Environmental Issues Affecting the Foreclosure Process
Environmental issues affecting the deed of trust collateral are of material interest to the mortgagee, as both federal and state law may (1) impose liability on the mortgagee as a deemed “owner” or “operator” of a contaminated site and (2) restrict the subsequent use of contaminated property. In general, federal and state environmental liability laws are not fault-based; rather, liability is based on one’s status in relation to the property (such as the current owner and operator or the owner or operator at the time hazardous substances were disposed thereon) or one’s activities associated with the property (such as “generator” or “transporter”). Subject to a few statutory exceptions (such as the “innocent purchaser” defenses discussed below), persons who are deemed owners or operators of property at the time of disposal are strictly liable, jointly and severally, with the current record owner of the property. Under this statutory approach, secured creditors deemed to have an “indicia of ownership” and to have “participated in management” of the property can be deemed to be an owner or operator for purposes of liability.
§ 35.2Federal Environmental Regulation
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), as amended in 1986 by the Superfund Amendments and Reauthorization Act (SARA), 42 U.S.C. §§ 9601–9675, imposes strict and joint and several liability on persons classified under the statute as “responsible parties” for cleanup costs for hazardous substances. See 42 U.S.C. § 9601. Responsible parties include the “owner or operator” of the site and a “generator or transporter” of hazardous waste. See 42 U.S.C. §§ 9601(20), 9607(a)(1). The owner or operator of a contaminated site can be deemed to be a responsible party even though the contamination occurred without its fault and even if the contamination occurred without its knowledge. See New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir. 1985); United States v. Conservation Chemical Co., 619 F. Supp. 162 (W.D. Mo. 1985).
§ 35.2:1Secured Creditor Exemption under Federal Law
Under the 1996 amendments to CERCLA, a mortgagee who “holds indicia of ownership primarily to protect [its] security interest in the . . . facility,” and who has not “participat[ed] in the management of” that facility, will not be subject to CERCLA liability. See 42 U.S.C. § 9601(20)(A)(iii). CERCLA exempts from the definition of “owner or operator” any “person, who without participating in the management of a . . . facility, holds indicia of ownership primarily to protect his security interest in the . . . facility.” 42 U.S.C. § 9601(20)(A). Therefore, a secured creditor needs to establish that it has not “participated in the management” of the borrower to avoid liability as an “owner or operator.” Some cases decided before the 1996 amendments to CERCLA interpreted the secured creditor exemption narrowly and extended CERCLA liability to creditors exercising traditional measures designed to ensure loan payment or collateral protection.
The court in United States v. Maryland Bank & Trust Co., 632 F. Supp. 573 (D. Md. 1986), held that a lender that acquired property through foreclosure became an owner and thus a responsible party with CERCLA liability and strictly liable for the borrower’s activities if the property was contaminated at the time the lender acquired title to the property. Previously a federal district court in United States v. Mirabile, 15 Environmental L. Rep. (Environmental Law Inst.) 20994, 1985 WL 97 (E.D. Pa. 1985), found a lender to have participated in the operation of the facility and thus was an operator under CERCLA, though no foreclosure had occurred. The court in United States v. Fleet Factors Corp., 901 F.2d 1535 (11th Cir. 1990), held that “a secured creditor will be liable if its involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions if it so chose.” Fleet Factors Corp., 901 F.2d at 1558. The court stated that CERCLA liability would extend to the creditor even if the creditor had not participated in the day-to-day operations of the facility, as long as the creditor could influence hazardous waste disposal decisions. Fleet Factors Corp., 901 F.2d at 1559–60. The U.S. Supreme Court denied certiorari.
§ 35.2:2EPA “Safe Harbor” Rule for Lenders
In response to the Eleventh Circuit opinion in Fleet Factors, in 1992 the Environmental Protection Agency (EPA) issued a rule (known as the “Lender Liability Rule” or “Safe Harbor Rule”) defining certain preforeclosure activities as not constituting participation in management and establishing criteria for lenders to follow postforeclosure in order to avoid CERCLA liability for preexisting contamination. See 57 Fed. Reg. 18344 (Apr. 29, 1992). This Safe Harbor Rule was held not to be within the rule-making authority granted to the EPA by CERCLA in Kelley v. EPA, 15 F.3d 1100, 1109 (D.C. Cir. 1994).
