Amicus Curiae Brief — Fleet Factors Corp. v. United States, 111 S. Ct. 752 (1991) (No. 90-504)

ot ABS

DEC 13 1990

No. 90-504 JOSEPH F. SPANIOL, JR.

a CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

FLEET FACTORS Corp.,

. Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

BRIEF OF

THE NATIONAL COUNCIL

OF SAVINGS INSTITUTIONS,

THE CALIFORNIA LEAGUE

OF SAVINGS INSTITUTIONS,

GLENDALE FEDERAL BANK, F.S.B.,

HOMEFED BANK, F.S.B.. AND IMPERIAL BANK

AS AMICI CURIAE IN SUPPORT OF PETITIONER

ROBERT H. KLONOFF

(Counsel of Record)

TIMOTHY B. DykK

DEENA B. JENAB

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

Counsel for Amici

WILSON - Epes PRINTING Co., INC. - 789-O096 - WASHINGTON, D.C. 20001

Le ee gh ae POP Oe Sa

QUESTION PRESENTED

Whether a secured lender is liable under CERCLA for

environmental response costs incurred at the borrower’s

facility, despite the statutory exemption for secured lend-

ers, where the lender neither took legal title to the bor-

rower’s property nor participated in the ne man-

agement of the facility.

(i)

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES * iv

STATEMENT OF INTEREST ...... i 2

REASONS FOR GRANTING THE PETITION .......... 8

I. THE ELEVENTH CIRCUIT’S DECISION

MISREADS THE SECURED CREDITOR

EXEMPTION AND CONFLICTS WITH

EVERY OTHER CASE TO CONSIDER THE

I alist pnthegpllacatienarcnieetiniininicnnitesirninneiesanntienncns 3

Il. THE ELEVENTH CIRCUIT’S DECISION, IF

NOT OVERTURNED, WILL HAVE A SERI-

OUS EFFECT ON BANKS, SAVINGS INSTI-

TUTIONS, AND POTENTIAL BORROWERS.. 7

III. REVIEW IS ESSENTIAL AT THIS TIME...... 13

I ih ceca nciccendicgacntrindibabciinsninlincainanpsinbidonedanseenson 14

(iii)

iv

TABLE OF AUTHORITIES

Cases

Statutes

Page

Guidice v. BFG Electroplating and Manufacturing

Co., 732 F. Supp. 556 (W.D. Pa. 1989) ............... 6

In re Bergsoe Metal Corp., 910 F.2d 668 (9th Cir.

1990) .. 6

In re T.P. Long Chemical Inc., 45 Bankr. 278

(Bankr. N.D. Ohio 1985) _....0000...... 5

New York v. Shore Realty Corp., 759 F.2d 1082

(2d Cir. 1985) - 11

United States v. Mirabile, 15 Envtl. L. Rep. 20994

(E.D. Pa. 1985) .. 5

United States v. Monsanto Co., 858 F.2d 160 (4th

Cir. 1988), cert. denied, 109 S. Ct. 3156

(1989) 9

Community Reinvestment Act of 1977, 12 U.S.C.

§ 2901 et seg. .... 13

Comprehensive Environmental Response, Com-

pensation, and Liability Act, 42 U.S.C. § 9601

et seq. passim

ge fe LES } ee ceneeeENEEEE passim

42 U.S.C. § 9607 (a) we fet 3

42 U.S.C. § 9607 (a) (1)... 3

42 U.S.C. § 9607 (a) (2) 8

Financial Institutions Reform, Recovery, and En-

forcement Act of 1989, Pub. L. No. 101-738, 1038

ca eee 13

Omnibus Budget Reconciliation Act of 1990, Pub.

L. No. 101-508, § 6301, 3-Year Extension of

Comprehensive Environmental Response, Com-

pensation, and Liability Act of 1980, 104 Stat.

