We have frequently written on the heightened risks that lenders face when foreclosing or taking control of the property of defaulted borrowers. See Ohio Bank to Reimburse EPA.
Despite several high-profile enforcement cases such as the HSBC case in New York that illustrate the potential exposure that lenders face when they take control over a borrower’s property, lenders are continuing to overlook environmental compliance issues in their rush to exercise their remedies following a default. Our prior posts discuss the challenges facing foreclosing lenders and some of the more common scenarios where lenders have inadvertantly exposed themselves to environmental liability. See Lender Liability and Post-Foreclosure; Lender LIability and Foreclosure ;When a Lender Is Thinking of Foreclosure
The latest example is the Bank of America (BOA) settlement with EPA where BOA agreed to pay the United States EPA $80K in past response costs incurred by EPA to remove hazardous waste drums at a facility of a defunct borrower. BOA committed some of the classic blunders that we have warned can cause banks to lose their CERCLA security creditor liability protection. BOA conducted an auction of equipment and inventory but left behind plating vats, tanks and associated pipling full of hazardous wastes and corrosive materials as well as wastes and chemicals associated with the wastewate treatment plant. The bank also failed to winterize the facility so pipes froze. This lead to a waterline break that prompted a response by the county environmental agency. The county called in EPA because of the presence of thousands of gallons of liquid hazardous wastes. EPA conducted a removal action and alleged that releases of hazardous substances had occurred due to improper management and storage of hazardous substances when BOA controlled the property. Because the releases occurred during the time BOA exercised control over the facility, EPA deemed BOA to be a CERCLA operator. The settlement is available on our Lender Liability Cases and Settlements Page
The borrower in this case, Rehrig United-International (Rehrig), had a checkered environmental history. Rehrig was one of the largest manufacturers of grocery shopping carts and shopping baskets, supplying retailers such as Wal-Mart, Home Depot, and Safeway Supermarkets. The Rehrig’s manufacturing processes consisted of metal fabrication, injection molding of high density polyethylene parts and metal plating of nickel and chromium onto the fabricated metal parts.
From 1979 to 2001, Rehrig operated at a facility located in Richmond, Va. Rehrig treated wastewater generated by the nickel and chromium electroplating operations in an on-site 4-stage wastewater treatment system consisting of tanks and a filter press to remove water from settled solids. Wastewater from the tanks and filter presses were discharged to the sanitary sewer system in accordance with a Pretreatment Permit.
During the 1990s, the Rehrig facility became subject to enforcement actions for significant non-compliance of its pre-treatment permit discharge limits. Indeed, in June 2001, Rehrig pleaded guilty to criminal violations of the Clean Water Act and was sentenced to pay $500,000 in fines. The company’s environmental compliance supervisor was also sentenced to six months of home confinement with weekends in jail for 120 days as well as a fine of $7,500 for tampering with wastewater samples.
In 2001, Rehrig moved its operations to the Chesterfield County Industrial Park. Rehrig leased the Chesterfield facility from J&P Keegan (Keegan). The Virginia Department of Environmental Quality (VADEQ) was unaware that Rehrig had moved until inspectors visited the former Richmond facility in 2003 to conduct a RCRA compliance inspection only to find out that the plant had been demolished and replaced with a grocery and strip mall. The VADEQ identified three potential areas of concern (AOCs) and nine Solid Waste Management that might be required to undergo corrective action. VADEQ subsequently determined that no corrective action was required.
In September 2008, Rehrig filed a Chapter 11 bankruptcy petition for reorganization which was converted to a chapter 7 liquidation proceeding in December of 2008. After the bankruptcy court approved the conversion to chapter 7 liquidation, BOA, as a senior creditor, ordered Rehrig to shut down operations. BOA assumed control of the assets at the Warehouse to conduct an auction. In April 2009, BOA turned over possession of the property Keegan.
Meanwhile, in January 2009 the Chesterfield County Office of Emergency Services responded to a report of water gushing from the Rehrig facility. The water leak was apparently due to frozen piping in the unheated facility. Because runoff and stormwater from the facility flowed to a tributary of the James River which is used for drinking water and other purposes, the county requested EPA assistance.
EPA sampled the surface water and found chromium and nickel as high as 14.3 and 27.3 micrograms per liter, respectively. Soil analysis detected chromium and nickel levels of 12.3 milligrams per kilogram (mg/kg) and nickel levels of 10.9 mg/kg, respectively. Sampling of liquid in the plating bath area revealed chromium and nickel of up to 709,000 and 707,000 micrograms per liter, respectively.
Because of the abrupt shutdown, hazardous substances and corrosive materials remained in process lines, tanks, and vats. In April 2009, EPA and the state VADEQ inspected the property and observed additional leakage in the plating area. Inspectors also observed piping and concrete beneath the plating area that had deteriorated from extended exposure to corrosive hazardous wastes. The agencies estimated that 50,000 to 75,000 gallons of process waste liquids were stored in open vats, tanks, drums, and process lines.
A pre-treatment system with two 50,000-gallon tanks was also located at the facility. At the time the facility was abandoned, the acid dump tank held approximately 8,000 gallons of liquids while 10,000 gallons of liquids remained in the caustic dump tank with another 10,000 gallons of liquids contained elsewhere in the tank system. EPA also found drums of pre-treatment chemicals and sludges in a sludge collection tank.
In July 2009, Keegan entered into Administrative Settlement Agreement and Order on Consent for a CERCLA Removal Response Action for the Facility (“EPA Consent Order”). Keegan agreed to remove the plating vats where electroplating had occurred inside the facility and to remove the wastewater treatment system.
In December 2010, Keegan also entered into a special order by consent with the Virginia Waste Management Board to conduct certain remedial measures. The Board concluded that releases had occurred due to improper management and storage of hazardous substances during Rehrig’s or Bank of America’s leasehold possession of the facility.
The story does have a good ending, though. After Keegan completed the remedial actions, the facility was renovated and a new tenant began operating at the property.