Following rejection of EPA’s Safe Harbor Rule through the decision in Kelley v. EPA, CERCLA was amended in 1996 to protect secured creditors under many common fact patterns. See Omnibus Consolidated Appropriations Bill, Subtitle E—Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, Pub. L. No. 104-208, 110 Stat. 3009 (1996) (codified in scattered sections of CERCLA, 42 U.S.C. §§ 9601–9705). In the amendments, Congress defined “participation in management” of real property as follows:
(i)the term “participate in management”—
(I)means actually participating in the management or operational affairs of a . . . facility; and
(II)does not include merely having the capacity to influence, or the unexercised right to control, . . . facility operations;
(ii)a person that is a lender and that holds indicia of ownership primarily to protect a security interest in a . . . facility shall be considered to participate in management only if, while the borrower is still in possession of the . . . facility encumbered by the security interest, the person—
(I)exercises decision making control over the environmental compliance related to the . . . facility, such that the person has undertaken responsibility for the hazardous substance handling or disposal practices related to the . . . facility; or
(II)exercises control at a level comparable to that of a manager of the . . . facility, such that the person has assumed or manifested responsibility
(aa) for the overall management of the . . . facility encompassing day-to-day decision making with respect to environmental compliance; or
(bb) over all or substantially all of the operational functions (as distinguished from financial or administrative functions) of the . . . facility other than the function of environmental compliance;
(iii)the term “participate in management” does not include performing an act or failing to act prior to the time at which a security interest is created in a . . . facility; and
(iv)the term “participate in management” does not include—
(I)holding a security interest or abandoning or releasing a security interest;
(II)including in the terms of an extension of credit, or in a contract or security agreement relating to the extension, a covenant, warranty, or other terms or condition that relates to environmental compliance;
(III)monitoring or enforcing the terms and conditions of the extension of credit or security interest;
(IV)monitoring or undertaking 1 or more inspections of the . . . facility;
(V)requiring a response action or other lawful means of addressing the release or threatened release of a hazardous substance in connection with the . . . facility prior to, during, or on the expiration of the term of the extension of credit;
(VI)providing financial or other advice or counseling in an effort to mitigate, prevent, or cure default or diminution in the value of the . . . facility;
(VII)restructuring, renegotiating, or otherwise agreeing to alter the terms and conditions of the extension of credit or security interest, exercising forbearance;
(VIII) exercising other remedies that may be available under applicable law for the breach of a term or condition of the extension of credit or security agreement; or
(IX)conducting a response action under section 9607(d) of this title or under the direction of an on-scene coordinator appointed under the National Contingency Plan, if the actions do not rise to the level of participating in the management (within the meaning of clauses (i) and (ii)).
42 U.S.C. § 9601(20)(F).
If the mortgagee becomes the owner, to thereafter avoid CERCLA liability as an “owner or operator” (assuming the mortgagee has not otherwise “participated in management” of the facility before foreclosure), the mortgagee as owner must divest itself of the property in an expeditious manner. CERCLA provides:
(i)Foreclosure—The term “owner or operator” does not include a person that is a lender that did not participate in management of a … facility prior to foreclosure, notwithstanding that the person—
(I)forecloses on the . . . facility; and
(II)after foreclosure, sells, re-leases (in the case of a lease finance transaction), or liquidates the . . . facility, maintains business activities, winds up operations, undertakes a response action under section 9607(d)(1) of this title . . . or takes any other measure to preserve, protect, or prepare the . . . facility prior to sale or disposition,
if the person seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest the person of the . . . facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.
42 U.S.C. § 9601(20)(E)(ii). Whether a foreclosing mortgagee has satisfied these requirements is a subjective determination by a court.