1388 18

Resource Conservation and Recovery Act of 1976,

EST OE ORT 14

Legislative Materials

Hearing on Lender Liability Under Superfund,

House Comm. on Energy and Commerce, Sub-

comm. on Transp. and Hazardous Materials,

101st Cong., 2d Sess. (Aug. 2, 1990) ................. passim

“oO —— oat

v

TABLE OF AUTHORITIES—Continued

Page

Hearing on S. 2827: The Federal Deposit Im-

provements Act of 1990, and Other Environ-

mental Risks to Lenders, Senate Banking Com-

mittee, 101st Cong., 2d Sess. (July 19, 1990)... 8,12

H.R. 4494, 101st Cong., 2d Sess. (1990) ................. 13

Impact of Superfund Lender Liability on Small

Businesses and Their Lenders, Hearing Before

the House Comm. on Small Business, 101st

Cong., 2d Sess. (June 7, 1990) ........................---- 8,12

S. 2319, 101st Cong., 2d Sess. (1990) ....................... 13

S. 2827, 101st Cong., 2d Sess. (1990) ...................... 13

Miscellaneous

Bolstein & Reznick, Lender Liability After Fleet

Factors, 10 A.B.A. Envtl. L. No. 3, at 1 (1990).. 8

Burcat, Environmental Liability of Creditors:

Open Season on Banks, Creditors, and Other

Deep Pockets, 108 Banking L.J. 509 (1986) ........ 7

Burcat, Environmental Liability of Creditors Un-

der Superfund, 83 Prac. Law. No. 2, at 13

CI ie ncitesttecinsinthinlinibhibicansnbindenenincennennneme 7

Burkhart, Lender/ Owners and CERCLA: Title and

Liability, 25 Harv. J. on Legis. 317 (1988) ........ 7

Comment, The Liability of Financial Institutions

for Hazardous Waste Cleanup Costs Under

CERCLA, 1988 Wis. L. Rev. 189 (1988) -........... 7

Corash & Behrendt, Lender Liability Under

CERCLA: Search for a Safe Harbor, 43 Sw.

Fell Se I ia snitch iteicninehstiesaliilntaiiinliidansntacesee 7

Dominick & Harmon, Lender Limbo: The Perils

of Environmental Lender Liability, 41 S.C.L.

Rev. 855 (1990) 7

Draft EPA Rule on Lender Liability (Text), IV

Inside EPA’s Superfund Report No. 22, at 19....passim

21 Env’t Rep. (BNA) No. 10, at 427 (1990) ........... 14

21 Env’t Rep. (BNA) No. 25, at 1173 (1990) ........ 13

Geltman, Rule 10b-5 and RICO: Alternative Rem-

edies for Environmental Liabilities Acquired by

Stock Purchase of a Closely Held Corporation,

26 Hous. L. Rev. 456 (1969) ................................. 8

vi

TABLE OF AUTHORITIES—Continued

General Accounting Office, Cleaning Up Hazard-

ous Wastes: An Overview of Superfund Re-

authorization Issues (1985) ae) CON SRS oe

Kneipper & Hooks, Don’t Turn Assets Into Lia-

bilities: Ways to Limit Environmental Risks,

5 Com. Lending Rev. No. 4, at 3 (1990) 00...

2 The Law of Hazardous Waste: Management,

Cleanup, Liability, and Litigation § 14.01[5] [c],

at 14-75 (S. Cooke ed. 1990) 0.000...

Ledbetter, 20 Chem. Waste Litig. Rep. No. 8, at

SU eT tshcrwindincitateiaptherianiidiaansled ti a sae

Marzulla & Kappel, Lender Liability Under the

Comprehensive Environmental Response, Com-

pensation and Liability Act, 41 S.C.L. Rev. 705

Environmental Statutes on Commercial Lend-

ing and Investment Activities, 41 Bus. Law.

1188 (1986) ........... :

Note, The Battle Continues: Lenders Are Still

Searching for Well-Defined Methods to Avoid

Hazardous Waste Cleanup Liability, 19 Stetson

ea earner Se ea eek ee

Note, Hidden Hazards of Hazardous Waste

Cleanup Laws: Lenders and Title Insurers Be-

ware, 18 Cumb. L. Rev. 728 (1988) .......00000000...

Note, Interpreting the Meaning of Lender Manage-

ment Participation Under Section 101(20) (A)

of CERCLA, 98 Yale L.J. 925 (1989) 000000000...

Note, Viable Protection Mechanisms for Lenders

Against Hazardous Waste Liability, 18 Hofstra

Ee BR I taleschticthatncdnslandnckkaieds

Parenteau & Johnston, The Big Chill: The Impact

of Fleet Factors on Lenders, 20 Chem. Waste

Litig. Rep. No. 8, at 880 (1990) —..000

Risks to Lenders—EPA Lists Cases Where Lend-

ers Risk Liability, TV Inside EPA’s Superfurd

Report No. 21, at 25 (1990) 0...

