Protection from Liability Increased for Secured Lenders and Trustees/Fiduciaries Under CERCLA and RCRA

The Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes certain environmental liabilities on “owners” and “operators” of property defined in the Act.

Parties holding indicia of ownership in a facility subject to CERCLA primarily to protect a security interest are excluded from the definitions of “owner” and “operator” provided the party does not participate in the facility’s management. Unfortunately, as enacted, CERCLA did not describe activities that constitute participation in management sufficient to impose liability on parties claiming exemption as a “secured creditor.”

The Eleventh Circuit Court of Appeals, in United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990), held that a secured lender’s “mere capacity to influence” decisions affecting a CERCLA facility constituted sufficient participation in management to hold the lender liable as an owner or operator under the law. This decision had a profound effect on commercial loan underwriting because most commercial loan arrangements include provisions giving secured lenders the “capacity to influence” the management of the encumbered assets. This prompted both the commercial lending and borrowing communities to seek clarification of the secured creditor exemption.

In 1991, the U.S. Environmental Protection Agency (“EPA”) responded by proposing Federal “Lender Environmental Liability Rule” (the “Rule”). The Rule was intended to clarify the range of activities that may be undertaken by a lending institution to protect its security interest without being considered to be participating in the facility's management. The Rule was issued in final form in the April 29, 1992 Federal Register, and embodied in the Code of Federal Regulations at 40 C.F.R. §300.1100. It was criticized for not addressing liability issues important to lenders and others, such as liability under the Federal Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C.§§6901 et seq.

Unfortunately, on February 4, 1994, the U.S. Court of Appeals for the District of Columbia Circuit, in Kelley v. EPA, 15 F.3d 1100 (D.C. Cir. 1994), invalidated the Rule, holding that EPA did not have the authority to define the scope of liability under CERCLA.

In response, the EPA issued, in the September 7, 1995 Federal Register, a similar rule directed to secured lender interests in petroleum underground storage tank properties under RCRA (the “UST Rule”). In addition, the EPA and the Justice Department released a “Guidance” (the “Guidance”) on October 6, 1995, indicating that both would adhere to the provisions of the Rule as a matter of “enforcement policy.” The Guidance afforded little comfort because it could not be “relied on to create a right or benefit, substantive or procedural, enforceable at law, or in equity, by any person.”

To address all of the foregoing and extend protections to trustees and fiduciaries, Congress, on September 28, 1996, passed the “Asset Conservation, Lender Liability, and Deposit Insurance Protection Act” (the “Act”), found in Subtitle E of Public Law 104-208, §§2501-2505.

At §2502 of the Act, entitled “CERCLA Lender and Fiduciary Liability Limitation Amendments,” in subsection (a), “Fiduciary” is defined to mean “a person acting for the benefit of another party as a bona fide . . . trustee . . . executor. . . administrator . . . custodian . . . guardian of estates or guardian ad litem . . . receiver . . . conservator . . . committee of estates of incapacitated persons . . . personal representative. . . trustee” or other “representative” determined to serve in a similar capacity. However, the term expressly excludes trust relationships established “for the primary purpose of . . .actively carrying on a trade or business for profit” (unless in connection with an estate plan or due to the incapacity of a natural person), or “with the objective of avoiding liability” in connection with a CERCLA facility.

Subsection (a) provides that the liability of a fiduciary in connection with a CERCLA facility “held in a fiduciary capacity shall not exceed the assets held in the fiduciary capacity.” This provision does not apply when the fiduciary is determined to be liable under CERCLA independent of the fiduciary relationship, when the fiduciary's negligence contributes to the release or threatened release, or when the fiduciary is also a beneficiary of the trust or fiduciary relationship. Specifically, fiduciaries are held not liable under CERCLA in their “personal capacity.”

Finally, subsection (a) expressly reserves to the fiduciary the “rights or immunities or other defenses” available under CERCLA and pronounces that the amendment is not intended to create any liabilities on the part of a person or a “private right of action” in favor of any party against fiduciaries.

Subsection (b) of the Act amends 42 U.S.C. §9601(20) to add three new subparagraphs: (E) “Exclusion of Lenders not Participants in Management”; (F) “Participation in Management”; and (G) containing relevant definitions. Subparagraph (E) amends the definition of owner/operator to exclude lenders that, without participating in the management, hold(s) indicia of ownership primarily to protect the lender’s security interest. Subparagraph (E) further permits foreclosure of the security interest and requires disposition of the foreclosed assets at the earliest reasonable time on “commercially reasonable terms.”

Subparagraph (F) defines “participation in management” to mean “actually participating in the management or operational affairs” of a CERCLA facility, and excludes the mere “capacity to influence” or “unexercised right to control” facility operations. “Participation in management” requires either the exercise of “decision-making control over environmental compliance,” the assumption of “overall management . . . with respect to environmental compliance,” or management of “substantially all of the operational functions.”

Finally, definitions are included in subparagraph (G) for terms including “Lender,” “Foreclosure,” and “Security Interest” that bear careful reading by secured lenders hoping to find protection under the Act.

Section 2503 of the Act amends the definition of owner/operator found in RCRA and incorporates by reference and applies to the petroleum underground storage tank context the fiduciary and secured lender exculpatory provisions in §2502. The Act then recognizes the Rule and UST Rule as validly enacted and viable in response to the Kelley decision and precludes further judicial review of the Rule in the form issued in 1992. The Act further responds to the criticisms directed at the Rule by providing that certain protections against CERCLA and RCRA liabilities now extend to secured lenders, trustees, and other fiduciaries.

Although Congressional re-authorization of CERCLA is still in development, and its liability mechanics may be significantly restructured, the Act represents an important step in providing secured lenders, trustees, and other fiduciaries “safe grounds” on which each may operate. It is important to note, however, that protections afforded by the Act will not extend generally to liabilities arising under other federal, state and local environmental laws and regulations. Therefore, secured lender, trustee and fiduciary due diligence with respect to assets under consideration as collateral for a loan should always incorporate the appropriate measure of environmental due diligence.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.