EPA Issues Long-Awaited Lender Liability Rule

Patricia L. Quentel

Patricia L. Quentel practices commercial, bankruptcy, and real estate law as an associate with Buist, Moore, Smythe & McGee, P.A., in Charleston, South Carolina. The author received a J.D., cum laude, from the University of Wisconsin Law School, where she was a managing editor of the Wisconsin Law Review, and a B.A., cum laude, from Lawrence University. She served as a law clerk to the Honorable Donald Russell, U.S. Court of Appeals for the Fourth Circuit, from 1988-89.

[22 ELR 10637]

On April 29, 1992, the U.S. Environmental Protection Agency (EPA) issued a final rule¹ that attempts to define the parameters of the security interest exemption set forth in the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).² Acting in the wake of the Eleventh Circuit's decision in United States v. Fleet Factors Corp.,³ EPA proposed and promulgated the rule in response to increasing concerns of secured creditors.⁴

The rule sets forth a range of activities that secured creditors may engage in to manage and protect their security interest while maintaining the security interest exemption. The rule clarifies the application of the security interest exemption and defines what conduct constitutes "participating in management," which may bring a secured creditor within the ambit of CERCLA liability for cleanup costs. Although it is probable that secured creditors are better off with the guidance offered by the rule than without it, the rule nonetheless leaves important issues undecided; consequently, secured creditors remain vulnerable to liability for cleanup costs.

Structure of CERCLA

CERCLA was enacted in 1980 in response to deficiencies in earlier environmental legislation and to the environmental problems posed by hazardous waste sites already in existence.⁵ CERCLA assigns liability for the costs of hazardous substance cleanup to four classes of responsible parties: those who are current owners or operators of a facility contaminated by hazardous substances; those who owned or operated the facility at the time hazardous substances were disposed; trasporters of hazardous substances; and generators of hazardous substances.⁶ CERCLA defines the term "facility" broadly to include real property, buildings, storage containers, motor vehicles, aircraft, and virtually any other site or area contaminated by a hazardous substance.⁷ Courts have held that liability under CERCLA is strict⁸ and joint and several when the allocation of harm cannot be divided.⁹ CERCLA allows the federal government [22 ELR 10638] as well as private citizens to sue the responsible party for statutorily permitted costs incurred in response to actions taken with respect to releases or threatened releases of hazardous substances.¹⁰

CERCLA specifically exempts from liability an owner or operator, who, without participating in the management of a facility, holds indicia of ownership primarily to protect a security interest in the facility.¹¹ Pursuant to this security interest exemption, secured creditors assumed, until a few years ago, that they would not be held liable for cleanup costs if they held indicia of ownership, such as title taken by foreclosure on a mortgage, to protect a security interest but did not participate in the management or control of the facility. CERCLA, however, did not define what constituted "participating in the management of the facility." The scope of the security interest exemption became increasingly controversial as courts struggled to define what constituted "management" of a facility, and under which situations a secured creditor who had foreclosed and held indicia of ownership to protect a security interest would avoid liability.¹²

In addition to the security interest exemption, CERCLA provides three affirmative defenses to liability. An otherwise responsible party may avoid liability by demonstrating by a preponderance of the evidence that the contamination was the result of an act of God, an act of war, or an act of a third person.¹³ Although these defenses were, by their terms, somewhat limited, Congress, by enacting the Superfund Amendments and Reauthorization Act of 1986,¹⁴ further restricted the third-party defense. To successfully assert the third-party defense, a potentially responsible party (PRP) must demonstrate that no contractual relationship exists with the third party responsible for the contamination; that the PRP exercised due care with respect to the hazardous substances; and that the PRP took precautions against a third party's foreseeable acts or omissions.¹⁵ If the PRP acquired contaminated property through inheritance or bequest, liability may be avoided if the PRP "did not know and had no reason to know" of the contamination.¹⁶

In light of CERCLA's comprehensive nature, the protection afforded to secured creditors by the security interest exemption is critical. The Fleet Factors decision called into question the scope and application of the security interest exemption,¹⁷ and after that decision, secured creditors were uncertain as to whether and to what extent they could influence their borrowers' business operations, yet remain within the protection of the security interest exemption. In response to these concerns, EPA promulgated its rule.¹⁸

After a brief overview of the case law that interpreted and applied the security interest exemption, this Dialogue discusses the CERCLA lender liability rule and the protections it offers secured creditors. Unfortunately, while providing some guidance, the rule leaves unanswered crucial questions regarding the scope and application of the security interest exemption. First, the rule does not address the potential liability of institutional and bankruptcy trustees. Second, the rule leaves secured creditors vulnerable to suits under state environmental laws, as well as by private parties proceeding under CERCLA's citizen suit provision.¹⁹ Third, the rule does not address citizen suits pursuant to § 7002 of the Resource Conservation and Recovery Act (RCRA).²⁰

