•- if,-
• I
1U ~J^- ' ' , United States Communications, Education.
/ /aWi/U'\ * Environmental Protection And Public Aft airs
u - Agency (A-107)
•r/EPA Environmental News
H\A)
FOR RELEASE: FRIDAY, APRIL 24, 1992
/
RULE CLARIFIES
LENDER LIABILITY LIMITS UNDER 8UPERFUND
Wendy BUtler (202) 260-4376
The Environmental Protection Agency today issued a final rule
under the Comprehensive Environmental Response, Compensation and
^ Liability Act (CERCLA) to resolve financial institutions' and other
^ lenders' concerns regarding potential Superfund liability for
Q environmental damage caused by their borrowers. The rule, which
j, will be effective immediately upon publication in the Federal
V
Register, also protects government agencies, including government
lenders, from CERCLA liability when contaminated property is
acquired through forfeiture and/or other involuntary seizure
authorities.
"This rule is a key element of EPA's efforts under President
Bush's regulatory reform initiative," said EPA Administrator
William K. Reilly. "It will free lending institutions from fear "of
undue and unfair cleanup liability without impairing EPA's ability
to protect the public from mismanaged hazardous waste sites."
Under the final rule, lenders are able to 1) insist that a
business be operated in an environmentally safe manner, 2) work
closely with their financially troubled borrowers, and 3) foreclose
on properties when loans are in default without immediately
becoming liable for the environmental harm their borrowers have
caused. As a result of the rule, credit-worthy businesses will be
better able to acquire the capital and funding they need from
lending institutions to the extent that environmental concerns may
have hindered lending.
The rule provides the Federal Deposit Insurance Corporation
and the Federal Resolution Trust Corporation with maximum
CJ>
£2 R-84 (more)
CO
^ EPA Hea
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protection from inappropriate CERCLA liability. In addition, the
rule's "involuntary acquisition" measures ensure that the
government is adequately protected when acquiring the assets of a
failed lending institution or when acquiring property through
seizure or forfeiture authorities.
The basic structure and intent of the Lender Liability Rule,
which takes an administrative approach to addressing the issue, was
proposed on June 24, 1991. EPA received well over 350 comments on
the proposal.
R-84
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Date: 4/23/92
COMMUNICATIONS PLAN
Office of Communications, Education, and Public Affairs
KEY WORD TITLE:
OFFICIAL TITLE:
IMPORTANT:
Lender Liability Under Superfund
Lender Liability Under CERCLA
High
PROJECTED
ANNOUNCEMENT DATE: 4/24/92
1. ACTION:
2. MESSAGE:
3. AUDIENCE:
4. OVERALL
STRATEGY:
The White House and EPA will announce a final
rule to address the extent to which lenders are
exempt from cleanup liability under Superfund.
This rule becomes effective upon its
publication in the Federal Register which
is expected to take place within 2 weeks.
This regulation will benefit the economy by
ensuring that businesses have access to the
capital they require from a lending industry
freed from fears from undue cleanup liability.
Members of Congress, Federal lending agencies
and loan guarantors, the banking and finance
industry, the nonfinancial sector of the
regulated community (real estate, construction,
insurance industries, PRP's (potentially
responsible parties), trade associations,
environmental groups, state and local
governments, and the general public.
(see anticipated reaction in item 8)
Approach is to inform key decision-makers in
Congress, the banking and finance industries,
the nonfinancial sector of the regulated
community, and environmental groups.
4/24 — Announcement by White House
4/24 — EPA press release
4/24 — Notify Hill and offer briefings
4/24 — Notify constituent groups
4/24 — 1:30 - 2:30 — Hold constituent
briefing in EPA Auditorium
(Ray L. or John Michaud, OGC
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Date: 4/23/92
DETAILED
COMMUNICATIONS PLAN
Office of Communications, Education, and Public Affairs
KEY WORD TITLE:
OFFICIAL TITLE:
Lender Liability Under Superfund
Lender Liability Under CERCLA
5. BACKGROUND
SUMMARY:
DETAILED
DESCRIPTION
OF ACTION:
EFFECT OF
ACTION:
In June 1991, EPA proposed a rule to clarify
the scope of the exemption from cleanup
liability for financial institutions and other
persons who hold security interest in property
under the Super fund lavr.
During the course of drafting its rule, Agency
personnel had numerous conversations with many
individuals and groups interested in this
issue, specifically the lending, environmental,
and business communities, as well as represent-
atives from the Resolution Trust Corporation
(RTC), the Federal Deposit Insurance Corp
(FDIC), the Department of the Treasury, and
other governmental and private lending
institutions in an effort to gather information
to assist EPA in crafting its response. These
discussions helped the Agency put together a
response to address the various situations
encountered by lenders (including loan
guarantors) during the making and monitoring of
a loan, during loan workouts, and upon
foreclosure and taking title to collateral.
EPA is finalizing a rule to clarify the
scope of the exemption from cleanup liability
for financial institutions and other persons
who hold security interest in property under
the Superfund law.
Under the final rule, lenders are able to 1}
insist that a business be operated in an
environmentally safe manner, 2) work closely
with their financially troubled borrowers, and
3) foreclose on properties when loans are in
default without immediately becoming liable for
the environmental harm their borrowers have
caused. As a result of the rule, credit-worthy
businesses will be able to acquire the capital
arid funding they need from lending institutions
to the extent that environmental concerns may
have hindered lending practices.
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8. ANTICIPATED
REACTION:
Members of Congress will have a mixed reaction.
Some members will support the action as
sufficient, others will support EPA's approach
while seeking to advance broader legislation.
Some members will view the action as
insufficient and will continue to press for
legislation for a blanket exemption for the
banking and finance industry.
Federal agencies generally will be supportive
of the Administration's position.
The banking and finance industry will be
supportive of the Agency's approach while
continuing to press for broader legislation.
Industry spokesman can be expected to praise
EPA's effort, while adding that the Agency
failed to go quite far enough.
Environmental groups and the non-financial
sector of the regulated community can be
expected to be critical because they believe
the rule to be unsupported by evidence of
actual injury to the banking industry. Both
these audiences can be expected to say that the
action constitutes a special favor to the
banking industry. However, both these groups
can also be expected to prefer EPA's approach
to resolving the issue through ongoing efforts
to pass legislation.
State and local governments will be generally
supportive of the EPA approach and very
critical of efforts to pass broader
legislation.
The general public can be expected to be
critical of the Agency's .approach on the
grounds that any action that offers relief to
the banks tends to be unpopular.
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9.
DETAILED
STRATEGY:
4/24 — White House announcement — industry
briefing at 11:00 and press briefing at
noon
4/24 — Issue EPA press release
4/24 — Notify Hill, send press release, and
offer briefings
4/24 — Hold constituent briefing in EPA
Auditorium from 1:30 - 2:30
4/24 — Distribute rule and press release
through the Superfund/RCRA Hotline
by 5/8 r- Publish Federal Register Notice
Information Materials:
Press Release (Wendy Butler)
Q&As for internal use only (Ott/Fogarty)
Federal Register Notice — xeroxed version
(Fogarty)
Side by side (Ott/Fogarty) — MAY NOT DO
A packet of the above items will be sent to:
(Robenolt)
Karen Burgan
Anne Randolph
Amy Dewey
Wendy Butler
NOTE: JOHN FOGARTY WILL ARRANGE TO HAVE COPIES
PRINTED AND DISTRIBUTED. HE WILL GET IN TOUCH
WITH THE FOLLOWING TO DETERMINE THE NUMBER OF
COPIES NEEDED.
Superfund/RCRA Hotline —
PIC :—
Wendy Butler
Copies
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•'4
10. ANNOUNCEMENT
NOTIFICATION
PLAN
INTERNAL AND INTER-AGENCY NOTIFICATION
who to Notify
Don Clay
Marjorie Buckholtz
Bruce Diamond
Regional Admins
Deputy Regional
Admins
Regional Counsels
Regional Public
Affairs Directors
When
4/23
4/23
4/23
4/23
4/23
4/23
4/23
Notifier
Ray L.
Ott
Ray L.
Randolph
Randolph
Randolph
Butler/
Michal
Federal Agencies
FANNIE MAE
(Asst Sec for Env
Affairs, Inglestat) 4/23 Dewey
Resolution Trust 4/24 Michaud
Corp (RTC)
Federal Deposit 4/23 Michaud
Insurance Corp
(FDIC)
Dept of Treasury 4/23 Michaud
OMB 4/23 Michaud
•9
NEWS MEDIA NOTIFICATION
Who to Notify When Notifier
General, trade, 4/24 ,Butler
financial and
Washington print
media
Action/Materials
Action/Materials
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CONGRESSIONAL NOTIFICATION
Who to Notify When
Hill 4/24
Hill - key 4/24
committees
Sen. Lautenberg 4/24
(Seth Hones)
Sen. Garn 4/24
(Ray Natter)
Rep. Lafalce 4/24
(Susan Lubick)
Rep. Owens 4/24
Sen. Hatch ? 4/24
INTEREST GROUP NOTIFICATION
who to Notify when
•^
Environmenta1 Groups
NRDC
EDF (Bill Roberts)
Southern Finance
Project (Jenny
Thelen)
Public citizen
Center for Policy
Alternatives
Citizen Action
Citizens Clearing-
house for Hazardous
Waste
Clean Sites, Inc
Clean Water Action
Project
Notifier
McCready
McCready
McCready
McCready
McCready
McCready
McCready
Notifier
Dewey/
Koerner will
make all calls
on 4/23
Action/Materials
press release to
all members and
key committees
Action/Materials
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Environmental Groups
Who to Notify when
Environmental 4/23
Action
Environmental Law
Institute
Friends of the Earth
Greenpeace
Inform, Inc
Natl Audubon Society
Natl Toxics Campaign
Natl Wildlife Fed.
Sierra Club
U.S. Public Interest
Research Group (PIRG)
WorldWatch Institute
Trade/Business Associations
Alliance of American
Insurers
American Bankers
Assn (Tom Greco)
American Insurance Assn
American International
Group
Business Roundtable
Chemical Mfgrs Assn
Environmenta1
Lender Liaibility
Coalition
(Alfred Pollard —
293-8440)
Hazardous Waste
Treatment Council
Notifier
Dewey will
make all calls
on 4/23
Action/Materials
Dewey will
make all
calls on
4/23
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Trade/Business Associations
Who to Notify When
Independent Bankers 4/23
Assn of America
Mortgage Bankers
Assn
Natl Assn of Mfgrs
Natl Solid Waste
Mgmt Assn
U.S. Chamber of
Commerce
State and Local Govt
Natl Governors Assn 4/23
Natl League of Cities 4/23
Natl Assn of Attys 4/23
General
Notifier
Dewey will
make all calls
Action/Materials
Randolph
Randolph
Randolph
11. CONTACTS:
Press calls
Major Press Bill Reilly or Ray L.
2nd Tier Press — Ray L, OGC
Trade Press John Fogarty, OE
Others Wendy Butler
Other:
OCEPA -
OCEPA -
OCEPA -
OSWER -
OSWER -
OROSLR
OGC
OE
Ruth Robenolt 260-1380
Caren Ewing 260-2556
Amy Dewey 260-1031
Marjorie Buckholtz 260-4610
Karen Burgan 260-8716
Anne Randolph 260-3870
Dana Ott 260-5466
-John Michaud 260-3840
-Bill Frank 260-1138
-John Fogarty 260-4697
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1434
ANALYSIS AND PERSPECTIVE
FEDERAL LEGISLATION
ON LENDER ENVIRONMENTAL LIABILITY:
Last Chance Before the Shootout at CERCLA Corral
By Margaret V. Hathaway *
In November 1991, Congress came close to enacting legislation regarding lenders' environmental
liabilities for contamination they are innocent of causing. The legislation is receiving attention again,
and while it is critically important to lenders, it is not certain if it will be enacted before the 102d
Congress adjourns. If not enacted this year, the legislation wilt become part of the fierce battle
anticipated when the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA or the superfund law) comes up for reauthorization in 1994.
This article summarizes what happened to lender environmental liability legislation in Congress in
the closing months of the 1991, the content of the legislation that passed the Senate without objection,
and the prospects for passage of a lender liability bill in 1992. A summary of the provisions in the
Senate bill is interspersed with commentary in italic type.
Sen. Jake Gam (R-Utah) and Rep. John LaFalce
(D-NY) both have bills to restore Congress' original
intent in enacting CERCLA's secured creditor exemp-
tion in light of lender concerns about its continued
usefulness. CERCLA imposes a harsh scheme of strict,
as well as joint and several, liability on several classes of
potentially responsible parties (PRPs). PRPs include
current owners and operators of contaminated properties
and owners and operators at the time of contamination,
even those that are innocent of any role in causing the
contamination. The secured creditor exemption provides
an exception to. owner/operator liability for a person
"who, without participating in the management of a
vessel or facility, holds indicia of ownership primarily to
protect (a) security interest in the vessel or facility."1
However, court decisions such as that in U.S. v. Fleet
Factors 2 have seriously eroded the exemption.
Rep. LaFalce's bill, H.R. 1450, has more than 260
co-sponsors. While it has not been voted on by the
Transportation and Hazardous Materials Subcommittee
of the Mouse Energy and Commerce Committee to
which it has been referred, there is recent renewed
attention to this legislation. It was at a hearing of this
subcommittee in August 1990 that the Environmental
Protection Agency announced its intention to address
lender liability by means of its still forthcoming rule on
lender liability under CERCLA. In 1991, there were no
hearings of this subcommittee on the LaFalce legisla-
• Margaret V. Hathaway is Counsel to the law firm of Thacher
IVufliti & Wood in Washington. D.C.
'42 U.SC%OI(20)(A).
7 901 F.2d l?50 (llth Cir. 1990), rch. den. en bane. 91! F.2d 742:
ccri. denied 112 L.lid.2d 772 (US 1991).
tion. but the Subcommittee on Policy Research and
Insurance (chaired by Rep. Ben Erdreich, D-Ala.) of the
House Committee on Banking, Finance and Urban Af-
fairs held a hearing in July 1991 on the issue of lenders'
liability for contamination they did not cause.
Sen. Garn succeeded in incorporating the provisions of
his legislation into the Senate version of the banking bill,
S. 543, as Title X. (Title X derived from Sen. Gam's
S.651, a bill which contained only provisions relating to
lender environmental liability.) Title X was passed by
the Senate without objection in the early hours of Fri-
day, Nov. 22. 1991 but did not survive the conference
committee on the banking bill (which completed its work
in the few days remaining before the Thanksgiving
holiday). There were many highly controversial issues in
the banking bill (some of which pitted lenders against
other lenders), and in the end the House prevailed with a
more narrow bill rather than a broad banking reform
bill.
Prior to the Senate's passage of Title X, a number of
lenders were concerned that, although intended to help
lenders, the bill had some serious drafting concerns that
would be likely to offset benefits expected from EPA's
forthcoming rule on CERCLA lender liability and in
fact might unintentionally exacerbate, rather than allevi-
ate, lenders' environmental liability problems. As report-
ed out of the Senate Banking Committee, those problems
remained in Title X. However, the final version that
emerged from the Senate floor in the early hours of Nov.
22, resolved many of those concerns.
Sen. Garn and his stall' {particularly Raymond Nat-
icr. Minoriiy Counsel 10 the Senate Banking Commit-
tee) engineered a successful path through the Senate
4-22-flZ
Copyright © 1992 by The Bureau of National Affairs. Inc.. Washington. D.C.
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CURRENT REPORT
1435
notwithstanding serious controversies. Perhaps the most
difficult obstacle was a jurisdictional dispute between
the Subcommittee on Superfund, Ocean and Water
Protection (chaired by Sen. Frank Lautenberg, D-New
Jersey) of the Senate Committee on Environment and
Public Works, which has jurisdiction over CERCLA,
and the Senate Committee on Banking, Housing and
Urban Affairs. By having his legislation amend the
Federal Deposit Insurance Act, rather than CERCLA,
Sen. Garn had managed to keep the legislation in the
Senate Banking Committee. Sen. Garn's legislation was
the subject of hearings of the full Senate Banking
Committee in June and July 1991, of Sen. Lautenberg's
Subcommittee in April 1991, and of the Senate Commit-
tee on Small Business in June 1991. In the end, Title X
amended CERCLA rather than the Federal Deposit
Insurance Act (except for provisions applying to govern-
mental tending entities), which was apparently one of
the compromises sought by the Seriate Committee on
Environment and Public Works.
Since Title X will serve as the basis for Senate action
in 1992, it is useful to review its provisions.
SUMMARY OF TITLE X
The final version of Sen. Garn's Title X of S. 543, as
passed by the Senate, would have provided substantial
benefits to lenders. In summary, the final version of Title
X would have:
• amended CERCLA, rather than the Federal Deposit
Insurance Act (except for provisions applying to govern-
mental lending entities);
• extended coverage to Subtitle I of RCRA, which
regulates underground storage tanks;
• established a limitation on liability of insured deposi-
tory institution tenders and mortgage lenders for releases
of hazardous substances; expressed as limiting liability
to the "actual benefit conferred" on a lender by a
cleanup, the provision would have required a lender to
repay any net gain realized upon sale of the property but
no more;
In this way, a lender's losses would be limited to the
amount of unpaid principal and interest and costs
incurred.
• covered properties acquired through foreclosure or
securing loans in portfolio; the language covering loans
in existing portfolio is "property ... (D) subject to
financial control or oversight pursuant to an extension of
credit";
• covered properties held as a lessor or fiduciary;
Previous versions had covered depository institution
lenders, but not non-depository institutions, in their
capacities as fiduciaries and lessors. (See definition of
fiduciaries below.)
• established some safe harbors for both insured de-
pository institutions and mortgage lenders that could not
serve as the basis of any liability, including:
• holding a security interest or abandoning or re-
leasing a security interest in collateral before
foreclosure;
•having the uncxcrciscd capacity to influence oper-
ations at or on :i properly in which a lender holds ;»
security inleresi:
This provision explicitly overrides the onerous stand-
ard established in U.S. v. Fleet Factors thai the mere'
unexercised capacity to influence a borrower's disposal
of hazardous substances is enough to trigger liability
under CERCLA.
• including covenants, warranties, or other terms
and conditions that relate to a borrower's compliance
with environmental laws;
• monitoring or enforcing the terms and conditions
of the extension of credit;
• inspecting the property;
• requiring the borrower to clean up the property
prior to or during the term of the loan:
• providing financial or other advice to mitigate,
prevent or cure default or diminution in value of the
property;
• restructuring, renegotiating, or otherwise agree-
ing to alter the terms of a loan;
• exercising any other remedies available at law or
in equity for borrower's breach; or
• declining to do any of the foregoing;
Although the legislation clearly applies to fiduciaries
and lessors, it is unclear how the safe harbors apply to
fiduciaries and lessors.
• retained liability for lenders who cause or signifi-
cantly and materially contribute to a release;
Under existing law, lenders are concerned that they
face grave risks of potentially catastrophic joint and
several liability when, in administering a loan or follow-
ing foreclosure, the lender contributes a very small
release at a property with large-scale existing contami-
nation. A lender could face this liability even if it
accidentally contributed only a de minimis amount
when acting as a good citizen in voluntarily cleaning up
a site. This provision alleviates this concern by making
lenders jointly and severally liable only if they "signifi-
cantlv and materially contribute" to a release of a
hazardous substance.
• required both depository institution lenders and
mortgage lenders to comply with environmental assess-
ment regulations to be developed by the FDIC;
The mandatory compliance with environmental as-
sessment regulations is one of the more controversial
provisions of Title X. Language in the Senate Banking
Committee's report accompanying S.543. with reference
to the environmental assessment requirement, explained
that the regulations "may provide for different types of
environmental assessments in order to account for dif-
ferent levels of risk that may be posed by different
classes of collateral or leased properly . .. {and that the
regulators) might find that a minimal or even no envi-
ronmental assessment might be appropriate for residen-
tial properties if those properties are not located in
areas of known or suspected environmental risk."* Pre-
vious versions of Title A' would have subjected non-
depository institution lenders to regulation by HUD and
'Comprehensive Deposit Insurance Reform and Taxpayer Protec-
tion Ac; of I9!'l. Rupori of ihe Committee on Banking. Housing and
Urban AiV;iirs, U.S. Senale. to accompany S.f-o. together with Addi-
tional Views. Oct. I. I9')l.
4-22-92
Toxics Law Reporter
0887-7394/92/$0->.SO
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1436
TOXtCS LAW REPORTER
ea
m
L *Jf
•!
I
depository institutions to regulations to be developed by
each federal financial regulator (e.g.. Office of the
'omptroller of the Currency. Federal Reserve, Office of
'hrift Supervision. FDIC), with the possible result of
Several sets of varying environmental assessment re-
quirements. If this language is enacted, lenders will
hope that regulations will clarify that a failure to
comply with the regulations for one loan will not taint a
lender's entire portfolio; failure to comply should have
no effect on any loan except the one loan secured by the
property for which the requirements are not met.
• required lenders to dispose of property "at the earli-
est practical, commercially reasonable, time" following
foreclosure;
One of the remaining problems in the Final Title X is
that it did not address the reasonableness of the terms
of offers to purchase a property (e.g. could a lender be
required to finance at below market interest rates? to
make unreasonable warranties?). Nor was it clear that a
lender would be allowed to recoup its losses by retaining
a property until its value was sufficiently restored.
These issues could possibly be addressed by
regulations.
• defined mortgage lenders to cover lenders whose
loans are secured by personal, as well as real, property,
and to cover those regularly engaged in the business of
buying and selling mortgage loans or interests therein,
(provided that the originating entity is required to com-
ply with the environmental assessment regulations to be
developed by the FDIC);
Previous versions of Title X would have provided
•otection for Fannie Mae, Freddie Mac and Farmer
'ac but would have denied protection to others in-
volved in secondary mortgage market transactions or
taking participation interests. The requirement that
those who purchase loans on the secondary market
must require compliance with environmental assessment
regulations to be developed by the FDIC would un-
doubtedly mandate changes in secondary market proce-
dures. While most originating lenders are conducting or
requiring environmental assessments on origination of
commercial real estate loans, the requirements vary
considerably from lender to lender.
• defined the "extensions of credit" to which the
limitation on liability would apply to include lease trans-
actions "functionally equivalent to a secured loan";
The term "extensions of credit" is critical because it
is the term used for loans and other covered transac-
tions throughout the legislation. Other than this refer-
ence to lease transactions, the term is undefined.
• defined the "fiduciary capacities" that would qualify
for the limitation on liability as a trustee, executor,
administrator, custodian, guardian of estates, receiver,
conservator, committee of estates of lunatics, or any
similar capacity;
The liabilities of trustees and other fiduciaries for
contamination they are innocent of causing is even more
nsettled in the law than lender environmental liability.
ere is little case law on it. and there is a fear thai
'duciaries will he liable as owners nierelv because rlicv
hold legal (although not equitable) title to property.
Thus, addressing fiduciaries is one of the most impor-
tant components of this legislation. Lenders also want
receivers to be exempt from liability because it is often
through receivers that a lender may exercise its reme-
dies, particularly pre-forcclosure collection of rents.
and since receivers are often officers of the court rather
than agents of the lender, they would not necessarily
have the same protection as lenders.
• included an unusual definition of "release" to in-
clude releases as defined in CERCLA and also "the
threatened release, use, storage, disposal, treatment,
generation or transportation of a hazardous substance";
This provision is intended to extend the protections of
the legislation beyond CERCLA. It inadvertently im-
plies that there is liability where there is not: there are
numerous ways in which hazardous substances are law-
fully released, used, stored, disposed of, treated, gener-
ated or transported (e.g., provided there is compliance
with the Resource Conservation and Recovery Act or
RCRA). It is also unclear what is meant by the "threat-
ened" use, storage, disposal, treatment, generation or
transportation of a hazardous substance.
• included a savings clause to the effect that nothing
in the legislation "shall affect the rights or immunities or
other defenses that are available under this Act or other
applicable law to any party subject to the provisions of
this ... (legislation). Nothing in this . .. (legislation)
shall be construed to create any liability for any party."
This provision was added to counteract any implica-
tion that the legislation might imply liability where
there is none. While it is uncertain how effective this
provision will be in protecting against judicial misinter-
pretations, it clearly is more protective to include this
provision than not to include it.
• given regulatory authority to the FDIC, rather than
the EPA, over this new section of CERCLA;
While EPA has regulatory authority over the rest of
CERCLA, this provision vests the regulatory authority
for these lender liability provisions in an agency which
is more likely to understand finance and lending issues
than the EPA.
• established a number of protections for federal agen-
cies under a new section of the Federal Deposit Insur-
ance Act, including a controversial limitation on the
applicability of state laws to federal agencies and a
provision protecting the first purchaser of properties
from federal agencies;
• provided that the legislation wouid become effective
upon enactment, "except that it shall not affect any
administrative or judicial claims that have been formally
filed as of such date;"
Excluding proceedings in progress is more serious for
pending judicial actions brought against lenders bv
private parties than by the EPA because EPA's draft
rule on lender liability under CERCLA (see discussion
below) is governing El'A 's enforcement policr pending ii
final rule, but private parlies (ire expected to challengf
the application of the rule to private actions.
4-22-92
Copyright C1 1992 by The Buieau of National Allans. Inc.. Washington. O.C.
0887-7394/92/SO-.50
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CURRENT REPORT
1437
Need For Legislation Notwithstanding
ERA'S Proposed Lender Liability Rule
EPA's rule on lender liability under CERCLA, pub-
lished in draft form June 24, 1991,' recently went to the
Office of Management and Budget (OMB) for inter-
agency review (6TXLR 1402). OMB review is the pro-
cess by which federal agencies other than the issuing
agency have the opportunity to comment on a regulation
before it is published in the Federal Register. It was
largely because the Treasury, FDIC, RTC, and other
federal agencies involved in lending were able to express
their concerns to EPA in the OMB review process that
the published draft was a considerable improvement over
previous versions.
OMB review is expected to be completed quickly. In
his State of the Union Address on Jan. 28, 1992, Presi-
dent Bush proposed a 90-day period to review regula-
tions and programs that could hinder growth in the
domestic economy. In a Jan 30. White House Fact Sheet
on this regulatory reform plan, the president promised
that EPA's lender liability rule would be finalized within
the same 90-day period because it would help rather
than hinder economic growth. Because the 90-day period
expires in late April, the final rule is expected to be
promulgated very soon.
However, even if the final rule does not erode lender
protections in the published draft, there is still a need for
legislation. The proposed rule does not address several
issues addressed by the legislation. It does not address
fiduciaries and is unlikely to do so in its final form
because the statutory language being interpreted by the
rule does not extend to fiduciaries. Nor do the regula-
tions reach beyond CERCLA to the Resource Conserva-
tion and Recovery Act,5 which is covered at least in part
by both the Garn and LaFalce legislation.
In addition to covering fiduciaries and extending cov-
erage to RCRA, legislation is important to protect
against judicial challenges to the rule. [Ed. note: See
5 TXLR 512, Analysis and Perspective article by James
P. O'Brien, "Environmental Lender Liability: Will an
Administrative Fix Work?"]. In light of comments filed
by the Chemical Manufacturers Associations and others
in response to EPA's draft, and the opposition of groups
to the Garn and LaFalce legislation, it will be surprising
if suits are not brought to overturn the rule. Moreover,
Section 9613(a) of CERCLA essentially requires judici-
al challenges to CERCLA regulations to be brought
within ninety days of final promulgation in the D.C.
Circuit. Thus, any judicial challenges are anticipated
within this 90-day deadline after promulgation of the
final rule.
Parts of the rule may well be vulnerable to judicial
challenges—particularly EPA's attempt to have the rule
restrict suits brought by private parties by including the
rule in the National Contingency Plan, the regulatory
scheme implementing CERCLA.* Legislation would
•52 FR 28798. June 24, 1991.
5 42 USC 6901 et seq.
'CERCLA Section !07{a)(4)(B) restricts PRP liability to private
persons to response costs consistent with the NCP.
send a clear message to the courts to protect lenders
from liability for contamination they are innocent of
causing, as originally intended by Congress in enacting
the secured creditor exemption as part of CERCLA in
1980.
Prospects For Passage
Prospects for a 1992 enactment of the Garn or La-
Falce legislation, or some variation thereof, are
uncertain.
The legislation is strongly supported by a multiplicity
of diverse groups including those whose businesses have
been hurt by the credit crunch (e.g. the National Feder-
ation of Independent Businesses, the National Associ-
ation of Home Builders, and the National Realty Com-
mittee), in addition to the finance community. There is
opposition by environmental groups and groups such as
the Chemical Manufacturers Association.
In the Senate, prospects for passage are aided by Sen.
Garn's intense commitment to enactment of this legisla-
tion prior to his retirement at the end of this year. It will
considerably enhance Sen. Garn's chances for success
that Title X passed the Senate without opposition in
1991. Sen. Garn is actively seeking a vehicle for passage.
However, if there are significant changes in the text of
what was Title X, the fragile accord in the Seriate may
be jeopardized. For this reason, Sen. Garn would be
understandably reluctant to amend his legislation from
that contained in Title X as it passed the Senate. Any
needed amendments would be best left to a conference
committee with the House.
If legislation is to be enacted this year, major activity
on this legislation will take place in the House. In the
House, Representatives John Dingell (D-Mich.) and AI
Swift (D-Wash.) are key: Dingell because he chairs the
House Energy and Commerce Committee and Swift
because he chairs the Subcommittee on Transportation
and Hazardous Materials. Rep. Swift recently offered to
play a role in attempting to achieve consensus among the
various parties concerned. Representatives Jim Slattery
(D-Kan.), who serves on the Transportation and Hazard-
ous Materials Subcommittee, and Richard Lehman
(D-California), who serves on the full Energy and Com-
merce Committee, have expressed an interest in intro-
ducing some variation of the legislation as an amend-
ment to the RCRA reautnorization bill (H.R. 3865)
either in the full House Energy and Commerce Commit-
tee or on the House floor. However, because of the
complexity and intensity of the RCRA debate and the
need to reauthorize RCRA this year, if a lender liability
amendment seems likely to force a defeat of the RCRA
reauthorization, the amendment is likely to be with-
drawn or defeated.
While prospects are uncertain, one thing is clear: to
achieve passage will require a vigorous effort by those
who support the Garn and LaFalce legislation.
If changes are not achieved in 1992, the chances of
obtaining changes before 1994 or 1995, when Congress
will reconsider the entire superfund legislation, wiH be
minimal at best, particularly in view of losing the main
Senate champion with Sen. Garn's retirement. Given the
4-22-92
Toxics Law Reporter
0887-7394/92/SCH-.50
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1438
TOXICS LAW REPORTER
^^eil
•
number of highly charged controversies expected in
connection with Superfund's reautKorization (including
efforts to limit liability of municipalities for liability in
;onncction with landfills and efforts in support of a
ajor overhaul of supcrfund), and the number of parties.
with opposing interests, lender environmental liability
issues are likely to caught in a particularly complex
crossfire of uncertain outcome. Thus, those affected by
this legislation, including those hurt by the credit
crunch, have every incentive to fight for enactment of
the Garn or LaFalce legislation before the superfund
reauthorization battle.
JOURNAL
May 7 - "Hazardous Waste & Superfund 1992,"
American Bar Association, Chicago (ABA Division for
Professional Education, Dept. HFALN, 541 N. Fair-
banks Court, Chicago, III. 60611; (312) 988-6200; FAX
(312) 988-5368).
May 7-8 - "Current Developments in Bankruptcy
and Reorganization," Practising Law Institute, Le Meri-
dien, Chicago (Practising Law Institute, Dept. BAT2,
810 Seventh Avenue, New York, N.Y. 10019; (212)
765-5700, FAX 1(800) 321-0093).
May 7-8 - "CERCLA/Superfund Law & Regula-
tions: Legal and Management Strategies," Government
Institutes Inc., Stouffer Concourse Hotel, Arlington, Va.
(Government Institutes Inc., 4 Research Place, Suite
200, Rockville, MD 20850; (301) 921-2345, FAX (301)
921-0373).
May 7-8 - "Effective Marshalling of the Facts,"
American Bar Association, Chicago (ABA Division for
Professional Education, 541 N. Fairbanks Court, Chica-
go, III. 60611; (312) 988-6200; FAX (312) 988-5368).
May 11-13 - "Environmental Regulation Course,"
Executive Enterprises Inc., Albany Hilton, Albany, New
York, Session #25TOX50/E2425 (Executive Enter-
prises, Inc., 22 West 21st Street, New York, N.Y..
10010-6904; (212) 645-7880; FAX (212) 645-8689).
May 11-13 - "Hazardous Waste Litigation," Federal
Publications Inc., Embassy Suites Downtown, Washing-
ton DC, (202) 857-3388, (Federal Publications
Inc.,1120 20th Street, N.W., Washington, DC 20036;
Contact J.K. Van Wycks, (202) 337-7000, FAX (202)
775-9304).
May 12-13 - "Environmental Laws & Regulations:
Compliance Course," Government Institutes Inc..
Stouffer Concourse Hotel, Arlington, Va. (Government
Institutes Inc., 4 Research Place, Suite 200, Rockville,
Md. 20850; (301) 921-2300; FAX (301) 921-0373).
May 12-13 - "The Environmental Insurance Law
Institute." Executive Enterprises Inc., The Grand Hotel,
2350 M Street. N.W., Washington, D.C. 20037, (202)
429-0100, Session #25TOXG7/E2331, 94111; (415)
788-1234, Session #25TOXE3/E2484 (Executive Enter-
prises inc.. 22 West 21st Street, New York, N.Y..
10010-6904; (212) 645-7880; FAX (212) 645-8689).
May 13 - "Evnironmcntal Insurance Coverage
Claims and Litigation: i992 and Beyond," Practising
" Law Institute, New York Hilton, 1335 Avenue of the
nericas. New York, N.Y0019; (212) 586-7000. (Prac-
fising Law Institute, Dcpl. CAB2. 810 Seventh Avenue,
New York, N.Y. 10019; (212) 765-5700, FAX 1(800)
321-0093).
May 14-15 - "Hazardous Waste and Cleanup Liabil-
ity," Law Journal Seminars-Press, Waldorf-Astoria,
New York City, (Law Journal Seminars-Press, 111
Eighth Avenue, New York, NY 10011; (212) 463-5509,
(800) 888-8300, ext. 509, FAX (212) 463-5526).
May 14-15 - "Environmental Laws & Regulations:
1992 Update Course," Stouffer Concourse Hotel. Ar-
lington, Va. (Government Institutes Inc., 4 Research
Place, Suite 200, Rockville, Md. 20850; (301)
921-2300; FAX (301) 921-0373).
May 14-15 - "Clean Air Act Update 1992," Monte-
rey Plaza, 400 Cannery Row, Monterey, CA 93940;
(408) 646 1700 (Government Institutes Inc., 4 Re-
search Place, Suite 200, Rockville. Md. 20850; (301)
921-2300: FAX (301) 921-0373).
May 15-16 - "Annual Spring Conference of the
Standing Committee on Environmental Law," American
Bar Association Standing Committee on Environmental
Law, Williamsburg, Va. (ABA Standing Committee on
Environmental Law, 1800 M Street, N.W., S-200,
Washington. D.C. 20036; (202) 331-2276; Contact:
Courtney Leyendecker).
May 19 - "Clean Air Operating Permits: The Key to
Business Survival," Government Institutes Inc., Stouffer
Concourse Hotel, 2399 Jefferson Davis Highway, Ar-
lington, Va. (703) 418-6800 (Government Institutes
I no, 4 Research Place, Suite 200, Rockville. Md. 20850;
(301) 921-2345. FAX (301) 921-0373).
May 18-20 - "Environmental Regulation Course."
Executive Enterprises, Hyatt Regency Milwaukee, 333
West Kilbourn. Milwaukee. Wis., 53203; Session
#25TOX2S/E2484, (Executive Enterprises Inc.. 22
West 21st Street. New York. N.Y., 10010-6904; (212)
645-7880: FAX (212) 645-8689).
May 18-20 - "Environmental Regulation Course."
