Management of Environmental Liabilities in Business Transactions
| Date | 01 May 2011 |
| Author |
5-2011 NEWS & ANALYSIS 41 ELR 10419
Management of Environmental
Liabilities in Business Transactions
by Patrick Del Duca
Patrick Del Duca is an Adjunct Professor of Law at UCLA Law School, and a Partner with Zuber & Taillieu LLP.
This Comment seek s to prepare lawyers to address
environmental risk management in the context of
transactions, including: (i) transfers of ownership
of corporate assets and of real property; (ii)extensions of
secured credit; and (iii)issuance of securities. It oers tools
for lawyers to assist clients in the identication of envi-
ronmental risk s, their assessment, and their avoidance or
allocation to others. It also assists clients in understanding
the goals of lawyers seeking to assess and manage environ-
mental liabilities.
I. The Lawyer’s Contribution
Environmental liability risks are omnipresent in trans-
actions. However, like other risks, if they are properly
managed, they need not be an obstacle to completing a
transaction successfully. e principal features that dis-
tinguish environmental liability risks from other business
risks are:
(i) the frequent uncertainty in their quantication that
is associated w ith the diculty and cost of obtain-
ing fuller information about them;
(ii) the extended time frame over which they may
unfold; and
(iii) the interdisciplinary character of the profes-
sionals required for their proper assessment and
management.
ese features in essence are each associated with the
interactions among often complex biological a nd physical
processes on t he one hand, and on the other of legal pro-
ceedings, including legislation, rulemaking, permitting,
enforcement, and litigation. Like other risks, environmen-
tal liability risks become more manageable if they are bet-
ter understood.
Environmental risk management in the context of a
transaction starts with the quantication of t hose risks
that can be quantied and the identication of the kinds
of risks not subject to quantication, so that at least quali-
tative judgments can be made about them. If the parties are
able to achieve a common understanding of the underlying
environmental issues and the associated risks, their nego-
tiation of how to allocate those risks among the parties may
be more eective. In any event, each of the parties is well-
served to understand the risks that it faces and to make
a business decision about what kinds of risks to assume.
Ideally, the decisions of the parties constitute a “meeting
of the minds” that forms t he basis of a contractual risk
allocation. Negotiations and drafting of the transaction
documentation can then be directed toward implementa-
tion of those agreements in principle. Uncertainty about
risks, miscommunication and inattention, as well as vary-
ing par ty perceptions of risk and the appetite to incur it,
routinely complicate the process of making the deal as to
allocation of environmental liability risks. ese factors
may also lead to surprises during and after the consumma-
tion of a transaction.
As with any other liability issue in a business trans-
action, both lawyers and business principals oug ht to
understand t he nature of the liability risks to collaborate
eectively in their assessment and management. With
limited exceptions, such as crime (where the lawyer can
have an armative eth ical obligation to avoid abetting a
crime, such as failure to report to the proper governmental
authorities a release of a hazardous substance,1 and in some
circumstances, such as dened in the Sarbanes-Oxley fed-
eral legislation with respect to securities-related disclosure,
where the lawyer may, in circumstances of corporate disre-
gard “of a material violation of securities law or breach of
duciary duty” or similar violation, have an obligation to
make a “noisy withdrawal”2), the business principals ought
to have the lead in decisions about assumption of risks, and
the lawyers should both develop and provide information
used in making the risk assumption decisions and assist
in their implementation by negotiation and drafting of
transactional documentation. Unlike many liability issues
associated with a transaction, however, to understand
environmental risks adequately, both lawyers and busi-
ness principals may require t he a ssistance of a variety of
specialized engineers, technicians, scientists, accountants,
1. 42 U.S.C. §9603(b) is an example of a statutory provision for criminal li-
ability in the event of failure to make timely reporting.
2. 15 U.S.C. §7245.
Copyright © 2011 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
41 ELR 10420 ENVIRONMENTAL LAW REPORTER 5-2011
appraisers, and economists. ese professionals are often
essential to understanding the nature of the risks t hat can
be quantied, as well as those risks the magnitude of which
remains uncertain.
e lawyer’s special tasks are to employ the lawyer’s
understanding of the legal fra meworks to ensure that the
appropriate environmental professionals are involved in
the diligence process, that their ndings are put to good
use, and that the technical knowledge is integrated with
the law yer’s insights about the application of the relevant
legal and ad ministrative frameworks. A lawyer conversant
in these tasks can contribute to establishment of a robust
transactional str ucture that supports the pa rties’ aims,
while increasing certainty about the consequences of con-
tingent liabilities, including in par ticular who bears them,
should they in fact be incurred. e aim of this Article is to
provide a lawyer a conceptual orientation and tools helpful
to achieving this objective.
