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Cost Recovery in Superfund Cases Can Deter Prospective Buyers

August 25, 2009

Current environmental laws enable the government to recover clean up costs from the parties responsible, but they can also deter prospective buyers from purchasing and redeveloping contaminated sites, according to Penn Law Professor Howard Chang and Hilary Sigman of Rutgers University.

Suppose a gas station goes out of business and the owner sells the station. The land is contaminated by a leaking underground storage tank until the government steps in to clean it up. The government is stuck with the cleaning bill because the former station owner has declared bankruptcy.  How can the government recover its clean-up costs?
 
Under the joint and several liability imposed under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the government can sue not only the previous owner but also the current owners regardless of whether they had a part in contaminating the land. Increasing the number of potentially responsible parties (PRPs) subject to joint and several liability enables the government to recover clean-up costs even when some of the parties are insolvent. Advocates of joint and several liability argue that shifting these costs from the government to PRPs lowers the likelihood of contamination by creating incentives to take care.
 
Critics, however, point out that this liability may deter prospective purchasers from buying contaminated sites, known as brownfields. A U.S. Conference of Mayors survey found 95,000 acres of brownfields in 192 responding cities and respondents listed “liability issues” as second only to “lack of clean up funds” as a deterrent to the redevelopment of these sites.
 
Many cities seek to encourage the redevelopment of brownfields because they are considered sources of urban blight. Furthermore, the re-use of brownfields allows developers to avoid building new sites in rural or suburban locations.
 
Joint and several liability may deter prospective buyers because a sale would increase the number of PRPs at a site, said Chang. This increase would discourage the sale of a brownfield for a number of reasons, including increasing the expected liability of the buyer and seller at trial, increasing litigation costs for the buyer and seller, and increasing the amount that the government can extract from PRPs in a settlement.    
 
A sale would increase the amount that the government can recover from PRPs through litigation or settlement, in part because the government can recover full costs even if some PRPs are insolvent and judgment proof. Joint and several liability may also create a race to settle among defendants. The government, said Chang, can exploit this race to increase recovery of its costs. These effects increase as the number of PRPs at a site increases, said Chang.
 
Chang and Sigman were able to determine the share of costs recovered by looking at the dollar amounts of settlements and recoveries at trial for specific Superfund sites and comparing those to the EPA’s reported spending at the site. They found that as the number of defendants increased, the government was able to recover more of its clean-up costs. For example, they found that raising the number of defendants from one to two raised the government’s expected recovery from 32 percent of its costs to 43 percent. 
 
Ultimately, joint and several liability may increase vacancy rates in cities by discouraging the sale of brownfields, said Chang.