Lenders: Beware of Potential Environmental Liabilities of Foreclosed Properties

Potential lender liability for contamination of foreclosed properties has been known for decades, and has been addressed by specific provisions in the federal Superfund law, among others.  Less well known, but potentially as significant, is the liability a lender can incur by foreclosing on property that is under development, under the federal Clean Water Act and its state counterparts (the CWA).

The CWA requires most construction projects to be permitted under either an individual NPDES permit, or a general permit for construction activities, either of which legalizes the discharge of stormwater runoff from sites under construction, as long as the permit conditions–such as employment of best management practices (BMPs)–are complied with.  Often, however, construction projects that are financially distressed skimp on compliance with the detailed permit conditions.

Because CWA compliance liability is imposed on both owners and operators of a site, once a lender forecloses, it inherits CWA compliance responsibility.  That responsibility can include not only compliance going forward, but also liability for penalties for any past violations.  The CWA does not contain a secured creditor exemption from liability.

Georgia’s stormwater construction general permit specifically requires a foreclosing lender to file a Notice of Intent to be covered by the permit within the earlier of 30 days from acquiring legal title or seven days after beginning any work at the site.

Penalties for violation of the CWA or CWA permits can be up to $37,500 per day for each violation.

How can a lender manage the risk of CWA compliance liabilities?  After a loan is made but before foreclosure, the lender should monitor the borrower’s compliance with CWA requirements.  Before foreclosure, a Phase I environmental assessment should be conducted.  However, because the typical Phase I will not necessarily identify CWA compliance issues, a foreclosing lender should request specific evaluation of permit status, best management practices, and inspection of the records of the state and/or federal environmental office responsible for CWA compliance before foreclosing.  It would also be wise to require correction of any CWA noncompliance, if possible, before foreclosing on any unfinished construction site.

For more information on potential lender liabilities under the CWA, contact Steve O’Day ( or Andy Thompson (

Leave a Reply

Share via
Copy link
Powered by Social Snap