Courts: Lenders Must Pay Cleanup

A NEW YORK banking industry official tells the story of how Manufacturers Hanover Trust Company was the executor of an estate that held commercial property on Long Island valued at $2.5 million. In selling off the property, environmental tests showed that acetates used in producing ladies lingerie were dumped on the property, and more than $1 million was spent in cleaning up the land. If the value of the estate had been insufficient, the bank, as executor, might have been forced by a court to cough up the money needed, says William Bitner III, president of the New York State Bankers Association.

Mr. Bitner and other banking officials are becoming increasingly concerned over recent United States court decisions expanding environmental liability to lending institutions under Superfund, the nation's hazardous-waste site cleanup law.

And as the courts expand that liability, financial institutions are warning that loans to small, environmentally risky operations, such as gasoline stations, plant nurseries, and manufacturing plants are going to get more expensive or impossible to get.

Courts have held in recent years that if a bank forecloses on a property that is discovered to have environmental contamination, the bank may be liable for cleaning up the mess. But adding new urgency to the issue, the 11th Court of Appeals ruled in May (US v. Fleet Factors Corporation) that a lender can be held liable for cleanup when the lender participates in the financial management of the borrower's facility, even if the lender does not actually foreclose.

Courts seek deep pockets

``The courts have been too expansive,'' said Rep. John LaFalce (D) of New York, chairman of the House Small Business Committee, which held a June 7 hearing to discuss his legislation to protect lending institutions from ``excessive'' environmental liability.

Representative LaFalce, who also sits on the House Banking Committee, said that Superfund provided an express exemption from such liabilities. However, he maintained that the courts, ``in their search for deep pockets, have held lenders liable for cleanup costs when they exercise their rights by foreclosing on their security interest.''

The courts are making lenders skittish, and small businesses such as gasoline marketers and other petroleum and chemical-related businesses may suffer. ``Gas station owners, autobody shops, and garages'' are potentially vulnerable to lender reluctance, said John Motley III, of the National Federation of Independent Business, a trade association representing small businesses.

Will efforts backfire?

The issue is somewhat ironic in that environmental liability may be inhibiting environmental compliance.

``Businessmen like myself are having difficulty obtaining private financing at our own expense to comply with the federal environmental laws and regulations'' on issues such as underground storage tanks, L.W. Locke, president of Eastern Petroleum Corporation of Enfield, N.C., told LaFalce's Small Business Committee last summer.

The Environmental Protection Agency and the Petroleum Marketers Association of America (PMAA) estimate that 20 percent of the 1.7 million underground storage tanks predominantly used for gasoline or diesel fuel are leaking. The typical tank owner at a gasoline station owns three or four tanks and the cost of retrofitting the tanks to meet federal standards ranges from $75,000 to $150,000, according to PMAA. But they are finding it increasingly difficult to find credit because bankers are scared they may be stuck with the cost of cleaning up the property.

Not all these properties are cause for alarm, says Phillip Chisholm, PMAA executive vice president. ``Every gasoline station and petroleum marketer says there is contamination on site.'' But that doesn't necessarily mean cleanups are in order.

The financial community is still trying to learn about environmental liability, and legal conferences around the country are increasingly being attended by banking attorneys, says Philip Cummings, a former Senate staffer and Superfund architect.

``With respect to making future loans, the banking industry needs to learn more about hazardous-waste laws and their potential liabilities. That may mean some loans won't be made to some environmentally risky busineses,'' Mr. Chisholm says.