Executive Enterprises, Grand Hotel. 2350 M Street
N.W.. Washington D.C., 20037: Session #25TOX09/
E2419. (Executive Enterprises Inc., 22 West 21st Street,
New York. N.Y.. 10010-6904; (212) 645-7880: FAX
(212) 645-8689).
May 18-20 - "Practical Environmental Law," Feder-
al Publications Inc., Biltmore Hotel, I.os Angeles, Calif-
(213) 624-1011. (Federal Publications Inc.. J.K. Van
Wycks. 1120 20th Street. N.W., Washington D.C-,
20036: (202) 337-7000. FAX (202) 775-9304).
May 2(1-2! - "The Successful Defense of The Product
Liabilitv Lawsuit." University of Wisconsin-Madison/
4-22-9?
Copyright c< 1992 by The Bureau of National Affairs, Inc.. Washington, D.C.
08B7-7394/92ySO-i .SO
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BIG STUFF. FROM SUPERFUND
EPA ANNOUNCED AT 11:00 TODAY
(FRIDAY 4/24) THE—
FINAL RULE ON
LENDER LIABILITY UNDER SUPERFUND
WHITE HOUSE ANNOUNCING AT 12:00 TODAY
I HAVE ONE COPY IN HAZARDOUS WASTE
THE, SUPERFUND DOCKET HAS COPIES TO
GIVE OUT UNTIL IT IS PRINTED IN THE
FEDERAL REGISTER ON HAY 8, 1992
QUESTIONS CAN BE DIRECTED TO THE
SUPERFUND HOTLINE 1-800-424-9346
FROM,
CRAIG, CONTRACTOR-TOXIC DUMP GUY
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Billing Code:
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 300 Sabpart L
National Oil and Hazardous Substances Pollution Contingency Plan;
Lender Liability under CERCLA
AGENCY: Environmental Protection Agency
ACTION: . Final Rule
SUMMARY: The Environmental Protection Agency is issuing this
rule to define the meaning of certain statutory elements in the
Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), which pertain to the liability of persons
maintaining indicia of ownership primarily to protect a security
interest, including both privately-owned and governmental
financial institutions, governmental receivers, conservators,
loan guarantors, lending or other governmental entities that hold
or maintain indicia of ownership as protection for a security
interest in contaminated vessels or facilities. CERCLA Section
101(20)(A) exempts persons whose indicia of ownership in a
facility are held primarily to protect a security interest,
provided that they do not participate in the management of the
facility. In this final rule, EPA is defining the CERCLA Section
101(20)(A) "security interest exemption" to clarify and specify
the range of activities that may be undertaken by a person who
maintains indicia of ownership in a facility primarily to protect
a security interest, without such activities being considered to'
be participation in the facility's management.
In addition, EPA is issuing this final rule to interpret the
meaning of certain statutory elements in CERCLA that pertain to
the liability of government entities that involuntarily acquire
* c:\wp\lander\rule\lendrule.flO
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ownership or possession of contaminated vessels' or facilities".
In this final rule, EPA is interpreting CERCLA to provide that a
government lending entity, receiver, or conservator involuntarily
acquiring a contaminated vessel or facility is entitled to assert
the so-called "innocent landowner" third-party defense under
Sections 101(35)(A)(ii) and 107(b)(3), provided that the other
elements of the defense are met. CERCLA Section 101(35)(A)(ii)
affects the ownership status under CERCLA of government entities
that acquire contaminated facilities by escheat, eminent domain,
involuntary transfer or acquisition, and other means, and
includes within its scope the governmental acquisition of vessels
or facilities by an involuntary.transfer under statutes or other
authorities requiring or authorizing a government entity to
acquire property. Government entities' acquisition of property
by other means or under other circumstances may also be
considered "involuntary" under the statute: Today's final rule
primarily addresses involuntary acquisitions of property through
the government's lending and lending-related activities, and does
not otherwise affect or limit the availability of the third-party
defense in other circumstances.
EFFECTIVE DATE: This final rule is effective (insert date of
publication). Under Section 4(d) of the Administrative Procedure
Act, administrative agencies must normally make substantive rules
effective no less than 30 days from the date of publication. 5
U.S.C. S 553(d). Section 4(d)(l), however, waives that delayed
effective date requirement for "a substantive rule which grants
or recognizes an exemption or relieves a restriction^.]" 5
U.S.C. S 553(d)(l). As discussed ,in the preamble to this final
rule, EPA believes that this regulation is a binding, substantive
rule that clarifies the scope and amplifies the meaning of
^ e:\wp\lender\rule\lendrula.flO
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statutory language in CERCLA providing an exemption for persons
(including government entities) whose indicia of ownership in a
facility subject to CERCLA are held primarily to protect a
security interest. Thus, this substantive rule recognizes an
existing statutory exemption, and as such is not subject to the
30 day delayed effective date requirement. EPA has therefore
chosen to make the rule effective immediately.
CERCLA Section 305 provides for a legislative veto of
regulations promulgated under CERCLA. Although INS v. Chadha.
*
462 U.S. 919 (1983), cast the validity of the legislative veto
into question, EPA has transmitted a copy of this regulation to
the Secretary of the Senate and the Clerk of the House of
Representatives. If any action by Congress calls the effective
date of this regulation into question, EPA will publish notice of
clarification in the Federal Register.
ADDRESSES: The official record for this rulemaking, Docket
Number NCP-LL/DSB, is located in the Superfund Docket, located at
Room 2427 at the U.S. Environmental Protection Agency, 401 M
Street, S.W., Washington, D.C. 20460 (telephone number 202-260-
3046). The record is available for inspection by appointment
between the hours of 9:00 a.m. and 4:00 p.m. Monday through
Friday, excluding Federal holidays. As provided in 40 C.P.R.
Part 2, a reasonable fee may be charged for copying services.
FOR FURTHBR IHTORXATION CONTACT: John Fogarty, Office of
Enforcement (LE-134S), U.S. Environmental Protection Agency, 401
M Street, S.W., Washington, D.C. 20460 (202-260-3050), or the
RCRA/Super fund Hotline at 800-424-9-346 (in the Washington, D.C.
area at 703-920-9810).
3 c;\wp\l«nd»r\rul«\l«ndrule.flO
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I. Background
The Agency is issuing this rule to define and interpret the
provisions of Sections 101(20) and 101(35) cf the Comprehensive
Environmental Response, Compensation, and Liibility Act (CERCLA),
as amended, 42 U.S.C. § 9601 et sea.. as they affect persons
maintaining indicia of ownership in a facility primarily to
protect a security interest, which includes private and
governmental lending institutions or entities, or which guarantee
loans secured by a facility1 contaminated by or containing
hazardous substances, or which acquire title to or ownership of
contaminated property by an involuntary transfer or acquisition.
Section 107(a) of CERCLA, 42 U.S.C. § 9607(a), identifies
four broad classes of responsible parties that are liable for the
costs of cleaning up hazardous substances when the federal
government, state government, or a private party brings suit.
The first two classes include "owners or operators" of facilities
contaminated by or containing hazardous substances. 42 U.S.C. §
9607(a)(l)-(a)(2). The third class consists of certain persons
who arranged for disposal or treatment of hazardous substances.
Id. § 9607(a)(3). Finally, the fourth class includes persons who
accepted for transportation hazardous substances and selected the
disposal facility. Id. S 9607(a)(4).
It is well-settled that each of the four groups of
responsible parties is strictly liable under section 107(a).
See, e.g.. United States v. Monsanto Co.. 858 F.2d 160, 167 &
n.ll (4th Cir. 1988), cert, denied. 109 S.Ct. 3156 (1989);
1 As used throughout this Preamble, the term "facility"
should also be considered to refer to a "vessel" subject to
CERCLA.
4 c:\wp\lender\rul«\lendrule.f10
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Tancrlewood East Homeowners v. Charles-Thomas. Inc.f 849 F.2d
1568, 1572 (5th Cir. 1988). In addition, it is also settled that
such parties are jointly and severally liable when the
environmental harm is indivisible. United states v. tonsanto
Co.. 858 F.2d at 171; United States v. Chem-Dyne Corp.. 572 F.
Supp. 802, 810-11 (S.D. Ohio 1983).
This rule concerns only the first two of these categories of
potentially liable parties—specifically, persons who are "owners
or operatots" of facilities subject to CERCLA—which are defined
in Section 101(20). Section 101(20)(A) exempts those persons
who, without participating in the management of a facility, hold
indicia of ownership in the facility2 primarily to protect a
security interest. 42 U.S.C. § 9601(20)(A). Questions regarding
the judicial interpretation of this "security interest" exemption
under CERCLA have generated uncertainty within the financial and
lending communities, particularly with regard to the extent to
which a secured creditor may undertake activities to oversee the
affairs of a person whose facility is encumbered by a security
interest (hereinafter interchangeably referred to as a
"borrower," "debtor," or "obligor") for. the purposes of
protecting the security interest, without incurring CERCLA
liability. Specifically, there is concern over whether certain
actions commonly taken by a secured creditor—such as monitoring
facility operations, requiring compliance with legal requirements
and compliance-related activities, refinancing or undertaking
loan workouts, providing financial advice, and undertaking other
2 The CERCLA definition of "'facility" includes real
property as well as any equipment or other articles of personal
property contaminated by hazardous substances. See CERCLA §
101(9), 42 U.S.C. S 9601(9).
" c:\wp\lander\rule\lendrule.flO
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similar actions that may affect the financial, management, and
operational aspects of a business—can be considered to be
evidence that the secured creditor is "participating in the
management of a facility.11
Under Section 101 (20) (A), "participation in management11 by a
person who holds indicia of ownership primarily to protect a
security interest (hereinafter referred to as a "holder") will
void the exemption. However, the extent to which a holder may
become involved in a facility without also being considered to be
participating in its management is not defined by the statute nor
is it addressed in the legislative history. Judicial
interpretations of this provision have articulated its meaning
using different terms, without clearly defining a precise
standard. See, e.g.. United States v. Maryland Bank & Trust Co..
632 F. Supp. 573 (D. Md. 1986); United States v. Mirabile. 15
Envtl. L. Rep. (Envtl. L. Inst.) 20994 (E.D. Pa. 1985); United
States v. Fleet Factors Corp.. 901 P.2d 1550 (llth Cir. 1990),
cert, denied. Ill S. Ct. 752 (1991) (cases suggesting that the
exemption is abrogated once a holder has divested the borrower or
debtor of its management authority, such as when the holder
becomes involved in the facility's day-to-day operations, where
it becomes "overly entangled" in the affairs of the facility, or
where its involvement otherwise affects a facility's hazardous
waste practices). However, the few cases construing this
exemption have established a general rule that a holder's
involvement in financially related matters—-such as periodic
monitoring or inspections of secured property, loan refinancing
and restructuring, financial advic^ and similar activities—will
not void the exemption. Id.; see also Guidice v. BFG
Electroplating and Manufacturing Co.. 732 F. Supp. 556 (W.D. Pa.
6 c:\wp\lender\rule\lendrule.flO
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1989); United States v. Nicolet. 29 Env't Rep. 'Cas. (SNA) 1851
(E.D. Pa. 1989). Beyond the examples provided by these few
judicial holdings, however, this area of the law is unsettled and
it is not clear what other activities would or would not be
considered "participating in the management" of a facility by a
holder.
This uncertainty was heightened by dicta in the opinion of
the Court of Appeals for the Eleventh Circuit in United States v.
Fleet Factors Corp. supra. In this opinion, the court suggested
that a secured creditor may be liable if it actually participates
in the management of a facility "to a degree indicating a
*
capacity to influence the corporation's treatment of hazardous
wastes." 901 F.2d at 1557. The Fleet Factors court confirmed,
however, the holding of prior cases that some level of actual
involvement or participation by a holder in the borrower's
facility is required to abrogate the exemption. The court went
further, however, and suggested that the exemption could be lost
if the holder's actual involvement was so extensive as to support
the inference that the holder could affect or influence
operational decisions concerning a facility's treatment of
hazardous wastes. However, the court's discussion of this issue
left open the question of the level or the extent of actual
participation that would be sufficient to support this inference.
A subsequent decision by the Ninth circuit Court of Appeals,
In re Berosoe Metal Corp.. 910 F.2d 668 (9th Cir. .1990), which
was consistent with the holding of-Fleet Factors and prior cases,
held that "there must be some actual management of the facility
before a secured creditor will fall outside the exception," and
cs\wp\lender\rule\lendrule.f10
-------
that the mere capacity or unexercised right to control facility
operations is insufficient to void the exemption. Id. at 672
("What is critical is not what rights the [creditor] had, but
what it did. ... [A creditor] cannot have participated in
management if it never exercised [its rights].") See also In_r_e
T.P. Long Chemical Inc.. 45 Bankr. 278 (N.D. Ohio 1985) (bank
that was not involved in facility's operations cannot be held to
have voided security interest exemption). However, because the
holder in Berasoe Metals was not in any way involved in the
facility's operation, the Ninth Circuit did not address the
question left unanswered in Eleet: the extent to which a holder
may act to oversee and manage its security interest without being
considered to be participating in the facility's management.
The scant legislative history of the security interest
exemption does not shed much light on this issue. . The little
history that exists indicates only that the exemption was
included out of a concern that the definition of a facility owner
as initially drafted "inadvertently" included a person who held
title or other ownership interest as security for a loan or other
obligation, even though such a person was not otherwise
affiliated with or involved in the management of the facility.
See House Debate on H.R. 85, 96th Cong., 1st Sess. (1979) (Sept.
18, 1980), reprinted in 2 A Legislative History of the CERCLA.
Senate Comm. on Environment and Public Works, 97th Cong., 2d
Sess. 889, 945 (Comm. Print 1983). Some of those commenting on
EPA's proposed rule suggested that there are other passages in
the legislative history that may be relevant for determining
whether certain forms of transactions should be considered to
vest a person with "ownership indicia" that are held primarily to
protect a "security interest" (discussed in the following
8 c:\wp\lender\rule\lendrule.flO
-------
section, Summary^of Comments, infra); however, there is no
legislative history that provides any guidance or other
indication of the types of activities that Congress considered to
be impermissible participation or involvement in a facility's
management, or of the sorts of activities that Congress
considered to be consistent with the exemption.
Uncertainty in this area has assumed particular importance
because of the current difficulties faced by the lending.
industry, and particularly by the Federal Deposit Insurance
Corporation ("FDIC") and the Resolution Trust Corporation
(MRTC'«) , both of which act as conservators and receivers of
failing or failed insured depository institutions under the
Federal Deposit Insurance Act ("FDI Act"),., as amended by the
Financial Institutions Reform, Recovery, and Enforcement Act
("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (Aug. 9, 1989).
Consequently, these government entities are likely to own,
possess, or have security interests in potentially contaminated
properties transferred to them as a result of their appointment
as the conservator or receiver of failed and insolvent lending
institutions. The FDI Act and FIRREA therefore raise a question
concerning the potential liability under CERCLA of these
government conservators and receivers administering the
properties and assets previously owned by the failed lending
institutions. Additionally, other government entities, including
those that provide lending and credit services, are also likely,
through a variety of statutory mechanisms, to acquire or to have
transferred to them an interest in or possession of diverse
+
businesses, properties, and othet'assets which may be
contaminated by hazardous substances. The governmental takeover
of assets formerly held by private entities in th'is manner has
a
7 c:\wp\lender\rule\lendrule.flO
-------
.raised pressing questions regarding the potential that these
government entities may incur CERCLA liability as an owner or
operator as the result of such acquisitions, and the availability
of the "innocent landowner" defense of Sections I07(b)(3) and
101(35) to these government entities.
To address these issues, EPA is issuing this final rule to
define and specify the range of permissible actions that may be
undertaken by a holder without exceeding the bounds of the
Section 101(20)(A) security interest exemption. This final rule
also specifies the circumstances in which government or
government-appointed entities that acquire possession or control
of contaminated facilities as conservators or receivers will be
considered "involuntary" owners for purposes of Section
101(35)(A)(ii), which is part of the "innocent landowner" defense
under CERCLA. The final rule's interpretation of "involuntary
acquisitions" applies both to acquisitions by federal government
entities for purposes of Section 101(35), and to acquisitions by
units of state and local government for purposes of Section
101(35) and Section 101(20)(D).
Government entities may also acquire property through other
mechanisms, such as through civil and criminal seizures and asset
forfeitures. The Agency requested comment on certain regulatory
language which would specify that such acquisitions by government
entities be considered "involuntary" within the meaning of the
statute. As provided in this final rule, the Agency considers
Section 101(35)(A)(ii) of CERCLA to include asset forfeitures and
seizures because such acquisitions- are analogous to acquisitions
by abandonment, escheat, and eminent domain, which are explicitly
covered by the this section.
•^ c:\wp\lender\rule\lendrule.f10
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EPA is issuing this final rule as a revision to the National
Oil and Hazardous Substances Pollution Contingency Plan (KCP),
codified at 40 C.F.R. Part 300 et seq.. under the authority of
CERCLA Sections 105 and 115, as Subpart L. Judicial review of
this rule is governed by the provisions of CERCLA Section 113(a).
These provisions mandate that any review of a regulation
promulgated under CERCLA is confined to the United States Court
of Appeals for the District of Columbia Circuit and that any
application for such review must be made within ninety days of
the rule's date of promulgation. By enacting these provisions,
Congress intended that the District of Columbia Circuit Court
would have "exclusive" jurisdiction to review regulations and
that any petitions for review that were filed after the ninety
day period would be barred. S. Rep. No. 848, 96th Cong., 2d
Sess. 95 (1980); see Lubrizol Corp. v. Train. 547 F.2d 310, 314-
16 (6th cir. 1976) (by centralizing appeals in the D.C. Circuit
under the Clean Air Act, Congress hoped to avoid needless delays
in the implementation of important national programs caused by
incessant litigation and inconsistent decisions).
II. SXimmary of The Proposed Rule
A. Security Interest Exemption
The proposed rule, which was published June 24, 1991 (56
Fed. Reo. 28798), sought to define the Section 101(20)(A)
"security interest" exemption in a manner that would permit a
person covered by the exemption to undertake a broad range of
activity in the course of protecting a security interest in a
facility that is subject to CERCLA, without being considered to
be participating in the management of the facility. The
activities specified in the proposed rule were not intended to be
exclusive, or mandatory or required to be undertaken as a
11 c:\wp\lender\rule\lendrule.flO
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condition of maintaining the exemption. Instead, the rule
proposed to identify a range of protected activities that a
holder miy take that would be considered consistent with holding
indicia ->f ownership primarily to protect a security interest.
The proposed rule sought to accomplish this by defining the key
terms of CERCLA Section 101(20)(A): (1) "indicia of ownership,"
(2} "primarily to protect a security interest," and (3)
"participating in the management of a vessel or facility."
The definitions did not attempt to define all possible
activities that could be undertaken by a holder consistent with
the exemption, out of a recognition that the specific actions
taken by a.holder will likely vary from case to case. Therefore,
the proposed rule provided both a list of commonly undertaken
activities that specifically were defined to be within the
exemption, as well as a general test of "participation in
management" by which the appropriateness of other activities not
specifically mentioned in the regulatory provisions could be
measured. This general test provided that a holder would not be
considered to be participating in management within the meaning
of Section 101(20)(A) unless, while the borrower was still in
possession, the holder either (1) was exercising decisionmaking
control over the borrower's environmental compliance, such that
the holder had undertaken responsibility for the borrower's waste
disposal or hazardous substance handling practices which resulted
in a release or threatened release, or (2) was exercising control
at a management level encompassing the borrower's environmental
compliance responsibilities, comparable to that of a manager of
the borrower's enterprise, such that the holder had assumed or
manifested responsibility for the management of the enterprise by
establishing, implementing, or maintaining the policies and
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procedures encompassing the day to day environmental compliance
decisionmaking of the enterprise.
In addition, the proposed rule contained provisions that
affected government lending or financial regulatory entities.
The proposed rule was specifically concerned with situations in
which governmental entities assumed ownership, conservatorship,
or receivership of a lending institution or business, or acquired
or had transferred to them properties or other assets through a
variety of statutory mechanisms, and would thereby assume
possession and control of a contaminated facilities. The
proposed rule sought to specify the circumstances in which such
acquisitions and transfers would be considered "involuntary"
within the meaning of Section 101(35)(A)(ii) of GERCLA, which is
part of the "innocent landowner" defense available to government
entities.
EPA sought to balance a variety of competing interests in
its proposal. While Section 101(20)(A) provides persons who hold
indicia of ownership in a facility primarily to protect a
security interest with a potential exemption from CERCLA
liability when the real or personal property serving as security
is contaminated, this statutory provision does not otherwise
provide protection from the ordinary risk assumed by the holder
that the facility's market value may not be sufficient to cover
the borrower's debt. The CERCLA security interest exemption is
not a loan guarantee for lending institutions and does not shift
to the Superfund the cost of poor loan decisions, seq United
States v. Maryland Bank & Trust, supra• 632 F. Supp. at 580, but
serves only as a shield from CERCLA liability where a person's
ownership indicia are held as protection for a security interest.
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EPA must concern itself first with protection of public
health, welfare, and the environment. Following expenditure of
public funds to clean up contaminated property, EPA's mandate
under CERCLA is to seek to recover the costs incurred by the Fund
from those liable under CERCLA. Accordingly, where there is a
release or threat of release of hazardous substances, CERCLA
clearly imposes liability on an "owner or operator" of a facility
for the consequences of that release. However, holders.(commonly
lending institutions) may undertake certain activities in the
course of managing and protecting their loan portfolios; such
activities may include inspections or monitoring of the
borrower's business and collateral, providing financial or other
assistance, engaging in "loan workout" activities, and
foreclosing on secured property. EPA therefore sought in the
proposed rule to reconcile a holder's need to manage, oversee, or
otherwise act in a manner consistent with holding ownership
indicia as protection for a security interest, with EPA's duty to
clean up waste sites and recover public funds spent in
remediating these sites from those responsible under the statute.
EPA's definition of the security interest exemption is an attempt
to acknowledge and accommodate these competing interests within
the statutory scheme of CERCLA.
In its proposal, EPA believed that this balancing of
interests could be accomplished by providing that a holder, at
its option, could conduct or require an environmental inspection
of a facility and may require cleanup of a facility during the
life of the loan or other obligation; could require from the
facility owner or operator assurances of compliance with
applicable federal, state, and local environmental and other
laws, rules and regulations during the life of the loan; could
1 A
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periodically or regularly monitor or inspect both the facility
(including site inspections) and the facility owner or operator's
business or financial condition; co ild provide periodic financial
or other advice or counseling to a debtor or obligor; or could
take other actions to police the debt or other obligation, or to
comply with legal requirements applicable to the holder.
The proposed rule also specified that a holder could
undertake so-called "loan workout" activities, such as
restructuring or renegotiating the terms of the obligation,
requiring payment of additional interest, extending the payment
period, exercising forbearance, or providing advice or taking
other work out actions. The proposed rule additionally permitted
a holder to foreclose on the security (whether by formal means
such as through the use of the judicial process, or by informal
means such as by taking a deed .in lieu of foreclosure), to wind-
up operations, to liquidate or sell off assets, or to otherwise
act to preserve and recover the value of the security interest.
These activities were specifically included in the proposed rule
because EPA believed that they were consistent with holding
indicia of.ownership to protect a security interest.
The proposed rule included several provisions that the
Agency considered significant for a variety of reasons. For
example, the proposal permitted environmental inspections or
audits of secured property at any time during the life of.the
loan or other obligation, because information available to EPA at
.the time of the proposal indicated that this was becoming a
. * *
customary or common practice for holders to minimize the risk
that their loans would be secured by contaminated property. An
inspection of a facility provides environmental advantages by
15 cs\wp\lender\rule\lendrule.f10
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identifying properties in need of cleanup or other
environmentally beneficial response, and by helping to minimize
environmental liability. Therefore, the proposed rule provided
that a holder who undertakes or requires a borrower to undertake
an environmental inspection or investigation of a facility
securing the obligation is not considered to be participating in
its management. However, because actions or omissions prior to
the creation of a security interest have no bearing on the test
of "participation in management," and the statute does not
require a holder to undertake an inspection to qualify for the
exemption, the proposed rule specified that the liability of a
holder seeking to avail itself of the exemption could not be
based on or affected by conducting or requiring, or failing to
conduct or require, such an inspection.
Most of the provisions considered significant by the Agency
concerned foreclosure, however. The proposed rule provided that
a holder could foreclose on property without incurring CERCLA
liability as an "owner or operator," so as to preserve a holder's
traditional remedy for a defaulted obligation. In addition to
permitting foreclosure, the proposed rule also contained a
provision that a holder (who did not participate in management
prior to foreclosure) could either wind up operations or retain
and continue functioning the enterprise in order to protect the
value of the secured asset prior to sale, as a means to realize
the debtor's unpaid obligation pending sale, liquidation, or
other disposition of the property. In this context, the Agency
recognized that it was necessary to develop a test that would
;-v
clearly distinguish whether the ownership indicia held by the
foreclosing holder continued to be held primarily to protect the
security interest, or whether title and control of the facility
^ c:\wp\lender\rule\lendrule.flO
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had been acquired for other reasons inconsistent with, the
purposes of the exemption. In other words, a holder can
foreclose on secured property consistent with the exemption only
if it does so in order to recoup the outstanding oblijation.
Therefore, the Agency proposed that a holder could avail itself
of the exemption in the post-foreclosure context only if it took
reasonable actions to promptly sell the property. This provision
N
was based on discussions of this issue in existing caselaw. In
addition, the Agency believed that this provision was consistent
with important public policy objectives: by ensuring that an
otherwise viable business or operation need not be shut down in
the event of default and foreclosure, any concomitant loss of
employment and other economic advantages of continued business
operations would be avoided. In addition, requiring the shut-
down of a business merely because of a loan default would provide
no environmental benefits (and could possibly cause environmental
harm), particularly where the continued functioning of the
facility is unrelated to any environmental harm at the secured
property. Therefore, the Agency included a provision in the
proposed rule permitting such activities following foreclosure.
Because any profits from such continued operations are set off
against the amount owed by the borrower, in the Agency's
judgment, continuing the functioning of facility operations
following foreclosure was not evidence that the holder's interest
in, the property was for investment purposes. The key issue for.
the Agency in the post-foreclosure context, as gleaned from
caselaw and actual practice by holders (primarily lending
institutions), was whether or not the holder was acting in a
manner consistent with seeking to .recoup the outstanding loan
obligation by actively seeking to sell or otherwise divest itself
of the property. .
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'Accordingly, the Agency included in the proposal a bright
line test to easily and readily make this determination. • The
proposed rule's test provided that the exemption would be lost if
the holder failed within twelve months following foreclosure to
take certain actions to sell the property. These were: (1) that
the property had to be listed with a broker, dealer or agent who
deals with the type of property in question, or (2) that the
holder had to begin advertising the property as being for sale or
disposition on at least a monthly basis in either a real estate
public?tion, a trade or other publication suitable for the
property in question, or a newspaper of general circulation
(defined as one with a circulation over 10,000, or one suitable
under any applicable federal, state, or local rules of court for
publication required by court order or rules of civil procedure)
covering the area where the property is located. In addition,
the holder would lose the exemption if at any time after six
months following foreclosure the holder outbid, rejected, or did
not act upon within 90 days of receipt of, a written, bona fide.
firm offer of fair consideration for the property. For purposes
/
of the proposal, a "written, bgna_fide.. firm offer" was defined
as a legally enforceable offer, including all material terms of
the transaction, from a ready, willing, and able purchaser who
demonstrates to the holder's satisfaction the ability to perform.
"Fair consideration" was defined as an amount equal to or in
excess of the sum of the outstanding principal owed to the
holder, plus any unpaid interest and penalties (whether arising
before or after foreclosure), plus all reasonable and necessary
costs, fees or other charges incurred by the holder incident to
foreclosure, retention, continued .functioning of the enterprise,
and sale of the property, less any amounts received by the holder
in connection with any partial disposition of the property or net
18 c:\wp\lender\rule\lendrule.flO
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revenues received as a result of continued functioning of the
facility. (Proposed 40 C.F.R. $ 300.1100(b)(l)(ii), 56 Fed. Rea.
at 28809).
The proposed rule also contained a provision specifying that
where a defendant .claimed the Section 101(20)(A) exemption from
liability under Section 107(a)(1), the burden was on the
plaintiff to prove that the defendant was the "owner or operator"
of the facility, as provided in the proposed rule.
B. Involuntary Governmental .Acquisition of Facilities
The proposed rule also contained provisions that were
.*
relevant to the potential liability faced by government entities
that acquired property through their lending-related activities.
The proposed rule interpreted certain provisions of the CERCLA
"innocent landowner" defense as potentially applying to
properties acquired in this manner on the basis that such
properties may be considered to have been acquired
"involuntarily" within the meaning of Section 101(35)(A)(ii).
The manner in which property is acquired by a government
entity is crucial to determining its potential liability under
CERCLA. Under Section 107(b)(3), the absence of a "contractual
relationship" between the person acquiring the property and the
person from whom the property was acquired is a critical element
of the "innocent landowner" or third-party defense. Section
101(35) defines "contractual relationship" for purposes of
Section 107(b)(3), and excludes from the definition the
involuntary transfer or acquisition of property by a government
19
c:\wp\lender\rule\lendrule.flO
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entity.3
The preamble to the proposed rule examined several sections
of CERCLA that appeared to be relevant to the issue of the types
of acquisitions that would be considered "involuntary." The term
is used twice in the definitional sections of CERCLA. Section
101(20)(D) excludes from the definition of "owner or operator" a
unit of state or local government which acquires ownership or
control over a facility involuntarily .by virtue of its function
as sovereign, which would on its face appear to cover property
acquired by state governmental entities as the result of the
failure or insolvency of lending institutions regulated by the
state. While there is no comparable provision for federal
government entities, Section 101(35)(A)(ii) of CERCLA specifies
that acquisition by any governmental entity—either state or
federal—is "involuntary" if the facility is acquired through
"escheat, or through any other involuntary transfer or
acquisition, or through the exercise of eminent domain authority
by purchase or condemnation." Employing rules of statutory
construction, EPA interpreted the statute's use of the term
"involuntary" in both sections to refer to the same types of
acquisitions, and that the types of acquisitions specified in
each would include those by which a government entity is required
3 Section 101(35} specifies two other circumstances in
which there is no "contractual relationship" for purposes of
Section 107(b)(3) with respect to the transfer of a facility,
such that the innocent landowner-third party defense will apply:
where the party acquiring the property did not and had no reason
to know that hazardous substances had been released or disposed
of on the property, after having undertaken "all appropriate
inquiry" (CERCLA S 101(35)(A)(i), 5 101(35)(B)); and where the
property is acquired by inheritance or bequest (CERCLA S
101(35)(A)(iii)j.
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to act as a conservator or receiver of a failed or insolvent
lending institution.
EPA recognized, when proposing the rule, that other
government entities, particularly financial institution
regulatory or lending entities,4 may act in a capacity similar
to the FDIC and RTC when acting under a statutory mandate similar
to the FDI Act and FIRREA, and that such entities should also be
considered to acquire property "involuntarily" for purposes of
Section 101(35)(A)(ii). Therefore, the proposed rule defined the
class in general terms so as to cover all government entities
that acquire property in this manner. The proposed rule also
expressed EPA's position that the discussion of involuntary
acquisitions covered by Sections 101(20)(0) and 101(35) was not
intended to define the limit or the entire scope of the statute's
coverage, and that other similarly situated government entities
that involuntarily acquire contaminated property would not be
precluded from asserting the defense.
. Finally, the proposed rule also considered whether
contaminated property that was acquired under civil or criminal
seizure or forfeiture laws was considered to be "involuntarily"
acquired for purposes of Section 101(35)(A)(ii).
III. Summary of Comments and Changes from The Proposed Rule
EPA received well over 350 comments on the proposed rule
4 As used throughout this rule, the term "governmental
lending entities" refers to governmental lending and credit
institutions, loan guarantors, and financial institution
regulatory entities which acquire security interests or
properties of failed private lending or depository institutions
as conservators or receivers.
21 c:\wp\lender\rule\lendrule.flO
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from representatives of banking, trade and industry groups,
environmental groups, individual banks and lending institutions,
as well as from persons commenting in their individual capacity.
The overwhelming majority of these comments were strongly
supportive of the Agency's efforts to address the "lender
liability" issue administratively, and cumulatively they
indicated a broad-based consensus for the rule's overall approach
and for most of its provisions. A large number of commenters
advocated adoption of the proposed rule's provisions without
change or modification, and several suggested that its coverage
be expanded in the final rule to include other areas or laws not
addressed by the proposed rule. Other commenters offered a
variety of specific revisions or alternatives to the proposed
rule's provisions to address ambiguities, perceived legal and
technical errors, and other issues of concern. Only a few
commenters recommended that the rulemaking effort be dropped in
its entirety as factually or legally insupportable.
The issues raised by the commenters, and the Agency's
responses to them, are summarized in this section. Changes or
modifications to the rule that have been adopted in response to
comments are discussed in this section, as well as in the section
of the Preamble that deals with the regulatory provisions that
are adopted in this final rule.
Coverage 9f Trustees and Fiduciaries
A number of commenters advocated that the rule's provisions
governing holders be extended to cpver trustees and fiduciaries.
These commenters—largely trust companies and trust departments
of lending institutions—expressed a concern that the bank or
individual bank officer acting as a trustee faces personal
22 c:\wp\lender\rule\lendrule.flO
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-liability for the costs of cleanup under CERCLA if any or all of
the trust's assets are contaminated by hazardous substances.
Some of these commenters characterized themselves as "innocent11
trustees on the basis that they may be named as trustees in
testamentary or other instruments without their prior knowledge
or consent, and that they would be personally liable for the
costs of cleanup on this basis.
These commenters asserted that they should not be held
personally liable for the cleanup of trust properties because
prior to their appointment as trustee they would have no way of
knowing whether the trust's property was contaminated, nor would
they have been able to have prevented the contamination. These
conunenters almost uniformly declared that "trusts are not
mechanisms' for escaping environmental liability," and that where
a .trust's assets include property that is contaminated with
hazardous substances, the assets of the trust should be available
for cleanup. However, these conunenters asserted that liability
should not extend beyond the trust's assets absent some
wrongdoing by the trustee.
The proposed rule did not address trustees because neither
the Section 101(20)(A) security interest exemption nor any other
section of CERCLA makes any special provision for trustees.
However, with one important exception, EPA agrees with most of
the conunenters' general statements regarding the circumstances
under which trusts and trustees are responsible for costs
incurred under CERCLA to address hazardous substance
contamination, because they are generally accurate statements of
the applicable laws governing trustee and fiduciary liability:
"innocent" trustees or fiduciaries are not liable under CERCLA.
23 c:\wp\lender\rule\lendrule.f10
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The assumption of several conunenters—that a trustee is
personally liable under CERCLA solely because a trust asset is
contaminated, even if the trustee had no knowledge of the asset's
contamination and was in no way involved in the activities that
resulted in the contamination—is incorrect. No case has so
held, and no commenter cited any principle of law that would
command this result. A trustee is not personally liable for
CERCLA cleanup costs solely because a trust asset is contaminated
by hazardous substances. EPA agrees with the cpmmenters that, in
most instances, the trust's assets are available for cleanup of a
trust property.
Therefore, the liability concerns raised by these commenters
are already addressed by existing law governing trustees, and
extension of the Section 101(20}(A) security interest exemption
to trustees is not necessary to resolve these questions.
Moreover, EPA has found no colorable legal basis for construing
the Section 101(20)(A) security interest exemption so as to also
cover circumstances in which indicia of ownership are held
primarily to protect a security interest is not involved. This
is why the proposed rule did not, and this final rule is not,
extended to cover the personal liability of trustees.
