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AUG
61990
TESTIMONY OF
FEDERAL DEPOSIT INSURANCE CORPORATION
STEVEN A. SEELIG
DIRECTOR
DIVISION OF LIQUIDATION
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, DC
ON
ENVIRONMENTAL LENDER LIABILITY
BEFORE THE
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
2:00 PM
JULY 19, 1990
Room 538, Dirksen Senate Office Building
Good afternoon, Mr. Chairman and members of the Committee.
We
appreciate this opportunity to present the views of the Federal
Deposit Insurance Corporation on lender liability for hazardous
substance clean up costs and damages.
The concerns and views raised
in our testimony are also shared by the Resolution Trust
Corporation.
We understand the RTC will be submitting its own
statement to the Committee.
The primary federal laws which impose liability on the basis of
hazardous substances are the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) or, as it is commonly called,
"Superfund," and the Resource Conservation and Recovery Act (RCRA).
The FDIC is very concerned about lenders' potential liability under
federal and various state environmental laws.
As the insurer of
banks and thrifts, as well as the receiver or liquidator of failed
banks and thrifts, we believe the federal deposit insurance system
should not be threatened as a result of environmental liability
assessments.
As the primary federal supervisor for almost 8,000
state-chartered nonmember commercial and savings banks with over one
trillion dollars in assets, we are anxious to see that the safety and
soundness of the banking and thrift system are not threatened as a
result of lender liability under such laws.
On the whole, the FDIC and RTC support the "Lender Liability Act of
1990” (Subtitle B of S. 2827).
The legislation would limit the
diversion of deposit insurance funds from their primary purpose —
the protection of depositors —
and limit the escalating costs of
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resolving failed and failing savings and loans.
The FDIC is
concerned about the protection of our environment.
But, the
environmental laws, as presently interpreted, also pose significant
risks to our goal of protecting depositors.
We believe it is
extremely important that we not divert deposit insurance monies from
their primary purpose, no matter how laudable the other goal.
Our testimony will provide background on how the FDIC may become
directly involved with property which poses problems under current
environmental laws.
We then will address the risk to the FDIC and
FDIC-insured lenders from potential environmental liability claims.
We will discuss generally how lenders have responded to the risks
arising under current environmental law.
In addition, we will
address the risk of loss to other agencies or instrumentalities of
the Federal government.
Finally, we will comment on proposed
legislation to provide relief from environmental lender liability.
BACKGROUND
At the time of the FDIC's appointment as receiver of a failed bank,
all assets of the failed institution come to the FDIC for
liquidation.
If the resolution of the failed institution is a
purchase and assumption transaction, the assuming financial
institution may purchase some or all of the assets of the failed
institution.
Even as to those assets assumed, the assuming
institution may later put some assets back to the FDIC.
3
Unsold assets, or those "putback" to the FDIC, may include
non-performing loans, as well as real estate owned by the institution
as a result of foreclosure on collateral (generally termed, “owned
real estate").
Thus, even under a purchase and assumption
transaction, some assets —
such as secured notes and owned real
estate -- may remain with, or be put back to, the FDIC.
We attempt
to confine these assets, and any potential liabilities associated
with them, to the failed institution's receivership estate.
This is
done in order to prevent access to, and protect, the deposit
insurance fund.
With regard to these retained assets, the FDIC as receiver is.
generally regarded as "standing in the shoes" of the failed
institution.
Although no cases have yet been decided in this area,
we are concerned that the FDIC, as to these assets, may be treated
just like any lender under the environmental laws.
We are also
concerned that a court may someday determine that the FDIC, in its
corporate capacity as well, is responsible for a receivership's
environmental liabilities.
Indeed, if the FDIC in its corporate
capacity ever becomes directly liable for environmental claims, our
resources —
designed to protect depositors —
could be imperiled.
In summary, whether oar not a purchase and assumption transaction is
effected, the FDIC may find that it holds assets plagued by
environmental problems.
Furthermore, we may even find that some of
these assets have outstanding Superfund liens against them.
Clearly,
current environmental laws may directly affect the soundness of the
4
federal deposit insurance funds and the stability of the deposit
insurance system generally.
