The EPA Lender Liability Regulations: EPA's Questionable Authority to Promulgate the Regulations as Part of the National Contingency Plan

Charles Dewey Cole Jr.

Charles Dewey Cole Jr. practices law with the firm of Meyer, Suozzi, English & Klein, in Mineola, New York. He graduated with an A.B. from Columbia College; he received a J.D. from St. John's University School of Law, where he was research editor of the St. John's Law Review; he graduated with an M.L.I.S. from The University of Texas at Austin; and he was awarded an LL.M. from New York University School of Law. Mr. Cole served as a law clerk to Chief Judge Joe J. Fisher of the U.S. District Court for the Eastern District of Texas from 1979 to 1980 and as a law clerk to Judge Thomas M. Reavley of the U.S. Court of Appeals for the Fifth Circuit from 1981 to 1982.

[23 ELR 10264]

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund)¹ has been construed to impose strict, joint and several, and retroactive liability on owners and operators of sites where there is a release of a hazardous substance.² The U.S. Environmental Protection Agency (EPA or the Agency) is charged with the responsibility of enforcing CERCLA to clean up the nation's toxic waste sites. Though CERCLA sets up a fund to pay for cleanup,³ the Act also envisions that those responsible for the contamination will pay cleanup costs. Thus, the Act provides for cost recovery actions, which may be brought by EPA and others who have the responsibility for cleanup.⁴

One vexing issue that has arisen under CERCLA is the liability for cleanup costs of a lender that holds a security interest, such as a mortgage, in the site.⁵ CERCLA § 101(20)(A) says that the phrase "owner or operator" does not include a person who, without participating in the management of a facility, holds indicia of ownership primarily to protect a security interest in the facility.⁶ Thus, CERCLA exempts from liability secured creditors, such as mortgagees, that do not participate in the management of the hazardous waste site.⁷

CERCLA's exemption for secured creditors that do not participate in a facility's management frequently is at odds with EPA's efforts to clean up hazardous waste sites and get someone other than the United States to pay for it. Indeed, EPA's enforcement of CERCLA has been marked by an effort to increase the number of potentially responsible parties, thus spreading the cost of the cleanup and increasing the probability that the responsible parties will pay.⁸ And, in the context of lender liability, a series of decisions, culminating in the Eleventh Circuit's decision in United States v. Fleet Factors Corp.,⁹ has greatly increased the concern of the lending community.¹⁰ Advice on environmental matters to a borrower now has become a potential source of liability, since it may be interpreted as the lender participating in the management of the site.¹¹

EPA responded to the Fleet Factors decision with a proposed amendment to CERCLA's national contingency plan (NCP)¹² that interpreted the scope of CERCLA's [23 ELR 10265] § 101(20)(A) security interest exemption.¹³ EPA proposed to clarify the range of activities that a private lending institution or other entity holding a security interest in a facility may undertake in the course of protecting the security interest without participating in the facility's management and thereby voiding the exemption from CERCLA liability.¹⁴ EPA recognized that lenders following the new rule still might find themselves haled into court by private parties, either in cost recovery actions or actions for contribution under CERCLA.¹⁵ EPA sought to preclude private parties from asserting claims against lenders that adhered to the regulations, and since a private-party recovery is limited to cleanup costs that are "consistent with" the NCP,¹⁶ EPA placed the lender liability regulations in the NCP.¹⁷ The final rule became effective on April 29, 1992.¹⁸ Whether EPA's lender liability regulations provide a safe harbor to a lender in a private-party action, or action for contribution, has been and will continue to be the subject of litigation.

The liability of lenders under CERCLA has been defined by Congress and enforced by the courts in several decisions construing CERCLA § 101(20)(A). This Dialogue argues that EPA lacks the authority to amend the NCP and alter the balance Congress struck in enacting CERCLA. Congress has authorized EPA to promulgate the NCP to establish procedures and standards for the cleanup of hazardous waste sites. An EPA amendment to the NCP to clarify the activities that a lender may undertake and still avoid liability thus raises a serious question on whether the Agency has acted outside the authority Congress accorded it.

