The uncertainty surrounding the COVID-19 pandemic has rocked the global economy, and companies of all types and sizes are feeling the impacts. In recent weeks, certain high-profile retailers filed for Chapter 11 bankruptcy protection. Some airlines are expected to enter bankruptcy as well, and even farmers are feeling the pinch. Overall, data suggest that bankruptcies will increase almost 25 percent from last year.
With bankruptcy filings expected to rise, it is important to remember that environmental liabilities factor into bankruptcy proceedings. Companies seeking a fresh start may try to discharge their environmental liabilities through bankruptcy. But this is not a simple task. Environmental laws are designed to keep responsible parties on the hook for remediation activities.
The Environmental Protection Agency (EPA) often participates in bankruptcy proceedings to ensure that environmental obligations are not overlooked. In fact, the agency states that an essential part of its cost recovery practice includes seeking payment for cleanup costs from bankrupt parties. To that end, EPA developed a guidance document that explains its approach for participating in bankruptcy proceedings. The guidance identifies a number of factors for EPA to consider when determining whether to participate in a bankruptcy case. Perhaps unsurprisingly, the first factor listed for EPA’s consideration is the potential for recovery. Under this factor, EPA evaluates the amount and priority of EPA’s claim and the assets and liabilities of the bankruptcy estate. Other factors influencing EPA’s decision to participate include the impact on agency resources and fairness to other liable parties.
Another important note from EPA’s guidance relates to enforcement. Under the police power exemption to the automatic stay, EPA may proceed with an environmental enforcement action against a company during Chapter 11 reorganization. The automatic stay will, however, prohibit collection activities once a penalty is assessed. At that point, collection activities must proceed through the bankruptcy process.
Companies distressed by the current pandemic may be forced to make tough decisions regarding bankruptcy. And while environmental liabilities may not be a primary factor in a company’s decision-making process, EPA will give those liabilities due consideration. Companies should keep this in mind as they seek a fresh start.