RISKS TO THE DEPOSIT INSURANCE FUNDS
The Environmental Protection Agency (EPA) has identified more than
30,000 Superfund sites in this country.
As the EPA cleans up these
sites, it is expected that litigation will escalate as the EPA seeks
to shift clean-up costs, as it is statutorily required to do, to
those originally responsible for the improper disposal.
At some point it will be argued that the FDIC is liable for the
clean-up costs of a particular hazardous substance site, even though
the FDIC did not originally create the problem.
If a court upheld
that argument, this liability would directly affect the insurance
funds or increase the cost of resolving failed and failing savings
and loans.
This would be true particularly if the FDIC and the RTC
in their corporate capacities are found to be chargeable with the
liability.
The stability of the deposit insurance funds also may be adversely
affected indirectly..' The number of failures of insured financial
institutions may increase due to lender liability for hazardous
substance clean-ups.
In turn, the financial condition of the deposit
insurance funds would be weakened.
Further, because environmental
contamination problems, or the threat thereof, may lower the sale
price of properties, the FDIC's recoveries from receivership
5
liquidations will decrease.
Finally, to the extent that receivership
estates are diminished by liabilities for clean-up costs, these
receivership estates may not be able to repay the monies originally
lent to them by the deposit insurance funds.
The FDIC does not face environmental liability risks because we
created hazardous wastes or improperly disposed of these materials.
Instead, we face these potential liabilities as a result of our being
an involuntary ”owner or operator” of properties —
for however short
a period of time these properties may be in our control —
and
because wastes were released or deposited on those properties bv
others in the past.
The extent to which we are placed at risk depends largely upon the
assets we hold.
The more banks and thrifts that fail, the greater
the potential for the assertion of environmental liability claims
against the FDIC and the RTC, due to the sheer numbers of assets
held.
As this Committee knows, the number of banks and thrifts that
have failed since 1983 has risen steadily.
At this time, the FDIC is
responsible for liquidating assets from 994 failed banks and 99
failed thrifts.
The FDIC presently holds in its various capacities a
total of approximately $13.2 billion in real estate related assets.
The FDIC is also liable for approximately $5.5 billion in real estate
related assets resulting from large assisted bank transactions.
Further, the FDIC has approximately $13.8 billion in real estate
related assets resulting from the FSLIC assistance agreements.
RTC also has a vast number of institutions and assets under its
The
6
jurisdiction.
They can provide the Committee with their numbers.
As the FDIC seeks to resolve failed financial institutions,
interested purchasers increasingly raise concerns about potential
environmental liability.
At times, these buyers seek
indemnifications from the FDIC for potential environmental liability
claims.
At other times, they seek drastic reductions in price to
accommodate their concerns for environmental risks.
Ultimately, some
buyers just refuse to purchase certain assets which they identify as
having potential environmental liability claims.
Because of buyers'
concerns, we may carve out assets in some cases, choosing not to even
attempt to transfer them.
Too often it is the FDIC —
deposit insurance funds or the taxpayer —
and, thus, the
that are left "holding the
bag."
To date, the FDIC has been fortunate.
Relatively few of our assets,
to our knowledge, contain hazardous substance problems.
Of the total
assets held by the FDIC for liquidation, approximately 270 assets —
with a total book value of about $365 million —
have been identified
at this time as potentially having hazardous substance problems.
We
have obtained clean-up estimates for approximately 50 of these
properties and have been told that these costs may be more than three
times the market value of these properties.
The FDIC holds other assets which may pose problems under other
environmental laws.
than 200 assets —
For example, the FDIC has an interest in more
with a total book value of about $300 million _
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which may have asbestos problems.
We are not addressing these types
of problems today because they are not generally affected by Senator
G a m ' s bill.
Yet, in considering this legislative initiative
further, we urge you to consider expansion of S. 2827 so that it
addresses these problems as well.
Inability to collect the principal of an asset is one thing.
But,
findings of Superfund liability on top of that could jeopardize the
financial soundness of a financial institution and the deposit
insurance system.
Superfund liability assessments and the expenses
incurred in litigating Superfund cases can be enormous.
