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Corestates/New Jersey National Bank v. Department of Environmental Protection

OAL Docket No. ESF 611-97 (Department of Environmental Protection 1997)

MORTGAGES; FORECLOSURE; ENVIRONMENTAL LIABILITY—Although a lender is generally protected from liability under the Spill Act when it acquires property upon foreclosure of its loan, this exemption does not apply where the lender’s negligence results in, or permits, the hazardous discharge. Here, the lender should have known to guard against vandalism to the PCB laden transformers on the property.

A bank filed a claim under the Spill Compensation and Control Act seeking reimbursement of costs associated with an environmental spill that resulted from an attempt by trespassers to remove copper from the inside of an electrical transformer located on land it had foreclosed upon. Fluid containing PCBs leaked from the transformer and invaded the groundwater and a nearby stream. After the claim was denied, the bank appealed to an Administrative Law Judge (ALJ). The Environmental Claims Administration (ECA) argued that since the bank was the “holder of a security interest,” it was not a party entitled to recovery. The ECA also argued that vandalism was not an allowable defense because the bank failed to protect the transformers even though it knew about the environmental concerns regarding them. Therefore, the ECA contended that the bank was responsible for the discharge and therefore was barred from recovery under the Act. The primary issue was whether a lender, which is specifically protected from liability for discharge under the Act, may recover costs from the Spill Fund.

The ALJ stated that the legislative intent behind the provision limiting lender liability was to encourage development of industrial sites by enabling lenders to provide capital without fear of liability. In the ALJ’s view, this intent could be expanded to permit a lender to recover its costs to clean up contaminated property. Furthermore, since the legislature expressly prohibited recovery in certain instances, the ALJ concluded that if the legislature wanted to deny recovery to lenders, the Act would clearly have stated as much.

This, however, was not the end of the analysis. A further issue was whether the bank acted as an owner or operator of the premises at the time of the spill, thereby barring it from recovery. Since the spill occurred after the bank foreclosed on the premises, and the Act states that the exemption to security holders does not apply to post-foreclosure discharges if caused by the negligent act or omission of the holder, the ALJ considered whether a reasonably prudent person would have foreseen an act of vandalism on the premises and whether the security measures taken by the bank were adequate. More specifically, the ALJ considered whether the bank should have foreseen that someone would “attack” the transformers, thereby causing a spill of the hazardous material inside. The judge also considered the fact that the bank knew the transformers contained hazardous material but decided not to dispose of that material. Since there had been prior incidents of vandalism on the property, the judge held that the bank should have expected future acts of vandalism to occur. The judge also determined that the bank acted unreasonably and negligently in failing to drain the hazardous fluid from the transformers. As a result, the ALJ concluded that the bank was not entitled to recover from the Spill Fund.


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