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Keep MTCA Lender Liability in Perspective -- Don’t Forsake Business Opportunities


One of my partners and I recently helped a lenderclient loan money to a borrower who wa purchasing a gas station/ convenience store, which typically have residual contamination.  The borrower initially approached a regional bank that turned down the loan.  The property was contaminated, but it was  being cleaned up by a major oil company under Ecology oversight.  The oil company agreed to indemnify the borrower and lender for all claims arising from the oil company’s cleanup of the contamination.  The bank’s counsel, however,  advised the bank not to lend on this property, based on the oil company’s limited indemnity, which did not cover all claims related to the contamination, but only the cleanup. My guess is that the attorney was being overly cautious because he saw the specter of lender liability under the Model Toxics Control Act (MTCA), Chapter 70.105D RCW.


But in fact the bank missed a good business opportunity because lenders are protected from MTCA liability if they follow the clear guidelines in the statute. A lender will usually have a security interest, such as a deed of trust, in the borrower’s contaminated property.   Under MTCA,a  lender may actively manage the property to preserve the value of the collateral or to mitigate any default by the borrower, within one year of foreclosure.  If one of these two conditions are met, then the lender can hire and manage environmental consultants and engineers to investigate and, if necessary,  clean up the contamination, if the borrower fails to do it.


If the property goes through foreclosure, then the lender must sell at the “earliest practicable, commercially reasonable time”, but no later than five years after the foreclosure.  Further, the lender is exempt from having to comply with   the Washington commercial real estate rule, codified at Chapter 64.06 RCW, that requires the seller to disclose all its knowledge of the environmental conditions at the property.


In most cases, five years is sufficient time to fully characterize and clean up the property.  However, lenders traditionally do not like to deal with heavily contaminated properties in their portfolio.  Thus, there is no substitute for good environmental due diligence early in the loan process. In our gas station matter, I discovered that the ground water met applicable cleanup standards and had not  migrated off the property.  Ecology was very pleased with the consultant performing the cleanup for the oil company, and given  these favorable environmental conditions, Ecology was expected to issue a No Further Action Letter for the property by the end of the year.    In sum, good due diligence combined with a better understanding of the MTCA lender liability rule paid off for our client.


The bank’s caution, was our lender client’s gain .  Don’t let the specter of lender liability scare you  away from a good business opportunity.


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