Case Law Shaping Lender Liability Under CERCLA

CERCLA imposes liability on owners or operators of facilities contaminated by hazardous waste, but a secured creditor could hold indicia of ownership, such as a mortgage, security agreement, or pledge to protect its security interest in the contaminated property and stay within the security interest exemption as long as it did not engage in "management" of the facility.²¹ The chronology of case law indicates that courts have increasingly scrutinized the roles of secured creditors in their borrowers' affairs, although the courts are in disagreement as to the specific actions that, taken by a secured creditor, will give rise to liability under CERCLA.²²

The first case to construe CERCLA's security interest exemption was in the context of a bankruptcy estate. In In re T.P. Long Chemical,²³ a bank held a perfected security interest in the debtor's accounts receivable, equipment, fixtures, inventory, and personal property, which included 90 drums of hazardous waste.²⁴ EPA commenced cleanup and sought reimbursement from the trustee's funds subject to the bank's security interest. EPA argued that its cleanup action had benefitted the secured creditor by enhancing the value of its collateral.²⁵ The bankruptcy court did not agree, and concluded that the secured creditor fell squarely within the security interest exemption. Notably, the court held that [22 ELR 10639] "even if [the secured creditor] had repossessed its collateral pursuant to its security agreement it would not be an 'owner or operator' as defined under CERCLA…. [T]he only possible indicia of ownership that can be attributed to [it] is that which is primarily to protect its security interest."²⁶ Since the secured creditor had not participated in management of the facility, it could not be held liable as an owner or operator under CERCLA.

Similarly, in United States v. Mirabile,²⁷ the court found that foreclosure, standing alone, was not enough to bring the secured creditor within the definition of owner or operator. The court indicated that a lender does not become liable as an owner or operator under CERCLA when it forecloses on its security interest and takes title to contaminated property, unless the lender has, at a minimum, participated in the day-to-day operational aspects of the site.²⁸ The court in Mirabile found that the management of a waste disposal facility meant participation in operational, production, or waste disposal activities. However, the court clarified that liability does not result from the "[m]ere financial ability to control waste disposal practices of the sort possessed by the secured creditors in this case."²⁹ Accordingly, the secured creditor fell within the exemption because it was not involved in management of the facility.

In United States v. Maryland Bank & Trust,³⁰ the court, without discussing whether the secured creditorhad participated in the management of the facility, found the security interest exemption to be unavailable when the secured creditor foreclosed on and took title to a contaminated property. In Maryland Bank & Trust, the court found that the bank had purchased the property at the foreclosure sale, not to protect its security interest, but to protect its investment.³¹ Thus, the holding in this case cast doubt on the continued viability of the security interest exemption after the secured creditor foreclosed on the property and took title to it.

Indeed, the next court to interpret the security interest exemption made clear that the exemption would not be available to the secured creditor after foreclosure. Guidice v. BFG Electroplating & Manufacturing³² involved a secured creditor that had held a mortgage on a contaminated property and later foreclosed; purchased the property at the foreclosure sale; sold the property; and was joined as a third-party defendant in a suit to recover cleanup costs. The court held that the secured creditor was protected by the exemption before it foreclosed on and bought the property.³³ Nonetheless, the court, following Maryland Bank & Trust, held that after the foreclosure the exemption did not apply, because the creditor was record owner of the property.³⁴

In United States v. Fleet Factors,³⁵ the secured creditor held a mortgage on the real property and a security interest in the facility's equipment, inventory, and fixtures. After the borrower went bankrupt and business ceased at the facility, the creditor foreclosed on some of the inventory and equipment, but it did not foreclose the mortgage securing the property. In answer to a suit for cleanup costs, the secured creditor claimed that it was entitled to the security interest exemption. In its analysis, the Eleventh Circuit observed that not only would day-to-day involvement with operations or participation in hazardous waste management void the exemption, but "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."³⁶ Accordingly, to void the exemption, the creditor had to be participating in the management of the facility to a degree to influence hazardous waste practices.

The next court of appeals to construe the security interest exemption did so less broadly. The Ninth Circuit, in In re Bergsoe Metal Corp.,³⁷ held 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."³⁸ The court focused on a functional test concerning what the creditor did, not on any rights it had to secure its investment.³⁹ With this case law in the background, EPA issued its rule.

