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 Lender and 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 assets of the estate may be at risk

Current Guidance “Policy on Interpreting CERCLA Provisions Addressing Lenders and Involuntary Acquisitions by Government Entities,” 62 Fed. Reg (July 7, 1997, effective June 30, 1997) “CERCLA Lender Liability Rule,” 57 Fed. Reg (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

The Top 10 Reasons You Are Still Vital to Your Institution 9.Burden of proof is on party claiming exemption  Need to prepare and document efforts / compliance  Overcome “broad remedial purpose” of CERCLA

The Top 10 Reasons You Are Still Vital to Your Institution 8.Fiduciary Negligence  Get to know your private bankers  Let them know what you can do for them

The Top 10 Reasons You Are Still Vital to Your Institution 7.Angry and Litigious Beneficiaries  Assets of estate / trust still at risk  Beneficiaries may pursue recovery of lost assets

The Top 10 Reasons You Are Still Vital to Your Institution 6.Limited Case Law  New statute; not many cases decided  Lack of clear precedent may result in significant variations  Banks are still attractive defendants

The Top 10 Reasons You Are Still Vital to Your Institution 5.Potential Liability Under Other Federal Programs  TSCA  RCRA  CWA

The Top 10 Reasons You Are Still Vital to Your Institution 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

The Top 10 Reasons You Are Still Vital to Your Institution 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

The Top 10 Reasons You Are Still Vital to Your Institution 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

The Top 10 Reasons You Are Still Vital to Your Institution 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