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New Federal Protection for Lenders from Environmental Liability

Spring 1997

On Tuesday, October 1, 1996, President Clinton signed into law the Omnibus Appropriations Bill. In addition to funding the federal govern-ment until a formal budget is adopted, the Bill contained many substantive provisions. Title II of the Bill is the Economic Growth and Paperwork Reduction Act of 1996 (the "Act") which contains a variety of changes to current banking law, most of them intended to provide regulatory relief for financial institutions.

Regulatory Relief.
Some of the areas affected by the Act include mortgage lending, consumer credit, debt collec-tion practices, lender liability for environmental cleanup, general regulatory relief, recapitalization of the thrift insurance fund, and setting the stage for the merger of BIF and SAIF. Many of the changes in the Act may directly influence your business. For example, the requirement to file a branch application for an ATM is eliminated; a well-capitalized and well-managed bank holding company can acquire companies engaged in non-banking activities without prior notice to, or approval from, the Federal Reserve Board; the threshold for banks to fit into the "small bank examination cycle" provisions of the FDI Act is raised from $175 million to $250 million.

One of the most important and immediate effects of the Act on your business will arise from the special protection for lenders and fiduciaries from cleanup liability added by the changes to the Federal Superfund Laws. The new law resurrects the EPA lender liability rule which was invalidated by the United States Court of Appeals for the District of Columbia in February 1994. This is especially good news for lenders and fiduciaries in Wisconsin since there are now federal and state laws designed to protect traditional lending and fiduciary activities from most cleanup liability that could attach to such activities in this state.

Important Elements of the New Federal Protection from Superfund Liability. Some of the more important elements of the new federal protection from Superfund liability for traditional lending and fiduciary activities are:

- The liability of a fiduciary for the release of contaminants at property held in a fiduciary capacity will not exceed the value of the asset held in a fiduciary capacity. However, the fiduciary generally will not have personal liability for such expenses for specified activities traditionally conducted by fiduciaries.
- An exclusion for cleanup liability is provided for traditional lending activities. Traditional lending activities which are expressly included in this special protection comprise: holding security interests; extensions of credit; monitoring enforcement of the terms and conditions of lending agreements; monitoring compliance with environmental laws of the customer before, during, or after the credit relationship; restructuring or negotiating terms of the credit relationship; and foreclosure activities.
- In order to take advantage of the special foreclosure protections, the lender must seek to divest the collateral at the earliest "practicable" time taking into consideration market and legal requirements.
- This lending "safe harbor" does not apply to activities that are tantamount to "participating in management" of the otherwise liable customer/company. However, it is important to note that such activity does not include merely having the capacity to influence management activity. There must be actual participation by the lender in the management of the otherwise liable customer/company to create liability for the lender under this management standard.

Warning of Gaps in Protection. A special note of caution needs to be sounded about this new federal legislation for lending activities in Wisconsin. The lender and fiduciary protection for cleanup liability in Wisconsin is not complete. Some of the gaps in protection include:

- The new federal legislation only covers cleanup liability that may arise under the Federal Superfund Law. It does not cover other possible federal sources of cleanup liability for lenders such as the Federal Hazardous Waste law.
- The Wisconsin lender/fiduciary protection under the Wisconsin cleanup law, while similar, is not identical to this new federal protection. There are additional requirements that must be met to shield liability under state law that are not required for protection under the federal law.
- The new federal legislation is designed only to shield lenders and fiduciaries from cleanup liability. It is not designed to affect the credit risk that may be present for customers exposed to environmental liabilities. Lenders will have to continue their vigilance against such credit risks created by state and federal environmental laws.

There are many special rules that apply to the general standards outlined in this article. Every lending and fiduciary situation must be analyzed based upon its special facts to determine if such activities can qualify for these new federal protections from cleanup liability. Nonetheless, this new federal legislation provides an important new road map for protecting lenders as well as fiduciaries from cleanup liability.

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