EPA's Questionable Authority to Promulgate Lender Liability Regulations in the National Contingency Plan

When passing legislation, Congress may select the method for implementing its policy choices.¹⁹ Congress may devise the details and include them in the legislation.²⁰ Or, Congress can enact general standards and assign to the administrative agency the responsibility for implementing a policy that conforms with those standards.²¹

In enacting CERCLA § 105,²² which authorizes the NCP, Congress plainly chose the latter course and delegated responsibility for implementing the NCP. It enacted a requirement that the executive revise and republish the NCP to include "procedures and standards for responding to releases of hazardous substances, pollutants, and contaminants."²³ And Congress ultimately included 10 items that the executive was to "include at a minimum."²⁴

When Congress delegated the responsibility to the executive to revise and republish the NCP, it used an "express delegation of authority to the agency to elucidate a specific [23 ELR 10266] provision of the statute by regulation."²⁵ When Congress acts in this manner, however, "[i]t is axiomatic that an administrative agency's power to promulgate legislative regulations is limited to the authority delegated by Congress."²⁶ If the agency has acted beyond the powers delegated by Congress in issuing its regulations, the regulations are void.

EPA's authority to promulgate its lender liability regulations as a part of the NCP must derive from Congress' intent as expressed in CERCLA. CERCLA § 105, which directs the executive to issue the NCP, speaks of the NCP as including "procedures and standards for responding to releases of hazardous substances, pollutants, and contaminants."²⁷ And the 10 subsections all are directed to methods for cleaning up toxic waste sites.²⁸ Thus, the statute on its face provides EPA with no authority to promulgate the lender liability regulations as part of the NCP.

Nor does the legislative history of CERCLA § 105 suggest that Congress intended the NCP to provide for anything other than a means to identify, evaluate, and clean up waste sites. As enacted by Congress, CERCLA § 105 requires the president to revise and republish the NCP, which previously had been promulgated under the Clean Water Act,²⁹ to "establish procedures and standards for responding to releases of hazardous substances, pollutants, and contaminants."³⁰ A review of § 105 illustrates that the NCP, as envisioned by CERCLA's authors, was designed to provide guidance for locating hazardous waste sites, evaluating the dangers presented by them, and cleaning them up.³¹ Indeed, this understanding of the role of the NCP was spelled out in the House report, which explained that the plan to be promulgated would include

(1) appropriate roles and responsibilities for federal, state, and local authorities;

(2) methods for discovering and investigating hazardous sites;

(3) methods for evaluating and containing releases; and

(4) criteria and methods for determining the appropriate extent of removal, containment, and response.³²

The Senate report made the same point.³³

This view — that the NCP was to provide guidance on identifying and cleaning up hazardous waste sites — was reflected in the Senate and House bills, both as introduced³⁴ and as reported out of committee.³⁵ This limitation in the NCP was also contained in CERCLA as initially passed by the House.³⁶

The version of § 105 that ultimately was passed by both houses was added by amendment in the Senate.³⁷ According to the sponsor of the Senate amendment, former Senator Stafford (R-Vt.), the revised and republished NCP also was to include a consideration of the relationship between the costs and benefits of a particular response action.³⁸ Otherwise § 105 remained the same: authorization to develop a plan to identify, evaluate, and clean up toxic waste sites. Thus, the legislative history of CERCLA — like the statute's text — also does not support EPA's authority to promulgate its lender liability regulations as part of the NCP.

The Unsettled Consequences of EPA's Amendment of the National Contingency Plan With the Lender Liability Regulations

Because the NCP as envisioned and enacted by Congress was limited to identifying and cleaning up toxic waste sites, there is serious doubt whether EPA properly could have used its authority to revise the NCP to promulgate its lender liability regulations. This doubt is heightened by the additional consequence to a private party in a cost recovery action of including the lender liability regulations in the NCP. A private party may recover only response costs that are consistent with the NCP.³⁹ If a lender has observed the strictures of EPA's rule, an action against it by a private party presumably would not be consistent with the NCP, and the private party would not be allowed to recover its response costs.⁴⁰ Thus, by amending the NCP, the Agency may affect the liability scheme enacted by Congress.

