Publications

On October 1, 1998, legislation became effective in Connecticut that aims at providing lenders with some comfort that, in the ordinary course, they will not be responsible for environmental liabilities occurring at property solely because the lender has encumbered the property with a mortgage. (See Wiggin & Dana Environmental Advisory, Autumn 1998, volume 1, number 1). The legislation identifies the circumstances under which lenders may be held responsible for environmental liabilities in connection with mortgaged properties. One of the purposes of the legislation is to reduce the reluctance of lenders to finance redevelopment projects.

A federal limitation on lender liability, known as the Secured Creditor Exemption, has been on the books since the enactment of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) in 1980; however, judicial interpretation of the exemption insured that the exemption was anything but. Because judicial interpretation of the Secured Creditor Exemption created anxiety in the lending community over the specter of environmental liability, in 1996, Congress enacted a lender liability statute that provided very specific limitations on the Superfund liability of lenders.

The Connecticut legislation, modeled on the 1996 federal statute, also creates a clear limitation on the triggering of environmental liability on lenders in connection with mortgaged premises, but does not go as far as its federal counterpart, and as a result, may not prove to be a significant factor in the state’s efforts to foster redevelopment projects.

The Connecticut lender liability statute has been codified at C.G.S. § 22a-452f and provides that:

a lender who holds indicia of ownership [such as a mortgage] to protect a security interest in a property… and does not participate in the management of such property… shall not be liable for any damages, assessment, fine or other costs imposed by the state for containment, removal or mitigation of such a spill or discharge, or any order of the commissioner to abate or remediate such spill or discharge from, or in connection with a property……

The statute also provides that a lender who does not participate in the management of the property and forecloses on the property shall not be liable

provided such lender seeks to sell, re-lease… or otherwise divest itself of the property… at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements, after the foreclosure.

Thus, as with the federal limitation, the two most important questions will be:

(i) whether the lender “participated in the management” of the borrower; and
(ii)whether, if the lender forecloses, the lender divests itself of the property “at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements, after foreclosure.”

However, there is a significant difference between the Connecticut and the federal limitations. While the federal limitation excludes lenders from the definition of “owner,” thereby effectively insulating lenders from Superfund liability that may result from a claim brought by any party, the Connecticut limitation insulates lenders only from claims brought by the state. It remains to be seen whether this legal loophole in the Connecticut law will cause a decrease in the number of loans for redevelopment projects instead of the increase intended by the legislature. What is certain, however, is that every lender should now develop and enforce mortgage requirements and foreclosure procedures taking advantage of the liability limitations offered by the federal and state statutory sections.