Readers may recall an earlier blog post regarding a bank’s potential liability for damage to private property caused by a tree falling onto a neighbor’s property. In addition to property damage from obvious unsafe conditions, banks should also consider the potential liability associated with potential, unseen environmental conditions on property it has foreclosed upon. Under Connecticut and federal law, landowners are typically responsible for the remediation of environmental contamination that exists on their property, regardless of who caused the contamination in the first instance. However, there are exemptions that protect lenders from liability for environmental conditions so long as certain requirements are met.
…there are exemptions that protect lenders from liability for environmental conditions so long as certain requirements are met.
First, the entity that acquires the property via foreclosure must be a lender. Although “lender” is broadly defined, there are some entities, affiliated with banks, which may not be considered a “lender” who is exempt from liability. “Lender” specifically includes insured depository institutions, insured credit unions, banks or associations chartered under the Farm Credit Act, and a leasing or trust company affiliated with an insured depository institution as well as “any person (including a successor or assignee of any such person) that makes a bona fide extension of credit to or takes or acquires a security interest from a nonaffiliated person.”
By comparison, some banks have created separate entities that have the role of holding a bank’s Other Real Estate Owned. These entities may or may not be considered lenders, depending on how the entity is structured and how it obtains the relevant property. For this reason, careful consideration should be given to the process by which lenders foreclose upon properties which may have environmental contamination.
Second, lenders also must not participate in management of operations at the foreclosed upon property prior to foreclosure. The term “participate in management” is defined by the statute and requires actual participation not just the mere ability to participate. Participation in management includes managing the business operations, reviewing and/or approving day-to-day operations, and/or influencing a business’s processes or waste disposal. Lenders, however, may take certain actions to wind-up business operations or sell the property, may respond to (or remediate) a release of hazardous substances that presents a danger to the environment or human health, or may take other actions that preserve, protect, or prepare the property for sale or other disposition. Lenders should be aware, however, of the risk of liability if any of a lender’s actions specifically cause a release of hazardous substances. Accordingly, all actions should be done with an appropriate standard of care.
Finally, after foreclosing on a property, lenders must seek to sell the property at the “earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.” Lenders have wide latitude in determining what is reasonable—and the requirement is not that the property actually sells, but is listed for sale within a reasonable time period. Often 6-12 months, depending on the state of the property and the efforts needed to prepare it for sale or other disposition has been determined to be a reasonable time period within which to list a property for sale.
Properties that may have environmental contamination can include a variety of commercial or industrial businesses, including gasoline stations, auto body repair, dry cleaners, greenhouses or nurseries, printing operations, and manufacturing facilities. Before foreclosing on a property with a business that requires the use of hazardous materials or which may otherwise have environmental contamination on-site, a lender should pay careful attention to its foreclosure process to ensure it remains exempt from liability. If a lender’s actions take it out of the safe harbor from liability, a lender could find itself liable for all environmental contamination on a property.