EPA's Proposed Rule on Lender Liability Under CERCLA: No Panacea for the Financial Services Industry

Philip R. Sellinger and Avery S. Chapman

Editors' Summary: Last year, a decision of the U.S. Court of Appeals for the Eleventh Circuit created grave concern in the financial services industry. In May 1990, the court, in United States v. Fleet Factors Corp. held that a secured lender that had a mere "capacity to influence" a corporation's treatment of hazardous waste could lose the protection of the security interest exemption under CERCLA § 101(20)(A), and thus be held liable for cleanup costs under CERCLA. To alleviate the uncertainty generated by this decision and to restrict this judicial broadening of liability under CERCLA, on June 5, 1991, EPA proposed a rule intended to clarify lender liability under CERCLA. The proposed rule specifies a range of permissible actions that may be taken by secured lenders without losing the protection of the security interest exemption. The authors examine this proposed rule and its ramifications. They argue that while the proposed rule is a constructive step toward resolving uncertainty in the lending community, it does not go far enough. First, they argue that the proposed rule does not cover private Superfund litigation seeking to apportion liability among private parties. Second, the proposed rule does not contain the depth of analysis needed to provide certainty of protection for parties utilizing less traditional types of financial products currently available in the marketplace. Furthermore, holders of passive ownership interests, such as bank trust departments, are not adequately protected under the proposed rule. The authors thus conclude that the impact of Fleet Factors will not be eliminated by EPA's promulgation of this rule. Finally, the authors suggest actions that secured lenders might take to minimize their environmental liability exposure under CERCLA.

Philip R. Sellinger is Co-Chairperson of the Environmental Department at Sills Cummis Zuckerman Radin Tischman Epstein & Gross in Newark, New Jersey. He represents bank, corporate, industrial, real estate, and governmental clients on environmental matters, including handling judicial and administrative proceedings and providing advice on compliance with environmental laws and regulations.

Avery S. Chapman currently practices law in New Jersey.

[21 ELR 10618]

On June 5, 1991, the Environmental Protection Agency (EPA) proposed a rule (the Proposed EPA Rule)¹ designed to alleviate the uncertainty in the financial services industry concerning the liability of secured lenders under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).² The rule interprets the security interest exemption (the Exemption) under CERCLA § 101(20)(A),³ which exempts from CERCLA liability persons whose "indicia of ownership" in a facility are held primarily to protect a security interest, provided that they do not participate in the management of the facility. Last year, in its decision in United States v. Fleet Factors Corp.,⁴ the Court of Appeals for the Eleventh Circuit created grave concern in the financial services industry with its interpretation of the Exemption. The Fleet Factors court held that a secured lender who had a mere "capacity to influence"⁵ a corporation's treatment of hazardous waste could lose the Exemption's protection and thus be liable for cleanup costs under CERCLA.

As a result of Fleet Factors, many lenders have been more reluctant to extend loans to enterprises when there is a suspicion of hazardous waste contamination. Financial services available to entire sectors of the economy have thus been limited, and lenders are writing off loans of considerable value rather than foreclose and risk CERCLA liability. Because of the recent failures of many of the country's lending institutions, governmental entities such as the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), which act as conservators and receivers of failed or failing insured depository institutions, are plagued by the same uncertainty.

The Proposed EPA Rule attempts to specify the range of permissible actions that may be taken under the Exemption by both privately owned financial institutions and governmental receivers, conservators, loan guarantors, lending, or other governmental entities. EPA Deputy Administrator F. Henry Habicht heralded the Proposed EPA Rule as "provid[ing] certainty to the lending community."⁶ Vice President Quayle declared that "the proposed rule fulfills Congress' original intent of protecting secured lenders from Superfund liability."⁷

The Proposed EPA Rule specifies a range of activities that lenders can undertake to manage and protect their collateral without being held liable under CERCLA. The Proposed EPA Rule also defines when a financial institution [21 ELR 10619] would be considered participating in the management of contaminated property and therefore liable for cleanup costs under CERCLA. For example, the Proposed EPA Rule makes clear that a security holder may, without triggering liability, regularly monitor or inspect the borrower's collateral, business condition, and financial health; require that property be maintained in an environmentally sound manner; provide financial, administrative, or other specific or general advice to a borrower to clean up the property if contaminated; and foreclose and even hold title to the property under certain circumstances. However, under the Proposed EPA Rule, a lender would be considered "participating in management" and would face liability if it directs or becomes so involved in the facility's environmental operations that it is acting in the same manner as a facility manager or director.

