USA – ALABAMA Law and Practice Contributed by: Adam J. Sigman, Crystal H. Walls, Nathan Stotser, Katie Sinclair and Courtney Bradshaw, Dentons
indemnity agreement from the borrower and one or more beneficial owners. If the lender forecloses and becomes the prop - erty owner, the only way to qualify for liability exemptions under the Comprehensive Environ - mental Response, Compensation, and Liability Act (CERCLA) for existing contamination is to conduct all appropriate inquiries (AAI), accord - ing to the ASTM E1527-13 standards, in a timely manner prior to the date the loan is made. AAI must be conducted no more than one year prior to the loan closing. Any report more than one year old is of no value in establishing an innocent purchaser defence under CERCLA. Certain portions of the AAI are only good for 180 days. If AAI is not performed or completed in a timely manner, a lender can be liable once it takes possession of the property for contamination it did not cause. In addition to AAI, most mortgage lenders in Ala - bama require the borrower (and other indemni - tors) to agree to indemnify the lender against potential environmental liability. 3.9 Effects of a Borrower Becoming Insolvent Lenders should consider the general principles of US federal bankruptcy law. Typically, loan documents will include provisions dealing with a borrower’s potential bankruptcy, though such provisions are of limited or no value in a bank - ruptcy proceeding. Borrowers Filing Bankruptcy Petitions When a borrower files a bankruptcy petition, there is an automatic stay of all actions against a borrower’s property, including foreclosure. If a security interest is foreclosed prior to the bankruptcy filing, then, in the absence of some
defect in the foreclosure process, the foreclosed property does not become part of the borrower’s bankruptcy estate, and the lender is free to exer - cise its state law rights regarding the property (including taking possession). Even in that sce - nario, a lender may be forced to ask the bank - ruptcy court for permission via a motion for relief from the automatic stay. In addition, the fore - closing lender may have an unsecured claim (a deficiency claim) to assert against the borrower in bankruptcy. Alternatively, if a secured lender fails to foreclose its lien prior to a borrower’s bankruptcy filing, the lender will be forced to assert its rights in the borrower’s bankruptcy case. Typically, a lender will file a proof of claim and, depending on which bankruptcy chapter the borrower files under (eg, Chapter 7 (liquidation), or Chapter 11 or 13 (busi - ness or consumer reorganisation, respectively)), will participate in the confirmation process as to the borrower’s proposed plan of reorganisa - tion. While in bankruptcy, the lender may assert the rights granted to it under the relevant loan documents. Petitioning the Court Prior to taking many actions that would other - wise be allowed outside bankruptcy, a lender must petition the court for relief from the auto - matic stay. In addition, as to non-residential property that is not a borrower’s homestead, a lender’s secured lien can be “valued” ie, bifur- cated into secured and unsecured portions after a valuation hearing with the bankruptcy court. Likewise, a wholly unsecured junior lien may be stripped off the property and treated as com - pletely unsecured in certain circumstances. Defaults A borrower’s insolvency will ordinarily lead to a default under the terms of the relevant loan
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