Some guidance may still be found in the decisions of various courts after the invalidation of the EPA Safe Harbor Rule, holding certain actions of lenders as not triggering lender liability. In Z&Z Leasing, Inc. v. Graying Reel, Inc., 873 F. Supp. 51, 55 (E.D. Mich. 1995), the court held that the lender’s ordering of an environmental assessment, the removal of underground storage tanks, the lender’s contacting state environmental authorities concerning contamination at the property, and the lender’s requiring the debtor’s compliance with environmental laws was insufficient to render the lender an “owner” or “operator” under CERCLA. In Waterville Industries v. Finance Authority of Maine, 984 F.2d 549 (1st Cir. 1993), the court held:
[s]o long as the secured party makes a reasonably prompt effort to divest itself of its unwelcome ownership, we think continued coverage under the exception serves its basic policy: to protect bona fide lenders and to avoid imposing liability on “owners” who are not in fact seeking to profit from the investment opportunity presented by prolonged ownership.
Waterville Industries, 984 F.2d at 553.
In Northeast Doran, Inc. v. Key Bank of Maine, 15 F.3d 1, 2–3 (1st Cir. 1994), the court held that a secured lender that had purchased the property at its foreclosure sale and then failed to disclose to the person to whom it later sold the property that it had discovered after foreclosure that the groundwater was contaminated was not liable to indemnify the purchaser as the lender never became an “owner,” and thus section 9601(35)(C) of CERCLA did not apply. In United States v. McLamb, 5 F.3d 69, 72–73 (4th Cir. 1993), the court held that lenders who take “prompt action” to sell the property and who do not develop or manage the property in the interim are not liable for cleanup costs and fall within the security interest exemption (the case involved a suit by a purchaser who purchased property from a lender after the lender had foreclosed on it, which was determined after the purchase to be contaminated).
For other cases dealing with a lender’s potential liability for remediation costs, see Ashland Oil v. Sonford Products Corp., 810 F. Supp. 1057 (D. Minn. 1993) (definition of “owner”); In re Cuyahoga Equipment Corp., 980 F.2d 110 (2d Cir. 1992); Kelley v. Tiscornia, 810 F. Supp. 901 (M.D. Mich. 1993) (definition of participation in management); McGuire v. Sigma Coatings, Inc., 1993 WL 329982 (E.D. La. 1993); and Reading Co. v. City of Philadelphia, 155 B.R. 890 (Bankr. E.D. Pa. 1993).
A conservative approach for a secured lender prior to foreclosure is to try to avoid CERCLA liability even under Fleet Factors’ “capacity to influence” standard. To do so, a lender must not only avoid participating in the day-to-day operational management of the borrower, it must also avoid conduct that could evidence significant participation in the financial management of the borrower.
Before lending, prudent mortgagees require borrowers to provide a Phase I environmental audit consistent with the EPA “all appropriate inquiries rule,” 40 C.F.R. pt. 12, adopted in response to CERCLA’s directive (see 42 U.S.C. § 9601(35)(B)(ii), governing whether a buyer qualifies as an innocent purchaser by having “no reason to know” of contamination). Before foreclosure a prudent mortgagee may wish to obtain another Phase I audit. If the Phase I audit discloses potential circumstances or incidents of concern (such as a dry cleaning operation on the property), a Phase II audit, including soil and possibly groundwater and surface water tests, may be warranted; the recommendations of the environmental professional conducting the Phase I ESA will be helpful in this regard. If the mortgaged property is significantly contaminated, the lender should at least consider foregoing foreclosure entirely and instead pursuing an action on the debt or against any guarantors. At the very least, the lender should consider electing not to purchase the property at any foreclosure sale of the property, so as to avoid even the possibility of being deemed an “owner” for liability purposes.
Mortgagees may face liability under the Resource Conservation and Recovery Act (RCRA), as amended by the Hazardous and Solid Waste Amendments of 1984 and the Land Disposal Program Flexibility Act of 1996, 42 U.S.C. §§ 6901–6992k, for hazardous waste on the property. RCRA authorizes federal and state agencies to issue corrective action orders to the owner of a facility that treats, stores, or disposes of hazardous waste. 42 U.S.C. §§ 6928, 6972. RCRA’s lender liability exemption is significantly more limited than that provided by CERCLA. Under RCRA, a foreclosing mortgagee has a “lender exemption” only with respect to underground storage tanks and is not protected from “owner or operator” liability if it forecloses on a RCRA treatment, storage, or disposal facility. 42 U.S.C. § 6991b(h)(9).