Application of the Section 101f20WAl Security Interest Exemption
to Other Sections of CERCLA and Other Laws
Numerous commenters suggested that the exemption from the
definition of "owner or operator" of a facility under CERCLA
should be extended to cover lenders in a variety of other
circumstances, particularly to address potential liability
arising from loans to owners of underground storage tanks (USTs)
under the Resource Conservation and Recovery Act (RCRA), 42
24 c:\wp\lender\rule\lendrule.flO
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U.S.C. S 6991 et sea. A few of these commenters formally
petitioned the Agency, pursuant to Section 7004 of RCRA, 42
U.S.C. S 6974, to promulgate a rule that would define the RCRA
security interest exemption in the same manner as the CERCLA
security interest exemption.
Under RCRA, the definition of a person who is an "owner" of
an underground storage tank for purposes of corrective action
contains an exemption for holders of a security interest in the
tank that is nearly identical to the exemption provided under
CERCLA. Compare RCRA Section 9003(h)(9), 42 U.S.C. S 6991(h)(9)
("[T]he term 'owner' does not include any person who, without
participating in* the management of an underground storage tank
and otherwise not engaged in petroleum production, refining, and
marketing, holds indicia of ownership primarily to protect the
owner's security interest in the tank.") with CERCLA Section
101(20)(A), 42 U.S.C. S 9601(20)(A) ("Such term [owner or
operator] does not include a person who, without participating in
the management of a vessel or facility, holds indicia of
ownership primarily to protect the his security interest in the
vessel or facility."). Because of the substantial similarity in
the wording of the exemption under both statutes, EPA has
previously testified that the two provisions should be
interpreted and applied similarly. Statement of Raymond B.
Ludwis2ewski, Acting Assistant Administrator for Enforcement,
before the House Committee on Banking, Housing and Urban Affairs
(June 12, 1991). In response to the rulemaking petitions, and to
formalize the Agency's previously announced position on this
issue, EPA has initiated work to propose a rule that would define
the RCRA security interest exemption in a manner similar to this
CERCLA rule.
25 c:\wp\lender\rul«\l«ndrule.f10
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Unlike the general unanimity of comments addressing the RCRA
security interest exemption, however, comments were divided—
particularly among those received from representatives of the
banking and lending industry—on the issue of extending the
rule's scope to limit liability under other provisions of CERCLA
and state laws. Some suggested that the rule should be
exclusive; that is, it should preclude or preempt any other laws
that would impose liability on a lender for lending-related
activities: so long as the lender's activities fell within the
CERCLA rule defining the exemption, a lender should be afforded
immunity from suit under any other federal or state law. other
commenters argued the opposite, asserting that the rule should
not be exclusive and that other laws to which a lender is subject
should take precedence over CERCLA: so long as a lender was not
violating any non-CERCLA federal or state laws and regulations,
the CERCLA rule should be subordinate and a lender should be
immune from liability under CERCLA. Yet other commenters
expressed a concern that the rule could be read as preempting
other federal and state laws. These commenters urged that the
rule should require that a holder comply with applicable laws
governing the facility to which the holder is otherwise subject,
as a condition of maintaining the Section 101(20}(A) exemption.
An intent on the part of Congress to preempt or subordinate
a law must be express or manifest, and there is nothing in the
statute or legislative history that indicates in any way that
this was intended. See, e.g.. Puerto Rico Department of Consumer
Affairs v. Isla Petroleum Corp.. 485 U.S. 495 (1988) ("clear and
„'-.
manifest11 preemptive intent required before federal legislation
held to supersede state law); Lvneott Corp. v. Chemical Waste
Management Inc.. 690 F. Supp. 1409 (E.D. Pa. 1988) (person not
26 e:\wp\lender\rule\lendrule.flO
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liable under CERCLA nevertheless potentially liable under state
law for release of hazardous substances).
The purpose of this rule is to define a provision of CERCLA
that specifies when a holder is an "owner or operator" of a
facility under the statute. As a definition of a tern used in
CERCLA, its effect is limited to defining the meaning of Section
101(20)(A); the potential application of laws other than CERCLA
to holders is determined not by reference to CERCLA nor this
rule, but to rules of statutory construction and preemption.
See, e.g.. California Federal Savings & Loan Ass'n v. Guerra. 479
U.S. 272 (1987). It is settled law that CERCLA does not
necessarily preempt state laws regulating, providing a remedy
for, or otherwise dealing with hazardous substances. E.g..
United States v. Union Gas Co.. 743 F. Supp. 1144 (E.D. Pa.
1990); Lvncott. supra. It is also well-settled that compliance
with one set of applicable laws or regulations does not shield a
person from complying with other equally applicable laws, unless
they are so conflicting and contradictory that compliance with
one law necessarily requires violation of the other. See United
States v. Akzo Coatings of America. Inc.. 719 F. Supp. 571 (E.D.
Mich. 1989) (federal preemption where compliance with state law
inconsistent with compliance with CERCLA), aff*d. No. 89-
2092/2137 (6th cir. Dec. 5, 1991). Moreover, there is no
principle of administrative law with which the Agency is familiar
or that was cited by any commenter by which this regulation alone
could work to preempt other state and federal laws, or to
subordinate CERCLA to them. Consequently, this final rule does
not preempt a holder's potential liability under any other state
or federal law to which the holder is also subject, nor can it be
construed to subordinate CERCLA to other state or federal laws.
^7 c:\wp\lender\rula\lendrule.flO
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Accordingly, EPA agrees with the commenters who stated that
this final rule cannot preempt other state or federal laws to
which a person is subject, and disagrees witi the commenters who
suggested that compliance with the rule can nr should shield a
person from liability imposed under any other state or federal
law to which the person is subject. EPA also disagrees that this
rule and/or CERCLA is subordinate to other laws and regulations
applicable to a holder. As a matter of law, neither Section
101(20)(A) nor this definitional rule can be interpreted,
construed, or defined either to preempt or be subordinated to any
other law to which a person holding a security interest is also
subject.
Other commenters suggested that the scope of the final rule
be expanded so that a lender is completely insulated from CERCLA
liability for any action that is taken by the holder, so that a
holder is immunized from liability as an arranger or transporter
of hazardous substances under Sections I07.(a) (3) and 107(a}(4),
even if the holder arranged for or disposed of hazardous
substances in a manner that resulted in a release. This view was
opposed by commenters who argued that the exemption is limited to
the definition of "owner or operator," and that it applied only
to a person's potential liability under Section I07(a)(l) or
Section 107(a)(2). Other commenters suggested an even narrower
view, arguing that the definition applied only to a person's
liability under Section 107(a)(1) as a current owner or operator
of a facility, but not Section 107(a)(2) as a facility's past
owner or operator.
•*• •
EPA agrees with the commenters who argued that the exemption
is specific to the definition of "owner or operator," and
28 e:\wp\lender\rule\lendrule.flO
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disagrees with the commenters who stated that the scope of the
rule could be expanded to affect other provisions of CERCLA. The
express terms of the exemption clearly apply only to the issue of
whether a person is an "owner or operator" of a facility subject
to CERCLA. Therefore, whether a holder is "participating in the
management" of a facility within the meaning of the Section
101(20)(A) exemption goes to the issue.of whether a person is
potentially liable under Section 107(a)(I) as the current owner
or operator of a facility, or under Section 107(a)(2) as a person
who owned or operated a facility at the time hazardous substances
were disposed of.
Other commenters argued that the scope of Section 101(20)(A)
is far narrower than the proposed rule's definition. According
to these commenters, it only limits a person's potential
liability as an "owner" and has no application to limiting a
person's potential liability as an "operator." These commenters
argued that the exemption is limited to owner liability because
the trigger for the application of Section 101(20)(A) is a
person's "indicia of ownership" in property; absent such evidence
of ownership, the exemption does not apply. Accordingly, these
commenters concluded that the exemption does not limit a lender's
potential to be liable as an "operator" of a facility.
While EPA agrees that the trigger for determining whether
the exemption applies is whether the holder maintains some
ownership indicia in a facility, EPA disagrees that the exemption
is limited only to a holder's potential liability as an "owner"
because the express terms of Section 101(20)(A) clearly provide
i
that the exemption applies both to a holder's potential liability
as an "owner fir. operator" of a facility (emphasis added).
29 c:\wp\lender\rule\l0ndrule.fIO
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Other commenters observed that the trigger for the exemption
is the holder's indicia of ownership, but argued that the scope
of the proposed rule was too broad, but in a different way and
for different reasons. These commenters argued that the proposed .
rule's definition of the exemption was written in such a way as
to cover all persons who are holders, regardless of whether any
ownership indicia were actually held as security for a loan or
other transaction. These commenters objected to this expansive
definition because it tended to identify anv holder of a security
interest potentially liable as an "owner" of contaminated
property, even though the holder had no ownership interest in it.
These commenters argued that the exemption was intended to apply
only to holders who held ownership indicia—specifically, to
holders of security interests in property located in title-theory
states (in which the lender-mortgagee holds title to the
property)—on the basis that holders in such jurisdictions
maintain an ownership interest in the .obligated property as
security for a loan. It was this element of ownership that could
technically be considered to make a holder potentially liable as
an "owner" under the CERCLA definition, and this was the
situation that the exemption was intended to address. See Senate
Comm. on Envt. & Pub. Works, 2 A Legislative History of the
Comprehensive Environmental Response. Compensation, and Liability
Act of 1980 944-45 (Comm. Print 1983) (Remarks of Rep. Harsha).
On the other hand, these commenters argued that the exemption has
no application to holders in lien-theory states (in which the
lender-mortgagee does not hold title prior to foreclosure)
because no ownership indicia are held. Therefore, these
commenters argued that the Section 101(20)(A) exemption is not
necessary to prevent holders in these states from being
considered "owners" until such time as they acquire title
30 c:\wp\lender\rula\lendrule.flO
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pursuant to foreclosure. These commenters concluded that prior
to foreclosure such holders should not be considered to be bound
by the rule.
EPA agrees that a necessary criterion for whether the
exemption applies is whether ownership indicia are held in a
facility. A holder that does not maintain any ownership indicia
in a facility is not technically an "owner" on the basis of the
loan or other transaction giving rise to the security interest.
EPA also agrees with the commenters1 reading of the legislative
history that the exemption was foreseen as protecting holders
from incurring liability solely as the result of a loan or other
transaction that vests the holder with ownership indicia, as is
the case.in title-theory states. See, e.g.. United States v.
Maryland Bank & Trust, supra. 632 F. Supp. at 579.
However, EPA disagrees that the rule can does not apply to
protect holders from incurring liability in non-title-theory
jurisdictions. EPA believes that the purpose of the exemption
was to treat holders in all jurisdictions — whether title-theory
or lien-theory — in a similar manner. Therefore, it is the
Agency's position that this rule applies equally to protect
holders in both types of jurisdictions, and the definitions of
"security interest" and "indicia of ownership" provided in this
rule are crafted to ensure that secured creditors in both types
of jurisdictions come within the provisions of this final rule.
EPA has chosen this approach to ensure that holders in lien-
theory states enjoy the same protection from potential liability
as an "owner or operator" afforded by the statute to holders in
title-theory states. However, this rule does not define who is
an "owner or operator" under CERCLA.
• • 31 c:\wp\lendet\ruie\lendrule.flO
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Definition of Covered Security Interests
Several conmenters raised issues concerning the scope of the
"security interests" that are covered under the rule. Some
conmenters advocated a CERCLA-specific definition that would
explicitly include certain types or forms of transactions and
that would specifically exclude others. These commenters argued
that a limited definition covering only certain, specific
transactions and which eliminated all others would be preferable
to a general definition. Other conunenters argued that it was
preferable to rely on general and existing law governing security
interests because these were the rules with which the lending and
finance community are already familiar.
Numerous types of financial arrangements and transactions
were offered by conunenters arguing for a specific definition of
covered "security interests.11 Some of these conunenters argued
that instead of covering transactions traditionally recognized as
creating security interests, a CERCLA-specific definition should
be promulgated that would include specific types of transactions
that they considered to be the "functional equivalent" of a
security interest. Invariably, comroenters advocating a
definition that protected only a limited number of transactions
did so on the condition that the specific transaction they
considered to be a "secured transaction" or its "functional
equivalent" was included within the CERCLA-specific definition.
<>
Some of these commenters contended that the legislative
history supported a narrow, CERCLA-specific definition, and that
this narrow definition should include transactions such as
financing leases and other types of financing transactions.
These commenters referenced an early, unenacted version of CERCLA
3^ e:\wp\lender\rule\lendrule.flO
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which contained a definition of "owner" that exempted a person
who "holds title either in order to secure a loan or in
connection with a lease financing arrangement . . . ." see H.R.
Rep. No. 172 pt. 1, 96th Cong., 1st Sess. 36 (1979), reprinted in .„•
2 A Legislative History of the CERCLA. Senate Comm. on
Environment and Public Works, 97th Cong., 2d Sess. 525, 546
(Coma. Print 1983) (discussing H.R. 85) (emphasis added).
Conversely, other comaenters argued for a non-exclusive
definition under which any transaction—regardless of form,
nomenclature, or other characterization—would be treated as a
covered transaction so long as it met the criteria specified in
the statute: first, that the transaction at issue vest the holder
with some evidence (or "indicia") of ownership; and second, that
the ownership indicia be held as protection for a security
interest as defined by the law governing such transactions.
These commenters argued that a broad, non-exclusive definition
that covered all bona fide security interests was preferable for
the financial community, since this would allow lenders wide
latitude to structure their financial arrangements without fear
that they would be excluded from protection on the basis of a
technicality.
These commenters also contended that a broad, non-exclusive
approach vas necessary to achieve a national consistency under
the statute. As a matter of policy, these commenters argued that
it is desirable to ensure that a holder will not be considered to
be a liable party solely on the basis of a loan or other
obligation, regardless of whether'ownership indicia are held
under the law of a particular state as the result of the
transaction. The exemption was crafted as it was by Congress so
33 cs\wp\l«ndar\rule\l«ndrul«.flO
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that it would treat similar financial transactions similarly,
despite variances in the manner in which laws of different
affect ownership rights acquired by a holder. These commenters
argued that a narrow definition which focused on the type or form
of the transaction would ignore the statute's plain terns and
would thwart Congress's apparent intent to achieve a level of
national consistency.
These commenters correctly.pointed out that not every
secured transaction results in the holder possessing ownership
indicia in the property or collateral securing the obligation.
(This issue is also relevant to the scope of the exemption, and
is discussed in the preceding subsection, Application of the
Section 101(20)(A) Security Interest Exemption to Other Sections
of.CERCIA and Other Laws.) According to the theory of these
commenters, the national consistency objectives of the exemption
would be undermined by a narrow definition, and financing
transactions would be impeded unnecessarily by the threat that
CERCLA liability would hinge on a definitional technicality.
EPA agrees that the exemption protects a broad range of
transactions, and that it covers all transactions in which
ownership indicia are held primarily to protect a security
interest, regardless of the transaction's type, form, or the
nomenclature given to it. The Agency disagrees with the
commentera who suggested that the statute creates a special
narrow class of protected security interests in which only some,
but not all, bona fide security interests in which ownership
indicia are held are protected.
EPA also agrees that the exemption was intended to be
* c:\wp\lender\rule\lendrule.flO
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functional in approach and apply to all transactions iri which
ownership indicia are held primarily to protect a security
interest. This approach assures consistency with principles of
commercial lav governing secured transactions. The definitions
of "security interest" and "indicia of ownership" contained in
the final rule conform to these criteria. These definitions list
numerous common financing transactions that have been
traditionally recognized as creating security interests in real
and personal property, and therefore are appropriately covered by
the exemption. So as to achieve the national consistency
purposes which Congress intended for the exemption, these
definitions are expressed in functional transactional terms. All
secured transactions are therefore treated uniformly under this
rule, and all holders are governed and protected by'its
provisions.
Traditional security interests in real property, such as
mortgages, liens, and deeds of trust (covering both title-theory
and lien-theory jurisdictions) are covered security interests
under this final rule, and are considered to be indicia or
evidence of ownership in property held primarily to secure a loan
or other obligation. The legislative history clearly shows that
such classic financing transactions were intended to be covered.
H.R. Rep. No. 172 pt. 1, 96th Cong., 1st Sess. 36 (1979),
reprinted in 2 A Legislative History of the CERCLA. Senate Cosan.
on Environment,and Public Works, 97th Cong., 2d Sess. 525, 546
(Comm. Print 1983) (an "owner" does not include a person "who
holdfsj title . . 1 in order to secure a loan"). In addition,
so-called "lease financing transactions," which are common
financing transactions for equipment and other types of personal
property, are also treated under this rule as security interests.
35 c:\wp\lend0r\rulc\10ndrule.flO
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Again, the legislative history clearly demonstrates that Congress
believed that title held pursuant to a lease financing
transaction should not be considered evidence of ownership for
purposes of CERCLA, and this final rule provides similarly. Id.
(an "owner" does not include a person who Mhold[s] title ... in
connection with a lease financing arrangement under the
appropriate banking laws, rules, or regulations.11)
While the reference to lease financing transactions was not
explicitly included in the version of the exemption as finally
enacted, EPA does not believe that this indicates an intent on
the part of Congress to exclude this type of financing
transaction from the purview of the exemption. Instead, EPA
believes that a specific reference was not necessary because the
s
title to the equipment or other property that is held by a
financial institution or other lender pursuant to a lease
financing transaction is maintained in the same way and for the
same purposes as any other secured transaction: as security for
the loan or other obligation. Therefore, a lease financing
transaction is appropriately considered to be a transaction
giving rise to a "security interest" as that term is defined in
this final rule, and the title held pursuant to such a
transaction is considered "indicia of ownership" maintained to
protect the security interest.
Many typical lease financing transactions are defined as
security interests under this rule, and therefore are within the
scope of Section 101(20)(A). These are leases where the form of
the transaction provides for the lessor to acquire title to the
property for and at the direction of the lessee. The lessor then
recovers its loan (i.e., the purchase price of the property)
36 c:\wp\lendar\rule\lendrule.flO
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through rental payments from the lessee and, in some cases, from
the sale of the property to the lessee or a third party at the
end of the lease. Thus, the lessee is the borrower and the
lessor the holder of a security interest in the property.
In the kinds of transactions covered by the rule, the lessor
does not initially select the leased property. Instead, this is
done by the lessee or a third party. Further, during the initial
lease or any re-lease, the lessor does not control the daily
operation and maintenance of the property (a lessor who conducts
such activities may participate in management, as provided in
this rule). Typical kinds of these transactions include national
*•
bank lease financing, leveraged leases, and single-investor
leases. In these transactions, the lessor is entitled to certain
tax benefits. While the lessor will have tax benefits and may
have some equity residual as secondary interests in the property,
the primary reason it holds indicia of ownership in the property
is to protect its security interest in -the event that the
debtor/lessee fails to pay off its obligation to the lessor. If
a debtor/lessee defaults, a lessor may acquire the property
through a variety of mechanisms, and is still considered to hold
indicia of ownership under Section 101(20)(A) provided that it
complies with the other provisions of the rule (See Foreclosure.
infra.1
The rule's definitions of "indicia of ownership11 and
"security interest" are also intended to ensure that other
persons involved in ensuring the free flow of credit and in
providing for needed financing are similarly protected. Loan
guarantors, sureties, and the like are integral parts of the
secured financing process. While such persons may not, for
37 c:\wp\lender\rule\lendrul«.flO
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example, hold title to property encumbered by a security
interest, they may have an interest in the transaction (such as a
surety bond), and evidence of such interests are therefore
defined to be "indicia of ownership" for purposes of Section
101(20}(A) of CERCLA. This ensures that such persons are
protected by this final rule and that the evidence of their
interest or ownership in a vessel or facility is not a basis for
their potential liability. The definition of these terms are
intended to be comprehensive so as to ensure that a person
»
(termed the "holder") whose "indicia of ownership" are held
primarily to protect a "security interest" is covered and
protected by the Section 101(20)(A) exemption and the provisions
of this rule. The definitions are also intended to cover all
legitimate financing transactions that create or establish an
interest in property for the purpose of securing a loan or other
obligation; excluded are sham transactions and any other
transaction in which indicia of ownership are not held by a
person primarily for the purpose of securing a loan or other
transaction.
Finally, some commenters suggested that the rule should also
apply to unsecured creditors—that is, persons who do not hold
any indicia of ownership in property as security for a general
unsecured debt or obligation. These commenters argued that the
rule should be expanded beyond its statutory limitations because
unsecured creditors may at times monitor and otherwise become
involved in the borrower's facility in the same way as secured
creditors. However, EPA disagrees .that Section 101(20)(A)
jf
applies to general creditors who do not hold any ownership
indicia in any property of the debtor. There is no legal basis
on which to construe Section 101(20)(A) in a contrary manner.
38 c:\wp\lender\rule\lendrule.f10
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However, because unsecured creditors do not maintain any indicia
of ownership, they cannot be held liable as "owners'1 under
Section 107(a)(1) or Section 107(a)(2). Of course, a secured
creditor who also holds unsecured d.ibt in a facility is not
foreclosed from asserting the exemption because of the unsecured
debt.
Persons considered to be Holders
A few comm&nters raised the issue of whether persons other
than a holder could exercise the same rights and undertake the
same activities as a holder under the rule. The examples given
of such persons by these commenters were agents, affiliates, and
subsidiaries of the holder, "participating lenders," and court-
appointed receivers or "keepers" of a holder's property, among
others. One commenter questioned whether the rule applied to a
lender that acquired the assets of another lending institution
through merger or purchase.
The statute, and therefore the rule, applies to any person
who maintains ownership indicia as protection for a security
interest (the "holder"). Therefore, while the rule has no
application to a person that is not a holder, under well-
established rules governing principals and agents the actions of
employees, representatives, or others acting for the benefit or
on behalf of a principal are generally considered to be the
actions of the principal. This rule has been endorsed judicially
in this context, see United States v. Fleet Factors Cprp.. 901
F.2d at 1555 (discussing actions q£ holder's agents as they
relate to the liability of the principal), and accordingly a
holder's agents, employees, and others acting on its behalf or
for its benefit may undertake the full range of protected
" c:\wp\lender\rule\lendrule.flO
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-------
activities specified in the rule, similarly, where a holder
seeks a court-appointed receiver or "keeper" of secured property,
for the purposes of this rule the receiver o.r keeper is also
considered to be acting for the benefit of the holder. In this
way the receiver or "keeper" may exercise the same rights and
undertake the same actions as the holder under this rule, without
being considered an owner or operator of the secured property.
Language has been included in the regulatory text which provides
that a "receiver or other person who acts on behalf of or for the
benefit of a holder" is covered by the protective provisions of
this final rule (see 40 C.F.R. § 300.llOO(a)(l)).
Finally, under general principles of commercial law any
holder, regardless of whether the holder is the loan originator
or a person who subsequently acquires the indicia of ownership by
purchase or other manner of acquisition, is considered to be the
current holder and covered by Section 101(20)(A). See, e.g., 79
C.J.S. Secured Transactions §§ 88 et seqt (discussing assignments
and transfers of security interests).
Inspections and Audits of Secured Property
The effect of an inspection of secured property was raised
by a number of commenters. Most commenters who discussed this
issue supported the proposed rule's provisions that an inspection
or audit is not required as a condition of maintaining the
exemption, nor is it to be considered evidence of management
participation. Most lender commenters agreed with the Agency's
characterization of facility inspections as a risk-based issue,
and that an inspection may not need to be done in every instance
in which credit is extended. Therefore, according to these
commenters, the proposed rule correctly treated the issue of the
40 c:\wp\lender\rula\lendrule.flO
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role of inspections by providing that the decision to conduct or
not to conduct an inspection of a facility should not be a facto
in determining whether a holder had acted consistently with the
exemption.
Both lenders and borrowers commented that the Agency
correctly observed that inspections were becoming more common in
commercial transactions (although a few disagreed, stating that
they were unaware of any "conclusive" evidence of this), and
suggested that for this reason it was not necessary for the rule
to require inspections as a condition of the exemption. Other
commenters similarly suggested that an inspection requirement was
unnecessary because lenders are already motivated to conduct
inspections in order to assess the value of collateral and to
avoid foreclosing on contaminated property. A few commenters
suggested that lenders who conduct inspections as a condition of
a loan should be given the benefit of a presumption that they are
acting consistently with the exemption.
Other commenters disagreed with the manner in which the
proposed rule treated inspections. Several commenters simply
advocated that an inspection requirement be included on the basis
that such a requirement was within the Agency's authority and
because it was consistent with the purposes of CERCLA. Some
argued that unspecified "current law" motivates or requires
lenders to conduct inspections, and that a lender which fails to
assess the condition of property serving as collateral should
suffer the consequences of an unsound business practice. Other
commenters noted that inspections serve the "salutary11 purpose of
identifying sites in need of cleanup, and asserted that "most"
sites are cleaned up by the property owner without any state or
^ c:\wp\lender\rule\lendrule.flO
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"EPA involvement. Another commenter argued that the rule should
link the "benefit" of foreclosure with the "burden" of conducting
an inspection of the property. According to this conunenter, a
lender should be required to conduct an inspection of property on
which it intends to foreclose, so long'as foreclosure is
permitted under the rule. If foreclosure is not permitted,
however, then an inspection requirement is unnecessary to serve
the purposes of CERCLA.
Noticeably absent from the comments of those who advocated
an inspection requirement as a condition for the exemption was a
legal theory that would support including an inspection
requirement as a condition of the Section 101(20)(A) exemption.
The absence is significant, insofar as EPA is unaware of any case
that has invalidated an otherwise bona fide security interest
under CERCLA because no inspection of the secured property was
undertaken at the time the interest was .created.
Audits or environmental inspections that are undertaken
prior to the creation of a security interest « for example, for
the purpose of providing information upon which a potential
holder may decide whether or not to extend credit — do not void
the exemption. Not only do these actions not involve the
potential holder in the facility's management, but also the
potential holder possesses no "indicia of ownership" prior to the
creation of a security interest. Since, for example, a potential
holder's pre-origination actions would not render it an "owner or
operator" if it ultimately decide not to extend credit, there is
no reason why those same actions should result in "owner or
operator" status if the holder decided to extend credit.
42 cz\wp\lender\rul*\l«ndrule.flO
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However, EPA notes that even though there is no requirement
for an inspection to be conducted or required by a lender to
accompany the creation of a security interest, a person seeking
to establish an "innocent landowner" defense is obligated by
Section 101(35) (B) to undertake "all appropriate inquiry11 into
the condition and previous uses of the property being acquired.
Therefore, there are currently mechanisms and incentives already
r
in place to encourage that an inspection by a purchaser accompany
the sale or transfer of property (at which time security
interests are commonly created). EPA recognizes, however, that
there are situations other than the purchase of property in which
a security interest may attach, and that the Section 101(35)(B)
requirement may not be an incentive for an inspection in such
circumstances. This situation underscores that, under current
law, principles of risk management govern the holder's decision
to conduct or require an inspection of the secured facility at
any point during the life of the loan or other obligation. Such
case-by-case risk-based decisionmaking is beyond the scope of
this regulation.
.Whether an inspection is undertaken in conjunction with the
creation of a security interest or not, a foreclosing holder may
itself be able to assert an "innocent landowner" defense if the
holder conducts an inspection when.taking title incident to
foreclosure. By asserting this defense, however, the foreclosing
holder is not acting within the security interest exemption as an
exempt owner under Section 101(20)(A), but is instead relying on
a defense under Section 107(b)(3) as an "innocent" owner of the
property. Nevertheless, a decisiori to perform an environmental
audit or inspection for the purpose of preserving the capacity to
assert the "innocent landowner" defense does not void or in any
43 c:\wp\lender\rule\lendrule.flO
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way compromise a holder's eligibility for the Section 101(20)(A)
exemption.
Application of the Exemption to Different Types of Property
A few commenters questioned whether the statutory exemption
(and therefore this rule) applied to all properties subject to
CERCLA, or whether it was limited to certain types of real
property—such as industrial and commercial properties—and
excluded real property committed to other uses—such as
residential property.
One commenter suggested that the proposed rule did not apply
to residential property because the rule had been preempted by a
subsequently-issued Agency policy statement covering residential
property. See Clay & Ludwiszewski, Policy Towards Owners of
Residential Property at Superfund Sites, (July 3, 1991) (OSWER
Directive No. 9834.6) (hereafter "Homeowner Policy"). The
Homeowner Policy specifies that EPA will not seek to recover the
costs of cleanup from owners of residential property within
Superfund sites, provided that the owner -is not responsible for
the -contamination. The commenter concluded that the issuance of
this policy meant that a person maintaining indicia of ownership
in residential property primarily to protect a security interest
would not be protected by the Section 101(20)(A) exemption.
These commenters have misread both the scope of CERCLA and
the intent and application of the Homeowner Policy. Superfund
applies to property that is contaminated by hazardous substances,
and does not distinguish among properties or "facilities11
according to the use to which they are committed: Similarly,
application of the Section 101(20)(A) exemption does not depend
44 c:\wp\lend«r\rul«\l«ndrule.flO
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on the use of the property which is subject to a security
interest. In short, the type of property or its intended or
actual use is irrelevant to the issue of whether the property is
contaminated by hazardous substances and potentially subject to a
CERCLA cleanup, and whether the security interest exemption
applies to preclude liability from attaching to the holder.
The Agency's Homeowner Policy does not change this
fundamental statutory principle. The policy is a statement of
the Agency's enforcement discretion and is directed to owners of
residential properties affected by Superfund cleanups. It makes
formal the Agency's long-standing practice of not seeking cleanup
costs from the owners of residential property located within the
boundaries of a Superfund site, unless the homeowner is
responsible for a release or threat of release of hazardous
substances at the site. This policy does not in any way supplant
either the statutory security interest exemption or this rule.
Instead of superseding the exemption, the policy works in
tandem with it and provides an assurance that the residential
property owner who is not responsible for a release of hazardous
substances at the property--as well as a person maintaining
indicia of ownership in the homeowner's property primarily to
protect a security interest—will not be subject to an EPA
enforcement action under CERCLA solely on the basis of property
ownership.
A Holder's Motivations for Policing the Loan
A few commenters raised the issue of the relevance of a
lender's motivations for undertaking certain activities in the
course of maintaining ownership indicia as protection for a
45 c:\wp\lender\rule\lendrule.flQ
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security interest. For example, it was suggested that the rule
be clarified to specify that it is permissible for a lender to be
motivated to act for reasons other than to protect a security
interest, such as to take over facility operations in order to
generate funds for cleanup or to keep facility employees working.
A few other commenters questioned whether it was permissible to
be motivated to act for other, unspecified reasons that were not
directly related to "protecting" the value of the security
interest.
Other commenters argued that a lender's motivations to act
are irrelevant, and that the proposed rule intimated that an
obligation to act with "proper" motives was imposed. These
commenters were concerned that a lender might be held liable,
even though it had undertaken an activity that was specifically
protected under the rule, because the holder had acted with an
"improper motive." These commenters also argued that a lender's
motivation is irrelevant; instead, what matters is the nature and
scope of the lender's actual involvement with the borrower.
EPA agrees that under Section 101(20)(A), the motivations of
a lender are irrelevant for determining whether the holder has
participated in management or hot. See In re Berosoe Metal
Corp.. 910 F.2d at 672 n.2 ("A creditor's motivation is
irrelevant ... to the issue of whether its actions constitute
participation in management."); United States v. Fleet Factors
Corp.. 901 F.2d at 1560 ("What is relevant is the nature and
extent of the creditor's involvement with the facility, not its
motive.") "Participation in management" is an objective, fact-
based inquiry, and the legal consequence of the same actions
undertaken by two different holders is not changed by differences
** c:\wp\lander\rule\lendrule.flO
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in motivation.
EPA also agrees with the commenters who observed that some
provisions of the rule as proposed nay have inadvertently
suggested that a lender's motivation to act was a relevant
factor. The proposed rule described certain activities as
protected because they were "consistent with protecting a
security interest." EPA agrees that this phrasing is
inconsistent with the express language of the statute. The
correct phrasing is whether the holder's actions are consistent
with "holding indicia of ownership primarily to protect a
security interest" (i.e., consistent with the exemption). The
Agency has attempted to correct this in the final rule to remove
any doubt that liability cannot be premised on actions prompted
by "improper-motives."
The only issue for which motivation is relevant under
Section 101(20)(A) is the reason why ownership indicia in
property are held: the indicia of ownership must be held
"primarily to protect [a] security interest," meaning that
protection of the security interest must be the primary (though
not necessarily the sole) reason for maintaining indicia of
ownership. This allows a lender to be motivated by other,
secondary reasons without necessarily voiding the exemption. In
all other respects, a lender's motivation is irrelevant.
Causing or Contributing to a fielease at a Secured Facility
The proposed rule provided that a holder who caused or
contributed to contamination at a secured facility did not
establish evidence that it had "participated in management"
solely on this basis. Several commenters strongly criticized
47 c:\wp\lender\rule\lendrule.flO
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this provision on both legal and policy grounds. Numerous lender
commenters also stated that a holder should be responsible for
the contamination they hav.» caused at a secured facility.
Some commenters argued that policy considerations support
voiding the exemption when the holder was itself responsible for
causing or contributing to contamination at the secured facility,
or where the holder was otherwise directly or indirectly
responsible for a release of hazardous substances there. Some of
these commenters apparently thought that the proposed rule went
further than simply excluding from the behavioral definition of
"management participation11 the empirical question of whether a
holder caused or contributed to contamination, and that this
provision might automatically exempt a holder from liability even
where it was responsible for a release of hazardous substances.
The commenters argued that the remedial purposes of CERCLA would
be undermined if the government's costs of responding to health
and environmental hazards were not reimbursed by those who were
responsible for creating them.
Other commenters argued that a holder that is in a position
to cause or contribute to a release of hazardous substances at a
facility must by necessity be participating in its management in
order to do so. These commenters reasoned that only by becoming
actually involved in a facility's management could a holder place
itself in a position to cause a release of hazardous substances.
Therefore, these commenters argued, evidence that a holder has
actually caused a release of hazardous substances at a facility
is probative and relevant evidence that the holder has
participated in the facility's management, contrary to the
proposed rule's statement.
AO
Q c:\wp\lender\rule\lendrula.flO
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EPA agrees with the comiaenters that a holder's actions whictl^B
results in a release or threat of rrs lease of hazardous substances
could be an indication that a holdei has participated in the
facility's management, depending on the circumstances in which
the release occurred. For example, if the release occurred in
connection with a holder's exercise of decisionmaking control
'over the borrower's environmental compliance, then the holder has
"participated in management11 under the first prong of either the
proposed or the final rule's general test, on the other hand, if
the release occurred in connection with activities undertaken at
the direction of an on-scene coordinator (under Section 107(d)(l)
of CERCLA), then evidence of a release is not relevant to the
issue of whether the holder has participated in management.
Similarly, where the release is the result of the actions of a
third party, as provided in Section 107(b)(3), evidence of the
release has no bearing on the matter of whether the holder has
participated in management.
\
N
Conversely, if a holder does not cause a release at a
secured facility, the holder still may be considered to be
participating in management if its actions meet the criteria laid
out in either prong of the general test. In sum, the touchstone
for determining whether a holder maintains the exemption is not
whether the holder causes a release, but whether, viewing the
holder's actions as a whole, the holder participates in
management under this final rule's two-prong test. The final
rule has been modified to reflect this principle.
Finally, as explicitly provided in this final rule, a holder
may independently incur liability in connection with its
AQ
" c:\wp\lender\rule\lendrule.flO
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activities pre- or post-foreclosure at a facility by having
arranged for-disposal or treatment of a hazardous substance, as
provided by CERCLA Section 107(a)(3), or by accepting for
transportation and disposal of hazardous substances at a facility .
selected by the holder, as provided by CERCLA Section 107(a)(4).
Provided that the holder is seeking to divest the foreclosed-on
facility as set forth in this final rule (and thus is not an
"owner or operator" under CERCLA Section 107(a)(1) or Section
I07(a)(2)), a holder can incur liability in connection with its
activities at a foreclosed facility only through the operation of
i
these alternative liability provisions. These issues are
discussed in greater detail in the following sections (General
Test of Participation in Management, infra, and Holder's Basis of
CERCLA Liability Independent of Status as Owner or Operator.
infra).
