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New California Legislation Addresses Environmental Lender Liability and Liability for Releases of Hazardous Substances
October 18, 1996
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Howrey LLP
Governor Wilson recently signed two new laws that will have a significant impact on environmental liability. Senate Bill 1285 creates a state "Lender Liability Rule" akin to a federal EPA rule that had been voided by the federal courts, and only recently was partially revived when Congress amended CERCLA and RCRA to offer some protection to lenders and trustees. Another new law, Senate Bill 649, is intended to prevent the imposition of criminal or civil liability when discharges into state waters are expressly authorized under state or federal water quality permits.
Senate Bill 1285
Senate Bill 1285 is intended to create immunity for lenders and fiduciaries relating to contaminated properties provided they assume no active role in the operations leading to contamination. The bill is intended to immunize lenders and fiduciaries from common law and statutory liability resulting from contamination, provided the requirements and proscriptions of the new statute are met.
The Shortcomings of Prior Law
Until now, state law did not adequately define the extent of participation in the management of property which might trigger a lender's liability for contamination on property which it holds as security for a loan. Several lenders have been held responsible when they have taken title to the property by foreclosure or become involved in the management of the property in a work-out. In 1990, the Ninth Circuit held that as a matter of federal law, there must be some actual management (rather than simply authority to control) of the facility before a secured creditor can be liable for the release of hazardous substances. In re Bergsoe Metal Corp. (9th Cir. 1990) 910 F.2d 688.
The decision in Bergsoe did not clearly define the boundaries of lender liability under federal law, and attempts to do so at the federal level have only recently resulted in amendments to CERCLA and RCRA which address this issue. The law had also failed to recognize that the lender and fiduciary relationship is not sufficiently related to the hazardous material contamination to warrant the imposition of liability.
The Scope of Senate Bill 1285
Under the new California law, the legislature intends that lenders will not be liable if they (1) hold a security interest in the property; (2) own the property in connection with a finance lease; (3) have extended credit to the owner without retaining a security interest in the property; or (4) acquire the property through foreclosure, provided they list the property for sale within 12 months. Nevertheless, lenders are not protected if they directly cause or contribute to the release of hazardous substances, or if they "participate in the management of the property." The law goes to great lengths to clarify what actions might constitute the requisite management activities giving rise to liability.
The law provides needed guidance for lenders and fiduciaries with interests in properties on which hazardous substances have been discharged, and should better define what they can do to avoid liability. The recent amendments to CERCLA and RCRA at the federal level will also assist lenders and fiduciaries who must deal daily with this complex area of law.
Senate Bill 649
Sections 5650 and 5650.1 of the California Fish and Game Code impose criminal and civil liability on parties that pollute state waters. In the past, even though a party was authorized by a permit to discharge or release hazardous substances, they might be subject to penalties. Senate Bill 649 attempts to addresses this issue, exempting parties from such liability if their discharge or release was expressly authorized by a permit issued by the State Water Resources Control Board or a Regional Water Quality Control Board.
The bill also creates an affirmative defense in criminal prosecutions for parties who have been charged with violating Section 5650 of the Fish and Game Code. To invoke the defense, a defendant must demonstrate that: (1) no harmful material reached state waters; (2) reasonable measures were taken to mitigate the discharge; and (3) all applicable reporting requirements were complied with.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©1996
Howrey LLP
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