While well meaning and constructive, the Proposed EPA Rule is no panacea for the financial services industry. First, the Proposed EPA Rule does not necessarily provide protection from private party CERCLA actions and other environmental litigation. Since secured lenders cannot know in advance whether EPA or some other party may ultimately seek to hold it liable for contaminated property, the Proposed EPA Rule may not remove any uncertainty, since its purported safe harbors may not be available in a private party or non-CERCLA suit. Second, the Proposed EPA Rule also fails to offer blanket protection to a host of nontraditional financial products, such as sales and leasebacks, conditional sales, and installment sales contracts. Third, the Proposed EPA Rule offers no protection to bank trust departments and bankruptcy trustees, making the appointment of such trustees more difficult. Legislation that takes a similar approach was reintroduced last spring into the U.S. Senate and House of Representatives and suffers from similar defects.

In the Wake of Fleet Factors

CERCLA seeks to clean up properties contaminated with hazardous substances by holding responsible the owners of such properties and any other parties who benefitted from the release of such hazardous substances. Because liability under CERCLA is typically joint and several, retroactive, and effectively strict, virtually any party linked to the release of hazardous substances at a site can be made to pay the entire cost of the cleanup. CERCLA imposes liability on the current owners or operators of a facility, the owner or operator at the time of discharge, generators who arranged for the disposal or treatment of hazardous substances, and transporters of such hazardous substances.⁸

Under the Exemption, no CERCLA liability is imposed on a party who "without participating in the management of a … facility holds indicia of ownership primarily to protect his security interest in the … facility."⁹ While the case law prior to Fleet Factors was not uniform,¹⁰ so long as lenders did not actively participate in the day-to-day operations, become overly entangled in the affairs of a facility, or foreclose and take title to a contaminated facility, then CERCLA liability generally did not attach.¹¹ Since their risk of loss was limited to the value of the loan, lenders did not have to fear potential cleanup liability that far exceeded the equity of their collateral.

Fleet Factors represented the first court of appeals decision to address squarely the scope of the Exemption. In that case, Fleet Factors Corporation entered into a factoring agreement with Swainsboro Print Works, secured through a deed of trust encumbering Swainsboro's equipment, inventory, and fixtures. Swainsboro filed for reorganization under bankruptcy laws, and Fleet foreclosed on its interest in some of Swainsboro's inventory and equipment, but not on the real estate. EPA discovered hazardous substances on the site and incurred $ 400,000 in cleanup costs. EPA sought reimbursement from Fleet, among others.

The court denied Fleet's motion for summary judgment, holding that Fleet, by dictating excess inventory prices, shipping schedules, and employment policy, had exercised "pervasive if not complete" involvement in Swainsboro's operations.¹² In language that shook the lending industry, the court held that "a secured creditor may incur CERCLA liability by participating in the financial management of a facility to a degree indicating a capacity to influence the corporation's treatment of hazardous wastes."¹³ While the court held that some level of participation by a secured party is required to lose the benefits of the Exemption, the court's opinion did not address the requisite level of participation sufficient to support the inference that a security holder's involvement could influence operational decisions concerning a facility's treatment of hazardous waste.

Two months later, a second appellate court confronted the potential liability of a secured lender under CERCLA. In United States v. The East Asiatic Co. (In re Bergsoe Metal Corp.),¹⁴ the Court of Appeals for the Ninth Circuit declined to endorse Fleet Factors, holding that the mere capacity or unexercised right to control facility operations is insufficient to make the Exemption unavailable. The court held that there must be "actual management of the facility" before a secured creditor will fall outside the Exemption and become liable under CERCLA.¹⁵ Because the secured lender was not in any way involved in the facility's operations, the court did not address the extent to which a security holder may act to protect its security interests without being considered participating in the facility's management.

