Responsibility of Lenders and Representatives for Remedial Action

Wisconsin Statutes Chapter 292, titled “Remedial Action,” provides the steps that must be followed by a property owner with regards to property that is contaminated by a hazardous substance or by a person possessing or controlling a hazardous substance. Wisconsin Statute § 292.21, titled “Responsibility of lenders and representatives,” addresses lender liability for the release or possession of hazardous materials on real property. Whether a lender becomes an owner of property through foreclosure, deed in lieu of foreclosure, or otherwise a basic understanding of the protections available to – and obligations of – lenders under this section is critical. The purpose of this article is to provide a brief overview of § 292.21 as it applies to lenders.

Before we dig deeper into the specific provisions of the statute, it is important to understand what a hazardous substance is pursuant to Chapter 292. Pursuant to Chapter 292, “hazardous substance” is defined as any substance or combination of substances including any waste or solid, semisolid, liquid or gaseous form which may cause or significantly contribute to an increase in mortality or an increase in serious irreversible or incapacitating illness. This definition is broadly written, and it is clearly intended to have broad impact without any real limitation.

First, under Chapter 292 a lender does not “possess or control a hazardous substance” or cause the discharge of a hazardous substance as a result of engaging in lending activities. See Wis. Stat. 292.21(1). That section simply states the obvious: a bank is not liable for lending to its borrower where its borrower thereafter goes out and discharges a hazardous substance or otherwise engages in harmful or tortious conduct.

Second, a lender can be found to possess or control a hazardous substance if: (1) a lender physically causes a discharge; or (2) the lender through tortious conduct with respect to lending activities causes a discharge of a hazardous substance or exacerbates an existing discharge. See Wis. Stat. 292.21(2). Again, this is an obvious provision. If the bank engages in conduct in direct violation of Chapter 292 by, for example, discharging a hazardous substance, then it can be found to be liable under the chapter and required to take remedial actions.

Third, Chapter 292 instructs the lender as to the proper steps that must be taken as part of any inspection of property for purposes of assessing compliance with environmental regulations prior to taking title to the property. See Wis. Stat. 292.21(1). This section provides the steps that must be followed by a lender that seeks and obtains an environmental assessment “pre-acquisition” of the subject property. A lender does not possess or control a hazardous substance or cause a discharge as the result of inspecting real property for compliance with environmental assessment, or for performing a remedial action to clean a discharge, if:

1. Any inspection or assessment occurs before the date on which the lender acquires title to, or possession or control of, real property through enforcement of a security interest;
2. The lender notifies the Department of Natural Resources of any discharge of a hazardous substance;
3. The inspection or remediation must be conducted in accordance with department rules;
4. The lender does not physically cause a discharge; and,
5. The lender does not engage in tortious conduct with respect to the activities described in Chapter 292.

See Wis. Stat. 292.21(1)(b).

Fourth, Chapter 292 dictates what a lender must do to avoid liability for a contaminated property if the lender acquires the property pursuant to its security interest. A lender that acquires title to, or possession or control of, real property through enforcement of a security interest is not subject to the subparts of Chapter 292 requiring remediation and cleanup for a discharge of a hazardous substance if all of the following conditions are satisfied:

1. The lender, through action or inaction, does not intentionally or negligently cause a new discharge of a hazardous substance or exacerbate an existing discharge of a hazardous substance;
2. The lender notifies the Department of Natural Resources of any known discharge of a hazardous substance;
3. The lender conducts an environmental assessment of the real property in accordance with the provisions of Chapter 292 at any time, but not more than 90 days after the date the lender acquires title to, or possession or control of, the real property. The lender shall file a complete copy of the environmental assessment with the department not more than 180 days after the date the lender acquires the property. If an environmental assessment is conducted more than one year before the date on which the lender acquires title to, or possession or control of the real property, the lender must engage in additional visual inspections of the property and report to the department;
4. For hazardous substances released after the lender acquires title or possession of the property, the lender must not be engaged in the operation of a business at the property;
5. For hazardous substances released after the lender acquires title or possession of the property, the lender engages in an emergency response;
6. The lender permits the department to enter and inspect the property at any time;
7. The lender does not interfere with any attempt to remedy any discharge; and,
8. The lender agrees to any condition that the department deems reasonable and necessary.

See Wis. Stat. 292.21(1)(c).

The statute does not talk in terms of whether a lender must only complete a Phase I environmental inspection, or if a Phase II is preferable. However, Chapter 292 does include a provision stating what must be included in an environmental assessment completed in accordance with Chapter 292. See Wis. Stat. 292.21(1)(c)(2). The section provides that an environmental inspection must include a visual inspection of the property; a review of the ownership and use history; a review of historical, aerial photographs; a review of licenses for use of the property; a review of environmental registries regarding the property; collection and analysis of representative samples of the soil; and collection and analysis of hazardous wastes on the property.

The Wisconsin legislature has afforded lenders certain protections in §292.21, but, in exchange, requires lenders report when their environmental reports indicate hazardous waste may be present. Often environmental inspection companies providing Phase I’s will take care of any reporting to the DNR that may be required pursuant to the statute, but a lender should not take this for granted and should make sure to follow up with any such provider to ensure any such provider has complied with the law. The protections afforded in §292.21 only arise if the lender complies with its obligations, and failure to so comply may result in substantial penalty or costs to the lender.

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