II. CERCLA, RCRA, and Other Scary Laws
Although a wide variety of norms established by all lev-
els of government, including local, state, federa l, and even
supranational bodies, t hat address sta ndards, procedures,
disclosures, permitting, clearances, and liability alloca-
tion, can be relevant to the de nition of environmental
liabilities pertinent to a transaction, the breadth of appli-
cation of the liability regime associated with hazardous
materials and hazardous waste makes the key features of
this regime particula rly helpful to have in mind while
considering approaches to the management of liability
allocation in the context of transactions. Although the
discussion that follows references United States federal
law, it should be kept in mind that the federal law dis-
cussed preser ves the ability of states to impose additional,
more stringent requirements.3
is brief sketch of environmental laws deals with haz-
ardous waste and hazardous substances. is is not to
minimize the importance of air and water pollution laws,
environmental impact and assessment laws, wetlands regu-
lation, land use requirements, occupational health and
safety norms, and a whole host of other environmental
norms adopted at all levels of government that may also
be relevant to a particular tra nsaction. Such laws are just
as likely to give rise to liability concerns a s the hazardous
substance and hazardous waste laws, and they should not
be overlooked. Issues presented under such laws may mate-
rially impinge on the value of what is at issue in a transac-
tion. Further, failure to comply with them may well give
rise to material civil or criminal penalties, and may jeopar-
dize the ability to complete a transaction.
3. 42 U.S.C. §§9614(a) and §6928, so providing in the case respectively of the
CERCLA and RCRA frameworks.
A. CERCLA Overview
e federal Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA)4 of 1980, as
amended, also known as the Superfund law, received its
name by virtue of its initial provision for an $8.5 billion
fund t hat federal authorities could use to pay the cost of
cleaning up release of hazardous substances. Federal author-
ities could accomplish cleanup with this money and then
attempt to replenish the fund by recoveries from the parties
responsible for the contamination.5 Of course, CERCLA
also provides tools outside the fund to achieve remediation
of releases of hazardous substances. Specically, it gives the
federal government the authority to require any of the par-
ties dened as responsible by CERCLA to accomplish the
cleanup.6 And, ordinary citizens can act as private attorneys
general to enforce CERCLA’s mandates against potentially
responsible parties and against government regulators.7
CERCLA pertains to “hazardous substances,”8 a term
that it denes to include substances designated pursuant to
the major federal environmental statutes as well as CER-
CLA itself. In particular, it includes the open-ended de-
nition of substances categorized as hazardous waste under
the Resource Conser vation and Recovery Act (RCRA),9
discussed below, that includes substances that are toxic,
ignitable, reactive, or corrosive.
Perhaps the most important and enduring provision of
CERCLA for counsel to transaction parties is the law’s
imposition of environmental cleanup responsibility on
multiple parties.10 Such parties include the present owner
or operator of the facility at which hazardous substance
contamination is located, the generator or the transporter
of the hazardous substance that has been released to the
environment, and any owner or operator of t he facility at
the time the hazardous substance was released. e imposi-
tion of liability is an imposition of strict liability, without
regard to concepts of negligence or fault.11 ese parties
are jointly and severally liable in the rst instance. at
is, the government can decide which, if any, of them to
pursue for the whole amount. Only in the second instance
may the various responsible parties allocate liability among
themselves according to contract or tort principles. In t he
context of a transaction, the diligence inquiry focuses not
only on quantication of the joint and several liability that
may exist, but also on the extent of assumption of liability
of third parties, or transfer of ultimate liability to third
parties, by contractual indemnication.
Of concern to an acquirer or a prospective lender in the
context of a transaction is the extent to which CERCLA
liability can be limited. Although CERCLA permits third-
4. 42 U.S.C. §§9601-9675, ELR S. CERCLA §§101-405.
5. 42 U.S.C. §9604.
6. Id. §9606.
7. Id. §9659.
8. Id. §9601(14).
9. 42 U.S.C. §§6901-6992k, ELR S. RCRA §§1001-11011.
10. 42 U.S.C. §9607.
11. Id. §9601(32).
Copyright © 2011 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
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