Analysis of the Rule

The rule presents a range of activities that lenders, financial institutions, government receivers,⁴⁰ and other secured creditors may undertake to protect their security interests and still fall within the security interest exemption. Significantly, the rule defines several terms crucial to the protection afforded by the security interest exemption. First, the rule defines "indicia of ownership" broadly to include evidence of a security interest in real or personal property such as a mortgage, deed of trust, lien, surety bond, guarantee of obligation, title held pursuant to a lease-financing transaction, legal or equitable title obtained pursuant to foreclosure, assignments, pledges, and other forms of encumbrances against property that are held primarily to protect a security interest.⁴¹ The rule also defines a "holder" of a security interest to include initial and subsequent holders as well as receivers.⁴² The rule interprets the crucial phrase "primarily to protect a security interest" to mean that "the holder's indicia of ownership are held primarily for the purpose of [22 ELR 10640] securing payment or performance of an obligation."⁴³ Thus, the critical element of the security interest exemption is that the security interest must be held primarily for the purpose of securing a loan or other obligation and gives the holder recourse against the property of the person pledging the security.⁴⁴ If indicia of ownership are held primarily for investment purposes, such indicia will not be considered primarily to protect a security interest, and the secured creditor will fall outside the scope of the security interest exemption.⁴⁵ A security interest held primarily to protect a security interest stemming from a loan or other obligation can arise from a mortgage, deed of trust, lien, title pursuant to lease financing transactions, sale/leaseback, conditional or installment sale, trust-receipt transaction, assignment, factoring agreement, accounts receivable, financing arrangement, or consignment.⁴⁶

The rule also sets forth a functional test for participation in management: Liability for cleanup costs will attach under the rule only if the secured creditor exercises "actual participation" in the facility's management or operational affairs, but such participation does not include the mere capacity to influence, or ability to influence, or the unexercised right to control facility operations.⁴⁷ With this functional test, EPA's rule effectively dismisses the broad language in Fleet Factors that caused apprehension among secured creditors. Further, under the rule, the secured creditor's motivation is not relevant. Instead, the determination of whether a secured creditor participated in management is an objective, fact-based inquiry.⁴⁸

The rule sets forth a two-prong test that focuses on management of environmental compliance and overall day-to-day operations to determine whether the secured creditor was participating in management at the time the borrower was in possession of the entity encumbered by the security interest.⁴⁹ First, the secured creditor will be participating in management if it exercises decisionmaking control over the borrower's environmental compliance, such that it has undertaken responsibility for the borrower's hazardous substance handling or disposal practices.⁵⁰ Under this part of the test, a secured creditor could be held to be managing the security interest and consequently liable for cleanup costs, regardless of whether such hazardous substance handling and disposal resulted in a release or threatened release of hazardous substances.⁵¹

The second prong of the management test focuses on the secured creditor's control over the borrower's overall management of the day-to-day operations. The secured creditor will be participating in management to the extent it exercises control at the enterprise's managerial level and has assumed or manifested responsibility for the overall management of the enterprise, including the day-to-day decisionmaking concerning either environmental compliance, or all, or substantially all, of the operational (not financial or administrative) aspects of the enterprise other than environmental compliance.⁵² This prong of the participation-in-management test will be especially troublesome to secured creditors who, during the course of the loan or workout activities, might exert managerial influence that, while perhaps salvaging the loan, ultimately could result in liability for cleanup costs.

In clarifying the guidelines relating to participation in management, the rule focuses on three categories of activities commonly undertaken by secured creditors that will not be considered participation in management: pre-loan activities, loan policing and workout activities, and foreclosures.⁵³ First, the rule makes clear that pre-loan activities will not be considered participation in management.⁵⁴ This is logical because the potential secured creditor possesses no indicia of ownership before credit is extended.⁵⁵ For example, the rule states that acts or omissions occurring before the time that indicia of ownership were taken to protect a security interest will not constitute evidence of participation in management within the definition of the security interest exemption.⁵⁶ The rule also clarifies that a prospective secured creditor who conducts an environmental inspection or audit of the facility, or requires a prospective borrower to clean up a facility or to come into compliance (before or after the credit is extended), will not be considered to be participating in the management of the facility.⁵⁷ Further, since neither CERCLA nor the rule requires that a secured creditor conduct the inspection to qualify for the exemption, the liability of the secured creditor cannot be based on or affected by its failure to conduct or require an inspection.⁵⁸ Nonetheless, it is assumed that a [22 ELR 10641] secured creditor would want to minimize its environmental risk and therefore would conduct an audit or inspection of the property before extending credit. CERCLA's affirmative "innocent landowner defense"⁵⁹ can be established only if the purchaser at the time of the acquisition undertook "all appropriate inquiry" into the history and uses of the property and, despite such inquiry, did not discover the presence of hazardous substances.⁶⁰ Thus, the security interest exemption remains intact even if the secured creditor undertakes an environmental inspection in anticipation of claiming the innocent landowner defense.

