Participation in Management

A lender “participates in management” (and will not qualify for the exemption) if the lender “actually” participates in the management or operational affairs of a facility.  Merely having the capacity to influence or the unexercised right to control the facility does not constitute “participating in management.”

A lender “participates in management” if the lender, while the borrower is still in possession of the facility encumbered by the security interest:

•    exercises decision-making control regarding environmental compliance related to the facility and, in doing so, undertakes responsibility for hazardous substance handling or disposal practices; or

•    exercises control at a level similar to that of a manager of the facility and, in doing so, assumes or manifests responsibility with respect to:

o  day-to-day decision-making on environmental compliance, or

o  all, or substantially all, of the operational (as opposed to financial or administrative) functions of the facility other than environmental compliance.

The Bank should avoid taking control of the borrower’s environmental compliance or substantially all of the operational management of the borrower’s business.  In order for the exception to apply the Bank may not violate either of the two tests in the course of servicing or policing the loan or engaging in work-out discussions with the borrower having contaminated collateral.

The following activities alone do not constitute participation in management:

•    Requiring the borrower to comply with all laws, codes, and regulations, including environmental laws and business obligations.

•    Monitoring and inspection of the borrower’s property.

•    Policing the loan and enforcing the borrower’s covenants.

•    Engaging in work-out discussions and negotiations with the borrower.

•    Restructuring and renegotiating existing loans.

•    Requiring payment of additional interest or rent.

•    Forbearance under a troubles loan.

•    Requiring or exercising rights pursuant to an assignment of rents.

•    Providing specific or even general financial or other advice, counseling, or guidance to the borrower.

•    Exercising any right or remedy the secured creditor is entitled to by law or under promises from the borrower.