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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1991

## Text

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).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_2869%3A7. Public record. Not legal advice.