Lender Defenses, Tenant Operations, and Transfers to Third Parties

Florida Statutes (FS) Section 376.308 pertains to the liabilities and defenses of facilities at contaminated sites. This article emphasizes lender defenses as outlined in paragraph 3 of the statute. The language in 376.308(3) is similar to the federal language in the 1996 Asset Conservation, Lender Liability, and Deposit Insurance Protection Act and is designed to clarify lender liability protections and make federal law consistent with State law. While this letter focuses on Florida Statutes, the regulations are very similar in other states. All citations below are paragraphs within Section 376.308, FS.

Summary of Liabilities and Defenses of Facilities, Section 376.308, FS

Pertaining to liabilities, any contamination reported to the regulatory agency will be the responsibility of the owner/borrower in most cases [308(1)]. The exceptions are tenants operating the site [308(1)], or possibly prior owners at the time of the discharge based on joint and several liability [308(4)].

Pertaining to defenses, the all appropriate inquiry defense is provided in 308(1)(c). There are also acts of God, government, war, and third-party defenses in 308(2). Lender defenses are outlined in 308(3).

After bank acquisition, impacts may be identified during the due diligence period conducted by a prospective purchaser prior to divestment, and such impacts may need to be reported to the regulatory agencies. Paragraph 308(3) provides defenses to lenders against regulatory enforcement of a reported discharge that occurs prior to bank acquisition or during bank ownership, provided bank activities comply with the fiduciary responsibility limitations specified in 308(3).

The statute is attached for reference. Tenant operations, lender decisions that may impact their protection, and third-party defenses that could be available to the purchaser of a bank asset are the primary subjects in the remainder of this article.

Bank Owned Sites with Active Tenant Operations

Issue: Implications of a contaminant discharge caused by a tenant operating at a bank owned site. This can be an expensive and complicated issue, and bank actions regarding tenant operations that involve petroleum or hazardous substances may impact lender liability defenses.

Paragraph 308(3)(c) pertains to bank-owned sites (see attachment). Proper bank actions can be summarized as making reasonable efforts to promptly divest the contaminated property, and not participating in management activities beyond those necessary to protect its financial interest. Management activities can be a fine line on a site with potential sources of impact, or where remediation is being conducted.

Bank-owned asset managers must use caution to understand the differences between issues such as contaminant disposal or remedial decision making, which could lead to liability, and directives to tenants regarding compliance with environmental statutes, which would generally not cause a lender to lose its defenses.

There is room for interpretation by agencies regarding the application of the statute in regulatory enforcement. Contamination discovered on bank owned sites where tenants are engaged in storage, handling and disposal of regulated substances could open the door for interpretation of ambiguous terms such as participation in management. For example, banks are entitled to take actions regarding pollution prevention, but in so-doing, must not take action that would cause or exacerbate contamination. Thus, a clear understanding of the rules cited in this article is critical to prevention of economically significant environmental risk to the bank.

Gas station and other high risk sites should be diligently assessed and bank decisions regarding the continuation of such operations after foreclosure should be made after careful examination of potential risk. Pollution liability policies may be in place or available to pay for reasonable and necessary corrective action costs on borrower or tenant claims. Existing leases may have terms regarding responsibility for chemical discharges, and special asset managers should be diligent in their understanding of these issues if renewal or re-leasing occurs to a higher risk tenant.

In summary, there are complex environmental issues pertaining to liability and defenses of property with potential or actual, regulated contamination. The decisions made by the bank before and after foreclosure with respect to these issues can have financially significant impact.

It is our goal to help you properly manage these risks through detailed risk management solutions. 

ENVIRONMENTAL RISK MANAGEMENT, INC.

Steve Hilfiker, MS, LEP
President

Steve Hilfiker is president of Environmental Risk Management, Inc. (ERMI), 4-term past president of the Florida Environmental Assessors Association, and a member of the FPMA Environmental Committee. ERMI is a site assessment and remediation contractor, licensed engineering firm, and licensed geology business. Steve has numerous related articles in the library of www.ermi.net, and can be reached by calling 1-888-ENV-MGMT (1-888-368-6468) or emailing steve@ermi.net.

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