Given the
large numbers of properties for which the FDIC is responsible, it can
be anticipated that the FDIC may be compelled to incur these high
Superfund clean-up costs, attorney fees, engineering fees and the
like —
absent legislative change.
Further, the FDIC may be held liable for these costs —
banks or thrifts involved failed years ago.
even if the
As a case in point, we
will describe briefly a lawsuit filed last year under CERCLA and
RCRA.
Plaintiffs in the pending case seek damages of approximately
$6 million based on allegations that hazardous substances were
released beginning in the early 1950's on property they now own.
The
hazardous substances allegedly were found on the property in the late
1980's, and the current owners sued numerous prior owners and
operators of the property.
8
In 1957 and 1959, legal title to portions of this property was
transferred to a bank for the benefit of an employee's profit sharing
retirement plan.
The bank held legal title to the property as
trustee of the plan but was not involved in the operation of the
property.
The property was leased back to the company that
established the plan, pursuant to various leases.
Plaintiffs do not contend that the bank contributed to the alleged
contamination.
Rather, plaintiffs allege only that the property was
contaminated during the time that the bank held record title.
In
1973, the bank failed, the FDIC was appointed receiver, and the bank
was sold under a purchase and assumption transaction.
The FDIC
became party to the lawsuit due solely to its brief role, in 1973, as
receiver of the failed bank.
In this case, it appears that the FDIC may be able to avoid ongoing
legal fees, engineering fees and payment of cleanup costs due to a
fortuitous indemnification clause in the various leases.
While this
particular case should conclude with relatively moderate expense to
the FDIC, we most certainly shall not always be so fortunate.
In
many cases, the FDIC will succeed to property interests without the
benefit of such an indemnity.
RISKS TO LENDERS
The FDIC has additional exposure to the environmental laws that arise
from the risk to lenders.
Lenders are faced with the specter of
enormous liability assessments under current environmental laws which
deal with hazardous substances.
This is particularly true today, in
light of a recent decision of the United States Court of Appeals for
the Eleventh Circuit.
In United States v. Fleet Factors Corporation
("Fleet Factors”), the Circuit Court held that a lender can be held
liable for Superfund clean up costs solely on the basis of the
lender's participation in the financial management of a facility.
In
reaching its decision, the Court made what has been described as an
"extraordinary interpretation" of various sections of CERCLA.
Even
without the Fleet Factors decision, lenders face significant risks
under the various federal environmental laws which deal with
hazardous substances.
In addition, most states now have laws that parallel CERCLA and
RCRA.
Some of these state laws are even more onerous than the
federal laws because they impose "Superliens" on properties subject
to clean-up.
A lender may become liable under Superfund as a result of being a
present or past owner of property, or if it is found to be an
"operator" of a facility, where hazardous substances have been
improperly released, stored or deposited.
Once a lender forecloses
on collateral, or otherwise obtains title to a borrower's property,
the lender may become liable immediately for any costs incurred to
remediate that property —
owner" of the property.
brief —
does not matter.
simply by virtue of its being the "current
The duration of the ownership —
however
10
Moreover, Superfund does not specify the standard of liability that
wiii be used to determine who is liable for clean up costs.
It also
does not describe or require a causal link for liability to attach.
Nevertheless, the courts have determined that the standard of
liability under Superfund is that of strict liability.
Thus, subject
only to certain very narrow defenses, a lender will be liable for
Superfund clean up costs and damages the moment it becomes the owner
of contaminated property.
A lender also may be held liable for Superfund costs and damages if
it was a past owner of contaminated property.
In fact, as the
statute is interpreted, virtually any person in the property's chain
of title following contamination may potentially be held liable.
Thus, if a lender was a past owner of a property at any point after
it became contaminated and if it can be asserted that barrels on the
property containing toxic wastes, for example, continued to leak
while the lender was the owner of the property, then the lender may
be liable under Superfund.
A lender can attempt to take advantage of the limited number of
statutory defenses available under Superfund.
However, the lender's
burden of proof is very high, since the courts have consistently
construed these defenses very narrowly.
The primary defense that
lenders, as well as others, may raise is commonly called the
"innocent purchaser" defense.