In the wake of Fleet Factors, many lenders have developed an entirely new risk assessment strategy. Some lenders are refusing to make loans to "dirty" industries or areas [21 ELR 10620] where potential exposure to liability may exist. The American Bankers Association (Bankers Association), in testimony before the Senate, gave a partial list of impacted businesses: residential developments; gas stations and other businesses with underground storage tanks (e.g., automobile dealerships and fleet operators); automobile repair shops; tool and die shops; wood preserving facilities; scrap yards; railroad facilities; utilities; bottling and canning facilities; metal fabricating plants; feedlot operations; grain elevators; fertilizer and chemical dealers and manufacturers; poultry operations; meatpacking facilities; cattle ranches; and traditional crop operations.

Otherwise healthy lending institutions may be forced to close their doors because of environmental problems on property on which they foreclosed. In testimony before the Senate, the chairman and chief executive officer of one bank argued that his otherwise financially sound bank may be forced into insolvency because it has been named a potentially responsible party for environmental cleanup at a property where the bank never took title, never foreclosed, and subsequently wrote off the debt.¹⁶ Additionally, marginal banks are being pushed into receivership by potential environmental liability.

The Bankers Association has pleaded that its members need immediate relief.¹⁷ It expressed concern that continued lender liability for environmental cleanup will threaten the ability of the federal government to rescue failing lending institutions and will prevent many institutions from saving themselves through real estate asset sales. It argued that Fleet Factors has strangled private lenders at a time when the country can ill afford to prolong the banking crisis.¹⁸

The EPA Rule

Private Parties

The Proposed EPA Rule is designed to "furnish holders of security interests with a map for remaining within the bounds of the [security interest] exemption."¹⁹ It interprets the Exemption to permit the holder of a security interest to undertake a broad range of activities in the course of protecting a security interest in a facility subject to CERCLA. In so doing, the Proposed EPA Rule defines three operative phrases not defined elsewhere in CERCLA: "indicia of ownership," "primarily to protect the security interest," and "participation in management."

[] Indicia of Ownership. The Proposed EPA Rule defines "indicia of ownership" as including evidence of interests in real or personal property held as security for a loan or other obligation. Examples include, but are not limited to, a mortgage; deed of trust; legal title obtained pursuant to foreclosure or its equivalents; and an assignment, lien, pledge, or other right to, or form of, an encumbrance legally recognized as establishing a bona fide security interest.²⁰

[] Primarily to Protect the Security Interest. Whether a person's ownership indicia bring it within the definition of "owner or operator" under CERCLA is determined by whether the indicia are held "primarily to protect the security interest."²¹ The ownership interest must be a bona fide security interest and not an interest in property held for some other reason. Interests in the nature of an investment are not covered. While a bona fide security interest may arise pursuant to a variety of statutory or common-law mechanisms, under the Proposed EPA Rule, a transaction giving rise to a security interest is deemed to be one that provides the security holder with recourse against real or personal property and that has as its purpose the intent to secure the repayment of money or some other obligation.²²

The Proposed EPA Rule provides that ownership interests falling within the protection of the Exemption include "mortgages, certain types of liens, forms of conditional sales, installment sales, trust receipt transactions, certain assignments, factoring agreements, or accounts receivable financing arrangements, and some forms of leases or consignments, among others."²³ The Proposed EPA Rule also provides that "whether sale-and-leaseback, conditional sale, installment sales contracts or any other transaction" will prevent CERCLA liability from attaching to the lender is "determined by the facts of each case…."²⁴

[] Participation in the Management of a Facility. Under the Proposed EPA Rule, participation in the management of a facility means actual participation in the management or operational affairs and does not include the mere capacity or unexercised right to influence facility operations.²⁵ A security holder will not be deemed to be participating in management unless, while the borrower is still in possession, the security holder is exercising either (1) decisionmaking control over the borrower's environmental compliance such that the security holder has undertaken responsibility for the borrower's waste disposal or hazardous substance handling practices that result in a release or threatened release, or (2) control at a management level encompassing the borrower's day-to-day environmental compliance responsibilities, comparable to that of a manager of the borrower's enterprise, by establishing, implementing, or maintaining environmental compliance policies and procedures.

