Bankrupt companies avoid more than $700 million in cleanup costs

Introduction

Four companies connected by the Environmental Protection Agency to some of America’s worst toxic waste sites have escaped more than half a billion dollars in pollution cleanup costs by declaring bankruptcy, potentially passing the tab onto taxpayers.

A Center for Public Integrity analysis of court documents shows that these four companies included on the EPA’s list of 100 companies connected to the largest number of Superfund sites could have owed the federal government about $750 million to clean up their sites.

The Center learned of the bankruptcies while profiling the EPA’s list of companies connected to the largest number of the 1,623 toxic waste sites ever included in the Superfund program. Superfund was launched in 1980 to identify and supervise the cleanup of America’s most toxic and polluted areas.The government, however, apparently received less than $20 million in bankruptcy court. Another company connected to 30 sites is still in bankruptcy proceedings. In addition, the government never filed a claim against another company in bankruptcy, although it was linked to 24 Superfund sites, according to EPA data.

The six companies that have filed for bankruptcy are connected to roughly 120 Superfund sites in 28 states, according to a Center study of EPA data.

Through the bankruptcy process, an insolvent individual or corporation can in many cases get a “fresh start,” discharging some or all of their previous debts for a fraction of what was owed. Certain types of debt receive priority under the bankruptcy laws, including “secured claims,” for which the debtor had mortgaged property or pledged other collateral. Only if there are enough assets to pay those debts in full do general “unsecured creditors” receive any payment.

In a bankruptcy involving Superfund sites or other environmental liabilities, the parties and eventually the judge must first place a dollar value on the full extent of the liabilities. Then, typically, these claims are grouped with those of other unsecured creditors, such as bondholders and vendors. All creditors within this group get the same treatment, splitting any available assets in proportion to the amount of their claims.

Even before bankruptcy seems likely, it is common practice, and generally legal, for parent companies to shift assets from their subsidiaries with potential liabilities in order to protect their bottom line, according to an August 2005 report by the Government Accountability Office. Companies usually emerge from bankruptcy reorganized into new firms, ready to do business and free of any responsibility for cleaning up their predecessors’ contaminated sites, other than sites they continue to own.

Officials for companies on the EPA list told the Center their former entities either went bankrupt and reorganized or sold their assets with no Superfund liabilities attached. Another company, W.R. Grace & Co. of Baltimore, has not yet emerged from bankruptcy proceedings.

An EPA spokeswoman said that bankruptcy does not let companies off the hook. “EPA, working with DOJ [the Department of Justice] … aggressively pursue[s] liable parties including during bankruptcy court proceedings,” said Jennifer Wood, the EPA’s spokeswoman, in an e-mail to the Center. “Filing for bankruptcy does not extinguish Superfund liability nor necessarily prevent EPA from recovering cleanup costs.”

But bankruptcy complicates the EPA’s ability to force companies to pay for their messes. Like other creditors, the EPA scrambles to secure as much money as it can from failing companies. In the end, the agency may recover “a payment of only pennies on the dollar amount” of its Superfund claims on bankrupt companies, according to the 2005 GAO report. Sometimes, the agency gets nothing at all.

“There is a limited amount of money, and the question is who should get that money — environmental cleanups, for example, versus asbestos claims or retiree claims,” said Joel Gross, a partner at the law firm Arnold & Porter and a former head of the Justice Department’s environmental enforcement section. “It’s not just fights between debtors and creditors. It’s fights among creditors.”

Who will pay?

“Bankruptcy to me is nothing but a farce,” said Gayla Benefield, a longtime Libby, Mont., resident and activist. She and others in the small town have fought with W.R. Grace & Co. for decades.

Asbestos from the company’s nearby mine — now a Superfund site — has sickened hundreds of miners, their family members and community residents, including Benefield. More than a thousand properties in Libby may still need to be cleaned up.

“The major companies, they call it reorganization, but really it is a way for them to avoid their liabilities,” Benefield said.

Bob Emmett, an attorney at W.R. Grace & Co., said, “It’s not our desire to stiff anyone, including EPA. It’s our desire to pay all legitimate claims and return to a company freed of the constraints of Chapter 11 [bankruptcy reorganization] status.”

When there are no polluters to pay for cleanup of toxic waste sites, EPA turns to Superfund. Originally established as a trust fund in 1980, Superfund was financed through a “polluter pays” tax on chemical and oil industries and other corporations.

That tax expired in 1995, however, and the fund has since been depleted. Now, when the polluter of a Superfund site is unknown or has gone bankrupt, the cleanup is almost entirely subsidized by taxpayers.

“I think it’s wrong to blame the bankruptcy. It’s the elimination of the tax. That’s the problem,” said John Wheeler, a retired senior EPA attorney, who was the agency’s coordinator on bankruptcy issues for more than 15 years.

