Liability for Waste Cleanups May Widen

New EPA rule aimed at clarifying lenders' rights, responsibilities under Superfund Act

UNTIL recently, the costs of cleaning up contaminated properties in the United States were usually paid by property owners, operators, and waste haulers under the federal Superfund law of 1980. But several recent court decisions have also forced banks and other lending institutions that have a financial interest in these properties to ante up, too. In response, the US Environmental Protection Agency is drafting a rule that would: Encourage lenders to conduct environmental audits before extending loans.

Seek reimbursement from lenders whose properties profit from Superfund cleanups.

Clarify the exemption given to government agencies that have ``involuntarily'' acquired properties from failed banks or thrifts.

Define what level of involvement banks or other lenders can have in properties or assets used as collateral and still remain exempt from liability.

``This is an issue with very significant public and private impact,'' says James Strock, assistant administrator for enforcement at the EPA. The agency has identified 1,200 sites as qualifying for Superfund cleanup money, at an average cost of $20 million per site.

No estimates are available, however, for the number of sites that would be affected by the draft rule. This, says William Roberts, legislative director of the Environmental Defense fund in Washington, D.C., ``is is a hot potato that has to land in someone's lap. If it doesn't, then we'll have the taxpayers pay for the cleanup.''

Taxpayers would not be the sole beneficiaries; businesses would be helped, too. ``Lender liability is an enormous problem,'' says Thomas Greco, associate general counsel for the American Bankers Association. ``Any lender ... that doesn't take into account `secured liability' before making a loan is putting its head into the sand,'' he says. Even after taking the general economic slowdown into account, he adds, loans have grown scarce for companies dealing directly with hazardous waste: dry cleaners, photo processors, service stations, and metal plating firms.

As for lenders, Ann vom Eigen, associate legislative counsel at the Mortgage Bankers Association of American (MBAA) in Washington, D.C., says: ``There are no bright lines in terms of what we can and can't do to work with a borrower who's experiencing problems when there's hazardous waste involved.''

Up to now, courts have exempted banks and other lending institutions from liability for the cost of cleaning up hazardous waste under the ``secured creditor exemption'' of the Superfund law - the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. But last May the US Court of Appeals for the 11th Circuit upheld a district-court ruling in United States v. Fleet Factors Corporation, that found a lender liable for cleanup costs when that lender had been involved in management decisions. This greatly expanded the number of lenders potentially liable for cleanup costs.

EPA's draft rule aims to set clear guidelines for lenders and third parties such as the Federal Deposit Insurance Corporation and Resolution Trust Corporation, which have inherited environmentally contaminated properties from failed banks and thrift institutions.

Says the EPA's Mr. Strock: ``When bankers act as bankers, they shouldn't be liable under Superfund. But when bankers or anyone else operate hazardous waste enterprises, they should be liable for improper conduct, just as much as anyone else.''

The MBAA's Ms. vom Eigen says, ``The practical reality is you have ... to work with the borrower somehow; otherwise you write off the property.''

Abandoning or ``writing off'' collateral properties where cleanup costs exceed the value of the properties is becoming more common among lenders. But if this poses a threat to public health, the EPA steps in and cleans up under Superfund.

The draft rule would protect Superfund as it asks lenders to pay for such cleanups. Says EPA's Strock: ``One key purpose of this rule is [to avoid] a situation where environmentally contaminated properties are abandoned and environmental threats to public health are left behind for economic reasons. ... If the number of `orphan sites' becomes too high, the amount of funds [in Superfund] could be threatened.''

The draft rule is currently in interagency review in the Office of Management and Budget. If accepted, it will be published in the Federal Register, where it may be open for a limited time to public comment. A leaked copy of the rule has been reprinted in several environmental and law journals.

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