Case Law Updates on Lender and Fiduciary Liability

1. Case Law Updates on Lenderand Fiduciary Liability Presented by Richard M. Fil, Esq.EBA Conference, St. Paul, MN June 2002

2. Background • Potential Liability as Owner / Operator • Pre-1996 Case Law

3. EPA Regulations / Guidance • EPA’s lender liability regulations • Treatment by the courts • EPA / DOJ response

4. Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996 • More clearly defines exemption under definition of “owner or operator” • Must hold “indicia of ownership primarily to protect the security interest” • Defines “participation in management” of the facility

5. Acts Which May Trigger Liability • May avoid liability UNLESS the person: • Actually participates in the management or operational affairs (not mere capacity to do so) • Undertakes decisionmaking control over environmental compliance • Exercises control comparable to a manager

6. Exceptions to Definition of “Participate in Management” • Abandoning or releasing an interest • Requiring environmental compliance, including appropriate response actions • Monitoring or inspecting property • Providing financial advice • Restructuring terms and conditions of the security interest

7. Avoiding Liability Through Foreclosure • At the “earliest practicable, commercially reasonable time, on commercially reasonable terms”: • Sell, re-lease, or liquidate the property; or • Prior to sale or disposition: • Maintain business activities, wind up operations, or undertake certain response actions, or • Take “any other measures to preserve, protect, or prepare” the facility for sale

8. Other Definitions • Extension of credit • Financial or administrative function • Foreclosure • Lender • Financial or administrative function • Operational function • Security interest

9. RCRA Implications • Similar exclusions from potential liability related to sites with USTs • Person must not “otherwise [be] engaged in petroleum production, refining, or marketing”

10. Protection of Fiduciaries • Exemptions also provided for “fiduciaries” (trustees, executors, custodians) • Does not apply to negligence causing or contributing to a release • Does not apply to trusts created to maintain business activities for profit • Does not apply to a person acquiring ownership or control to avoid liability

11. Other Caveats for Fiduciaries • Protections do not apply to: • Fiduciary who is a beneficiary and receives “extraordinary compensation” • Acts outside of the fiduciary capacity • Protection is limited to fiduciary; the assetsof the estate may be at risk

12. Current Guidance • “Policy on Interpreting CERCLA Provisions Addressing Lenders and Involuntary Acquisitions by Government Entities,” 62 Fed. Reg. 36424 (July 7, 1997, effective June 30, 1997) • “CERCLA Lender Liability Rule,” 57 Fed. Reg. 18344 (April 29, 1992)

13. Post-1996 Case Law • Federal • State

14. The Top 10 Reasons You Are Still Vital to Your Institution 10. Guidelines for exemptions must still be followed • Keep reading the statute • Avoid control over waste handling and decision-making • Dispose of property as directed • EPA guidance is not binding

15. The Top 10 Reasons You Are Still Vital to Your Institution 9. Burden of proof is on party claiming exemption • Need to prepare and document efforts / compliance • Overcome “broad remedial purpose” of CERCLA

16. The Top 10 Reasons You Are Still Vital to Your Institution 8. Fiduciary Negligence • Get to know your private bankers • Let them know what you can do for them

17. The Top 10 Reasons You Are Still Vital to Your Institution 7. Angry and Litigious Beneficiaries • Assets of estate / trust still at risk • Beneficiaries may pursue recovery of lost assets

18. The Top 10 Reasons You Are Still Vital to Your Institution • Limited Case Law • New statute; not many cases decided • Lack of clear precedent may result in significant variations • Banks are still attractive defendants

19. The Top 10 Reasons You Are Still Vital to Your Institution • Potential Liability Under Other Federal Programs • TSCA • RCRA • CWA

20. The Top 10 Reasons You Are Still Vital to Your Institution 4. Potential Gaps Under State Law • Most states have similar exemptions, but variations may exist in: • Language • Application / interpretation • Other forms of liability may attach • Lead paint • Consumer protection • Increasing role of states in enforcement actions

21. The Top 10 Reasons You Are Still Vital to Your Institution • Common Law Claims • Exemptions do not necessarily negate common law claims • Often joined with state and/or federal statutory claims for a “belt and suspenders” approach

22. The Top 10 Reasons You Are Still Vital to Your Institution 2. Limitations on Insurance Coverage • Limits may not cover all claims • Policy / exclusions may not cover all types of claims • Voluntary action may be prudent to limit overall costs • Existing coverage may lapse / no longer be available in the future

23. The Top 10 Reasons You Are Still Vital to Your Institution 1. Nuisance Value / Avoiding Litigation • Number of reported cases are far fewer than those brought or settled • Following the considerations noted above will better position your institution to more favorably resolve claims