authoritative guides to the construction of statutes. See United States v. United Mine Workers, 330 U.S. 258 (1947). For a more balanced discussion of the issue, see Note, When a Security Becomes a Liability: Claims Against Lenders in Hazardous Waste Cleanup, 38 HASTINGSL.J. 1261 (1987).

The U.S. District Court for the District of Delaware recently applied common law principles to decide whether "successor" corporations were liable under CERCLA for acts committed by the predecessor corporation. United States v. Chrysler Corp., 31 Env't Rep. Cas. (BNA) 1997 (1990). The court concluded that one corporation, which merely purchased some assets from the predecessor corporation, was not liable, while a successor corporation formed as a result of the splitting up of the predecessor corporation was liable where the agreement provided that the company would assume such liability. Id. One commentator has suggested allocating liability based upon "participating in the management" as that concept is defined in the context of shareholder liability for a corporation's actions. Marzulla & Kappel, LENDER LIABILITY UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT, 41 S.C. L. REV. 705, 724-26 (1990). Another commentator has suggested analogizing environmental lender liability to the liability that a parent corporation may experience when it becomes overly involved in the affairs of a subsidiary corporation. Comment, CERCLA: Looking for Missing Pieces of the Lender Liability Puzzle, 58 U.M.K.C. L. REV. 279, 302-06 (1990).

164. H.R. 4494, 101st Cong., 2d Sess. (1990).

165. S. 2827, 101st Cong., 2d Sess. (1990). For a complete analysis of the LaFalce Bill, the Garn Bill, and other possible legislative and regulatory alternatives, see Unterberger, Lender Liability Under Superfund: What the Congress Meant to Say Was …, 5 TOXICS L. REP. 541, 569 (1990).

166. 42 U.S.C. § 9601(20)(D), ELR STAT. CERCLA 008.

167. 42 U.S.C. § 1811 et. seq.

168. Bill introduced at 136 CONG. REC. S9171 (daily ed. June 28, 1990). See also 136 CONG. REC. S9217 (daily ed. June 28, 1990) (statement of Sen. Garn).

169. EPA Wants Lender Liability Exemption Rule, SUPERFUND, Aug. 10, 1990, at 1, 3.

170. EPA Promises Clarifying Rule to Protect Lenders, Won't Oppose Legislation, INSIDE EPA'S SUPERFUND REPORT, Aug. 15, 1990, at 3, 4.

171. EPA Wants Lender Liability Rule, supra note 169, at 2.

172. Congressional Moves — Environmentalists Blast 'Bailout' for Banks, INSIDE EPA'S SUPERFUND REPORT, July 18, 1990, at 14.

173. SUPERFUND, Oct. 5, 1990, at 1.

174. Id.

175. For a general discussion of EPA's proposed rulemaking, see Wolf, EPA's Lender Liability Rule: No Surprises but More Work Needed, 21 ELR 10006 (1991).

176. See Immigration & Naturalization Service v. Cardoza-Fonseca, 480 U.S. 421, 447-48 (1987) ("The judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear congressional intent. If a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect."), quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, n. 9, 14 ELR 20507, 20508 n. 9 (1984) (citations omitted).

177. See O'Brien, Environmental Lender Liability: Will an Administrative Fix Work?, 5 TOXICS L. REP. (BNA), 512 (1990) (detailed analysis of this topic and the relevant cases).

178. See 5 TOXICS L. REP. (BNA), 692 (1990).

179. Ringer, Failure of Congress to Limit Lender Liability Exacerbates Uncertainties in Lending Markets, HAZARDOUS WASTE TOXIC TORTS L. & STRATEGY, Nov. 1990, at 8.

180. For a discussion that reaches the conclusion that a statutory clarification of the lender liability controversy is preferable to EPA regulations addressing the matter see Wolf, EPA's Lender Liability Rule: No Surprises But More Work Needed, 21 ELR 10006 (Jan. 1991). For other discussions of the EPA draft rule see New EPA Rule Negates Fleet, Requires Actual Management, LENDER LIABILITY NEWS (BNA), Oct. 17, 1990, at 2; Miano, Lender Liability Under Superfund: Light at the end of the Tunnel?, THE LEGAL INTELLIGENCER, Nov. 8, 1990, at 7.

181. Lender Liability — EPA Rewriting Draft Rule in Response to Comments, INSIDE EPA'S SUPERFUND REP., Jan. 2, 1991, at 3.

182. Although it is beyond the scope of this Article to discuss methods for avoiding environmental lender liability, creditors should consider the following activities to limit such liability: developing detailed questionnaires to be answered prior to entering into a loan and prior to foreclosure, see Burcat, Environmental Liability of Creditors: Open Season on Banks, Creditors, and Other Deep Pockets, 103 BANKING L.J. 509, 540-41 (1986); conducting an environmental audit, Id.; obtaining warranties, covenants, and indemnification agreements, Id.; revising existing loan documents to limit the potential for management of a debtor's activities or hazardous waste disposal decisions, see Berz & Gillon, Lender Liability Under CERCLA: In Search of a New Deep Pocket, 108 BANKING L.J. 4, 27 (1991); considering obtaining alternative forms of collateral to avoid association with facilities containing hazardous substances; obtaining an environmental inspection easement as a part of the loan documentation, see Gebhardt, The Environmental Inspection Easement: An Essential Commercial Loan Document, 107 BANKING L.J. 317, 330-33 (1990); obtaining environmental impairment liability insurance, to the extent it is available, see Comment, The Battle Continues: Lenders are Still Searching for Well-Defined Methods to Avoid Hazardous Waste Cleanup Liability, 19 STETSON L. REV. 633, 657-59 (1990); and developing an environmental risk and liability policy or guidelines to be utilized by bank personnel in making loans, see Dominick & Harmon, Lender Limbo: The Perils of Environmental Lender Liability, 41 S.C.L. REV. 855, 870 (1990).

21 ELR 10464 | Environmental Law Reporter | copyright © 1991 | All rights reserved