Background: Why This Federal Law was Enacted
With good reason, lenders have historically been concerned, and yes even afraid, to loan money in instances where the loan was collateralized by contaminated property. The reason has been, and to some extent still is, that if the loan becomes bad, the lender must take the property in order to protect its interests. By taking the property, the lender becomes an owner of the property. Under many state and federal laws, one who owns contaminated property becomes entirely responsible for the cleanup of the property.

Lenders have asked, why should we make a $200,000 loan on a contaminated piece of property and run the risk of not only losing the loan amount if the borrower becomes insolvent or unavailable, but also become potentially responsible for a one million dollar cleanup of the property. If you have not realized this by now, lenders are in business to make a profit. This is hardly a profitable scenario and as a result, lenders have traditionally shied away from making loans on dirty properties.

In the last five years, many states have taken the lead in addressing this problem. These states have understood that recycling contaminated properties can be good for municipalities, counties, states, and industry. Recycling cannot occur with lender participation. And lenders were not participating absent some strong legislative protection against liability based on owner status, acquired merely because a lender is required to foreclose to protect its legitimate security interest. Atlas, the states responded. But without an equivalent federal response, lenders could not feel entirely secure.

The good news is that the federal government has responded with The Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996 (the Act), signed into law on September 30, 1996. The bad news is that the federal law and the state laws are not identical. This means that lenders and borrowers must be aware of both sets of laws in order to maximize lender protection. As explained more fully below, the new federal law does not provide lenders with absolute blanket environmental immunity. Lenders must still ensure that their actions fall within required parameters to retain protection.

Extent of Lender Protection Under the New Law
The new federal Act protects lenders from liability under CERCLA (also called the Superfund Program) in those instances where they hold[] indicia of ownership primarily to protect their security interests in the ... facility without participating in the facility's management. Participation in management is defined as actually participating in the management or operational affairs. By contrast, merely having the capacity to influence, or the unexercised right to control is not considered to be participation in management and therefore does not expose a lender to federal environmental clean up liability.

Under the new Act, the following actions are excluded from the definition of the term participation in management:

1. the lender's performance of any act before the creation of the security interest;
   
2. holding or abandoning/releasing a security interest;
   
3. mere inclusion of a loan condition relating to environmental compliance;
   
4. monitoring/enforcing environmental-related terms and conditions;
   
5. site inspections;
   
6. requiring borrower to address a release or threatened release;
   
7. providing financial counseling in resolve a default status;
   
8. restructuring loan terms and conditions;
   
9. exercising other available remedies under loan agreement;
   conducting a federally required response action to a spill or discharge.
   

Before there is a foreclosure, lenders become liable only if they exercise decision-making control over hazardous substance handling or disposal practices or if they exercise day-to-day decision-making authority with respect to either environmental compliance, or all or substantially all of the operational functions.

After foreclosure, and assuming the lender followed all of the rules before foreclosure, it will avoid liability so long as it attempts to sell, re-lease or otherwise divest the facility at the earliest practicable, commercially reasonable time.

While this is taking place a lender is permitted to sell, release, or liquidate the facility, maintain business activities, wind-up operations, undertake a response action under CERCLA, or take other measures to preserve, protect, or prepare the facility prior to sale or disposition.

Conclusion
Until now, lenders lacked federal statutory protection from environmental liability. Under the new federal Act, this is no longer the case. However, some caveats are in order. First, lenders must strictly comply with the federal law's requirements to enjoy the afforded protection. Second, the federal and state lender liability laws are similar, but not the same. A lender needs to comply with both state and federal laws to be protected.

Obviously, each matter must be fully analyzed and understood as this hardly presents a one size fits all scenario. Nonetheless, this is good news for everyone involved. For lenders-- it means the possibility of new business in areas that were previously hands off.

For borrowers, Realtors, and investors, it means greater financial strength which will allow increased recycling of contaminated properties. For government and tax payers, it represents increased opportunities to convert unproductive dormant properties into productive, tax producing properties, employment growth, and neighborhood development.

The information provided in this column is written by Stuart Lieberman,a practicing environmental attorney, and is for general information purposes only. It is not legal advice and should not be used in place of legal advice.

Stuart Lieberman, Esq., and IRED.Com, Inc., will not accept any responsibilty for any reliance on the information in this column or any damages whatsoever resulting from reading this column.