A recent court decision in the landmark lender-liability case of U.S. v. Fleet Factors Corp. embodied the Environmental Protection Agency's final interpretation of the secured-creditor exemption from the Superfund law.

While the court's finding was specific to that long-running case, the decision provides guidance to lenders, defining some activities they may undertake without voiding the exemption.

The story began back in 1976, when the Fleet Financial Group subsidiary entered into a factoring agreement with Swainsboro (Ga.) Print Works. Fleet advanced funds against accounts receivable and took a security interest in real property, inventory, equipment, and machinery.

The print company filed for bankruptcy in 1979 and ceased operations in 1981. In 1982, Fleet foreclosed on its inventory, equipment, and machinery, but not on the real property.

Fleet employed Baldwin Industrial Liquidators Inc. to auction the equipment and machinery. After the auction, Fleet allowed Nix Rigging Co. to salvage the remaining equipment and machinery. Nix remained on site until the Environmental Protection Agency's arrival in 1984.

Hazardous Substances

In 1984, the EPA discovered asbestos debris and several hundred drums of hazardous chemicals. After Fleet refused the EPA's demand to clean up the site, the EPA conducted a removal action under the Superfund law (formally, the Comprehensive Environmental Response, Compensation, and Liability Act).

The costs of the action were considerable, and the United States sought to recover them by suing Fleet.

The first Fleet Factors decision, issued in response to a preliminary appeal by Fleet, established a controversial new standard, imposing liability on lenders who have a mere "capacity to influence" a borrower's treatment of hazardous wastes.

Partly in response to that decision, the EPA proposed a rule interpreting the Superfund law's secured-creditor exemption. The Fleet Factors trial court stayed the case pending the EPA's final rule, which became effective April 29, 1992.

The case then proceeded to trial. The government alleged that Fleet was liable as an owner-operator of Swainsboro Print Works.

Secured-Creditor Exemption

The principal question was whether the secured-creditor exemption protected Fleet.

The Superfund law imposes liability for the cleanup of hazardous substances on "any person who at the time of disposal of any hazardous substance owned or operated" the facility where disposal occurred.

The law exempts from the definition of the term "owner or operator" any "person who, without participating in the management of a ... facility, holds indicia of ownership primarily to protect his security interest" in the facility.

This secured-creditor rule discusses activities a lender can undertake without voiding the exemption.

The trial court analyzed Fleet's role in two phases: preforeclosure and post-foreclosure.

The court held that Fleet's preforeclosure actions did not void the secured-creditor exemption, but that the post-foreclosure actions of Fleet's agents -- Baldwin and Nix -- amounted to participation in management under the rule's foreclosure provisions, and therefore voided the exemption.

Under the rule, a lender participates in the management of a facility, and thus incurs Superfund liability, if it makes decisions about its environmental compliance or exercises managerlike control over a facility's day-to-day operations.

The government claimed that Fleet participated in Swainsboro Print Works' management by blocking the sale of chemicals, which then leaked and contaminated the site.

The court found the evidence inconclusive, however, and limited its ruling to the facts, declining to rule on whether a creditor that affirmatively blocks the sale of chemicals at a facility is participating in management.

Also, the court rejected the government's argument that Fleet assumed managerlike control of the print works.

The court applied a "reasonable person" standard, comparing Fleet's actions to those of a reasonable secured creditor acting primarily to protect its security interest."

Before foreclosure, Fleet disposed of inventory, provided payroll funds, paid certain bills, helped resolve customer disputes, and collected receivables.

Even though Fleet was the only entity making decisions at the plant, the court held that Fleet's actions were those of a reasonable lender seeking to mitigate its losses and acting in the "normal course of business."


The rule's foreclosure provisions, triggered by "foreclosure or its equivalents," permit a lender to undertake a number of specific managerlike actions after foreclosure to preserve a secured asset.

Even though Fleet conducted an extra-judicial repossession of assets at Swainsboro Print Works, the court found it was "consistent with normal lending practices" and therefore the equivalent of a judicial foreclosure.

The court noted that the foreclosure provisions permit the incidental handling of hazardous substances if it is directly related to a permitted activity such as preparing a facility for liquidation.

But the court found Baldwin's handling or mishandling, of drums containing hazardous substances was not permissible under the foreclosure provisions, and amounted to participation in management of the facility.

The critical factor was that the environmental threat posed by the drums was serious and apparent "even to a lay observer."

The court further found that Nix's activities at the facility voided Fleet's secured-creditor exemption for three reasons.

* First, like Baldwin, Nix handled substances at the site in a manner that was not merely incidental to Fleet's foreclosure activities.

* Second, Nix aggravated a conspicuous environmental hazard by haphazardly moving drums around the site, rupturing some in the process, and leaving asbestos-laden insulation strewn around. Those actions constituted decision-making control and amounted to impermissible participation in management even under the foreclosure provisions.

* Third, Nix remained on site over 18 months after Baldwin's auction and failed to finish its salvage operations "in a reasonably expeditious manner." As a result, Fleet exercised excessive control over the real property that had not been foreclosed on at the time of foreclosure of the assets.

The court stated that a lender may exercise control over real property on which the creditor hasn't foreclosed only to the extent necessary to protect and liquidate assets on which the creditor has foreclosed.

Limited Mandate

In the preforeclosure period, the court allowed significant involvement by the lender in winding down its borrower's operations.

While lenders may conduct more extensive managerlike activities in the post-foreclosure period, they should avoid exercising excessive control over assets on which they have not foreclosed. When hazardous substances pose a serious and apparent environmental threat, lenders should avoid handling those substances without EPA or state agency supervision.

Also, the court's broad reading of the phrase "foreclosure and its equivalents" is helpful to lenders because it permits them greater involvement in a borrower's activities under the rule's foreclosure provisions than under the preforeclosure provisions.

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