>Date: Sun, 27 Jul 2008 09:33:56
-0500=20
>To: dirt-dd@mail.abanet.org,
dirt@listserv.umkc.edu,=20
brokerdirt@listserv.umkc.edu, dmargolies@kcstar.com,
abc_mattie@hotmail.com,=20
large@lclark.edu, David.Glickstein@piperrudnick.com,
rmasters@acadiarealty.com,=20
jsinger@law.harvard.edu, Bobroff@law.unm.edu, emccaffe@law.usc.edu,=20
rrash@inlandgroup.com, florrie.roberts@lls.edu,
kathleen@mountainmax.net,=20
land@bwclaw.com, jcolbert@omm.com, DArnold@gibsondunn.com,=20
THomburger@bellboyd.com, JHKaplan@bryancave.com, MMBerger@MANATT.COM,=20
parellar@stjohns.edu, JMurray@firstam.com, mark@rsf-law.com,
bliss@blisslaw.biz,=20
kuehnle@akslaw.net, mbetesh@kbalease.com, janet.jackson@washburn.edu,=20
ngutmacher@bfca.com, poiriema@shu.edu, kunkeln@umkc.edu, zjq22@umkc.edu,
dianes@prestongates.com, zinmanr@stjohns.edu, shlevine@arnstein.com,=20
dlumpkins@gatewaylegal.org, mballard@lawschool.gonzaga.edu,=20
larry@larryliang.com, zgn62@umkc.edu, mmeister@modrall.com,
jstone@acedsl.com.,=20
JSagar@vendomegrp.com, carbonej@umkc.edu, belianj@umkc.edu,=20
michael.glazerman@gm
ail.com
>From: Patrick=20
Randolph <dirt@umkc.edu>
>Subject: DD=20
7/28/08 When your contracted environmental clean up specialist in
fact=20
spills more gunk - are you an "operator"
>
>Daily
Development=20
for Monday, July 28, 2008
>by:
Patrick A.=20
Randolph, Jr.
>Elmer F. Pierson
Professor of=20
Law
>UMKC School of
Law=20
>Of Counsel: Husch Blackwell
Sanders=20
>Kansas City, Missouri
>=20
>This is from Larry Schnapf of the New Jersey
Bar=20
>
>
>Hicks
Family=20
Limited Partnership v. 1st National Bank of Howell, 2008 Mich. App.
LEXIS 1444=20
(Mi. Ct. App.7/15/08) (unpublished opinion)
>
>Defendant bank had=20
foreclosed on property formerly operated by a defunct paint manufacturer
in=20
1983. In the same year, Bank sold the property to the predecessor of the
Plaintiff=E2=80=99s estate. When the bank acquired the property,
it was=20
contaminated with buried drums of paint and paint thinners. The
1983=20
purchase agreement provided in part that "Sellers agree to have all
equipment=20
inside and out, all stock, debris and residue removed from premises at
time of=20
closing, in compliance of E.P.A. Rules &
Regulations."
>
>Defendant bank=20
performed remedial activities from 1983 to 1997. But there was evidence
that a=20
contractor hired by the bank had damaged a barrel during remedial
activities=20
that led to another discharge. In 1997, the bank requested that the site
be=20
delisted but the state of Michigan refused.
>
>In
2004, plaintiff=20
began developing the property and discovered several additional buried
drums and=20
additional groundwater and soil remained contaminated. In December 2004,
plaintiff then sought to recovery its cleanup costs from the defendant
bank=20
under the state superfund law and common law claims.
>
>The
trial court=20
looked to CERCLA caselaw to determine whether the plaintiff, a PRP
(=E2=80=9Cpotentially responsible party=E2=80=9D), had a right to
bring a contribution=20
action under the state superfund law since that right was modeled after
CERCLA=20
section 113. The trial court ruled consistent with the majority of split
authority under CERCLA, that a PRP did not have a statutory right of=20
contribution and also dismissed the common law claims. Ultimately, on
later=20
appeal in this case, court ruled that the trial court had erred when it
granted=20
defendant's motion for summary disposition because of the U.S. Supreme
Court=20
ruling in United States v Atlantic Research Corp, 127 S. Ct. 2331; 168
L. Ed. 2d=20
28 (2007) that PRPs could bring contribution actions.
>
>The
trial court=20
dismissed the common law claims based on the statute of
limitations. It=20
held that the =E2=80=9Cdiscovery rule=E2=80=9D tolling the statute of
limitations did not apply=20
because because the plaintiff failed to exercise reasonable diligence in
monitoring defendant's performance of the cleanup operation. The court
said that=20
even if the plaintiff did not know the particular facts concerning the
buried=20
drums or the ruptured barrel, it had sufficient grounds for knowing no
later=20
than 1997 that defendant may not have been adequately fulfilling its
alleged=20
cleanup obligations. In the absence of evidence that plaintiff made
reasonable=20
efforts to ascertain the condition of the property, the trial court
determined=20
that it was not appropriate to apply the discovery rule in this
case. The=20
appeals court affirmed the dismissal of plaintiff's various common-law=20
claims.