Definition of "Participation in Management"
Comments on the proposed rule's provisions defining the term
"participation in management" were numerous and varied. The
proposed rule contained a list of activities that were
specifically defined not to be evidence of management
participation, such as undertaking or requiring an inspection of
secured property, requiring that property be cleaned up,
monitoring the obligor's business or financial condition, and
various other activities. (Proposed 40 C.F.R. 5 300.llOO(c) (2).)
The proposed rule also provided that the listing was not intended
to be exclusive, and that other activities could be undertaken by
a holder consistent with the exemption. For this purpose, the
""^
proposed rule contained a general test of management
participation. The general test provided that a holder would
void the exemption if it exercised decisionmaking control over
50 c:\wp\lender\cula\landrule.flo
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facility operations in a manner that resulted in a release of
T;t''
hazardous substances, or if the holder exercised control of a
* •$
facility comparable to that of a manager of the facility
(Proposed 40 C.F.R. S 300.1100(c)(1)).
Most commenters who focused on the provisions specifically
defining certain activities not to be evidence of management
participation generally supported the provisions, and suggested
that certain additional activities be added to the list or
suggested certain modifications to the existing provisions. A
few commenters objected to certain of the activities as
inconsistent with the exemption's prohibition, arguing that the
defined actions were actually participation in management both
within the ordinary and plain meaning of that term and as
construed by caselaw.
Commenters who focused on the general test—even among those
who generally favored it—criticized it as lacking precision and
stated that its meaning was unclear because it introduced new
terms or concepts unfamiliar to the lending community or under
CERCLA. Others criticized it as an overly broad rendering of the
exemption, and that it functionally equated "management
participation" with "operation" of a facility. These comroenters
argued that the use of two different terms in the same
definitional section of the statute indicated that Congress
intended two different meanings. The comments regarding the
specific activities defined not to be evidence of participation
in a facility's management and the-"general test are discussed in
detail in the following sections.
51 c:\wp\lender\rule\lendrule.flO
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Pre-Loan Activities. . Some commenters objected to the
proposed rule's provision that no action by a holder prior to '-.he
creation of the security interest could be considered evidence of .
"management participation" because a prospective lender could
require that certain actions be undertaken by a prospective
borrower which could affect adversely the facility's
environmental compliance obligations, such as requiring a
"substantial diversion of resources" to a cash account set up for
the lender's protection. This was characterized by these
commenters as "direct involvement in the operational aspects" of
a facility by a holder that should not be protected under the
rule. : .
EPA believes that such pre-loan activities are irrelevant
for determining whether a holder has participated in the
facility's management after the time that indicia of ownership
are held primarily to protect a security interest. Such
activities necessarily take place prior to this time, and for
purposes of Section 101(20)(A) a person's pre-loan actions are
not relevant to the issue of whether the holder, has participated
in a facility's management after the time that the indicia of
ownership are held to protect a security interest.
The actions or omissions of any person who is not a holder,
or whose actions take place outside of the holder-borrower
relationship, are not relevant for purposes of the Section
101(20)(A) exemption. Depending on the person's relationship to
the facility and the conduct involved, a non-holder (one who does
not maintain ownership indicia in a facility primarily to protect
52 c:\wp\lender\rule\lendrule.flQ
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a security interest) may be an "operator" of the facility under
Section 107(a)(1). or 107(a)(2), or a person who "arranged" for
disposal under Section 107(a)(3), or one who "accepted [hazardous
substances] for transport to disposal" at a facility under
Section 107(a)(4). Therefore, while the actions of a person who
is not a holder may make it a responsible party under CERCLA,
such pre-loan or extra-loan actions are not relevant to the issue
of whether a holder has participated in the facility's management
during the time that the Section 101(20)(A) exemption applies.
Policing and Workout Activities. The proposed rule
specified that a holder's "actions that ensure that the facility
is managed in an environmentally sound manner" are not considered
evidence of management participation. Some commenters viewed
this provision as permitting a holder to dictate to a borrower
that a facility could be managed in a certain way. These
commenters expressed concern that this type of activity could
constitute that which the exemption does not permit.
Nevertheless, these commenters generally agreed that liability
should not be premised on lender-imposed requirements that a
facility be operated in an environmentally sound manner.
EPA agrees that liability cannot be premised on the
existence (or the absence) of loan covenants or other
requirements imposed by a holder that seek to ensure that a
facility is operated in an environmentally sound manner. The
intent behind including this provision in the proposed rule was
to protect these types of common policing activities by holders
as consistent with the environmental objectives of CERCLA. The
inclusion of such covenants merit protection under the rule
because requirements of this sort have the effect of ensuring
53 c:\wp\lender\rule\lendrul«.flO
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that the value of the collateral or property securing the
holder's obligation is not impaired by hazardous substance
contamination. However, a holder that enforces or takes action
at the facility under the authority such general covenants cannot .
overstep the bounds of the test of management participation, or
must ensure that it is acting pursuant to Section 107(d)(l) of
CERCLA (see General Test of Management Participation and
Enforcement of Loan Terms and Covenants by a Holder, infra).
Another provision criticized by some commenters was the
general statement that, in addition to providing "specific
financial or operational advice" and taking other specified
actions, it was permissible for a holder to take "any other
actions reasonably necessary to protect the security interest."
This general statement was criticized by various commenters as
vague, too broad, or that it was otherwise in need of
clarification regarding the types of activities that it was
intended to cover. EPA agrees that, when read in isolation, this
single provision may not fully communicate EPA's intent. It is
also an example of a drafting deficiency which led some
commenters to infer that a holder's motive was relevant for
determining whether any particular activity is considered
permissible (see A Holder's Motivations for Policing the Loan.
supra}.
EPA intended this general statement to indicate that the
list of specifically protected activities was not meant to be
exclusive, and that other actions by a holder were permissible,
even though not specifically listed in the rule. EPA also
intended that the issue of whether an unlisted action undertaken
by a holder was permissible under the rule would be determined by
54 c:\wp\lender\rula\lendrula.flO
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reference to the general test of "management participation."
The commenters have indicated that this general statement did n
clearly convey this intention. Therefore, this general provision
has been modified in the final rule to specifically reference the
general test for management participation as the measure of
whether a holder's policing and workout activities that are not
specifically mentioned in the rule fall within the exception.
i
Commenters also noted that "workout" activities may occur
both prior to and after a technical default by a borrower, and
argued that workout activities should be defined to include
actions to cure, mitigate, or even to prevent default.
Commenters also suggested that other, specific actions taken by a
holder be included within the list of protected policing or
workout activities; the most common suggestion was the addition
of an assignment of rents by the borrower to the lender, or other
similar action by which payments due to the borrower would be
immediately assigned to or directed to be paid to the holder.
EPA agrees that workout activities may be undertaken without
voiding the exemption regardless of whether a "default" has
technically occurred. The determination of whether a holder has
"participated in the management" of a borrower's facility is not
dependent on when or whether the borrower is technically in
default: what is critical is what the holder actually does, not
what motivates the action. See, e.g.. Berasoe Metal, supra. 910
F.2d at 672 n.2. Therefore, the final rule has been modified to
specify that the protected workout activities identified in this
rule may be used to cure, mitigate-/' or to prevent a default by
the borrower.
55 c:\wp\lender\rule\lendrule.flO
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An assignment is, by itself, not evidence that the holder is
participating in the management of the borrower's facility. An
assignment of accounts or proceeds, for example, may be ••'
considered an independent secured transaction under the Uniform
Commercial Code, and under this rule "participation in
management" cannot be premised on the mere creation of a security
interest.5 As such, the assignment of accounts is included in
this final rule as a protected activity. This final rule
provides that such actions are permitted to the extent that they
do not rise to the level of management participation, as defined
by the general test. (See -General Test of Participation in
Management, infra.1
Numerous other commenters commended the Agency for
recognizing that a problem loan, or a loan in or near default,
will often require active counselling with .the borrower, and that
managing a problem loan may bring the lender into close contact
with the borrower, the borrower's business, and/or the collateral
or facility itself. These commenters generally expressed support
for the provisions of the proposed rule that permitted
affirmative lender actions to safeguard the loan collateral and
to avoid loss, as being consistent with accepted lending
practices.
However, a few of these commenters criticized the rule for
failing to insulate completely from CERCLA liability a holder in
a workout situation, and expressed disappointment that the
5 However, it is unlikely that an assignment of accounts
would be a "facility" that can be contaminated by hazardous
substances. See 42 U.S.C. S 9601(9) (definition of "facility")
" c:\wp\lender\rule\lendrule.flO
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proposed rule did not carve out, without limit or reservation,
the full panoply of activities that a lender might conceivably
undertake. Specifically, these commenters faulted the rule for
providing that the holder is generally on safe ground when
providing advice and counseling to a financially troubled
borrower, but only so long as the borrower remained the ultimate
decisionmaker and in control of the facility. These commenters
stated that there may be situations in which the holder would
prefer that the borrower not remain in control, such as where the
holder believes that the borrower is not competent or where the
holder simply desires to direct facility operations without
interference from the borrower. These commenters suggested that
a holder should be permitted to completely divest the borrower of
control over facility operations, and that the holder (or a third
party designated or approved by the holder) should be allowed to
step in as the facility's operator. These commenters argued that
there should be no liability connected with the holder's
operation of the facility in such circumstances.
EPA has provided the general test of management
participation because the Agency recognizes that no regulation
could specifically cover every activity that a holder might
conceivably undertake. EPA also does not agree with certain
commenters that a holder, prior to foreclosure, may divest the
borrower of control over facility operations without voiding the
exemption. In such a situation, the holder is not seeking to
cure, mitigate, or prevent the default of the borrower (a workout
situation), but is itself acting as the operator of the facility.
,-'-*,,'
The workout activities identified in this rule are protected
because they fall short of management participation. The
activities described by these commenters—in which the borrower
" c:\wp\lender\rule\lendrule.flQ
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is divested of possession and control by the holder—cross the
line from non-participation to active facility management and
operatior when undertaken pre-foreclosure. (However, the
activities described by these commenters are for the most part
permitted as a consequence of foreclosure. See the discussion of
foreclosure-related activities in Foreclosure, infra.1
Finally, some commenters also argued that, for public policy
reasons, holders should be relieved from CERCLA's standard of
strict liability when addressing a facility's environmental
problems in loan workout situations. In general, EPA agrees with
this position because CERCLA already contains provisions that
have this effect. Section 107(d)(1) of CERCLA specifically
provides that "no person shall be liable . . . for costs or
damages as a result of actions taken or omitted in the course of
rendering care, assistance, or advice in accordance with the
National Contingency Plan or at the direction of an onscene
coordinator . . . with respect to an incident creat[ed] ... as
a result of any releases of a hazardous substance or the threat
thereof." 42 U.S.C. § 9607(d)(l). Persons addressing hazardous
site conditions in accordance with this section are not subject
to strict liability, but are liable only "for costs and damages
as the result of negligence on the part of such' person." Id^
Therefore, and for the public policy reasons articulated by the
commenters, both the proposed rule and this final rule specify
that the actions of a holder engaged in mitigating or otherwise
responding to a release at a facility in which a security
interest is held are not considered to be evidence of management
participation. See Kelley v. ARCd Industries Corp.. supra'
(active, direct, knowing efforts to prevent or abate
contamination may work for, not against, a person). Accordingly,
58 c:\wp\lender\rule\lendrule.flO
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this provision has been retained in the final rule, and has been
included in the regulatory text.
Enforcement cf Loan Terms and Covenants by a Holder. A few
commenters argued that the enforcement of covenants and loan
conditions by a holder, such as the enforcement of environmental
covenants, the requirement that a borrower pay fines imposed by
government agencies, or other requirements that require the
borrower to comply with "legal requirements," should not be
considered evidence that the holder is participating in the
management of the facility, even though the holder is directing
that certain activities be undertaken at or in connection with
the facility.
EPA agrees that the enforcement of loan covenants and
conditions, and instructions to the borrower that laws be obeyed,
fines be paid, etc. are not evidence of management participation.
A holder's instruction that the borrower or obligor comply with
applicable environmental laws is not a basis for voiding the
Section 101(20)(A) exemption. However, the enforcement or
exercise of rights in covenants that allow a holder to undertake
or direct activities at a facility— i.e., to participate in
management—would be inconsistent with the express provisions of
this rule and with caselaw construing Section 101(20)(A). See In
re Bergsoe Metal Corp.. supra. 910 F.2d at 672 (management
participation may exist where a holder exercises rights under
security agreement; "What matters is not what rights the [holder]
had, but what it did."). Therefore, whether the enforcement of
loan covenants or conditions are sufficient to void the exemption
is determined by reference to the general test of management
participation, as provided in this final rule.
^ c:\wp\lender\rule\lendrule.flO
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General Test of Participation in Management. The proposed
rule's general test of when a holder participates in management
was criticized by numerous commenters. The general test provided
that a holder was considered to be participating in management
if, while the borrower is still in possession, the holder either:
(A) exercised decisionmaking control over the borrower's
environmental compliance, such that the holder had undertaken
responsibility for the borrower's waste disposal or hazardous
substance handling practices which results in a release or
threatened release; or (B) exercised control at a management
level encompassing the borrower's environmental compliance
responsibilities, comparable to that of a manager of the
borrower's enterprise, such that the holder had assumed or
manifested responsibility for the management of the enterprise by
establishing, implementing, or maintaining the policies and
procedures encompassing the day to day environmental compliance
decisionmaking of the enterprise.
Because it is not possible to specifically cover in this
rule1 every conceivable situation in which a holder might act, or
to make specific provisions for every action that a holder might
undertake, the general test was formulated to provide a framework
within which to assess the consistency of a holder's actions with
Section 101(20)(A). At least one commenter concluded that a
general rule was impossible to construct and apply because the
issue of whether a holder has participated in 'management is "so
closely tied to the specific facts of each case that any
definition in a nationally applicable regulation is bound to miss
the mark."
In line with this commenter's views, the general test was
60 c:\wp\lender\rule\Urolrule.flO
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criticized by a range of other commenters as vague and redundant,
as doing little to clarify terms, and as awkwardly phrased and
poorly defined, significantly, the test was considered to fail
in its attempt to clarify the exemption because it introduced new
terms that were not generally accepted or understood by the
lending community or under CERCLA. The test was also criticized
as poorly defined because it did not clearly distinguish between
'protected and impermissible activities.
Commenters critical of the proposed rule's general test also
remarked that the Agency seemed to formulate it in such a way as
to give the narrowest possible meaning to the term "participation
in management." They asserted that this extremely narrow
rendering of the term would inappropriately elevate holders as a
special class of persons not subject to liability, even if they
were.directly responsible for the overall manner in which a
facility was operated. These commenters argued that the proposed
rule failed to clarify matters: it is not necessary for a holder
to explicitly assume responsibility for the facility's
environmental obligations in order to affect its environmental
compliance, and exercising control over a variety of areas or
aspects of a facility can and does have environmental impacts.
Other commenters believed that the general test gave
"management participation" an overly narrow meaning: Thus,
actions that were clearly participation in a facility's
management under existing caselaw would not be considered as such
under the general test. One comroenter indicated that the only
way in which the test could be made any narrower was if the "or11
in the latter part of the test (providing that a holder
participates in management if it has "assumed or manifested
61 c:\wp\lender\rule\landrule.flO
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responsibility for the management of the enterprise by
establishing, implementing, OE maintaining the policies and
procedures encompassing the day-to-day environmental compliance
decisionmaking of the enterprise") was changed to an "and." In
this commenter's view, the effect of this change would permit a
holder to participate freely in management without voiding the
exemption so long as it artificially "carved out" the facility's
environmental compliance obligations from its purview. Other
commenters asserted that this result was possible even without
the change, and that so long as a holder's participation did not
include primary or exclusive responsibility for waste disposal
practices, a holder could freely participate in and direct a
facility's management. Finally, some commenters asserted that
the second part of the test actually set a standard for a person
who was fully operating a secured facility, and instead of
defining when a person "participates in the management11 of a
facility, it defined when a person controlled the management of a
secured facility.
The intention of the general test, as noted above, was to
provide a framework for analyzing the propriety of a holder's
actions within the limitations of the exemption. The Agency had
attempted to craft a regulation that was consistent with
principles expressed in existing caselaw and to "fill the gaps"
where the decisional law, the statute, and the legislative
history did not address the question presented.- See, e.g..
Chevron. U.S.A. v. NRDC. 467 U.S. 837, 843 (1984) (administering
agency permitted to provide reasonable construction of statute
where statute is silent or ambiguous on a specific question).
The caselaw indicates that a holder need not remain entirely
passive in order to retain the exemption, and a holder is
62 c:\wp\lender\rula\lendrule.flO
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permitted to undertake certain activities with respect to a
facility in which ownership indicia are held as protection for a
security interest, without such activities being considered
participation in the facility's management. The specific
activities defined in this rule are drawn from and based on the
holdings of the few cases that have construed Section
101(20)(A).6 Beyond these cases, however, the statute is silent.
The proposed test's two parts were intended to cover two
general situations in which a holder should be considered to have
participated in a facility's management: where a holder
controlled or directed the facility's environmental compliance
activities, and where the holder's actions indicate that it has
manifested or assumed responsibility for other•aspects of the
6 Several commenters also noted apparent inconsistencies
between the proposed rule's provisions and prior government
litigating positions on the meaning of the term, noting with
particularity that the Agency had advocated in court briefs a
position that the "plain meaning" of the term prohibited any
participation in a facility's management of any kind, and not
participation for limited purposes. Even though this regulation
defining Section 101(20)(A) is not necessarily identical to
interpretations taken in prior government litigating positions,
it is settled law that agency interpretations fashioned solely
for litigation purposes do not rise to the level of an agency
rulemaking that would need to be addressed in this regulation.
See, e.g.. Alaniz v. Office of Personnel Management. 728 F.2d
1460 (Fed. Cir. 1984). Furthermore, the fact that there may be
some variance between the provisions of this rule and prior
government litigating positions is not germane to the issue of
whether this final regulation is binding and valid, and entitled
to judicial deference. See pobertson v. Methow Valley Citizens^
council. 490 U.S. 322, 355 (1989) ("Where administrative
guidelines conflict with earlier pronouncements of the agency, .
. . substantial deference is nonetheless appropriate if there
appears to have been good reason for the change."); Chevron. 467
U.S. at 862 (the "fact that the agency has from time to time
changed its interpretation of the term [in question] does not
[lead] to [the] conclusion that no deference should be accorded
the agency's interpretation of the statute.").
63 c:\wp\lender\rule\lendrule.flQ
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facility's operations at the level of a facility manager. The
first situation was intended to be captured by proposed 40 C.F.R.
S 300.UOO(c) (i) (i). The theory behind this formulation was t.iat
"management participation" short of day-to-day decisionmaJeing .s
evidenced where a holder exercises control over a facility in a
manner that affects the hazardous substance handling or disposal
practices. The second situation, intended to be captured by
proposed 40 C.F.R. $ 300.1100(c)(1)(ii), was that a holder
participates in management where its overall involvement
indicates that it has assumed a position of responsibility for
the facility's operations. For purposes of the proposed rule,
this was when a holder is effectively acting at a level of
management that is senior to and inclusive of the facility's
environmental obligations. . In other words, under this prong of
the general test a holder is participating in management where it
is exercising control over the facility's operations, and the
holder is therefore responsible for what occurs at the facility.
EPA agrees that the wording and construction of the proposed
rule's general test of management participation may have been
imprecise. However, EPA disagrees with those commenters who
suggested that the general test be dropped entirely from the
final rule. The Agency believes that it is both appropriate and
desirable to provide a general standard so that a holder's
actions can be assessed for consistency with the exemption, and
therefore a general test or standard of management participation
has been retained, albeit revised to address the criticisms and
shortcomings identified by the commenters. In addition, EPA
expects that the discussion of the general test in this Preamble
will help to clarify any ambiguities that may remain.
64 c:\wp\l«nd«r\rul«\lendrule.flO
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In response to comments that the proposed rule's general
test permitted activities that courts construing the exemption
had prohibited, EPA reexamined the caselav interpreting Section
101(20)(A). In this respect, a number of courts construing the
Section 101(20)(A) exemption cited or relied on principles of
tort and corporate liability law to determine the meaning of the
phrase "without participating in the management" of a facility—
particularly the line of cases in which a stockholder or company
officer lost the protection of his position by participating or
taking part in hazardous waste handling activities that gave rise
to CERCLA liability, or by specifically directing other officers,
agents, or employees to undertake the wrongful actions. See
United States v. Fleet Factors. 901 F.2d at 1556-57 (citing
United States v. Northeastern Pharmaceutical & Chem. Co.. 810
F.2d 726 (8th Cir. 1986), United States v. Kayser-Roth Corp.. 724
F. Supp. 15 (D.R.I. 1989), and United States v. Nicolet. 712 F.
Supp. 1193 (E.D.Pa. 1989)); Guidice v. BFG Electroplating &
Manuf. Co.. 732 F. Supp. at 561 (citing United States v. Nicolet.
supra. and Idaho v. Bunker Hill Co., 635 F. Supp. 665 (D. Idaho
1986)); United States v. Mirabile. 15 Envtl. L. Rep. (Envtl. L.
Inst.) at 20995 (E.D. Pa 1985) (citing New York v. Shore Realty
Corp.. 759 F.2d 1032 (2d Cir. 1985), and United States v.
Northeastern Pharmaceutical & Chern. Co., 579 F. Supp. 823 (W.D.
Mo. 1984)). These cases appear to have been considered relevant
by the courts construing Section 101(20)(A) because they tended
to focus on the issue of whether the actions or involvement of an
affiliated but otherwise protected person in the affairs of
another is sufficiently extensive to warrant loss of the
protection. See generally 3A S. Flanagan & C. Keating, Fletcher
Cyclopedia of the Law of Private Corporations 55 1135 et seq.
(rev. perm. ed. 1986); see also Riverside Market Dev. Corp. v.
65 c:\wp\lender\rul«\l*ndrul«.f10
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International Buildinq_Pro_ds.. 931 F.2d 327 (5th Cir. 1991)
(issue of a defendant's personal participation in wrongful
conduct under CERCLA); Vermont v. Staco. Inc.. 684 F. Supp. 822
(D. vt. 1988) (a person "participate[s] in the management*1 of a
facility by making "decisions that relate to the managing
businesses and the marketing businesses and the selling
businesses and all the overall operations of the company.").
These holdings indicate that the liability of a holder
should attach where the holder is acting as a day-to-day manager
of the borrower's business or enterprise, or where the level of
involvement directly affects or controls the facility's hazardous
substance handling or disposal practices. The Agency considers
the line of cases cited by the courts in construing the exemption
to be an appropriate standard by which to measure whether the
extent of a holder's involvement is sufficient grounds for loss
of the exemption by participating in the management of the
facility.
Courts considering the meaning of Section 101(20)(A) have
also made it clear that "participation in management" and
"operator" do not have the same meaning, even though facts
showing operation of a facility will be sufficient to establish
participation in management. See, e.g.. United States v. Fleet
Factors. 901 F.2d at 1556 n.6, 1557-58 ("[W]e can conceive that
there may be instances where the facts showing participation in
management are different from those indicating operation, ....
Although similar, the term 'participating in the management1 and
'operator' are not congruent."); Quidice v. BFG Electroplating &
Mfg. Cp^. 732 F. Supp. at 56 (holder had not participated in
facility's management where there was lack of evidence regarding
" c:\wp\l«nder\rul«\l«ndrule.f10
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operational involvement: "There is no evidence that the Bank
controlled operational, production, or waste disposal activities
at the [site]."); United States v. Mirabile. 15 Envtl. L. Rep.
(Envtl. L. Inst.) at 20996-97 (drawing distinction between
involvement in financial matters and the "day-to-day operations"
of a facility). In this respect the courts have focused on the
types of activities that are ordinarily undertaken by a holder in
its lending capacity, as well as the effect such involvement,
short of day-to-day management, may have on a facility's disposal
or handling of hazardous substances. In Mirabile, for example,
the pre- and post-foreclosure activities of a holder that were
related to ordinary loan management were considered permissible.
Where there was no evidence that a holder was responsible for the
facility's operations, the holder remained within the exemption.
The courts in Berasoe Metals and Guidice held similarly in the
pre-foreclosure context. In Fleet Factors, the court focused on
the actual involvement of the holder with the operations of the
borrower, particularly with respect to the effect of that
involvement on the borrower's hazardous waste disposal practices.
Similarly, the Agency believes that" the general test of
management participation should seek to assess the effect of a
holder's involvement in a facility on the hazardous substances
present there. The holdings of these cases, and the intent of
the Agency's general test of management participation, is to
protect "lenders from being exposed to CERCLA liability for
engaging in their normal course of business," while imposing
liability where a holder moves from oversight and advice to
instances of actual facility management. Fleet Factors. 901 F.2d
at 1556.
" 67 c:\wp\lender\rule\lendrule.flO
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Furthermore, the Agency believes that the general test
should also reflect the distinction between the control exercised
by a person who is exercising decisiomnaking authority over the
operational aspects of the facility, and the influence that may
be exerted (no matter how great) over the borrower by a person
who is not part of the facility's decisionmaking hierarchy, in
the first instance, a person who is functioning in the capacity
of a facility manager is "participating in management" under this
final rule. In the latter case, a person who exerts influence
over such a facility manager but who has no power to direct or
implement operational decisions is not "participating in
management," even if the level of influence exerted over the
borrower is substantial. . .
The distinction between control and-influence is critical
because the borrower's behavior may be strongly influenced by a
broad array of parties such as customers, suppliers, insurers,
unions, competitors, and even the government, none of whom
participate in the day-to-day management of the borrower's
facility. The borrower may respond to such influence by altering
its production processes or changing its behavior in other ways,
or the borrower may respond by changing nothing at all. In no
instance would the influence exerted by these other parties be
construed as "participating in management" because they cannot
compel the implementation of any policy or preference at the
facility. The borrower is always free to decline to accept the
advice and counsel of such persons;-even if doing so may entail
adverse consequences. Accordingly, it is only where the holder
68 c:\wp\lender\rula\landrule.flO
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actually exercises decisionmaJcing control over-the facility's
dperations from within the facility's hierarchy (as detailed in
this final rule) does the holder "participate in management."
The Agency therefore believes that the proposed rule's
general test largely conforms to the approach adopted by the
courts to date by focusing on the relationship between the
holder's involvement and the resulting impact on the hazardous
substances at the secured facility. Accordingly, the general
format and approach of the general test is retained in this final
rule, although the two prongs of the test are modified to conform
more closely with the caselaw, to address ambiguities, and to
otherwise respond to the comments.
The first prong of the test will continue to provide that a
holder participates in management where the holder has exercised
decisionmaking control over the borrower's environmental
compliance (i.e., the borrower's hazardous substance disposal or
handling practices). The proviso that the holder's
decisionmaking control over the borrower's environmental
compliance must result in a release or threat of release of
hazardous substances has been deleted from the final rule. It is
not necessary for a holder to cause a release in order to be
exercising control over a facility's hazardous waste disposal or
handling practices. Put another way, whether or not a holder is
participating in a facility's management is not dependent on any
specific environmental outcome.
The second prong has been revised to a greater degree than
the first prong, but for similar reasons ~ to improve clarity,
69 c:\wp\lender\rule\lendrule.fl0
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conform more closely to existing caselaw, and to address the
concerns of commenters. The basic intent of the second prong
remains unchanged, however: where the holder is exercising day-
to-day, c verall management control over the operational aspects
of the borrower's business or enterprise (as opposed to
administrative or financial management), then this level of
actual involvement is sufficient to constitute management
participation for purposes of Section 101(20)(A). Accordingly,
the Agency believes that the basic formulation of the general
test in the proposed rale is correct. However, the general test
is modified in this final rule in an effort to address the
comments that the general test was unclear or presented other
difficulties.
EPA's review of the comments indicates that much of the
confusion about the difference between the two prongs of the
proposed rule's general test is probably due to the use of
'•environmental compliance" in the initial clause of both prongs.
(The first prong provided that management participation existed
if the holder was "exercising control over the borrower's
environmental compliance, . . .", and the second prong provided
that management participation existed if the holder was
"exercising control at a management level encompassing the
borrower's environmental compliance responsibilities, comparable
to that of a manager . . . ".) Commenters addressing these
provisions often expressed confusion or concern about the
difference between this language, or about the Agency's intent in
using these somewhat different articulations. The Agency's
intent regarding the difference between these two prongs is
discussed in detail above, and the Agency believes that the
confusion about the differences between these two prongs is
70 e:\wp\lender\rul«\lendrul«.£10
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remedied by modifying the second prong to provide that management
participation exists where the.holder is "exercising control at a
management level comparable to that of a manager of the
borrower's enterprise, . . . ." When phrased this way, the
intended meaning of this prong is not changed, but the language
more clearly indicates that management participation exists where
the holder is acting as the manager of the borrower's enterprise.
Additional revisions to the second prong have been made to
further reduce the potential for confusion. The phrase
"establishing, implementing, or maintaining the policies and
procedures" as it relates to the environmental compliance of the
enterprise has been deleted. This phrase was intended to convey
the idea that a holder participates in management for purposes of
CERCLA where it becomes involved in management at a level that is
senior to and inclusive of responsibility for the enterprise's
environmental compliance obligations. It was intended to be
functional in approach by indicating that control over such
matters establishes that the holder is sufficiently involved to
be considered to be participating in management. However,
because of confusion regarding the matters that are encompassed
by (and the differences between) "establishing, implementing, or
maintaining" policies and procedures, this phrase did not have
its intended effect, and has therefore been deleted from the
final rule.
Finally, language has been added to the second prong to
* *• '
address the concerns expressed by commenters that, under the
proposed rule's formulation, a holder could artificially "carve
out" environmental matters but otherwise fully operate the
71 c:\wp\lenderYrule\l«ndrui«.f10
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.facility. An ability to "carve out" environmental matters prior
to foreclosure so as to allow a holder to otherwise "operate11 a
facility without also "participating in management11 was not the
Agency's intent under the proposed rule. In the Agency's view, a
holder's ability to "carve out" environmental compliance
responsibilities demonstrates that the holder has manifested or
assumed responsibility at a management level sufficient to
establish that the holder is participating in management. The
general test's second prong has therefore been revised to more
clearly reinforce the Agency's intention that such "carve outs"
are prohibited. It now provides that a holder participates in
management when it assumes or manifests responsibility for the
overall management of the enterprise encompassing the day-to-day
decisionmaking over either (A) the enterprise's environmental
compliance or (B) all, or substantially all, of the operational
aspects of the enterprise other than environmental compliance.
This is intended to ensure that a holder who is effectively
functioning as the operational manager of an enterprise is
considered to be "participating in management," even if
environmental matters have been artificially carved out from the
holder's decisionmaking control.
In addition, the revisions to the second prong are also
intended to more clearly provide that a holder whose activities
demonstrate that it is functioning as a manager of the
enterprise, regardless of how the holder has chosen to
characterize its involvement, is "participating in management"
within the meaning of Section 101(20)(A) of CERCLA. A holder's
involvement in financial or administrative matters does not rise
to a level of management participation that will void the
exemption because involvement in such areas does not assume the
^ c:\wp\lender\rule\lendrule.flO
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functions of facility operations, see, e.g.. Fleet Factors. 901
F.2d at 1556; Guidice. 732 F. Supp. at 562, and a holder's
ability to become involved in such natters is preserved in this
final rule. The Agency has included in the second prong language
that is intended to reinforce the distinction between financial
and administrative versus operational involvement, so as to
preclude a holder from terming its involvement as merely
"financial" when the actual functions performed by the holder are
operational in nature. This additional language focuses on the
functions performed by the holder, and in so doing the rule
comports with established caselaw which focuses on what a holder
actually does with respect to an enterprise's management. See^
e.g.. Berasoe. 910 F.2d at 672 ("What is critical is ... what
[the holder] did."}. Accordingly, the final rule has been
revised to provide that a holder performing the functions of a
plant manager, operations manager, chief operating officer, chief
executive officer, and the like, is considered to be involved in
the operational .aspects of the enterprise and participating in
management under Section 101(20)(A). Involvement in the .
financial or administrative functions, such as that of a credit
manager, accounts payable or receivable manager, personnel
manager, controller, chief financial officer, and similar
functions is not involvement in the "operational" aspects of the
enterprise and is fully consistent with holding indicia of
ownership primarily to protect a security interest. Therefore,
such involvement is not appropriately considered participation in
management that would void the exemption.
Foreclosure
Commenters largely supported the proposed rule's provisions
allowing for foreclosure without loss of the exemption.
'^ c:\wp\lender\rule\lendrule.f10
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Foreclosure was asserted by these commenters to be a holder's
only remedy in the case of an incurable default by the borrower
or obligor. The proposed rule's provision that foreclosure be
coupled with a requirement for. resale was noted by many as
consistent with established commercial lending practices,
although there was some disagreement among the commenters on the
specifics of the requirements governing post-foreclosure offers
for resale.
A sizable minority of commenters objected to the foreclosure
provisions of the proposed rule, however, citing both policy and
legal impediments to a holder's ability to foreclose without
voiding the exemption. These commenters generally concluded that
a foreclosing holder is the "owner" of the encumbered property
following foreclosure. A number of reasons were put forth to
support this conclusion, but common to all was the position that
a foreclosing holder surrenders the interest in exchange for full
legal title and ownership.of the property. The legal
authorities often cited by these commenters to support their
legal conclusion that the exemption is lost upon foreclosure were
United States v. Maryland Bank & Trust Co.. 632 F. Supp. 573 (D.
Md. 1986), and Guidice v. BFG Electroplating & Manufacturing Co..
732 F. Supp. 556 (W.D. Pa. 1989). These commenters also
disagreed with the Agency's use of other cases to support the
assertion that a holder does not necessarily lose the exemption
upon foreclosure, notably In re T.P. Long Chemical Inc.. 45
BanXr. 278 (N.D. Ohio 1985) and United States v. Mirabile. 15
Envtl. L. Rep. (Envtl. L. Inst.) 20994 (E,D. Pa. 1985). Other
4* '
commenters argued that a foreclosing holder should be considered
the "owner or operator" of the foreclosed-on facility because the
borrower has been dispossessed of the facility, at which point
74 e:\wp\lender\rule\lendrule.flO
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the holder is exercising complete control over the facility and
over its ultimate disposition. It was also suggested that if
foreclosure is permitted, it should be coupled with a requirement
that the facility be inspected.
EPA disagrees that the cases cited by the commenters
establish a "no foreclosure" rule under Section 101(20)(A). In
Maryland Bank & Trust, the court held that the exemption does not
apply "to a former mortgagee currently holding title after
purchasing at a foreclosure sale, at least when, as here, the
former mortgagee has held title for nearly four years . . . ."
632 F. Supp. at 579 (emphasis added) (footnote omitted). While
commenters commonly cited this passage to mean that a foreclosing
holder necessarily loses the exemption, EPA disagrees that this
passage establishes a per se rule against foreclosure. A close
reading of this passage indicates that a holder may—-but does not
necessarily—lose the exemption upon foreclosure. In fact, the
court specifically left open the issue of whether a foreclosing
holder automatically becomes the "owner" of a facility under
CERCLA, and specifically declined to consider "the issue of
whether a secured party which purchased the property at a
foreclosure sale and then promptly resold it would be precluded
from asserting the section 101(20)(A) exemption." Id. at 579
n.5.
The holding of Maryland Bank & Trust is therefore consistent
with allowing foreclosure under certain circumstances without
voiding the exemption; the case's affirmative holding is simply
that a foreclosing holder could lose the exemption by holding
onto the foreclosed-on property for an extended period of time
without making any attempt to promptly sell it. The
c:\wp\lender\rule\lendrule.£10
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circumstances of that case indicated to the court that the
property was held following foreclosure only or primarily to
protect the lender's investment interest (in contrast to its
security interest). Id. at 579.
