Real Estate Transactions

1
Real Estate Transactions

• Environmental Contamination pgs. 388-403

2
Environmental Liability

• CERCLA imposes strict liability for costs of
  cleaning up land contaminated by hazardous
  materials on the following persons
• Current owner/operator
• Past owner/operator (at/after contamination)
• Parties who generated or transported hazardous
  materials
• Question Does mortgage lender qualify as an
  owner/operator of contaminated land
• Prior to foreclosure?
• After foreclosure (if mortgage lender becomes
  foreclosure sale purchaser)?

3
Lender Liability Prior to Foreclosure

• 42 U.S.C 9601(20)(A) lender is not an owner or
  operator if it holds mortgage primarily to
  protect its security interest and without
  participating in management of the contaminated
  facility

4
Liability Prior to Foreclosure

• Prior to 1996, some courts held that lender was
  participating in management if its relationship
  w/borrower indicated that lender had the capacity
  to influence the borrowers decisions re
  handling/treatment of hazardous waste

5
Lender Liability Prior to Foreclosure

• In 1996, Congress enacted Asset Conservation,
  Lender Liability and Deposit Insurance Protection
  Act
• Lender is not liable merely b/c it has the
  capacity to influence the borrowers decisions re
  handling/treatment of hazardous waste
• Lender is liable as owner/operator only if
• It actually controls borrowers decisions
  regarding environmental compliance or
• Exercises day-to-day control over all other
  operational aspects of borrowers business

6
What Can Lender Do Prior to Foreclosure Without
Participation in Management?

• Require environmental audit before making loan
  and/ or (if required by terms of mortgage) during
  the term of the loan
• Require borrower to clean up site if needed
• Obtain/enforces reps and warranties about
  condition of the land and compliance with the law
• Monitor site
• Negotiate workout agreement in case of default

7
Lender Liability After Foreclosure

• Prior to 1996, courts generally held that
  mortgage lender who purchased at foreclosure sale
  was an owner and not entitled to security
  interest exception.
• mortgage lender was protected only if it could
  qualify for CERCLAs innocent owner exception
  required owner to show that
• It had no knowledge/ reason to know of
  contamination at time it acquired its interest
• Prior to time it acquired its interest, it had
  made all appropriate inquiry consistent with
  good commercial or customary practice

8
Innocent Owner Defense

• Factors considered by court in determining
  eligibility to innocent owner defense
• Any specialized knowledge or experience on part
  of buyer/mortgagee
• Relationship of purchase price to value of land
  uncontaminated
• Commonly known or reasonably ascertainable info
  about the land
• Ability to discover contamination of the land
  through inspection
• Problem it is difficult to prove retrospectively
  that buyer/mortgagee made all reasonable
  inquiry
• 20/20 hindsight

9
Due Diligence

• Phase I Inspection based on American Society
  for Testing and Materials standards
• Review of public records
• Site reconnaissance
• Interview current owners/operators
• Evaluation/ Due Diligence Report

10
Due Diligence

• Phase I inspection involves no intrusive testing
  (soil, water, asbestos, etc.)
• If Phase I inspection reveals potential issue,
  then Phase II inspection would occur (specific
  intrusive tests to determine presence of
  indicated contaminants)

11
Lender Liability After Foreclosure

• 1996 Act Lender who forecloses and acquires
  title may still qualify for security interest
  exception if lender seeks to sell land at
  earliest practicable, commercially reasonable
  time on commercially reasonable terms 42 U.S.C
  9601(20)(E)
• Questions
• Does this obviate need for lender to do due
  diligence at time it makes loan?
• Does this obviate need for lender to qualify for
  innocent owner exception?

12
SI Exception

• Does 1996 Acts expansion of SI Exception obviate
  need for lender to do due diligence at time it
  makes loan?
• No! as a practical matter, land that is
  contaminated will be unmarketable until it is
  cleaned up
• Thus, SI is likely practically valueless if
  contamination exists

13
SI Exception

• Does 1996 Acts expansion of SI Exception obviate
  need for lender to qualify for innocent owner
  exception?
• Problem exception limits foreclosing lenders
  discretion in selling land (rejecting an offer
  could deprive seller of exception- see 42 U.S.C
  9601(20)(E)
• Innocent owner exception is absolute if qualified
  for (not as restrictive)

14
Environmental Liens

• CERCLA creates lien on contaminated land in favor
  of govt (to secure payment of cleanup costs)
• Additionally, some state environmental law create
  super liens in favor of state environmental
  agencies. These liens would prime (take
  priority over) existing mortgage liens.
• How could a lender protect itself from such liens?

15
Example if Time

• Justin owns residential property downhill from a
  wardrobe factory owned by Janet. Janet acquired
  title to the factory through foreclosure as
  mortgagee of the property. Shortly after
  acquiring the property, Janet removed certain
  contaminants from the land.
• Justin soon noticed that his water was
  contaminated by the same contaminants and sued
  Janet for nuisance and trespass.
• Is Janet protected from exposure by a state
  statute that excludes from liability for charges
  of contamination a mortgagee who obtained title
  through foreclosure?

16
Example if Time

• No! Janet is still exposed to liability for
  state law actions based on contamination b/c a
  statute that excludes from liability a mortgagee
  who obtained property through foreclosure does
  not preempt or abrogate common law actions based
  on contamination.

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End of Environmental Contamination pgs. 388-403

• Please prepare Insurance and Taxes pgs. 403-424