case law updates on lender and fiduciary liability

B O S T O N • H A R T F O R D • N E W L O N D O N • S T A M F O R D • G R E E N W I C H • N E W Y O R K

Case Law Updates on Lenderand Fiduciary Liability

Presented by Richard M. Fil, Esq.EBA Conference, St. Paul, MN

June 2002

Background

• Potential Liability as Owner / Operator

• Pre-1996 Case Law

EPA Regulations / Guidance

• EPA’s lender liability regulations

• Treatment by the courts

• EPA / DOJ response

Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996

• More clearly defines exemption under definition of “owner or operator”

– Must hold “indicia of ownership primarily to protect the security interest”

– Defines “participation in management” of the facility

Acts Which May Trigger Liability

• May avoid liability UNLESS the person:

– Actually participates in the management or operational affairs (not mere capacity to do so)

– Undertakes decisionmaking control over environmental compliance

– Exercises control comparable to a manager

Exceptions to Definition of “Participate in Management”

• Abandoning or releasing an interest

• Requiring environmental compliance, including appropriate response actions

• Monitoring or inspecting property

• Providing financial advice

• Restructuring terms and conditions of the security interest

Avoiding Liability Through Foreclosure

• At the “earliest practicable, commercially reasonable time, on commercially reasonable terms”:

– Sell, re-lease, or liquidate the property; or

– Prior to sale or disposition:

• Maintain business activities, wind up operations, or undertake certain response actions, or

• Take “any other measures to preserve, protect, or prepare” the facility for sale

Other Definitions

• Extension of credit

• Financial or administrative function

• Foreclosure

• Lender

• Financial or administrative function

• Operational function

• Security interest

RCRA Implications

• Similar exclusions from potential liability related to sites with USTs

• Person must not “otherwise [be] engaged in petroleum production, refining, or marketing”

Protection of Fiduciaries

• Exemptions also provided for “fiduciaries” (trustees, executors, custodians)

• Does not apply to negligence causing or contributing to a release

• Does not apply to trusts created to maintain business activities for profit

• Does not apply to a person acquiring ownership or control to avoid liability

Other Caveats for Fiduciaries

• Protections do not apply to:

– Fiduciary who is a beneficiary and receives “extraordinary compensation”

– Acts outside of the fiduciary capacity

• Protection is limited to fiduciary; the assetsof the estate may be at risk

Current Guidance

• “Policy on Interpreting CERCLA Provisions Addressing Lenders and Involuntary Acquisitions by Government Entities,” 62 Fed. Reg. 36424 (July 7, 1997, effective June 30, 1997)

• “CERCLA Lender Liability Rule,” 57 Fed. Reg. 18344 (April 29, 1992)

Post-1996 Case Law

• Federal

• State

The Top 10 Reasons You Are Still Vital to Your Institution

10. Guidelines for exemptions must still be followed

Keep reading the statute

Avoid control over waste handling and decision-making

Dispose of property as directed

EPA guidance is not binding


9. Burden of proof is on party claiming exemption

Need to prepare and document efforts / compliance

Overcome “broad remedial purpose” of CERCLA


8. Fiduciary Negligence

Get to know your private bankers

Let them know what you can do for them


7. Angry and Litigious Beneficiaries

Assets of estate / trust still at risk

Beneficiaries may pursue recovery of lost assets


6. Limited Case Law

New statute; not many cases decided

Lack of clear precedent may result in significant variations

Banks are still attractive defendants


5. Potential Liability Under Other Federal Programs

TSCA

RCRA

CWA


4. Potential Gaps Under State Law

Most states have similar exemptions, but variations may exist in:

• Language

• Application / interpretation

Other forms of liability may attach

• Lead paint

• Consumer protection

Increasing role of states in enforcement actions


3. Common Law Claims

Exemptions do not necessarily negate common law claims

Often joined with state and/or federal statutory claims for a “belt and suspenders” approach


2. Limitations on Insurance Coverage

Limits may not cover all claims

Policy / exclusions may not cover all types of claims

Voluntary action may be prudent to limit overall costs

Existing coverage may lapse / no longer be available in the future


1. Nuisance Value / Avoiding Litigation

Number of reported cases are far fewer than those brought or settled

Following the considerations noted above will better position your institution to more favorably resolve claims

case law updates on lender and fiduciary liability

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