[T]he already wary banking industry [will be] even more reluctant to lend to many borrowers, not just those who present obvious environmental liability problems, and less willing to help troubled borrowers through difficult financial times. Inhibited financial transactions and modified lending practices will reduce the supply and increase the cost of capital for many borrowers. Old industrial property is likely to remain abandoned and unused for fear of environmental liability. Increased caution on lenders' part will probably result in more bankruptcies, since helping a borrower overcome financial difficulties will seldom be worth the risk of cleanup liability, considering the unpredictable scope of [environmental] damages.
This passage appears in a 1990 brief petitioning the Supreme Court for a writ of certiorari, seeking review of a now-infamous Eleventh Circuit decision, United States v. Fleet Factors Corp.1 Certiorari was denied,2 and the brief accurately forecasted the shock that resulted from the opinion rendered by the court in Fleet Factors. In that case, a financial institution was found liable for costs to clean up contaminated property it had held as collateral, based on the lender's mere capacity to influence its borrower's hazardous waste disposal practices and regardless of whether such capacity was actually exercised. 3
Since Fleet Factors came down in 1990, the attitudes and practices of the real estate and finance communities have significantly evolved with regard to contaminated properties. The change has resulted from the efforts of the private sector, regulating bodies, and federal and state legislatures to avert the collapse of the market for contaminated properties, or brownfields, 4 that had been feared in the aftermath of the Eleventh Circuit's decision. Today, regulatory incentives are aligned to encourage, rather than halt altogether, the redevelopment of brownfields, and environmental risk management has matured as a practice such that sophisticated lenders and borrowers are able to allocate and insure such risks to their satisfaction for even the most complex contaminated sites.
This article traces the legal evolution that has made today's brownfield redevelopment climate possible. The history of lender liability provides needed context for the latest developments in environmental risk management for contaminated site transactions: we discuss those developments as well, and endeavor to provide practice commentary for participants in today's market for contaminated real estate.
I. Historical Overview
CERCLA
In 1980, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")5 in response to "the increasing environmental and health problems associated with inactive hazardous waste sites."6 CERCLA, commonly known as the Superfund law, is the primary federal law imposing liability on private parties to ensure the remediation of contaminated properties. The statute was designed "to promote the timely cleanup of hazardous waste sites and to ensure that the costs of such cleanup efforts were borne by those responsible for the contamination."7 Section 107(a) of CERCLA establishes strict liability for potentially responsible parties ("PRPs"),8 a statutory term of art that includes current owners and operators of facilities, past owners or operators at the time of a release, and "arrangers" who planned for disposal of hazardous substances at the facility. 9 This liability is subject only to a few narrow defenses and exemptions. 10 Liability is, by default, joint and several, meaning that any PRP can be responsible for the payment of all cleanup costs. 11 As a result, under CERCLA and parallel state statutes, the owner or operator of contaminated property can be liable for indefinite remediation costs by virtue of its status as owner or operator of the property, even if the contamination pre-dated its ownership or operation. Remediation can be very expensive. It is not unheard of for remediation costs to far exceed the value of a property if it were clean.
Most states have enacted statutes similar to CERCLA to create liability for owners and operators of hazardous waste sites, providing a mechanism for the government, and in some cases private parties, to recover costs related to environmental cleanups.12 Many of these state statutes also offer liability protection for lenders, parallel to the CERCLA safe harbor discussed further herein, which excludes from the definition of "owner or operator" lenders holding a security interest in a facility, as long as they follow certain rules.13
The state statutory provisions exempting lenders from liability generally track CERCLA language closely. California, for example, expressly adopts CERCLA's definition of a responsible party, "implicitly adopting CERCLA's security interest exemption to the definition of owner and operator."14 New York, New Jersey and Texas statutes provide that parties merely holding a security interest in a site are not liable parties, as long as they do not participate in its management.15 Of course, the application of state laws to a particular facility must be evaluated on a case-by-case basis.
