Distressed Properties and Environmental Liability: To Foreclose or Not to Foreclose, That is the Question


When the collateral has environmental contamination, the lender is faced with a take-it-or-leave-it dilemma, either of which poses significant financial risk. Taking a property in foreclosure may result in the lender bearing substantial costs of cleanup and regulatory compliance just to sell in a market where property values may still be depressed. If the lender does not foreclose, then it loses its investment in the loan. Often, however, it’s not clear that property is contaminated, which makes it imperative not to wait until the end of the foreclosure decision process to find out whether and how much cleanup might be necessary.

Washington’s Model Toxics Control Act (“MTCA”) establishes several categories of “potentially liable parties” (“PLPs”), including current owners or operators of a property. PLPs are strictly liable for cleanup at contaminated sites regardless of their fault in causing (or not COUNSELOR’S CORNER causing) the contamination. MTCA does provide limited safe harbors, both before and after foreclosure, that can protect a lender from being unwittingly caught by MTCA’s liability scheme.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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