Page

vii

TABLE OF AUTHORITIES—Continued

Sen. Subcomm. on Superfund, Ocean and Water

Protection, Lautenberg-Durenberger Report on

Superfund Implementation: Cleaning Up the

Nation’s Cleanup Program (1989) .....................

Vollman, Double Jeopardy: Lender Liability Un-

der Superfund, 16 Real Est. L.J. No. 1, at 3

CE DF cntinsionsectaiipielitians

Page

IN THE

Siyptreme Court of the United States

OCTOBER TERM, 1990

No. 90-504

FLEET FACTORS CorP.,

‘ Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

BRIEF OF

THE NATIONAL COUNCIL

OF SAVINGS INSTITUTIONS,

THE CALIFORNIA LEAGUE

OF SAVINGS INSTITUTIONS,

GLENDALE FEDERAL BAN&, F.S.B.,

HOMEFED BANK, F.S.B, AND IMPERIAL BANK

AS AMICI CURIAE IN SUPPORT OF PETITIONER

This amici curiae brief is filed on behalf of the Na-

tional Council of Savings Institutions, the California

League of Savings Institutions, Glendale Federal Bank,

F.S.B., HomeFed Bank, F.S.B., and Imperial Bank with

the written consent of all parties to this action.’ Amici

urge the Court to grant certiorari in this case.

1 See Sup. Ct. R. 87.2. Statements of consent are on file with the

Clerk of the Court.

2

STATEMENT OF INTEREST

The National Council of Savings Institutions (the

“National Council”) is a major trade association head-

quartered in Washington, D.C. It represents approxi-

mately 400 savings banks and savings and loan associa-

tions nationwide.

The California League of Savings Institutions (the

“California League”) is another major trade association.

It represents all savings institutions in the State of

California.

Glendale Federal Bank, F.S.B. is the nation’s fourth

largest savings institution. It provides real estate lend-

ing and consumer banking services at 235 branch offices

in California, Florida, and Washington, and has in ex-

cess of $24 billion in assets.

HomeFed Bank, F.S.B. is a federal savings bank with

consolidated assets of approximately $19 billion. The

bank operates a network of 212 retail banking offices

throughout California. Although its primary lending

focus is in California, it has lent money throughout the

United States in numerous commercial and residential

projects.

Imperial Bank is a state, non-member, Federal Deposit

Insurance Corporation (“FDIC”) insured commercial

bank with assets of approximately $3 billion. It is Cali-

fornia’s tenth largest commercial bank with twelve bank-

ing offices throughout the state. Imperial Bank provides

real estate construction and permanent loans to commer-

cial as well as residential borrowers.

‘The members of the National Council and the Cali-

fornia League, as well as Glendale Federal Bank, Home-

Fed Bank, and Imperial Bank, are substantially involved

in secured lending. The issue of the proper scope of se-

cured lender liability for hazardous waste cleanup under

the Comprehensive Environmental Response, Compensa-

tion, and Liability Act, 42 U.S.C. §9601 et seg.

3

(“CERCLA”), is therefore of great significance to the

Amici.

REASONS FOR GRANTING THE PETITION

This case presents an important and recurring ques-

tion under CERCLA: whether a secured lender may be

held liable for cleanup costs at a borrower’s facility, even

though the lender did not participate in the day-to-day

management of the site and is thus not an “operator” of

the facility. Contrary to every other court to address

the issue, the Eleventh Circuit held that a secured lender

need not have participated in such day-to-day manage-

ment to be held liable. Rather, it must simply have had

the “capacity to influence” the borrower’s management

of hazardous waste at the site. Pet. App. 14a. If allowed

to stand, the Eleventh Circuit’s decision will have severe

economic consequences for banks and savings institu-

tions. Such institutions will find themselves confronted

with enormous and unanticipated hazardous waste

cleanup costs in situations in which they never foreclosed

on their security interest and never exercised control.

The ultimate consequence will be that these institutions

will be reluctant to make loans to companies that may

have environmental problems. This Court’s review is

plainly warranted.

I. THE ELEVENTH CIRCUIT'S DECISION MIS-

READS THE SECURED CREDITOR EXEMPTION

AND CONFLICTS WITH EVERY OTHER CASE

TO CONSIDER THE ISSUE

Section 107(a) of CERCLA, 42 U.S.C. § 9607(a),

identifies the classes of persons who are liable for haz-

ardous waste cleanup costs. These include, inter alia, the

present “owner” or “operator” of the site and the owner

or operator of the site at the time of disposal of hazard-

ous substances. 42 U.S.C. §9607(a)(1) and (2).