Second, the rule allows a secured creditor to engage in policing and workout activities prior to foreclosure without incurring liability, as long as it does not "participate in management" of the facility as that term is defined in the rule.⁶¹ Whether the secured creditor participates in management will depend on the facts on each case.⁶² Thus, the secured creditor will remain within the exemption when it takes actions such as requiring the borrower to clean up the facility during the term of the security interest; requiring the borrower to comply or come into compliance with applicable environmental laws, rules and regulations; monitoring or inspecting the facility or the business or financial conditions; or taking other actions consistent with policing the loan or security interest.⁶³

Similarly, the secured creditor that engages in workout activities before foreclosure to prevent, mitigate, or cure a default by the borrower or to preserve the value of the security will be protected by the exemption as long as its activities are not "participation in management" as defined by the rule.⁶⁴ Permissible workout activities include restructuring or renegotiating the terms of the security interest, requiring the payment of additional rent or interest, and providing advice on financial and other matters.

Third, the rule permits the secured creditor to engage in foreclosure and post-foreclosure activities.⁶⁵ Thus, the rule makes clear that a secured creditor can foreclose and fall within the security interest exemption, and the indicia of ownership will continue to be maintained primarily as protection for the security interest, if the secured creditor undertakes to divest itself of the property in a reasonably expeditious manner and if the secured creditor did not engage in management of the facility before foreclosure.⁶⁶ Furthermore, the secured creditor that did not participate in management before foreclosure may maintain business activities and take other actions consistent with protecting and preserving its security interest without voiding the exemption.⁶⁷

To establish that the secured creditor continues to hold the property primarily as protection for its security interest and not as an investment, it must by broker or agent list the property for sale within 12 months of foreclosure or advertise it according to specific criteria set forth in the rule.⁶⁸ The 12-month period begins to run at the time the property may legally be offered for sale.⁶⁹ This bright-line 12-month test is consistent with the rule's standard that the security interest must be held primarily to protect a security interest, and not as an investment. Presumably, the property could be held indefinitely, as long as it was advertised in a commercially reasonable manner and until an offer of fair consideration was tendered. Under the rule, only by divesting itself of the property may the secured creditor argue that its indicia of ownership were held primarily to protect a security interest. The rule's inflexibility, however, fails to recognize that a secured creditor could change its strategy with respect to the property.

The rule forbids the secured creditor from refusing a bona fide, firm offer of fair consideration received any time after six months from obtaining marketable title.⁷⁰ The rule defines "fair consideration" as a cash amount that represents a value equal to or greater than the outstanding obligation owed to the secured creditor, including the amounts owed to other creditors who hold interests in the property.⁷¹ If the secured creditor seeks any amount above what is owed, or outbids or rejects an offer of fair consideration, it has in effect established that the ownership is held for investment purposes and is not held primarily to protect the security interest, unless the secured creditor is required or obliged by other federal or state laws not to accept the bid.⁷²

Shortfalls

Although the rule gives some guidance to secured creditors, it fails to address adequately several crucial issues. First, the rule does not address the question of whether institutional trustees or fiduciaries fall within the security interest exemption under CERCLA. Thus, it remains unclear whether and to what extent a bank's trust department may be liable for cleanup costs in the event a trust holds contaminated [22 ELR 10642] property.⁷³ Most institutional trustees will fall within the definition of "owner or operator" of a site or facility and thus will be potentially liable for cleanup costs. Thus, a trustee that takes title as a trustee may nonetheless be personally liable under CERCLA as an owner and could face personal liability for cleanup costs if the trust's assets are not sufficient to indemnify the trustee.⁷⁴ Moreover, institutional trustees who manage trust portfolios that lease trust property may also face "operator" liability under CERCLA.⁷⁵ In some circumstances, a trustee may be able to assert the third-party defense by demonstrating either that the property was devised to the trust through inheritance or bequest, or that the contamination occurred after the trust acquired the property.⁷⁶ In the alternative, the trustee must show that at the time of the acquisition the trustee "did not know and had no reason to know" of any contamination;⁷⁷ that a contractually unrelated third party was responsible for the contamination; and that the trustee exercised due care and took precautions against a third party's foreseeable acts or omissions.⁷⁸

Furthermore, while the rule sheds some light on the security interest exemption with respect to EPA's right to sue secured creditors for hazardous waste cleanup costs, the rule gives no guidance with respect to lawsuits brought against secured creditors by private parties under CERCLA or other environmental statutes. Accordingly, while secured creditors may come within the exemption afforded by the rule, they nonetheless may be facing significant exposure to third parties from whom the government will seek cleanup costs, and who in turn may seek contribution from secured creditors on the basis of the borrower-creditor relationship.⁷⁹

In addition, while the rule addresses CERCLA liability, it does not apply to the security interest exemption under RCRA, which governs the treatment and disposal of underground storage tanks.⁸⁰ RCRA sets forth the definition of "owner" of an underground storage tank for purposes of cleanup liability and provides for a security interest exemption that parallels CERCLA's.⁸¹ Consequently, it is unclear whether secured creditors facing potential RCRA liability can use the rule as a corollary for defining the range of activities they may engage in to stay within the RCRA security interest exemption.