This defense excludes lenders from
Superfund liability if they can establish that: (1) they acquired the
11
property after the hazardous substance disposal had occurred? and,
(2) they did not know, and had no reason to know, that hazardous
substances had been disposed on the property.
This latter requirement has been the subject of much judicial
interpretation and has led to the development of a whole new
industry.
Lenders now must regularly undertake expensive
environmental audits of properties before foreclosure, if they hope
to later successfully raise the innocent purchaser defense.
Even if
an environmental due diligence audit is undertaken, uncertainty
remains.
No guidance is provided under the law or regulation as to
what constitutes the "all appropriate inquiry” required to be ,
protected from environmental liability.
Finally, because of the
expenses involved in attempting to establish the “innocent purchaser”
defense, it is, ironically, somewhat punitive itself.
The situation is exacerbated by the recent Fleet Factors decision.
The Court in this case interpreted a section of Superfund, which
expressly excludes from the definition of "owner or operator" a
person "who, without participating in the management of a...
facility, holds indicia of ownership primarily to protect his
security interest in the...facility." [42 U.S.C. Section
9601(20)(A)].
In thepast, lenders believed this section provided
protection from Superfund liability, so long as they did not
participate in the operation of a facility.
Lenders also generally
understood that their risk of being held liable as an "operator" was
a function of the nature and degree of their control over the
12
operations of a borrower's facility.
More specifically, lenders
generally thought that lender liability would not attach under
Superfund unless they were involved in the day-to-day operations of a
facility.
In short, liability rested with the responsible,
controlling party —
the owner/operator —
and lenders would be held
liable only if evidence could be advanced similar to that presented
in other, traditional lender liability suits.
However, the Court in Fleet Factors held that a secured creditor need
not be involved in the day-to-day operations of a facility or
actually participate in the borrower's decisions relating to
hazardous waste management.
Instead, a lender will be liable .if the
lender is participating in the financial management of a facility to
such a degree as to permit the inference that the lender could
influence the borrower's waste management decisions.
j?leet— Factors decision may have an enormous impact on lenders,
particularly if the decision is adopted by other circuits.
Lenders
may have to change their loan underwriting practices and how they
deal with defaulted borrowers.
Further, just as federal banking
agencies are encouraging banks and thrifts to manage their loan
portfolios more carefully, the decision in Fleet Factors may signal
to lenders that they.should be less involved in overseeing
borrowers.
Should this occur, the FDIC's goals of promoting the
safety and soundness of the banking and thrift system, and the
viability of the deposit insurance system, may be frustrated.
13
LENDERS RESPONSE TO THE PTffyg
Lenders clearly face significant potential risks under current
environmental laws and court rulings.
Irrespective of the size of a
loan, a Superfund lawsuit could result in a claim that is in excess
of a lender's net worth.
While an individual charge-off is a normal
occurrence and can be managed, a Superfund lawsuit could cause the
insolvency of an insured institution.
Lenders have attempted to control their environmental risks in a
number of ways.
Almost all large institutions address hazardous
wastes and other environmental problems in their loan policies and/or
procedures manuals.
Smaller lenders usually deal with the
environmental issues on an ad hoc basis, seeking outside advice when
necessary.
Before a credit decision is made, financial institutions
often conduct environmental audits on potential loan customers that
are involved in some way with hazardous wastes.
If the borrower is
unable to repay the loan, many banks assess potential environmental
risk before restructuring the loan or foreclosing on real estate held
as collateral.
While lenders are aware of environmental risk and have taken action
to limit their liability, the adequacy of the preventive measures
cannot be evaluated because lender responsibility under Superfund
legislation remains undefined.
Various court interpretations
indicate that almost any current or past owner could be held liable
14
for the cost of the cleanup, whether or not that owner was in any way
responsible for the problem.
It also is possible that a lender might
incur liability even if it does not take possession of real
property.
Because the issues are still evolving, what is considered
a prudent action by the lender today might become a cause of action
tomorrow.
Unless the law is changed to exempt insured depository institutions
and the FDIC and RTC from this potential but unrealized liability, it
is possible that the next court ruling or regulation may have an
unfavorable systemic impact on banks, savings and loans, and the
deposit insurance funds.