§ 35.2:5RCRA’s Underground Storage Tank Rules
Under RCRA, a “holder” of a mortgage does not become an “owner” of an underground storage tank (UST) or UST site for environmental liability purposes by the mere act of foreclosing, so long as the property acquired by foreclosure is maintained “primarily as protection for a security interest.” To remain within this statutory safe harbor, the foreclosing lender must seek to divest itself of title to the UST or UST site in a commercially reasonable manner, within twelve months following the foreclosure must list the property for sale with a dealer or broker (or advertise the property for sale at least monthly), and must not participate in the operation or management of the site during the period of ownership between foreclosure and divestment. The foreclosing lender can also lose the safe harbor protection by outbidding, rejecting, or failing to act upon a bona fide written offer of fair value for the UST or the UST site. RCRA’s exemption does not shield mortgagees against citizen suits. See 42 U.S.C. § 6972. See section 35.3:2 below for Texas statutory provisions regarding the foreclosure of UST sites.
§ 35.2:6Clean Water Act and Clean Air Act
The Clean Water Act, 33 U.S.C. §§ 1251–1387, does not contain a secured creditor exemption. Compliance with the Clean Water Act should be of particular concern for a mortgagee foreclosing on a construction site, where there is a likelihood of substantial storm water runoff due to a mortgagor’s failure to complete erosion controls. Airborne dust from construction sites may implicate provisions of the Clean Air Act, 42 U.S.C. §§ 7401–7671q, to the extent that such a condition must be permitted or controlled. Under both Acts, a foreclosing lender may be the subject of citizen suits. See 33 U.S.C. § 1365; 42 U.S.C. § 7704.
§ 35.2:7Federal “Innocent Purchaser” Protection and Brownfields Revitalization Act
Innocent Purchaser Protection: As to commercial property, CERCLA provides a defense to liability to a potentially responsible party if it can establish that at the time of acquisition it had undertaken “all appropriate inquiries” into the “previous ownership and uses of the property in accordance with generally accepted good commercial and customary standards and practices; and the defendant took reasonable steps to (1) stop any continuing release; (2) prevent any threatened future release; and (3) prevent or limit any human, environmental, or natural resource exposure to any previously released hazardous substance.” 42 U.S.C. § 9601(35)(B)(i); see also 42 U.S.C. § 9607(b)(3); Fina, Inc. v. ARCO, 200 F.3d 266 (5th Cir. 2000).
For nonresidential properties purchased after May 31, 1997, CERCLA required the use of procedures developed by the American Society for Testing and Materials (ASTM), including ASTM’s Standard E1527-97, entitled “Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessments Process” (see 42 U.S.C. § 9601(35)(B)(iv)(II)), until EPA adopted its own “all appropriate inquiries” rule. After adoption of this section of CERCLA, ASTM updated its standard by issuing of E1527-05 and most recently by E1527-13 (Nov. 6, 2013).
After EPA issued its final rule, “Clarification to Interim Standards and Practices for All Appropriate Inquiry Under CERCLA and Notice of Future Rulemaking Action,” 68 Fed. Reg. 3430 (Jan. 24, 2003) (subsequent clarification at 68 Fed. Reg. 24,888 (May 9, 2003) and now at 78 Fed. Reg. 79319 (Dec. 30, 2013)), purchasers can comply either by following the revised ASTM standard or EPA’s specified procedures. The ASTM standard is preferable in that it includes in its scope petroleum products that are excluded from CERCLA’s “hazardous substances.”
As to residential property, “all appropriate inquiries” means conducting an inspection and title search that reveal no basis for further investigation. See 42 U.S.C. § 9601(35)(B)(v).