CERCLA explicitly defines “owner or operator” to

4

exempt “a person, who, without participating in the

management of a... facility, holds indicia of ownership

primarily to protect his security interest in the... fa-

cility.” 42 U.S.C. § 9601(20) (A) (emphasis added).

In construing the “secured creditor” exemption, the

district court below concluded that secured lenders may

“provide financial assistance and general, and even iso-

lated instances of specific, management advice to its debt-

ors without risking CERCLA liability if the secured

creditor does not participate in the day-to-day manage-

ment of the business... .” Pet. App. 28a.

The Eleventh Circuit rejected the district court’s

standard, concluding that it was “too permissive towards

secured creditors who are involved with toxic waste fa-

cilities.” Pet. App. 18a. Under the standard adopted by

the Eleventh Circuit, a lender may be liable for the bor-

rower’s CERCLA liabilities “by participating in the fi-

nancial management of a facility to a degree indicating

a capacity to influence the corporation’s treatment of

hazardous wastes.” Jd. at 13a-14a (emphasis added).

Stated another way, under the Eleventh Circuit’s stand-

ard, “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.” Id. at 14a (em-

phasis added). The court of appeals specifically stated

that “[i]t is not necessary for the secured creditor ac-

tually to involve itself in the day-to-day operations of the

facility in order to be liable... .” Id.

The Eleventh Cireuit’s standard renders CERCLA’s

secured creditor exemption virtually meaningless. Even

if the lender refrains from foreclosing on the borrower’s

property, and carefully avoids any participation in the

operation of the borrower’s facility, it may be liable to

the United States or private parties for CERCLA cleanup

costs merely because it holds a mortgage, lien, or other

security interest and exercises—or has the power to

5

exercise—prudent collateral management in the nature

of financial oversight solely to protect that interest. In

essence, this means that a lender risks exposure to

CERCLA liability virtually any time it makes a secured

loan to the owner of a facility where a hazardous sub-

stance has been deposited, stored, disposed of, or placed,

even where neither the lender nor the borrower was

aware of any environmental problem at the time of the

loan.

In interpreting the secured creditor exemption, the

Eleventh Circuit has seriously misconstrued the language

and purposes of Section 101(20)(A). That section, by

its terms, was clearly designed to avoid the imposition

of either “owner” or “operator” liability on lending in-

stitutions that did not engage in “management” of the

facility and that acted “primarily to protect [their] se-

curity interest in the facility.”

Prior to the Eleventh Circuit’s decision, every court

to address the question had held that day-to-day opera-

tional involvement at a borrower’s facility was a pre-

requisite for subjecting a non-foreclosing secured lender

to CERCLA liability. The first detailed analysis of the

issue was in United States v. Mirabile, 15 Envtl. L. Rep.

20994 (E.D. Pa. 1985). The court in Mirabile held that,

to be liable under the exemption, a secured creditor must

participate in the “operational, production, or waste dis-

posal activities” of the corporation. Jd. at 20995. ‘Mere

financial ability to control waste disposal practices .. .

is not sufficient ....” Id. Put another way, “it must,

at a minimum, participate in the day-to-day opera-

tional aspects of the site.” Jd. at 20996. Several other

cases, including the district court decision below (see Pet.

App. 28a), have adopted the same approach. See, e.g.,

In re T.P. Long Chemical Inc., 45 Bankr. 278, 289

(Bankr. N.D. Ohio 1985) (under the secured creditor

exemption, a lender must have “participated in the man-

agement of the [borrower’s] facility” to be held liable) ;

6

Guidice v. BFG Electroplating and Manufacturing Co.,

732 F. Supp. 556, 561 (W.D. Pa. 1989) (stating that “a

mortgagee is exempt... under 42 U.S.C. § 9601(20) (A)

so long as [it] did not participate in the managerial and

operational aspects of the facility’).

