Exemption for Failed Banks

MUCH has been made of the clean-up costs of contaminated properties held by failed savings and loan institutions in the United States. Nearly 1 percent, or 400 of 40,000 properties, ``may have some form of environmental contamination,'' says James Davis, senior assets specialist at the Resolution Trust Corporation (RTC), holder of the failed thrift assets. Estimates are not available on cost of cleanup or extent of contamination, says Mr. Davis; the problem cuts across residential, industrial, and commercial properties. Will the RTC and the Federal Deposit Insurance Corporation (FDIC) be liable for cleanup costs?

No, says Gail Jensen, senior counsel for the legal division of the RTC and the FDIC, citing the 1986 amendment to Superfund, which exempts government entities from liability when they ``involuntarily'' inherit contaminated lands from failed lending institutions. But this rule hasn't yet been tested. Says Ms. Jensen: ``There has been no case law concerning application of that defense in particular to the FDIC or to the RTC.''

A 1990 federal circuit court decision, in US v. Fleet Factors Corporation, held a lender liable for cleanup costs. This caused great concern among lending institutions. In June, the RTC and FDIC, together with other lender groups, pressed Congress to pass a law that would strictly limit their liability as lenders. No bill was passed in the last session. But it is believed that an Environmental Protection Agency draft rule now under consideration may set clear enough limits of liability that the RTC and the FDIC are exempt from cleanup costs.

Also unresolved is how to treat buyers of these properties. While the RTC has argued that it needs to grant immunity to buyers of these properties, environmentalists counter that this would just shift the cost of cleanup onto taxpayers in the form of Superfund.

``The majority of these properties are mostly commercial, only a little contaminated, ... with lots of other assets on the property,'' says William Roberts of the Environmental Defense Fund. ``I am puzzled with this: If thousands of transactions take place under the Superfund every day - where truly contaminated properties find buyers - why is it the RTC cannot work within the same context with its [less troubled] properties?''

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