May 15, 2013
Best Practices: Abandonment of Environmentally Contaminated Collateral
by Starfield & Smith
Unfortunately, all too frequently, after a loan is in default and the liquidation process has begun, the lender learns the real property collateral for the loan is environmentally contaminated. If this is the case, one should not automatically assume it is appropriate to abandon the collateral. Under the SOP 50 57, lenders must be prudent in their liquidation activities. In other words, they must take all commercially reasonable steps to affect maximum recovery.
One of the first steps in the liquidation process is the environmental investigation. The SOP requires an environmental investigation be conducted prior to any of the following:
* Accepting property as substitute collateral;
* Releasing a lien on collateral for substantially less than its estimated recoverable value based on unsubstantiated claim of contamination;
* Abandoning collateral;
* Acquiring title to property held as collateral (e.g., at foreclosure sale or accepting deed in lieu of foreclosure);
* Taking over operation of a business that uses hazardous substances or is located on contaminated property regardless of whether borrower owns the property;
* Selling REO or acquired personal property collateral for substantially less than the appraised value based on unsubstantiated allegations of contamination;
* Abandoning REO or acquired personal property collateral based on unsubstantiated allegations of contamination.
The determining factor for abandonment is based on the recoverable value of the property. Under the new SOP 50 57, it is appropriate to abandon personal property if the recoverable value is less than $5,000 and real property if the recoverable value is less than $10,000. Therefore, the prudent lender must look to the liquidation value based on the appraisal and then must factor in the cost to clean up and liquidate a contaminated property to determine the recoverable value.
Where this gets most tricky for the lender is determining the cost to clean up the property. Environmental companies certainly have the ability to provide an estimate of the costs, however, depending on the type of contamination, the expense associated with that may exceed the value of the property. For instance, the environmental company may do a phase one report that identifies contamination. In most cases, in order to get a reasonably accurate estimate to clean up the property, a phase two or sometimes even a phase three investigation needs to be done. In many cases, these additional investigations can have substantial costs. In the case of a property that has a low liquidation value, it can put the lender in a difficult situation.
However, there are potential solutions for the lender. First, one can look to the SBA for guidance on the appropriate course of conduct. Depending on the cooperativeness of the borrower, they may be convinced to sell the property avoiding the need for foreclosure. If the buyer is uncooperative the lender may want to have a receiver appointed (with prior SBA approval). If the expense of the receiver is too great to take over a going concern, the receiver may be appointed with his or her powers limited solely to listing and selling the property. Again, with any potential course of action in these scenarios, it is critical to first get SBA approval.
It is always challenging to liquidate collateral after default. It is even more difficult when the property is contaminated. The lender must make sure to comply with the requirements of the SOP and explore different options to insure prudent liquidation instead of simply abandoning any property that is contaminated.
For more information on liquidating environmentally contaminated property, contact us at 215.542.7070.