By: Shadi J. Enos, Esq.
ABL Advisor, October 30, 2013
When Congress enacted CERCLA (the Comprehensive Environmental Response, Compensation and Liability Act), they gave the EPA broad powers to identify parties responsible for the release or threatened release of hazardous substances, to impose liability and to ensure compliance with cleanup measures. Kudos to Congress for enacting this comprehensive measure, but ABL lenders beware … what’s great for the environment may not be so great for the uninformed lender. The EPA’s broad powers under CERCLA can affect the priority of your security interest by creating hidden liens in favor of the U.S. Government.
Identify the Threat
Let’s begin by discussing the types of CERCLA liens that you should be aware of. There are three sections under CERCLA (42 U.S.C. Section 9607) that allow the US Government to create liens: (i) Section 9607(a), which we will call the “Primary CERCLA Lien”; (ii) Section 9607(m), which we will call the “Maritime Lien”; and (iii) Section 9607(r), which we will call the “Windfall Lien.”
Primary CERCLA Lien (One if by land…)
The Primary CERCLA Lien can be imposed on an owner or operator of a facility where hazardous materials were disposed of or were merely possessed regardless of that party’s fault [that’s right…regardless of fault] or involvement with the hazardous materials. There are some limited exceptions that would enable an escape liability under this section, but we can skip those for now. Suffice it to say, that the Primary CERCLA Lien casts a wide net.
Maritime Lien (Two if by sea…)
In the event the release or threatened release of hazardous substances comes from a vessel, the U.S. Government can also impose a Maritime Lien on that vessel for all costs and damages that the owner or operator would be liable for.
Windfall Lien (Three if you try to escape me…)
Even if a person is able to avoid a Primary CERCLA Lien by qualifying for one of the limited exceptions, they may still be subject to a Windfall Lien if they benefitted from the decontamination efforts. The Government would just need to show that there are unrecovered response costs and that the response action enhanced the FMV of the property. In these cases, the lien attaches to the property for the lesser of (i) any unrecovered costs associated with the clean up actions, or (ii) the increased FMV of the property.
Understand the Threat
Now that we have a functional understanding of what type of CERCLA liens exist, let’s discuss how these liens affect a secured lender. Since the Primary CERCLA lien is the broadest in scope and the one most likely to ensnare your borrower, we’ll focus the discussion on these liens.
What property is subject to the lien?
The Primary CERCLA Lien attaches to basically all real property where the U.S. Government has spent any Superfund money, and that list is quite expansive. The EPA has established a website listing Superfund locations throughout the country and providing details about the contamination at each site. You should search this website as a starting point for your CERCLA due diligence.
When does the lien arise and how long does it continue?
In order to obtain a CERCLA lien, the government must incur costs associated with a CERCLA remedial or removal action and provide notice of potential liability to the owner of the affected property. Assuming the government has taken these steps, its lien attaches automatically upon the later of (i) the time such costs are incurred or (ii) the time the notice is provided. The lien continues to be effective until liability for the costs is satisfied or the statute of limitations has run. Generally, the government has three years from the completion of a removal action (or six years from the decision to grant a waiver) and six years from the initiation of a remedial action to assert liability under CERCLA.
How much can the government recover?
The liability associated with a CERCLA lien can be staggering! The government can recover not only all its direct costs of removal/remediation, but also third party costs, damages for injury or destruction of natural resources, and any health assessment conducted.
How are CERCLA Liens Perfected?
A CERCLA lien that has not been filed is subordinate to existing perfected liens under state law. However, if the EPA files a notice of a CERCLA lien, the government will be afforded priority over subsequent filers, judgment lien creditors who have not perfected their interests, and potential purchasers of the property.
Depending on the state in which the effected property is located, the U.S. Government may file its lien notice at the state level, the county level or even at the District Court. This means that when you order lien searches, you should consider searching in both the District Court and the local office for recorded property interests, in addition to ordering Secretary of State searches.
Neutralizing the Threat
To properly protect your security interests from CERCLA liens, consider taking the following actions:
- Perform a title search on any real property collateral
- Search the Secretary of State, District Court and applicable county records
- Conduct a search of the EPA/CERCLA website
- Get Phase I environmental reports
- Perform searches for other collateral owned by the borrower that may constitute a facility (as defined in CERCLA)
- File mortgages and UCC financing statements in a timely manner
- Require borrowers to rep and warrant that they have complied with environmental laws and that they have no environmental liabilities
- Include affirmative covenants to continue compliance with environmental laws
- Include negative covenants prohibiting the creation or existence of environmental liens