In its recent amendments to the comprehensive environmental response, compensation and liability act, Congress gave the banking industry significant relief from the risk of exposure to lender liability.
The amendments provide unequivocally that a lender cannot incur liability merely because it has the potential capacity to influence the management or operations of an affected facility. They enumerate the activities that, if taken by a secured lender, will not be deemed to be "participation in management."
They protect lenders under sale and leaseback transactions in addition to financings represented by mortgages or deeds of trust. They limit the exposure of banks administering real property as fiduciaries to the value of the assets in the estate.
Finally, they are retroactive - they apply to "any claim that has not been finally adjudicated as of the date of enactment of this Act."
The language of these amendments, however, raises several new questions that may prove troublesome to lenders. The first question is whether the protective provisions of the amendments are intended to apply to an institution in its role as a servicing agent.
In the exclusion from "owner or operator" status that relates to activities conducted prior to foreclosure, relief is accorded to a person who "holds indicia of ownership primarily to protect the security interest of the person in the vessel or facility."
Once a mortgage has been assigned, the servicer no longer holds title, as security or otherwise, and is acting not to protect its security interest but to execute the duties specified in the servicing agreement. Yet activities conducted in its role as a servicing agent may make it a de facto "operator" of affected property under CERCLA. Are such servicers protected?
It may not have been thought necessary to address the role of the servicer in drafting the amendments. In its commentary explaining the Environmental Protection Agency rule on which the amendments were based, the EPA noted:
"While the rule has no application to the person that is not a holder, under well-established rules governing principals and agents, the actions of employees, representatives, or others acting for the benefit or on behalf of a principal are generally considered to be the actions of the principal ... and accordingly a holder's agents, employees, and others acting on its behalf or for its benefit may undertake the full range of protected activities specified in the rule."
The problem with this analysis, in the context of the amendments, is that the amendments specify the fiduciary capacities that are entitled to protection. Significantly, this list does not include "servicing agent" or even "agent."
Although the amendment authorizes the addition of additional types of representatives by administrative action, the persons so protected must be similar to those who fall within the definition provided in the amendment: trustees, executors, administrators, custodians, guardians, receivers, indenture trustees, and the like.
Thus, it remains to be seen whether addition of the term "servicing agent" - if it were to take place - would be held to be within the scope of the statute.
In lieu of a clarifying regulation, how may a bank protect itself? If circumstances permit, it may sell a 90% participation rather than the whole loan. It will then be holding title to protect its own security interest (as well as that of the participant).
A second ambiguity resides in the language affording protection to the lender who forecloses, takes title (by buying at the foreclosure sale, or otherwise), and continues operations at the facility pending resale.
Under the amendment, that person is protected "if the person seeks to sell, re-lease ... or otherwise divest the person of the vessel or facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements."
In the EPA rule, there was instead a "bright-line test": The lender was protected if, within a year after foreclosure, it offered the property for sale, and if it did not ignore or reject an offer equal to or in excess of its security interest.
By replacing a bright-line test with a vaguer facts and circumstances test, Congress may have intended to give foreclosing banks more latitude. It is not clear, however, that the new standard restricts a court from second-guessing the bank's business judgment.
Suppose, for example, that the foreclosure takes place in a depressed real estate market. Several months after the bank acquires title, a purchaser makes an offer that the lender rejects. Years later, the lender is forced to accept an offer that is a fraction of the first offer.
From the bank's perspective, the "earliest practicable commercially reasonable time" was the time when it became clear that it would be fruitless to continue to hold the property. From another perspective, however, the test is objective: It was the time when the best price was in fact proffered.
A final ambiguity concerns the position of the letter of credit issuer as a "lender." Under the amendments, "lender" includes "a person that insures or guarantees against a default in the repayment of an extension of credit or acts as a surety with respect to an extension of credit."
Superficially, the term would appear to include those who issue stand-by letters of credit that guarantee repayment of a mortgage or deed of trust. Once the beneficiary is repaid under the letter of credit, the issuer may have a common-law right to enforce the beneficiary's rights against the real property. Under this analysis, the issuer is the functional equivalent of a surety and should be protected.
The problem with this analysis, however, is that the letter of credit is not really a guarantee. Because it is supposed to function independently of the underlying transaction and to operate upon presentation of the specified documents, not fulfillment of the underlying contract, an argument may be made that the letter of credit is not really like a performance bond, insurance policy, or guarantee.
Omission of the issuer of a letter of credit may have been unintentional. In its commentary to the rule, the EPA noted that "loan guarantors, sureties, and the like are integral parts of the secured lending process. While such persons may not, for example, hold title to property ... they may have an interest in the transaction ... . This ensures that such persons are protected."
Since the amendments closely parallel the rule, Congress may have intended to subsume "issuer" under the term "surety."
The issuer need not be overly concerned about the statutory ambiguity, however, since it may contract for assignment of the beneficiary's rights. Under the amendments, the term "lender" includes assignees.
Alternatively, it may, subject to regulatory requirements, issue a guarantee rather than a letter of credit.
Although the new amendments provide a substantial measure of regulatory relief, significant questions remain open for administrative rule making. It is to be hoped that resolution will occur before courts begin to approach these questions.
Ms. Stern is a member of Nordquist & Stern, a New York law firm.
Sandra Stern
