Many secured lenders do not realize the risks associated with lending upon collateral involving underground storage tanks (USTs). Whereas the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), was amended years ago to protect and insulate from liability lenders who foreclose on environmentally-tainted collateral, USTs are governed by the Resource Conservation and Recovery Act of 1976, as amended (RCRA). Because RCRA does not contain the protections afforded by CERCLA, secured creditors must be much more careful when making loans secured by real property that contains USTs.
A Secured Party Is a “Holder”
RCRA contains provisions that apply to “holders,” and this definition includes secured creditors. A “holder” includes a person who maintains indicia of ownership primarily to protect a security interest in a petroleum UST or UST system or the property on which a petroleum UST is located. 40 CFR §280.200(d). “Primarily to protect a security interest” means that the holder’s security interest is held primarily for the purpose of securing payment for performance of an obligation. 40 CFR §280.200(f). The regulations define “security interest” to be an interest in a petroleum UST or the property on which a petroleum UST is located for the purpose of securing a loan or other obligation. 40 CFR §280.200(f)(1).
A Holder’s Participation in Management Makes That Holder an Owner or Operator
“Participation in management” means that the holder is engaging in decision-making control of, or activities related to, operation of the UST or UST system. 40 CFR §280.210. A holder is participating in management of the UST or UST system if it does either of the following: (1) exercises decision-making control over the operational, as opposed to the financial or administrative, aspects of the UST or UST system such that the holder has undertaken responsibility for all or substantially all of the management of the UST or UST system; or (2) exercises control at a level comparable to that of a manager of the borrower’s enterprise, such that the holder has assumed or manifested responsibility for the overall management of the enterprise encompassing the day-to-day decision-making of the enterprise with respect to all, or substantially all, of the operational, as opposed to financial or administrative, aspects of the enterprise. 40 CFR §280.210(a)(1)(i-ii). “Operational aspects” of the enterprise relate to the use, storage, filling or dispensing of petroleum contained in a UST or UST system, including functions such as that of a facility or plant manager, operations manager, chief operating officer or chief executive officer. 40 CFR §280.210(a)(2). “Financial or administrative aspects” include functions such as that of a credit manager, accounts payable/receivable manager, personnel manager, controller, chief financial officer or similar functions. Id.
A holder is considered an owner of a UST, UST system, or the property on which the UST or UST system is located if it participates in the management of the UST or UST system. 40 CFR §280.220. A holder, prior to foreclosure, is considered an operator of a UST, UST system, or the property on which the UST or UST system is located if it is in control of or has responsibility for the daily operation of the UST or UST system. 40 CFR §280.230(a).
However, a holder who, through foreclosure, acquires a UST or UST system or the property on which it is located is not an operator if another operator is in control of or has responsibility for the UST or UST system’s daily operation and can be held responsible for complying with the regulations. 40 CFR §280.230. If another operator does not exist, then the holder is not an operator, provided that, within a certain timeframe, it empties all of the known USTs and UST systems, empties all USTs and UST systems discovered after foreclosure, and closes the USTs or UST systems. 40 CFR §280.230(2). The requirements for emptying and closing the USTs are set forth below:
Emptying USTs: The holder must: (1) empty all of its known USTs and UST systems, as well as those USTs and UST systems discovered after foreclosure, within 60 calendar days after foreclosure or another reasonable time period specified by the implementing agency so that no more than 2.5 centimeters (one inch) of residue or .3 percent by weight of the total capacity of the UST system remains in the system; (2) leave vent lines open and functioning; and (3) cap and secure all other lines, pumps, manways, and ancillary equipment. 40 CFR §280.230(b)(2)(i-ii).
Closing USTs: The holder may either permanently or temporarily close the USTs or UST systems. If the holder chooses to permanently close the USTs or UST systems, it must comply with sections 280.71 through 280.74, except section 280.72(b). 40 CFR §280.230(b)(3)(i). If the holder chooses to temporarily close the USTs or the UST systems, it must: (1) continue operation and maintenance of corrosion protection in accordance with section 280.31; (2) report suspected releases to the implementing agency; and (3) conduct a site assessment in accordance with section 280.72(a) if the UST system is temporarily closed for more than 12 months and the UST system does not meet either the performance standards in section 280.20 for new UST systems or the upgrading requirements in section 280.21, except for the spill and overfill equipment requirements. The 12-month period begins to run from the date on which the UST system is emptied and secured. 40 CFR §280.230(b)(3)(ii). Additionally, the holder must report any suspected releases to the implementing agency. Id. The holder may keep the UST or UST system in temporary closure until a subsequent purchaser has acquired marketable title to the UST or UST system or facility or property on which the UST or UST system is located. 40 CFR §280.230(4).
State Law
State laws should also be consulted for further clarification on the specific regulations of the state for management of USTs. However, state law will not override the liability set forth in RCRA.
Receivership
Often a secured party believes that a receiver should be appointed for a borrower that is mismanaging or wasting assets. When a receiver is appointed at the request of a secured party, that receiver rather than the secured party is managing the business and in control of it. However, it is advisable to have the order appointing the receiver provide that the receiver and secured party have no liability for any releases from the USTs or other issues that occurred prior to the appointment of the receiver. The receiver will have to comply with state and federal laws regarding management of the USTs after the receiver is appointed. This may be a concern to receivers who are not experienced in the management of USTs. The receivership order should provide that the secured party, through the motion for appointment of the receiver, is not in control nor managing the borrower, even though the secured party may be involved in the decisions reached by the receiver as it proceeds to determine the best course of action for liquidation of the borrower.
Conclusion
Secured parties who take as collateral property containing USTs should be extremely careful not to engage in any form of action that could be considered “management” or the lender will be considered an owner or operator and will be required to comply with UST technical standards, UST corrective action requirements and UST financial responsibility requirements. If, however, the lender acquires the UST or UST system through foreclosure and no other operator exists, the lender will need to empty and close the UST as described above to protect it.