This result is more troublesome in light of the courts' enforcement of the security interest exemption to provide a narrow but workable safe harbor for lenders that do not participate in the management of the waste site.⁴¹ If the courts' interpretation of a statute is not faithful to the enactment, Congress may amend the statute to correct the misreading. In the context of CERCLA, if the courts' reading of the exemption is not consistent with congressional intent, the traditional approach calls for Congress to amend CERCLA and change it. Thus, EPA's "amendment" of the statute by using its power to revise the NCP not only alters [23 ELR 10267] the balance struck by Congress in CERCLA but also usurps Congress' power to correct a judicial misinterpretation.

Given EPA's questionable authority to promulgate its lender liability regulations as part of the NCP, it is uncertain whether lenders will take comfort in following the regulations.⁴² Until the courts have decided whether the Agency properly promulgated its regulations as part of the NCP and, if so, whether the regulations apply in private-party cost recovery actions, lenders will continue to be added as parties to cleanup litigation. Even if the lender liability regulations are upheld, a lender still may be added as a party on the ground that it is a de facto owner, operator, or participant in a facility's management.⁴³ In short, the sanctuary sought by the lending community is best supplied by Congress through an amendment to CERCLA that defines the security interest exemption.⁴⁴

Conclusion

The recent litigation over the liability of lenders for cleanup costs under CERCLA has increased the uncertainty in the financial community concerning its environmental liabilities. It is commendable that EPA joined the debate over the range of activities that a lender may undertake while claiming CERCLA's security interest exemption. However, by promulgating the regulations as a revision to the NCP, EPA has needlessly injected an element of uncertainty both by inviting a judicial challenge to its authority and by possibly forestalling action by Congress to clarify the limits of the security interest exemption. Because it is questionable whether EPA may preclude private parties from asserting cost recovery claims against lenders by revising the NCP, it also is doubtful many lenders will find a safe harbor in the regulations. Thus, the uncertainty in the lending community over its environmental liabilities will continue.

Congress, however, has the authority to amend CERCLA to define the scope of the security interest exemption and sweep away the uncertainties created by the courts' decisions. Congressional action has the additional advantage of enacting a rule that would apply in both EPA-initiated and private-party actions. Thus, lenders would be given the assurance that their environmental liabilities to private parties and to the United States would be the same.

1. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075.

2. Congress defined the term "hazardous substance" in CERCLA § 101(14). 42 U.S.C. § 9601(14), ELR STAT. CERCLA 007-008.

3. The so-called "Superfund" is established in CERCLA § 111, 42 U.S.C. § 9611, ELR STAT. CERCLA 034.

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

5. For an informative treatment of the issue of lender liability under CERCLA, see Roslyn Tom, Interpreting the Meaning of Lender Management Participation Under Section 101(20)(A) of CERCLA, 98 YALE L.J. 925, 925 (1989).

6. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

7. See, e.g., In re Bergsoe Metal Corp., 910 F.2d 668, 671, 20 ELR 21229, 21230 (9th Cir. 1990).

8. See James Edward Enoch Jr., Environmental Liability for Lenders After United States v. Fleet Factors, Corp.: Deep Pockets or Deep Problems?, 48 WASH. & LEE L. REV. 659, 662-63 (1991).

