Posted on April 2, 2009 by Keith H. Mullen

Stop, Look and Listen: What Are the Risks? What is the Exit Strategy?

There's an old, old joke about two old men and a dog.  They see a bus go down the street.  Pretty soon a little dog goes chasing after the bus, barking wildly and looking for all the world like it's going to try to bite it.  One old gentleman looks at the other and says, "There's that dog chasing that bus again."  The other one says, "Yep, he sure is.  And I wonder what he's going to do when he catches it."

Lenders and servicers contemplating foreclosure on property probably should take a moment to remember that dog and its bus before they try to catch foreclosed property.  The foreclosure process itself can be fraught with peril; for example, on September 11, 2008, the Nevada Supreme Court held a lender vicariously liable for punitive damages based upon the improper acts of its local asset manager in disposing of the personal property of a family that had been mistakenly foreclosed upon.  (Countrywide Home Loans, Inc. v. Titchener, 193 P.2d 243 (Nev., September 11, 2008).)  There also is case law to the effect that a foreclosing party's failure to maintain foreclosed property may subject it to claims for nuisance or other torts.  (Nuisance – cf. Willmschen v. Trinity Lakes Improvement Ass'n, 362 Ill. App.3d 546, 840 N.E.2d 1275 (2d Dist. 2005); other torts, see, e.g., Miller v. Everest, 212 N.W.2d 522 (Iowa 1973).)  And even if legal liability is not imposed, imagine the results of a Channel 7 Eyewitness News FocusTeam® Investigation about the meth lab found in a piece of property you foreclosed on . . .  Or on how Mr. & Mrs. Joe Doakes want to buy the property at 1234 Wisteria Lane but can't find anyone to sell it to them.

Whether your foreclosed property is commercial or residential, the same principles apply.  Before foreclosing – even better before lending – ask yourself what you're going to do with that "bus" if you catch it.  Most of the issues are ones you know from your own house: doing the paperwork right, maintenance, upkeep, safety, comps, and curb appeal.  Advance consultation with the right professionals and careful attention to details can spare you a mountain of heartache later.

 

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Posted on March 24, 2009 by Keith H. Mullen

More on That Ticking Sound: Selling Environmental Problem Property

Here's another topic from our "ticking sound" series covering insurance issues and environmental issues . . .

Most discussion of the environmental issues that can come with foreclosed property focuses on when the CERCLA lender safe harbor provisions and its state-law analogues apply. What doesn't get discussed often enough is how a lender goes about selling an environmentally challenged piece of property and its obligations during the sale process independent of CERCLA.

The problem for lenders or others who foreclose on property with environmental problems is that CERCLA requires them to try to sell it. This means listing the property, keeping control of any brokers or listing agents acting on seller's behalf, learning enough about the issues there to provide accurate disclosures and appropriately responding to the purchaser's efforts to make "all appropriate inquiries" as it tries to shoehorn itself into EPA's "innocent purchaser" safe harbor, while trying at the same time to maximize the sale price so as to satisfy security holders or regulators. There obviously can be real tension for a lender or servicer caught between these requirements.

Maneuvering through these obstacles safely starts by recognizing that the environmental problems on the property cannot and should not be concealed. Not only is it difficult if not impossible to engage in such concealment in these days of multiple on-line environmental clean-up databases and deed records, established law recognizes that immediate and possibly later purchasers of the property may have a cause of action for misrepresentation based on the concealment. (See, e.g., Rhee v. Highland Development Corp., 162 Md. App. 516, 958 A.2d 285 (Md. App., October 7, 2008)(developer that failed to disclose existence of a graveyard in real estate development liable to immediate and subsequent purchasers for concealing this information).)

EPA does not require the lender or foreclosing party to get full price for the property; its safe harbor regulations only require that the price be reasonable in light of the property's condition and the market. With this in mind there simply is no reason not to come clean – no pun intended – on the issues of the parcel's environmental problems.

The next step for a safe transit of these obstacles is to actively consider offering environmental insurance as a part of the sale. The days when environmental impairment insurance was a cookie cutter product are long since gone, and while principles of fortuity put some constraints on insuring known environmental problems, there almost always is a "workaround" available that will help resolve the issues. Again, EPA does not prohibit use of environmental insurance by a lender or foreclosure purchaser. On the contrary, transferring the risks of environmental contamination to a solvent third party is something most environmental regulators would applaud.

Finally, the idea of cleaning up should not be rejected out of hand. EPA safe harbor regulations do not prohibit a lender from taking steps to improve environmental conditions on property it has acquired. Most states have voluntary clean-up programs and tailored remediation standards that may allow a relatively small investment in clean-up costs to result in a much larger return in sale price and peace of mind.

As with so much else in the foreclosure/workout process, early consultation with competent professionals, both scientific and legal, can result in large benefits. It's simply a matter of not being afraid to roll up one's sleeves and getting to work.

If you have any questions or war stories, please post a comment.
 
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