It is important to note that a person may forfeit his standing and defense as an “innocent purchaser” under CERCLA by failing to disclose to a subsequent buyer knowledge of a release or threatened release of hazardous materials on the property that the seller obtained during the seller’s period of ownership. 42 U.S.C. § 9601(35)(C).
Brownfields: The Small Business Liability Relief and Brownfields Revitalization Act (the Brownfields Act), Pub. L. No. 107-118, 115 Stat. 2356 (2002) (codified in 42 U.S.C. §§ 9601–9705), was adopted with the goal of encouraging the redevelopment of “brownfield sites” and creating clarity with respect to the level of due diligence required to qualify for CERCLA’s “innocent purchaser” defense. A brownfields site is defined as real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. 42 U.S.C. § 9601(39)(A). The Act directed the EPA to promulgate regulations to address the required due diligence. Further regulations defining “all appropriate inquiry” are currently pending with the EPA. The Brownfields Act also extended the concept of potentially protected owners to “contiguous property owners” (defined at 42 U.S.C. § 9607(q)) and “bona fide prospective purchasers” (defined at 42 U.S.C. §§ 9601(40), 9607(r)). A “bona fide prospective purchaser” is a person or the tenant of a person who acquires a site after January 11, 2002; is not the party or affiliate of a party that did the release of the pollution on the site; does an investigation that makes “all appropriate inquiries;” and, if a discovery of release of any hazardous substance is found, informs the EPA about it, and cooperates with the cleanup of the property by persons authorized to conduct response actions or natural resource restoration. See 42 U.S.C. § 9601(40). The owner that fulfills the statutory requirements of this program and its tenants are exempted from liability for the known pollutants, but a lien is imposed on the property for the amount that the cleanup adds to the fair market value of the property, to be paid at sale or until the cost of the cleanup is recovered. See 42 U.S.C. § 9607(r).
The U.S. Department of Labor, Occupational Safety and Health Administration (OSHA) published its final rule on Occupational Exposure to Asbestos in 1994 (the “Final Rule”). 59 Fed. Reg. 40,963 (Aug. 10, 1994), with corrections at 60 Fed. Reg. 33,974 (June 29, 1995), 60 Fed. Reg. 35,411 (Sept. 29, 1995). In Texas, asbestos is regulated by the Department of State Health Services (formerly the Texas Department of Health). See 25 Tex. Admin. Code § 295.31. Texas regulations apply to all buildings that are subject to public occupancy and to all individuals and organizations involved in removing or encapsulating asbestos. An asbestos survey is required before a municipality may issue a permit to renovate or demolish a commercial or public building. See 25 Tex. Admin. Code § 295.32.
All buildings constructed before January 1, 1981, are presumed to have asbestos-containing building materials in all resilient flooring, thermal insulation material, and spray-on or troweled-on wall and ceiling surfaces. An owner of a pre-1981 building must manage the building and its employees as if the building contains asbestos until a certified asbestos expert certifies the building as not containing asbestos under the Final Rule’s more stringent testing standards. Under the Final Rule the seller of a pre-1981 building must notify the buyer of the presence of and location of any asbestos-containing materials (ACMs) known to the seller, based on “available” information. The Final Rule requires that the seller maintain and transfer to the buyer records of work performed at the site, the location and quantity of asbestos or presumed asbestos remaining at the completion of work, and data supporting any rebuttal of the presumption that ACMs exist in the building.
For further information, contact Environmental and Sanitation Licensing Group, Texas Department of State Health Services, by mail at P.O. Box 149347, Austin, TX 78714-9347, by telephone at 512-834-6600 x 2174 or (800) 572-5548 (toll-free in Texas), or at its website, https://www.dshs.state.tx.us/asbestos/contact.shtm#top.
The Residential Lead-Based Paint Hazard Reduction Act of 1992, codified at 42 U.S.C. §§ 4851–4856, promulgated a broad range of disclosure and abatement requirements regarding lead-based paint in residential housing built before 1978. The Act provides that any tenant or purchaser of target housing must be provided with a copy of a lead-based-paint hazards pamphlet prepared by the EPA and must also receive a written lead-warning statement reciting the statutory warning; any historical reports or studies done of the property relating to the presence of lead-based paint must be disclosed to the tenant or purchaser, and the tenant or purchaser must be given an opportunity to conduct its own risk assessment before being bound to purchase the property. See 42 U.S.C. § 4852d(a)(1). The EPA-prepaid pamphlet is available at https://www.epa.gov/lead/protect-your-family-lead-your-home.
