ENVIRONMENTAL LIABILITY FOR BANKS

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1 ENVIRONMENTAL LIABILITY FOR BANKS EDITED BY JOSEPH J. NORTON Sir John Lubbock Professor of Banking Law Centre for Commercial Law Studies Queen Mary and Westfield College, University of London Professor of Banking Law, SMU School of Law (Texas) RAYMOND M. AUERBACK Senior Visiting Fellow, Centre for Commercial Law Studies JEFFREY M. GABA Professor of Environmental Law, SMU School of Law (Texas) PUBLISHED JOINTLY WITH BANKING AND FINANCE LAW UNIT, THE CENTRE FOR COMMERCIAL LAW STUDIES AND ITS LONDON INSTITUTE OF INTERNATIONAL BANKING, FINANCE AND DEVELOPMENT LAW LLP LONDON NEW YORK HAMBURG HONG KONG LLOYD'S OF LONDON PRESS LTD 1995

2 CONTENTS Preface Contributors Table of Cases Table of Legislation Page v xiii xv xix CHAPTER 1 ENVIRONMENT LAW, PRACTICE AND LIABILITY: BACKGROUND RaymondM. Auerback Introduction 1 The "polluter-pays" principle 2 Lender liability basic legal issues 2 Strict liability v. fault-based liability 3 The secured creditor's liability 4 Constant risks 5 Contingent risks 5 The secured lender exemption 6 The role of lenders 7 Monitoring and enforcing without managing 8 "Green" lending 10 Conclusion 10 CHAPTER 2 ENVIRONMENTAL LIABILITY FOR LENDERS IN THE UNITED STATES: SUBSTANTIVE LAW ASPECTS Jeffrey M. Gaba Introductory summary 13 Liability for the clean-up of hazardous substances 13 Liability under CERCLA 14 Pre-requisites for liability 14 Clean-up options 14 Private parties 15 Liability of potentially responsible parties 16 Defenses 17 Liability under RCRA 17 Issues of lender liability 18 Liability of lenders holding security interests 18 Case law prior to Fleet Factors 19

3 viii CONTENTS The Fleet Factors decision 21 In re Bergsoe Metal Corporation 23 Liability of lender who purchases property in foreclosure sale 24 Pre-1986 case law 24 The "innocent landowner defense" and the 1986 amendments 25 EPA lender liability rule 27 Types of covered security interests 27 Permissible actions during the course of the loan 28 Permissible actions following foreclosure 29 Limitations on the protection of the rule 30 Judicial response to the EPA's lender rule 31 Invalidation of the rule 31 Case law relying on the vacated rule 31 Case law not relying on the vacated rule 34 Due diligence and the "innocent landowner" defense 35 Scope of a due diligence review 35 Reasons for conducting a due diligence review 36 Innocent landowner defense 37 EPA de minimis settlements and pre-purchase agreements 39 Knowledge to make sound decision 40 Risks of due diligence 40 Security interests in bankruptcy 41 Priority of security interests in bankruptcy 41 Discharge of hazardous waste clean-up claims in bankruptcy 41 Priority of Government clean-up claims as against unsecured creditors 42 Priority of Government clean-up claims as against perfected security interests 42 Superlien statutes 43 CHAPTER 3 LENDING AND THE ENVIRONMENT IN THE UK: ENVIRONMENTAL RISKS FOR BANKERS Robert Lee Introduction 45 Credit risks 46 Air pollution 46 Waste on land 48 Pollution of watercourses. 49 Global pollution 50 Security risk 51 Liability risks 52 Common law liabilities 52 Nuisance 53 Rylands v. Fletcher 53 Negligence 54 Breach of statutory duty 54 Statutory liabilities 55 Integrated pollution control/air pollution control 55 Land and pollution 57

4 CONTENTS "Owner" 59 "Occupier" 60 Water pollution 61 Receivership and administration 63 Conclusion 66 CHAPTER 4 LENDER'S LIABILITY IN THE EUROPEAN UNION: THE CURRENT BACKGROUND AND PROPOSED LEGISLATION Patrick Thieffry and Drake McKenney The European Union's environmental policy and its new instruments 67 The internationalization of environmental costs 70 Packaging collection and recycling requirements: a prototype? 71 Voluntary compliance: certificates of good environmental standing 73 Ecological labelling 74 The "ECO-AUDIT" 75 Liability and freedom of information: facilitation for lenders' due diligences 76 Current issues and the European Union's establishment of strict environmental liability: proposed Directive and Convention compared 77 Strict liability for damage to the environment 78 Parties strictly liable 79 Strict liability: defenses, forms of relief and standing 80 Impact on national laws 83 Civil liability for pollution to the environment: EU harmonization of national legislation 83 The convergence of Member State laws: strict liability 84 Harmonization: the inevitable disparities between Member State treatment of environmental pollution 86 Practical impact on lenders: the EU banking industry's legitimate concerns 88 Spreading the financial burden of pollution 88 Mandatory insurance regime 88 Liability pools 88 Position of banking industry 89 CHAPTER 5 ENVIRONMENTAL IMPACT ON LENDING: PRACTICES IN THE UNITED STATES Joseph J. Norton and Sangeeta Khicha Introduction 93 Impact on lender's loan policies 94 Environmental assessment 96 American Society for Testing and Materials transaction screen 97 The transaction screen questionnaire and site visits 98 Government records and historical sources search 99 Upon completion of the ASTM transaction screen process 99 Phase I environmental assessment 100 Procedures common to Phase I environmental assessments 101 Due diligence and the "innocent landowner" defense 105 Written environmental assessment report 108 ix

