After almost a year of debate, the Environmental Protection Agency has issued its final rule governing secured-creditor liability under the Superfund law for property contaminated with hazardous substances.

The rule, effective April 29, provides secured creditors with some guidance and comfort regarding loan transactions and foreclosure actions.

However, the rule leaves open questions that require close examination of the facts to determine if the lender's actions make it liable under the law.

Since 1980, the law -- properly, the Comprehensive Environmental Response, Liability, and Compensation Act -- has protected the lender from liability if it holds an ownership interest in collateral property primarily to protect its security interest. The lender is also protected if it does not participate in the management of the property.

Lenders Adrift

But the act's failure to flesh out this test has left lenders adrift. As a result, loan or foreclosure opportunities have been forgone in order to avoid potentially crippling cleanup cost often imposed on the owner or operator of a contaminated property.

Judicial interpretation of the secured creditor exemption, such as the Fleet Factors decision, has only heightened lenders' uncertainty.

In an effort to clarify the degree of permissible lender activity, the rule establishes the following guidelines:

* The exemption protects a broad range of secured transactions where the creditor holds an ownership interest primarily to protect its security interest, such as mortgages, deed of trust, liens, surety bonds, guarantees, and lease financing interests. This list is not exclusive.

* A lender's pre-loan activities are not considered in determining whether the lender has participated in the management of the borrower.

For example, whether the lender performed an environmental audit prior to entering into the transaction is not a factor in determining liability.

Also, the lender may conduct pre-loan due diligence and take prudent steps such as environmental inspection, requiring the prospective borrower to clean up the facility as a condition for the loan, or selecting as alternative security a noncontaminated property of the borrower.

* During the course of a loan, the lender may take policing and workout actions consistent with the protection of its security interest, such as generally requiring sound environmental management and compliance with environmental laws.

However, to avoid participation in the management of the property and the loss of the exemption, the lender must avoid pervasive control that gives the appearance of exercising decision-making authority over environmental compliance and management.

* In the rule, the EPA recognizes that foreclosure is often an inevitable result of loan transactions and of protecting a security interest.

Lenders may foreclose, wind up, or even maintain a going business as long as they make active efforts to list and sell the property within 12 months after receiving title.

Legal Hazards

The rule require a careful weighing of the lender's particular actions to determine if it can still claim the exemption.

Even if a lender, prior to foreclosure has not participated in the management of the property, it may still incur independent liability under the comprehensive act if it arranges for the disposal or transport of hazardous substances on the property.

The rule does not specifically cover fiduciaries such as trust companies and trust departments of lending institutions, although the EPA seeks to allay fears of personal liability of trustees.

Moreover, the rule does not apply to the many other environmental lawsuits under other federal, state and local environmental laws. The rule does not supplant these other laws.

Such unresolved questions under the rule, and the rule's limited role in lawsuits between private parties, require a lender to consider protective steps in pursuing a foreclosure.

Time and Expense Factors

The size of the foreclosure and the potential extent of environmental liability will influence the time and money put into steps such as:

* Monitoring loans not yet in foreclosure to require the borrower's compliance with environmental laws and regulations in its handling of hazardous materials.

* Working out problem loans through financial guidance and assistance without participating in management's operation of the business.

* Conducting pre-foreclosure environmental testing if allowed by the loan documents.

* Seeking court approval in foreclosure proceedings to conduct environmental test. In a recent case, a court permitted the Resolution Trust Corp. to get environmental test results before deciding whether to proceed with foreclosure.

* Maintaining or winding up the business on a foreclosed property to protect the security interest, rather that to recover more than the debt through continued operations.

* Marketing foreclosed property reasonably promptly to avoid being considered its operator.

Availability of these step depends not only on the rule under the Superfund law but on other federal, state, and local laws.

The foreclosing lender will want to consult counsel to review these or other protective steps to reduce exposure to environmental liability. Mr. Robert F. Copple and Mr. Edward W. Stern are environmental and litigation attorneys with the Denver law firm of Parcel, Mauro, Hutlin & Spaanstra.

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