Commenters also criticized the Agency's reliance on United
States v. Mirabile. supra. on the basis* that it was poorly-
argued, poorly-written, or that it was an inappropriate precedent
because it had been rejected by other courts considering the
foreclosure issue. The concern expressed by these commenters was
that permitting foreclosure would, in the words of the Maryland
Bank & Trust court, "convert CERCLA into a insurance scheme for
financial institutions." 632 F. Supp. at 580. These commenters
also argued that permitting foreclosure would result in a
windfall to the lender. In support of this contention they
observed that the value of contaminated 'property will likely be
less than the borrower's outstanding debt, which would leave the
holder with a deficiency on the loan. However, if foreclosure is
permitted and the property is subject to a taxpayer-financed
cleanup, the value of the property will be increased and the
holder will reap a windfall profit (the difference between the
property's value prior to and following cleanup). These
commenters, like the Maryland Bank & .Trust court, argued that a
private gain at public expense is an undesirable public policy
outcome, and one that is inconsistent with the purposes of
CERCLA. The commenters argued that in no other circumstance does
the government guarantee with public money that a holder will
recoup its entire loan where the value of loan collateral has
been diminished.
EPA agrees with the commenters that CERCLA was not intended
c:\wp\lender\rulo\lendrule.flO
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to be an "insurance scheme" for holders, but disagrees that a "n,
foreclosure" rule is necessary to prevent this consequence.
Under roost lavs applicable to foreclosing holders, any surplus
received by the holder from sale of the foreclosed-on property
(i.e., an amount in excess of the debt and other costs related to
foreclosure and sale) is required to be returned to the debtor,
who as the former owner or operator of the facility is a liable
party-from whom the Agency can recover its response costs. In
addition, as noted in the preamble to the proposed rule, EPA will
seek to recover any amount by which a person is unjustly enriched
by a taxpayer-financed cleanup. See 56 Federal Register 28798,
28806 (June 24, 1991).
*• ^
EPA also disagrees with the commenters that the Mirabile
decision establishes an "unlimited" foreclosure rule that would
give a holder free reign to .be an "owner or operator" without
incurring liability for its actions, or that EPA had embraced
this principle in the proposed rule. The specific holding of
Mirabile which is relevant to this issue is that a holder who
forecloses and promptly resells the property is acting
consistently with the exemption. Following this principle,
therefore, the Agency's regulation requires that a foreclosing
holder who acts promptly to sell or otherwise divest itself of
the foreclosed-on property will avoid liability as an "owner"
after foreclosure. Therefore, foreclosure without any attempt to
resell the secured property is inconsistent with Mirabile and
this regulation.
* *" '
*
Commenters critical of the proposed rule's provisions
allowing for foreclosure also cited Guidice v. BFG Electroplating
& Manufacturing Co.. supra. as establishing a "no foreclosure"
77 e:\wp\lender\rule\lendrule.flQ
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rule. The Guidice court specifically held that "[wjhen the
lender is the successful purchaser at a foreclosure sale, the
lender should be liable to the same extent as any other bidder at
the sale would have been." 732 F. Supp. at 563. While EPA
agrees that the holding appears to be more restrictive than in
other cases construing Section 101(20)(A), EPA disagrees that it
establishes a firm rule that a holder becomes the owner of
property immediately upon foreclosure. A close reading of the
case indicates that foreclosure is in fact permitted; in Guidice
the lender became the owner only after it had purchased the
property at the foreclosure sale. The court viewed the
purchasing holder as being in the same position as any other
purchaser at the foreclosure sale, and therefore liable in the
same manner as any other owner of the property. This holding is
not necessarily inconsistent with the provisions of this final
rule, however.
This regulation provides that a foreclosing holder will lose
the exemption if it refuses or outbids an offer of fair
consideration for the property. In the situation presented in
Guidice. the lender presumably outbid an offer of fair
consideration for the property: Although this is not explicit,
the court's discussion intimates this by characterizing the
lender as the "successful" bidder at the sale, indicating that
the court believed that the sale was the result of a commercially
reasonable bidding process in which there were other prospective
purchasers for the property. If in fact the lender's
"successful" bid at the foreclosure sale was in excess of fair
consideration for the property (as defined in this regulation),
the exemption would be lost because the holder would have outbid
(and therefore rejected) an offer of fair consideration for the
78 c:\wp\lender\rule\lendrule.fl0
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property.
Under both Guidice and this rule, a holder does not lose the
exemption merely upon foreclosure, but because of post-
foreclosure actions that are inconsistent with those of a person
holding ownership indicia primarily to protect a security
interest. In Guidice. the holder became a liable owner because
it was the successful bidder at the foreclosure sale, which
indicated to the court that the ownership indicia in the property
were no longer held to protect its security interest. Under this
rule, the result would be the same if the holder outbid (or
rejected) the offer of a person at the foreclosure sale (or
thereafter) of fair consideration for the foreclosed-on property.
To the extent that Guidice indicates a contrary result, the
Agency believes that it is inconsistent with the purposes of the
Section 101(20)(A) exemption.
It was pointed out by the commenters that the Guidice court
\
read the holdings in Maryland Bank & Trust and Mirabile as
representing a "divergence in the case law as to whether the
security interest exemption is applicable when a secured creditor
purchases its security interest at a foreclosure sale.11 Guidice,
732 F. Supp. at 562. On this basis, the commenters disagreed
with the Agency that Maryland Bank & Trust could be used as
support for the proposition that foreclosure is permitted, and
further asserted that Guidice and Maryland Bank & Trust form a
majority rule that foreclosure is inconsistent with the
exemption.
As discussed previously, EPA does not agree that these cases
must be read as being incompatible or that they necessarily
79 e:\wp\lender\rule\lendrule.flO
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represent a "divergence" in the case law. EPA believes that the
cases are not inconsistent with a rule under which a foreclosing
holder which seeks to divest itself promptly of foreclosed-on
property acts consistently with the exemption, and one that does
not do so—or that otherwise manifests an intent to hold the
property for investment purposes—risks losing the exemption. In
Maryland Bank &Trust (in which the holder was found to have lost
the exemption post-foreclosure) there was no evidence of any
attempt to sell or otherwise divest the property; in Mirabile (in
which the holder was found to have retained the exemption post-
foreclosure) the property was promptly resold; and in Guidice (in
which the holder was found to have lost the exemption) the holder
apparently outbid other bidders offering a fair price for the
foreclosed-on property. In none of these cases was the holder
held to be an "owner" of property immediately upon foreclosure,
which is consistent with the provisions of this rule.
EPA believes that this is a correct result because
acquisition of legal or equitable title, even when acquired by
foreclosure, is consistent with the wording of the exemption:
Section 101(20)(A) provides that a holder may maintain indicia.
or evidence, of ownership in a facility, without being an "owner"
for purposes of CERCLA. Neither the statute nor the legislative
history' define or establish a quantum of ownership indicia
(either as a minimum or maximum) for purposes of the exemption.
In fact, there are no restrictions of any sort imposed by Section
101(20)(A) on the type, extent, or quality of the indicia of
ownership that may be held. The nature of the ownership indicia-
-whether the indicia are evidence of equitable or legal title, or
of some other interest recognized as evidence of ownership, or
whether the indicia are held prior to or following foreclosure—
80 c:\wp\lender\j-ule\landrule.flO
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is irrelevant; the only limiting qualification on the ownership
indicia is that they must be held as protection for a security
interest. See Mirabile. 15 Envtl. L. Rep. (Envtl. L. Inst.) at
20996 ("regardless of the nature of the title" held or acquired
by a holder, what matters is whether it is held to protect a
security interest).
Finally, commenters asserted that the Agency's citation of
In re T.P. Long Chemical Co.. supra. as support was erroneous
because T._jp_t_]EfO_ng is a bankruptcy case that does not involve a
security interest. While the commenters are correct in pointing
out that T.P. Long was a matter in bankruptcy, the case is
relevant because the issue of the scope of the CERCLA security
interest exemption was discussed in that case as it related to
foreclosure. The T.P. Long court found "that even if [the
lender] had repossessed its collateral pursuant to its security
agreement it would not be an 'owner or operator* as defined under
CERCLA. The term owner or operator is defined, in relevant part,
in section 101(20)(A) of CERCLA [which provides an exemption for
holders of a security interest.] The only possible indicia of
ownership that can be attributed to [the lender] is that which is
primarily to protect its security interest." 45 Bankr. at 288-89
(footnote omitted). Therefore, EPA disagrees that T.P. Long is
not relevant for purposes of understanding the scope of Section
101(20)(A), and the case is another example of judicial opinion
that foreclosure does not necessarily void the exemption.
Therefore, because the few courts to consider the meaning of
x •""
Section 101(20)(A)'s security interest exemption have not made
loss of the exemption an automatic consequence of foreclosure,
the Agency believes the approach taken in this rule is fully
a i
* c:\wp\lender\rule\lendrula.flO
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consistent with the caselaw. Regardless of the nature of the
ownership indicia that are held, the critical inquiry for this
rule is whether the property continues to be held as protection
for a security interest. Established caselaw indicates that, in
the post-foreclosure context, whether the indicia continue to be
held to protect a security interest may be determined by
referring to the specific actions of the holder. The answer
provided by these cases is that a foreclosing holder loses the
exemption if it does not act to sell or otherwise divest the
property promptly upon foreclosure, or if it purchases the
property itself at the foreclosure sale where fair consideration
is offered by another qualified bidder, or otherwise holds the
property as an investment or for purposes other than primarily to
protect a security interest. Accordingly, this rule incorporates
these standards and establishes them as criteria for making this
determination in a nationally consistent manner.
Requirement to Offer Property for Sale AfterForeclosure
Several commenters expressed concerns about the proposed
rule's provisions requiring that a holder must list property for
sale following foreclosure. Some argued that it is not always in
a holder's best interests to try to sell property that has been
foreclosed upon. Other lender commenters disagreed, arguing that
the only reason that, a holder would foreclose is if the property
would be resold at a later date so as to recoup the outstanding
money obligation. Still other commenters suggested that all
holders are never "owners" of property following foreclosure
because banking regulations applicable to some lenders limit the
*
amount of time that property can be' held. Still other commenters
stated that there should be no requirement of any kind for a
foreclosing holder to sell or otherwise dispose of foreclosed-on
82
°* c:\wp\lender\rulc\lendrule.flO
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property.
Numerous other commenters took a contrary view and supported
the proposed rule's post-foreclosure requirement. These
commenters advocated the specification of minimum criteria for
advertising foreclosed-on property because it created an
objective "bright line" test for determining whether a
foreclosing holder continues to hold indicia of ownership to
protect the security interest in the post-foreclosure context,
and therefore to avoid liability as an "owner or operator."
EPA agrees that this provision establishes an objective,
bright line test, and disagrees that there is no support in the
caselaw for requiring a foreclosing holder to act to sell or
otherwise divest itself of foreclosed-on property. Commenters
that both supported and disagreed with this provision based their
position on the same assumption: that the only reason that a
holder would foreclose consistent with the exemption is to then
resell or otherwise divest the property so as ,to recoup the
outstanding loan amount, an assumption that the Agency accepts.
It is only by undertaking to sell or otherwise divest foreclosed-
on property that the "ownership indicia" held by a holder after
foreclosure are considered held "primarily to protect a security
interest." Compare United States v. Maryland Bank & Trust, supra
(holder that made no attempt to sell foreclosed-on property for
four years after foreclosure held to have voided the exemption),
with United States v. Mirabile. supra (holder that divested
foreclosed-on property within four months held to have acted
consistently with the exemption). "Therefore, a requirement that
foreclosed-on property be offered for sale or other divestiture
is a necessary component of this rule, and it is additionally
83 c:\wp\l*nd«r\rule\lendrul«.f10
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necessary that this rule specify with clarity how a foreclosing
holder can meet this requirement.
EPA disagrees that bar.king regulations that place a limit on
the length of time property may be held by a regulated banking
institution are inconsistent with this provision. First, banking
regulations cover only some, but not all, holders subject to
CERCLA. Therefore, such regulations do not address all persons
subject to this rule. Second, a requirement that foreclosed-on
property be offered for resale or other divestiture in order to
maintain consistency with Section 101(20)(A) of CERCLA is not
inconsistent with regulations promulgated under other statutes.
that limit the time that property may be held by certain
regulated financial institutions. So long as the foreclosed-on
property is offered for resale or other divestiture as provided
in this rule, there is no limit on the length of time that the
property may be held (provided that no offers of fair
consideration are tendered). Furthermore, no commenter suggested
that the requirement to sell or divest foreclosed-on property was
inconsistent with any other regulation or rule of law, nor could
the Agency find such a requirement.
other comments dealing with this provision addressed the
specific requirements for listing foreclosed-on property to be
sold. One commenter suggested that the proposed rule's specific
provisions for selling foreclosed-on property should be .deleted
in favor of a general requirement that a holder should make
reasonable attempts to divest foreclosed-on property in a
* V *
•r *
reasonably prompt manner. Other commenters suggested numerous
variations on this theme. These commenters stated that the
proposed rule's provisions were not appropriate for a wide (and
84
c:\wp\lender\rule\lendrule.flO
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sometimes inconsistent) variety of reasons, including: that
listing properties with a broker is difficult or is not a normal
practice; that listing with a broker is a normal practice, but
that print advertising of foreclosed-on property is not; that
listing with a broker is not a normal practice, but that "in-
house marketing" is common and should be acceptable; and so on.
One commenter suggested that, to accommodate the enormous range
of types of known and unknown properties potentially contaminated
by improper hazardous waste disposal practices, compliance with
the proposed rule's provisions should be just one way of
affirmatively establishing consistency with the exemption, and
that other reasonable and commercially valid methods by which to
market property should be permitted on a case-by-case basis.
EPA generally agrees with the commenters that there are
numerous methods by which properties may be listed for sale or
other divestiture in a commercially reasonable manner following
foreclosure, any of which may be appropriate to establish that
the holder's taking of title or right to control disposition by
foreclosure is consistent with holding indicia of ownership
primarily to protect a security interest. Therefore, EPA accepts
the position of the commenters and has revised the final rule to
permit holders to use commercially reasonable means for resale or
divestiture following foreclosure to establish consistency with
Section 101(20)(A). Therefore, this final rule contains both a
general requirement that a foreclosing holder sell or otherwise
divest foreclosed-on property in a reasonably expeditious manner,
taking all facts and circumstances into account, as well as an
alternative "bright line" method by which the holder may be
assured of complying with the general requirement.
85 c:\wp\lender\rulB\l«ndrule.£10
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While the final rule will not specify particular steps that
a holder must take in every instance in order to establish that
this general requirement is satisfied, so as to establish clear
liability rules the proposed rule's provision that a foreclosing
holder must publicly list the property as being for sale or
disposition within twelve months of foreclosure will be retained
as an alternative method for holders to easily and clearly show
consistency with the exemption. Compliance with this alternative
provision will be considered to be clear and unambiguous evidence
that a foreclosing holder is acting consistently with the
exemption in the post-foreclosure context. Whether the holder
uses the "bright line" marketing provisions, or uses other means
to divest itself of the foreclosed-on facility, the holder must,
within 90 days of receipt, act upon, or not reject or outbid, a
written bona fide full-value offer for the property at any time
after six months following foreclosure, in order to retain the
exemption.
Other comments that were received on this issue focused on
the post-foreclosure time periods established by the proposed
rule. Most commenters addressing this issue argued that the
twelve month period within which the foreclosed-on property must
be offered for sale or other disposition should not begin to run
until all legal impediments to transferring title have been
removed (for example, by extinguishing redemption rights) and
marketable title is obtained. Other commenters suggested that
the rule should provide a strict definition of "foreclosure," so
that the twelve month time period can be more easily calculated.
These suggestions were considered necessary by these commenters
because a foreclosing holder risked losing the exemption if the
time limits specified in the proposed rule were not satisfied: A
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holder could take all the steps required by the rule, but
miscalculate the running of the twelve month period by a single
day, which would result in the unfair imposition of Liability
under the proposed rule.
EPA agrees that the twelve month time period should not
begin to run until the holder may legally offer the foreclosed on
property for sale. Because the Section 101(20)(A) exemption
applies to both real and personal property, however, and because
redemption rights and other issues relating to the ability of a
holder to legally seek to have foreclosed-on property offered for
sale will necessarily vary from property to property and from
jurisdiction to jurisdiction, it is inappropriate for this rule
to specify a strict rule that is applicable in every case for
determining when property has been foreclosed on, or when the
foreclosed-on property is able to be legally offered for sale by
the holder. Such a provision could result in the twelve month
period beginning to run before foreclosure was actually completed
or before the property could be legally offered for sale in some
instances, thereby unfairly prejudicing the rights of the holder
and/or the borrower. In other instances the time period might
not begin until well after such impediments were removed, thereby
resulting in an inconsistent application of this rule.
Therefore, EPA believes that a general requirement that
foreclosed-on property must be offered for sale within twelve
months of foreclosure, where the period begins to run from the
time that the holder may legally offer the property for sale, is
an appropriate standard that fully encompasses the legal and
property-specific variations with'which a holder may be faced
when preparing a facility for sale. However, in order to
establish that the holder is acting to divest the property in a
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reasonably prompt manner following foreclosure, the holder must
be acting diligently to acquire marketable title following
foreclosure.
In addition, because the twelve-month provision is no longer
an absolute requirement for establishing consistency with the
exemption, a holder may still be able to show that it has acted
consistently with the exemption even though it may have missed
the 12-month "deadline." The final rule permits a holder to
establish that the foreclosed-on property was offered for sale in
a reasonably expeditious manner following foreclosure,
irrespective of the 12-month deadline. Therefore, fixing a date
certain for when a "foreclosure" occurs is not as critical for
purposes of compliance with the final rule as it may have been
under the proposed rule.
Definition of "Fair Consideration"
Several commenters who addressed a lender's post-foreclosure
activities focused on the proposed rule's definition of "fair
consideration." Some expressed a concern that the rule's
specific provisions did not adequately permit the terms of a bid
to be considered by a holder in evaluating whether the bid was
appropriate and acceptable. This was asserted to have the effect
of requiring a lender to accept an unsatisfactory bid in order to
remain within the exemption, even though the bid might contain
conditions that are unacceptable to the holder (such as
requirements for indemnification agreements, non-cash offers,
"bundled" offers in which a single .bid for several properties is
offered that, taken as a whole, is unacceptable but which would
satisfy the outstanding loan balance, etc.). Most commenters
that raised this issue suggested that the appropriate reference
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was to an "all cash" offer for the property.
Other comnenters were concerned that the definition of "fair
consideration" was different than the property's "fair market
value,11 and that fluctuating real estate values, poor loan
decisions, and other factors nay mean that the property's value
on the open market (and any reasonable price that would be
offered) could either be in excess of or less than the
outstanding obligation owed to the holder; in short, the
outstanding loan obligation may bear no relationship to the
property's value. Conversely, other commenters pointed out that
there may be other secured creditors or lien holders to which the
foreclosing holder owes a duty to obtain the highest fair market
value for the property. Moreover, this duty may also be owed to
the borrower or obligor whose property has been foreclosed upon.
These commenters argued that the proposed rule would require
a foreclosing holder to accept an offer that, while greater than
the foreclosing holder's outstanding obligation, is less than the
property's fair market value. This could require the foreclosing
lender to breach obligations owed to other creditors and/or the
borrower to seek the highest value for the foreclosed-on
property at, for example, the foreclosure sale, or risk voiding
the exemption. Therefore, according to some of these commenters,
the appropriate value for "fair consideration" is not the amount
that is owed to the foreclosing holder, but the amount that the
property will bring at sale (i.e., its fair market value), or
some other amount that the holder is required to obtain under
law.
Other commenters were concerned about' the potential windfall
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that a holder could obtain where the value of the secured asset
was less than the outstanding obligation (for example, where the
loan was undercollateralized, or where the value of the property
dropped due to market conditions or contamination). In such
circumstances, the proposed rule's definition would allow holders
to reject any and all offers that, while equal to or greater than
the property's fair market value, were less than the outstanding
obligation. This would permit a holder to retain the property
until cleaned up (likely at the government's initiative and at
public expense). At this point, the property's market value
would have been enhanced by the cleanup, which would then result
in a windfall to the holder by effectively "guaranteeing" the
loan.
EPA agrees that the proposed rule's formulation of "fair
consideration" could be read to inappropriately require a
foreclosing holder to breach duties owed to other parties, or to
require acceptance of otherwise unreasonable offers. However,
this was not the Agency's intent in proposing this provision.
EPA's intent was to determine whether the foreclosing holder was
maintaining its ownership indicia in the property for investment
purposes, or whether the holder was continuing to protect its
security interest. The proposed rule sought to do this by
specifying that the rejection of offers equal to or in excess of
the outstanding obligation would be evidence that the foreclosing
party was no longer maintaining ownership indicia primarily to
protect a security interest, on the theory that the rejection of
such offers indicated that the holder was interested in gaining
something other than recovery of the loan or other obligation.
In addition, EPA did not intend for holders to accept offers that
contained unreasonable terms and conditions, such as non-cash
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offers, "bundled" offers, etc. EPA agrees with the commenters
that the proposed definition did not clearly convey this intent,
and the final rule has been modified to make this clear.
In addition, EPA agrees that the proposed rule's definition
of "fair consideration"—which focused solely on the outstanding
obligation owed to the holder—could result in the holder being
required to accept an offer fully satisfying the lender's
outstanding obligation for the property, even though the offer
did not satisfy the full amount that the holder might be
obligated to obtain. To address this problem, some of the
commenters suggested that the appropriate definition of "fair
consideration" is the property's "fair market value," which is
ascertained when the subject property is offered for sale in a
commercially reasonable manner. In the proposed rule, EPA
contemplated that the resale of repossessed or foreclosed-on
property would be conducted in a commercially reasonable manner,
and that such a sale would be sufficient for the holder to
recover the outstanding obligation on the theory that the holder
had properly collateralized its loan. The Agency was also
concerned, however, that fluctuating market conditions might make
it difficult to determine the property's fair market value at any
given time. For this reason the Agency proposed that an easily
discernable value—the outstanding obligation—serve as an
easily-identifiable baseline reference for whether offers for the
foreclosed-on property were reasonable. The comments have
indicated, however, that the definition as formulated in the
proposed rule required some modification.
f
As noted above, the Agency's intent regarding this aspect of
the regulation is to determine when a holder is inappropriately
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rejecting offers for foreclosed-on property or is otherwise
improperly continuing to maintain foreclosed-on property, so as
to address the "investment" issues raised by the Maryland Bank &
Trust court. These issues are unique to CERCLA because of the
special meaning and application of the 'security interest
exemption. The key issue for the Agency is whether the
foreclosing holder is seeking an amount greater than that which
it is entitled or otherwise obliged to obtain (i.e., an
"investment" and not a security interest). In this respect, the
determining factor is the point at which the holder—at the
•foreclosure sale or thereafter—rejects an amount greater than
that which it is entitled. If the foreclosed-on property is
truly serving as security for the loan or other obligation, then
the holder's interest in the property is limited to this amount.
Once that debt is satisfied, the holder should have no further
interest in the property. Therefore, evidence that the holder is
seeking a greater amount (by rejecting bids of fair
consideration, or outbidding others offering the fair
consideration at the foreclosure sale, or by failing to act upon
such an offer) indicates 'that it has an interest in the property
beyond satisfaction of the'debt (i.e., an investment interest in
the property), and is therefore no longer protected by the
exemption.
A holder's acceptance of an amount that is different than
that to which it is entitled (where, for example, the fair market
value of the property is less than the outstanding obligation, or
where it receives offers in excess of the outstanding obligation}
is not evidence of an investment 'interest, and neither is a
holder's rejection of an amount less than that to which it is
entitled. It is only where the foreclosing holder seeks an
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amount greater than this is it clear that the holder is not
maintaining its ownership indicia primarily to protect a security
interest. In this circumstance, the holder should not be, and is
not, protected by the Section 101(20)(A) exemption. Accordingly, .
the relevant benchmark for purposes of determining consistency
with the exemption is the amount owed by the borrower.
The comments indicated that the proposed rule's formulation
of fair consideration was deficient because the foreclosing
holder may in some circumstances be obligated by law to obtain an
amount higher than the amount the holder is owed, because of
obligations owed to junior or senior creditors, the borrower,
etc. EPA agrees that the.rejection at the foreclosure sale or
thereafter of a bid or offer for the property that is equal to or
greater than the amount owed to the foreclosing holder should not
be considered evidence of an investment interest where the bid or
offer is less than the amount that the foreclosing holder is
under a duty imposed by law to attempt to obtain. EPA agrees
that in such circumstances a foreclosing holder does not display
an investment interest in the property when it rejects such
offers, and continues to hold indicia of ownership primarily to
protect a security interest.
Therefore, this final rule allows the foreclosing holder to
reject offers of an amount less than that which the holder is
obliged by law to obtain. Furthermore, the final rule has been
modified to reflect that "fair consideration"—which is that
amount necessary to recover the "security interest" in the
property—may vary depending on the seniority of the loan or
other obligation at issue. Specifically, a junior creditor may
be required to outbid senior creditors in order to recover the
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value of its loan or other obligation. The definition of fair
consideration therefore distinguishes between what junior and
senior creditors may bid or accept for purposes of maintaining
the exemption.
EPA also shares the commonters' concerns about the
"windfall" that a holder might obtain as the result of a
publicly-financed cleanup, and believes the public should be
recompensed for any excess value that a foreclosing holder might
obtain as the result of a government cleanup of the secured
property. Therefore, in appropriate situations, the United
States will seek to recover any windfall or excess amount by
which a person is unjustly enriched by means of a taxpayer-funded
cleanup. (See Effect of CERCLA Lien and "Equitable
Reimbursement" of the Agency for Taxpayer-Financed Cleanups.
infra.)
To address these comments, the final rule has been modified
to define "fair consideration" as a cash amount that represents a
value equal to or greater than the outstanding obligation owed to
the holder (including the fees, penalties, and other charges
incurred by the holder in connection with the property},
including the amounts owed to other creditors with interests in
the property. The final rule also takes into account other
actions a holder may be required to take to avoid liability under
other lav that affect the amount that the holder may be required
to obtain, or the manner in which the holder offers the property
for sale. These changes ensure that the rule's provisions
defining when the sale or disposition of property is consistent
with the CERCLA security interest exemption will not conflict
with principles of commercial law governing the manner in which
94 cs\wp\lender\rule\lendrule.f10
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such sales are required to be or are ordinarily conducted. More
importantly for purposes of CERCLA, the definition of "fair
consideration" provides a bright-line test for determining
whether the foreclosing holder has primarily an investment or
other non-security interest in the property, or whether the
holder's post-foreclosure activities indicate that it is
continuing to maintain its ownership indicia in the property
primarily to protect a security interest.
A final question commenters raised regarding foreclosure is
whether the phrase "plus any unpaid interest and penalties
(whether arising before or after foreclosure), plus all
reasonable and necessary costs, fees, or other charges incurred
by the holder incident to foreclosure, retention, ..." etc., in
the definition of "fair consideration," included particular types
of fees or charges, such as "unrecovered costs incurred by the
lender in enforcing the secured obligation," "premiums," "late
charges," costs incurred by the holder to prepare the facility
for resale (including site remediation), and other fees or
charges for which the borrower would be liable to the holder.
The general phrase cited was used by the Agency in the proposed
rule to address the fact that the amount owed by the borrower to
the holder is not necessarily limited to the outstanding
principal, but. also includes a variety of other fees, charges,
and other costs incurred by the holder. The definition does not
(and could not) specify each and every incurrence of an amount in
excess of the principal. Rather, this provision of the rule is
intended to cover those additional amounts beyond the principal
that the borrower is legally obliged to pay to the holder to
discharge the debt owed, less the net revenues received by the
holder from maintaining the business activities at the facility.
QC
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Therefore, this provision has been retained in the final rule.
Post-Foreclosure "Qperatior" of a Facility by a Holder
The proposed rule contained a provision that a foreclosing
holder could, "without incurring liability . . . retain and
continue functioning the enterprise" pending sale or other
disposition of the facility. Several conunenters objected on both
policy and legal grounds to the apparent ability of a lender to
/
operate a facility without voiding the exemption, since in their
view operation of a facility necessarily requires participation
in the management of the facility. This' provision of the
proposed rule was therefore asserted to be inconsistent with the
plain meaning of the term "without participating in the
management" of a facility.
These commenters argued that it was impossible as a
practical matter for any person who "continue[s] functioning the
enterprise" to avoid also "participating in the management" of
the facility. Furthermore, these conunenters argued that a holder
who is "functioning the enterprise" is also acting as the
"exclusive manager" of a facility, which is equivalent to being
an "operator" of a facility. Acting as the manager of a facility
is sufficient to void the exemption under the proposed rule's
general test of management participation. Therefore, it was
argued that this provision obliterated all meaning from the term
"without participating in management."
Commenters who objected to this provision based their
opposition primarily on legal grounds, but they also asserted
that allowing a foreclosing holder to operate a facility without
being treated as an operator under CERCLA created an
96 cs\wp\lendet\rule\lendrule.f10
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inappropriate incentive for lenders to foreclose on ongoing
operations in cases where the lender-borrower relationship was
strained, thereby unfairly prejudicing the rights of the
borrower.
In general, comments from representatives of the lending
community were in favor of this provision. These commenters
supported it on the basis that it made good commercial sense, and
most expressed a desire to be able to foreclose on a facility
without necessarily incurring liability for the full extent of
the pre-existing contamination at the facility for which the
holder was not responsible. These commenters believed that post-
foreclosure maintenance of a facility's business activities was a
proper policy objective not only because it would preserve or
even enhance the facility's value for subsequent sale, but also
because it could conceivably generate funds for possible cleanup
if the facility were in fact contaminated. They further argued
that a lender's liability should be limited to responsibility for
the hazardous substance releases for which the holder was
responsible, or that occurred between foreclosure and subsequent
sale.
EPA believes both as a matter of public policy, and to give
real meaning to the exemption, that a holder should not be
required to shut down an ongoing business in every instance in
which it forecloses as the only means by which liability for pre-
existing contamination can be unambiguously avoided. However,
EPA believes that a countervailing public policy consideration
also applies in this situation—that any person who is a liable
party under CERCLA at a facility is responsible for the cleanup
of hazardous substances there. This latter policy consideration
97 c:\wp\lender\rule\lendrule.flo
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is a fundamental tenet of CERCLA, and EPA agrees with those
conmenters who argued that the deterrent effect of CERCLA would
be, undermined if a rule that provided otherwise were adopted.
The key issue for the Agency in this rulemaking is how these
competing public policy considerations are to be reconciled. EPA
believes that both concerns can be accommodated within the CERCLA
statutory framework.
A full understanding of this issue requires a recognition
that foreclosure by a holder is a voluntary act; no commenter
suggested that a holder is ever required to foreclose, nor could
EPA find any law that would require a holder to do so.
Therefore, the issue of whether a holder determines that
circumstances counsel it to foreclose because doing so is
commercially desirable in a given situation depends on the facts
of each case. (Note that the issue of whether a holder should,
or .should not, foreclose in a given situation is a decision for
the holder and is beyond the scope of this rule.) Similarly,
whether a holder determines that there is a commercial need to
maintain the facility's business is likewise a case-specific
decision that is made by the holder, and is also beyond the scope
of'this rule.
However, and as pointed out by some lender commenters,
maintaining the business activities at a facility post-
foreclosure is not necessary or even possible in every, case: it
is likely unnecessary where the foreclosed-on facility is already
shut down, where there is no enterprise to continue, or where the
foreclosing holder determines that It would prefer to wind up
operations and simply secure the property for subsequent resale.
However, there may also be situations in which a holder chooses
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both to foreclose and to maintain the on-going business
activities at the facility for commercial reasons. EPA accepts
that, for the policy reasons noted above, a holder who forecloses
on a going concern and maintains that business as a functioning
enterprise is not by such actions acting inconsistently with
maintaining indicia of ownership primarily to protect a security
interest. Such activities are consistent with the manner in
which banking and lending institutions (common holders)
ordinarily operate, and while neither the statute nor the
legislative history addresses this issue directly, the Agency
believes that Congress intended the exemption to prevent banking
and lending institutions from incurring CERCLA liability for.
their ordinary lending practices. See Chevron. U.S.A. v. NRDC.
467 U.S. at 843 (administering agency permitted to provide
reasonable construction of statute where it is silent or
ambiguous on a specific question). As articulated by the Fleet
Factors court, the purpose of the exemption is to protect
"lenders from being exposed to CERCLA liability for engaging in
their normal course of business . . . ." Fleet Factors. 901 F.2d
/
at 1556. In addition, EPA does not believe that Congress
intended for commercial enterprises that provide economic
advantages and benefits through employment and the production of
goods and services to be shut down solely because, for example,
an incurable loan default has resulted in a foreclosure.7
7 EPA notes that a security holder may pursue options other
than foreclosure in order to ensure that an ongoing enterprise is
not shut down, such as by allowing the borrower to continue to
operate the facility while the security holder seeks a new
purchaser-owner/operator for the business. While a security
holder is always free to pursue this course of action, the Agency
does not believe that a security holder should be restricted to
this means of seeking to transfer ownership of the secured asset
in the course of managing its loan portfolio.
QQ
• c5\wp\lander\rul«\lendruie.f10
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Therefore, EPA believes that it is appropriate and reasonable to
allow foreclosing holders to maintain the business activities of
a foreclo»ed-on enterprise without loss of the Section 101(20)'A)
security interest exemption.
Some commenters who objected to the proposed rule's
provision permitting a holder to allow the foreclosed-on business
to continue argued that any.person whose actions result in
contamination at a facility should be liable under CERCLA.
Numerous lender comnenters agreed that where they were
responsible for contamination at a facility they should be
obligated to contribute to the cleanup of the release. However,
this-final rule does not eliminate a holder's potential for
liability in connection with its activities following
foreclosure. A holder may incur liability under Section
107(a)(3) of CERCLA at .a facility as the result of its own
actions by having arranged for disposal of hazardous substances,
or under Section 107(a)(4) by itself having accepted hazardous
substances for transport and disposal at a facility from which
there is a release.
In addition, provided that the holder is seeking to divest
the facility in a reasonably prompt manner (as provided in 40
C.F.R. S 300.1100(d)(1)), the holder's "indicia of ownership" are
still considered to be maintained primarily to protect the
security interest, and as such the holder is not an "owner" of
the facility even where the holder determines for commercial
reasons to maintain the facility's business activities. However,
a holder that does not comply with this requirement to sell or
otherwise divest the facility (thereby indicating that the holder
primarily has an investment or other non-security interest in the
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facility) loses the exemption.
As discussed above, the Agency believes .that it is
appropriate for a holder to be able continue a facility's
business activities following foreclosure, without being
considered the "operator" of the facility. The term
"participation in management" is a special term in CERCLA,- and
also as discussed above, EPA does not believe that Congress
intended to impose liability on a holder acting consistent with
accepted commercial lending practices in the post-foreclosure
context. EPA understands from the comments of the lending
community that continuing or maintaining the business activities
of a foreclosed-^on facility is a common undertaking and. a normal
business practice. In such cases, EPA believes that the holder
(provided that it is seeking to sell, liquidate, or otherwise
divest the facility) is still holding indicia of ownership
primarily to protect a security interest. Thus, the rule
provides that the exemption still applies in this context.
Following foreclosure, the holder's relationship both to the
borrower (who has been divested of dominion and control of the
facility) and to the facility (i.e., the collateral) is
fundamentally altered. EPA believes that Congress intended to '
allow a holder to act in an accepted and commercially reasonable
manner when exercising its rights of foreclosure. In such
circumstances, the effect of the exemption is that the .
foreclosing holder is not the owner or operator simply because it
is acting as a holder is expected to act.
* ..'
However, in.recognition of the CERCLA tenet (and also in
light of lender comments) that a holder's activities at a
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foreclosed-on facility may nevertheless form an independent basis
of liability, this final rule (as did the proposed rule) provides
that a holder may be held liable as having arranged for disposal
or treatment of hazardous substances at the facility, under
Section 107(a)(3), or by having transported hazardous substances
for disposal, under Section 107(a)(4). Therefore, while the
final rule protects a holder from incurring liability as an
"owner or operator" at a facility where it is acting in a manner
consistent with ordinary lending practices, the final rule also
fulfills Congress's intent that persons liable under CERCLA
should contribute to the cleanup of the facility at which they
incurred liability.