5 x CONTENTS Choosing the party to perform a Phase I assessment 108 Who pays for the Phase I environmental assessment? 109 Environmental audits 110 Environmental provisions in loan agreements 111 Representations and warranties, conditions precedent and covenants 111 Introduction 111 Sample representations and warranties, conditions precedent and covenants 113 Indemnity provisions 117 Introduction 117 Sample indemnity provisions 118 Monitoring of the borrower during the life of the loan 119 Foreclosure: enforcing the security 121 Appendix 5-1: definitions to be applied in conjunction with sample representations and warranties, covenants, conditions precedent and indemnity provisions 123 CHAPTER 6 ENVIRONMENTAL LIABILITY: PRACTICE IN THE UK Stephen Sykes Introduction 127 Environmental lending practice in the United Kingdom: the story so far 129 In the beginning The Contaminated Land Register: The European Commission: The UK Government: The courts: The British Bankers' Association: Banks' environmental lending practices: a recent study 133 Banks and contaminated land 135 Hazard ranking systems 137 Banks and environmental consultants 138 Terms and conditions 139 Professional indemnity insurance 140 Locality 140 Speed of response 140 Laboratories 141 The consultant on site and sub-contracting 141 Environmental audits 142 Contaminated land audits 142 General compliance audits 144 Sample environmental documentation 146 Lender checklists 147 Environmental authorisations 148 Waste disposal arrangements 149 Impact on security 151 Enforcing security 152 Going into possession 152 Appointing receivers 153 Summary 155

6 CONTENTS CHAPTER 7 INTERNATIONAL PROJECT FINANCING Raymond M. Auerback and Andrew C. Shutter Introduction 157 Risk-intensive lending 157 Lending in an uncertain regulatory environment 158 Self-regulation 159 Developing country focus 159 Environmental project appraisal the elements of the legal investigation 160 Application of international law 160 Laws and policies of host governments 161 Rules and conditions of co-financiers 165 The World Bank 166 The European Bank for Reconstruction and Development (EBRD) 167 The Commonwealth Development Corporation (CDC) 167 Influence of pressure groups 168 Risk evaluation and management 170 Existence of pre-investment pollution 171 Nature of legal interest in project land 171 Should project sponsors involve a multilateral or bilateral development institution in the project? 171 How should the project be protected against future environmental legislation and practices? 172 Partition of the project 173 Allied goods and services 173 Contractual issues 173 Lender issues 173 Risk assessment 173 Valuation of real property assets for security purposes 174 Insurance cover 174 Political considerations 174 Direct lender liability 175 Risk management 175 Loan documentation 176 Defined terms 176 Conditions precedent 180 Representations and covenants 181 Representations 181 Covenants 182 Events of default 182 Enforcement of security 183 Conclusion 184 CHAPTER 8 INTERNATIONAL FINANCIAL INSTITUTIONS AND THE ENVIRONMENT: THE CASE OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT Mads Andenas Introduction 185 xi

7 xii CONTENTS Development banks and the environment 186 The EBRD Agreement The EBRD Environmental Policy and Procedures The World Bank, the IFC and the EBRD 194 CHAPTER 9 INTERNATIONAL OPPORTUNITIES FOR LENDER TO USE AND BENEFIT FROM ENVIRONMENTAL LEGISLATION AND POLICY Derek Asiedu-Akrofi Introduction 197 Debt-for-nature swaps origin, nature and structure 197 Selected country survey 199 Bolivia 199 Brazil 200 Brazil Update 200 Costa Rica 202 Ecuador 203 El Salvador 204 Guatemala 205 Panama 205 Jamaica 205 The Philippines 206 Poland 207 Madagascar 207 Mexico 209 Zambia 210 Protected agreements 210 Comparison 211 Direct governmental initiatives for swap programs 211 The impact of debt-for-nature swaps 223 Concerns in structuring debt-for-nature swaps 225 Future of debt-for-nature swaps 227 Conclusion 231 Index 233

DISTRESSING ASSETS: LENDERS AND ENVIRONMENTALLY-IMPACTED COLLATERAL. By: John Slavich

DISTRESSING ASSETS: LENDERS AND ENVIRONMENTALLY-IMPACTED COLLATERAL By: John Slavich This article will focus on the complicating issues that arise for lenders when property held as collateral is, or is