Maybe You're Not Really Naked

Article excerpt

Maybe you're not really naked

Environmental liability lawsuits against lenders continue to send shock waves throughout banking, and with good reason. Public and private litigants found a new strategy for cleaning up the environment: Sue the banks!

With the average cost to clean up a single "Superfund" hazardous waste site reaching $30 million, banks make attractive targets. In dealing with such claims, bankers must realize that existing insurance policies may cover the cost of defending lender liability lawsuits and paying any judgments that result.

Through a thorough examination of their own insurance policies - and those of all other parties having anything to do with a given parcel of polluted land - coverage can be found and the bottom line preserved. Success depends on fully understanding the risks; taking precautions; and pursuing coverage when the first two measures fail. Owner, operator, cop. The most common environmental liability claim is that the lender has become the "owner/operator" of a contaminated site. Such suits have been brought under state and federal environmental laws which impose strict, retroactive, and joint and several liability on any party which has used, owned, or operated a contaminated site.

Strict liability means that cleanup costs can be imposed on "potentially responsible parties" without regard to their fault and without regard to efforts taken to prevent contamination. Retroactive liability means that a party can be held liable for pollution that took place years ago - even before the particular statute involved was enacted. Joint and several liability means that one party may be held liable for all cleanup costs, even it others contributed to the contamination.

These principles have been applied to banks which foreclosed and then became "owners," responsible for past owners' sins. The principles have also been extended to banks which did not foreclose, but exercised some sort of management control over the site. In the 1990 Fleet Factors decision, a federal appeals court ruled that a lender may be held liable for cleanup if "involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions if it chose." Earlier this year the Supreme Court refused to review this decision.

Lenders may be enmeshed in yet a third type of liability - failure to police the borrower's environmental practices. Consider a recent case from a federal court in Rhode Island.

A real estate subdivision was built with a septic system that deposited raw sewage into an adjacent river. For two decades the river was closed to shellfishing and swimming. The state issued orders to stop the pollution, but these were never enforced.

Fed up, a local citizens group sued, under the federal Clean Water Act, to shut down the sewer system. Not to be outdone, state officials filed a second lawsuit, this time naming the present landowners and their lenders as defendants (O'Neil v. Q.L.C.R.I., Inc.).

The original theory was that these institutions were mortgage holders, who would be held liable for the pollution if and only if they foreclosed. Later the state's attorney general upped the ante and accused the banks of "aiding and abetting" violations of state and federal environmental statutes.

According to the attorney general, the lenders "knew of the sewage problem and could have conditioned loans on the fixing of the sewage problem." That was enough for the court to proceed with this novel theory of lender liability for borrower pollution. The court found no irony in the fact that the state, which did not enforce its own orders to stop the pollution, could sue the lenders for failing to stop the pollution.

The federal Environmental Protection Agency has recently proposed giving lenders some relief. (See the Washington column.) Lenders would not be held liable unless they take an active role in managing borrowers' daily operations. …