The issue of a holder's potential liability under Sections
107(a)(3) and I07(a)(4) was discussed in the preamble to the
proposed rule. See 56 Fed. Recr. at 28800 ("Note, however, that
while a security holder may not be liable as an 'owner1 or
'operator1 under CERCLA section 107(a)(l) by virtue of the
exemption, liability may nevertheless attach under section
107{a)(3) or section 107(a)(4) as the result of a security
holder's own actions in connection with a facility."); see also
id. at 28804, 28806 & n.13. The comments have indicated that the
issue of a holder's post-foreclosure activities relating to
maintaining the facility's business activities should be made
more explicit. Therefore, the final rule has been revised and a
separate provision has been added that addresses this issue with
greater specificity (see Holder's Basis of CERCLA Liability
Independent of Status as Owner or Operator, infrai. The
additional provision is intended to codify the preceding
discussion, and provides that a foreclosing holder may, without
voiding the Section 101(20)(A) security interest exemption,
102 c:\wp\lender\rule\landrule.flO
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continue the business activities at a foreclosed on facility,
providing that it is seeking to divest the facility as provided
in the rule. The regulatory language also.makes it clear that a
holder's potential liability under Section 107(a)(3) or Section
I07(a)(4) of CERCLA is unaffected by the Section 101(20)(A)
exemption.
»
Burden of Proof
Conunenters who addressed this issue generally expressed
confusion about its discussion and the relevance of its inclusion
in the regulatory language, several commenters questioned
whether it was an attempt to alter the normal rules of evidence,
while others strongly criticized it as an attempt to shift the
burden of proof in CERCLA cases. Most commenters addressing this
issue, however, indicated that they were simply puzzled by the
discussion and were unclear about its purpose.
EPA did not intend to—nor could it—alter the rules of
evidence or shift the burden of proof. The inclusion of this
provision was intended to confirm that the burden of proof
remains with the plaintiff in all cases, even though there may be
some shifting between the plaintiff and defendant of the burden
to come forward with evidence, in accordance with applicable
precedent and statutory provisions. The burden of proof,
however, never shifts, see 9 Wigmore, Evidence SS 2485-2489
(Chadbourn rev. 1981).
A few commenters noted, however, that while this provision
stated that a CERCLA plaintiff has the burden to prove that a
holder is an owner or operator "as provided in this regulation,"
the regulation did not define "owner or operator." Instead, the
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regulation defined an exemption from those terms. EPA
acknowledges that the commenters are correct in this observation.
Therefore, this provision has been retained and EPA expects
that any confusion regarding its intent or purpose is addressed
in this response. In addition, the language of the provision has
been modified to correct the error noted above, and nov simply
provides: "The plaintiff bears the burden of establishing that
the defendant is liable as an owner or operator."
Effect of CERCLA Lien and "Equitable Reimbursement" of the Agency
for Taxpayer-Financed Cleanups
Several commenters addressed the issue of the potential that
a secured creditor may reap a private windfall at public expense
when EPA conducts a cleanup of property which enhances its value.
Most commenters on this issue agreed with the position that
holders should not receive the benefits of a cleanup that they
did not fund or conduct, and that any profits derived from the
disposition of property cleaned up with public funds should be
returned to the government. Some of these commenters, however,
were concerned that the preamble discussion of this issue
indicated that the CERCLA lien (Section 107(1)) was a kind of .
"superlien" and superior to all other liens and encumbrances
against the affected property. These commenters requested that
the final rule clarify that the CERCLA lien is junior to any and
all other liens (whenever imposed), and that it is subordinate to
a holder's pre-existing interest. One commenter requested a
discussion of the relationship between the lien and the "innocent
landowner" defense.
EPA agrees that the CERCLA lien is not a "superlien" that by
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its own terms takes priority over pre-existing valid and superior
liens. Section 107(1) specifies that the lien applies to
property subject to an EPA cleanup and that is owned by a liable
person. The lien will not apply, therefore, to property owned by .
a person who is not a "liable owner" of cleaned up property.
This includes persons who are not owners under the statute (such
as holders under Section 101(20)(A) and exempt units of state and
local government under Section 101(20)(D)). With respect to the
"innocent landowner" defense, the lien may not apply to a person
who successfully establishes that they are an innocent owner of
contaminated property. See Reardon v. United States. 947 F.2d
1509 (1st cir. 1991). However, EPA disagrees that the lien is
necessarily junior to any and all other liens whenever imposed.
While it may be junior to preexisting and to other superior
liens, under applicable state or federal law like any lien it
could take precedence over other liens or encumbrances, see
generally Adams, Guidance on Superfund Liens (EPA, Office of
Enforcement and Compliance Monitoring, Sept. 22, 1987).
EPA also agrees that no person should reap a private
windfall at public expense when EPA conducts a cleanup of
property. For this reason, as the preamble of the proposed rule
noted, the Agency will use its enforcement powers in a manner
consistent with the statute and general principles of law to
ensure that the benefit of a publicly-financed cleanup inures to
the public, and that it does not result in a private windfall.
(This issue is also discussed with respect to the definition of
"fair consideration." See Definition of "Fair Consideration".
supra.)
Therefore, and as noted in the proposed rule, in the event
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that EPA conducts a response action at a facility during the time
that a holder maintains indicia of ownership to protect a
security interest, pursuant to CERCLA Section 107(1), a lien in
favor of the United States may be imposed for the "costs and
damages for which a person is liable to the United States . . .
upon the property and rights to such property which . . . belong
to such person; and . . . which are subject to or affected by a
removal or remedial action." 42 U.S.C. S 9607(1). In addition,
should the EPA response action enhance the value of the facility
and result in the holder realizing an amount greater than that to
which the holder is otherwise entitled, the United States may
seek equitable reimbursement under applicable principles of law,
of the amount by which the holder has been unjustly enriched or
has benefitted as a result of the EPA cleanup.
Application to Private "Third Party" Actions Aoainst Holders
Numerous commenters questioned whether this regulation would
apply in actions to which the United States was not a party.
Others criticized the proposed rule because in their view it
either did not or could not apply in any private party action
under CERCLA. Some other commenters stated that, as a mere
interpretation of the statute by EPA, the rule would not have any
binding effect on any party in litigation, other than on the
Agency. A few commenters questioned the appropriateness of
codifying the rule as part of the NCP because it did not specify
standards for a site cleanup under Section 105.
other commenters disagreed with the position that the rule
would have no effect in litigation, noting that as a rule
promulgated under the Administrative Procedure Act it would be
binding both on courts and third parties because it had the
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"force and effect" of law. Some others who apparently supported
the rule's application in private, third-party actions suggested
that the rule include certain additional restrictions on '
plaintiffs in third-party and private actions to recover response
costs under CERCLA, such as a prohibition on the collection of
attorney's fees.
EPA disagrees that this regulation cannot ever have any
effect in litigation to which the government is not a party.
This rule is not merely an Agency interpretation of Section
101(20)(A), but is a "legislative" or "substantive" rule that has
undergone notice-and-comment pursuant to the Administrative
Procedure Act. As such, it defines the liability of holders for
CERCLA response costs in both the United States' and private
party litigation. Furthermore, EPA disagrees that even if this
rule were a "mere" interpretation of Section 101(20)(A) it would
have no effect in litigation: EPA guidance and interpretations of
laws administered by the Agency are given substantial deference
by the courts. See, e.g.. Wilshire Westwood Assoc. v. Atlantic
Richfield. 881 F.2d 801 (9th Cir. 1989) (deference granted to
internal EPA memoranda interpreting statute) ,* Wickland Oil
Terminals v. Asarco. Inc.. 792 F.2d 887 (9th Cir. 1986)
(deference granted to preamble statements in EPA rulemalcing) ;
Montana Power Co. v. EPA. 608 F.2d 334 (9th Cir. 1979) (deference
granted to internal EPA memoranda interpreting statutory terms);
see generally Udall v. Tallman. 380 U.S. 1, 16 (1965) (M[W]hen
faced with a problem of statutory construction, this Court shows
great deference to the interpretation given the statute by the
officers or agency charged with its administration.")
EPA also disagrees with the argument that because this
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regulation deals with issues other than site cleanup standards it
should not be part of the NCP. EPA has the authority under the
Administrative Procedure A-:t and Sections 105 and 115 of CERCLA
to promulgate regulations that address matters concerning the
enforcement of the statute and that affect private party actions
under CERCLA, as well as those to which the United States is a
party. See, e.g.. 40 C.F.R. 55 300.700 et seq. (NCP Subpt. H—
Participation by other Persons) (specifies actions to be taken by
any person to undertake a response action and to recover costs of
response under CERCLA}. The regulation promulgated today defines
the scope and coverage of the Section 101(20)(A) security
interest exemption, and as a definition of a term used in CERCLA
it applies to all CERCLA actions, whether initiated by EPA or by
any other person who seeks to recover costs or to impose cleanup
liability under the statute.
Moreover, the binding effect of this regulation in all
private party CERCLA actions is confirmed by Section 113(a) of
CERCLA, 42 U.S.C. 5 96l3(a). As discussed in Part I of this
Preamble, Section 113(a) restricts review of "any regulation"
promulgated under CERCLA to the United States Court of Appeals of
the District of Columbia. Such review must be sought within 90
days from the date of the rule's promulgation. CERCLA Section
113(a) also states that "[a]ny matter with respect to which
review could have been obtained under this subsection shall not
be,subject to judicial review in any civil or criminal proceeding
for enforcement or to obtain damages or recovery of response
costs." If a party fails to file a petition for review of any
* *
regulation promulgated under CERCLA within 90 days, review of the
rule is prohibited in any other context. See Eacrle-Picher
Industries. Inc. v. EPA. 759 F.2d 905, 911-12 (D.C. Cir. 1985);
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see also United States v. Genzale Plating. Inc_.. 723 F. Supp.
877, 883 (E.D.N.Y 1989).
Thus, if a private party has net challenged this rule in the
D.C. Circuit within 90 days, any party will be prohibited from
challenging the applicability of the rule in any private party
CERCLA cost recovery or contribution action. Furthermore, in
such CERCLA private party actions, district courts will not have
jurisdiction to review this regulation. Instead, as a rule
promulgated in accordance with the notice and comment
requirements of the Administrative Procedure Act and the
authority of Sections 105 and 115 of CERCLA, private parties are
bound by the rule's provisions in all contexts—including private
party litigation.
Finally, EPA disagrees that this rule should address the
issue of whether private parties can recover attorney's fees in
private litigation under CERCLA. This issue is simply beyond the
scope of this rulemaking because it is unrelated to the
amplification of the definition of Section 101(20)(A).
Effect of Final Rule on Holding In United States v. Fleet Factors
Several commenters expressed the view that the proposed rule
was an attempt to administratively overrule the holding of United
States v. Fleet Factors Corp.. supra. Some commenters supported
this objective, while others stated that the rule was a legally
invalid attempt to repudiate the Fleet Factors case because a
rule could not overturn a court decision. However, all of these
commenters have misread the Fleet'Factors holding and have
misunderstood this rule's relation to it.
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The view .that this regulation overrules or repudiates Fleet
Factors is based on the mistaken assumption that the llth circuit
held that a holder is liable merely because .-t has the power or
right to influence facility operations, even if those rights are .
never exercised. Commenters talcing this position invariably
characterized Fleet Factors as establishing a "mere capacity to
influence11 standard of liability for holders. These commenters
further characterized the subsequent decision by the 9th Circuit,
In re Bercrsoe Metal Corp.. supra. which held that "there must be
some actual management of the facility before a secured creditor
will fall outside the exception," as a repudiation of the Fleet
Factors "mere capacity" standard. 910 F.2d at 672.
This characterization of the Fleet Factors case is
inaccurate. The llth Circuit did not hold that the mere capacity
to influence operations, without more, was a sufficient basis on
which to impose liability on a holder. The Fleet Factors court
stated that a holder could lose the exemption if it was actually
involved in the management of a secured facility, and only then
if "its involvement with the management is sufficiently broad to
support the inference" that it could affect hazardous waste
•iisposal practices. 901 F.2d at 1557. Therefore, some actual
involvement by a holder is a necessary precedent to voiding the
exemption. This critical point was echoed by the 9th Circuit's
holding in Berosoe Metal: "As did the Eleventh Circuit in Fleet
Factors, we hold that a creditor must, as a threshold matter,
exercise actual management authority before it can be held liable
• • • «" Berosoe. 910 F.2d at 673 n.3. :
Consequently, this final rule does not administratively
overturn or overrule Fleet Factors, but instead answers a
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question raised but not resolved in that case: 'specifically, what
amount or extent of involvement by a holder "is sufficient[] . .
. to support the inference" that it could be affecting hazardous
waste disposal practices by the borrower. This rule amplifies
the meaning of the Section 101(20)(A) exemption, and is
consistent with the Fleet Factors decision, as well as the
several other cases construing the exemption.
Insurance for Lending Institutions
Comments were submitted suggesting that this rule was not
necessary to protect lenders against environmental liabilities
because insurance packages were being developed or already
existed that would cover losses incurred by holders as the result
of contamination at secured properties. Because holders of
security interests in contaminated properties—particularly banks
and lending institutions—could acquire insurance, they would not
suffer irreparable damage that would impair the national banking
system. These commenters also suggested that EPA's promulgation
of this rule conflicted with the intent of various Agency
policies and publications which encouraged and considered.
appropriate private, market-based responses to environmental
needs.
EPA agrees with the commenters that market-based responses,
of which insurance coverage against environmental losses is an
example, may be an effective and appropriate resolution of the
financial risk issues faced by holders who come within the
protective ambit of this final rule. This regulation is not
meant to supplant such private-sector responses to the risk of
loss, and, because this rule defines with greater precision an
existing statutory exemption about whose meaning and scope there
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is some uncertainty, the rule's promulgation may make the risk of
loss for holders easier to quantify. The Agency therefore
believes that promulgation of this rule should operate to
encourage, not discourage, the development of the risk-spreading
mechanisms that were described by the commenters.
Rules Applicable to Government Lending Entities
Some commenters questioned which provisions of the rule
defining "participation in management" under Section 101(20) (A)
applied to government lenders. These commenters raised various
issues regarding the provisions that they believed applied only
to government lenders, and questioned the basis for the
distinctions they believed the Agency drew in applying some, but
not all, of the rule's provisions to non -government entities that
held security interests in contaminated property.
EPA disagrees that the "security interest" provisions of the
rule do not apply to all holders equally, and believes that these
commenters have misunderstood or misread the proposed rule. The
sections of the rule that define "participation in management"
under Section 101(20) (A) apply to all holders equally, without
regard to whether the holder is a government or non-government
entity. Government entities that hold indicia of ownership in
contaminated facilities primarily to protect a security interest
are covered by the provisions of 40 C.F.R. 5 300.1100 to the same
extent and in the same manner as non-government entities. There
is no basis in the statute for different treatment of a holder
based on whether the holder is a government-affiliated entity,
and both are treated equally under the "security interest"
provisions of this rule.
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Other commenters advocated that the provisions of the rule
regarding government lenders' involuntary acquisitions under
Sections 101(20)(D) and 101(35)(A)(ii) be extended to cover non-
government lenders as well. These commenters argued that non-
government lending institutions which "involuntarily acquire"
properties should be treated the same as government lending
entities. However, other than stating that an FDIC-regulated
bank should be treated the same as the FDIC, these commenters did
not specify the circumstances in which they believed that a non-
government lending entity would "involuntarily acquire"
property.a
EPA disagrees that the "involuntary acquisition" provisions
of the rule can apply to non-government entities in the manner
described. The section of this rule that applies to government
entities, 40 C.F.R. 5 300.1105, is limited to government entities
because the relevant provisions of the statute contain this
limitation. Under Section 101(20)(0), only a .state or local
government entity that involuntarily acquires property is not
considered to be an "owner or operator" of the property, and
under Section 101(35)(A)(ii) only a government entity may be able
to assert an "innocent landowner" defense based on the
involuntary acquisition of,property—see Involuntary Transfer or
8 A few commenters offered that a trustee sometimes
"involuntarily acquires" contaminated property, and that under
such circumstances the trustee should not be held personally
liable for cleanup of the contaminated trust asset. However,
trustees present a- different question for purposes of analysis,
see Coverage of Trustees and Fiduciaries, supra. and in any event
a trustee or any non-government entity does not 'acquire property
by the involuntary means specified in the statute (e.g., by
escheat, abandonment, or other circumstances in which the
government involuntarily acquires property by virtue of its
position as sovereign).
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AcquisitionBy A Government Entity, and Seizures of Property by
Governmental Entities, infra. There is simply no provision of
CERCLA that applies to property "involuntarily acquired" by non-
government entities.
Finally, several comments were directed to the specific
application of the rule to the FDIC and the RTC. In the preamble
discussion of proposed 40 C.F.R. § 300.1105, the Agency stated
that "where a governmental entity or its designee is acting as a
conservator or receiver of an institution, the general rule that
the liabilities against the institution's estate are limited to
the estate's assets will apply, and such liabilities do not
extend to the assets of the conservator or receiver." 56 Federal
Register at 28807-08 (June 24, 1991). This passage was intended
to express the government's expectation that, similar to trust
law, the liabilities of an insolvent lending institution's estate
would be satisfied from the estate's assets. Therefore,
satisfaction of an estate's debts or liabilities would not reach
the general assets of the FDIC or RTC, or those of any other
government entity acting in a similar capacity, or those of a
private person acting on behalf of the government conservator or
receiver.
The commenter requested that this "rule" be limited further,
however, so that satisfaction of the insolvent lending
institution's liability would be confined just to the particular
asset that was subject to CERCLA, and that the other assets in
the estate of a liable lending institution would not be available
to satisfy the CERCLA debt. The commenter did not indicate
whether this "rule" applied to limit other, non-CERCLA
liabilities incurred by the lending institution's estate, nor did
114 c:\wp\lend*r\rul«\Undrul«.flO
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it cite any legal authority that would support this position.
EPA does not believe that it has the authority under CERCLA
to rewrite trust law in the manner described. The passage of the
proposed rule's preamble cited by the commenter is not a rule of
CERCLA, but was instead an expression of the government's
understanding and expectation that the law that applies to
conservators and receivers administering an insolvent's estate
would apply in this context. These principles may prevent the
FDIC or RTC (or other government conservator or receiver of an
insolvent lending institution) from incurring liability beyond
that of the insolvent's estate, and direct that satisfaction of
CERCLA (or any) liability is limited to the estate's assets.
The commenter also objected to the reference to the term
"sovereign", in the regulatory text of the proposed rule, and
requested that it be dropped. The proposed rule specifically
provided that "[gjovernment ownership or control of property by
involuntary transfer within the meaning of Section 101(35)(A)(ii)
includes acquisition by the government in itscapacity as a
sovereign." The proposed rule further provided that "[a]n
involuntary acquisition includes the transfer to a government
entity [under] circumstances in which the government
involuntarily obtains ownership or control bv virtue of its
function aa sovereign. . . . ." 56 Federal Register at 28809-10
(June 24, 1991) (Proposed 40 C.F.R. S 300.1105) (emphasis added).
The use of the term "sovereign" was objected to out of a concern
that the FDIC and RTC, as quasi-independent government
corporations, were not acting in a sovereign capacity.
EPA disagrees that "sovereign" can be deleted from the
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regulatory language because its use in this context comes
directly from the statute, which the regulation repeats almost
verbatim. Its deletion from the regulatory text would not alter
or affect this element of the statute. However, EPA does not
agree that the FDIC and RTC, or any other government entity
a'cting as a conservator or receiver of an insolvent lending
institution, is not covered by the statute's involuntary
acquisition provisions. The statute's use of the term
"sovereign" refers to the capacity or role of the acquiring
government entity: specifically, that the involuntarily acquiring
government entity do so "by virtue of its function as sovereign."
The government is clearly acting in its sovereign capacity, or by
virtue of its function as sovereign, when it acts to administer
or resolve the assets of regulated and insolvent lending
institutions. No entity other than a government entity has the
authority or is competent to act in this manner.
Additionally, EPA believes that the statute's use of the
term "government entity" instead of, for example, "government
agency" in Section 101(35)(A)(ii) is significant in this respect.
Although the reason for the use of "entity" in this context is
not explained in the legislative history, its ordinary meaning
covers a far broader range of government organizations than does
"agency" or any other term associated with or given to the
various divisions of government (such as "department," "bureau,"
"administration," etc.). The Agency believes that this term was
chosen.because it was the broadest possible, and was intended to
include not only agencies, departments, and the like, but also
quasi-governmental entities such as the FDIC and RTC (and the
FSLIC, the predecessor of the RTC). As discussed in the preamble
of the proposed rule and in this final rule, the Agency has
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'defined this term to include government conservators and
receivers acting pursuant to a statutory or regulatory mandate t
acquire the assets of failed and insolvent lending or depository
institutions, which necessarily includes the FDIC and RTC.
Finally, the commenter requested that the FDIC and RTC be
specifically mentioned in the regulatory text as covered
government entities. However, .this is not possible because this
regulation is one of general application, and it is defined to
apply to the class of government and government-appointed
entities that act as conservators or receivers of insolvent
lending institutions. The class as defined includes the FDIC and
RTC, but it is inappropriate and against applicable principles of
administrative law for the regulatory text to single out any
specific member of the class of covered entities. See. e.g..
Marketing Assistance Program. Inc. v. Berqland. 562 F.2d 1305,
1309 (D.C. Cir. 1977) (drawing distinction between agency
"orders" applying to particular person and rules that "appl[y]
prospectively to all [affected parties] .and was based on broad
policy considerations.").
Seizures of Property by Governmental Entities
The proposed rule contained language that would have defined
a civil or criminal seizure or forfeiture of property to be an
"involuntary acquisition" within the meaning of Section
101(35)(A)(ii). Section 101(35)(A)(ii) excludes from the
definition of "contractual relationship11—for the purposes of the
Section 107(b) (3) "third-party" defense—governmental '•
acquisitions of property "by escheat, or through any other
involuntary transfer or acquisition, or through the exercise of
eminent domain authority by purchase or condemnation." Only a
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few comments were received on this issue, which were divided.
Connenters that supported the interpretation were for the most
part representatives of state governmental entities which urged
that, if adopted, the provision should include-seizures under
state as well as federal law. .Commenters that opposed the
provision found the proposal to treat an intentional seizure by
the government as an involuntary acquisition to be "nonsensical,"
"outrageous," and "bizarre," and clearly contrary to the
statute's plain meaning. At least one commenter questioned the
relevance of this non-lending provision in a regulation that
purported to deal with the potential liabilities arising from a
lending relationship.
Commenters that opposed this provision generally based their
opposition on some version of the doctrine of elusdem generis.
This doctrine, a rule of statutory construction, provides that
when a listing of specific words is followed by more general
words in a statute, instead of being given their broadest
possible meaning the general words are construed to apply only to
the same class as that identified by the specific words. As
applied to Section 101(35)(A)(ii), the phrase "involuntary
transfer or acquisition" would be considered to be one of general
meaning because it follows "escheat," which is a word of specific
meaning. Therefore, only those acquisitions of property in which
the government is passive, ;such as an escheat, is considered
"involuntaryn within the meaning of CERCLA. Accordingly, a
seizure is not within the same general class as an escheat
f
because the government does not acquire seized property
passively.
Other Commenters made similar arguments based largely on
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rules of grammar. These conunenters observed that Section
101(35)(A)(ii) covered both voluntary and involuntary
acquisitions by governmental entities, but that no specific
provision vas made for acquisition by seizure. These conunenters
argued that the phrase "by any other involuntary transfer"
follows, and therefore modifies, the word "escheat."
Acquisitions that are "involuntary" within the meaning of Section
101(35}(A)(ii) therefore are limited to those that are like an
escheat of property to the government. Therefore, "involuntary"
acquisitions are those in which the government passively obtains
title to or control of property because there is no competent
person to whom the property may be transferred. Such transfers
are involuntary because there is no action by the government.
These conunenters therefore concluded that only those acquisitions
that are involuntary to the government are within the scope of
the section, which would not include property intentionally taken
by the government by'Seizure.
Further, the commenters observed that the "voluntary"
element of Section 101(35)(A)(ii) does not include acquisitions
by seizure, because this provision only covers voluntary
acquisitions that are effected through the exercise of the
government's eminent domain authority. A seizure is not an
acquisition by eminent domain, and is therefore not covered by
the section's "voluntary" component. See J.W. Goldsmith. Jr.-
Grant Co. v. United States. 254 U.S. SOS (1921) (seizure of a
person's property pursuant to a forfeiture statute is not a
taking for which compensation is required).
, ^
(•
Therefore, whether by rules of grammar or of statutory
construction, these commenters all concluded that Section
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101(35)(A)(ii) covers all transactions in which the government
acquires property where it has no choice (by "escheat, or through
any other involuntary transfer of acquisition"), and for policy
reasons that are unexplained in the legislative history only one
type of acquisition that is "voluntary" to the government
("through the exercise of eminent domain authority by purchase or
condemnation.").
It was also suggested that while an interpretation of
"seizure" is not properly within the scope of Section
101(35)(A)(ii), it is unnecessary to resort to this subsection
because an acquisition by seizure is by definition a transfer in
which there is no "contractual relationship" between the parties.
Accordingly, a governmental entity that seizes property may be
able to establish an "innocent landowner" defense under Section
107(b)(3). According to this theory, the general definition of
"contractual relationship" provided in Section 101(35) is
sufficient to exclude seizures, and therefore reference to one of
the three enumerated exceptions (each of which assumes that a
contractual relationship exists but for the exception) is
unnecessary.
EPA disagrees that Section 101(35)(A)(ii) must be read in
the manner urged by the commenters opposing the inclusion of
forfeitures and seizures as involuntary acquisitions. EPA does
not believe that the phrase "any other involuntary transfer or
acquisition" is intended solely as a modification of the term
"escheat." There is no indication in the legislative history
that this provision was intended t.o/ be read in a such a manner,
nor do rules of construction compel this result. Furthermore,
EPA does not agree that the doctrine of elusdem generis
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appropriately applies in this instance to determine the meaning
of Section 101(35)(A)(ii).
The statutory construction rul».s urged by the conunenters is
inappropriate for a number of reasons. As a threshold matter,
Section 101(35)(A)(ii) does not contain a sequence of words that
range from the specific to the general, but begins with only a
single word of specific meaning, followed by a general phrase,
and concludes with a phrase of specific meaning. Therefore, the
form of Section 101(35)(A)(ii) is not suitable for the
application of the eiusdem generis doctrine. Applying the
doctrine rigorously would mean that "eminent domain" would be
considered words of general meaning that are within the same
class as escheat, because they follow both •'escheat11 and "any
other involuntary transfer or acquisition" in the sequence. To
avoid this absurd result the conunenters advocating use of the
doctrine have sought to bifurcate Section 101(35)(A)(ii) into
"involuntary" and "voluntary" components, but have cited no rule
of statutory construction or legislative history to support the
notion that Congress intended that the provision be bifurcated.
Instead, EPA believes that a different rule of statutory
construction is more appropriate: that where similar terms are
used twice in close proximity in the same statute they are
presumed to refer to the same concept. See, e.g.. ICC
Industries. Inc. v. United states. 812 F.2d 694, 700 (Fed. Cir.
1987) (citing cases); see generally 2A Sutherland Statutory
Construction S 46.06 (4th ed. 1984). Under this rule, the
v ,'
deficiencies that result from the'doctrine of eiusdem generis are
avoided. As discussed in the Preamble of the Proposed Rule (and
in more detail in Section V, involuntary Transfer or Acguisition
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Bv A Government Entity, infra), CERCLA refers to involuntary
acquisitions and transfers in two different definitional
sections: Section 101(20)(D) and Section 101(35)(A)(ii).9 Under
this principle, EPA considers both sections t;o refer to the same
types of transactions, and interprets both to cover acquisitions
and transfers in which property is transferred involuntarily to a
government entity by virtue of its function as sovereign. In
this respect, it is important to recognize that some of the forms
of acquisitions listed in the statute that are specifically
identified as "involuntary" nevertheless require some volitional
action by the government entity in order to perfect title to the
property (such as acquisition by foreclosure or by a tax
delinquency). Therefore, it is not necessary for the government
entity to be completely "passive" in order for the transfer to be
considered "involuntary" for purposes of CERCLA. In this regard,
9 These are the only two sections in which the concept of
involuntary transfers or acquisitions is defined under CERCLA.
Some commenters suggested that Section 101(20)(A)(iii) also
referred to involuntary acquisitions, and that the rule should
also define this provision because it dealt with a third type of
involuntary acquisition. EPA believes that the meaning of
Section 101(20)(A)(iii) is beyond the scope of this rulemaking.
Section 101(20)(A)(iii) provides that the "owner or
operator" of a facility in which title or control "was conveyed
due to bankruptcy, foreclosure, tax delinquency, abandonment, or
similar means to a unit of state or local government" is the
person who owned or operated the facility immediately beforehand.
EPA does not agree that this creates a third, or separate class
of "involuntary" acquisitions, but instead provides that the
"owner or operator" of a facility that a unit of State or local
government had acquired by one of the listed means—including
property acquired involuntarily by the State or local government
unit under Section 101(20) (D) and Section 101(35) (A) (ii)— is the
person from whom the property was .acquired prior to its
acquisition by the State or local government unit. This
subsection is not otherwise related to the provisions being
defined in this rule, and does not create any new rights or
defenses based on involuntary acquisitions of property.
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EPA disagrees with the commenters that an "escheat" is a passive
acquisition by the government. An escheat of property is simila
to an abandonment, and both require some overtly volitional act
in order to effect the governmental acquisition, such as a
declaration that the property is abandoned, or that there are no
competent heirs to an estate. The general phrase "or any other
involuntary transfer or acquisition11 does not require .that the
government entity acquiring the property do so in a completely
passive fashion. Therefore, the mere existence of governmental
discretion with respect to the time or fact of acquisition cannot
be deemed dispositive of whether an acquisition or transfer is
"involuntary" within the meaning of CERCLA.
None of the commenters, however, addressed the substantive
merits of the proposed language regarding forfeitures or seizures
of property, although the commenters' concerns about the
"involuntariness" of a forfeiture prompted the Agency to
investigate further the legal authorities for such takings of
private property. Forfeiture and seizure authorities appear to
be many and varied, and may be either in rem proceedings where
the property is the contraband, or in cersonam proceedings that
are intended to punish the possessor of the property. The nature
(and "involuntariness") of the forfeiture or seizure in a
particular case depends, therefore, on the particular statute
involved.
Forfeiture statutes appear to operate similarly to
abandonment or escheat authorities. For example, the Drug Abuse
and Prevention Act contains a criminal forfeiture provision
providing that n[a]ll right, title, and interest in property
described in [a prior section of the Act] vests in the United
123 c:\wp\l«nd«r\n»U\l«ndrule.£10
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states upon commission of the act giving rise to forfeiture under
this section." 21 U.S.C. S 853(c). Forfeiture statutes of this
type have long been recognized as vesting full title in the
government immediately upon the occurrence of the condition
specified, and without any voluntary action on the part of the
government. This holds true even though (and similar to
abandonment or escheat proceedings) some overt or volitional act
on the part of the government is necessary to perfect title to or
take possession of the forfeited property. See, e.g., Gaolin &
Drvsdale. Chartered v. United States. 491 U.S. 617, 627 (1989)
(construing 21 U.S.C. 5 853(c)) (citing United States v. Stovell,
133 U.S. 1, 10.(1890)).
Accordingly, EPA interprets the terra "involuntary
acquisition or transfer" under CERCLA to denote any acquisition
or transfer in which the government's interest in, and ultimate
ownership of, a specific asset exists only because the conduct of
a non-governmental party — as in the case of abandonment or
escheat — gives rise to a statutory or common law right to
property on behalf of the government. Such conduct may include
the failure of a financial institution to meet regulatory
requirements, thereby giving rise to a government right of
receivership or conservatorship. Similarly, the commission of a
crime or other violation that subjects a property to civil or
criminal forfeiture is involuntary, even .where the government may
have some discretion as to whether the forfeiture should be
sought. In each case, the government would have neither an
interest in property nor a basis for acquisition in the absence
of specific conduct by a nongovernmental party that confers an
interest in property on the government.
124 ci\wp\l«nd«r\rul«\lendrul«.f10
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Finally, some commenters feared that the proposed rule's
language regarding seizures would cover every acquisition of
property by government entities, and criticized the proposal for
creating an "open-ended" grant of authority that was without a
sound legal or policy basis. However, EPA believes that the
commenters' fears are misplaced. The proposed regulatory
language limited such acquisitions to "any forfeiture-or seizure
law or authority," and a footnote in the Preamble to the Proposed
Rule was intended to prevent this provision from being construed
to cover every acquisition of property by a governmental entity.
fSee 56 Federal Register at 28807, col.2, n.17.) Indeed,•seizure
and forfeiture authority forms no basis for a government entity
to acquire property in a proprietary manner. Furthermore, the
final language adopted in this regulation clearly precludes an
interpretation that would allow this result.
Subsequent Purchasers of Contaminajfcgd Pjrpperty from Holders
Some commenters advocated a provision in the final rule by
which a holder could sell foreclosed-on property to a subsequent
purchaser who could take as an "owner" without liability or
responsibility for.the hazardous substances that may be located
on the property. However, there is ho authority anywhere in
CERCLA that would support the "laundering" of liability simply
because a facility has been foreclosed on by a holder.
Accordingly, no such provision could be included in this final
rule.
Commenters that supported such a provision expressed the
view that contaminated property is hot readily marketable and
that absolving a subsequent purchaser from any obligation to
clean up the property will enhance the property's resale value.
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There was substantial disagreement from other commenters with
respect to.this view, however. These commenters argued that such
a provision would create an "artificial" value for the property
that was unrelated to its actual worth. Alternatively, it was
argued that such a provision would not actually increase the
property's value or marketability because contaminated property
is not usable for commercial purposes because of its physical
condition, and not because of any cleanup obligation imposed by
CERCLA. These commenters argued that the presence of hazardous
substances constitutes a health and safety threat that renders
the property unfit for use until it is cleaned up, and that only
after the property is cleaned up is its marketability and value
enhanced. According to these commenters, a "subsequent
purchaser" provision will neither enhance the property's value
nor increase its viability for commercial use.
In addition, a provision that would "cleanse" a property of
CERCLA liability because it was foreclosed on and/or "owned" or
transferred by a government entity could also result in
government lending institutions becoming attractive targets for
dumping of contaminated properties: liable owners could simply
default on their government loans, which would create a large
inventory of government-owned contaminated properties. The
concern.is that once any liability on the part of the private
owner to clean up property is removed, such properties would only
be cleaned up at taxpayer expense without prospect that the
government would be reimbursed.
f* f
Regardless of the commenters' arguments regarding a
"subsequent purchaser" provision, there is no basis in the
statute that would support including such a provision in this
126 c:\wp\lender\rule\lendrula.flO
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rule. A few commenters who argued for a subsequent purchaser
provision suggested that the rule could include a clause
providing that the government's defense under Section
101(35)(A)(ii) be deemed to "run with the land," or that would
otherwise allow the defense to be assigned by a government entity
to a non-government entity as the subsequent purchaser. However,
there is no authority of which the Agency is aware or that was
cited by any commenter that would support a transfer or
assignment of a CERCLA defense, particularly in light of the
Section 107(e) prohibition on agreements respecting the transfer
of liability from one person to another.
Furthermore, the Agency does not have the authority to
promulgate such a provision as a component of the definitions of
either Section 101(20) (A) or Section 101(35) (A)—which are the
subject of this rule—nor does the Agency believe that such a
definition, even if promulgated, would be legally valid. CERCLA
does not contain any provision that would insulate from liability
a person who knowingly purchases contaminated property; under
CERCLA, the opposite is true. See CERCLA SS 101(35)(B) &
107(b)(3), 42 U.S.C. SS 9601(35)(B) & 9607(b)(3); see also H.R.