>
>Because the=20
appeals court found that a PRP could bring a contribution action,
however, it=20
then had to deal with the question of whether defendant was either
an=20
"operator" nor an "arranger" under the state superfund law. The appeals
court,=20
however, held that the defendant bank was not an "operator" or
"generator" at=20
the site. While the defendant bank exercised control over the site when
carrying=20
out its remedial actions, the court said that plaintff had to show that
the=20
defendant must have had authority to control the operations or decisions
involving the disposal of the hazardous substance, or must have assumed=20
responsibility or control over the disposition of the hazardous
substance. Since=20
the defendant's only connection to the site was its remedial clean-up
effort,=20
the court said this was insufficient to establish the requisite nexus
required=20
for liability as an operator.
>
>On the
=E2=80=98arranger=E2=80=99=20
theory of liability, the plaintiff had introduced evidence that a
contractor=20
hired by defendant ruptured a barrel during the cleanup operations in
1984 and=20
that this was sufficient to show that defendant disposed of a hazardous=20
substance and was responsible for an activity causing a release.
However, the=20
court ruled that defendant could not be held liable as an arranger as it
did not=20
intend the 1984 disposal.
>
>Reporter=E2=80=99s Comment=20
1: It is interesting that the defendant did not try to assert the
secured=20
creditor exemption under the Michigan superfund law which appears to be
broader=20
than the CERCLA secured exemption . In particular, foreclosing lenders
may=20
assert the exemption if they take certain steps to dispose of the
property and=20
has taken reasonable care in maintaining and preserving the real estate
and=20
permanent fixtures; provides to the department all environmental
information=20
related to the facility that is available to the lender; has complied
with any=20
order issued by the state environmental agency and if conditions on the
property=20
pose a threat of fire or explosion or present an imminent hazard through
direct=20
contact with hazardous substances, the lender has undertaken appropriate
response activities to abate the threat or hazard.
>
>Perhaps the bank=20
did not comply with the foreclosure rules set forth in the state secured
exemption or felt it did not act retroactively. In any event, the bank
was=20
forced to defend itself as a former landowner of the property without
the extra=20
layer of protection that is provided by the expansive state secured
creditor=20
defense.
>
>Reporter=E2=80=99s Comment=20
2: This case can be contrasted to the enforcement action from last year
in State=20
of New York vs. HSBC where the bank agreed to pay $850,000 in fines and=20
reimburse environmental agencies for response costs involving a facility
that=20
was abandoned by a borrower. In this case, HSBC extended a $4.1 million
loan to=20
Westwood Chemical Corp. After the borrower defaulted, HSBC established a
lockbox=20
and directed customers to forward payments to that account. A few months
later,=20
HSBC seized Westwood's operating funds and asked the company to prepare
a plan=20
for an orderly shutdown. As part of this request, Westwood requested=20
approximately $60,000 to properly dispose of hazardous materials in
drums,=20
containers and wastewater tanks as well as raw materials and work in
process.=20
HSBC refused this request and also declined to follow the
recommendations of its=20
consultants to winterize the facility. During the winter, pipes from the
fire=20
suppression system burst as well as many of
the containers storing hazardous materials. The=20 contents of the drums mixed with water when the weather warmed. At some point,=20 the local code enforcement officer became aware of the conditions and notified=20 the New York State Department of Environmental Conservation (NYSDEC), which then=20 referred the matter to EPA. The bankruptcy trustee then got into the act, filing=20 a motion under section 506(c) of the bankruptcy code seeking to subordinate the=20 bank's lien. EPA, DEC and the town also filed administrative claims seeking=20 reimbursement of their response costs. In the fall of 2006, HSBC arranged for=20 the sale of the property for $3 million. Approximately $2.3 million of the sales=20 price was used to reimburse some of the costs incurred by the regulatory agencies. In its lawsuit against HSBC, the New York Attorney General asserted=20 that HSBC was not entitled to the secured creditor exemption because it had=20 become involved in the management of the facility when it seized the operating=20 funds
, refused to allow money to be used to properly dispose of=20 the hazardous materials or otherwise enable the borrower to comply with its=20 closure obligations, and failed to properly winterize the facility when it had=20 assumed control of the building and constructive possession of the hazardous=20 materials. The attorney general also charged that the bank had an obligation to=20 notify the NYSDEC of the conditions at the facility.