Consistent with the Exemption, a security holder may undertake undefined but plainly far-reaching actions prior to or at the inception of a security interest. The security holder may secure the loan and knowingly take a security [21 ELR 10621] interest in a contaminated facility. The security holder may conduct or require an environmental inspection or cleanup of a facility prior to or during the life of the loan, monitor and inspect both the facility and the business or financial condition, and police the loan. The security holder may also require assurances of compliance with applicable environmental laws during the life of the loan and provide periodic financial or other advice to a financially distressed debtor. Finally, the security holder may undertake loan workout activities (e.g., restructuring or renegotiating the terms of the obligation, requiring payment of additional interest, extending the payment period, exercising forbearance, or providing advice); and foreclose, wind up operations, liquidate assets, or otherwise act to recover the value of the security interest consistent with good commercial practice.²⁶

Foreclosure or acquisition is deemed to be consistent with the scope of the statutory exemption as long as it is reasonably necessary to ensure satisfaction or performance of the obligation — (i.e., the foreclosing entity must be acting to preserve the assets for subsequent sale).²⁷ A security holder may foreclose, liquidate, sell, or wind up operations and continue the enterprise in order to protect the value of the secured asset without incurring CERCLA liability, unless the security holder (1) fails within 12 months following foreclosure to list and advertise the property for sale, or (2) at any time after six months following foreclosure, rejects or fails to act upon a written, bona fide offer for a value equal to or exceeding the loan obligation.²⁸

While security holders do not participate in management under the Proposed EPA Rule merely because they cause or contribute to hazardous substance contamination, security holders are cautioned that their own actions may result in independent CERCLA liability as generators that arranged for the disposal or transportation of hazardous substances.²⁹

Additionally, EPA notes that mitigative or preventive measures that are "environmentally responsible" are considered actions that preserve and protect the assets' value, and hence protect the security interest.³⁰ Accordingly, inclusion of environmental warranties and covenants, or actions by the security holder that ensure that the facility is managed in an environmentally sound manner do not constitute bases for liability.³¹

If the property appreciates in value by virtue of an EPA cleanup while the acquiring entity holds indicia of ownership, and that entity subsequently realizes an amount at foreclosure greater than what it would have received before cleanup, EPA may seek equitable reimbursement of the difference.³²

Involuntary Acquisition by the Government

The Proposed EPA Rule also addresses the potential liability of the FDIC, the RTC, and other governmental entities acquiring contaminated properties as part of the assets of failed or insolvent lending and depository institutions. Under the Federal Institutions Reform, Recovery, and Enforcement Act (FIRREA),³³ the Office of Thrift Supervision or the Office of the Comptroller of the Currency will direct the FDIC or the RTC to acquire the property and assets of failed or insolvent banks, credit unions, savings institutions, and thrifts. The range of acquired assets may include interests securing performing loans, loans in workout, loans in default or nonperforming loans, property for which the depository or thrift institution held title, or property that had been purchased as an investment. The FDIC and the RTC succeed to such assets and act as conservators or receivers of insolvent lending institutions.

First, the Proposed EPA Rule provides that these agencies are entitled to the same protection under the Exemption as the failed institution and are permitted to undertake the same range of activities that private lenders are permitted to undertake to protect their security interests. Second, the Proposed EPA Rule provides that where the governmental lending entity involuntarily acquires assets to which the Exemption would not apply (i.e., where the predecessor did not hold the interest to protect a security interest), such assets may be considered "involuntarily acquired" for purposes of the "innocent landowner" defense³⁴ to Superfund liability. Establishing that defense generally requires that the governmental entity have involuntarily acquired the contaminated property and that it exercise due diligence prior to foreclosure and "due care" with respect to the hazardous substances known to be present once the property is acquired.³⁵ Finally, where a governmental entity is acting as a conservator or receiver of an institution, the general rule that the liabilities of the institution's estate are limited to the estate's assets will apply, and such liabilities do not extend to the assets of the conservator or receiver.³⁶

The Efficacy of the Proposed EPA Rule

The Proposed EPA Rule constitutes a constructive step toward resolving some of the uncertainty in the lending community concerning the scope of the Exemption. To the extent financial products and transactions are plainly within the scope of the Exemption, the Proposed EPA Rule provides incentive to financial institutions to loan to industries that serve a useful societal function, and — where required — to foreclose upon contaminated assets, to clean up the assets, and to reintroduce such assets into use, without fear of incurring CERCLA liability. However, the Proposed EPA Rule, while well meaning and constructive, does not go far [21 ELR 10622] enough in providing certainty to financial institutions seeking protection under the Exemption.

