Monthly Archives July 2012

Jul 302012
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Construction Loan Agreements: Unless Agreed To, Lender Has No Duty To Protect Borrower’s Interests

The risk involved with a construction loan makes it very unattractive for most lenders. Nonetheless, commercial banks are drawn to construction loans because it allows them to maintain their liquidity. When the provisions of a construction loan agreement are negotiated, the bank will traditionally request monitoring systems for the disbursed funds to minimize the risk it assumes with the loan.

The general rule in Tennessee is that, in the absence of a contrary agreement between the parties, a lender owes no duty to a borrower to disburse the loan proceeds for the borrower’s benefit. This means that a lender has no affirmative duty to protect the borrower’s interests. However, as an exception to this rule the lender may assume such a duty by agreement.

In Suzich v. Booker, et al. (affirmed on Friday, July 27, 2012), a $1.7 million construction loan was exhausted prior to the completion of the borrowers’ residence. As a result, a contractor filed his claim for a materialmen’s lien for $95,000 and subsequently sued the borrowers and the lender, First Citizens National Bank, to enforce same. The borrowers responded with a cross complaint against the lender alleging that the lender breached the construction loan agreement when it disbursed all of the loan funds without inspecting the progress of the construction. The lender responded that it did not have a contractual duty to inspect the construction of the residence.

After reviewing the provisions of the construction loan agreement, the Court of Appeals agreed with the lender. In looking at the entire contract, the Court reasoned that while the lender was entitled to demand an inspection before disbursing funds to the borrowers, it was “not obligated to inspect . . . or inform [the borrowers] about the Project’s progress or performance.” Thus, the construction loan agreement did not explicitly require the lender to assume an affirmative duty to protect the borrowers’ interests.

The decision of the Court hinged on its interpretation of several provisions of the construction loan agreement. This is why all of the provisions in a construction loan agreement are important to both lender’s counsel and borrower’s counsel.

Jul 292012
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Chattanooga Agrees To Clean Water Act Settlement With U.S., Tennessee

The city of Chattanooga has agreed to a settlement with the United States and the state of Tennessee, as well as the Tennessee Clean Water Network, to fix sanitary sewer overflows and other alleged violations of the Clean Water Act. According to the proposed consent decree (available here), Chattanooga has agreed to pay a $476,400 civil penalty and make improvements to its sewer systems, estimated by the city at $250 million, to eliminate unauthorized overflows of untreated raw sewage.

Chattanooga has also agreed to perform a stream restoration supplemental environmental project at a cost of $800,000 in the 3800 Block of Agawela Drive, to restore the stream and stabilize the banks of a tributary of the South Chickamauga Creek and eliminate a significant source of sediment and solids to the creek. Half of the civil penalty will be paid to the United States and, at the direction of the state of Tennessee, the other half of the civil penalty will be paid by Chattanooga through the performance of green infrastructure demonstration projects in the historic downtown Highland Park neighborhood to, among other things, improve water quality in the Dobbs Branch stream, which flows into Chattanooga Creek.

The case against the city began in 2010 after it was discovered that Chattanooga had reported 32 unpermitted discharges totaling at least 319 million gallons of raw sewage mixed with stormwater from the West Bank and East Bank outfalls directly to the Tennessee River in the previous four years. As a result of these and other alleged violations, the Tennessee Clean Water Network filed suit against Chattanooga on October 13, 2010. The United States Environmental Protection Agency and the Tennessee Department of Environment and Conservation then participated with the Tennessee Clean Water Network and the city of Chattanooga in the negotiations that led to the settlement.

The United States has reached similar settlements with municipalities across the country including the Metropolitan Government of Nashville and Davidson County in 2007 and the Knoxville Utilities Board in 2004.

Passed in 1972, the Clean Water Act is the primary federal law in the United States governing water pollution. On June 25, 2012, the Supreme Court agreed to review two Ninth Circuit Court of Appeals Clean Water Act cases (Los Angeles Cty. Flood Control Dist. v. NRDC and two consolidated cases, Decker v. Northwest Envtl. Defense Center and Georgia-Pacific West Inc. v. Northwest Envtl. Defense Center). The holdings in both cases will have a major impact on the scope of the EPA’s permitting authority under the Clean Water Act, which will in turn have significant implications for regulated entities.