ELR Citation: ELR 20946
No(s). CV687-070 (S.D. Ga. Apr 23, 1993)

The court, which previously stayed this case pending EPA's promulgation of its lender liability rule interpreting the secured creditor liability exemption under §101(20)(A) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), denies both the government's and the corporate lender's second motions for summary judgment, because general issues of material fact exist in the government's CERCLA cost recovery action against the lender. The corporate lender entered into a standard factoring agreement with a textile printing company three years before the company filed for reorganization in bankruptcy. With the Bankruptcy Court's approval, the company continued operations as a debtor in possession and the corporate lender advanced funds to the debtor until its debt exceeded the value of its accounts receivable, which represented the corporate lender's collateral.

Thereafter, the corporate lender advanced funds during the winding-down period to pay utilities and to make payroll for a skeleton crew retained to pack and ship the remaining inventory and to provide site security. The bankruptcy court authorized the corporate lender to foreclose on the debtor's inventory, equipment, and machinery, and the lender arranged for a liquidator to conduct a public auction, including organizing and arranging the salable items. After the auction, the corporate lender contracted a company to remove any equipment or machinery not sold.

The U.S. Environmental Protection Agency (EPA) subsequently conducted a CERCLA removal action related to several hundred drums and numerous vats of CERCLA hazardous chemicals found on the plant site. EPA then sought to recover its response costs under CERCLA against the corporate lender as an operator of the facility, and in this second motion additionally seeks recovery under CERCLA against the lender as a person that arranged for the disposal of the hazardous wastes. After this court previously denied the parties' first motions for summary judgment, the corporate lender appealed and the Eleventh Circuit Court of Appeals affirmed and remanded for trial. In so doing, the Eleventh Circuit, the first federal court of appeals to interpret the exemption, addressed the applicability of CERCLA §107(a)(2) owner or operator liability to lenders. The court explained that a lender may incur management participation liability for less than actual control of a borrower's day-to-day operations, although the court did not explain fully the type and level of involvement necessary to incur such liability. In response, the financial community expressed great concern and EPA responded by promulgating its lender liability rule.

The court first notes that resolution of the parties' motions for summary judgment requires a meshing of the Eleventh Circuit's decision and EPA's interpretation of CERCLA's secured creditor exemption, as provided in the lender liability rule. Although the court is bound to follow the Eleventh Circuit's previous analysis, deference to EPA's lender liability rule is warranted under application of the Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 14 ELR 20507, statutory construction test, because the reasonableness of the Agency's rule has not been brought into question in this case. The court, however, notes that there is no real conflict between EPA's rule and the Eleventh Circuit's opinion, because the rule simply elaborates on several questions left unanswered by that opinion.

The court next notes that although the Eleventh Circuit recognized two possible theories for secured creditor liability under §101(20)(A), "conventional" operator liability and "management participation" liability, the Eleventh Circuit based its analysis on the management participation theory only. In relying on this theory, the Eleventh Circuit explained that although the phrase "participating in the management" and the term "operator" are not congruent, a secured creditor can be held liable even though its level of involvement is insufficient to warrant finding it in actual control of the borrower's day-to-day operations. The court holds that EPA's lender liability rule directly addresses this distinction and interprets it simply as recognizing the need to hold liable a secured creditor that either acts as a day-to-day manager or, without acting as a day-to-day manager, otherwise directly affects or controls the facility's hazardous substance handling or disposal practices. The court holds that although EPA's interpretation is not directly supported by the Eleventh Circuit's opinion or related case law, the rule is reasonable and consistent with CERCLA's policy of imposing liability on those responsible for creating hazardous waste problems. Thus, the court concludes that EPA's rule is a congruent extension of the Eleventh Circuit's decision and the remaining case law interpreting the secured creditor exemption.