Most recently, the Ninth Circuit emphasized the need

for operational management in order to hold a secured

lender liable. In re Bergsoe Metal Corp., 910 F.2d 668

(9th Cir. 1990). Although the court declined to adopt a

precise standard, it noted that “whatever the precise

parameters of ‘participation,’ there must be some actual

management of the facility before a secured creditor will

fall outside the exception.” Jd. at 672 (emphasis in orig-

inal). According to the court, “[mJerely having the

power to get involved in management, but failing to ex-

ercise it, is not enough.” Jd. at 673 n.3. Applying that

reasoning, the court rejected the argument that simply

having “the right ‘to direct that hazardous waste be

stored properly’ ” was sufficient to impose CERCLA li-

ability on a secured lender. Jd. (quoting appellant’s

brief). While the court did not repudiate the Eleventh

Circuit’s formulation, there can be little doubt that the

two standards are fundamentally at odds. Indeed, the

Environmental Protection Agency (“EPA”) has itself

recognized that Bergsoe Metal conflicts with the Eleventh

Circuit’s decision and that the latter decision is erroneous.

See Draft EPA Rule on Lender Liability (Text), IV

Inside EPA’s Superfund Report No. 22, at 19, 20, 25

(“EPA Draft Rule’) (rejecting Eleventh Circuit’s

standard and, contrary to its position in the court below,

proposing Bergsoe Metal’s standard of “actual opera-

tional participation by. the lender’’).

Thus, the Eleventh Circuit’s decision stands alone, un-

supported by any other decision and even by the agency

charged with enforcing the statute. Review by this

Court is necessary to resolve these conflicting approaches.

7

Il. THE ELEVENTH CIRCUIT’S DECISION, IF NOT

OVERTURNED, WILL HAVE A SERIOUS EFFECT

ON BANKS, SAVINGS INSTITUTIONS, AND

POTENTIAL BORROWERS

Few, if any, issues under CERCLA have received

greater attention than the question of lender liability

for remediating hazardous waste sites.? Indeed, although

the Eleventh Circuit’s decision was rendered only six

months ago, it has already been the subject of consid-

erable commentary, most of it sharply critical of the

Eleventh Circuit’s analysis.* It has also been a focus

2A review of the Index to Legal Periodicals reveals that more

than 35 law review articles have been written on the topic in the

past four years. The following are representative: Marzulla &

Kappel, Lender Liability Under the Comprehensive Environmental

Response, Compensation and Liability Act, 41 S.C.L. Rev. 705

(1990); Dominick & Harmon, Lender Limbo: The Perils of En-

vironmental Lender Liability, 41 S.C.L. Rev. 855 (1990); Note,

The Battle Continues: Lenders are Still Searching for Well-Defined

Methods to Avoid Hazardous Waste Cleanup Liability, 19 Stetson L.

Rev. 633 (1990); Corash & Behrendt, Lender Liability Under

CERCLA: Search for a Safe Harbor, 43 Sw. L.J. 863 (1990);

Note, Interpreting the Meaning of Lender Management Participa-

tion Under Section 101(20)(A) of CERCLA, 98 Yale L.J. 925

(1989) ; Note, Viable Protection Mechanisms for Lenders Against

Hazardous Waste Liability, 18 Hofstra L. Rev. 89 (1989); Note,

Hidden Hazards of Hazardous Waste Cleanup Laws: J.enders and

Title Insurers Beware, 18 Cumb. L. Rev. 723 (1988); Burkhart,

Lender/Owners and CERCLA: Title and I ‘ability, 25 Harv. J. on

Legis. 317 (1988) ; Comment, The Liability of Financial Institutions

for Hazardous Waste Cleanup Costs Under CERCLA, 1988 Wis. L.

Rev. 139 (1988) ; Vollmann, Double Jeopardy: Lender Liability Under

Superfund, 16 Real Est. L.J. No. 1, at 3 (1987); Burcat, Environ-

mental Liability of Creditors Under Superfund, 33 Prac. Law. No.

2, at 13 (1987); Burcat, Environmental Liability of Creditors:

Open Season on Banks, Creditors, and Other Deep Pockets, 103

Banking L.J. 509 (1986); Murphy, The Impact of “Superfund”

and Other Environmental Statutes on Commercial Lending and

Investment Activities, 41 Bus. Law. 1133 (1986).

3 See, e.g., Kneipper & Hooks, Don’t Turn Assets Into Liabilities:

Ways to Limit Environmental Risks, 5 Com. Lending Rev. No. 4,

8

of three separate Congressional hearings and the sub-

ject of regulatory review by EPA.*

A few statistics illustrate the importance of the issue.

