Robert Szustakowski, The Lotis Engineering Group, PC

Due to the nature of their business, banks create “walls” between their Trust Department and most other areas of the bank. Even departments that can help the Trust Departments in their day-to-day work, like appraisal and environmental departments, are often not contacted for assistance. However, as the “environmental guy” for numerous banks, either as a consultant or an in-house employee, I always tried to service ALL of the bank, including the Trust Department.

Trust Departments can have real environmental liability and should be understand that their actions can not only put the trust’s assets at risk but can put the bank’s assets at risk as well.


A trust can include almost any type of assets, such as cash and bonds, but also real estate, operating companies and other valuables. When one becomes the trustee, he/she has a fiduciary responsibility to protect the trust on behalf of the beneficiaries. Further, there may be very specific instructions on the proper handling of the trust, which may be inconsistent with the wishes of the beneficiaries. So, the Trust Officer already has a tough job. Environmental risks just complicate things.

Prior to 1996, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund) held that a trustee was like any other owner of real property and had “joint and several” liability for hazardous waste contamination any property held in trust. At that time, I was at a very large bank with a very active Trust Department. It was not uncommon for the Trust Officer to get a call from the court asking if they were accepting the responsibility for a decedant’s estate as trustee with the Trust Department knowing nothing of this requested role or the contents of the trust. We had to do some very quick scrambling, trying to identify potential concerns on any real estate within the trust – the court was waiting for a decision. This was due to the fact that the bank’s potential environmental liabilities went beyond the value of the trust – the bank’s own assets were at risk. If a property in trust was contaminated, and the cleanup exceeded the value of the trust, the trustee (the bank) was liable for the remaining cleanup costs.

The Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, often referred to as the “Safe Harbors” for banks, changed this. In addition to providing protections to banks as lenders, allowing them to assess and monitor properties held as collateral, foreclose and then sell without incurring CERCLA liabilities, it also provided similar protections to banks as trustee – subject to specific limitations. But there are actions that can void those protections and it is important to know what you can and cannot do. And, to complicate matters, different courts have not all concurred on how extensive the banks’ protections may be.

Environmental Responsibilities of the Trustee

If a property is contaminated at the time of death, the regulators can and do view this as a responsibility of the decedent’s estate/trust. The regulators would expect that the trust will use its assets to address the contamination in accordance with applicable regulations. Further, if trust funds have already been distributed and there is later insufficient funds to complete remedial work, the courts can and have “clawed back” those distributed funds from the beneficiaries to complete the remedial work. While not an environmental liability to the trustee, certainly a difficult issue to address with the beneficiaries if the trustee were to allow this to happen. What the trustee needs to do is to understand all liabilities of the trust before disbursement of funds.

Monitoring your trust department’s holdings is also very important. If an environmental problem occurs while you are the trustee, short of negligence on your part (something you may need to fight in court), you likely would not be liable for the cleanup (such would be up to the trust). However, it is a situation that may decrease the value of the trust and/or the funds available for the beneficiaries. Again, an uncomfortable conversation between the Trust Officer and the beneficiaries.

Opening the Bank to Environmental Liabilities

This is a very important note. The protections provided to banks, detailed below, are limited to the ownership of real estate. The protections specifically do NOT include instances where the trust is actively carrying on a business for a profit. In those instances, the bank, now an operator as defined by CERCLA, is exposed to liabilities that can exceed the value of the trust.
I had one instance that would have been difficult to define legally. The bank had no role at all in the on-going business; but that operating industrial company was placed into trust. The beneficiary was provided a monthly check from the business, via the trustee. Of course, the beneficiary always wanted the checks to be larger; and the trustee, trying to satisfy the beneficiary, increased the amount paid by the company. Those were monies that could not go into growing the business and, if enough were held back, properly operating the business as required by law, which in this case included generation and off-site disposal of hazardous wastes. The potential problems are obvious.

As a trustee of real estate, and no operating company, the actions that you can take without incurring environmental liabilities beyond the value of the trust are similar to those for lending situations. That is, you cannot participate in management of the property but you can monitor the property, you can provide monetary advice for the benefit of the trust and/or beneficiaries and you can terminate the fiduciary relationship. What’s different is that you can also arrange for someone to address hazardous substances on-site. This means that if you are aware of hazardous substances on-site, you can have the contamination addressed, thereby improving the condition of the real estate on behalf of the beneficiaries, without incurring environmental liability to the bank.

You can also choose to do nothing, including NOT doing a cleanup that improves the condition of the real estate. Another quandary. Do you take the short view and not spend the trust’s money to remediate the property? Or take the long view and improve the condition of the real estate through remediation? Obviously, the beneficiaries need to have a say here.
Lastly, the trustee can be liable for their own negligence if it creates or makes an environmental problem worse. For example, if the trustee is aware of the above-referenced environmental problem, and based on the desires of the beneficiaries, decides to do nothing, could the regulators suggest that your “negligent inaction” made a problem worse? What if that inaction caused the contamination to impact a third party, such as allowing groundwater and/or vapor contamination to migrate off-site onto another’s property? These liability protections are for CERCLA liability, not from neighboring property owners for things like trespass.

What to Do?

If your Trust Department maintains real estate or businesses, it is very important that they have access to both qualified counsel and environmental consultants. Many actions, or inactions, can introduce liabilities to the bank. Even if limited to the value of the trust, improper management of environmental risks can result in fiduciary liability.

The first step is to know what is in your Trust Department. While this department is often walled off from the rest of the bank, they need to be able to know where to access confidential guidance on these matters. Start by identifying every business and every piece of real estate held in trust. Assess which ones may create environmental liability and then obtain some information on each. Desktop-type studies are good for this on real estate; your consultant can do some research on every operating business as well. Any issue identified in that review needs to be discussed with the beneficiaries and counsel to assess how best to address the matter.

Set up a clear regular inspection program, likely at least yearly. Use a qualified environmental firm for the inspections of any properties that may pose environmental liabilities; this may have to include interior inspections. If trustee property includes property such as gasoline stations, dry cleaners, industrial operations, etc., it may be necessary to review documentation, permits and other materials to identify potential concerns. Regulatory compliance audits may also make sense. Again, any issue identified in that review needs to be discussed with the beneficiaries and counsel to assess how best to address the matter.

Trust Officers should be trained on what they can and cannot do. And the bank must make a conscious decision on where that fine line is such that protection of the beneficiaries is not at the expense of the bank and vice versa.

Remember, there are no guarantees in this. Lender Liability protections will continue to be decided in court.

About the Author

Bob has been completing environmental due diligence for lenders for 30 years. He has developed and managed environmental programs, as a consultant and bank employee, for some of the largest and smallest banks in the country. He has also devised bank programs for construction monitoring and routine property inspections.