I. INTRODUCTION The Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (the “Act”) (Pub.L. 104-208, Div. A., Title II, Subtitle E, Sept. 30, 1996, 110 Stat. 3009) remains the most significant change to CERCLA anyone will likely see for the next two years or longer. Previously introduced Superfund Reform Legislation in 1997, such as that proposed by Representative Oxley, H.R. No. 3000 (introduced November 9, 1997), appears to be going nowhere fast, at least as far as the Administration is concerned, based on comments made by U.S. EPA Administrator, Carol M. Browner, as late as December of 1997. The most likely changes to CERCLA are those that will codify Brownfield legislation within CERCLA, with more protection to bona fide prospective purchasers and/or innocent landowners of contaminated sites. Both H.R. No. 3000 and recently introduced H.R. No. 3262 (Proposed by Representative Pallone February 25, 1998), would codify Brownfield funding within CERCLA. (Brownfield redevelopment projects were appropriated $25 million last year to be administered by HUD … pursuant to Independent Agencies Appropriations Act of 1998, Pub.L.No. 105-65, 111 Stat. 1344.) The 1996 Reforms fit nicely within the Administration’s apparent desire to provide protection to prospective purchasers and innocent landowners by reestablishing the protection provided to lenders who act only as lenders and do not cross the line into the owner/operator realm of liability. The Act similarly provides additional protection to fiduciaries enabling them to take action with respect to contaminated property without assuming the risk of personal liability. The Act, along with similar changes to California law, should make it easier for contaminated real property to change hands. Additional CERCLA reform is not expected until after the 1998 Congressional elections, and probably not until after the millennium. II. LENDER LIABILITY UNDER SUPERFUND The concept of “lender liability” has, in realty, never existed under the language of the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA,” 42 U.S.C. § 9601 et seq.). Nor has it ever existed under the language of California’s equivalent, the Hazardous Substance Account Act (“HSAA”) (“Cal. H&S § 25300 et seq.). To the contrary, “lenders” have always been expressly excluded form the definition of “owner or operator” under both CERCLA and HSAA, and have never been classified as “liable parties” under thee statutory schemes. It is only in those cases where lenders have taken certain action to preserve or protect their security interest in contaminated property, or have taken action to foreclose on such property, i.e., act as “owners or operators,: that have cause them to be viewed as “liable parties” or “PRP’S.” On the other hand, lenders cannot remain in the business of loaning funds if they are unable to protect their security and/or to foreclose in the event of default. It is these two key issues Congress sought to address with the passage of the Act. The Act also amended CERCLA to provide protection from personal liability to fiduciaries who may voluntarily or involuntarily own or take action concerning contaminated property. Similarly, the California Legislature, with the adoption of Senate Bill 1285, effective January 1, 1997, amended State law to provide these same but somewhat broader protections to lenders and fiduciaries from similar State statutes. As noted above, lenders have always been expressly excluded from the definition of “owner or operator” under 42 U.S.C. §9601(20). As such, they have never been classified as “liable parties” except in those instances where they actively sought to protect their security interest by participating in the management of the facility, or where they foreclosed on the security, thus becoming “owners or operators.” There are several well-known decisions where courts have reviewed the actions of lenders in preserving their security or in foreclosing on the property and concluded the lender may have crossed the line by either “participating in the management” or becoming an “owner or operator” for purposes of liability under CERCLA. (See, e.g., United States v. Fleet Factors Corp. 901 F.2d 150 (11th Cir. 1990) cert. denied, 498 U.S. 1046 (1991); United States v. Maryland Bank & Trust Co., 632 F. Supp. 573 (D.C. Md. 1986); and United States v. Mirabile, 15 E.L.R. 20994 (E.D. Pa. 1985).) In Fleet Factors Corp., the Eleventh Circuit Court of Appeal found that a secured lender could be held liable as an “owner or operator” under CERCLA, if the lender had the mere “capacity to influence” the debtor’s treatment of hazardous substances, whether or not that capacity to influence was ever exercised. The ramifications of this holding reverberated across the country, although its holding was not necessarily widely accepted by the courts. (See, e.g., In re Bergsoe Metal Corp., 910 F.2d (9th Cir. 1990). In response to the Fleet Factors decision and the other cited above, and to address the concerns of financial institutions through the country, the U.S. EPA formulated the Lender Liability Rule, with the final Rule being adopted in April of 1992 (Lender Liability Rule, 57 Fed.Reg. 18344 (1992) (to be codified at 40 C.F.R. 300.1100 et seq.).) In short, the Lender Liability Rule defines “an exempt security interest” by defining actions that constitute “participation in management” as well as those actions that do not. The Rule provides protection to lenders by exempting “persons who maintain evidence of property interests primarily to secure the payment of a loan and performance of an obligation.” Under the Rule, the following actions