Finally, the promulgation of EPA's rule has no bearing on the issue of lender liability under various state environmental laws. It is well established that CERCLA does not preempt state laws with respect to hazardous substances.⁸² Although some states have passed their own laws exempting secured creditors from hazardous waste cleanup costs on properties acquired through foreclosure,⁸³ other states may seek to hold these secured creditors liable. Indeed, the gaps in the rule may force some secured creditors to rely on private agreements to allocate liability among themselves, although whether and to what extent such agreements would be enforceable is uncertain.⁸⁴

CONCLUSION

EPA's rule on lender liability confirms that participation in hazardous waste management may take a lender outside CERCLA's secured creditor exemption and make it liable for environmental cleanup costs. Under the rule's two-prong test, a lender is liable if it participates in the management of the borrower's operations by exercising decisionmaking control over either the facility's environmental compliance or the facility's overall day-to-day operations. These activities are prohibited if the lender wants to stay within CERCLA's secured creditor exemption. [22 ELR 10643] Under the rule, a lender may also protect itself against the risk of environmental liability by policing loans to ensure environmentally sound management.

The rule is a legislative rule under the Administrative Procedure Act,⁸⁵ and a reviewing court owes deference to EPA's interpretation of a statutory term if the agency's interpretation is reasonable.⁸⁶ The rule's participation-in-management test will present difficulties in interpretation and application. Furthermore, uncertainties surrounding the participation-in-management standard may set lenders apart from other more concrete categories of CERCLA PRPs such as owners, transporters, and generators. Without knowing exactly what "participation in management" means, lenders would be held to the same standard of strict liability as other PRPs who can more easily foresee what kinds of activities will incur liability. These factors will test the rule's ability to provide guidance to the lending community and will affect the role of lending institutions as PRPs in CERCLA litigation. Whether courts will defer to the rule is indefinite, particularly in the Eleventh Circuit, as well as district courts in Alabama, Georgia, and Florida, in light of the precedent articulated in Fleet Factors.⁸⁷

1. 57 Fed. Reg. 18344 (1992) (to be codified at 40 C.F.R. § 300.1100).

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

3. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), aff'g 724 F. Supp. 955, 19 ELR 20529 (S.D. Ga. 1988), cert. denied, 111 S. Ct. 752 (1991).

4. See 56 Fed. Reg. 28798, 28799 (1991) (proposed). Congress also had attempted to clarify the scope of the security interest exemption. In 1989, Rep. John J. LaFalce (D-NY) introduced a bill in the House that exempted from CERCLA liability any financial institution that foreclosed and took title to a property without causing or contributing to contamination. H.R. 2085, 101st Cong., 1st Sess. (1989). After the Fleet Factors decision was issued, Rep. LaFalce introduced a second version of the bill, which more forcefully addressed the issues discussed in Fleet Factors and exempted from liability fiduciaries or trustees who were left with contaminated property. H.R. 4494, 101st Cong., 2d Sess. (1990). Sen. Jake Garn (R-Utah) introduced a bill in the Senate which added a new subtitle to the Federal Deposit Insurance Act exempting financial institutions, the Resolution Trust Corporation, and the Federal Deposit Insurance Corporation from cleanup costs unless their actions caused or contributed to the contamination. S. 2827, 101st Cong., 2d Sess. (1990). While the Senate legislation passed on November 21, 1991, the exemption was deleted from the final bill passed by Congress on November 27, 1991. On July 1, 1992, the Senate voted 77 to 19 in favor of the Federal Housing Enterprises Regulatory Reform Act of 1992, S. 2733, to which Sens. Lautenberg (D-NJ) and Garn had attached measures to protect municipalities and lenders from CERCLA liability. The bill would normally have proceeded to conference, but the Senate bill did not substitute S. 2733's language for the companion House bill (H.R. 2900). Thus, the bill proceeded to, and will likely stay in the House, where many members object to certain banking provisions in the Senate version. See Procedural Snag Puts up New Hurdle for Bill Relieving Cities, Lenders, INSIDE EPA's SUPERFUND REP., July 15, 1992, at 10.

5. In 1976, Congress had attempted to address the growing problem of hazardous waste by passing the Resource Conservation and Recovery Act, Pub. L. No. 94-580, 90 Stat. 2795 (codifiedat 42 U.S.C. §§ 6901-6987, ELR STAT. RCRA 001-050). As noted in the legislative history of CERCLA, however, RCRA granted no investigatory or enforcement power to EPA or the Justice Department and was only prospective in nature. See H.R. Rep. No. 1016, 96th Cong., 2d Sess., pt. I, at 22 (1980), reprinted in 1980 U.S.C.C.A.N. 6119, 6125.

