Ohio Bank to Partially Reimburse EPA For Removal Costs Related To Defunct Borrower Facility

October 23rd, 2012

An Ohio bank agreed to pay the United States EPA $8K in past response costs incurred by EPA to remove hazardous waste drums at a facility that had been owned by a defunct borrower. The amount the bank agreed to pay represented approximately 10% of the EPA’s response costs. The notice of the proposed Agreement for Recovery of Past Response Costs under section 122(h) of CERCLA was published in the October 22nd issue of the Federal Register  and is captioned “In the Matter of Ultimate Industries Site, Citizens Banking Co. of Sandusky, settling party”.

The bank had initially taken title to the borrower’s facility through a foreclosure sale but then obtained a court order to set aside the sale several months later. However, the bank retained possession of the property and there were allegations that during this period of time, the bank allowed drums of useful raw materials and inventory to deteriorate and become hazardous waste.

We previously reported on a related proceeding in 2010 captioned State of Ohio v Estate of Roberts, 188 Ohio App.3d 306 (6th Dist. 2010). In this case, Ultimate Industries, Inc. (“Ultimate”) manufactured decorative landscaping rocks and rock waterfalls at a property located in a residential neighborhood in Sandusky, Ohio. The manufacturing process involved the use of chemicals, paint, and stain and generated hazardous and nonhazardous waste. In 2002, the Ohio Environmental Protection Agency (“OEPA”) cited Ultimate Industries, Inc. (“Ultimate”) for improperly venting paint booths and storing waste on the property in 55-gallon drums. Ultimate was ordered to remove 20 drums of waste, eight of which contained hazardous waste. Ultimate complied by April 2, 2003

Ultimate had obtained a loan from Citizens National Bank of Norwalk (“Citizens”) in 1993 which was secured by a mortgage, inventory and equipment. In 2004, Ultimate ceased operations, defaulted on its loan and its principals, Thomas and James Roberts, filed for bankruptcy. Citizens took possession of the property in the fall of 2004. Approximately 54 drums of chemicals were present when Citizens assumed control of the site, of which 35 had chemicals, paint, and stain that were usable materials. The bank sold some of the equipment but was only able to sell two of the drums.

The bank commenced foreclosure proceedings in May 2005 and allegedly rejected an offer to purchase the entire building and its contents for $100K in late 2005. When one of the paint sprayer’s that Citizen sold was removed, a hole was left in the roof were the vent line had been located. This allowed water to accumulate on the third floor and black mold soon began to grow. Except for putting antifreeze in the toilets, Citizens took no action to winterize protect the building

In May 2006, the property was sold at sheriff’s sale to Citizens for $40,000. However, before the sheriff was ordered to convey the deed to Citizens, Citizens moved to have the confirmation of sale vacated due to “newly discovered evidence.” While Citizens’ motion to vacate was pending, the Ohio Attorney General filed a complaint in October 2006 against Ultimate for injunctive relief and civil penalties, claiming that most of the material in the drums had turned to hazardous waste. Additionally, because drums were rusting as a result of the hole in the roof, drums were at risk of leaking many of drums at the site had become unusable in the intervening period.

In January 2007, the trial court granted Citizens’ motion to vacate, finding that Citizens acted within a reasonable time of becoming aware of the newly discovered evidence which by due diligence could not have been discovered. In July 2007, the state ordered Ultimate to properly dispose the hazardous wastes at the site. Two weeks later, the owner of the company died and Ultimate was dissolved.

In January 2008, the state filed an amended complaint against the estate of the owner of the company, alleging that the company had failed to obtain a Title V air permit, had not complied with Toxics Release Inventory (TRI) reporting requirements as well as RCRA closure violations. The estate, in turn, filed a third-party complaint against Citizens in April 2008, asserting that Citizens breached its duty of good faith dealing and committed waste for failing to take steps to adequately protect the real property after it took control of the property. The estate also asserted that it no longer had no longer owned or possessed the waste drums since Citizens assumed control of the site. The state also issued an interim order to the estates of the principals, ordering them to comply with Title V and requiring proceeds from the sale of the property be used to satisfy the civil penalties and injunctive relief mandated by the order.

Citizens subsequently filed a motion for summary judgment arguing it had no obligation to comply with the OEPA order. The trial court agreed, holding that while Citizens had had discretion under the financing statement or loan documents to perform any duty or covenant that appellants failed to perform, the bank was not obligated to do so. The trial court also noted that no appeal was taken from the foreclosure action, and that while a financial institution could be liable for remediation under environmental statutes, the complaint did not contain such a cause of action. The court also noted that responsibility for environmental remediation generally follows ownership and Citizen did not have title to the property. As a result, the trial court dismissed the third-party complaint filed by appellants.

A bench trial was then held to determine the amount of the civil penalty to be assessed against Ultimate. The trial court then ordered Ultimate to evaluate and label all waste present, remove all hazardous waste, secure the property, and submit a closure plan acceptable to OEPA. The trial court assessed a civil penalty of $50K but suspended $47,500 of the penalty on the condition that Ultimate fully complied with the injunctive relief within 120 days.

Ultimate appealed the trial court’s grant of summary judgment in favor of Citizens The court of appeals reversed, finding numerous genuine questions of material facts about the bank’s actions. The court said there was a material question if Citizens had possession of the entire inventory, not just the inventory it sold as it alleged. The court also said there was also a material question if Citizens’ disposition of the inventory in which it held a security interest contained viable, marketable, and usable chemicals at the time appellants defaulted on their agreement. Moreover, the court found genuine issue of material fact if Citizens breached its implied duty of good faith and dealing when allowed the inventory to deteriorate into hazardous waste, thereby allegedly causing appellants additional damages in excess of their mortgage obligation to Citizens

Turning to the secured creditor exemption, the court noted that the statute not only required Citizen to dispose of its collateral in a commercially reasonable manner but that “every aspect of the disposition of collateral, including the method, manner, time, place and other terms, must be commercially reasonable.”  Since the bank’s agent was at the property to sell the collateral, the court found genuine issues of material fact if the bank failed to properly dispose of the drums and allowed useful chemicals to deteriorate into hazardous wastes.

I have frequently posted and written on the heightened risks that lenders face when foreclosing or taking control of the property of defaulted borrowers. Despite several high-profile enforcement cases such as the HSBC case in New York that illustrate the potential exposure that lenders face, lenders are continuing to overlook environmental compliance issues in their rush to exercise their remedies following a default. Our prior post discusses the challenges facing foreclosing lenders and some of the more common scenarios where lenders have inadvertantly exposed themselves to environmental liability.

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