RISKS OF LOSS TO AGENCIES OR INSTRUMENTALITIES OF THE FEDERAL
GOVERNMENT
As discussed previously, there are several risks of loss to the FDIC
and RTC that arise by reason of lenders' risks.
The environmental
liability that lenders face will place an increasing burden on the
deposit insurance funds by accelerating, if not being solely
responsible for, the capital depletion and insolvency of some insured
depository institutions.
Because lenders may understandably be
unwilling to foreclose on collateral known to be contaminated, such
loans effectively become unsecured.
contribute to increased insolvencies.
All of these factors may
15
In addition, the transactional costs associated with making loans are
increased by the need to conduct environmental due diligence audits.
Under the current state of the environmental laws, such audits must
be conducted repeatedly —
before making a loan, renewing a loan,
engaging in a workout with a borrower in default, and foreclosing on
collateral.
The simplest due diligence investigation can cost
between $3,000 and $10,000 each and a lender may be required to
perform hundreds of these due diligence investigations every year.
This transactional cost may strain a financial institution's
financial condition and most certainly lenders will attempt to pass
the cost on to the customers.
In addition to the cost and risk increases, the potential for
environmental liability could have credit allocation consequences
that could jeopardize the ability of certain segments of the economy
to obtain financing and, therefore, to operate.
We are unable to comment extensively about the risks of loss that
agencies or instrumentalities of the Federal Government, like the
Small Business Administration, for example, may face as a result of
the risks to lenders.
We imagine that the Small Business
Administration may find that more small businesses, such as dry
cleaners, are defaulting on their loans due to increased operating
costs arising from environmental laws.
Also, if lenders refuse to
foreclose on collateral because of contamination, this may have some
impact on agencies such as the Farmers Home Administration, the
Federal Housing Administration, and the Small Business Administration
that insure or guarantee these loans.
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LEGISLATIVE PROPOSALS
— 2827— (Subtitle B) . “Lender Liability Act of 1990M
As stated previously, the FDIC on the whole supports S. 2827.
It
would limit diversion of deposit insurance funds from their primary
purpose and limit escalation of the cost of resolving failed and
savings and loans to the American taxpayer.
However, we
believe that the immunity afforded by S. 2827 should be
strengthened.
A detailed discussion of the individual provisions of
S. 2827, as well as recommended amendments, are contained in an
attachment to this statement.
At this time, however, we would like
to highlight three of our greatest concerns.
First, we have concerns about the provisions that deprive the FDIC
and the RTC of immunity from environmental laws if they have either:
"caused the release, or threatened release of a hazardous or
potentially dangerous substance" or had "actual knowledge that a
hazardous or potentially dangerous substance was located on [a]
property but failed to take all reasonable actions necessary to
prevent the release of such substances."
We believe these provisions are overly broad and ambiguous.
They
the FDIC and RTC to expensive and unnecessary litigation
on their intended scope, as well as to liability for environmental
clean-up costs in circumstances not intended by Congress.
For
example, the requirement that the FDIC and the RTC take "all
reasonable actions necessary" to prevent the release of a substance,
17
if interpreted broadly by the courts, could entirely eviscerate the
purpose of S. 2827 to grant a Superfund exception for the FDIC and
the RTC.
We suggest that these provisions be more clearly defined or
narrowed to ensure that they do not undo the basic thrust of
S. 2827.
We have some suggestions in the attachment to this
testimony, and we would be happy to work further with the members of
this Committee to draft appropriate language.
Second, we suggest inclusion of language to clarify that the immunity
granted the FDIC and the RTC extends to those who purchase
contaminated property from the FDIC or the RTC.
ambiguous on this point.
The bill is
As previously discussed, the deposit
insurance funds and the cost of the savings and loan bailout may be
adversely affected to the extent that we cannot sell properties.
So
that we are not left "holding the bag" and to ensure that properties
in our hands are indeed marketable, the immunity afforded the FDIC
^nd the RTC must be transferable to those who buy contaminated
properties from us.
Finally, it is unclear exactly what laws will be affected by the
immunity granted the FDIC and the RTC under S. 2827.