Conf. Rep. No. 962, 99th Cong. 2d Sess. (1986), reprinted in
Senate Comm. on Envt. & Pub. Works, 6 A Legislative History of
the Suoerfund Amendments and Reauthorization Act of 1986 5002-03
(Comm. Print 1990). A judicial or administrative settlement or
execution of a prospective purchaser agreement in which the
Agency agrees to provide a covenant not-to-sue are the only
methods recognized by EPA by which owners of contaminated
property are able to resolve their liability. See Guidance on
Landowner Liability Under Section 107(a)(1) of CERCLA, De Minimis
Settlements Under Section l22(g)(l)(B) of CERCLA, and Settlements
127 c:\wp\lender\rule\lendrula.flO
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With Prospective Purchasers of Contaminated Property, 54 Fed.
Reg. 34235. (Aug.18, 1989).
In any event, transfers of, property by the federal
government are beyond the scope of this regulation: Section 120
.of CERCLA contains specific and detailed provisions delineating
the responsibilities of government "owners or. operators11 of
contaminated properties, and it is this section that controls the
transfer of government properties to subsequent purchasers.
There is no provision in Section 120 of the type described by the
commenters, nor is there any discussion in the legislative
history, of any intent to include such a provision. This
regulation addresses only whether a person is exempt from the
definition of "owner or operator" as the holder of a security
interest by virtue of Section 101(20)(A), or as a government
entity that has acquired property involuntarily within the
meaning of Section 101(35) (A) (ii)..
Notice, and Comment Issues . '
A few comments were received that were critical of the 30-
day .comment period, arguing that thirty days was too short a
period for public comment and that this "too short" period
rendered the rule invalid. A few commenters requested that the
comment period be extended for an additional thirty days.
Other commenters argued that there was no meaningful
opportunity for public comment because the proposed rule did not
explain why certain provisions were included in the proposal, and
because it did not articulate or address unspecified "alternative
approaches'* to the provisions that were proposed. Some
commenters also stated that there was no meaningful opportunity
... 128 c:\wp\lender\rula\lendrule.flO
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for comment because no comments were solicited or accounted for
in connection with pre-proposal, internal Agency drafts of the
proposed rule, and/or because changes from earlier internal
drafts of the rule were not explained.
EPA disagrees that providing for a 30-day comment period
renders the rule invalid or denies a meaningful opportunity for
public comment. Thirty days is a common period for public
comment, and longer periods—while permitted—are not required.
The Agency received approximately 300 comments within the 30-day
period, and many more shortly after the 30-day period had
expired. Although the Agency declined to extend the comment
period, in this rulemaking EPA has nevertheless considered and
evaluated fully all the comments received within sixty days of
the proposed rule's publication. The Agency also notes that the
few persons who requested an extension nevertheless submitted
comments in a timely fashion.
EPA also disagrees that the proposal failed to disclose or
indicate the bases for its provisions. The preamble stated
explicitly on numerous occasions that the proposal was based in
large part on existing caselaw, cited to those cases and to other
relevant cases and legal authorities for specific provisions, and
that the purpose of the regulation was to fill a void in an
unsettled area of law. The Agency endeavored to ensure that the
proposed rule's provisions were 'not considered arbitrary,
capricious, or otherwise not in accordance with law by basing its
provisions on established caselaw,and other relevant legal
principles, and therefore EPA did not attempt to provide
"alternative approaches" to the principles established in legal
precedents construing the exemption. EPA is also unaware of any
129 c:\wp\lervder\rule\lendrula.flO
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principle of administrative law that requires an agency to
articulate alternative approaches in a proposed rule.
Finally, the Agency disagrees that the notice and comment
requirements of the APA were not complied with because EPA did
not solicit comments on the Agency's internal, pre-proposal
drafts of the rule. Although what purported to be two drafts of
the proposed rule were published in non-official sources, these
documents were not released by the Agency nor were they formally
identified by the Agency as official EPA documents that
represented the EPA's official or even unofficial proposal. The
Agency is not aware of, nor has any commenter cited, any
principle of administrative law that would require public notice
and comment during the Agency's pre-proposal, deliberative
process, or that would require an explanation of internal and
confidential agency deliberations.
Effective Date of the Final Rule
A few commenters, mostly representatives of the lending
community, raised questions regarding the effective date of this
final regulation. Commenters were divided over the date that the
rule should be considered effective. Several submitted that the
rule should be "retroactive1* in application, on the theory that
only a retroactively applied regulation would establish that the
protected activities identified in the rule were always
permissible, even if undertaken by a holder prior to the rule's
promulgation. Others argued that the rule should only be
prospective in its application, because before the rule was
^ •*
issued persons affected by it would have had no notice of the
actions considered acceptable or unauthorized by Section
101(20)(A). These commenters argued that the legality of a
130 c:\wp\lend«r\rul«\lendrule.flO
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holder's pre-rule actions could not fairly be judged by a later
promulgated rule.
The effect of this final rule governed by the Administrative
Procedure Act (APA). This rule is a legislative or substantive
rule under the APA because it is an "agency statement of ...
future effect . . .", 5 U.S.C. S 551(4), and intended to
establish with greater clarity the bounds of CERCLA's involuntary
security interest exemption and provisions governing involuntary
acquisitions and transfers. The criteria identified in the
various cases considering whether a regulation may have a
retroactive application are not present in this instance. See^
e.q.^ Citizens to Save Spencer County v. Environmental Protection
Aaencv. 600 F.2d 844, 880-81 (D.C. Cir. 1979); Retail. Wholesale
and Department Store Union. AFL-CIO v. National Labor Relations
Board. 466 F.2d 380, 390 (D.C. Cir. 1972). Accordingly, the
effective date of this regulation is controlled by Section 4 of
the APA, 5 U.S.C. S 553(d). See General Motors Corp. v.
Ruckelshaus. 742 F.2d 1561, 1565 (D.C. Cir. 1984) (citations
omitted), cert, denied. 471 U.S. 1074 (1985). This section of
the APA provides that substantive rules are effective no sooner
than thirty days after the publication date, unless one of
certain exceptions apply. Section 4(d)(l) of the APA provides an
exception from the requirement that a substantive rule is
effective no sooner that 30 days from the date of publication if
it is "a substantive rule which grants or recognizes an exemption
or relieves a restriction!.]" 5 U.S.C. S 553(d)(l). Therefore,
because this regulation recognizes a statutory exemption for
persons who hold indicia of ownership primarily to protect a
security interest in a facility subject to CERCLA, and because it
clarifies those acquisitions by and transfers to the government
131 c:\wp\lend*K\rul«\lendrule.flO
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that are involuntary under CERCLA, this regulation is effective
immediately upon publication in the Federal Register.
Although this is a legislative or substantive rule effective ;
upon the date of publication, the principles underlying the
regulation are based on EPA's interpretation of CERCLA's security
interest exemption and involuntary acquisition provisions, and on
caselaw construing the exemption. Moreover, the regulation does
not specify the only means for compliance with the exemption,10
For these reasons, EPA expects that the provisions of this
regulation will provide appropriate guidance for evaluating the
actions of a holder or government entity prior to the effective
date of this final rule. See Fertilizer Institute v. United
States Environmental Protection Agency. 935 F.2d 1303, 1308 (D.C.
Cir. 1991). .
IV. Explanation of Provisions in the Final Rule Protecting the
Holder "
The Section 101(20)(A) security interest exemption is the
principal means of avoiding CERCLA liability for a person
maintaining indicia of ownership in a facility primarily to
protect a security interest.
Section 101(20)(A) provides, in part:
10 For example, the provisions regarding foreclosure
specify that if a security holder undertakes certain defined
activities it will be considered to continue to maintain its
indicia of ownership primarily to protect a security interest.
This provision is intended to establish certainty for a
foreclosing security holder that it- will be able to undertake
actions that are consistent with the exemption. However, the
rule does not narrowly define this as the only manner by which a
foreclosing security holder can establish consistency with the
exemption. Sfifl 40 C.F.R. $ 300.llOO(d)(2).
132 ci\wp\lender\rul«U«ndrul«.flQ
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"Such term [owner or operator] does not include a person
who, without participating in the management of a vessel or
facility, holds indicia of ownership primarily to protect
his security interest in the vessel or facility."
There are three key terms found in the exemption that are
not otherwise defined in CERCIA: (1) "indicia of ownership11 (2)
the requirement that the ownership indicia be held "primarily to
protect [a] security interest," and (3) the prohibition of the
holder "'-'from "participating in the management" of the facility.
1. Indicia of ownership .
Ownership indicia within the meaning of Section 101(20)(A)
means evidence of interests in real or personal property. • There
is no limitation or qualification on the type, quality, or
quantity of ownership indicia that may be held by a person within
the meaning of Section 101(20)(A), provided that the indicia are
held primarily as protection for a security interest (such as for
a loan or other obligation, including title to the real or
personal property acquired incident to foreclosure and its
equivalents). The nature of the ownership interest may vary
according to the type of secured transaction and the nature of
the holder's relationship (such as that of a guarantor or
surety). Accordingly, indicia of ownership may be evidence of a
security interest, or of an interest in a security interest, or
of an interest in real or personal property. For purposes of
Section 101(20)(A), examples of such indicia include, but are not
limited to, a mortgage, deed of trust, or legal or equitable
title obtained pursuant to foreclosure or its equivalents, a
surety bond, guarantee of an obligation, title held pursuant to a
lease financing transaction in which the lessor does not select
initially the leased property, or an assignment, lien, pledge, or
other right to or form of encumbrance against property.
133 c:\wp\l«nd«r\rul«\l«ndruie.flO
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Accordingly, it is not necessary for a person to hold actual
title or a security interest in order to maintain some "indicia"
or evidence of ownership in an encumbered vessel or facility.
2. Primarily to protect the security interest
Whether the ownership indicia maintained by a person in a
vessel or facility bring it within or outside of the definition
of "owner or operator" under CERCLA is determined by whether the
indicia are held "primarily to protect [a] security interest.11
(V
The use of this phrase requires that the ownership interest be
maintained primarily for the purpose of, or primarily in
connection with, securing payment or performance of a loan or
other obligation (a security interest), and not an interest in
property held for some other reason. A security interest way
arise pursuant to a variety of statutory or common law financing
transactions. While a security interest is ordinarily created by
*
mutual consent, such as a secured transaction within the scope of
Article 9 of the Uniform Commercial Code, there are other means
by which a security interest may be created, some of which may or
may not be the result of a consensual arrangement between the
parties to the transaction. In general, a transaction that gives
rise to a security interest is one that provides .the holder with
recourse against real or personal property of the person pledging
the security; the purpose of the interest is to secure the
repayment of money, the performance of a duty, or of some other
obligation. See generally J. White & R. Summers, Handbook on the
Uniform Commercial. Code 5 22 (2d Ed. 1980); Restatement of
Security (1941).
As used in Section 101(20)(A) and under this final rule,
security interests arise from transactions in which an interest
134 e:\wp\l«nd«r\rui«\l«ndrul«.flO
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in property is created or established for the purpose of securing
a loan or other obligation, and includes mortgages, deeds of
trust, liens, and title held pursuant to lease financing
transactions. Security interests nay also arise from
transactions such as sale-and-leasebacks, conditional sales,
installment sales, trust receipt transactions, certain
assignments, factoring agreements or accounts receivable
financing agreements, consignments, among others, provided that
the transaction creates or establishes an interest in a vessel or
facility for the purpose of securing a loan or other obligation.
w
A "holder" as used in this regulation is a person who
maintains ownership indicia primarily to protect a security
interest, however acquired or held, and is covered by Section
101(20) (A) and this regulation. The term "holder11 includes the
initial holder (such as the loan originator, for example), and
any subsequent holder, such as a successor-in-interest, .
subsequent purchaser on the secondary market, loan guarantor,
surety, or other person who maintains indicia of ownership
primarily to protect a security interest. The term also includes
any person acting on behalf of or for the benefit of the holder,
such as a receiver.
in contrast, under Section 101(20)(A), "indicia of
ownership" held "primarily to protect [a] security interest" do
not include evidence of interests in the nature of an investment
in the facility, or an ownership interest held primarily for any
reason other than as protection for a security interest, see.
e.g.. United States v. Maryland Bank & Trust. supra, (actions
taken by lending institution after foreclosure indicate property
held as an investment rather than as security for a loan). EPA
135 c:\wp\Und«r\rule\lendrule.f 10
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recognizes that lending institutions have revenue interests in
the loan transactions that create security interests; such
transactions are not considered to be investment interests, but
are considered secured transactions falling within the exemption.
See In re Berosoe Metal Corp.. 910 F.2d at 672 n.2.
When a person holds indicia of ownership in a facility
primarily for investment purposes, as opposed to assuring
repayment of a loan or as security for some other obligation, the
exemption will notFapply. The person holding ownership indicia
to protect a security interest may have additional, secondary
reasons for maintaining the indicia in addition to protecting a
security interest; maintaining indicia for reasons in addition to
protecting a security interest is consistent with the exemption
and .is permissible under this rule. However, any such additional
reasons must be secondary to protecting a security interest in
the secured facility.
Lending institutions, which typically hold a large number of
security interests, may also act in some trustee, fiduciary or
other capacity with respect to a facility. However, this rule
defining the Section 101(20)(A) security interest exemption does
not'address circumstances in which a lending institution or any
person acts as a trustee, or in a non-lending capacity, or has
any interest in a facility other than as provided in this rule.
Because the exemption in Section 101(20)(A) addresses only
holders, any discussion of persons with other interests or
involvement in a facility is beyond the scope of this rule. Of
course, a trustee or other fiduciary with respect to a facility
(or any person) who holds indicia of ownership in the vessel or
facility primarily to protect a security interest may assert the
136 c:\wp\l«nder\rule\l«ndrula.flO
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.exemption.
3. Participating in the Management of a Facility
Whether the holder has participated in management
sufficiently to void the exemption is a fact-sensitive inquiry.
Participation in the management of a facility means actual
participation in the management or operation of the facility by
the holder, and does not include the mere^capacity or unexercised
right or ability to influence facility operations. In all cases,
the determination of Whether a holder is participating in
management depends on the holder's actions with respect to the
facility, rather than the outcomes associated with such actions.
This regulation contains a list of activities commonly undertaken
by holders that the Agency considers to be consistent with
holding ownership indicia primarily to protect a-security
interest. These activities, if undertaken by a holder, are not
considered evidence of participation in the management of the
facility. In addition, to address those other activities not
specifically listed in this rule, a general test of management
participation is provided. The general test specifies that a
holder is considered to be participating in management within the
meaning of Section 101(20)(A) of CERCLA when it exercises
decisionmaking control over the borrower's environmental
compliance (such that the holder has undertaken responsibility
for the borrower's hazardous substance handling or disposal
practices), or where the holder assumes overall management
responsibility encompassing the day-to-day decisionmaking of the
enterprise.
*
With respect to the specifically listed activities, a holder
acts consistently with holding ownership indicia primarily to
137 c:\wp\lender\rule\lendrule.flO
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protect a security interest, for example, when policing the loan,
undertaking financial workout with a borrower where the
obligation is in default or in threat of default, or by
foreclosing and preparing the facility for sale or liquidation.
In addition, the holder is not considered to be acting outside
the scope of the exemption by monitoring the borrower's business,
or by requiring or conducting on-site inspections and audits of
the environmental condition of the facility or the borrower's
financial condition, or monitoring other aspects of the facility
considered relevant or necessary by the holder, or requiring
certification of financial information or compliance with
applicable duties, laws or regulations, or requiring other
similar actions, provided that the holder does not otherwise
participate in the management of the facility, as provided in
this regulation. Such oversight and obligations of compliance
imposed by the holder are not considered part of the management
and operation of a facility. (Note that although such
requirements and. oversight may inform and perhaps strongly
influence the borrower's management of a facility, the holder is
not considered to be participating in management where the
borrower continues to make operational decisions at the
facility.)
The protected activities of a holder that are specifically
identified in this rule are based on caselaw construing the
exemption and on input from commenters. Cases addressing the
issue of a holder's involvement with a borrower have routinely
held that financial, administrative, and similar general advice
is not ordinarily considered to rise to the level of management
participation. See, e.g.. United States v. Fleet Factors Corp.,
901 F.2d at 1556-57 (facility monitoring and involvement in
138 cs\wp\lender\ruleUendrule.f 10
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financial decisions protected); United States v. Mirabile. 15
Envtl. L. Rep. at 20996-97 (facility monitoring, involvement in
financial decisions, restrictions on financial decisions
contained in loan documents, and general financial advice
permissible!; In re Berasoe Metals Corp.. 910 F.2d at 672 (input
at planning stages of project, inspection and entry rights
permissible); Guidice v. BFG Electroplating and Manufacturing
Co.. 732 F. Supp. at 562 (monitoring of accounts and of business
and personnel matters, site inspections, assistance in loan
negotiations, loan restructuring, and procurement of purchaser
for facility permissible). Other similar types of activities
that do not rise to the level of management participation that
were suggested by commenters have also been included in this
final regulation.
While the cases construing the exemption have described some
activities and drawn a rough line between those actions of a
holder that are and are not evidence of management participation,
there remains uncertainty about the effect of other activities
commonly or routinely undertaken by a holder in the course -of
managing a loan. To the greatest extent possible, therefore,
this final rule is intended to protect "lenders from being
exposed to CERCLA liability for engaging in their normal course
of business," Fleet Factors. 901 F.2d at 1556, and to define with
greater precision the point at which a holder's actions pass from
oversight and advice to actual facility management.
Accordingly, the activities identified in this rule do not
specify the only activities that ma'y be undertaken by a holder
without voiding the exemption, and it should not be inferred that
activities not specifically mentioned in this rule are
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automatically considered evidence of participation in a
facility's management—those must be addressed on a case-by-case
basis and based on the general test provided in this rule because
of the many arid varied situations arid different types of property
that may be subject to a valid security interest and that are
potentially "facilities" under CERCLA, and because of the
numerous ways in which a holder may work with a borrower and/or
the secured asset. .EPA does not believe that a regulation of
general application could be promulgated that could contain a
list of each and every action that a holder might undertake.
Therefore, this rule provides a general test of "management
participation'* in a facility, which is intended to serve as a
standard -by which the actions that a holder undertakes with
respect to a facility may be assessed for consistency with the
exemption.
In addition, the Section 101(20)(A) exemption applies only
to "owner or operator" liability under Section 107(a)(l) and
Section 107(a)(2) of CERCLA. Where the exemption applies, a
holder is not the current "owner or operator" of a facility for
purposes of Section 107(a)(1), or the "owner or operator" of a
facility at the time hazardous substances were disposed of for
purposes of Section 107(a)(2). Accordingly, a holder should take
care that its own actions do not result in liability under other
sections of>CERCLA. See, e.g.. CERCLA Section 107(a)(3)-(4), 42
U.S.C. S 9607(a)(3)-(4). This admonition is not a new
requirement or an obligation imposed by the terms of Section
101(20}(A): In general, any person that is liable under Section
107(a)(3) or 107(a)(4) of CERCLA is held.strictly, jointly, and
140 c:\wp\l«nd*r\rule\lendrul8.flQ
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severally liable for the costs of cleanup.11 Accordingly, a
holder is cautioned to be aware of the hazardous substances
present at a secured facility to ensure that its actions do not
subject it to liability under other provisions of CERCLA.
The following sections discuss and describe the specifically
protected activities of a holder that the final rule defines not
to be instances of participation in the management of a facility
by a person holding indicia of ownership primarily to protect a
security interest in the facility. The general test or standard
of participating in a facility's management, which is intended to
address the consistency with the exemption of those activities
that are not specifically provided for in this rule, is also
discussed below.
Actions at the Inception of the Loan or Other Transaction
Actions undertaken by a holder prior to or at the inception
of a transaction in which indicia of ownership are held primarily
to protect a security interest are irrelevant with respect to the
general test of participation in management, and thus are not
considered evidence of participation in the management of the
facility. Absent any indicia of ownership, the Section
101(20}(A) exemption has no application. Thus, consultation and
negotiation concerning the structure and terms of the loan or
other obligation, the payment of interest, the payment period,
and specific or general financial or other advice, suggestions,
counseling, guidance, or other actions incident or prior to time
that indicia of ownership are held to protect a security interest
11 See, e.g.. Tanalewood East Homeowners v. Charles-Thomas.
Inc.. supra: Spited. States v. Monsanto, supra; United States v.
Chem-Dvne Corp.. supra.
141 c;\wp\lender\rule\lendrule.f10
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are not considered evidence of participation in the management of
the facility for purposes of the Section 101(20)(A) exemption.
Activities that take place prior to this time are not relevant
for determining whether the holder has participated in the
management of the facility after the time that the holder
maintains indicia of ownership to protect a security interest.
In addition to such pre-loan involvement, a holder may
determine (whether for risk management or any other business
purpose) to undertake or require an environmental inspection of a
facility securing the loan or other obligation. Such
environmental inspections may be undertaken by the holder, for
example, or the holder may require one to be conducted by another
party (such as the borrower) as a condition of the loan or other
transaction. The statute does not require that such an
inspection be undertaken to qualify for the exemption, and the
liability of a holder seeking to avail itself of the exemption
cannot be based on or affected by the holder not conducting or
not requiring an inspection in connection with the security
interest. Nor can liability be premised on a holder's having
undertaken or required an inspection, and nothing in this rule
should be understood to discourage a holder from undertaking or
requiring such an inspection in circumstances deemed appropriate
by the holder.
In the event that an environmental inspection of a facility
reveals contamination, the holder may undertake any one of a
variety of responses that it deems appropriate: for example, the
holder may refuse to extend credit "or to follow through with the
transaction, or instead maintain indicia of ownership in non-
contaminated property as protection for the security interest.
142 c:\wp\lender\rul«\lendrul«.flO
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Alternatively, a holder may determine that the'risk of default is
sufficiently slight (or that the extent of contamination is
minimal and does not significantly affect the value of the
facility) and proceed to maintain indicia of ownership in the
contaminated property. Additionally, the holder may require the
borrower to clean up the facility as a condition of the loan or
other obligation. Such activities are not considered
participation in the facility's management, and a holder that
knowingly takes a security interest in a contaminated facility is
not subject to CERCLA liability solely on this basis.
Policing the Security Interest or Loan
Actions which are consistent with holding ownership indicia
primarily to protect a security interest include, but are not
limited to, a requirement that the borrower clean up the facility
prior to or during the life of the loan or security interest; a
requirement of assurance of .the borrower's compliance with
applicable federal, state, and local environmental or other rules
and regulations during the life of the loan or security interest;
securing authority or permission for the holder to periodically
or regularly monitor or inspect the facility in which the holder
possesses indicia of ownership (including site inspections), or
the borrower's business or financial condition, or both; or to
comply with legal requirements to which the holder is subject; or
other requirements or conditions by which the holder is able to
police adequately the loan or security interest, provided that
the exercise by the holder of such other loan policing activities
are not considered evidence of management participation as
provided in the rule's "general t9£'t" of management
participation.
143 c:\wp\lender\rule\landrule.f10
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The authority for the holder to take such actions may be
contained in contractual (e.g., loan) documents or other relevant
documents specifying requirements for financial, environmental,
and other warranties, covenants, and representations or promises
from the borrower. While the exemption requires that the actions
undertaken by a holder in overseeing or managing the loan or
other obligation be consistent with those of a person whose
indicia of ownership in a facility is are held primarily to
protect a security interest, a holder is not expected to be an
insurer or guarantor of environmental safety or quality at a
secured facility. The inclusion of environmental warranties and
covenants .are not considered to be evidence of a holder acting as
an insurer or guarantor, and liability cannot be premised on the
existence of such terms, or upon the holder's actions that ensure
that the facility is managed in an environmentally sound manner.
Neither are these actions or requirements considered to be
evidence of participation in management. See, e.g.. United
States v. Fleet Factors Corp.. 901 F.2d at 1558 (secured
creditors "encouraged11 to closely monitor waste treatment
practices and policies of debtors, and may insist upon compliance
with acceptable treatment standards as a condition of financial
support, and may adjust loan terms to reflect debtor's hazardous
waste practices).
Loan Work Out
The holder may determine that action heeds to be taken with
respect to the facility to secure or safeguard the security
interest from loss. These actions may be necessary when, for
example, a loan is in default or'threat of default, and are
commonly referred to as loan "work out" activities. "Work out11
is largely an undefined term, but generally refers to activities
144 c:\wp\l«nd«r\rule\l«ndrule.flO
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undertaken to prevent, mitigate, or cure a default by the
obligor, or to preserve or prevent the diminution of the value o
the security. Work out activities are recognized by EPA as a
common lender undertaking, and as such these actions will not
take a holder outside of the Section 101(20)(A) security interest
exemption, provided that such actions are consistent with the
general test of management participation.
When the holder undertakes work out activities, provides
financial or other advice, and similar support to a financially
distressed borrower, the holder will remain within the exemption
only so long as the holder does not participate in management as
provided by this rule's general test. Work out actions which are
not- evidence of "participation in management11 include, but are
not limited to, restructuring or renegotiating the terms of the
security interest; requiring payment of additional rent or
interest; exercising forbearance; requiring or exercising rights
pursuant to an assignment of accounts or other.amounts owing to
an obligor; requiring or exercising rights pursuant to an escrow
agreement pertaining to amounts owing to an obligor; providing
specific or general financial or other advice, suggestions,
counseling, or guidance; and exercising any right or remedy the
holder is entitled to by law or under any warranties, covenants,
conditions, representations or promises from the borrower.
Foreclosure and Sale or Liquidation
Foreclosure and possession of property for purposes of sale
or liquidation is often the only remedy the holder may have to
secure performance of.an obligati9h. Several courts construing
Section 101(20)(A) have accordingly indicated that the mere
foreclosure and taking of title does not void the exemption.
145 cj\wp\lend«r\rul*\l«ndrtil«.flO
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United States v. Mirabile. supra; United states v. Maryland Bank
and Trust, supra; Guidice v. BFG Electroplating and.
Manufacturing Co. supra; In re T...P. Long Chemical Inc..
supra.12 The process of foreclosure and sale or liquidation of
a foreclosed-on facility often results in the exclusive
possession of the facility by the holder, and may require or
result in the holder taking record title to the facility under
the laws of some states. Under this rule, foreclosure, purchase
at foreclosure sale, acquisition or assignment of title in lieu
of foreclosure, repossession in the case of a lease financing
transaction, acquisition of a right to possession or title, or
other agreement in settlement of the loan obligation, or any
other formal or informal manner by which the holder acquires
possession of the borrower's collateral for subsequent
disposition in partial or full satisfaction of the underlying
obligation, are considered to be actions within the scope of the
statutory exemption as necessary incidents to holding ownership
indicia primarily to protect a security interest. However, a
holder is protected by the exemption and is not considered an
"owner or operator" of property under this rule only so long as
the holder's acquisition pursuant to foreclosure is temporary in
nature and the holder is seeking to sell or otherwise divest the
foreclosed-on property.
To avoid liability as an "owner or operator" in the post-
foreclosure context, a holder must be acting consistently with
the exemption's requirement that the ownership indicia maintained
by the holder continue to be held primarily to protect the
12 The holdings of these cases as they relate to
foreclosure are discussed in a previous section. See
Foreclosure. S III, supra.
* ' 146 c:\wp\Under\rule\landrule.flO
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security interest. Where a holder's actions indicate that it is
not seeking to sell or liquidate the secured assets, the .
exemption is voided. See Cuidice v. BFG Electroplating & Mfg.
Co.. 732 F. Supp. at 562-563; United States v. Maryland Bank &
Trust Co.. 632 F. Supp. at 579. This final regulation contains
provisions that establish how a holder avoids being considered an
"owner or operator"vof property following foreclosure. The rule
first provides a set of general criteria for offering a facility
for sale, and when and under what circumstances an offer of
purchase may or may not be rejected. In addition, even though a
holder is permitted to use whatever means are appropriate and
available to sell or otherwise divest itself of foreclosed-on
property, as a measure of certainty this final rule contains
"bright line11 provisions that, if followed by a holder, establish
that the holder is meeting the general obligation to divest
itself of a foreclosed-on facility in a reasonably expeditious
manner.
In general, a foreclosing holder must seek to sell or
otherwise divest itself of foreclosed-on property in a reasonably
expeditious manner using whatever commercially reasonable means
are available or appropriate, taking all facts and circumstances
into account. A.holder cannot, consistent with the exemption,
reject or refuse offers for the property that represent fair
consideration for the asset. A holder that outbids or refuses
offers from parties offering fair consideration for the property
establishes that the property is no longer being held primarily
to protect a security interest.13 The terms of the bid are
13 To the extent that the foreclosing lender is acting
"primarily to protect its security interest" and is within the
secured creditor exemption, EPA considers that the ownership of
147 e:\wp\lend*r\rul«\lendrule.flO
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relevant for'this purpose, and a holder is not required to accept
offers that would require it to breach duties owed to other
holders, the borrower, or other persons with interests in the
property that are owed a legal duty. In addition, the term "fair
consideration" refers to an all cash offer, which is intended to
ensure that this final rule will not require a lender to accept a
bid that contains unacceptable conditions, such as requirements
* for indemnification agreements, non-cash offers, "bundled"
offers, etc. This provision should not be read to require that a
holder may accept only cash offers, however; a holder is always
free to accept any offer satisfactory to the holder. The exact
requirement imposed by this regulation, consistent with the
established caselaw, is that a holder may not re-iect a cash offer
of fair consideration for the foreclosed-on property. If it
does, or if it outbids others offering fair consideration, then
the holder is liable in the same manner as any other purchaser of
property.
This rule's provisions defining "fair consideration" and
specifying when the foreclosing holder may reject or outbid
offers for the property are formulated to reflect the amount that
the holder may bid at the foreclosure sale, or not reject during
the foreclosure'sale or thereafter, in order to recover on its
loan or other obligation. Therefore, for a senior creditor, the
term "fair consideration" means a cash amount that represents a
value equal to or greater than the outstanding obligation owed to
the holder (including the fees, penalties, and other charges
incurred by the holder in connection with the property). "Fair
the property remains with the borrower for purposes of the CERCLA
lien provision. See 42 U.S.C. $ 9607(2).
: 148 c:\wp\lender\rule\lendrule.flO
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consideration" is further defined to reflect that the amount that
will recover the holder's "security interest" in the property may,
vary depending on the seniority of the loan or other obligation
that is being foreclosed upon. Specifically, a junior creditor
may be required to outbid senior creditors in order to recover
the value of its loan or other obligation. The definition of
fair consideration therefore distinguishes between what junior or
senior creditors may bid or not reject for purposes of
maintaining the exemption. In addition, the foreclosing holder
may be required, to avoid liability under law (for example, to
the borrower) to seek an amount at the foreclosure sale that is
greater than the outstanding obligation owed to the foreclosing
holder, or to sell the property in a different manner; therefore,
the final rule does not require a holder to accept an offer of
"fair consideration" if to do so would subject the holder to
liability under federal or state law.
In this way the final rule's provisions governing whether
the sale or disposition of property is consistent with the CERCLA
security interest exemption will not conflict with the manner in
which such sales are required to be conducted under principles of
law applicable to the holder and the disposition of the property.
For purposes of CERCLA, the definition of "fair consideration11 is
a bright-line test to determine whether the foreclosing holder
has an investment or other interest in the property that is not
within the exemption, see United States v. Maryland Bank & Trust.
suora. or whether the holder's post-foreclosure activities
indicate that it continues to.maintain its ownership indicia in
the property primarily to protect .a'security interest, and is
therefore within the protective ambit of the exemption.
149 c:\wp\l«nder\rule\lendrul0.flO
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While a holder may use whatever means are reasonable and
appropriate for marketing foreclosed-on property to establish
that it is seeking to divest itself of property in an expeditious
manner, this final rule also provides a mechanism by which a
holder can definitely establish that it continues to hold indicia
of ownership primarily to protect a security interest and is not
an "owner or operator" of foreclosed-on property. This mechanism
is intended to act as another "bright line" to provide clear and
unambiguous evidence that a holder is not the facility's "owner
or operator" following foreclosure: a holder choosing to avail
itself of this bright line test must, within twelve months
following the acquisition of marketable title, list the property
with a broker, dealer, or agent who deals with the type of
property in question, or advertise the property as being for sale
or disposition on at least a monthly basis in either a real
estate publication or a trade or other publication suitable for
the property in question, or a newspaper of general circulation
(defined as one with a circulation over 10,000, or one suitable
under any applicable federal, state, or local rules of court for
publication required by court order or rules of civil procedure)
covering the area where the property is located. If the holder
satisfies these criteria, the holder is considered to have
complied with the requirement that it is seeking.to sell or
otherwise divest the property in an expeditious manner.
EPA also recognizes that market conditions, the.condition of
the property, and other factors may mean that despite reasonable
efforts to expeditiously sell or divest foreclosed-on property,
the property may not be quickly sold. Therefore, this regulation
does not impose a time requirement for the ultimate disposition
of foreclosed-on property. Provided that the property is being
150 c:\wp\lender\rule\lendrula.flO
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actively offered for sale by the holder and no offers of fair
consideration are ignored, outbid, or rejected, foreclosed-on
property may continue to be held by the holder without the holier
being considered an "owner or operator" of the property.
Regardless of the manner in which the foreclosing holder
chooses to market the property, if at any time after six months
following the acquisition of marketable title the holder rejects,
or does not act upon within 90 days of receipt of, a written,
bona fide, firm offer of fair consideration for the property, the
exemption is voided. A "written, bona fide, firm offer" is a
legally enforceable, commercially reasonable, offer, including
all material terms of the transaction, from a ready, willing, and
able purchaser who demonstrates to the holder's satisfaction the
ability to perform. Where a holder outbids, rejects, or fails to
act upon an offer of fair consideration, the holder is considered
to be maintaining its indicia of ownership in the property as
protection for an investment, and not as security for the
obligation.
Finally, a foreclosing holder is also permitted to undertake
actions with respect to the facility to protect or preserve the
value of the secured asset. For example, a holder may determine
that it needs to take certain actions with respect to a
facility's operations in order to preserve the value of the
foreclosed-on assets or to prevent a future release (such as by
the removal of drummed waste), or to otherwise prepare property
for safe public access incident to sale or liquidation of assets.
Precisely because a holder in charge of a facility may need to
take affirmative action with respect to the facility incident to
foreclosure and with respect to any hazardous substances that are
151 c:\wp\lender\rule\lendrule.flO
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known to be present,-the rule provides that such actions of
dominion and control over the facility are considered necessary
components of holding ownership indicia primarily to protect a
security interest.
Therefore, under this final rule, such mitigative or
preventative measures are considered to be actions that are
consistent with holding ownership indicia primarily to protect
the security interest in the facility, provided that such actions
are within Section 107(d)(l). 42 U.S.C. S 9607(d)(l). This
section provides that no person is liable for CERCLA costs or
damages "as a result of rendering care, assistance, or advice"
•»
with respect to hazardous substances—even if such actions result
in the release or threat of release of a hazardous substance—so
long as the actions taken are in accordance with the NCP, or at
the direction of an onscene coordinator. The NCP, promulgated
under CERCLA Section 105, 42 U.S.C. S 9605, specifies the
appropriate response actions for addressing the release or threat
of release of hazardous substances at a facility. 40 C.F.R. Part
300, 55 Fed. Recfc 8666 (Mar. 8, 1990). In addition, a holder—or
any person—is not considered to be liable under CERCLA for the
release or threatened release of a hazardous substance for which
another party is solely responsible, as provided in Section
107(b), 42 U.S.C. S 9607(b).
In addition, in the post-foreclosure context, this rule
provides that a holder which forecloses on a facility with
ongoing operations may wind up the facility's operations without
losing the security interest exemption, winding up is considered
a protected activity by a foreclosing holder because, without
such protection, foreclosure would not be possible where
152 c:\wp\lender\rula\lendrule.flO
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practical or commercial necessity dictates that the foreclosing
j
holder undertake such actions. "Winding up", in the post-
foreclosure context includes those actions that are necessary to
close down a facility's operations, secure the site, and
otherwise protect the value of the foreclosed assets for
subsequent sale or liquidation. See, e.g., United States v.
