Bank trustees facing environmental liability lawsuits won another big case last week when a federal appeals court strengthened an already favorable lower court ruling.

The U.S. Court of Appeals for the 11th Circuit said on Aug. 11 that banks are not liable for pollution on property they hold in trust unless they "caused or contributed" to it.

A lower court had ruled in 1997 that a federal environmental cleanup law protects banks from liability on property held in trust because they are not the property owners. The appeals court said the lower court addressed the wrong issue and ruled that, even if the trustee could be considered an owner, it still is not liable unless it "took particular negligent actions."

According to the appeals court's 11-page ruling, "the bank had no duty to prevent someone else from releasing hazardous substances."

The opinion "provides a very clear roadmap for fiduciaries," said Nill V. Toulme, a partner in the Alston & Bird law firm in Atlanta who is defending Bank of America Corp.

The appeals court sent the case back to the U.S. District Court for the Middle District of Georgia and said the plaintiff must prove Bank of America was negligent.

A 1996 amendment to the Comprehensive Environmental Response Compensation and Liability Act protected banks from these sorts of cases but carved out two narrow exceptions: Lenders could be held liable if they had day-to-day management of a borrower's business or if they were negligent. The 1996 amendment is known as the Asset Conservation Act.

"The court has carefully restated the high threshold of proof required while determining that the complaint in the case should not have been dismissed," said Alfred Pollard, senior director of the Financial Services Roundtable, which lobbied for the amendment. The opinion "follows the line of rulings that have sought to protect banks from lawsuits stretching the limits of liabilities," he said.

Before the 1996 amendment, at least two cases created confusion about banks' liabilities in this area.

In a suit against a subsidiary of Fleet Financial Group, the 11th Circuit Court of Appeals said a lender could be held liable along with a borrower if its involvement "is sufficiently broad to support the inference that it could affect hazardous waste disposals."

The other case involved a Bank One Corp. predecessor that leased land in a trust to a garbage dump operator.

The U.S. District Court for Arizona found that the banking company was liable because it had the "power to control the use of trust property."

The Bank of America case began in 1996 when Canadyne-Georgia Corp., a chemical company in Fort Valley, Ga., sued NationsBank Corp. for $50 million to cover the cost of cleaning up the site of a former pesticide plant in town.

A bank bought by NationsBank, Fulton National Bank, had been the trustee from 1945 until 1972 for partnerships that owned and managed the plant. NationsBank merged with Bank of America last year.

Canadyne-Georgia argued that, as trustee, the bank was liable. The plaintiff also argued that the bank was responsible for the cleanup because it also made loans to the plant. The appeals court dismissed that argument. "We are confident Congress did not intend for the mere existence of a lending relationship to be enough to bring a fiduciary under this exception," the appeals panel wrote. "Canadyne's expansive interpretation of the exception would render the protections of the Asset Conservation Act virtually meaningless for banks, the very group Congress intended to protect."

"It was a surprise," said John Spinrad, who represents Canadyne-Georgia. Mr. Spinrad, a partner in Arnall Golden & Gregory in Atlanta, said the bank is liable because it did nothing to stop the environmental damage. "You can be negligent by omission or by action," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.