The federal Environmental Protection Agency's long-awaited final rule on banks' liability under the Superfund law took effect with publication in the Federal Register on April 29.

It clarifies the types of activities that a secured creditor may undertake at a facility without triggering liability under the Superfund law.

But the rule did not resolve environmental concerns for secured creditors under other environmental laws.

Letter of the Law

The Superfund law imposes liability on "owners and operators" of sites where hazardous substances have been released.

The law contains, however, a "security interest" exemption that excludes from liability any "person who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility."

But in recent years, several federal courts have narrowly construed this exemption. These courts have held a secured creditor liable for environmental problems for assuming too much control over the debtor, foreclosing on contaminated land, or causing a release of hazardous substances.

If deemed an owner or operator, a lender could be liable for cleanup costs or natural resource damages, in amounts well beyond those originally at risk.

Avoiding Liability

After almost two years of deliberation, the EPA issued the rule to eliminate uncertainty about the scope of the security interest exemption. The rule specifies a range of actions that secured creditors may take regarding secured property without voiding the exemption.

The rule specifically enumerates actions that secured creditors may take without being deemed to have "participated in the management," which would trigger liability. These permissible activities include the following:

* In response to a loan application, conducting an environmental inspection of the property or requiring the borrower to comply with applicable environmental laws.

* During the loan term, taking actions to police the security interest, such as inspecting the facility or monitoring the borrower's business or financial condition.

* Prior to foreclosure, engaging in workout activities to prevent, cure, or mitigate a default by the borrower, or prevent diminution of the value of the security.

|Participation in Management'

The rule also identifies certain lender activities that are considered "participation in management" sufficient to void the security interest exemption. These would include decision-making control over the borrower's environmental compliance or hazardous-substance disposal.

The preamble to the rule suggests that a lender performing functions such as a facility or plant manager, operations manager, chief operating officer, or chief executive officer may void the exemption.

The rule permits a secured creditor to take legal or equitable title to a facility through foreclosure without voiding the security interest exemption if the lender takes little primarily to protect its security interest.

After a Foreclosure

To establish that it holds title primarily to protect its security interest, a creditor should comply with certain specified conditions of the rule for advertising and selling the property.

And so long as a secured creditor continues to hold a facility after foreclosure primarily to protect its security interest, the creditor may maintain business activities at the facility, wind up operations, or take measures to prepare the secured property for sale without voiding the exemption.

A creditor may trigger Superfund liability after foreclosure, however, by arranging for treatment or disposal of hazardous substances or accepting hazardous substances for transportation to a disposal facility that it selects.

To Protect Yourself

Though the rule does clarify the activities that a secured creditor may undertake at a facility without voiding its security interest exemption under the Superfund law, a lender nevertheless remains exposed to significant liability under other environmental laws, particularly the Resource Conservation and Recovery Act.

Accordingly, the rule does not eliminate the need for environmental investigations. Property securing a loan should be examined to assess potential liability under environmental laws not covered by the rule and to evaluate the creditworthiness of the borrower and the value of the collateral.

Congress is still considering legislation on the security interest exemption and may weigh in with the last word on these issues.

Ms Robb is a partner and Ms Sotto an associate in the New York office of the Hunton & Williams law firm. They specialize in environmental law.

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