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Announcement

New EPA Rule Shields Banks and Lenders from UST Liability

Fall 1995

The Environmental Protection Agency ("EPA") has issued a rule specifying conditions under which a security interest holder may be exempted from the Resource Conservation and Recovery Act ("RCRA") Subtitle I Regulation of Underground Storage Tanks, otherwise applicable to a tank owner. The rule’s effective date is December 6, 1995.

Under Subtitle I of RCRA, EPA was required to develop a comprehensive regulatory program for underground storage tanks ("UST") storing petroleum or hazardous substances. The regulations included leak detection, corrective action, and the demonstration that the UST owner or operator was financially capable of the corrective action and could compensate third parties for resulting damages. The EPA believes that concerns over environmental liability have made many lenders reluctant to make loans to otherwise credit worthy owners and operators of USTs. They believe this security interest exemption rule will protect from liability those persons whose only connection with the tank is as the holder of a security interest, and who has in return secured the loan by taking a security interest in the tank or in the property on which the tank is located.

A "holder of a security interest," as used in this rule, is a person who maintains ownership indicia primarily to protect a security interest and includes the initial holder (such as the loan originator), and any subsequent holder (such as a successor in interest or loan guarantor). The EPA intends that the rule shall apply to an ownership interest maintained primarily for the purpose of, or primarily in connection with securing payment or performance of a loan or other obligation, and not an interest in the UST or property on which the UST is located, held for some other reason. Any such additional reasons must be secondary to protecting a security interest in the UST or the property on which the UST is located.

A security interest holder cannot avail itself of the security interest exemption if it participates in the management or control of decision making related to the operational aspects or day-to-day operations of the UST. Participation and management, however, does not include the mere capacity or unexercised right or ability to influence the operational aspects or day-to-day operation of the UST or the property on which the UST is located, nor does it include participation in the financial, administrative, or environmental compliance aspects of the UST or the property on which the UST is located. A holder of a security interest is permitted to conduct those activities related to its financial and administrative obligations of managing a loan portfolio as well as environmental compliance activities and activities undertaken voluntarily to protect human health and the environment. If the holder becomes engaged in the daily operation of the UST, however, it becomes subject to the full range of requirements applicable to owners or operators of USTs. In the event of foreclosure, a security interest holder must, in order to maintain consistency with the security interest exemption, seek to sell or divest itself of the foreclosed property in a reasonably expeditious manner. A holder cannot, under the terms of the rule, reject offers of fair consideration for the property and avail itself of the regulatory exemption.

Once a holder has foreclosed on the UST or the property on which the UST is located, it cannot continue to use, store, dispense, or fill petroleum in the UST without incurring Subtitle I liability unless there is another operator such as a tenant on the property who is willing to take responsibility as an operator for compliance with the Subtitle I requirements. A foreclosing holder will be deemed an operator for purposes of the Subtitle I requirements if petroleum is added to, stored in or dispensed from the UST. A security interest holder must empty the UST within 60 calendar days after foreclosure or within 60 calendar days after December 6, 1995, whichever is later. In the event an unknown UST is discovered, the security interest holder can avail itself of the protection of the rule by emptying the unknown UST within 60 calendar days after its discovery, or within 60 calendar days after December 6, 1995, whichever is later.

The security interest holder must also either permanently or temporarily close the UST. If the UST is temporarily closed, the holder must continue operation and maintenance of corrosion protection in accordance with §280.21, and report suspected releases to the implementing agency. The holder must also conduct a site assessment in accordance with §280.72(a) if the UST is temporarily closed for more than twelve months and the UST does not meet either the performance standards in §280.20 for new UST systems, or the upgrading requirements in §280.21. The UST can remain in temporary closure until a subsequent purchaser has acquired title to the UST or the facility on which the UST is located. Once a subsequent purchaser acquires title, the purchaser must decide whether to operate or close the UST in accordance with applicable requirements in 40 C.F.R. part 280.

Under this rule, a holder is exempted from corrective action as an operator after foreclosure if it ensures that the tanks no longer store petroleum and it complies with the temporary or permanent closure requirements specified in the rule. The holder would also not be required to comply with any of the UST financial responsibility requirements, including those for corrective action and third party liability coverage.

This regulation provides a road map that ensures that security interest holders can utilize the security interest exemption, however, it is not the complete answer for lenders and other security interest holders. This rule affects only federal UST requirements and only provides protection against federal enforcement actions. The rule does not apply to non-petroleum, hazardous substance or hazardous waste USTs, nor does it apply to above-ground storage tanks and heating oil tanks used for on site consumption.

Finally, the security interest exemption rule does not apply to trustees, or personal representatives. Lenders acting in that capacity and not in the capacity of making a loan to the tank owner, will not be able to take advantage of this rule. While the new rule offers protection to lenders from the time credit is extended through and including foreclosure and resale, lenders need to proceed with caution.

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

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