When the fund had millions of dollars, Wheeler said, the EPA could clean up the sites and charge the polluters. “Now that tool is no longer available, I would assume,” and “it’s no great threat to say if you don’t clean it up, we will [do the work] and make you pay for it.”

The Center’s review of court documents also shows that the federal government’s settlements with bankrupt companies often allowed them to pay far below estimated cleanup costs. In many cases, liability for some of the sites disappeared altogether.”The real travesty,” Wheeler said, is that taxpayers are now footing the bill.

The Center’s investigation found:

• Kaiser Aluminum Corp., then a subsidiary of MAXXAM Inc., went bankrupt in 2002. In bankruptcy court it settled its environmental liability for 58 sites at close to $19 million, including $1.15 million Kaiser had previously paid, while its liabilities at 16 other sites were discharged. But unsecured creditors received only 2.9 percent of the amounts Kaiser owed, or about $500,000 in the case of the EPA. The government originally claimed Kaiser owed close to $460 million for more than a dozen sites, although the EPA conceded some other companies could have been responsible for cleanup at those locations. Kaiser has since reorganized separate from MAXXAM.
• Before its assets were sold to the International Steel Group (ISG), which then merged with Mittal Steel Co. N.V., Bethlehem Steel Corp. filed for bankruptcy in 2001 and later agreed in a 2003 settlement to $3 million in liability for seven Superfund sites, including $325,000 previously paid. The government had claimed that the steel company owed more than $162 million for cleanup at nine sites, but even its $3 million settlement was actually worth only another $9,000 at the end of the bankruptcy process, or three-tenths of a cent on the dollar.
• Eagle-Picher Industries Inc. went bankrupt in the 1990s and settled for liability of $41 million to clean up 25 sites and pollution at the company’s smelters in Kansas and Missouri, ultimately paying 37 percent of that, or about $15 million. Yet the government originally claimed it was owed $77 million for just eight sites. The company’s reorganized successor, EaglePicher Holdings Inc., went bankrupt about a decade later and has not yet resolved the government’s $25 million claim for seven sites, though it has established $17 million in different trusts to help fund cleanups by the EPA and state agencies at certain sites in the Midwest.
• Polaroid Corp. — many of whose assets are now owned by Petters Group Worldwide — filed for bankruptcy in 2001 and agreed to an $11 million price tag to clean up one site. The federal government originally estimated that cleanup for the site at $50 million, although it said companies other than Polaroid might also have had liabilities at the same location. Now as Primary PDC Inc., the former Polaroid is still in bankruptcy and settling many of its claims. In 2003, it estimated that it would pay 14 to 18 percent of unsecured claims, which would be less than $2 million to the EPA.
• Before it entered bankruptcy in December 2003 because of asbestos litigation, Dresser Industries Inc., a Halliburton subsidiary later renamed DII Industries LCC, was linked to 24 Superfund sites, according to EPA data. The government, however, never filed a claim against the company to recover any funds through the bankruptcy court, according to the claims register.
• Still in bankruptcy, W.R. Grace & Co. has been linked to 30 sites, according to the government’s court filing that says other companies might share responsibility for several of those sites. Cleanup of the 30 sites is estimated at close to $900 million — at least $134 million for the Libby site alone. The company has settled some claims related to that site: $2.8 million that funded a nearby medical center and some initial cleanup costs. Further, the Supreme Court refused to hear the company’s appeal of lower-court decisions that would force Grace to pay $54.5 million to the EPA for cleanup costs at the Libby, Mont. site, but it did pay $1.25 million to help clean up a site in Wauconda, Ill.

Except for W.R. Grace, the other companies above have either reorganized or sold the majority of their assets.

Officials for many of these companies told the Center that the EPA cannot touch their assets because they can no longer be held liable for the toxic waste sites. Since what they did is perfectly legal, they are correct.

Mittal Steel executives did tell the Center, however, that they are cleaning up sites that were owned by Bethlehem Steel before the company went bankrupt.

“In effect, we are cleaning up at the properties that Bethlehem owned. There are substantial costs,” said Keith Nagel, director of environmental affairs and real estate for Mittal Steel U.S.A. “In bankruptcy proceedings, the taxpayer usually eats up the cost for these third-party sites. Once you get one of these companies in financial disarray, you are not going to get blood from a stone.”

“Frankly, if Mittal or ISG did not take up Bethlehem Steel’s owned sites, the taxpayer would have been eating up [the cost for] those sites as well,” said Nagel.Mittal is expecting to spend more than $100 million cleaning up several of Bethlehem Steel’s former sites, according to the steel company’s recent financial statements. Under the Superfund law, reorganized companies typically cannot discharge their liabilities for sites they choose to continue to own, in contrast to the way bankruptcy law generally treats their liabilities elsewhere.