were described as not constituting “participation in the management” of a facility: foreclosure where the ownership held after foreclosure continued to be maintained primarily as protection for the security interest, provided the holder of the security attempted to sell, or where appropriate, release property held pursuant to a lease, or otherwise to divest itself from the property, all in a reasonably expeditious manner, using whatever commercial means were relevant and/or appropriate with respect to the facility, and taking into account all facts and circumstances, but provided the holder of the security had not previously participated in management of the facility. The Rule further provides that in those instances where the borrower is in possession of the property, a lender will be deemed to be participating in the management of the facility only if the lender has taken one of the three actions: 1) exercised decision making control over the borrower’s environmental compliance; 2) assumed or manifested responsibility for the overall management of the enterprise, including the day-to-day decision making of the enterprise with respect to environmental compliance; or 3) assumed or manifested responsibility for the overall management of the enterprise, including day-to-day decision making with respect to all or substantially all of the operational aspects of the enterprise (as opposed to financial or administrative) other than environmental compliance. (See Kelly v. Tiscornia, 810 F. Supp. 901 (W.D. Mich. 1993) discussing the Rule and its application.) Shortly after the U.S. EPA’s adoption of the Rule, the Rule was challenged on the grounds EPA did not have this broad rule-making authority, and specifically did not have the ability to adopt regulations which arguably contravened the language of the statute itself. In Kelly v. EPA, 15 F.3d 1100 (D.C. Cir. 1994), reh’g denied, 25 F.3d 1088 (1994), cert. denied, American Bankers Ass’n v. Kelley, 513 U.S. 110, the D.C. Circuit Court overturned the Rule, finding that only the courts are the designated adjudicators of the scope of CERCLA liability, and the U.S. EPA has no such authority. III. THE LENDER/FIDUCIARY AMENDMENTS TO CERCLA With the adoption of the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, Congress responded to the Circuit Court’s decision in Kelly v. EPA, by adopting two significant changes to CERCLA. First, Congress added subsections (E)(i), (E)(ii), (F), and (G) to §9601(20), i.e., the definition of “owner or operator,” to provide guidance and clarity to lenders seeking to protect their security in a facility through pre-foreclosure activities or through foreclosure. Second, Congress amended 42 U.S.C. §9607 (the private cost recovery provisions) by adding subsection 9607(n) to create a cap on the liability of fiduciaries (i.e., not to exceed the assets held by the fiduciary) to the extent the fiduciary acts in his or her fiduciary capacity. (See 42 U.S.C. §9607(n).) In Kelly v. Tiscornia, 44 ERC 1951 (6th Cir. 1996) a case decided within three months of the adoption of the Act, the Sixth Circuit recognized that the Act was a rein-statement of the Lender Liability Rule and an attempt by Congress to codify its provisions. (Id. at 1952.) The Court also found that the Act applied to all claims that had not been fully adjudicated as of its effective date. (Id. at 1952.) The Court, therefore, upheld the district court’s decision granting summary judgment in favor of the PRP Bank, based on the Lender Liability Rule, in spite of the arguments of the plaintiff that the Rule had since been vacated by the D.C. Circuit Court in Kelley v. EPA. A. “Lender Liability” The protection provided to lenders under the amendments to §9601(20) closely parallels the protection established by the U.S. EPA under the Rule. (See 42 U.S.C. §9601(20) and 40 C.F.R. 300.1100 et seq.) With amendments to CERCLA, however, Congress made no language change to the definition of “owner or operator” itself. Rather, that language remained the same, i.e., the definition does not include a person “who without participation in the management of a vessel or facility holds indicia of ownership to protect his security interest” in the property (42 U.S.C. §9601(20)(A)). Instead of amending this language, Congress imply added more detail how the exception is to be applied: new subsection (E), entitled “Exclusion of lenders not participants in management”; new subsection (F), “Participation in management”; and new subsection (G), “Other terms” (defining “extension of credit,” “foreclosure,” “lender,” “operational function” and “security interests”). New subsection (E) provides that even where a lender forecloses on a facility, it will not be classified as an “owner or operator” if the lender did not “participate in management” of the facility prior to foreclosure, and after foreclosure, the lender seeks to sell, release (in the case of a lease finance transaction) or otherwise divest the property at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements. If these conditions are met, a lender will not be found liable as an “owner or operator” after foreclosure even if it sells, re-leases (in the case of a lease finance transaction), liquidates the facility, maintains business activities, winds up the operations of the business, undertakes a response action pursuant to §9607(d)(1), acts on the direction of an on-scene coordinator appointed under the National Contingency Plan, or takes other measures to preserve, protect or prepare the site prior to sale or disposition (42 U.S.C. §9601(20)(E)(ii)). Under the new subsection (F), “Participation in