The Act excludes informal rental agreements, such as oral tenancies, and commercial lodging facilities such as hotels, motels, and inns and provides that foreclosure sales will be exempt from the disclosure requirements due to the typical lack of information possessed by lenders about mortgaged property as of foreclosure. However, it is recommended that a foreclosing lender attempt to make such disclosures due to the acknowledged health hazards involved with lead-based paint.
§ 35.3State of Texas Regulations
A foreclosing lender may find itself the new owner of a common-law or statutory nuisance. See Tex. Civ. Prac. & Rem. Code §§ 125.001–.002. See the following out-of-state cases, wherein liability was sought to be imposed on the mortgagee after it became the owner of a contaminated facility on grounds of nuisance and negligence: Edwards v. First National Bank of North East, 712 A.2d 33 (Md. Ct. Spec. App. 1998), and F.P. Woll & Co. v. Fifth & Mitchell Street Corp., No. 96-5973, 1997 WL 535936 (E.D. Pa. July 31, 1997).
§ 35.3:1Texas Superfund Program and Secured Creditor Exemption
In 1985 the Texas Solid Waste Disposal Act was amended to create the Texas Superfund Program. See Tex. Health & Safety Code §§ 361.181–.202, 361.271–.279, 361.341–.345. In 1997, the Texas legislature enacted certain protections for secured creditors from state Superfund liability. See Tex. Health & Safety Code §§ 361.271(f), 361.701–.703. Although these protections were patterned after the 1996 federal statutory changes to CERCLA, there are important differences. Under the Texas rule, a secured lender is required to sell, re-lease the foreclosed-on property, or undertake a government-approved cleanup plan within “a commercially reasonable time.” A lender is presumed to have divested itself of the property “within a commercially reasonable time” if it advertises the property for sale within twelve months after foreclosure. See Tex. Health & Safety Code § 361.702(a)–(c).
§ 35.3:2Texas Underground Storage Tank Lender Exemption
Section 26.3514 of the Texas Water Code provides that certain regulated lenders, such as banks, savings and loans, and credit unions, are exempted from cleanup liability for leaky underground storage tanks on the mortgaged property if the regulated lender did not participate in the management of the site and if it establishes that its ownership after foreclosure continues to be consistent with holding the property primarily to protect its security interest. See Tex. Water Code § 26.3514.
To qualify for this exemption, the lender who forecloses on property must list the property for sale within twelve months of foreclosure and accept or consider offers of fair consideration for the property that would permit the lender to recover its debt. If a lender refuses to sell the foreclosed-on property to a purchaser who offers fair consideration for the property, the lender will lose the protections of the exemption and will be considered to be holding the property primarily for investment purposes, not primarily for purposes of protecting its security interest. See Tex. Water Code § 26.3514(g)–(i).
§ 35.3:3Brownfields, Innocent Owners, and State-Approved Voluntary Cleanup Program
In 1997, subchapter V, Immunity from Liability of Innocent Owner or Operator, was added to the TSWDA. See Tex. Health & Safety Code §§ 361.751–.754. The TSWDA authorizes the Texas Commission on Environmental Quality (TCEQ) to issue an Innocent Owner/Operator Program (IOP) Certificate that declares that a person is an innocent owner or operator and not responsible for an environmental problem described in the certificate. (That is, the liability release does not apply to any subsequent releases of contaminants impacting the property.) An applicant must establish that his property has become contaminated as a result of a release or migration of contaminants from a source not located on the applicant’s property and that he did not cause or contribute to the source of the problem. This protection is available “if after appropriate inquiry consistent with good commercial or customary practice, the person did not know or have reason to know of the contamination at the time the person acquired the property.” See Tex. Health & Safety Code § 361.752(b). IOP Certificates are not transferable. See the TCEQ website for program requirements at https://www.tceq.texas.gov/remediation/iop/iop.html.