In turn, Halliburton representatives said they are cleaning up sites linked to Dresser Industries Inc., even though the federal government has not filed a claim.

“DII Industries LLC is participating financially at several of those sites either through PRP [potentially responsible parties] groups or directly with EPA. We are not aware that EPA has had difficulty contacting us with regard to our potential liability at any Superfund sites,” Melissa Norcross, a Halliburton spokeswoman, said in an e-mail to the Center.

In regard to no claim being filed, the EPA’s Wood said the agency does not discuss “decisions regarding litigation strategy or our deliberations on enforcement decisions” and referred questions to the Justice Department.

Cynthia Magnuson, a Justice Department spokeswoman, also declined in an e-mail to answer questions about the Dresser case, saying she understood that the EPA would clarify its response.

W.R. Grace expects to announce a settlement soon with the federal government. The firm declared bankruptcy in 2001 and is still reorganizing. An EPA official said he is confident, however, that the agency will secure enough money from W.R. Grace to help clean up its toxic waste sites.

“Our expectation is we are going to get much better than pennies on the dollar. Grace is a very solvent company, and they have lot of assets,” said Paul Peronard, EPA’s on-scene coordinator for the Libby site. “We are going to stay chasing that because we are looking for a return.”

Misery in Montana

Benefield from Libby is not pleased with W.R.Grace’s bankruptcy proceedings. She and Les Skramstead, another local activist, have been diagnosed with various asbestos-related diseases. More than 200 people have died from asbestos-related diseases in Libby, according to EPA estimates.

Benefield does not have much faith in the courts to get justice for her town from W.R. Grace. “We are literally at the mercy of the bankruptcy courts. In the bankruptcy court, there is a multitude of companies, producers and clients,” Benefield said. “We are a small portion of that to carve out.”

Much of the cleanup in Libby remains to be done and could be threatened by W.R. Grace’s bankruptcy. The local medical center, funded by the company, could suffer as well.

Benefield is particularly upset by W.R. Grace’s transfer of assets over the years.

“The biggest issue with us here is this was an intentional act by them to avoid responsibility. They literally spun off the money,” Benefield said. “When the game got too rough, they picked up their marbles and went home.”

A creditors’ committee had similar complaints. Suspecting a fraudulent transfer by W.R. Grace of its profitable subsidiary, Cryovac, to Sealed Air, a New Jersey packaging company, the committee lodged an action against the company, and Justice Department lawyers soon intervened.

“The Sealed Air case was brought by creditors at first, and now, as a result, they are going to have disgorged millions of dollars back into Grace,” said Emmett, the W.R. Grace attorney. “Gayla may be right on how the deal was structured at the time. But the way it has turned out now, it has been mutually beneficial to the company and Libby.”

The transfer — some valued it at $5 billion — rendered W.R. Grace insolvent and unable to pay off its environmental liabilities, including the Libby site, according to the GAO report. The Justice Department settled a roughly $1 billion settlement, split between cash and stock, from Sealed Air.

But the government does not always come out ahead. One challenge confronting the government’s attorneys is the corporate maze of parent companies and their subsidiaries.

“They can insulate themselves with their corporate structure,” said Andrea Madigan, who chairs the National Bankruptcy Work Group, an interagency group of lawyers led by the EPA that files claims against companies in bankruptcy court to recover funds for Superfund cleanups. “If they can protect profitable parts of their company from their unprofitable parts, some might say they have fiduciary responsibility to do so.”

Including some of the companies on the EPA’s list, the Department of Justice filed 100 Superfund claims on behalf of the EPA in bankruptcy court from fiscal years 1998 to 2003, according to the GAO report. More than 200,000 companies went bankrupt in that period, but there is no way to know how many may have had any environmental liabilities.

The EPA may miss opportunities to pursue companies in bankruptcy court for a variety of other reasons. A business might not list the EPA as a creditor, or, after several mergers and acquisitions, the company’s name could become unrecognizable to agency officials by the time of its bankruptcy, according to the GAO.

Yet, despite the need to better account for its work, the EPA does not keep records of its bankruptcy cases. The GAO report based its findings on information in Justice Department records.

“At EPA, there is no database designed to exclusively capture bankruptcy information. Other databases that do capture it don’t single it out as a bankruptcy case,” said Madigan. “And because it is included with non-bankruptcy data, it’s hard to keep track.”

EPA’s Region 3 office, based in the mid-Atlantic, is using an initial bankruptcy database it developed for its work. The agency was considering implementing it on a national scale, according to the comments of EPA officials in the GAO report, but that option is no longer on the table.