Mirabile. supra. In winding up a facility a holder may .undertake
all necessary security measures or take other actions that
protect and preserve a facility's assets, including steps taken
to prevent or miriimize the risk of a release or threat of release
of hazardous substances.14
The rule also protects a holder that determines that
maintaining the business activities of the foreclosed-on facility
is appropriate under the circumstances, provided that the holder
seeks to sell or otherwise dispose of the property consistent
with this regulation. While continuing a facility's business
activities following foreclosure is not necessary or even
possible in every case (it is likely unnecessary where the
foreclosed-on facility is already shut down, where there is no
enterprise to continue, or where the foreclosing holder
determines that it would prefer to wind up operations or take
other actions to secure the property for subsequent resale), the
rule permits holders both to foreclose and, to maintain the
business activities of the facility. Such activities are
considered part of what "lenders [do when] engaging in their
normal course of business," Fleet Factors. 901 F.2d at 1556, and
14 A security holder also may be under an obligation to
protect collateral from loss or impairment, or to act in a
commercially reasonable manner. See, e.g.. U.C.C. S 9-507.
153 c:\wp\lender\rule\lendrule.flO
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accordingly are protected by this regulation. However, even if
the holder is seeking to divest the facility in a reasonably
prompt manner (as provided in 40 C.F.R. $ 300.llOO(d)(1)), a
holder nay be independently liable for having arranged for
disposal or treatment of hazardous substances at the facility, as
provided under Section 107 (a)(3) of CERCLA. in addition, a
holder may also incur liability by having arranged for the
transportation and disposal of hazardous substances at the
facility, as provided under Section 107(a)(4),
General Standard of Participation in the Management of a Facility
It is not possible to specifically cover in this final rule
or any regulation every conceivable situation in which a holder
might act, or to make specific provisions for every action that a
holder might undertake without voiding the exemption. A general
test or standard of participation in a facility's management has
been formulated to provide a framework within which to assess the
consistency of a holder's actions with the limitations of Section
101(20)(A).
Although oversimplified here (see General Test of
Participation in Management. $111, supra) . the rule's two-prong
test or standard of management participation provides that while
the borrower is still in possession (i.e., pre-foreclosure) a
holder participates in the management of a facility only if the
holder either exercises decisionmaking control over a facility's
environmental compliance obligations, or where the holder's
actions manifest or assume responsibility for the overall
management of the facility's day to day operations. The general
test adopts a functional approach which focuses on the holder's
actual decisionmaking involvement in the operational (as opposed
154 ej\wp\Under\rul«\l«ndrul«.flO
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to the financial or administrative) affairs of the secured
facility. The first prong looks to where the holder has
exercised decisionmaking control over the borrower's
environmental compliance (i.e., the borrower's hazardous
substance disposal or handling practices). If so, the holder is
"participating in the management1* of the facility within the
meaning of Section 101(20)(A). Similarly, the second prong looks
to where the holder is functioning as the overall manager by
exercising management at a level encompassing the borrower's
environmental obligations, or over all or substantially all of
the operational aspects of the borrower's enterprise, regardless
of whether decisionmaking control over the enterprise's
environmental compliance responsibilities has been explicitly
assumed or not. This level of actual involvement in the
management of the facility is sufficient to constitute
"management participation" for purposes of Section 101(20)(A).
The general test prohibits a holder from artificially
"carving out" environmental matters from its purview as a means
to otherwise participate in the facility's operational management
yet maintain the exemption. Under the second prong of the
general test, the ability to "carve out" environmental compliance
responsibilities from other operational aspects of the borrower's
business or enterprise demonstrates that the holder has
manifested or assumed operational responsibility at a management
level that includes such matters, and doing so is considered to
be participation in the facility's management.
However, management participation does not include the
unexercjised right to become involved in operational facility
decisionmaking. whether the exercise of rights that a holder
135 c:\wp\l«nd«r\rul«\lendrule.no
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might have—whether under the contract or other agreement (if
any) or otherwise, including the enforcement of loan terms and
covenants or other rights—rises to the level of participation in
the facility's management is measured by reference to the general
test.
Holder's Basis of CERCLA Liability Independent of Status as owner
or Operator
This final rule also specifically provides that a holder
avoids liability as an "owner or operator" of a facility under
Section 107(a)(l) and Section 107(a)(2) of CERCLA, provided that
the holder does not, prior to foreclosure, "participate in
management" as defined in this rule, and,, following foreclosure,
provided that the holder seeks to sell or otherwise divest the
foreclosed-on facility, and does not reject offers of fair
consideration. The Section 101(20)(A) exemption and this rule
only affect a holder's potential liability under Section
I07(a)(l) and Section 107(a).(2), however, and do not affect a
holder's potential to incur CERCLA liability independent of its
status as an "owner or operator."
As discussed throughout this preamble, a holder's activities
at a facility may form an independent basis of liability, under
Section I07(a)(3) and Section 107(a)(4). Therefore, this final
rule specifically provides that a holder may be held liable as
having arranged for disposal or treatment of hazardous substances
at the facility, under Section 107(a)(3), or by having
transported hazardous substances for disposal, under Section
107(a)(4). Accordingly, while compliance with the final rule
protects a holder from incurring liability as. an "owner or
operator" of a facility, it also provides that a foreclosing
156 e:\wp\lender\rule\lendrule.flO •
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holder may, without voiding the Section 101(20)(A) security
interest exemption, potentialyl incur liability under Section
I07(a)(3) or Section 107(a)(4) of CERCLA.
Therefore, 40 C.F.R. $ 300.1100(d)(3) specifically provides
that, so long, as the holder did not participate in management
prior to foreclosure and its equivalents and the holder complies
with the requirements of 40 C.F.R. 5 300.1100(d)(i)-(d)(2),
during the period following foreclosure and.its equivalents, a
holder in possession of a vessel or facility can incur liability
under CERCLA in connection with its activities at such foreclosed
vessel or facility only by arranging for disposal or treatment of
a hazardous substance, as provided by CERCLA section 107(a)(3),
or by accepting for transportation and disposing of hazardous
substances at a facility selected by the holder, as provided by
CERCLA section 107(a)(4). In addition, following foreclosure and
its equivalents, a foreclosing holder that directs or undertakes
activities under CERCLA section I07(d)(l) or at the direction of
an on-scene coordinator at the foreclosed vessel or facility does
not incur liability for such activities.
V. Involuntary Transfer or Acquisition By A Government Entity
A government entity that involuntarily acquires a facility
is entitled to assert a defense to liability as an "innocent
landowner1* if all statutory elements are satisfied, or, in the
case of state and local government entities, it may be exempt
from the definition of "owner or operator" under CERCLA.15 The
15 In addition, Section 101(20)(A)(iii), 42 U.S.C. S
9601(20)(A)(iii), specifies that where title or control of a
facility is "conveyed due to bankruptcy, foreclosure, tax
delinquency, abandonment, or similar means to a unit of state or
" c:\wp\lender\rule\lendrule.flO
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statute refers to involuntary acquisitions and transfers by
government entities in two sections defining the terms used in
CERCLA: Section l-)l(20)(D) with respect to state and local
governments, and Section 101(35)(A)(ii) with respect to any
government entity, whether federal, state, or local. Under the
well-established principle of statutory construction that
identical words used twice in a statute are presumed to have the
same meaning, EPA interprets Congress1 use of the same term in
close proximity in the definitional section of CERCLA to refer to
the same concept.16 EPA therefore interprets involuntary
acquisitions and transfers of property by the government as used
in Sections 101^20) (D) and 101(35) (A) (ii) to refer to the same
types of transfers or acquisitions.
Section 101(35)(A)(ii) was added by the Superfund Amendments
and Reauthorization Act (SARA) of 1986, Pub. L. No. 99-499, loo
Stat. 1613 (Oct. 17, 1986). Where a government entity acquires
property involuntarily within the meaning of this section, it may
be able to assert a defense to liability as an "innocent
landowner." The innocent landowner defense is part of the third-
party defense contained in Section 107(b)(3), which works in
local government," the owner of the facility is the person "who
owned, operated, or otherwise controlled activities at such
facility immediately beforehand."
16 See generally 2A Sutherland Statutory Construction §
46.06 (4th ed. 1984); ICC Industries. Inc. v. United States. 812
F.2d 694, 700 (Fed. Cir. 1987) (citing cases). Even though the
language differs slightly between sections, this is not unusual
in CERCLA and does not indicate that Congress intended different
meanings in the absence of any legislative history to the
contrary. See Pennsylvania v. Union Gas Co.. 491 U.S. 1 (1989)
(similar language in different sections of CERCLA separately
waiving state and federal immunity held to have the same effect).
158 c:\wp\lender\rule\lendrul«.flO
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tandem with Section I0l.(35).17
The relevant sections of the third-party/innocent landowner
s
defense provide:
Section 107(b):
"There shall be no liability under [section 107(a)] for a
person who can establish . . . that the release or threat of
release of a hazardous substance and the damages resulting
therefrom were caused solely by—
(3) an act or omission of a third party other than . .
. one whose act or omission occurs in connection with a
contractual relationship, existing directly or
indirectly with the defendant . . ., if [the defendant]
(a) [has] exercised due care with respect to the
hazardous substances . . ., and (b) he took precautions
against the foreseeable acts or omissions of any . . .
third party . . . ."
Section 101(35):
"(A) The term 'contractual relationship,1 for the purpose
of section 107(b)(3), includes, but is not limited to, land
contracts, deeds, or other instruments transferring title or
possession, unless the real property on which the facility
concerned is located was acquired by the defendant after the
disposal or placement of hazardous substances, and . . .:
(ii) The defendant is a government entity which
acquired the facility by escheat, or through any other
involuntary transfer or acquisition, or through the
exercise of eminent domain authority by purchase or
condemnation. . . .
In addition, . . . the defendant must . . . satisf[y] the
requirements of section 107(b)(3)(a) and (b)." (emphasis
added.)
The defense is available for the government-as-owner where
the harm was caused solely by the acts of third parties with
which the government entity had no "contractual relationship,11
provided that certain additional elements specified in section
101(35)(A)-(B) are also established. Section 101(35)(A)(ii)
17 see Guidance on Landowner/Liability Under Section
107(a)(1) of CERCLA, Oe Minimis Settlements Under Section
i22(g)(l)(B) of CERCLA, and Settlements With Prospective
Purchasers of Contaminated Property, 54 Fed. Reg. 34235 (Aug. 18,
1989).
159 cs\wp\l«nd«r\rul«\l«ndrul«.flO
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lists three situations in which a* government entity has no such
"contractual relationship": acquisition through the exercise of
eminent domain authority by purchase or condemnation, through .
escheat, or "through any other involuntary transfer or
acquisition."
The legislative history of section 101(35)(A) does not
'discuss the issue of involuntary acquisitions or transfers to
government entities, and with respect to this specific provision
notes only that the cost of cleaning up a contaminated facility
taken by eminent domain may 'be offset a'gainst the price paid to
the owner of property as compensation. H. Conf. Rep. No. 962,
99th Cong., 2d Sess., at 187 (1986). However, while it is clear
that the clause is intended to shield a government entity from
CERCLA liability in certain narrow and limited circumstances when
a facility is involuntarily acquired or transferred to the
government in its capacity as sovereign, it is also clear that it
is not so broad as to serve as a defense to liability in every
instance in which the government owns contaminated property,
however contaminated or acquired.
Section 101(20)(D) contains the statute's second use of the
term "involuntary," and is substantially similar to Section
101(35). The section, also added by the SARA of 1986, provides
an exemption from the definition of "owner or operator" (and
therefore liability under Sections 107(a)(1) and (a)(2)) for
state and local entities that acquire possession of property
involuntarily. Section 101(20)(0) provides (in part):
"The term 'owner or operator,'- does not include a unit of
State or local government which acquired ownership or
control involuntarily through bankruptcy, tax delinquency,
abandonment, or other circumstances in which the government
160 c:\wp\l«nder\rule\lendruie.flO
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•\
involuntarily acquires title by virtue of its function as
sovereign."
The section's legislative history does not discuss the "other
circumstances11 in which acquisition of property by state or local
governments nay be involuntary; it only mentions that state and
local governments will lose the exemption if they cause or
contribute to the release or threat of release of hazardous
substances at such involuntarily acquired properties. H. Conf.
Rep. No. 962, supra. at 185-86. The legislative history of this
section also does not discuss why state and local governments ,
which acquire property involuntarily are excluded from the
definition "owner or operator," while Section 101(35)(A)(ii)
provides that any government entity that acquires property under
the same circumstances is considered an "owner" of property, but
with a potential defense to liability. The meaning of these
terms must therefore be gleaned from their use in the statute
itself.
The examples of "involuntary" acquisition given in Section
101(20)(D) indicates that the acquiring government agency need
not be completely passive in order to acquire property
involuntarily within the meaning of the section. Several of the
examples given actually require some intentional or purposeful
action on the part of the government to complete or perfect the
transfer—abandonment, for example, requires government-initiated
proceedings to determine that property has, in fact, been
abandoned. See, e.g.. United States v. Sylvester. 848 F.2d 520,
525 (5th Cir. 1988) (determination of abandonment a question of
fact). However, once abandonment,_tax delinquency, or bankruptcy
*•
has been determined, a. state or local government acquiring the
property that was the subject of such proceedings is not
161 c:\wp\l«nd«r\rule\l*ndrul«.flO
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considered the "owner or operator" of the property because the
transfer was "involuntary" for purposes of CERCLA. In addition,
Section 101(20)(D)'s use of the phrase "or other circumstances in
which the government involuntarily acquires title or possession
by virtue of its function as sovereign" indicates that the
exemption includes other acquisitions in which the government has
property involuntarily transferred to it—so long as the
government's acquisition is by virtue of its function as
sovereign.
The examples of involuntary acquisitions provided in Section
101(35)(A)(ii) are similar. An escheat may require some
volitional act by a government entity to confirm or legally
determine that the property should properly escheat to the
government. See generally 30A C.J.S. Escheat 5.7 (discussing
escheats of property both by operation of law and by affirmative
proceedings under state statutes). In addition, acquisition by
exercise of the government's eminent domain authority—an
inherently sovereign function—also often requires some overt,
volitional act to complete or effect the transfer, such as a
condemnation action.
Accordingly, governmental ownership or control of property
by involuntary transfer or acquisition clearly includes
acquisitions and transfers that are involuntary to the government
in its capacity as a sovereign. Involuntary acquisitions and
transfers within the meaning of the Section 101(20)(D) and
Section 101(35)(A)(ii) of the statute are therefore defined to
include, in addition to those specifically enumerated in the
statute, acquisitions of property for which a government lending
or credit institution or financial regulatory entity is assigned,
162 c:\wp\lender\rule\lendrule.flO
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required, appointed, or otherwise obligated to -act as a
conservator or receiver of a private lending institution, its
assets and property, pursuant to specific statutory or
authority. Acquisition under lav as a conservator or receiver of
property is not materially different from other forms of
involuntary acquisitions listed in the statute, such as transfers
to government entities pursuant to abandonment proceedings, or as
the result of tax delinquency, or other circumstances in which
the government obtains ownership of property by virtue of its
function as sovereign.18 Acquisition of property as a
conservator or receiver is ordinarily pursuant to a clear and
direct mandate that provides little or no discretion with respect
to fact and the manner of acquisition, and without regard to the
condition of the property acquired. Such acquisitions are
18 That property may be acquired by virtue of the
government's function as sovereign is not necessarily
dispositive, however; the clear terms of Sections 101(20}(0) and
101(35)(A)(ii) require that the acquisition must be involuntary
as well. Other sections of CERCLA indicate that government
entities which acquire ownership or possession of facilities
under circumstances different that those specified in Sections
101(20)(D) and 101(35)(A)(ii), or where the government entity
itself is responsible for, contamination on property owned by it,
are subject to CERCLA1s liability provisions. See CERCLA §
101(21), 42 U.S.C. S 9601(21) (federal, state, and local
governments included in definition of "person"); id. S
101(20)(D), 42 U.S.C. $ 9601(20)(D) (loss of exemption for
involuntarily acquired property by state or local government
where entity caused or contributed to release); id. S 107(d)(2),
42 U.S.C. S 9607(d)(2) (state or local government entity may be
liable for gross negligence or intentional misconduct in
conducting cleanup action); id. $ 120, 42 U.S.C. S 9620 (federal
government liable as any nongovernment entity under S 107).
Reading the definition of "involuntary11 to cover every instance
of governmental ownership as ownership by virtue of its function
as sovereign would render these other sections meaningless.
Pennsylvania v. Union Gas Co.. 491/U.S. 1, 8 (1989) (the narrow
exclusion from liability provided for states in S 101(20)(D) is
meaningful only because "Congress intended that States be liable
along with everyone else for cleanup costs . . . .").
163 c:\wp\lender\rule\lendrule.fld
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ordinarily for limited and non-proprietary purposes, and occur
because no entity other than a government entity is available to
serve in this capacity with respect to the property so acquired.
Government entities, including conservators and receivers
may involuntarily acquire security interests as well as
properties independent of a security interest. While all such
assets are involuntarily acquired within the meaning of this
rule, with respect to security interests so acquired, the
acquiring government entity is entitled to the same rights under
the security interest provisions of this rule as any holder.
Where the security interest provisions are unavailable with
regard to the assets so acquired, the "involuntary transfer or
acquisition" provisions of this rule may apply as a potential bar
to CERCLA liability attached to the asset.
In addition, all property acquired "involuntarily11 within
the meaning of this rule by a -government or government-appointed
entity as a conservator or receiver, regardless of whether the
property was formerly held as an investment property or for some
other purpose by the prior owner, is defined to be property
obtained through an "involuntary transfer or acquisition" under
Section 101(20)(D) and Section 101(35)(A)(ii) of CERCLA. The
manner or purpose for which the subject property was owned prior
to its acquisition is irrelevant for determining whether the
acquisition is "involuntary" for purposes of this rule, and
accordingly this rule does not distinguish among former uses of
property so acquired.
Therefore, where a government entity or its designee is
acting as a conservator or receiver, EPA interprets these
164 c:\wp\l«nd«r\rule\l*ndrul«.no
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provisions to preclude the imposition of the insolvent estate's
liabilities against the government entity acting as the
conservator or receiver, and that the liabilities of the
institution being administered are limited to the institution's
assets. The situation of a conservator or receiver of a failed
or insolvent lending institution is analogous to that of a
trustee (particularly a trustee in bankruptcy) that is
administering an insolvent's estate, and in accordance with those
principles the insolvent's liabilities are to be satisfied from
the estate being administered, and not from the assets of the
conservator or receiver.
Finally, the governmental exercise of forfeiture or seizure
authority results in an involuntary acquisition or transfer
within the meaning of CERCLA. These authorities operate
similarly to abandonment or escheat authorities, and in the same
way even though some volitional act may be required of the
government to perfect title, the property itself is transferred
to or acquired by the government in its capacity as sovereign.
Therefore, acquisitions of property pursuant to the government's
seizure or forfeiture authorities are considered involuntary
acquisitions within the meaning of Sections 101(20)(D) and
101(35)(A)(ii).
VI. Regulatory Assessment Requirements
A. Executive Order 12291
Under Executive Order 12291, EPA must judge whether a rule
is "major" and therefore requires a Regulatory Impact Analysis.
EPA has determined that this final..rule is not a "major rule"
because it will not have an annual effect on the economy of $100
million or more. By establishing criteria for determining which
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parties are within the "secured creditor" exemption under CERCLA
Section 101(20) (A) and which government entities are entitled to
the involuntary acquisition or transfer provisions of CERCLA
Section 101(20) (D) or Section 101(35) (A) (ii) , this final rule
could potentially result in costs savings to holders of security
interests and government entities which may have previously been
held liable under CERCLA Sections 107(a)(l) or 107(a}(2). In
addition, this final rule imposes no new requirements or
reporting obligations upon a person who holds a security
interest, or upon a person whose property is encumbered by a
security interest. This final rule is not a major regulation;
therefore, no Regulatory Impact Analysis is required.
B. Regulatory Flexibility
In accordance with the Regulatory Flexibility Act of 1980,
agencies must evaluate the effects of a regulation on small
entities. If the rule is likely to have a "significant impact on
a substantial number of small entities," then a Regulatory
Flexibility Analysis must be performed. Because this final rule
may actually result in cost savings for small entities that hold
security interests in contaminated facilities, EPA certifies that
today's final rule would not have a significant impact on a
substantial number of small entities.
C. Paperwork Reduction Act
This final rule does not have any information collection
requirements under the provisions of the Paperwork Reduction Act
of 1980, 44 O.S.C. S 3501 at sea.
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40 C.F.R. Part 300
Subpart L—National Oil and Hazardous Substances Pollution
Contingency Plan; Lender Liability Under CERCLA
S 300.1100 Security Interest Exemption. A person who maintains
indicia of ownership primarily to protect a security interest in
a vessel or facility, and who does not participate in the
management of the vessel or facility, is not an "owner or
operator" of such vessel or facility under CERCLA section
I07(a)(l) or section 107(a)(2). The plaintiff bears the burden
of establishing that the defendant is liable as an owner or
operator.
fa) Indicia of ownership as used in section 101(20)(A) of
CERCLA means evidence of a security interest, evidence of an
interest in a security interest, or evidence of an interest in
real or personal property securing a loan or other obligation,
including any legal or equitable title to real or personal
property acquired incident to foreclosure and its equivalents.
Evidence of such interests include, but are not limited to,
mortgages, deeds of trust, liens, surety bonds and guarantees of
obligations, title held pursuant to a lease financing transaction
in which the lessor does not select initially the leased property
(hereinafter "lease financing transaction"), legal or equitable
title obtained pursuant to foreclosure, and their equivalents.
Evidence of such interests also include assignments, pledges, or
other rights to or other forms of encumbrance against property
that are held primarily to protect a security interest. A person
is not required to hold title or a'-security interest in order to
maintain indicia of ownership.
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(1) A holder is a person who maintains indicia of ownership
(as defined in 40 C.F.R. S 300.1100(a)) primarily to protect a
security interest (as defined in 40 C.F.R. S 300.1100(b)(1)). A
holder includes the initial holder (such as a loan originator),
any subsequent holder (such as a successor-in-interest or
subsequent purchaser of the security interest on the secondary
market), a guarantor of an obligation, surety, or any other
person who holds ownership indicia primarily to protect a
security interest, or a receiver or other person who acts on
behalf or for the benefit of a holder.
(2) A borrower, debtor, or obligor is a person whose vessel
or facility is encumbered by a security interest. These terms
are used interchangeably.
(b) Primarily to protect a security interest for the
purposes of section 101(20)(A) of CERCLA means that the holder's
indicia of ownership are held primarily for the purpose of
securing payment or performance of an obligation.
(1) The term "security interest" as used in Section
101(20)(A) of CERCLA means an interest in a vessel or facility
created or. established for the purpose of securing a loan or
other obligation. Security interests include, but are not
limited to, mortgages, deeds of trusts, liens, and title pursuant
to lease financing transactions. Security interests may also
arise from transactions such as sale and leasebacks, conditional
sales, installment sales, trust receipt transactions, certain
assignments, factoring agreements, accounts receivable financing
arrangements, and consignments, if the transaction creates or
establishes an interest in a vessel or facility for the purpose
of securing a loan or other obligation.
(2) The term "primarily to protect a security interest" does
not include indicia of ownership held primarily for investment
168 c:\wp\lender\rule\lendrule.flO
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purposes, nor ownership indicia held primarily for purposes other
than as protection for a security interest. A holder may have
other, secondary reasons for maintaining indicia of ownership,
but the primary reason why any ownership indicia are held must be .-
as protection for a security interest.
(c) Participation in Management Defined. The term
"participating in the management of a vessel or facility11 means
that the holder is engaging.in acts of facility or vessel
management, as defined herein.
(1> Actions That Are Participation in Management.
Participation in the management of a facility means, for the
purpose of section 101(20}(A), actual participation in the
management or operational affairs of the vessel or facility by
the holder, and does not include the mere capacity to influence,
or ability to influence, or the unexercised right to control
facility operations. A holder is participating in management,
while the borrower is still in possession of the vessel or
facility encumbered by the security interest, only if the holder
either:
(i) exercises decisionmaking control over the borrower's
environmental compliance, such that the holder has undertaken
responsibility for the borrower's hazardous substance handling or
disposal practices; or
(ii) exercises control at a level comparable to that of a
manager of the borrower's enterprise, such that the holder has
assumed or manifested responsibility for the overall management
of the enterprise encompassing the day-to-day decisionmaking of
the enterprise with the respect to (A) environmental compliance
or (B) all, or substantially all, of the operational (as opposed
-------
enterprise include functions such as that of facility or plant
manager, operations manager, chief operating officer, or chief
executive officer Financial or administrative aspects include
functions such as that of credit manager, accounts
payable/receivable manager, personnel manager, controller, chief
financial officer, or similar functions.
(2) Actions That Are Not Participation in Management.
(i) Actions at the Inception of the Loan or Other
Transaction. No act or omission prior to the time that indicia
of ownership are held primarily to protect a security interest
constitutes evidence of participation in management within the
meaning of section 101(20)(A). A prospective holder who
undertakes or requires an environmental inspection of the vessel
or facility in which indicia of ownership are to be held, or
requires a prospective borrower to clean up a vessel or facility
or to comply or come into compliance (whether"prior or subsequent
to the time that indicia of ownership are held primarily to
protect a security interest) with any applicable law or
regulation, is not by such action considered to be participating
in the vessel or facility's management. Neither the statute nor
this regulation requires a holder to conduct or require an
inspection to qualify for the exemption, and the liability of a
holder cannot be based on or affected by the'holder not
conducting or not requiring an inspection.
(ii) Policing and Workout. Actions that are consistent with
holding ownership indicia primarily to protect a security
interest do not constitute participation in management for
purposes of section 101(20)(A) of CERCLA. The authority for the
holder to take such actions may, but need not, be contained in
contractual or other documents specifying requirements for
financial, environmental, and other, warranties, covenants,
170 e:\wp\lend«r\rula\lendrule.flO
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conditions, representations or promises from the borrower. Loan
policing and workout activities cover and include all activities
up to foreclosure and its equivalents, as provided in 40 C.F.R. §
300.llOO(d)(1).
(A) Policing the Security Interest or Loan. A holder who
engages in policing activities prior to foreclosure will remain
within the exemption provided that the holder does not by such
actions participate in the management of the vessel or facility
as provided in 40 CFR 300.1100(c)(1). Such actions include, but
are not limited to, requiring the borrower to clean up €he vessel
or facility during the term of the security interest; requiring
the borrower to comply or come into compliance with applicable
federal, state, and local environmental and other laws, rules and
regulations during the term of the security interest; securing or
exercising authority to monitor or inspect the vessel or facility
(including on-site inspections) in which indicia of ownership are
maintained, or the borrower's business or financial condition
during the term of the security interest; or taking other actions
to adequately police the loan or security interest (such as
requiring a borrower to comply with any warranties, covenants,
conditions, representations or promises from the borrower}.
(B) Work Out. A holder who engages in work out activities
prior to foreclosure and its equivalents will remain within the
exemption provided that the holder does not by such action
participate in the management of the vessel or facility as
provided in 40 CFR 300.1100(c)(1). For purposes of this rule,
"work out" refers to those actions by which a holder, at any time
prior to foreclosure and its equivalents, seeks to prevent, cure,
or mitigate a default by the borrower or obligor; or to preserve,
or prevent the diminution of, the value of the security. Work
out activities include, but are not limited to, restructuring or
171 c:\wp\l«nd«r\rul*\l*ndrule.flQ
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renegotiating the terms of the security interest; requiring
payment of additional rent or interest; exercising forbearance;
requiring or exercising rights pursuant to an assignment of
accounts or other amounts owing to an obligor; requiring or
exercising rights pursuant to an escrow agreement pertaining to
amounts owing to an obligor; providing specific or general
financial or other advice, suggestions, counseling, or guidance;
and exercising any right or remedy the holder is entitled to by
law or under any warranties, covenants, conditions,
representations or promises from the borrower.
(iii) Actions Taken Under CERCLA Section 107 fdl m.
Notwithstanding 40 C.F.R. $ 300.1100(c)(1), a holder does not
participate in the management of a vessel or facility by taking
any response action under section 107(d)(l) of CERCLA or under
the direction of an on-scene coordinator.
(d) Foreclosure on Property and Post-Foreclosure Activities.
(1) Foreclosure. Indicia of ownership that are held
primarily to protect a security interest include legal or
equitable title acquired through or incident to foreclosure and
its equivalents. For purposes of this Subpart, the term
"foreclosure and its equivalents" includes purchase at
foreclosure sale; acquisition or assignment of title in lieu of
foreclosure; termination of a lease or other repossession;
acquisition of a right to title or possession; an agreement in
satisfaction of the obligation; or any other formal or informal
manner (whether pursuant to law or under warranties, covenants,
conditions, representations or promises from the borrower) by
which the holder acquires title to or possession of the secured
property. The indicia of ownership'heId after foreclosure
continue to be maintained primarily as protection for a security
interest provided 'that the holder undertakes to sell, re-lease
172 c:\wp\lend«r\rul«\l«ndrule.£10
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property held pursuant to a lease financing.transaction {whether
*
by a new lease financing transaction or substitution of the
lessee), or otherwise divest itself of the property in a
reasonably expeditious manner, using whatever commercially
reasonable means are relevant or appropriate with respect to the
vessel or facility, taking all facts and circumstances into
consideration, and provided that the holder did not participate
in management (as defined in 40 CFR 300.1100(c» prior to
foreclosure and its equivalents. For purposes of establishing
that a holder is seeking to sell, re-lease property held pursuant
to a lease financing transaction (whether by a new lease
financing transaction or substitution of the lessee), or divest a
vessel or facility in a reasonably expeditious manner, the holder
may use whatever commercially reasonable means as are relevant or
appropriate with respect to the vessel or facility, or may employ
the means specified in 40 CFR 300.1100(d)(2)(i). A holder that
outbids, rejects or fails to act upon a written bona fide, firm
offer of fair consideration for the property, as provided in 40
CFR 300.llOO(d)(ii), is not considered to hold indicia of
ownership primarily to protect a security interest.
(2) Holding Foreclosed Property for Disposition and
Liquidation. A holder, who did not participate in management
prior to foreclosure and its equivalents, may sell, re-lease
property held pursuant to a lease financing transaction (whether
by a new lease financing transaction or substitution of the
lessee), liquidate, maintain business activities, wind up
operations, undertake any response action under section I07(d)(i)
of CERCLA or under the direction of an on-scene coordinator, and
take measures to preserve, protect 6r prepare the secured asset
prior to sale or other disposition. The holder may conduct these
activities without voiding the exemption, subject to the
173 c:\wp\lend«r\ruleU«ndrule.flO
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requirements of 40 CFR §§ 300.llOO(d) (1) and 300.noo(d) (2) .
(i) A holder establishes that the ownership indicia
maintained following foreclosure and its equivalents continue to
be held primarily to protect a security interest by, within
twelve months following foreclosure, listing the vessel or
facility with a broker, dealer, or agent who deals with the type
of property in question, or by advertising the vessel or facility
as being for sale or disposition on at least a monthly basis in
either a real estate publication or a trade or other publication
suitable for the vessel or facility in question, or a newspaper
of general circulation (defined as one with a circulation over
10,000, or one suitable under any applicable federal, state, or
local rules of court for publication required by court order or
rules of civil procedure) covering the area where the property is
located. For purposes of this provision, the twelve-month period
begins to run from the time that the holder acquires marketable
title, provided that the holder, after the expiration of any
redemption or other waiting period provided by law, was acting
diligently to acquire marketable title. If the holder fails to
act diligently to acquire marketable title, the twelve-month
period begins to run on the date of foreclosure and its
equivalents.
(ii) A holder that outbids, rejects, or fails to act upon an
offer of fair consideration for the vessel or facility
establishes that the ownership indicia in the secured property
are not held primarily to protect the security interest, unless
the holder is required, in order to avoid liability under federal
or state law, to make a higher bid, to obtain a higher offer, or
,^ •*
to seek or obtain an offer in a different manner.
(A) "Fair consideration," in the case of a holder
maintaining indicia of ownership primarily to protect a senior
174 c:\wp\l6nder\rule\lendrule.flO
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security interest in the vessel or facility, is the value of the
security interest as defined in this section. The value of the
security interest is calculated as an amount equal to or in
excess of the sum of the outstanding principal (or comparable
amount in the case of a lease that constitutes a security
interest) owed to the holder immediately preceding the
acquisition of full title (or possession in the case of property
subject to a lease financing transaction) pursuant to foreclosure
and its equivalents, plus any unpaid interest, rent or penalties
(whether arising before or after foreclosure and its
equivalents), plus all reasonable and necessary costs, fees, or
other charges incurred by the holder incident to work out,
foreclosure and its equivalents, retention, maintaining the
business activities of the enterprise, preserving, protecting and
preparing the vessel or facility prior to sale, re-lease of
property held pursuant to a lease financing transaction (whether
by a new lease financing transaction or substitution of the
lessee) or other disposition, plus response costs incurred under
section I07(d)(l) of CERCLA or at the direction of an on-scene
coordinator; less any amounts received by the holder in
connection with any partial disposition of the property, net
revenues received as a result of maintaining the business
activities of the enterprise, and any amounts paid by the
borrower subsequent to the acquisition of full title (or
possession in the case property subject to a lease financing
transaction) pursuant to foreclosure and its equivalents. In the
case of a holder maintaining indicia of ownership primarily to
protect a junior security interest, fair consideration is the
value of all outstanding higher priority security interests plus
the value of the security interest held by the junior holder,
each calculated as set forth in the preceding sentence.
175 e:\wp\lender\rule\lendrule.f10
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(B) "Outbids, rejects, or fails to act upon an offer" of
fair consideration means that the holder outbids, rejects or
•'• ••$. - .. <;;' f
fails to act upon within 90 days of receipt of a'written, bona
fide, firm offer of fair consideration for the property received
at any time after six months following foreclosure and its
equivalents. A "written, bona fide, firm offer" means a legally
enforceable, commercially reasonable, cash offer solely for the
foreclosed vessel or facility, including all material terms of
the transaction, from a ready, .willing, and able purchaser who
demonstrates to the holder's satisfaction the ability to perform.
For purposes of this provision, the six-month period begins to
run from the time that the holder acquires marketable title,
provided that trie holder, after the expiration of any redemption
or other waiting period provided by law, was acting diligently to
acquire marketable title. If the holder fails to act diligently
to acquire marketable title, the six-month period begins to run
on the date of foreclosure and its equivalents.
(3) Holder's Basis of CERCLA Liability Independent of Status
as Owner or Operator
(i) Provided that the holder did not participate in
management prior to foreclosure and its equivalents and the
holder complies with the requirements of 40 C.F.R. §
300.1100(d)(l)-(d)(2), during the, period following foreclosure
.and its equivalents a holder in possession of a vessel or
facility can incur liability under CERCLA in connection with its
activities at such foreclosed vessel or facility only by
arranging for disposal or treatment of a hazardous, substance, as
provided by CERCLA'section 107(a)(3), or by accepting for
transportation and disposing of hazardous substances at a
facility selected by the holder, as provided by CERCLA section
I07(a)(4). .
176 c:\wp\lender\rul0\lendrule.flO
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;\ ..(ii)' Following foreclosure and its equivalents, a
foreclosing .hoider that directs or undertakes activities under
CERCLA4 se
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pursuant to seizure or forfeiture authority.
(b) Nothing in this section or in CERCLA section ioi(20)(D)
or section 101(35)(A)(ii) affects the applicability of 40 C.F.R.
§ 300.1100 to any security interest, property, or asset acquired
;—
pursuant to an involuntary acquisition or transfer, as described
in this section.
Dated:
William K. Reilly',
Administrate
178 c:\wp\UndM\rula\lendrulB.f 10
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