EPA estimates that there are more than 30,000 haz-

ardous waste sites around the country.’ According to

EPA, the average cleanup cost per site is about $25

million, with costs for some sites estimated as high as

$100 million.*®

at 3, 7 (1990) (“[T]he broad legal theory set forth in Fleet Factors

is very troubling”); Ledbetter, 20 Chem. Waste Litig. Rep. No. 3,

at 376 (1990); Parenteau & Johnston, The Big Chill: The Impact

of Fleet Factors on Lenders, 20 Chem. Waste Litig. Rep. No. 3, at

880 (1990); 2 The Law of Hazardous Waste: Management,

Cleanup, Liability, and Litigation § 14.01[5][c], at 14-75 (S. Cooke

ed. 1990) ; Bolstein & Reznick, Lender Liability After Fleet Factors,

10 A.B.A. Envtl. L. No. 3, at 1 (1990).

* See Impact of Superfund Lender Liability on Small Businesses

and Their Lenders, Hearing Before the House Comm. on Small

Business, 101st Cong., 2d Sess. (June 7, 1990) (“June 1990 Hear-

ing’); Hearing on S. 2827: The Federal Deposit Improvements

Act of 1990, and Other Environmental Risks to Lenders, Senate

Banking Committee, 101st Cong., 2d Sess. (July 19, 1990) (tran-

script on file with Senate Banking Committee) (“July 1990 Hear-

ing”) ; Hearing on Lender Liability Under Superfund, House Comm.

on Energy and Commerce, Subcomm. on Transp. and Hazardous

Materials, 101st Cong., 2d Sess. (Aug. 2, 1990) (draft minutes on

file with the House Committee on Energy and Commerce) (“August

1990 Hearing”); EPA Draft Rule, supra.

5 August 1990 Hearing at 3 (statement of Rep. Luken describing

EPA estimates). This estimate includes only inactive sites. If

active sites, such as industrial and municipal landfills, are included,

the estimated number of sites is more than 300,000. General Ac-

counting Office, Cleaning Up Hazardous Wastes: An Overview of

Superfund Reauthorization Issues, at 10 (1985).

6 See Geltman, Rule 10b-5 and RICO: Alternative Remedies for

Environmental Liabilities Acquired by Stock Purchase of a Closely

Held Corporation, 26 Hous. L. Rev. 455, 457 n.8 (1989) (citing

press coverage) ; cf. Sen. Subcomm. on Superfund, Ocean and Water

Protection, Lautenberg-Durenberger Report on Superfund Imple-

mentation: Cleaning Up the Nation’s Cleanup Program (1989),

at 40 (noting that EPA staff estimates average cleanup costs of

9

Many of these hazardous waste sites may involve lia-

bility on the part of secured lenders. While the vast

majority of sites have not yet been the subject of

CERCLA enforcement or remediation,’ lenders (primar-

ily banks and savings institutions) are or have been in-

volved in approximately three dozen CERCLA lawsuits,

and EPA has notified approximately 60 additional lend-

ers of potential Superfund liability.* These figures can

be expected to escalate substantially over time, as EPA

continues to investigate hazardous waste sites and to in-

itiate CERCLA enforcement proceedings. Indeed, one

witness at recent Congressional hearings on lender lia-

bility testified that the cost of cleanup for banks could

exceed $100 billion. August 1990 Hearing at 177-78.

Prior to the Eleventh Circuit’s decision, no bank or

savings institution could have foreseen the serious risk

of exposure to hazardous waste cleanup liability that

would result from making ordinary business loans and

exercising traditional collateral management. Conse-

quently, such institutions now face the prospect of enor-

mous unanticipated CERCLA liability.

In many cases, this liability could vastly exceed the

amount the creditor agreed to lend against the security

of the property. Indeed, with average cleanup costs esti-

mated at $25 million per site, see page 8, supra, and

with CERCLA providing for joint and several liability,

see, e.g., United States v. Monsanto Co., 858 F.2d 160,

171 (4th Cir. 1988), cert. denied, 109 S. Ct. 3156 (1989),

cleanup costs will often exceed the fair market value of

the property, even after full remediation. At a time

when many banks and savings institutions already face

1168 sites listed on the National Priorities List at $18 million per

site).

7™See August 1990 Hearing at 3 (statement of Rep. Luken)

(noting that cleanup has “begun” on about four percent of the

hazardous waste sites) .