In 1995, subchapter S, Voluntary Cleanup Program (VCP), was added to the TSWDA. The VCP enables private property owners, including foreclosing lenders, to negotiate a voluntary cleanup of contaminated sites in order to achieve a release from liability for subsequent owners or lenders of a contaminated site. See Tex. Health & Safety Code §§ 361.601–.613. This Texas legislation is also referred to as “Brownfields” legislation, with the goal of making formerly contaminated property more marketable. On satisfaction of a cleanup plan approved by TCEQ, the commission issues a final certificate of completion, which results in TCEQ being bound to the legal conclusion that the site cleanup is finished (at least to the extent of the contamination identified in the plan). While in the VCP process, the current owner of the property is free from VCP enforcement actions. There is a memorandum of understanding between TCEQ and EPA-Region 6 providing that the EPA will generally not pursue enforcement actions on properties in the VCP. However, purchasers must be placed on the VCP application before purchase of the contaminated property or they will need to wait until a certificate of completion or conditional certificate of completion is issued to be eligible for liability waiver. Future owners or lenders will not be subject to cleanup liability for prior contamination as defined in the certificate, should it later be determined that the contamination was not properly remediated. However, subchapter S does not address potential tort liability of the property owner to third parties. See the TCEQ website at https://www.tceq.texas.gov/remediation/vcp/vcp.html for program requirements and the form of the final certificate of completion.
§ 35.3:4Dry Cleaner Remediation Program
In 2003 the legislature enacted the Dry Cleaner Environmental Response Act to facilitate cleanup of property contaminated by the operation of dry cleaners. See Tex. Health & Safety Code §§ 374.001–.253. The law establishes a TCEQ-administered fund (known as the Texas Dry Cleaner Remediation Program) available for TCEQ-conducted corrective actions. An applicant must have been the owner of the contaminated site for not less than five years. See the TCEQ website at https://www.tceq.texas.gov/permitting/registration/dry_cleaners for dry cleaner remediation program requirements.
§ 35.3:5Closed Municipal Solid Waste Landfills
The development and use of property overlying a closed municipal solid waste landfill is regulated under Tex. Health & Safety Code §§ 361.531–.539 and 30 Tex. Admin. Code § 330.952. No one may lease land overlying such a landfill unless the land is in compliance with the statutory requirements or notice is given to prospective lessees of what is required to bring the land and any development into compliance with law and the prohibitions and restrictions on future development of the land. Tex. Health & Safety Code § 361.537; 30 Tex. Admin. Code § 330.964. An owner of such land must also notify each lessee and occupant of the land’s former use as a landfill and the structural controls in place to “minimize potential danger” posed by the landfill. Tex. Health & Safety Code § 361.539(b); 30 Tex. Admin. Code § 330.963(b).
If mold remediation is performed on a property, a licensed mold assessor is required to provide a certificate of mold remediation to the property owner within ten days following the remediation. If the assessor determines that it is reasonably certain that the mold will not return from that remediated cause, the mold assessor must note on the certificate that the underlying cause of the mold has been remediated. Tex. Occ. Code § 1958.154(a). Upon sale of the property, the seller must give the buyer a copy of each Certificate of Mold Damage Remediation issued for the property during the preceding five years. Tex. Occ. Code § 1958.154(b). Accordingly, if a borrower performs mold remediation on the collateral, the lender should obtain a copy of the certificate at that time, in case the lender later purchases the property at foreclosure.
Hopefully, the loan documents provide for inspection and Phase I and Phase II audit rights and compliance with the ASTMs information standards. Given the current state of environmental laws, the following are strategies that might be followed by a mortgagee.