“EPA researched the issue and determined that the Region 3 database was not practical to be implemented agencywide,” Wood said in her e-mail. “We are now in the process of designing a system that regional and headquarters staff can use to record information on environmental bankruptcy notices and cases.”

Conflicting laws

The bankruptcy code, last thoroughly revised in 1978, allows a failing company to restart with a clean slate, free of its past liabilities and debts.

Working at cross-purposes, however, is the Comprehensive Environmental Response, Compensation, and Liability Act, which was passed two years later. The act, commonly known as Superfund, is designed to make polluters pay.

“There is a basic, inherent conflict. But the courts have balanced that out,” said Madigan. “Sometimes bankruptcy principles trump, and sometimes environmental principles trump.”

Rulings like that leave the EPA as one of many unsecured creditors. Along with former employees and corporate partners, the agency has to fight for scraps from insolvent companies to help pay for its Superfund site work.Case law has been confusing at best. The standard was set by the U.S. Court of Appeals for the 2nd Circuit in 1991’s In re Chateaugay Corp. Its ruling said that the EPA’s Superfund claims against LTV Corp., a bankrupt steel company, should be discharged in bankruptcy court and that no LTV successor company could be held responsible for future cleanup costs.

In its decision, the appeals court asked Congress to clarify how the bankruptcy and Superfund laws work together. Sixteen years later, Congress still has not acted.

A new bill would address the problem. Angered by a bankruptcy action that endangered cleanups at Superfund sites in her own state, Sen. Maria Cantwell, D-Wash., introduced the Cleanup Assurance and Polluter Accountability, or CAPA, Act in June 2006.

The bill never came up for a vote on the Senate floor, and Cantwell reintroduced it in January 2007.

The bill aims to “hold polluters accountable, force them to take responsibility, and prevent them from abusing corporate bankruptcy laws to pass cleanup costs on to taxpayers,” according to an e-mail from Elizabeth Ferranti, a spokeswoman for Cantwell.

Co-sponsored by Sen. Frank Lautenberg, D-N.J., and Sen. Barbara Boxer, D-Calif., CAPA would require the EPA to write regulations mandating that companies guarantee that they could financially cover the cost of future environmental problems, as well as track the agency’s work in pursuing bankrupt companies.

The bill would also allow government lawyers to look back 10 years in a company’s history for any fraudulent financial transfers if the company has any cleanup liabilities.

Too little assurance

The financial guarantees from companies that Cantwell’s bill proposes are already required under the Superfund law. The law instructed the EPA to write regulations forcing all industries handling hazardous waste to provide “financial assurances” for any future environmental messes. But 27 years later, the agency has yet to do so.

According to the GAO, the EPA has had issue papers written, made recommendations and formed work groups, but no regulations have resulted. The GAO prodded the EPA in 1987 to write the rules. The National Research Council noted in 1999 the need for adequate financial assurances for the mining industry; otherwise, “the public will be responsible for reclamation and post-closure costs.”

As recently as 2004, an EPA study again recommended that Superfund officials pursue new regulations under the law’s “broad financial assurance authorities [that] could reduce the future needs of the Superfund program.”

Part of the problem is that such rules would require certain industries to set aside millions of dollars to pay for future cleanups of their sites.

“What do you think is going to happen when EPA proposes a new rule for financial assurances, no matter how streamlined they were, for the mining industry?” asked an EPA official who spoke on the condition of anonymity because of the issue’s sensitive nature. “We are talking about tens of millions of dollars being set aside.”

But without the companies’ money, the bill for taxpayers could be much more startling. A 2004 report by the EPA’s inspector general identified 156 mining sites that could cost $7 billion to $24 billion to clean up.

Wood, the EPA spokeswoman, told the Center that the Superfund settlements are the best route to getting enough money from companies to clean up sites.

But some involved in Superfund say that approach comes too late.

“The financial assurance provisions in the Superfund settlements are akin to seeking fire insurance for a house that’s already on fire,” said another EPA official who asked to remain anonymous since talking to a reporter could jeopardize the official’s job.

Superfund law already stipulates the regulations should be written. “With the [regulations] written, we would be buying the fire insurance before the house was on fire,” the EPA official said.

Back in Libby, Benefield looks forward to the criminal trial of W.R. Grace’s executives, scheduled to start in September. After losing both her parents to asbestos-linked disease, Benefield is worried about what effect the company’s bankruptcy will have on the town’s health.

“We don’t know if the medical program will continue or not. If we did not have that program, that would have forced the town hospital into bankruptcy,” she said. “That is the plus side with Grace, but we had to force them to do that.”

She promises to fight on, however. “We are just not going to give up on this. I keep saying we have one opportunity to get this right.”

Research Editor Peter Newbatt Smith contributed to this report.