8 See Risks to Lenders—EPA Lists Cases Where Lenders Risk Lia-

bility, IV Inside EPA’s Superfund Report No. 21, at 25 (1990).

10

serious financial difficulties, the imposition of massive

Superfund liability could have severe consequences. Al-

though the Eleventh Circuit notes that, in the future,

creditors, aware of its decision in this case, will weigh

the risk of CERCLA liability in making loans, Pet. App.

15a, this provides little comfort to institutions that made

loans prior to its decision. It also does not help in the

case of a hazardous waste problem, such as buried waste,

that does not become known until years after the loan is

made.

Yet another problem for creditors who have already

made loans arises when the borrower encounters financial

difficulty. In the past, a typical creditor would actively

assist its borrowers in assessing their finances and work-

ing out their financial setbacks. This practice, known as

“collateral management,” is beneficial both to creditors

and borrowers, and is often used with small businesses.

Under the Eleventh Circuit’s decision, however, the pru-

dent lender would be virtually obligated to follow a

“hands-off” approach and avoid helping the borrower.

Any degree of involvement in the affairs of the borrower

could constitute evidence of a “capacity” to influence haz-

ardous waste decisions, and thus subject the creditor to

massive cleanup liability.

The Eleventh Circuit’s decision, if not overturned, will

have a serious impact not only on creditors who have

already made loans but also on the future course of lend-

ing activity. As a practical matter, lenders will have

little choice but to deny financing if there is any possi-

bility that the prospective borrower’s site may be subject

to CERCLA liability. No reasonable lender will feel free

simply to ignore the decision below, even in jurisdictions

other than the Eleventh Circuit, since no one can predict

whether other circuits will adopt the same standard. This

reduction in lending will harm not only lenders but also

potential borrowers, many of which are small companies

or farmers that may not be able to survive the downturn

ll et) ee a es ff ne ee ee

i

11

in lending. Indeed, the Eleventh Circuit’s decision will

have the perverse effect of reducing the availability of

funds for companies that need to borrow money to ad-

dress hazardous waste cleanup problems. It will also re-

sult in costs to failed and failing savings institutions,

costs that may ultimately be borne by the taxpayers.

The reason the Eleventh Circuit’s decision will lead to

a decline in lending activity is simple. If financial institu-

tions lend money without taking steps to protect their

security investment—such as monitoring the company’s

financial records—they run a great risk in the event of

a default. On the other hand, under the Eleventh Cir-

cuit’s standard, it is all but impossible for lenders to pro-

tect their security interest without incurring CERCLA

liability. This is contrary to Congress’ purpose in enact-

ing CERCLA, which was primarily to impose cleanup

costs on “polluters.” See, e.g., New York v. Shore Realty

Corp., 759 F.2d 1082, 1041 (2d Cir. 1985). Lenders can

be held liable even when they did not cause or con-

tribute to contamination at the borrower’s site, and even

when they exercised the utmost caution to avoid having

any role in the operational management of the site.

The Eleventh Circuit urges lenders “to address haz-

ardous waste problems at the facility rather than studi-

ously avoiding the investigation and amelioration of the

hazard.” Pet. App. 16a. Yet, it is precisely that sort of

day-to-day involvement in a borrower’s operations that,

under the language of Section 101(20) (A), disqualifies

a lender from relying on the exclusion. In other words,

the Eleventh Circuit would require a lender to do pre

cisely what would deprive it of the benefit of the secured

creditor exemption. The only way to avoid these risks is

to refuse to provide loans if there is any question of

potential CERCLA liability.

These serious consequences of the Eleventh Circuit’s

decision are neither speculation nor hypothetical situa-

tions. Indeed, even prior to the decision, many lenders

4

4

12

were already concerned about the possibility that a court

might construe the exemption narrowly. Five examples

from the recent Congressional hearings on lender liability

illustrate the point.

First, a witness on behalf of the American Bankers

Association testified about the results of a recent poll

of banks with assets of $250 million or less. According

to the witness, 43 percent of the banks responding to the

poll have already stopped making loans altogether to

small businesses associated with environmental problems,

and an additional 11 percent planned to stop making

such loans in the future. July 1990 Hearing at 65-66.