9. 901 F.2d 1550, 20 ELR 20832 (11th Cir. 1990), cert. denied, 111 S. Ct. 752 (1991). For an overview of how courts have addressed the lender liability issue, see Patricia L. Quentel, EPA Issues Long-Awaited Lender Liability Rule, 22 ELR 10637, 10638-39 (Oct. 1992); G. Van Velsor Wolf, Lender Liability Under the Federal Superfund Program, 25 ARIZ. ST. L.J. 531, 533-35 (1991); Enoch, Cleaning Up the Debris After Fleet Factors: Lender Liability and CERCLA's Security Interest Exemption, 104 HARV. L. REV. 1249, 1251 (1991); Enoch, supra note 8, at 673-77; Tom, supra note 5, at 929-31.

Before Fleet Factors, several district courts had wrestled with the liability of lenders under CERCLA when they had acted to protect their investments. Generally speaking, these courts had held that financial assistance or advice by a lender to an owner or operator through a workout or foreclosure and sale to a third party did not make the lender liable as an operator under CERCLA. See, e.g., United States v. Mirabile, 15 ELR 20994, 20995 (E.D. Pa. 1985). Conversely, the courts imposed liability on a lender if it foreclosed on the property and acquired it because foreclosure converted the lender into an owner. E.g., United States v. Maryland Bank & Trust Co., 632 F. Supp. 573, 578-80, 16 ELR 20557, 20559-60 (D. Md. 1986). In Fleet Factors, EPA sought to impose liability for cleanup costs on a lender that had continued to advance funds to a business that had filed for bankruptcy and then went out of business. 901 F.2d at 1552-53, 20 ELR at 20833. On appeal, a panel of the Eleventh Circuit said that a secured creditor may be liable "withoutbeing an operator, by participating in the financial management of a facility to a degree indicating a capacity to influence the corporation's treatment of hazardous wastes." Id. at 1557, 20 ELR at 20835 (footnote omitted). Actual involvement in the day-to-day operations of the facility was not necessary. Id. Nor was it necessary for the lender to participate in the hazardous waste decisions. Id. at 1558, 20 ELR at 20835. The lender was "liable if its involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste decisions if it so chose." Id. (footnote omitted). See also In re Bergsoe Metal Corp., 910 F.2d 668, 672, 20 ELR 21229, 21231 (9th Cir. 1990) ("Fleet Factors proposed a rule adopted by certain district courts, that participation in financial management is allowable, but participation in day-to-day operational management of a facility will subject the creditor to liability.").

10. Martin R. Jelliffe, Lender Liability Under CERCLA: A Game of Chance or a Game of Skill?, 11 MISS. C. L. REV. 39, 50 (1990) ("difficult to imagine how the holding in Fleet Factors can have anything other than a chilling effect on lenders"); Wolf, supra note 9, at 539; Enoch, supra note 9, at 1257 ("Fleet Factors has dramatically increased the lending community's awareness of potential CERCLA liability.").

11. Enoch, supra note 9, at 1257-58 ("Ironically, however, Fleet Factors may actually deter lenders from counseling their borrowers on methods of averting hazardous waste damage. If the lender attempts to address a borrower's environmental problems, it may expose itself to liability as an owner who could have affected waste disposal decisions.").

12. 40 C.F.R. pt. 300 (1992). The NCP is promulgated by EPA pursuant to CERCLA § 105, 42 U.S.C. § 9605, ELR STAT. CERCLA 021.

13. 42 U.S.C. § 9601(20)(A), ELR STAT. CERCLA 008.

14. 56 Fed. Reg. at 28798, 28798 (1991). In its proposal, EPA said it recognized the uncertainty that had grown up around the judicial interpretations of CERCLA § 101(20)(A). Id. at 28798-99. And, it pointed to the Eleventh Circuit's decision in Fleet Factors, which suggests that a lender may be liable if it participates in the management "to a degree indicating a capacity to influence the corporation's treatment of hazardous wastes," as contributing to the uncertainty. Id. at 28799 (quoting Fleet Factors, 901 F.2d at 1557, 20 ELR at 20835). EPA said its proposed rule specified the range of activities in which a lender could engage without losing its security interest exemption. Id. at 28799; see id. at 28808-09.

