DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME?

I read this morning a snippet in the National Law Journal about Enron, the notorious energy trading company, settling with one of ten banks alleged to have abetted the company's collapse in the wake of its schemes to fleece shareholders by falsely inflating profits.  This brought to mind the biggest stain in River City's banking market, Fifth Third.

As you may know from the Toxic Towers dumping scandal, Fifth Third Bank is actually one of the owners of the Boardwalk project.  In fact, in consortium with National City Community Development Corporation (NCCDC) control 99% of 940 Monroe L.L.C., the company that developed and now manages the Boardwalk.  Fifth Third's consortium controls all of that company's assets and cashflow to ensure that it receives the full benefit of $5-6 million in state and federal historic tax credits along with repayment of $26.5 million in loans secured by the Boardwalk property.

In fact, all the other partners are required to guarantee, out of their own pockets if necessary, the Fifth Third consortium a 20% annual return on their investment in 940 Monroe L.L.C. before they receive one dime from the company.

To put together this sweetheart deal, Fifth Third* did an extremely strange thing.  Although its consortium agreed to invest about $31.5 million into the Boardwalk project, the bank took none of the prudent and customary measures to eliminate the project's environmental liability.  Because the Boardwalk site was heavily contaminated with toxic concentrations of chemical wastes and heavy metals, that liability was huge.  (In fact, because the Boardwalk's developers did release that contamination into the environment and public areas, the potential fines alone exceed forty billion dollars!  That's more than one thousand times the amount Fifth Third and NCCDC invested in the project.)

Michigan state law, passed a decade ago, allows banks like Fifth Third to reduce and even eliminate liability for existing environmental contamination of brownfield site by inviting the Michigan Department of Environmental Quality (MDEQ) to vet the bank's environmental due diligence.  For example, a bank can curtail liability for old contamination at a site by taking the following steps:

[1] A bank as a condition of a loan always requires a developer to assess a brownfield for environmental contamination.

[2] The developer in turn hires an environmental consultant to do this assessment, the purpose of which is to find out what levels of hazardous waste exist at the site.

[3] The developer files the consultant's report with the MDEQ.

[4] The bank then requires the developer to request that the MDEQ make a "determination" as to the accuracy and sufficiency of the consultant's report.

[5] If the MDEQ determines that the consultant's report is adequate, it will not hold the developer or the bank liable for cleaning up the contamination identified in the consultant's report.

Against its own interest in protecting $31.5 million in loans and investments in the Boardwalk project, Fifth Third never took Step #4.  The bank has admitted to this fact in briefs it has filed with the Kent County Circuit Court.  Fifth Third's failure to protect its investment as now permitted under Michigan state law is unprecedented.

Why didn't Fifth Third protect itself?

We know this.  The environmental consultant's report for 940 Monroe L.L.C. concealed a huge area of environmental contamination at the Boardwalk site.  This area coincided with the location of the new parking ramp, which 940 Monroe L.L.C. had to have excavated down to bedrock to accommodate the ramp's foundation.  This meant the very costly removal of about 13,000 tons of "urban fill", or contaminated waste, if that section of the site were to be properly examined and tested.  Instead, the report falsely stated that this area had been filled in with clean sand and so required no testing.

By falsely passing off the parking ramp dirt as clean, Dykema Excavators Inc. (whose owner is one of Fifth Third's partners in 940 Monroe L.L.C.) proceeded to cheaply remove it without any controls to prevent the release of the dirt into the environment.  As reported elsewhere, Dykema Excavators dumped all of this contaminated dirt at the nearby Monroe Avenue Water Filtration Plant, which it had bought from the City of Grand Rapids for this purpose.

If Fifth Third had required 940 Monroe L.L.C. to get a determination from the MDEQ as to the accuracy and sufficiency of the consultant's report, the MDEQ would have likely discovered the attempt to pass off the parking ramp's soil as clean.  If that happened, the costs of cleaning up that parking ramp area would have increased the project's costs probably beyond the profit the Fifth Third consortium expect to glean from its investment.

This wasn't the only safeguard Fifth Third failed to obtain from the MDEQ.  Similary, the bank could have had the MDEQ determine the adequacy of 940 Monroe L.L.C.'s "due care" plan (i.e., the procedures for preventing a site's contamination from coming into contact with people and the environment) and the completion by 940 Monroe L.L.C. of any remediation (i.e., clean-up or containment of contamination) directed by the due care plan.  But Fifth Third never directed 940 Monroe L.L.C to obtain these determinations either.

In light of these facts, it hard not to conclude that Fifth Third abetted 940 Monroe L.L.C. and its contractors in their scheme to illegally dump the Boardwalk's contaminated soil at the Filtration Plant and other locations around Grand Rapids.

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* The reference to Fifth Third includes Old Kent Bank.  Fifth Third has tried to deny any responsibility for Old Kent's actions prior to its acquisition of the bank in April 2001.  However, Fifth Third is legally Old Kent's successor and is responsible for it.