Businesses  file for bankruptcy under chapter 7 when they are ceasing operations. Thus, although national bankruptcy data show that 231,630  businesses operating in the United States filed for bankruptcy in fiscal  years 1998 through 2003—an average of about 38,600 businesses a year— how many of these had environmental liabilities is not known. Currently,  information on bankrupt businesses with federal environmental liabilities  is limited to data on the bankruptcy cases that the Justice Department has  pursued in court on behalf of EPA and other agencies, such as the  Department of the Interior. In fiscal years 1998 through 2003, the Justice  Department filed 136 such claims, 112 of which related to hazardous waste  liabilities under Superfund and RCRA. EPA Faces Significant Challenges When Seeking to Hold Businesses Responsible for Their Cleanup Obligations, Particularly Businesses in Bankruptcy and Other Financial Distress

In its efforts to hold businesses responsible for their cleanup obligations,  particularly when they are in bankruptcy or other financial distress, EPA  faces significant challenges, often stemming from the differing goals of  environmental laws that hold polluting businesses liable for cleanup costs  and other laws that, in some cases, allow businesses to limit or avoid  responsibility for such liabilities. Legal and Informational Challenges Constrain EPA’s Ability to Hold Businesses in Bankruptcy Responsible for Their Cleanup Obligations

An obvious challenge that EPA faces when it attempts to ensure that  businesses in bankruptcy carry out their environmental cleanup obligations  is that the businesses may have little or no financial resources to pay EPA  or any other creditors. Specifically, while environmental laws generally impose cleanup costs on  the parties responsible for pollution, one purpose of bankruptcy law is to  give the debtor a fresh start by discharging existing claims against the  debtor, including environmental claims in some cases. For example, in many bankruptcy cases there may be few, if any,  assets available for distribution to creditors. EPA has on  occasion used other enforcement authorities, including (1) obtaining  offsets, which allow the government to redirect payments or tax refunds it  owes businesses to federal agencies with claims against these businesses  and (2) filing liens on property for which the government has incurred  expenses under Superfund. Greater use of these authorities could  produce additional payments for cleanups from liable businesses, even in  bankruptcies. EPA Has Not Implemented a Statutory Mandate under Superfund to Establish Financial Assurance Requirements for Certain Businesses Handling Hazardous Substances

Despite a requirement to do so in the 1980 statute creating the Superfund  program, EPA has not issued regulations requiring certain businesses that  handle hazardous substances to demonstrate their ability to pay for  environmental cleanup costs. In addition, over time, businesses have become more  sophisticated in using the limited liability principle to protect their assets  by separating them from their liabilities. In addition, to better ensure that the financial assurances EPA does require  under the Superfund and RCRA corrective action programs provide  sufficient funds for cleanups in the event liable parties do not fulfill their  environmental obligations, EPA should enhance its efforts to manage and  enforce the financial assurance requirements for Superfund and RCRA  corrective action cleanups by taking the following actions:  Evaluate the financial assurances the agency accepts in light of such  factors as the financial risks EPA faces if liable parties do not meet their  cleanup obligations; the varying financial risks posed by the individual  financial assurance mechanisms; the agency’s capacity to effectively  oversee the various financial assurance mechanisms—in particular, the  expertise of staff (federal and state) and the number of staff; the  information gaps the agency faces in overseeing the various financial  assurances; and the concerns about certain financial assurances, such  as the corporate financial tests, corporate guarantees, and captive  insurance, that have been brought to the agency’s attention by state  regulators, the EPA Inspector General, and others. Objectives, Scope, and Methodology

GAO was asked to (1) determine how many businesses with liability under  federal law for environmental cleanups have declared bankruptcy and how  many such cases the Justice Department has pursued in bankruptcy court;  (2) identify key challenges that EPA faces in holding bankrupt and other  financially distressed businesses responsible for their cleanup obligations;  and (3) identify actions EPA could take, if any, to better ensure that  bankrupt and other financially distressed businesses pay the costs of  cleaning up their contaminated sites to the maximum extent practicable.
Why GAO Did This Study

The burden of cleaning up Superfund and other hazardous waste sites is increasingly shifting to taxpayers, particularly since businesses handling hazardous substances are no longer taxed under Superfund and the backlog of sites needing cleanup is growing. While key environmental laws rely on the "polluter pays" principle, the extent to which liable parties cease operations or restructure--such as through bankruptcy--can directly affect the cleanup costs faced by taxpayers. GAO was asked to (1) determine how many businesses with liability under federal law for environmental cleanups have declared bankruptcy, and how many such cases the government has pursued in bankruptcy court; (2) identify challenges the Environmental Protection Agency (EPA) faces in holding bankrupt and other financially distressed businesses responsible for their cleanup obligations; and (3) identify actions EPA could take to better ensure that such businesses pay for their cleanups.

What GAO Found

While more than 231,000 businesses operating in the United States filed for bankruptcy in fiscal years 1998 through 2003, the extent to which these businesses had environmental liabilities is not known because neither the federal government nor other sources collect this information. Information on bankrupt businesses with federal environmental liabilities is limited to data on the bankruptcy cases that the Justice Department has pursued in court on behalf of EPA. In that regard, the Justice Department initiated 136 such cases from 1998 through 2003. In seeking to hold liable businesses responsible for their environmental cleanup obligations, EPA faces significant challenges that often stem from the differing goals of environmental laws that hold polluting businesses liable for cleanup costs and other laws that, in some cases, allow businesses to limit or avoid responsibility for these liabilities. For example, businesses can legally organize or restructure in ways that can limit their future expenditures for cleanups by, for example, separating their assets from their liabilities using subsidiaries. While many such actions are legal, transferring assets to limit liability may violate federal law in some cases. However, such cases are difficult for EPA to identify and for the Justice Department to prosecute successfully. In addition, bankruptcy law presents a number of challenges to EPA's ability to hold parties responsible for their cleanup obligations, challenges that are largely related to the law's intent to give debtors a fresh start. Moreover, by the time a business files for bankruptcy, it may have few, if any, assets remaining to distribute among creditors. The bankruptcy process also poses procedural and informational challenges for EPA. For example, EPA lacks timely, complete, and reliable information on the thousands of businesses filing for bankruptcy each year. Notwithstanding these challenges, EPA could better ensure that bankrupt and other financially distressed businesses meet their cleanup obligations by making greater use of existing authorities. For example, EPA has not implemented a 1980 statutory mandate under Superfund to require businesses handling hazardous substances to demonstrate their ability to pay for potential environmental cleanups--that is, to provide financial assurances. EPA has cited competing priorities and lack of funds as reasons for not implementing this mandate, but its inaction has exposed the Superfund program and U.S. taxpayers to potentially enormous cleanup costs at gold, lead, and other mining sites and at other industrial operations, such as metal-plating businesses. Also, EPA has done little to ensure that businesses comply with its existing financial assurance requirements in cleanup agreements and orders. Greater oversight and enforcement of financial assurances would better guarantee that cleanup funds will be available if needed. Also, greater use of other existing authorities--such as tax offsets, which allow the government to redirect tax refunds it owes businesses to agencies with claims against them--could produce additional payments for cleanups from financially distressed businesses.