When EPA promulgated the final rule, it went out of its way to explain that it was not administratively overruling the Eleventh Circuit's decision in Fleet Factors. By an ipse dixit, the Agency explained that the court of appeals "did not hold that the mere capacity to influence operations, without more, was a sufficient basis on which to impose liability on a holder." 57 Fed. Reg. 18368, 18369 (1992). According to EPA, the Eleventh Circuit instead held that "a holder could lose the exemption if it was actually involved in the management of a secured facility, and only then if 'its involvement with the management is sufficiently broad to support the inference' that it could affect hazardous waste disposal practices." Id. (quoting Fleet Factors, 901 F.2d at 1557, 20 ELR at 20835). Thus, by EPA's reading, its lender liability rule did not overturn the Eleventh Circuit's decision in Fleet Factors but instead interpreted CERCLA § 101(20)(A) to provide a standard to measure "what amount or extent of involvement by a holder 'is sufficient] [ … to support the inference' that it could be affecting hazardous waste disposal practices by the borrower." Id. at 18369.

15. Private parties also may bring actions under CERCLA to recover the cost of an environmental cleanup. E.g., Tanglewood East Homeowners v. Charles-Thomas, Inc., 849 F.2d 1568, 1572, 18 ELR 21348, 21349 (5th Cir. 1988) ("CERCLA provides a private cause of action where a release or threatened release of a hazardous substance causes response costs to be incurred."). In addition, a party against whom the United States has brought a cost recovery action "may seek contribution from any other person who is liable or potentially liable under section [107(a) of CERCLA], during or following any civil action under section [106 of CERCLA] or under section [107(a) of CERCLA]." CERCLA § 113(f)(1), 42 U.S.C. § 9613(f)(1), ELR STAT. CERCLA 039.

16. CERCLA § 107(a)(1-4)(B), 42 U.S.C. § 9607(a)(1-4)(B), ELR STAT. CERCLA 024-025.

17. Many commentators on the proposed rule not only questioned whether the lender liability regulations applied to actions to which the United States was not a party but also doubted whether the courts would be required to apply the rules in private-party actions. 57 Fed. Reg. at 18368. Other commentators saw the rule as an interpretation of CERCLA that could not bind parties other than the United States. Id. And still others — perhaps not discerning the EPA's reasons for including the regulations in the NCP — "questioned the appropriateness of codifying the rule as part of the NCP because it did not specify standards for a site cleanup under section 105." Id. In its response to the comments, EPA disagreed with comments that the lender liability rule should not be part of the NCP because it did not set a cleanup standard. The Agency explained,

EPA has the authority under … sections 105 and 115 of CERCLA to promulgate regulations that address matters concerning the enforcement of the statute and that affect private party actions under CERCLA, as well as those to which the United States is a party. The regulation promulgated today defines the scope and coverage of the section 101(20)(A) security interest exemption, and as a definition of a term used in CERCLA it applies 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.

Id. (citations omitted).

18. Id. at 18344 (codified at 40 C.F.R. pt. 1100). For an analysis of the final EPA rule, see Quentel, supra note 9, at 10639-43. The final rule immediately was challenged in the D.C. Circuit on the ground that it exceeded EPA's statutory authority. Chemical Mfrs. Ass'n v. EPA, No. 92-1314 (D.C. Cir. filed July 28, 1992); Kelley v. EPA, No. 92-1312 (D.C. Cir. filed July 28, 1992).

19. Metropolitan Washington Airports Auth. v. Citizens for the Abatement of Aircraft Noise, Inc., 111 S. Ct. 2298, 2309 (1991).

20. Id.

21. Id. at 2309-10.

22. 42 U.S.C. § 9605, ELR STAT. CERCLA 021.

23. CERCLA § 105(a), 42 U.S.C. § 9605(a), ELR STAT. CERCLA 021-022.

24. Id. Although Congress placed the authority for administering CERCLA with the President, most of that authority was delegated to the Administrator of EPA. Exec. Order No. 12580, 52 Fed. Reg. 2923 (Jan. 29, 1987), ELR ADMIN. MATERIALS 45031.

25. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 843-44, 14 ELR 20507, 20509 (1984).

26. Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988).

27. CERCLA § 105(a), 42 U.S.C. § 9605(a), ELR STAT. CERCLA 021.

28. Id.

29. Clean Water Act § 311(c), 42 U.S.C. § 1321(c), ELR STAT. FWPCA 044.

30. CERCLA § 105(a), 42 U.S.C. § 9605(a), ELR STAT. CERCLA 021.

31. 94 Stat. 2767, 2779-80.

32. H.R. REP. No. 1016, 96th Cong., 2d Sess., pt. 1, at 30 (1980), reprinted in 1980 U.S.C.C.A.N. 6119, 6133.

33. S. REP. No. 848, 96th Cong., 2d Sess. 52 (1980).

34. S. 1480, 96th Cong., 1st Sess. § 3(c) (1979); H.R. 7020, 96th Cong., 2d Sess. § 5(a) (1980); see also S. 1341, 96th Cong., 1st Sess. § 4 (1979) (amendments to Clean Water Act).

35. S. 1480, 96th Cong., 1st Sess. § 3(c) (1980); H.R. 7020, 96th Cong., 2d Sess. § 5(a) (1980).

36. H.R. 7020, 96th Cong., 2d Sess. § 4(a) (1980). The House debate on § 4(a) of H.R. 7020 focused on an amendment offered by then-Representative Stockman that would have placed the responsibility for cleanups of hazardous waste sites on the states and provided federal grants to the states to assist them with the administration of their programs. 126 CONG. REC. 26757-61 (1980). Representative Stockman's amendment also required that each state adopt a plan for identifying, evaluating, and cleaning up hazardous waste sites. Id. at 26758. Representative Stockman's principal innovation was that the use of federal funds was to be "cost-effective." Id. The amendment was rejected. Id. at 26769.

37. 126 CONG. REC. 30113-14, 30972-73, 30976, 30982.

38. Id. at 30985.

39. CERCLA § 107(a)(1-4)(B), 42 U.S.C. § 9607(a)(1-4)(B), ELR STAT. CERCLA 024-025.

40. See id.

41. See John P.C. Fogarty, The Legal Case Against Lender Liability, 21 ELR 10243, 10244 (May 1991).

42. In the handful of reported decisions issued after EPA promulgated its lender liability regulations, no court specifically has addressed whether EPA had the authority to promulgate its regulations as part of the NCP so they would apply in private-party actions. In Ashland Oil v. Sonford Products Corp., 23 ELR 20387 (D. Minn. Jan. 11, 1993), the district court applied the regulations in granting a motion for summary judgment by a lender. In so ruling, the court noted only that "EPA's rule is consistent with the statutory language of CERCLA and the interpretation accorded that language by the majority of leading federal cases …." Id. at 20388. And in Kelley v. Tiscornia, 23 ELR 20424 (W.D. Mich. Jan. 12, 1993), the district court also applied the lender liability regulations in granting summary judgment dismissing CERCLA's claims against a lender. The court did not consider either whether EPA had authority to promulgate the regulations as part of the NCP or even whether the regulations were consistent with CERCLA. In Grantors to the Silresim Site Trust v. State Street Bank & Trust Co., 23 ELR 20428 (D. Mass. Nov. 24, 1992), by contrast, the district court, after a trial, dismissed the CERCLA claims against a lender without relying on EPA's regulations. In so doing, the court questioned whether EPA's rule was consistent with CERCLA. Id. at 20431 ("the rule does require more in the way of a relationship to constitute participating in the management in a relevant sense here than at least one might arguably read the statute as required").

43. Sean Monaghan, CERCLA, RCRA, EPA and Lender Liability, N.J. LAW., Nov. 2, 1992, at 10, 23.

44. Wolf, supra note 9, at 550 (questioning whether EPA's regulations "protect a lender-owner against liability in a contribution action" and urging congressional action).