The New Lender - Lessor Safe Harbor under OPA 90 - Five Things You Need to Know
June 2005I. Introduction
The premise of OPA 90 is simple: the polluter pays. As others have said, the difficult part is determining who is the polluter and what does he pay.” Last August we were given some assistance in answering this question. The Coast Guard and Maritime Transportation Act of 2004 (H.R. 2443) included several amendments to definitions in OPA 90, the effect of which is to provide a safe harbor for lenders and lessors.
II. Main Features of the Safe Harbor
1. A lender or lessor will not be liable under OPA if it does not exercise actual control over vessel operations.
2. Any type of bona fide financial transaction is included in the safe harbor regardless of its structure, form or nomenclature as long as it does not include an investment in the vessel. For lessors, some other party must have initially selected the vessel and the lessee must have operational control of the vessel.
3. A lender or lessor may take possession on default, and a lender may bid in its debt in a marshal’s auction in order to maximize repayment of its loan from the collateral, as long as the vessel is sold or re-leased as soon as commercially practicable. If the vessel is held too long, it will be deemed held for investment and the safe harbor will not apply.
4. When the lender or lessor is in possession of the vessel after default, the safe harbor will protect it from OPA liability (liability without fault), but not from liability for its own negligence. Under the facts of the EXXON VALDEZ, for example, if a lessor in possession of a ship, placed a captain on board with a known alcohol problem, the captain put the ship on the rocks and a huge spill resulted, the safe harbor would be of no help to the lessor. It would be liable for its own negligence in the same manner as Exxon.
5. The OPA amendment does not affect state pollution laws which also impose strict liability and many have no safe harbor provision. State laws apply to oil spill damage within three miles of the coastline (nine miles in the Gulf of Mexico in some states) concurrently with OPA. OPA applies from the coastline out to 200 miles.
III. History of the Safe Harbor
Most of the text of the safe harbor was taken directly from the EPA’s 1992 regulations for the lenders’ safe harbor under the Comprehensive Environmental Response, Compensation and Liability Act, 1980, 42 U.S.C. § 9601 et seq., also known as CERCLA or the superfund law, covering pollution on land. CERCLA contains a barebones safe harbor provision for lenders holding indicia of ownership primarily for the purpose of protecting a security interest as long as they do not participate in management. When OPA 90 was adopted a safe harbor provision was considered and rejected by Congress. Commentators suggested that Congress did not want to include a safe harbor in OPA only to have it nullified by the courts as it was under CERCLA, as described below.
In response to court decisions effectively eliminating the safe harbor under CERCLA, the EPA proposed regulations that spelled out in detail the eligibility and limits of the safe harbor under CERCLA. The EPA’s discussion of the proposed and final regulations (56 F.R. 28798; 57 F.R. 18344) indicate that all kinds of bona fide financial structures are intended to be included within the safe harbor. Unfortunately, the EPA regulations were held to be invalid because they impermissibly purported to amend CERCLA.
In 1996, Congress amended CERCLA to incorporate the text of the 1992 EPA regulation. In 2004, Congress amended OPA 90 to add what is substantially the text of the EPA regulation to OPA.
IV. The Language of the Amendment
Liability under OPA is imposed on a “responsible party,” which for a vessel is defined as “any person owning, operating or demise chartering the vessel.”
The amendment expanded the definition of “owner or operator” to exclude lenders who do not participate in management and hold indicia of ownership primarily to protect their security interest in a vessel. (Defined terms are underscored.)
A “lender” is defined by reference to the CERCLA definition which includes banks and any person that makes a bona fide extension of credit to or acquires a security interest from a nonaffiliated person.
An “extension of credit” includes loans and lease financing transactions in which the lessor does not initially select the vessel and does not control its operation or maintenance.
A ‘security interest” is also defined by reference to CERCLA and includes rights under a mortgage, assignment, security agreement, lease, or any other right to secure the repayment of money or any other obligation. Under the Uniform Commercial Code (the “UCC”), ‘security interest” excludes certain types of leases. UCC 1-102(37). A true lease for purposes of the tax laws (which is usually characterized by a purchase option at fair market value at the end of the lease) is not a ‘security interest” under the UCC. The EPA comments in adopting the final EPA regulation make it clear that the definition of ‘security interest” under CERCLA and OPA is much broader than the UCC definition. Not only are true leases included, but any lease or other transaction that is a bona fide financing arrangement is considered a security interest regardless of its type, form or the nomenclature given to it, provided that the transaction comes within the type of lease included in the definition of an “extension of credit.” 57 F.R. 18344.
“Participate in management” means actually participating in management or operational affairs of the vessel and does not include the capacity to influence or the unexercised right to control vessel operations. A lender or lessor will be held to participate in management if, while the borrower is in possession of the vessel (i.e. before foreclosure):
1. It exercises decision-making control over environmental compliance such that it has undertaken responsibility for oil handling or disposal practices; or
2. It acts as a manager with day-to-day decision making such that it has assumed or manifested responsibility for:
a) Environmental compliance; or
b) Substantially all operational functions (as distinguished from financial or administrative functions) of the vessel other than environmental compliance.
The statute provides a list of actions are not participating in management as long as they do not rise to the level of 1 or 2 above, including enforcing a security interest, monitoring environmental compliance, enforcing remedies for breach and conducting a removal action.
As long as there is no participation in management before foreclosure, a lender may foreclose and a lessor may take possession of a vessel, and thereafter take over vessel operation without losing the protection of the safe harbor as long as the lender seeks to divest itself of the vessel (or the lessor seeks to re-lease the vessel) at the “earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.” The requirement to divest itself of the vessel reflects Congress’ intention that no one should enjoy the profits of a vessel’s operation, then stand by and let the government pay for clean-up of a spill. The safe harbor permits a lender or lessor to receive the profits of a loan or lease, but not the profits generated by vessel operation except to the extent they were obtained during a limited period for the purpose of foreclosure. A lender that holds a vessel for investment is not holding primarily to protect a security interest and is not within the safe harbor. Thus, any equity participation by a lender or lessor in a transaction should be avoided if the protection of the safe harbor is desired.
IV. Putting the OPA Amendment in Context
OPA applies in the U.S. Exclusive Economic Zone (the “EEZ”) which extends 200 nautical miles out from the baseline (which is generally the coast line). The coastal states all have pollution laws for which the jurisdiction is typically three nautical miles from the baseline (except for some states in the Gulf of Mexico where the limit is three marine leagues which is about nine nautical miles). When the vessel is inside the limit claimed by a state, or when pollution damage occurs within the state limit, the pollution claims may be made under either state or federal law. While a lender might be within the OPA safe harbor, liability could be imposed by state law.
V. Conclusion
The amendment to OPA provides a major improvement in the risk scenario for tanker financing, but it is too soon to say that the floodgates are open. Many coastal states have pollution laws that, like OPA, impose strict liability for pollution, but do not have a safe harbor for lenders and lessors.