First, the Proposed EPA Rule offers only EPA's interpretation of select CERCLA provisions and guidance as to how EPA may act in the future. The Proposed EPA Rule may not protect financial institutions from liability in the burgeoning area of private party Superfund and other environmental litigation where defendants inevitably seek to expand the net of potentially responsible parties to reduce their own liability. While many argue that EPA, with the assistance of the courts, has expanded CERCLA far beyond its drafters' original intent, in some cases private parties have sought to extend CERCLA liability even further than EPA. For example, in B. F. Goodrich Co. v. Murtha,³⁷ a private party sought to hold municipalities liable under CERCLA. The plaintiff withstood the municipalities motion for summary judgment, notwithstanding EPA's interim municipal settlement policy disfavoring liability under the circumstances presented. Thus, since secured creditors cannot know in advance whether EPA or some other party will ultimately seek to hold them liable for contaminated property, the Proposed EPA Rule may not remove any uncertainty because its purported safe harbors may not be available in a private party or non-CERCLA suit.

Second, a major failure of the Proposed EPA Rule is that it does not provide certainty of protection for many types of less traditional financial products offered by the financial services industry today. The Proposed EPA Rule appears to have been drafted by well-meaning environmentalists, unsophisticated in the multitude of transactions, structures, and financial considerations driving the modern financial services industry. While many traditional financial products are covered, EPA has declined to indicate whether other financial products — such as sales and leasebacks, conditional sales, and installment sales contracts — are covered. Such transactions will be evaluated on a case-by-case basis. Further, the Proposed EPA Rule provides that certain — but not all — liens, assignments, leases, and consignments are protected, but the circumstances favoring protection are not clearly defined.

The Proposed EPA Rule does not address, and in some cases expressly fails to protect, a host of investment vehicles designed to affect varying expectations relating to, inter alia, expected rates of return on investment or tax "appetite." These vehicles include conventional equity, convertible debt, debt with an equity kicker, lease transactions, leveraged lease transactions, various forms of unsecured lending, insurance financing, and certain forms of subordinated or mezzanine financing. Although equity interests, unsecured debt, and insurance financing are plainly not covered by the Exemption, the treatment of convertible debt, or debt with an equity kicker, is unclear. One might argue that to the extent such transactions bear the indicia of traditional financing (including conventional collateral), they are designed "primarily to protect a security interest." However, EPA's failure to address such transactions leaves substantial uncertainty with respect to future treatment under the Exemption. Likewise, to the extent financing leases are secured, they may be covered by the Exemption, but true leases carrying no security interest are likely not covered.

In short, many transactions today are driven by particular tax and economic benefits, and a structure that may enhance the economic or tax benefits of the participants may be undermined by the environmental uncertainty created by the inherent limitations under the Proposed EPA Rule. The rule simply does not analyze the financial services industry in sufficient depth to even consider, let alone protect, the wide variety of financial products currently on the market.

Third, the Proposed EPA Rule fails to adequately protect bank trust departments from CERCLA liability. It does not mention banks or lending institutions acting as a trustee or manager of property. Unless trust departments are specifically protected, liability arising from such passive ownership can result in significant losses to a bank and could threaten the bank's financial stability. This potential liability will also likely discourage persons from serving as bankruptcy trustees (or other trustees), positions that have increased significance in the current economic climate.

