The One Form of Action rule of CCP Section 726(a) forces the secured lender to look primarily to its real property collateral to be paid its debt. Real property collateral, however, can be a liability, not an asset, if it is contaminated by toxic waste. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (“CERCLA”), any one who owns land, which is contaminated by toxic waste, is potentially liable for the potentially astronomical costs of cleaning up the land. Secured lenders thus need to be very wary about foreclosing upon contaminated properties.
CCP Section 726.5 permits lenders sometimes to escape the rigors of the One Form of Action if the real property collateral is “environmentally impaired.” “Environmentally impaired” means that the costs to clean up the property are 25% or more of the fair market value of all security for the loan and the lender did not have actual knowledge of the problem at the time that the loan was made. CCP 726.5(e)(3).
If the property is “environmentally impaired”, the lender is permitted to waive its lien against the impaired property. It can then obtain a personal judgment against the debtor, and/or pursue other collateral. Before the lender may do this, however, it must obtain a court order, valuing the property and determining that it is “environmentally impaired.” Further, the lender has none of these special rights, if the environmental problem was not, to some degree, caused by or contributed to by the lender or some party affiliated with it. CCP 726.5(d).
There are several statutes associated with this law. First, Civil Code Section 2929.5 gives the lender the right to inspect the property, under certain circumstances, to see if there are environmental problems. Second, CCP Section 564(c) permits the lender to have a receiver appointed to investigate environmental issues on the land. Finally, CCP Section 736 permits a secured lender to sue a borrower for breach of contract, under certain circumstances, if it breaches any environmental provision in the loan documents. (Well-drafted loan documents now contain contractual promises that the borrower will not permit any environmental contamination to occur on the land