As drafted, the
bill provides the FDIC and the RTC with immunity from "any law
imposing strict liability for the release... of hazardous
substances...."
The language, "anv law." may invite disputes
regarding the scope of the immunity.
We suggest that either the law
or the legislative history reflect clearly that "any law" encompasses
"any federal, state or local statute, regulation, rule, ordinance or
18
common law.
This will clarify that the FDIC and RTC are immune not
only from federal laws dealing with hazardous substances but also
similar laws and regulations of other governmental units.
The foregoing amendments, as well as those contained in the
attachment to this statement, are suggested to strengthen the
immunity afforded the FDIC and the RTC under S. 2827.
To the extent
that we can minimize judicial interpretation of the bill once
enacted, we will be able to save litigation-related expenditures.
H.R. 4494
While we support the bill introduced by Congressman LaFalce,
H.R. 4494, it is not clear that the protection afforded to lending
institutions by that bill would extend to the FDIC and the RTC.
H.R. 4494 protects those who make loans secured by properties
affected by Superfund.
However, neither the FDIC nor the RTC
typically make secured loans.
to protect those agencies,
As a result, H.R. 4494 is not adequate
in addition, H.R. 4494 does not provide
any exemption from liability under other federal environmental laws,
such as the Resource, Conservation and Recovery Act —
nor does it
limit lenders' potential liability under state environmental laws.
For any hazardous substance exemption to be fully effective, we
believe it must cover not only Superfund but also other related
federal environmental laws, state laws, local initiatives and common
law.
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1L-E-!— 4076,— the “Federal Custodial Responsibility Protection Act
of 1990
The FDIC generally favors the legislative initiative set forth in
H.R. 4076, which was introduced by Congressman Conte.
This bill
would exempt federal agencies from Superfund liability when they
acquire properties through foreclosure and similar means.
While
H.R. 4076 may provide some measure of relief to the FDIC and RTC, it
would not fully protect the deposit insurance funds or limit the
the savings and loan bailout.
Like the bill introduced by
Congressman LaFalce, its exemption is limited to Superfund.
As a
result, it may not provide protection from suits filed under other
federal environmental laws, state laws or common law.
In addition,
it is not clear that H.R. 4076 would provide the FDIC with protection
from Superfund liability when we are acting in our receivership or
conservatorship capacity.
CONCLUSION
In conclusion, the FDIC is vitally concerned with the risks posed by
hazardous substance claims.
The greatest risk of such claims is that
they may divert deposit insurance funds, and taxpayers' money
allocated to resolve the savings and loan crisis, from their intended
purposes.
The legislative initiatives now being considered
will help ensure that these funds and monies are spent properly.
They also will promote the safety and soundness of the banking and
thrift system.
20
We believe that it is altogether appropriate and necessary to exempt
FDIC and the RTC from liability under federal and state
environmental laws that deal with hazardous substances and to clarify
or limit the instances when a lender can be found liable.
The FDIC
and RTC were created to safeguard the safety and soundness of the
banking system, provide confidence to depositors and handle the
savings and loan bailout.
They were not created to solve the
environmental problems confronting this country.
Other agencies were
created to deal with these problems and they can do so much more
effectively and efficiently.
Particularly during these times, the
energies and funds of the FDIC and the RTC should not be diverted
from their primary missions.
The FDIC and RTC thoroughly support the goals underlying current
environmental laws.
However, liability for remedying environmental
problems certainly should be borne by those who created them and not
by banks and thrifts or the FDIC and the RTC.
If those who are
responsible for the problem are insolvent, then another “insurance
fund,” if you will, exists to pay for them —— the “Response Trust
Fund“ created by Congress under Superfund.
That Fund, and not the
FDIC7s insurance funds or the RTC's funds, should bear the cost of
environmental problems.
July 19, 1990
FDIC & RTC LEGAL STAFF COMMENTS ON SUBTITLE B OF S. 2827
THE LENDER LIABILITY ACT OF 1990
The following are substantive and technical comments on Subtitle B of
S. 2827. Where appropriate, we have included revised statutory
language.
AGENCY IMMUNITY - Subsection (dl
1.