Pending Legislation

Three bills pending before Congress also address, but still leave uncertain, the scope of the Exemption. S. 651,³⁸ introduced by Sen. Jake Garn (R-Utah) last year and reintroduced this year, amends the Federal Deposit Insurance Act. The Garn bill provides that the liability of insured depository institutions, mortgage lenders, and federal banking and lending agencies shall be limited to the actual benefit conferred on such institution by a removal, remedial, or other response action undertaken by EPA or another party.³⁹

The bill makes clear that an insured depository institution, mortgage lender, or federal banking and lending agency shall not be liable under any federal environmental law covered by the bill "solely on the fact that the institution or lender has the unexercised capacity to influence operations at or on property in which it has a security interest."⁴⁰ The bill's limitation on liability of insured depository institutions and mortgage lenders applies with respect to property acquired through foreclosure or held in a fiduciary capacity or to leases functionally equivalent to a loan. Any other property is considered held for "investment purposes," and the holder of such property may not claim protection under this bill. Additionally, private lending entities acquiring property through foreclosure must seek to sell or otherwise divest themselves of that property at the earliest practical time.

The bill exempts federal bank and lending agencies from liability under CERCLA for contamination to property acquired in connection with receiverships, provision of loans, or proceedings or enforcement. This exemption from liability also extends to the first subsequent purchaser of that property from the federal bank and lending agencies unless such purchaser (1) would otherwise be liable or potentially liable for all or part of the cost of removal, remedial, or other response action due to a prior relationship with the property; or (2) fails to take reasonable steps to prevent the continued release of a hazardous substance that gives rise to a removal, remedial, or other response action, if such release is discovered by such purchaser.

[21 ELR 10623]

Under CERCLA, if EPA conducts a response action on a site, a lien in favor of the United States may be imposed to recover the costs of such response. The Garn bill provides that any property held or otherwise transferred by a federal banking and lending agency will not be subject to such a lien for costs or damages associated with the release or threatened release of a hazardous substance known to exist at the time of the transfer.

H.R. 1450,⁴¹ introduced by Rep. John J. LaFalce (D-N.Y.) last year and reintroduced this year, is pending before the House Committee on Energy and Commerce. Like Sen. Garn's bill, this bill attempts to cap lender liability under federal environmental statutes. However, unlike the Garn bill, H.R. 1450 amends both CERCLA and the Resource Conservation and Recovery Act (RCRA).⁴² The liability imposed is limited to "the cost of response to the extent that the release or threatened release [of hazardous substances] is attributable to the person's activities."⁴³

H.R. 1643,⁴⁴ introduced by Rep. Wayne Owens (D-Utah) last year and reintroduced this year, is also pending before the House Committee on Energy and Commerce. This bill operates in a manner similar to the LaFalce bill.

Minimizing the Risk for Lenders

EPA has indicated that prior to promulgating a final rule, it will utilize the Proposed EPA Rule as guidance for implementing the Exemption and the "innocent landowner" defense. However, the Proposed EPA Rule may not apply to private parties or to actions under any statute other than CERCLA. Also, as noted above, many financial products are not clearly covered by the Proposed EPA Rule, and the courts have yet to rule upon the Proposed EPA Rule. Thus, as to any transaction for which the Exemption is unavailable or for which the application of the Exemption is unclear, financial institutions should continue taking steps to minimize their potential liability under CERCLA.

Lenders should conduct environmental audits of prospective borrowers. The audits can be used to evaluate the risk of property contamination, especially any properties serving as collateral, and the quality of the borrower's environmental management, so that the lender need not become involved in these issues. Where environmental problems are evident, escrow funds can be set aside for the cleanup if the problem is discrete and well understood, or the secured lender could require the cleanup of a discrete problem as a condition to obtain financing.

Whatever audit is conducted should be updated. The liability of a lender is determined not from the condition of the property when the lender-borrower relationship began, but when title actually passes to the lender. On that date, the condition of the property, and hence the potential environmental liability of the lender, may have radically changed for the worse. The judicious lender should always update its previous investigation before foreclosing and taking title to a property.

A lender may be able to demonstrate due diligence, and thus preserve its defenses, by including various representations and warranties in the loan documents. One of the most useful allows the lender the absolute right to enter the borrower's property and investigate the extent of environmental problems. By exercising this right, the lender can protect himself from CERCLA liability by demonstrating due diligence. To avoid disputes as to the meaning of a right "to inspect," the loan documents should include the right to conduct environmental sampling and testing.