Uncertainty and Fears of Liability
The story of Fleet Factors highlights the worst fears harbored by lenders when lending to environmentally sensitive businesses and where collateral property may be impacted by so-called "legacy contamination" from past operations at or near the subject property. Fleet Factors, a financial institution, held a security interest in a textile facility's inventory and equipment in the late 1980s, during which, "[i]n an overheated and often speculative economy, banks were often the only 'deep pockets' in sight from which litigious individuals, businesses, or government might seek to recoup losses."16 When the company got into financial trouble, Fleet Factors provided extensive financial and business counseling to the company in an effort to preserve its solvency. These efforts proved unsuccessful. After the company filed for bankruptcy, Fleet Factors foreclosed on its security interest, sold much of the inventory and equipment through a liquidator, and retained a salvage company to remove unsold equipment from the site. Significantly, Fleet Factors' agents removed neither the over 700 fifty-five-gallon drums alleged to contain toxic chemicals, nor the 44 truckloads of asbestos-containing materials that were stored on the site. Ultimately, the United States Environmental Protection Agency ("EPA") spent nearly half a million dollars addressing the threat of an environmental release presented by the toxic materials that were left behind, and sued Fleet Factors for cost recovery.
The lender was found liable even though CERCLA contained a "safe harbor" that expressly shielded secured creditors from liability if they did not participate in management of a facility and held indicia of ownership primarily to protect their security interest.17
The appeals court could have decided the case on narrower grounds, as the facts suggested that, following foreclosure, Fleet Factors was an "operator" of the facility, exercising complete control over day-to-day operational decisions. Indeed, the lower court looked to the lender's degree of actual involvement in site management when assessing the lender's liability.18 Instead, the appeals court rejected this narrower standard and embraced a more far-ranging theory of liability:
A secured creditor may incur . . . liability, without being an operator, by participating in the financial management of a facility to a degree indicating a capacity to influence the corporation's treatment of hazardous wastes. It is not necessary for the secured creditor to actually involve itself in the day-to-day operations of the facility in order to be liable . . . . Nor is it necessary for the secured creditor to participate in management decisions relating to hazardous waste. Rather, 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.19
Following Fleet Factors, the banking sector experienced what can only be described as commercial panic – an understandable reaction, considering that the court's decision seemed to contemplate liability for thoughts rather than deeds. Observers at the time noted the troubling questions raised by the decision:
Is a lender's power to respond to environmental threats on the borrower's property, even if never exercised, enough to make the lender liable for the government's response costs? What if the loan is going sour and the lender refuses a loan increase needed to address troublesome environmental conditions which are then exacerbated by the lack of funds to address them? What if the lender merely enforces loan provisions which require paydown of the loan, thereby passively diverting funds away from proper disposal of hazardous wastes? Is a lender worse off monitoring a borrower's environmental problems or keeping its distance from them?20
No clarification was provided by the Supreme Court, which denied review of the case in 1991.21 Meanwhile, the banking sector was in dire need of clarity. Many banks announced that they would no longer lend to companies in certain environmentally sensitive businesses and refused to lend on many properties, casting a pall over economic development. One scholar noted that "a 1990 poll revealed that 43% of community banks had stopped making loans to certain categories of higher-risk businesses. A survey the next year discovered that 62.5% of banks had declined loan applicants because of the risk of liability" caused by known or potential environmental contamination.22 Some banks even abandoned collateral properties rather than take on the potential risks of foreclosure.23 Some observers during this period feared a more ominous domino effect:
After Fleet Factors, and without the aid of administrative regulations, no counsel confidently can assuage the fears of a creditor with contaminated property as collateral. Unwilling to risk CERCLA liability, that creditor must refuse to pursue foreclosure and instead choose to abandon both the property and any chance that it might lend to similarly situated borrowers in the future. The ripple effect, however, does not stop there. Within the bankruptcy itself, estate assets suddenly become estate liabilities, insofar as the costs of cleanup often will dissuade even the most intrepid purchasers at auction. As a consequence, unsecured creditors lose even the little they might have otherwise foraged from the estate. While the debtor receives a "fresh start," the system receives neither the confidence nor sufficient law to function effectively.