6. CERCLA § 107(a)(1)-(4), U.S.C. § 9607(A)(1)-(4), ELR STAT. CERCLA 024-025.

7. Id. § 101(9), 42 U.S.C. § 9601(9), ELR STAT. CERCLA 007.

8. See, e.g., County Line Inv. Co. v. Tinney, 933 F.2d 1508, 1515, 21 ELR 21299, 21302 (10th Cir. 1991) (per curiam); United States v. Monsanto Co., 858 F.2d 160, 167 & n.11, 19 ELR 20085, 20087 & n.11 (4th Cir. 1988), cert. denied, 490 U.S. 1106 (1989); Tanglewood E. Homeowners v. Charles-Thomas, Inc., 849 F.2d 1568, 1572, 18 ELR 21348, 21350 (5th Cir. 1988); see also CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024-025.

9. If the harm is divisible, then liability may not be joint and several. See, e.g., County Line Inv., 933 F.2d at 1515 & n.11, 21 ELR at 21303 & n.11; Monsanto, 858 F.2d at 171, 19 ELR at 20089; United States v. Chem-Dyne Corp., 572 F. Supp. 802, 810-811, 13 ELR 20986, 20989 (S.D. Ohio 1983).

10. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024-025.

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

12. See, e.g., 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. Maryland Bank & Trust Co., 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986); United States v. Mirabile, No. 84-2280, 15 ELR 20994 (E.D. Pa. Sept. 4, 1985).

13. CERCLA § 107(b)(1)-(3), 42 U.S.C. § 9607(b)(1)-(3), ELR STAT. CERCLA 025.

14. Pub. L. No. 99-499, 100 Stat. 1613 (1986).

15. CERCLA § 107(b)(3)(a) & (b), 42 U.S.C. § 9607(b)(3)(a) & (b), ELR STAT. CERCLA 025.

16. Id. § 101(35)(A)(i); 42 U.S.C. § 9601(35)(A)(i), ELR STAT. CERCLA 009.

17. United States v. Fleet Factors Corp., 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991).

18. For a detailed overview of the proposed rule, see Philip R. Sellinger and Avery S. Chapman, EPA's Proposed Rule on Lender Liability Under CERCLA: No Panacea for the Financial Services Industry, 21 ELR 10618 (Oct. 1991).

19. CERCLA § 310, 42 U.S.C. § 9659, ELR STAT. CERCLA 067.

20. 42 U.S.C. § 6972, ELR STAT. RCRA 034.

21. CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008; see supra notes 6-11 and accompanying text.

22. For an overview of lender liability, see Joel R. Burcat et al., The Law of Environmental Lender Liability, 21 ELR 10464 (Aug. 1991); Patricia L. Quentel, The Liability of Financial Institutions for Hazardous Waste Cleanup Costs Under CERCLA, 1988 Wis. L. Rev. 139.

23. 45 B.R. 278, 15 ELR 20635 (Bankr. N.D. Ohio 1985).

24. Id. at 280-81, 15 ELR at 20637.

25. Id. at 287, 15 ELR at 20640.

26. Id. at 288-29, 15 ELR at 20640 (footnote omitted).

27. 15 ELR 20994 (E.D. Pa. Sept. 4, 1985).

28. Id. at 20996.

29. Id. at 20995.

30. 632 F. Supp. 573, 16 ELR 20557 (D. Md. 1986).

31. Id. at 579, 16 ELR at 20559. The record indicated that the bank bid $ 381,000 on a $ 335,000 mortgage.

32. 732 F. Supp. 556, 20 ELR 20439 (W.D. Pa. 1989).

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

34. Id. at 563, 20 ELR at 20442.

35. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), aff'g 724 F. Supp. 955, 19 ELR 20529 (S.D. Ga. 1988), cert. denied, 111 S. Ct. 752 (1991).

36. 901 F.2d at 1558, 20 ELR at 20835. The court specifically rejected the formulation of the secured creditor exemption suggested by the district court in Mirabile. Id., 20 ELR at 20835-36; see supra notes 28-30 and accompanying text.

37. 910 F.2d 668, 20 ELR 21229 (9th Cir. 1990).

38. Id. at 672, 20 ELR at 21231.

39. Id.

40. The application of the rule as it applies to government receivers is beyond the scope of this Dialogue.

41. 57 Fed. Reg. 18382 (to be codified at 40 C.F.R. § 300.1100(a)).

42. Section 300.1100(a)(1) states that "[a] holder is a person who maintains indicia of ownership (as defined in 40 C.F.R. § 300.1100(a)) primarily to protect a security interest (as defined in 40 C.F.R. § 300.1100(B)(1)). 57 Fed. Reg. 18382 (1992).

43. 57 Fed. Reg. 18382-83 (to be codified at 40 C.F.R. § 300.1100(b)).