management,” is defined to mean “actually participating in the management or operational affairs” of the facility and not to mean “merely having the capacity to influence, or the unexercised right to control, vessel or facility operations.” (This language is designed to overturn the test in United States v. Fleet Factors Corp., supra. See 42 U.S.C. §9601(20)(F).) Congress provided further guidance on “participation in management” with respect to the level of control that may be exercised by a lender over the operations of the borrower before the lender will be considered an “owner or operator” as a result of such management participation (42 U.S.C. §9601(20)(F)(ii). Finally, new subsection (G), “Other terms,” defines the salient terms referenced in subsections (E) and (F). In sum, the amendments provide the direction intended by the Lender Liability Rule, and provide statutory protection to lenders when taking action to preserve their security interest or foreclosing on property. Yet, as evidenced by the recent district court decision in F.P. Woll & Company v. Fifth & Mitchell Street Corporation, et al., 1997 U.S. Dist. LEXIS 11685 (E.D. Pa. July 31, 1997), the additional protections provided do not constitute a basis for absolute immunity, and nor do they provide a basis for automatic dismissal of a lawsuit brought against a lender. In F.P. Woll & Company, the District Court denied the defendant Bank’s motion to dismiss brought based on the exception to definition of “owner or operator” under the recently adopted amendments to CERCLA. The Court determined that the complaint alleged the Bank was an “operator” of the facility during the time the alleged releases of hazardous substances occurred, and that it could not look beyond such bare bones allegations to determine whether the allegations were valid. The Court made this determination in spite of allegations in the complaint that after the Bank declared the borrower in default, it foreclosed and took title to the assets and thereafter promptly sold the assets to another defendant. As a result of the decision, the Bank will undoubtedly be forced to engage in significant discovery with respect to what actions it took and/or did not take after it foreclosed on the property, and to thereafter bring a motion for summary judgment. The difficulty with the decision is that, from the opinion itself, there did not appear to be any specific allegations as to what releases occurred during the time the Bank acted as the alleged “operator,” not did there appear to be any allegations supporting the legal conclusion that the Bank conducted any activities to take it outside of the security exception to the definition of “operator.” In short, the complaint did not appear to put the Bank or the Court on notice as to what actions the Bank had undertaken to cause it to fall out of the “lender” category and into the “owner or operator” category. Thus, on the fact of the Court’s decision, the Bank’s motion to dismiss the CERCLA cause of action on the grounds that it failed to state a claim for relief, should have at least been granted with leave to amend. The F.P. Woll & Company v. Fifth & Mitchell Street Corporation decision illustrates some of the difficult issues the courts will need to sort through with the recent amendments to CERCLA. For its party, however, Congress has attempted to do its best to add more flesh to the bare bones exception to the definition of “owner or operator,” and it is now up to the courts to hold that “lender liability” in the true sense of the term “lender” will be “nevermore.” (For more detail, refer to the Resource Conservation and Recovery Act, 42 U.S.C. §§6901, et seq.) B. “Fiduciary Liability” under the Amendments to CERCLA The second significant change to CERCLA by the Act is the protection from personal liability provided to fiduciaries (42 U.S.C. §9607(1).) This protection had not been previously provided to fiduciaries with the Lender Liability Rule. The Act provides that the liability of a “fiduciary” under CERCLA, with certain exceptions, is limited to the assets held in the fiduciary capacity. The term fiduciary” has been broadly defined to include any person acting for the benefit of another as a bona fide trustee; executor; administrator; custodian; guardian of estates or guardian ad litem; receiver; conservator; committee of estates of incapacitated persons; personal representative; and other trustees under indenture agreements, trust agreements, leases or other similar financing agreements. (42 U.S.C. §9607(n)(5)(A)(i)(I-XI).) The term “fiduciary” does not, however, include a person acting as a trustee with respect to a trust organized for the primary purpose of actively carrying on a trade or business for profit, unless created to facilitate an estate plan or because of incapacity. (42 U.S.C. §9607(n)(5)(A)(ii)(I).) Similarly, the term does not include a person who acquires ownership or control as a fiduciary with the objective purpose of avoiding liability. (42 U.S.C. 9607(n)(5)(A)(ii)(II).) The Act creates a “safe harbor” for fiduciaries, allowing them to take removal or remedial action on the site(among other actions), something that lenders cannot do, and still not be found to be a responsible party under CERCLA (42 U.S.C. §9607(n)(4)). The Act’s limitations on the liability of fiduciaries should provide some important protections to trustees in bankruptcy, receivers and executors of estates, to allow them to assess, investigate and clean up contaminated properties. In the past, the lack of such protection has caused a “chilling” effect on the assessment and clean up of properties