Second, a bank officer from Ohio, who appeared on be-

half of the Ohio Bankers Association, indicated that his

bank had recently amended its loan policy to classify as

“undesirable” loans to businesses with high risk environ-

mental implications. August 1990 Hearing at 120. Third,

the president of the New York State Bankers Association

testified that a bank had to withdraw from a deal in-

volving $50 million of financing because of CERCLA

concerns. An environmental audit had been deemed nec-

essary, but since the cost of the audit was $250,000, nei-

ther the borrower nor the bank could absorb that cost.

June 1990 Hearing at 11. Fourth, a witness testifying

on behalf of the National Association of Homebuilders

described a situation where, because a chemical company

had allegedly dumped hazardous waste on a site, the de-

veloper could not obtain financing, even after the devel-

oper had shown that in fact there had not been any

dumping. August 1990 Hearing at 190. Fifth, repre-

sentatives of the FDIC stated that the Eleventh Circuit’s

decision could lead lenders to become less involved in the

borrowers’ financial affairs, a consequence that would con-

flict with the FDIC’s goal of furthering the soundness of

the country’s financial system. Jd. at 89-90.° As these

® The Eleventh Circuit standard also undermines federal banking

requirements applicable to federally regulated depository institu-

tions. Such institutions are required to “meet the credit needs of

eee ts Se ee ee ee NS Re er ee ee ee ee = eS USOC ee

13

examples illustrate, the Eleventh Circuit’s decision will

have substantial economic effects.

Ill, REVIEW IS ESSENTIAL AT THIS TIME

While there are only two court of appeals decisions

addressing the issue in this case, review at this time is

clearly warranted. The issue has already been addressed

by several district courts and by numerous commentators,

and there is little benefit to be gained by waiting for

additional court decisions. Moreover, there is no immedi-

ate prospect of legislative or regulatory action. The

major bills that Congress has proposed to clarify the

lender liability provision were not even reported out of

Committee before Congress recessed.’*° While the EPA

has written a draft rule on the subject, see EPA Draft

Rule, supra, that draft has been under review by the

Office of Management and Budget (“OMB”) for months,

21 Env’t Rep. (BNA) No. 25, at 1173 (1990), and there

is no way to predict when a final regulation will be pro-

their . . . communities . . . .” Community Reinvestment Act of

1977 (“CRA”), 12 U.S.C. § 2901 et seg. See also Financial Institu-

tions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No.

101-73, 103 Stat. 183, at 527.

10 See, e.g., H.R. 4494, 101st Cong., 2d Sess. (1990) (introduced

by Rep. La Falce, referred on April 4, 1990 to House Committee on

Energy and Commerce); S. 2827, 101st Cong., 2d Sess. (1990)

(introduced by Sen. Garn, referred on June 28, 1990 to Senate

Committee on Banking, Housing, and Urban Affairs); S. 2319,

101st Cong., 2d Sess. (1990) (introduced by Sen. Garn, referred on

March 23, 1990 to Senate Committee on Environment and Public

Works). Indeed, immediately before adjourning, Congress reau-

thorized the Superfund program without enacting any provision

dealing with lender liability. Omnibus Budget Reconciliation Act

of 1990, Pub. L. "We. 101-508, § 6801, 3-Year Extension of Compre-

hensive Environment! Response, Compensation, and Liability Act

of 1980, 104 Stat. 1388. For this reason, there is now speculation

in the financial community that the possibility of corrective lender

liability legislation is “greatly diminished.” Wall. St. J., Nov. 5,

1990, at B6, col. 1-2.

14

mulgated."* Finally, even if Congress or EPA takes ac-

tion in the lender liability area, there is no assurance

that the statute or rule that ultimately emerges will ad-

dress the problems posed by the Eleventh Circuit’s deci-

sion.

The Eleventh Circuit’s decision squarely presents the

issue of the proper standard for determining lender lia-

bility under CERCLA. Even EPA does not seriously dis-

pute that the standard adopted by that court is erroneous.

This Court should grant certiorari and resolve the issue

now.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

ROBERT H. KLONOFF

(Counsel of Record)

TrmoTHY B. DYK

DEENA B. JENAB

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-8939

December 13, 1990 Counsel for Amici

11 To illustrate the potential for delay, a major hazardous waste

cleanup rule under the Resource Conservation and Recovery Act of

1976, 42 U.S.C. § 6901 et seq., that EPA sent to OMB did not

receive OMB approval for 2] months. See 21 Env’t Rep. (BNA)

No. 10, at 427 (1990).