It has become common practice for a Bank to have at least a Phase I environmental assessment of the mortgaged property made by a qualified environmental audit firm, prior to nonjudicial foreclosure. See Chapter 5 “Environmental Issues.” The fact that the Bank undertook an appropriate inquiry into the previous ownership and uses of the property consistent with good commercial practice in an effort to minimize liability may enable the Bank to take advantage of the “innocent purchaser” defense to environmental liability.
Until its purchase of the property at the foreclosure sale, the Bank will generally not have liability under the Comprehensive Environmental, Response, Compensation, and Liability Act (usually referred to as “CERCLA” or “Superfund”) by reason of the “secured creditor” exception to CERCLA. To avoid liability, however, the Bank must prove that it did not engage in the day-to-day management of the debtor and did not have involvement with the management of the facility sufficiently broad to support the inference that it could affect hazardous waste disposal decisions, if it so chose.
At such time as the Bank becomes owner of the property through foreclosure sale, however, the Bank will have CERCLA liability for environmental cleanup costs for the release of a hazardous substance, as a present “owner or operator” of the property. In short, were the EPA to assess cleanup costs, the Bank, as owner of the property, would likely be named as a responsible party and be liable for all or a portion of such cleanup costs, or could become liable to other responsible parties for contribution to cleanup costs.
Sometimes it is in the best interest of the Bank to decline to foreclose on its real property collateral (or decline to take title by deed) when it appears that serious environmental problems affect the property. The Bank’s taking a loss on an uncollectible, unsecured debt may be preferable to the Bank’s becoming liable in excess of the current value of the property.