Pub. 5 2015 Issue 2

Environmental Liability – A Lender’s Risks By BARBARA U. RODRIGUEZ-PASHKOWSKI, Gust Rosenfeld P.L.C. COUNSELOR’S CORNER F R EQUENTLY, LENDERS WHO ARE FRUSTRATED BY NON-PERFORM- ING REAL ESTATE LOANS ARE ALSO CONCERNED ABOUT WHETHER THE real property is being managed properly. The loan documents usually give the lender the right to step in, after de- fault, and either take possession of the property, or at least assume control over the management in order to protect the lender’s security for the loan. But be- ware: lenders who assume control may also assume liability – to the EPA as an operator under the Comprehensive En- vironmental Response, Compensation, and Liability Act (“CERCLA”). P ARTICIPATION IN PROPERTY M ANAGEMENT Owner or operator liability does not attach to a lender with a security interest on a property as long as the lender does not participate in the management of the property. The problem arises when the lender says, figuratively, “I’ve got this” and participates in management. There is an important difference between par- ticipating in management and preserving the security for the loan. Participation in management. A lender who, prior to foreclosure (1) takes responsibility for hazardous substance handling or disposal practices; (2) as- sumes the overall management of the daily decision making regarding envi- ronmental compliance; or (3) assumes “the operational functions (as distin- guished from financial or administrative functions)” at the property is considered to participate in management. 42 U.S.C. § 9601 (20) (F) (ii) (II) (aa) (bb). Preservation of the security. A lender does not participate in management, and therefor does not incur CERCLA liabil- ity, by taking other reasonable measures to preserve, protect, or prepare the facil- ity prior to sale or disposition, provided that the lender sells, re-leases or divests itself of the facility at “the earliest practicable, commercially reasonable time and on commercially reasonable terms”. 42 U.S.C. § 9601 (20) (E) (ii). 8 www.azbankers.org