10. MAKE CREATIVE BORROWING ARRANGEMENTS

Often banks and other lenders are reluctant, with good reason, to finance contaminated property, taking dirty land as collateral. Until recently, court cases held banks liable under Superfund if they foreclose on a piece of property, so as to own it even briefly. Additionally, these cases held banks liable if they get too involved in borrower operations, or if they have the authority to control the operations--even if they do not exercise it.

The liability nightmare for the lending community ended on September 30, 1996, with the “Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996.” Title II, Subtitle E, Section 2501-2505 of the 1996 Omnibus Appropriations, H.R. 3610, which amended CERCLA owner/operator liability, under 42 U.S.C. § 9601(20), to exclude lenders that do not actively participate in an entity’s management.

Lenders are protected from owner/operator liability, with respect to environmental compliance or operational functions of the facility, if they do not exercise decision making control and actively participate in the management of a facility prior to foreclosure. These CERCLA lender amendments defined management participation as actual participation in a facility’s affairs. The mere ability of a lender to influence management decisions does not give rise to owner/operator liability. Lenders which exercise control over a facility’s environmental services or actively participate in management will risk liability. Lenders which foreclose on contaminated property are protected, where the lender attempts to sell the property in a commercially reasonable manner, liquidate the foreclosed property, or wind up the foreclosed business’s operations.

It remains significant, of course, that property held as collateral may lose its value once hazardous waste is found. Or the borrower may not be able to repay a loan if forced to pay for a cleanup. Or the lender may lose priority to a superlien filed by a state environmental agency.

There are, therefore, some ways lenders can be comfortable financing dirty property. The careful bank requires a proper site assessment along with written representations about the absence or condition of any known contamination either on the property or on the neighboring property, which could migrate. The thorough bank requires the buyer to give prompt notification of any contamination discovered during the term of the loan. The creative bank also might insist on indemnity from borrowers and guarantors, or may condition the loan on cleanup, or may adjust interest rates to reflect risks, or may take personal guarantees, or mortgages on clean property, to back up the usual collateral.