Moreover, the entire value of a security interest depends on a creditor being capable of looking to the collateral for repayment in the event of default. This fact has been affirmed at common law, in the Uniform Commercial Code, and by the existence of the "secured lender" exemption itself. Fleet and its successors, in a very real sense, threaten to extinguish the viability of this principle. In essence, holding a security interest in real property has become an unwise risk — better to be unsecured and break even than to be secured and incur millions of dollars in clean-up costs.24
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Footnotes
1. United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990).
2. Fleet Factors Corp. v. United States, 111 S. Ct. 752 (1991).
3. United States v. Fleet Factors Corp., 821 F.Supp. 707 (S.D. Ga. 1993).
4. Federal law defines a brownfield 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).
5. 42 U.S.C. §§ 9601–9675.
6. Nurad, Inc. v. William E. Hooper & Sons Co., 966 F.2d 837, 841 (4th Cir.1992).
7. Burlington N. & Santa Fe Ry. Co. v. United States, 556 U.S. 599, 602 (2009).
8. 42 U.S.C. § 9607.
9. Id. § 9601; United States v. Monsanto Co., 858 F.2d 160, 167 (4th Cir.1988).
10. See 42 U.S.C. § 9607(b) (defenses); id. at § 9607(o)–(r) (exemptions).
11. See Monsanto, 858 F.2d at 171–72.
12. See 49 Am. Jur. Proof of Facts 3d 173, § 19 (updated 2025, originally published in 1998).
13. See CERCLA § 101(20)(A), 42 U.S.C. § 9601(20)(A) (excluding from the definition of owner or operator "a person who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility").
14. Id. (citing Cal. Health & Safety Code § 25323.5 (repealed Jan. 1, 2024, and replaced by § 78145(a)(1)) ("'Responsible party' or 'liable person,' for the purposes of this chapter, means those persons described in Section 107(a) of the federal act [CERCLA]")).
15. See N.Y. Envtl. Conserv. Law § 27-1323 (Lenders are not liable simply for holding "indicia of ownership primarily to protect the lender's security interest in the site or, if such lender did not participate in the management of such site prior to a foreclosure on such site"); Tex. Health & Safety Code § 361.702 ("[T]he term "owner or operator" does not include a person that is a lender that: (1) without participating in the management of a solid waste facility, holds a security interest in or with regard to the solid waste facility; or (2) did not participate in management of a solid waste facility before foreclosure, notwithstanding the fact that the person" forecloses on the facility and sells, releases, or liquidates said facility); N.J. Stat. § 58:10-23.11(g)(5) ("A person who maintains indicia of ownership of a vessel, facility, or underground storage tank facility primarily to protect a security interest in a vessel, facility, or underground storage tank facility and who does not participate in the management of the vessel or facility or underground storage tank facility is not deemed to be an owner or operator . . . .")
16. Deborah Addis, Comment: Tide May Be Turning to Banks in Lender Liability Lawsuits, American Banker, May 25, 1993.
17. Comprehensive Environmental Response, Compensation, and Liability Act of 1980, Pub. L. No. 96-510, § 101, 94 Stat. 2767 (1980) (prior to 1996 amendment).
18. United States v. Fleet Factors Corp., 724 F. Supp. 955, 960 (S.D. Ga. 1988) (interpreting CERCLA's safe harbor to exclude secured creditors from liability if they did not "participate in the day-to-day management of the [debtor] business or facility").
19. Fleet Factors, 901 F.2d at 1557–58.
20. Johnine J. Brown, Fleet Factors Case Produces Gibberish, 4 MERRILL'S ILLINOIS LEGAL TIMES 440, Aug. 1, 1990.
21. 111 S. Ct. 752 (1991).
22. Walsh, Brian C., Seeding the Brownfields: A Proposed Statute Limiting Environmental Liability for Prospective Purchasers, 34 HARV. J. ON LEGIS. 191, n. 53 (1997).
23. John M. Ames et al., Toxins-Are-Us, How Deep in Toxic Waste Are Secured Lenders under CERCLA, A Review of the Last Five Years, 14-9 AM. BANKR. INST. J. (1995); Walsh, supra note 22, at n. 55.
24. Ames, supra note 23.
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