Partial relief from toxic liability could be in the works for California banks.

A reform bill that would reduce liability for lenders who unknowingly become involved with contaminated real estate has passed the state Senate and is awaiting a hearing in the Assembly.

The bill is backed by Sen. Lucy Killea and the California Bankers Association, who feel it would boost lending opportunities in the state, especially for community banks.

"What has happened is that bankers have lost all interest in providing loans where there's a danger of them becoming liable for a property that has toxic waste on it," said Sen. Killea. "What this will do for banks is, if they are simply providing a banking function and have no knowledge of the toxic waste before, they won't be held liable."

Bankers hope that immunity could spark increased development, said Maureen Padden, of the California Bankers Association.

"Development lending is not taking place to the amount it would, especially for community banks," Ms. Padden said. "We think this is the key for encouraging more lending for development."

Sen. Killea added, "Bankers simply can't take the risk of being involved in a toxic waste liability case, and a lot of worthwhile projects can't get funding as a result."

Ms. Padden said lenders need legal clarification for situations in which banks could incur liability. That includes cases of institutions lending money either to purchase previously contaminated land or to clean up a contaminated site.

Currently, even banks that acquire property through foreclosure and weren't aware of problems beforehand are potentially liable. If the individual responsible for the contamination cannot be found, liability falls to the next entity connected to the property, often banks.

"It's pretty punitive to beat up on the guy who gets stuck with contaminated land just because he made a loan on it," said James R. Kenny, president and chief executive of San Jose National Bank. "And it's time- consuming. You have to really sit down before you make a loan and be certain there's nothing there that can backfire on you."

Dealing with toxic real estate is a common problem for bankers. Gas station sites, for example, are notorious for having leaking tanks underground that are labeled as contaminated.

"I know we've passed on loan applications in the past for just that reason," said Ronald D. Reinartz, president and chief executive, Bank of Santa Clara. "We had two loan applications recently from people who wanted to purchase property which had had gas stations on it. They wanted to build strip malls, but we wouldn't lend on it. Anytime we see something with a red flag like that, we back right off."

Current law provides limited immunity for banks from toxic liability, but conflicting judicial interpretations have created some uncertainty.

The bill would amend state law to specify what actions a lender may undertake regarding a borrower's property without acquiring liability as an owner or operator under federal Superfund laws or local codes.

In addition, the legislation would relieve fiduciaries of liability for cleanup costs and related damages incurred on a property within a trust or other estate, except when the fiduciary caused or contributed to the contamination.

Trial lawyers and environmentalists initially opposed the bill, but California Bankers pushed it through the state Senate to the Assembly. Should the bill pass, Gov. Pete Wilson is expected to sign it, Sen. Killea said.

"It's a deep pockets issue," Mr. Reinartz said. "Everyone's interested in going after whoever has lots of money, and it's not right."

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