Court Raises the Ante for Trustees in Hazardous Substances Cases
Campell, Susan Millington, Hook, Elizabeth I., American Banker
In a decision that sent shock waves throughout the banking industry, an Arizona federal court held in January that a trustee could be liable for contamination cleanup costs under the Superfund law.
The case, City of Phoenix v. Garbage Services Co., was the first to address the Superfund liability a testamentary trustee in a traditional trustee/beneficiary relationship.
The initial decision did not say whether the trustee could be held liable for damages exceeding the trust's assets. But much to the dismay of the banking community, the court in a very recent decision finally answered that question - in the affirmative.
The court held that a trustee who has the power to control the trust property and knowingly allows it to be used for the disposal of hazardous substances" will be held personally liable for Superfund damages "to the same extent that he would be liable if he held the property free of trust."
However, the court determined, if a trustee is not the owner of property when hazardous substances are discharged, or lacks power to control the use of the trust property, then Superfund liability should be limited to the assets of the trust.
Potential trustees should take precautions in structuring trusts so as to avoid the potential liability implicit in this decision.
Landfill Land Mine
In the Phoenix case, Valley National Bank was the trustee of a testamentary trust established by Wilbur Calvin Estes.
Before his death, Mr. Estes had conveyed a landfill to four individuals, but retained an option to repurchase. After his death, Valley as trustee, exercised the option and repurchased the landfill.
At the time of the repurchase, Garbage Services Co. managed operations at the landfill, and Valley continued the arrangement for another six years. Then the landfill was closed.
During that period, Valley simply paid taxes and purchased liability insurance for the property.
Eight years later Phoenix condemned and acquired the former landfill. The city commenced cleanup of the hazardous substances that had been deposited on the site and sought contribution from Valley on the ground that the bank was the record owner when the landfill was operational, because the property was an asset of the Estes trust.
Analyzing Superfund's liability provisions, the federal court in Arizona held that an owner will be liable under Superfund when either of two circumstances prevail:
* When the owner is the one who currently holds title to the contaminated property. …