throughout the country. The amendment is an important change to federal law not only because of the protection from personal liability it provides to fiduciaries handling contaminated property, but also because of the protection from personal liability it provides to fiduciaries handling contaminated property, but also because of its casual effect on the development of previously undevelopable property. IV. CALIFORNIA SENATE BILL 1285 Under Senate Bill 1285, the California Legislature added Chapter 6.96 entitled “Hazardous Materials Liability of Lenders and Fiduciaries” to Division 20 of the California Health & Safety Code. Pursuant to new §25548.2, protection is provided to lenders when “acting in the capacity of a lender” from “any state or local statute, regulation or ordinance . . . .” As Congress did with its amendments to CERCLA, the California Legislature defines what it means to “participate in the management” of property, so that a lender can better understand the line drawn between its capacity as a “lender” and that of an “owner or operator” of a facility. (H&S §25548.1(k).) In addition, similar to the limitations provided by the amendments to CERCLA on the liability of fiduciaries, the State Legislature adopted nearly identical protection to fiduciaries from personal liability from “any state or local statute, regulation or ordinance” imposing liability for “the release or threatened release of hazardous materials at, from, or in connection with any property held at any time by the fiduciary as part of the fiduciary estate.” (H&S §25548.3.) The protections and limitations on liability provided under Senate Bill 1285 go beyond those provided by Congress because of the protections and limitations on liability from “any state or local statute, regulation or ordinance,” and because of the Bill’s use of the term “hazardous materials” rather than the more limited definition of “hazardous substances.” Specifically, “hazardous materials” as defined under SB 1285, includes “petroleum,” as well as any “hazardous waste” under State law, and any “waste” as defined under the Porter-Cologne Act. (See H&S §§25548.1(g) and 25260(d).) Thus, the “petroleum” exclusion to the definition of “hazard substance” under CERCLA and the HSAA will not act as a limitation on the protections to lenders and fiduciaries from liability under any state statutory theory of recovery. As to fiduciaries, the Act and SB 1285 appear to address most of the concerns put forth by Judge Conti in City of Phoenix v. Garbage Servs. Co., 816 F.Supp. 600 (D.Ariz. 1993): “It may seem unjust to subject trustees that are not involved in the contamination of the Property to liability for cleanup that, in some cases, may far exceed the value of the trust’s assets. But, as mentioned above, a defendant’s degree of culpability has nothing to do with owner/operator liability under CERCLA. If Congress had meant to exempt uninvolved trustees from liability as owners’ under CERCLA, it would have said so in the statute.” The Court’s finding, holding fiduciaries personally liable, is no longer controlling authority. Yet, it must be recognized that neither the Act, nor SB 1285, provides fiduciaries carte blanche authority to act without taking necessary precautions in administering contaminated property. Fiduciaries must proceed with caution, but may do so without fear of subjecting their personal assets to strict liability. V. CONCLUSION The challenge for “lenders” remains knowing when to avoid crossing into the “owner or operator” realm of liability, and for fiduciaries, staying within the “safe harbor” provisions to avoid personal liability. The challenge for the courts remain interpreting Congress’ intentions with respect to the exception to the definition of “owner or operator.” Hopefully, the players now have the tools to meet their respective challenges, although as evidenced, by the Court’s decision in F.P. Woll & Company v. Fifth & Mitchell Street Corporation, 1997 U.S. Dis. LEXIS 11685 (E.D. Pa. July 31, 1997), it will take time for all the issues to be sorted out. As to further Superfund Reform, Congress’ inability to muster enough votes may be attributable to the vast array of Superfund legislation that is presented to it each year. A quick review of Superfund legislation proposed during the previous three sessions (http://thomas.loc.gov) shows 50 proposed Bills for each of the 105th, 104th, and 103rd Congressional sessions amending or reauthorizing Superfund/CERCLA. In the past, major Superfund Reform has been delayed through the adoption of specific band-aid amendments, rather than necessary wholesale changes. Additional Superfund Reform will not likely be seen until the year 2000. In addition to Ms. Browner’s comments in December, in February of this year, Senate Majority Leader Trent Lott, in a speech before the Council of Insurance Agents and Brokers, asserted that was “no chance” of Superfund Reform in this Congressional session, although he later attempted to place a more positive light on possible reform. Still, with the adoption of the Act, the continuing progress on Brownfield legislation and the apparent desire of the U.S. EPA to broaden the protection provided to prospective purchasers, one should expect some loosening of administrative enforcement against those potentially responsible parties who were not “owners or operators” at the time of the actual disposal of the contamination in issue. Mr. Montevideo is a partner in the Public Law Department and specializes in environmental law and mediation of environmental disputes. Mr. Montevideo may be contacted by e-mail at rmontevideo@rutan.com.