As presently drafted, subsection (d) exempts the FDIC, RTC, and
the other listed entities from liability "...under anv law
imposing strict liability for the release ... of hazardous
substances...". To ensure that the term "any law" exempts the
listed entities from liability not only under Federal law, but
under state and local statutes, as well as common law, we suggest
that the term "any law" in subsection (d) be replaced with the
following language: "anv federal, state or local statute,
regulation, rule, ordinance or common law".
2.
Subsection (d) provides an exemption from "any law imposing
strict liability...". The term "strict" liability is not defined
in Subtitle B nor is it defined or used in the various
environmental statutes, including the Comprehensive,
Enviroimental Response, Compensation and Liability Act (CERCLA).
Accordingly, it could be interpreted to narrow inappropriately
the exemption granted under subsection (d). We strongly
recommend that the term "strict liability" be replaced with
"liability".
3.
We suggest that subsection (d) be amended to clarify that the
exemption from liability granted to the FDIC, the RTC, and the
other listed entities extends to the employees and agents of
these entities, as well as to the entities themselves. Inclusion
of this clarifying language will resolve questions that may arise
as to the scope of the exemption and avoid needless litigation.
4.
Subsection (d) as presently drafted contains the phrase,
"hazardous substances or similar material". The phrase, "similar
material." is ambiguous. It is not defined in Subtitle B or in
any federal environmental statute. This phrase also is not a
term of art used in the area of hazardous substance liability
litigation. As a result, we recommend that it either be defined
or deleted.
5.
Subsection (d) provides that the listed entities shall not be
liable "under any law imposing strict liability for the release.
threatened release, use, storage, or disposal of hazardous
substances...".
While the language used in the foregoing phrase
covers most of the bases for liability under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA),
it does not precisely refer to all CERCLA bases of liability. As
a result, we suggest that the phrase be modified to read:
"...under any law imposing liability for the release, threatened
release, use, storage, disposal, treatment. generation or
transportation of hazardous substances...".
6.
To be consistent with terminology used elsewhere in Subtitle B,
we suggest that the term, "Agency Immunity" used in the title of
this subsection be replaced by the term, "Agency Exemption". Use
of the term, "Agency Exemption" also will avoid potential
confusion with statutes and case law dealing with sovereign
immunity.
• In summary, we recommend that the beginning of subsection (d) be
modified as follows:
(d) Aaencv Exemption.
"Neither the Corporation, the Resolution Trust Corporation...nor
the Farm Credit Administration in any of their capacities shall
be liable, nor shall any of their employees and agents be liable,
under any federal, state or local statute, regulation, rule,
ordinance or common law imposing liability for the release,
threatened release, use, storage, disposal, treatment, generation
or transportation of hazardous substances from property
acquired— ...".
EXCEPTIONS TO AGENCY IMMUNITY - Subsection (d)
1.
Two bases are contained in subsection (d) to deprive the FDIC,
RTC, and other listed entities of superfund immunity:
• First, immunity is unavailable if the agency "has caused the
release, or threatened release of a hazardous or potentially
dangerous substance".
• Second, immunity is unavailable if the agency "had actual
knowledge that a hazardous or potentially dangerous substance was
located on such.property but failed to take all reasonable
actions necessary to prevent the release of such substances."
3
There are a number of problems with the language of these
exclusions:
•
The term Potentially dangerous substance11 used in both
exclusions is neither defined in Subtitle B nor in any
federal environmental statute. In addition, the term is not
used in the grant of immunity contained in subsection (d)
As a result, it should either be deleted from this
subsection or defined in the Subtitle.
•
The use of the term t,release11 in conjunction with causatipn
as the basis for removing agency immunity under the firs*£
exclusion is extremely problematic. The term "release" is
defined in Superfund as "any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing into the
environment...". 42 U.S.C. section 9601(22).
Many of the actions listed in the definition of "release"
such as "leaking" and "leaching" may purely be the result of
prior owners' actions and resultant chemical reactions.
Furthermore, some of the actions included in the definition
of "release" may be extremely difficult to pinpoint as to
the time of the "release" with any accuracy. Should it be
argued that a "release" occurred while the FDIC or RTC owned
a property, it may be extremely difficult to produce
evidence to prove that no "release" of hazardous substances
occurred while the property was in the hands of the FDIC or
RTC.