If possible, the mortgagee should conduct a Phase I Environmental Site Assessment (ESA) of the mortgaged property. To inspect the property, the lender will have to obtain the cooperation of the owner of the property in gaining peaceable entry to the property. If the mortgagor refuses to cooperate, the lender may be able to obtain an injunction permitting entry for the purpose of having an ESA conducted. See RTC v. Polmar Realty, Inc., 780 F. Supp. 177 (S.D.N.Y. 1991) (granting injunction to permit mortgagee entry to conduct ESA where mortgage contained clause permitting lender right to inspect property on occurrence of default on loan); First Capital Life Insurance Co. v. Schneider, Inc., 608 A.2d 1082 (Pa. Super. Ct. 1992) (inspection clause did not allow for Phase II ESA since it would involve digging of holes in property, conducting subsurface tests, and leaving groundwater monitoring well, but found that “reentry to protect the security after default” clause sufficient).
Unless the costs of the Phase I and II ESAs are listed in the deed of trust as being a cost of sale or as a secured debt if incurred by the mortgagee, there is authority that such costs are not covered by the deed of trust. See Norwest Bank Indiana v. Friedline, 591 N.E.2d 599 (Ind. Ct. App. 1992). The Texas Real Estate Forms Manual’s form for deed of trust does not refer to the cost of an ESA as being either a cost of sale or a secured debt.
If the mortgaged property is contaminated and the mortgagee has an interested buyer, it might negotiate the sale of the loan to the buyer.
If the loan documents permit, the mortgagee might elect to foreclose on the portion of the mortgaged property that is not contaminated.
§ 35.4:4Notice to Governmental Agencies
The mortgagee might contact the governmental agencies responsible for enforcing cleanup actions and report the contamination. It is possible that these agencies will undertake their own cleanup actions that result in the mortgaged property being cleaned up before the mortgagee’s foreclosure or can pressure the mortgagor into cleanup actions. The mortgagee may also be able to structure a cleanup plan with the agencies under one of the “Brownfields”-type initiatives that minimize owner or operator liability to the lender.
§ 35.4:5Receivership or Injunction
The lender might seek a receiver to be appointed for the property to undertake actions to reduce waste to the mortgaged property or injunctive relief in support of the loan document covenants. See section 37.2 in this manual concerning receiverships.
The mortgagee might elect to foreclose its lien and try to avoid becoming an “owner,” “operator,” or “generator” as defined under the various environmental laws by complying with the statutory exemptions for qualifying foreclosing lenders.
If the foreclosing lender and the trustee conducting the sale have knowledge of apparent contamination, they should consider disclosing the contamination to prospective bidders at the sale. In Karoutas v. HomeFed Bank, 283 Cal. Rptr. 809 (Cal. Ct. App. 1991), the court permitted the successful bidder at a foreclosure sale to recover damages from the lender by finding that the lender had violated a common-law duty to disclose known defects.
A lender’s attempts to set aside or rescind its foreclosure sale due to its discovery after the sale of preforeclosure contamination probably will most likely not be successful. See Horicon State Bank v. Kant Lumber, Inc., 478 N.W.2d 26 (Wis. Ct. App. 1991).
Civins, Jeffrey, and Mary Mendoza. “Drafting Real Estate Contracts to Address Environmental Concerns.” In Advanced Real Estate Drafting Course, 2012. Austin: State Bar of Texas, 2012.
Cox, Susan C., Karen Gren Johnson, and Catherine Weir. “Ethics Do’s and Don’ts for the Dirt Lawyer.” In Advanced Real Estate Law Course, 2013. Austin: State Bar of Texas, 2013.
Gilberg, Howard L., “Getting the Deal Done: The Environmental Perspective.” Austin: Mortgage Lending Institute, University of Texas School of Law and Texas Mortgage Bankers Association, 2004.
Kotvis, Jill A. “Should You or Shouldn’t You? Statutory and Implied Environmental Disclosure Obligations.” In Advanced Real Estate Law Course, 2012. Austin: State Bar of Texas, 2012.
Nettles, Larry W. “Environmental Indemnity and Liability Allocation Agreements – Evaluating and Negotiating the Risks.” In Advanced Real Estate Drafting Course, 2010. Austin: State Bar of Texas, 2010.
Record, Richard S. “Regulatory Tools: VCP, IOP and Brownfield Programs.” In Advanced Real Estate Law Course, 2003. Austin: State Bar of Texas, 2003.