Dispose of Properly: Handling Environmentally Impaired Liabilities in Bankruptcy
Hedge funds or other companies that buy bankrupt assets are understandably wary of potential environmental issues at properties they are purchasing. Such buyers could end up owning more than just the asset — they can be liable for substantial environmental problems. Since environmental liability attaches to the land in any potential sale, a buyer can still face liability even if owners deem the asset to be “free and clear of all liens and claims.”
Sellers, too, can often face a barrage of unknown environmental problems when choosing to sell bankrupt assets. Contamination, such as oil leaks and water damage, can result in significant financial cleanup obligations. Even known environmental problems can leave uncertainty around cost projections.
Being aware of some of the most efficient ways to dispose of bankrupt assets that have pollution or other environmental damage can help buyers and sellers sleep a bit more soundly. Some strategies to consider when faced with impaired environmental assets include:
- Disposing of claims. Companies entering bankruptcy may opt to have any outstanding claims related to environmental problems erased or discharged. While not always possible, organizations have settled these claims with the US government in various capacities or with the principal responsible parties (PRPs) involved.
- Selling assets. Companies that are in bankruptcy reorganization may seek to raise cash through a 363 asset sale directly rather than restructure through Chapter 11 proceedings.
- Setting up an environmental trust. Companies can create an environmental trust that would own the property, be responsible to remedy any contamination, and subsequently sell the property. Here, remediation obligations are typically funded and the sale proceeds are returned to the bankrupt party’s estate.
- Rejecting indemnity obligations. Under the US Bankruptcy Code, companies can seek rejection of one-sided executory contracts, in particular environmental indemnity obligations with one-sided performance obligations.
Buying a bankrupt entity’s assets can be a risky proposition, especially when there are environmental exposures, but the right mitigation strategies can enable both buyers and sellers to seize opportunities while managing the risk.
For more information about understanding environmental risk exposures within bankrupt assets, read Managing Environmental Risk Amid Bankruptcy.