In view of the foregoing, this exclusion from immunity
should be clarified, narrowed or deleted. We suggest that
the bill provide that the FDIC or RTC must be the "sole
cause" of, or the agent that initially caused, the release
or threatened release of the hazardous substance. Absent
such clarification, we believe that the goals of S. 2827
will be significantly frustrated and the deposit insurance
funds and RTC may again be endangered.
•
The phrases, "actual knowledge" and "all reasonable actions
necessary" contained in the second exclusion are extremely
broad and ambiguous. Consequently, they are likely to
subject the FDIC and RTC to expensive and unnecessary
litigation..
•
Furthermore, the phrase "all reasonable actions necessary",
if interpreted broadly by the courts, would eviscerate the
basic purpose of this legislation, which is to grant an
exception from Superfund liability for the FDIC, RTC, and
the other listed entities. We suggest that the term be
defined or narrowed.
The FDIC and RTC must act quickly to resolve failed
financial institutions and, consequently, may not have
•'actual knowledge" of problems associated with properties at
the time of their acquisition. Nonetheless, litigants will
undoubtedly argue that we had "actual knowledge" of a
problem when they seek to deprive the FDIC and RTC of
immunity under subsection (d). Accordingly, the FDIC and
RTC will be placed once again at risk of liability and
forced to incur substantial attorneys fees. We suggest that
this phrase be deleted.
2.
As a technical drafting matter, we suggest that the exceptions to
agency immunity be moved to a separate subsection, rather than
simply being a part of subsection (d).
HATTERS NOT ADDRESSED IN S. 2827
jk* 2l£<*nsferal ^of_immunity. Language should be included to clarify
that the immunity granted the FDIC and RTC extends to those who
purchase contaminated property from the FDIC and RTC. The bill as
presently drafted is ambiguous on this point. Absent such a
provision, the ability of the FDIC and RTC to sell properties would
be greatly impaired.
Such an amendment is consistent with the goal of requiring those who
created the hazardous substance problem to pay for its clean up. The
cost of remediating environmental problems should lie with Superfund,
not the deposit insurance funds or the RTC. By extending the
immunity afforded by S. 2827 to the FDIC's and RTC's buyers, the
values of properties sold by the FDIC and RTC will be enhanced and,
thus, the deposit insurance funds will be protected and the cost of
the savings and loan bailout reduced.
2. Exemption from liability to purchasers under 42 U.S.C. 9 6 2 o r M .
S. 2827 does not address its relationship with 42 U.S.C. 9620(h),
which requires federal agencies to provide certain covenants or
warranties to buyers when they sell properties. Under 42 U.S.C.
9620(h), a federal agency must warrant (1) that it has cleaned up
hazardous substances on the property transferred; and (2) that it
will pay for any clean up costs which arise in the future. While
S. 2827 would exempt the FDIC and RTC from hazardous substance
liability per se. the risks associated with the warranties required
by 42 U.S.C. 9620(h) remain.
To resolve this dilemma, S. 2827 should be amended to provide that
the entities covered by subsection (d) are exempt from providing the
warranties identified in 42 U.S.C. section 9620(h). This recommended
exemption is consistent with our prior suggestion that the immunity
granted the FDIC and RTC under subsection (d) be extended to those
who buy properties from us.
5
3.
Impact of 42 U.S.C. 9607(1). The bill does not appear to
contemplate the impact of 42 U.S.C. 9607(1) on the immunity provided
the agencies under subsection (d) of Subtitle B. Section 9607)(1) of
Title 42 imposes a federal lien on property that has benefited from a
clean up funded by the federal government through Superfund. In the
event a lien is imposed under Section 9607(1) or an analogous state
statute on property acquired by the FDIC or RTC, the protection
afforded the deposit insurance funds and the RTC may be greatly
diminished and the value of that property to the FDIC or RTC would be
greatly reduced. We suggest that S. 2827 be amended to provide an
exemption from 42 U.S.C. 9607(1) for the entities granted immunity
under subsection (d) of Subtitle B.
@FedFRASER