The court next clarifies that the Eleventh Circuit's failure to explain fully the type and level of involvement necessary for a lender to incur management participation liability did not create a rule of liability that attaches without actual involvement, but only provided that a secured creditor will be liable if its involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions if it so chose. Through its rule, EPA sought to achieve Congress' intent that secured creditors be protected when engaged only in the normal course of their business. Further, the preamble to the rule indicates EPA's intent not to overrule administratively the Eleventh Circuit's decision, but rather be an extension of that opinion. Also, in response to the understandable concern from the financial community, the general test in the rule expressly states that participation in management requires actual participation and does not include the mere capacity or ability to influence, or the unexercised right to control facility operations. The court notes that the rule's preamble explains the capacity to influence as the distinction between a secured creditor who, acting as an outsider, can exercise even considerable influence over a borrower and one who actually exercises decisionmaking control over the facility's operations from within the facility's hierarchy. Only the latter situation warrants liability under EPA's rule. Finally, the court notes that because the Eleventh Circuit's attention was directed only to the corporate lender's motion for summary judgment—not toward establishing a comprehensive test, the application of which would solve all secured creditor exemption issues—too strict a reading of its dicta would be a disservice to the court and to the exemption.

Applying EPA's lender liability rule to decide whether the corporate lender is covered by the secured creditor exemption, the court first declines to decide whether the lender's second motion for summary judgment is barred by the Eleventh Circuit's decision. Although the lender's second motion for summary judgment is tenuous, the record contains disputed facts concerning the applicability of the exemption. This conclusion is necessitated because the Eleventh Circuit had before it only the lender's motion for summary judgment, which required that court to consider all the evidence in the light most favorable to the government. This court's consideration of the government's cross-claim for summary judgment, however, must be made viewing the evidence most favorably to the lender.

Turning to application of the rule's preforeclosure provisions, the court finds that the corporate lender was involved with the goings-on at the plant site during the preforeclosure period, but holds that this participation was not, as a matter of law, participation in the borrower's management. The rule's general test for management participation liability requires that the control exercised be so pervasive that the holder demonstrated responsibility for either environmental compliance or day-to-day decisionmaking with respect to either environmental compliance or all, or substantially all, of the operations aspects of the enterprise. The court finds that the voluminous materials presented by the parties leave many questions unanswered as to the lender's involvement in the debtor's operations, but that the lender will carry a heavy burden at trial to show that its actions were taken in its normal course of business.

Turning to application of the rule's postforeclosure provisions, the court holds that it may not decide whether the lenders postforeclosure winding-up activities are protected by the secured creditor exemption, because the rule's post-foreclosure provisions regarding allowable winding-up activities by lenders are only available if the secured creditor promptly attempts to divest itself of the foreclosed property and did not participate in management before foreclosure. Since the question of the lender's participation pre-foreclosure is in question, it cannot be said, as a matter of law, that the post-foreclosure provisions of the rule apply to the lender. The court, however, rules that the lender's failure to foreclose on the real property associated with the plant site does not preclude the lender's foreclosure on the debtor's inventory, equipment, and machinery from being covered by the rule's foreclosure provisions. Although the lender liability rule does not specifically embrace the foreclosure of only inventory, equipment, and machinery, it is equally true that the rule does not restrict itself to real property. Moreover, to adopt the government's position that failure to foreclose on the underlying real property bars application of the post-foreclosure provisions that provide for application of the secured creditor exemption, would violate Congress' intent in creating the secured creditor exemption, because it is sometimes in the normal course of a secured creditor's business to foreclose on other than real property.

Finally, the court rules that the government may proceed to trial under its newly asserted second claim against the lender as an "arranger" for the disposal of hazardous waste under §107(a)(3). Although the government first brings its §107(a)(3) claim against the lender in its second motion for summary judgment, this second claim encompasses the same operative facts as the government's §107(a)(2) "owner or operator" claim and the government's strategy adjustment is understandable. The original complaint put the lender on notice of its potential liability under §107(a)(2) and, through its general claim for relief, at least gave some minimal notice that the government's assertion of liability might not be limited strictly to §107(a)(2).

[Prior decisions in this litigation are published at 19 ELR 20529 and 20 ELR 20832. A related case is published at 23 ELR 20961.]

Counsel for Plaintiff
Anne S. Almy
Environment and Natural Resources Division
U.S. Department of Justice, Washington DC 20530
(202) 514-2000

Counsel for Defendant
Richard E. Miley
Nixon, Yow, Waller & Capers
1500 First Union Bank Bldg., Augusta GA 30910
(404) 722-7541