Abstract
Legal commentators, policy-makers, and the media argue that the current structures of environmental, bankruptcy, and corporate law permit firms to strategically use bankruptcy to inappropriately displace hundreds of millions of dollars of environmental liability onto taxpayers. However, the proposed solution to this supposed problem-reforming bankruptcy, environmental, and/or corporate law-is draconian, and may cause dramatic and unintended consequences. Moreover, these demands for reform are occurring in a complete absence of data about whether and to what extent inappropriate strategic use of bankruptcy in this manner actually occurs. We conducted an empirical analysis of Chapter 11 bankruptcies filed in 2004 and closed by mid-2006 to try to determine the extent to which environmental liabilities drive bankruptcy filings, with an eye to examining the following questions. First, how many firms in the data set reported environmental violations, liabilities, or other obligations? Second, of these firms, in how many instances did the environmental issues play a role in the bankruptcy filing? Third, of the firms in which environmental matters caused the bankruptcy filing, in how many cases did the debtor end up shifting the cost of the environmental cleanup to the taxpayer? Fourth, even if environmental obligations did not play a role in the decision to file for bankruptcy, did the debtor avoid paying for environmental remediation either by invoking the Bankruptcy Code's abandonment power or its right to discharge? Finally, is there any evidence that parent corporations are using subsidiaries as a mechanism to siphon off assets, thereby leaving a bankrupt subsidiary with environmental liabilities but no assets with which to satisfy them? Our findings suggest that the strategic use of Chapter 11 to avoid environmental obligations is an uncommon phenomenon. We conclude with suggestions about how to improve the reporting of environmental issues in bankruptcy, and also with a cautionary note about reforming bankruptcy, environmental, or corporate law based on anecdotal, rather than empirical, evidence.
Recommended Citation
Anne M. Lawton and Lynda J. Oswald, Scary Stories and the Limited Liability Polluter in Chapter 11 Polluter in Chapter 11, 65 Wash. & Lee L. Rev. 451 (2008).Available at: https://scholarlycommons.law.wlu.edu/wlulr/vol65/iss2/4