Discovered contamination during a workout can trigger CERCLA liability for the lender if it forecloses and takes title. Lenders typically order Phase II testing on suspect sites and frequently pivot from foreclosure to note sale or discounted payoff to avoid environmental exposure they did not underwrite at origination.
What is the lender's exposure?
Under CERCLA, owners and operators of contaminated sites can be jointly and severally liable for cleanup costs. The secured-creditor exemption can continue after foreclosure if the lender did not participate in management before taking title and, after foreclosure, seeks to sell or otherwise divest at the earliest practicable, commercially reasonable time. Discovered contamination therefore changes lender remedy economics dramatically.
How can sponsors use this?
Where contamination exists and cleanup cost is meaningful, the lender's incentive to take title evaporates. Sponsors with strong environmental counsel can sometimes negotiate favorable DPO terms because the lender's alternative (foreclosure plus cleanup) is genuinely worse than partial recovery via DPO.
Sources
- Superfund: CERCLA Overview · U.S. Environmental Protection Agency · current
- ASTM E1527-21 Standard Practice for Phase I Environmental Site Assessments · ASTM International · 2021