44. Id. at 18375.

45. Id. at 18383 (to be codified at 40 C.F.R. § 300.1100(b)(2)); see also id. at 18375.

46. Id. (to be codified at 40 C.F.R. § 300.1100(b)(1)).

47. Id. (to be codified at 40 C.F.R. § 300.1100(c)(1)).

48. See id. at 18354; cf. In re Bergsoe Metal, 910 F.2d at 672 n.2, 20 ELR at 21231 n.2 ("A creditor's motivation is irrelevant … to the issue of whether its actions constitute management."); Fleet Factors, 901 F.2d at 1560, 20 ELR at 20837 ("What is relevant is the nature and extent of the creditor's involvement with the facility, not its motive.").

49. 57 Fed. Reg. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(1) & (2)).

50. Id. (to be codified at 40 C.F.R. § 300.1100(c)(1)(i)).

51. See id. at 18355, 18359.

52. Id. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(1)(ii)(A) & (B)). Under the rule, operational aspects of the enterprise include functions such as that of facility or plant manager, operations manager, chief operating officer, or chief executive officer. Financial or administrative aspects include functions such as that of credit manager, accounts payable/receivable manager, personnel manager, controller, chief financial officer, or similar functions. Id. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(1)(ii)(B)). This rule follows case law that has held that administrative and financial advice do not rise to the level of participation in management that would void the security interest exemption. See, e.g., In re Bergsoe Metal, 910 F.2d at 672, 20 ELR at 21231; Fleet Factors, 901 F.2d at 1556-57, 20 ELR at 20835; Guidice v. BFG Electroplating & Mfg., 732 F. Supp. 556, 562, 20 ELR 20439, 20441 (W.D. Pa. 1989); Mirabile, 15 ELR at 20996-97.

53. 57 Fed. Reg. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(2)).

54. Id. (to be codified at 40 C.F.R. § 300.1100(c)(2)(i)).

55. The secured creditor, prior to extending credit, depending on its relationship to and activities with the borrower, nonetheless could be considered an operator pursuant to CERCLA § 107(a)(1), 42 U.S.C. § 9607(a)(1), ELR STAT. CERCLA 024, or one who arranged for disposal under CERCLA § 107(a)(3), 42 U.S.C. § 9607(a)(3), ELR STAT. CERCLA 024, ora transporter of hazardous substances under CERCLA § 107(a)(4), 42 U.S.C. § 9607(a)(4), ELR STAT. CERCLA 024. See 57 Fed. Reg. at 18355-56.

56. 57 Fed. Reg. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(2)(i)).

57. Id. (to be codified at 40 C.F.R. § 300.1100(c)(2)(i)).

58. Id.

59. CERCLA § 107(b)(3), 42 U.S.C. § 9607(b)(3), ELR STAT. CERCLA 025; see generally G. Van Velsor Wolf Jr., Emerging Contours of the CERCLA "Innocent Landowner" Defense, 20 ELR 10483 (Nov. 1990).

60. CERCLA § 101(35)(B), 42 U.S.C. § 9601(35)(B), ELR STAT. CERCLA 010.

61. 57 Fed. Reg. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(2)(ii)(A)).

62. See 57 Fed. Reg. at 18375 ("Whether the holder has participated in management sufficiently to void the exemption is a fact-sensitive inquiry.").

63. Id. at 18383 (to be codified at 40 C.F.R. § 300.1100(c)(2)(ii)(A)).

64. Id. (to be codified at 40 C.F.R. § 300.1100(c)(2)(ii)(B)).

65. Id. at 18383-84 (to be codified at 40 C.F.R. § 300.1100(d)(1)).

66. Id. at 18384 (to be codified at 40 C.F.R. § 300.1100(d)(1)).

67. Id. (to be codified at 40 C.F.R. § 300.1100(d)(2)).

68. Id. (to be codified at § 300.1100(d)(2)(i).

69. Id. This 12-month period offers a guideline consistent with the rule's admonition that a foreclosure must be primarily to protect the secured creditor's security interest and that the property cannot be held for investment purposes. The district courts in Maryland Bank & Trust and Mirabile both looked to the length of time the secured creditor held title to the property after foreclosure. In Maryland Bank & Trust, the court held that the security interest exemption would not apply to a former mortgagee still holding title four years after purchasing the property at a foreclosure sale. 632 F. Supp. at 579, 16 ELR at 20559. In that case, the court specifically declined to address "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 [CERCLA] section 101(20)(A) exemption." Id. at 579 n.5, 16 ELR at 20559 n.5 (citing CERCLA § 101(20)(A), 42 U.S.C. § 101(20)(A), ELR STAT. CERCLA 008). In contrast, in Mirabile, the court held that the exemption applied to the secured creditor who foreclosed on the property and assigned the bid four months later. 15 ELR at 20996.