>
>Lenders encounter=20
their greatest risk of liability during post-foreclosure activities, and
the=20
HSBC case highlights the importance of a lender exercising extreme
caution when=20
winding down operations at a borrower's manufacturing facilities. Under
the 1996=20
Asset Conservation, Lender Liability Deposit Insurance Act, also known
as the=20
Lender Liability Amendments, a lender may maintain business operations,
wind=20
down operations, take measures to preserve, protect and prepare the
vessel or=20
facility for sale or disposition, and even undertake response actions
under=20
section 107(d) (l) of CERCLA so long as the lender seeks to sell or
re-lease (in=20
the case of a sale/leaseback transaction)and complies with certain
foreclosure=20
requirements.
>
>Banks
continue to=20
find themselves subject to environmental issues because of the actions
they took=20
during workouts or following foreclosures. Many of these enforcement
actions=20
involve administrative orders or lawsuits that are quietly settled by=20
governmental agencies. These situations have typically taken place when
a=20
borrower has gone out of business and the bank takes control of the
facility in=20
order to sell off the inventory, fixtures, machinery and equipment of
the=20
borrower subject to the bank's lien. The bank typically does not
taketitle to=20
the property because of fear that it will lose its exemption, but
instead hires=20
an auction house to conduct the sale of the property. Usually, there are
barrels=20
or drums of hazardous waste strewn about the facility and the equipment
that is=20
being auctioned off may even contain hazardous wastes. To avoid any
suggestion=20
that the bank or the auction had any control over hazardous wastes, the
auction=20
will often rope off the area where the dru
ms or barrels are found. After theauction is conducted, the=20 drums and barrels are then left in the abandoned facility. At somepoint, government authorities discover that there are abandoned drums at the facility=20 and order the lender to pay for the removal of the materials.
>
>Lenders should be=20
aware that the definition of "release" under CERCLA includes abandonment
of=20
drums. Thus, a lender who has taken control of a facility to conduct an
auction=20
and leaves behind drums or equipment containing hazardous wastes could
be deemed=20
to have caused a threatened release of hazardous substances. EPA has=20
consistently taken the position that such action constitutes abandonment
of=20
hazardous wastes (when the borrower is insolvent) and creates generator=20
liability for the lender. As a result, financial institutions should
consult=20
with environmental counsel prior to taking possession of a former
borrower's=20
facility or conducting any auction at a manufacturing facility. It would
also be=20
advisable for lenders to retain an environmental consultant or
environmental=20
attorney to inspect the facility prior to taking control in order to
evaluate=20
the possible environmental liabilities that might be associated with the
auction. The financial institution could have its
environme
ntal consultant or attorney perform a regulatory review of=20 the facility to minimize the possibility that the lender could incur liability=20 for releases of hazardous substances at that treatment or disposal=20 facility.
>
>The
Reporter for=20
this item was Larry Schnapf of the New Jersey Bar. =20
>
>Items=20
reported here and in the ABA publications
>should not be relied upon in the course
of=20
>representation or in the forming of decisions
in
>legal matters. The same
is true of=20
all
>commentary provided by
contributors to=20
the DIRT
>list. Accuracy of
data and=20
opinions expressed
>are the sole=20
responsibility of the DIRT editor
>and are=20
in no sense the publication of the ABA.
>Parties posting
messages to=20
DIRT are posting to a
>source that
is=20
readily accessible by members of
>the=20
general public, and should take that fact
>
>ABOUT DIRT:
>DIRT is an internet
discussion=20
group for serious
>real estate=20
professionals. Message volume varies,
>but=20
commonly runs 5 to 15 messages per work day.
>Daily Developments
are posted=20
every work day. To
>subscribe, send=20
the message
>
>to
>To cancel your
subscription,=20
send the message
>signoff DIRT to
the=20
address:
>
>for information on
other=20
commands, send the message
>Help
to the=20
listserv address.
>=20
>DIRT has an alternate, more extensive
coverage that=20
includes not only
>commercial and
general=20
real estate matters but also focuses specifically upon
>this service more
valuable,=20
it is named =E2=80=9CBrokerDIRT.=E2=80=9D But
residential
>residential market will
want to=20
subscribe to this alternative list. If you
>BrokerDIRT carries all
DIRT=20
traffic in addition to the residential discussions.
>To subscribe to
BrokerDIRT,=20
send the message
>
>to
>To cancel your
subscription to=20
BrokerDIRT, send the message
>signoff=20
BrokerDIRT to the address:
>=20
>listserv@listserv.umkc.edu
>DIRT is a service
of the=20
American Bar Association
>Section
on Real=20
Property, Probate & Trust Law and
>the=20
University of Missouri, Kansas City, School
>Patrick A. Randolph, Jr., Professor of Law,=20
UMKC
>School of Law, but Professor
Randolph=20
grants
>permission for copying or=20
distribution of Daily
>Developments for=20
educational purposes, including
>no charge is imposed for such distribution=20
and
>that appropriate credit is
given to=20
Professor
>Randolph, DIRT, and its
sponsors.
>
>