Bank Not Liable For Auction Sale of Contaminated Property

Bank Not Liable For Auction Sale of Contaminated Property

Larry Schnapf   By Lawrence Schnapf, Principal, Schnapf LLC

In Lusk v First Century Bank, 2012 W. Va. LEXIS 241 (Sup. Ct. 4/27/12), the plaintiff/petitioners purchased a commercial property at an auction foreclosure sale. The Notice of Trustee's Sale and Regency's advertising notice stated that the sale was subject to "environmental regulations" and that the property was being sold in an "as is" condition. The Deed of Trust also provided that the property would be sold "without any covenant or warranty, express or implied." Prior to the sale, the petitioners conducted a brief walk-through of the building but did not perform any further due diligence. The petitioners then submitted the high bid of $49,000 for the property.

As it turned out, the property had been used by businesses that cleaned and rebuilt electric motors that contaminated the site with a variety of hazardous substances, including PCBs. The last operator had been Lin-Electric who acquired the site from a local charity with a loan from First Century Bank. After Lin-Electric went out of business, the loan went into default which led to the subject foreclosure sale.

Shortly after taking title, the petitioners received a PRP notice from the USEPA. The petitioners then filed a lawsuit against the bank among others, claiming they relied on the representations made by the auctioneer and a Bank representative that the property was "clean".

Toxic Hazardous Waste

The trial court granted the bank's motion for summary judgment on the claim that the bank intentionally failed to disclose the contamination, committed fraud and intentional misrepresentation, breached its duty of good faith and fair dealing, and violated the West Virginia Hazardous Waste Management Act by failing to disclose in the foreclosure deed that the property was previously used to store and dispose of hazardous waste materials.  The case then proceeded to trial on the remaining issues. At the close of evidence, the Bank moved for judgment as a matter of law on the claim that the bank negligently proceeded with the foreclosure sale with knowledge that the real estate was environmentally contaminated. The circuit court granted the Bank's motion and the case went to the jury on the remaining claims. In February 2011, the jury allocated found the Bank and Regency had no liability and that petitioners was 60% at fault.

Petitioners filed a motion for a new trial, arguing that the circuit court erred in granting summary judgment in favor of the Bank because the bank as a seller of real estate had an affirmative duty to disclose latent defects or conditions of the property to a purchaser and that the failure to do so constituted constructive fraud.

In denying the motion for a new trial, the circuit court said that the bank as a trust creditor did not own an interest in the real property, and therefore was not required to make affirmative disclosures concerning the condition of the property. Moreover, the court said the petitioners purchased the property "as is" and with notice that the property was subject to environmental regulations.

On the claim of breach of duty of good faith and fair dealing, petitioners contended that that the foreclosure deed constituted a contract with the Bank and formed the basis for a claim for breach of duty of good faith and fair dealing. However, the circuit court disagreed, finding there was no contractual relationship with the Bank. In the absence of such a relationship, the court said the bank had no duty of good faith and fair dealing.

The petitioners then appealed the grant of summary judgment and the order denying their motion for a new trial. Petitioners argued that a reasonably prudent bank would not have proceeded with the foreclosure sale of property that the bank knew was environmentally contaminated. Thus, they asserted that the bank's decision to proceed with the foreclosure sale constituted negligence. However, the Supreme Court ruled in 4-1 decision agreed that a secured party at a foreclosure sale was under no duty to make affirmative representations about the condition of the property to be sold. Without a duty, the court said, there could not be any negligence. Accordingly the court affirmed the decision of the circuit court.

Lawrence P. Schnapf is an environmental attorney based in New York City and New Jersey with over 25 years of national environmental transactional experience and is the principal of Schnapf LLC. With this background and his geology training, Larry is uniquely qualified to handle the legal and technical issues commonly encountered with environmental issues. Larry is also a contributing author for several chapters of "Brownfields Law and Practice: The Cleanup and Redevelopment of Contaminated Properties" published by Matthew Bender and the Matthew Bender "Environmental Law Practice Guide".

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