70. 57 Fed. Reg. at 18384 (to be codified at 40 C.F.R. § 300.1100(d)(ii)(B)).

71. Id. (to be codified at 40 C.F.R. § 300.1100(d)(2)(ii)(A)); see also id. at 18365.

72. Id. (to be codified at 40 C.F.R. § 300.1100(d)(2)(ii)).

73. See generally Joel S. Moskowitz, Trustee Liability Under CERCLA, 21 ELR 10003 (Jan. 1991). Only a few cases have focused on the liability of trustees. For example, in United States v. Burns, No. C-88-94-L (D.N.H. Sept. 12, 1988), a trust was record owner of real property that had been contaminated. EPA sought to recover cleanup costs from the trustee, who also was the beneficiary of the trust. The court held the trustee liable as an owner because the trustee held legal title to the trust property and under trust law could be liable for obligations as the owner of the property. Burns, No. C-88-94-L, slip op. at 4. In Phoenix v. Garbage Service Co., No. 89-1709 PHX PGR (D. Ariz. Apr. 5, 1991), the district court refused to dismiss the suit brought by the city of Phoenix against a bank that acted as a trustee for an estate that exercised an option to purchase a landfill on behalf of the estate. The bank claimed it was merely acting as executor of the estate through which the landfill passed and therefore was not an owner under CERCLA. The city, in turn, claimed that the bank was liable as a matter of law because it held title to the landfill and because there were other indicia of ownership extant. In the alternative, however, the city argued that there existed a genuine issue of material fact as to the capacity in which the bank held title. The court held that while there was no liability attributable to the bank on the bases of its role as executor or through the warranty deed that conveyed the landfill to the bank as trustee, there existed a question of material fact as to whether the bank bore the indicia of ownership in either its capacity as executor or testamentary trustee.

74. See Moskowitz, supra note 74, at 10004; but see 57 Fed. Reg. at 18349 (suggesting that a trustee would not be personally liable, and asserting that in most instances, the trust's assets are available for cleanup of a trust property).

75. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024-025.

76. Id. § 101(35)(A), 42 U.S.C. § 9601(35)(A), ELR STAT. CERCLA 009-010.

77. Id. § 101(35)(A)(i), 42 U.S.C. § 9601(35)(A)(i), ELR STAT. CERCLA 009.

78. Id. § 107(b)(3)(b), 42 U.S.C. § 9607(b)(3)(b), ELR STAT. CERCLA 025.

79. Although not specifically stated in the rule, EPA nonetheless claims that the rule will apply, as a definition of the CERCLA § 101(20)(A) security interest exemption, "to all CERCLA actions, whether initiated by EPA or by any other person who seeks to recover costs or to impose cleanup liability under the statute." See 57 Fed. Reg. at 18368 (citing 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008).

80. RCRA § 9001-9010, 42 U.S.C. §§ 6991-6991i, ELR STAT. RCRA 042-047.

81. Cf. RCRA § 9001, 42 U.S.C. § 6991, ELR STAT. RCRA 042 with CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

82. See, e.g., Manor Care, Inc v. Yaskin, 950 F.2d 122, 22 ELR 20320 (3d Cir. 1991); United States v. Union Gas Co., 743 F. Supp. 1144, 21 ELR 20337 (E.D. Pa. 1990); CERCLA § 114(a), 42 U.S.C. 9614(a), ELR STAT. CERCLA 041 ("Nothing in this chapter shall be construed or interpreted as preempting any State from imposing any additional liability or requirements with respect to the release of hazardous substances within such State.").

83. For example, an Illinois law, H.B. 687, enacted September 23, 1991, entitled EPA Lender Liability Act, exempts financial institutions as well as the Illinois Housing Development Authority from liability for hazardous waste cleanup costs unless those entities exercised "continual or recurrent managerial control" that caused the release.

84. See generally James W. Conrad Jr., CERCLA Does Not Invalidate Contractual Allocations of Liability, 22 ELR 10045 (Jan. 1992). Additionally, it is unclear whether courts should apply the rule retroactively.

85. 5 U.S.C. § 500-559, ELR STAT. ADMIN. Proc. 001-018; 57 Fed. Reg. at 18368.

86. Chevron, U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 14 ELR 20507 (1984); Eagle-Picher Indus. v. EPA, 759 F.2d 905, 15 ELR 20467 (D.C. Cir. 1985) (holding that the court will defer to the EPA because it has been entrusted by the President with the administration of CERCLA.).

87. The issue of whether EPA exceeded its authority in issuing the lender liability rule has been raised by Michigan's Attorney General Kelley and the Chemical Manufacturers Association in separate petitions for review. Michigan v. EPA, No. 92-1312 (D.C. Cir. July 28, 1992); Chemical Mfrs. Assoc. v. EPA, No. 92-1314 (D.C. Cir. July 28, 1992).