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November 16, 2010 / Law Alert

Potential Lender Liability for Environmentally Hazardous Collateral

A recent Ohio appellate court decision could have lasting implications for lenders that take possession of potentially hazardous collateral upon the borrower’s default. In State v. Roberts (2010-Ohio-2003), the Court of Appeals for the 6th District of Ohio reversed a grant of summary judgment in favor of a lender that denied responsibility for the impact of its defaulting borrower’s environmentally hazardous collateral. Future courts may possibly interpret this opinion to mean that R.C. 1309.610 imposes an affirmative duty on lenders to dispose of collateral in their possession in a commercially reasonable manner. The Roberts decision moves Ohio courts one step closer to accepting the “instrumentality” theory of liability, under which lenders assume liability if they exert significant control over the day-to-day business of their debtors. If adopted, the combination of an affirmative duty for commercially reasonable disposal, along with instrumentality liability, would result in an Ohio law that mirrors the lender liability exemption under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Once a lender takes possession of collateral upon a borrower’s default, the lender should proceed with caution to ensure the collateral’s compliance with all laws and regulations until final disposition.