Other useful provisions include having the borrower covenant to (1) conduct an annual environmental audit, (2) pay for any cleanup required by law, (3) give notice to the lender before the use or handling of any hazardous substances upon the property, (d) have well-organized environmental functions, staffed with well-trained and experienced personnel, and (4) notify the lender immediately of any environmental problems. The "event of default" clause of the loan should include violation of any of these provisions.⁴⁵ Fleet Factors suggests that requiring such action might place the lender within the zone of actual participation in management, and the benefits of requiring such borrower action should be weighed carefully against the dangers. Alternatively, provisions requiring independent environmental audits with reports to the borrower's board of directors may be as effective without the same degree of risk.

Notwithstanding the inclusion of various covenants in the loan documentation, it may also be prudent for the private lender to review its standard loan provisions with a view to modification where appropriate. Specifically, a distinction can be made between negative covenants and affirmative covenants. Under a literal interpretation of Fleet Factors, the mere capacity to influence hazardous waste operations can lead to CERCLA liability. It is possible to infer that affirmative covenants indicate a capacity of the lender to influence operations, whereas negative covenants only prohibit certain activities from the outset of the lending relationship. Therefore, rewording such provisions into negative covenants may be the safest path to follow.

Diversifying collateral is another powerful method of reducing lender risk. The lender can require the borrower to produce a source of collateral other than real property. Additional collateral can consist of a security interest in stock or personal guarantees from a well-capitalized corporate parent or shareholder.⁴⁶ Another avenue of protection is environmental risk insurance. However, this type of insurance may by too costly for smaller loans.⁴⁷

Secured creditors should develop a strategy to address workouts based on the magnitude of environmental problems discovered. If the problems are small compared with the value of the collateral, substantial involvement may be warranted. Conversely, if the problems are large compared with the value of the collateral, substantial involvement will not be warranted. Throughout the workout, each new action should be evaluated as to how it could be interpreted as affecting the management of hazardous waste. Secured creditors should consider encouraging borrowers to retain independent consultants to advise them regarding serious [21 ELR 10624] environmental matters rather than giving borrowers advice directly. If separate facilities are involved in a lending relationship and only one of them is seriously contaminated, creditors should consider relinquishing their interest in the contaminated facility and thus eliminating it from the workout process.

Trustees of estates containing potentially contaminated property are well advised to conduct environmental inspections and to segregate that property from the main corpus of the trust by placing that property in a separate trust. Segregation of contaminated assets may reduce, but will not eliminate, the possibility of exposing other assets if CERCLA liability attaches to the contaminated property. Further, a fiduciary may find that it faces a conflict of interest because the requirements imposed under CERCLA and other environmental laws and the interests of the beneficiaries may not always coincide.⁴⁸

Conclusion

Since the political debate over the scope and unfairness of CERCLA will likely continue for some time, so too will the uncertainty over the liability of financial institutions. In the final analysis, to the extent that uncertainty remains respecting certain financial products or types of transactions, the financial services industry will be less inclined to accept serious risks concerning environmental contamination. The presence of increased risks will simply diminish their willingness to finance "dirty" industries with nonexempt financial products. To the extent loans have already been extended, the unwillingness of the financial industry to foreclose on such loans may have a detrimental effect on society. Where property has net equity, no societal function is served by discouraging the financial industry from acquiring the asset, remediating the property, and permitting the asset again to serve a useful commercial purpose. Ultimately, if the financial industry is required to abandon such property, taxpayers will pay for cleanup.

1. 56 Fed. Reg. 28798 (1991) (to be codified at 40 C.F.R. pt. 300) (proposed June 5, 1991).

2. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075.

3. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

4. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

5. 901 F.2d at 1557, 20 ELR at 20835.

6. EPA Environmental News, June 5, 1991, at 3 (press release).

7. Id. at 1.

8. CERCLA § 107(a)(1)-(4), 42 U.S.C. § 9607(a)(1)-(4), ELR STAT. CERCLA 024.

9. CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

10. See Burcat, Shorey, Chadwell & O'Connell, The Law of Environmental Lender Liability, 21 ELR 10464 (Aug. 1991).

11. See, e.g., Guidice v. BFG Electroplating & Mfg. Co., 732 F. Supp. 556, 20 ELR 20439 (W.D. Pa. 1989) (preforeclosure activities, such as site visits, financing the removal of waste drums, and assisting the borrower in obtaining additional financing, did not give rise to CERCLA lender liability); United States v. Maryland Bank & Trust Co., 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986) (continued ownership of land during and after EPA cleanup voids security interest exemption); United States v. Mirabile, No. 84-2280, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985) (measure of "participation in management" is extent of participation in operations, production, or waste disposal activities, not merely financial affairs of company).

