OverviewofLenderLiabilityUnderEnvironmentalLaws
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OverviewofLenderLiabilityUnderEnvironmentalLaws
American Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawser Environmental LawsLawrence p. Schnapf New York. New York 212-756-2205 (phone) 212-593-5955 (fax) Lawrence.schnapf@Environmental-law.netCopyright © 2005 Lawrence Schnapf9253930 212I. INTRODUCTIONEnvironmental issues present three basic types of risks to lenders: Credit Risk, Direct Liability and R OverviewofLenderLiabilityUnderEnvironmentalLawseputational Risk•Credit Risk- This concern has two components. First, lenders are concerned that environmental issue may impact the cash flow of the bOverviewofLenderLiabilityUnderEnvironmentalLaws
orrower and affect its ability to repay the loan. The second concern within this risk category is impairment of collateral value from contamination orAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawsll be held liable for cleanup costs or toxic tons (i.e., personal injuiy or property damage claims from hazardous substances)•Reputational Risk-Lenders do not want to be associated with property that may be stigmatized or that poses risk to the local community.The type of bank that is involved in a OverviewofLenderLiabilityUnderEnvironmentalLawsparticular transaction as well as the nature of the transactions may also influence the level of concern for environmental issues. Factors that couldOverviewofLenderLiabilityUnderEnvironmentalLaws
influence sensitivity to environmental issues include the following:•Community Bank, Regional or Money Center Bank, or Investment Bank:•Traditional MoAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawsing to a survey conducted by Environmental Data Resources Inc (EDR) in 2003, one out of every ten banks involved in commercial real estate loans have experienced losses due to environmental issues within the past year. The environmental-related losses involved two loans per year and the average tota OverviewofLenderLiabilityUnderEnvironmentalLawsl loss of SI.2 million. Based on the number of banks involved in commercial real estate transactions, EDR said the survey results mean that 900 banksOverviewofLenderLiabilityUnderEnvironmentalLaws
may have experienced losses due to environmental issues during the past 12 months and that the total value of these defaulted loans could be SI. 11 biAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawson (mainly community and smaller regional banks) experienced almost 75% of loan losses due to contamination. For example, 43% of all lenders having less than $250 million in assets23reported that they suffered losses from environmental issues. The total loss experienced by this asset category was $4 OverviewofLenderLiabilityUnderEnvironmentalLaws73 million. In contrast, 29% of banks with assets between $250 million and $1 billion experienced a total of S319 million in loan defaults because ofOverviewofLenderLiabilityUnderEnvironmentalLaws
environmental issues. Banks in the $1 billion lo S10 billion asset category represented 28% of the respondents and experienced the lowest total loss aAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawsm less comprehensive environmental due diligence and also because smaller borrowers had a greater tendency to walk away from contaminated sites since the cleanup costs often exceed the amount of the equity invested in the property; rhe smaller banks typically do not have in-house environmental exper OverviewofLenderLiabilityUnderEnvironmentalLawstise, have not developed environmental risk management policies, have not established minimum due diligence requirements, and often simply accept phasOverviewofLenderLiabilityUnderEnvironmentalLaws
e 1 environmental site assessments (ESAs) performed by consultants who have been retained by the borrower and whom the banks have not pre-qualified.EDAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawsver liability. As a result, many lenders have developed their own environmental due diligence protocols that often exceed the ASTM El527-00 standard for Phase 1 ESAs. These so-called ASTM-Plus protocols often require consultants to examine issues not addressed by the ASTM E1527-00 standard such as a OverviewofLenderLiabilityUnderEnvironmentalLawssbestos, lead-based paint, lead in drinking water, radon and mold.This article will review the scope of liability that lenders may face under federalOverviewofLenderLiabilityUnderEnvironmentalLaws
and state environmental laws.II. OVERVIEW OF LENDER LIABILITY UNDER CERCLA AND RCRAThe two environmental laws of greatest concern to lenders are (he fAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLaws")? These laws do contain secured creditor exemptions that provide a safe harbor to lenders from liability for the cleanup of contaminated property. Ihe exemptions can provide liability protection to secured creditors during the administration of a loan (including workouts) as well as during foreclo OverviewofLenderLiabilityUnderEnvironmentalLawssure and post-foreclosure.It should be noted that die CERCLA and RCRA secured creditor exemptions do not provide liability relief for other federal laOverviewofLenderLiabilityUnderEnvironmentalLaws
ws such as for the cleanup of polychlorinated biphenyls C'PCBs") or for complying with the lead-based (“T.BP") disclosure rules promulgated under the American Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability Unde OverviewofLenderLiabilityUnderEnvironmentalLawsclaims.34A. CERCLAThis law imposes strict and joint liability on four classes of potentially responsible parlies ("PRPs") for (he cleanup and reimbursement of costs associated with releases of hazardous substances. The four classes of PRPs include:•past and current owners of facilities and vessels ( OverviewofLenderLiabilityUnderEnvironmentalLawsi.e., tanks, equipment, etc.);American Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability UndeAmerican Bar Association Section of Business LawMaking the World Safe for Banks and Commercial Real Estate DevelopersOverview of Lender Liability UndeGọi ngay
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