12. 901 F.2d at 1559, 20 ELR at 20836.

13. Id. at 1557-58, 20 ELR at 20835.

14. 910 F.2d 668, 20 ELR 21229 (9th Cir. 1990).

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

16. Hearings on S. 2827 Before the Senate Comm. on Banking, Housing, and Urban Affairs, 101st Cong., 2d Sess. (1990) (statement of John T. Johnson, president and chief executive officer of the Miners Bank of Butte, Butte, Montana).

17. Id. at 2, 7, 44 (statement on behalf of the American Bankers Association by Charles M. Mitschow, regional president of Marine Midland Bank in Buffalo, New York).

18. Id. at 31, 36.

19. Letter from David B. Van Slyke, acting associate enforcement counsel for Superfund to Richard B. Belzer of the Office of Management and Budget, reprinted in Proposed Draft Rule on Lender Liability Under CERCLA With Accompanying Letter From EPA to OMB, Jan. 24, 1991, 21 Env't Rep. (BNA) 1908 (Feb. 22, 1991) [hereinafter Proposed EPA Rule].

20. 56 Fed. Reg. at 28808 (to be codified at 40 C.F.R. § 300.1100(a)).

21. CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

22. See EPA Policy Statement, June 5, 1991, accompanying the Proposed EPA Rule, at 19-22.

23. 56 Fed. Reg. at 28808 (to be codified at 40 C.F.R. § 300.1100(b)).

24. Id.

25. 56 Fed. Reg. at 28808 (to be codified at 40 C.F.R. § 300.1100(c)(1)).

26. 56 Fed. Reg. at 28809 (to be codified at 40 C.F.R. § 300.1100(b)(1)-(ii)(A)), and EPA Policy Statement at 12-14; see also, Nation, Minimizing Risk of Loss From Environmental Laws, 108 BANKING L.J. 346 (1991).

27. EPA Policy Statement, supra note 22, at 31.

28. Id. at 14-15.

29. Id. at 29.

30. Id. at 32-33.

31. 56 Fed. Reg. at 28809 (to be codified at 40 C.F.R. § 300.1100(c)(2)).

32. EPA Policy Statement, supra note 22, at 37.

33. Pub. L. No. 101-73, 103 Stat. 183 (1989).

34. 56 Fed. Reg. at 28809 (to be codified at 40 C.F.R. § 300.1105); see also CERCLA § 101(35)(A)(ii), 42 U.S.C. § 9601(35)(A)(ii), ELR STAT. CERCLA 009.

35. Proposed EPA Rule, supra note 1, at 29, 43.

36. The Proposed EPA Rule also proposes that acquisition of property by federal law enforcement agencies through forfeiture or seizure authority should be deemed to be an involuntary transfer. EPA Policy Statement, supra note 22, at 43.

37. 754 F. Supp. 960, 21 ELR 20777 (D. Conn. 1991).

38. 102d Cong., 1st Sess., 137 CONG. REC. S3457-501 (1991).

39. Id.

40. Id.

41. 102d Cong., 1st Sess. (1991).

42. 42 U.S.C. §§ 6901-6992k, ELR STAT. RCRA 001-050.

43. Id.

44. 102d Cong., 1st Sess. (1991).

45. See Nation, supra note 26, at 378.

46. See Goodman, CERCLA's (Insecure) Secured Creditor Exemption, 7 PRAC. REAL EST. LAW. 94 (1991).

47. Environmental Compliance Services Co., a subsidiary of Reliance Insurance Co., has a new policy for commercial lenders. Coverage is limited to $ 1 million aggregate per year, with a $ 25,000 deductible. See Nation, supra note 26, at 380.

48. Shi & Moxley, New Hazards for Fiduciaries: Environmental Liability, 4 PROB. & PROP. 41 (1990).