Environmental liability

A hidden time bomb

Environmental liability is a hidden time bomb that can wipe out the value of a family business. Learn about the defenses and how to prevent it.

Succession planning leads many family business owners to pass the business on to heirs, place it in a family trust or even to sell the business.

Unfortunately, what many of these retirees do not realize is that there may be a huge environmental liability lurking within their business assets.

Hidden time bomb

In much of the European Union, EMAS [Eco-Management and Auditing System] provides regulatory direction on environmental practices.

In America, the hidden time bomb of environmental risks occurs because in 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act, [CERCLA] commonly referred to as the "Superfund Act", and followed it in 1986 with the Superfund Amendments and Reauthorization Act [SARA]. CERCLA, SARA, various State Superfund acts and the 1976 RCRA [Resource Conservation and Recovery Act] did two basic things. First, they set in motion a way to respond to releases of hazardous substances to the environment; and secondly, they identify and compel the "responsible parties" to pay for the cleanup.

Responsible party

Who can be subject to environmental litigation by being named as a "responsible party" to an environmental cleanup by the US Environmental Protection Agency?

Well, not only a former property owner at the time of the spill, but also the current owner of a property. That is because Superfund liability is both "retroactive" and "joint and several". "Retroactive" means that Superfund does not care when a release of a hazardous substance occurred to a property. Therefore, a release may have occurred on the family business property in the past, however the current owner could be responsible for the cleanup. "Joint and several" simply means that any responsible party can be either fully or only partially liable for the cleanup costs regardless of their contribution to the environmental problem.


Editors note:
We discuss the effect of this in our Family Business Valuation section Family Business Valuation

Environmental liability defenses

There are few defenses to Superfund's environmental definitions and regulations.

  1. Acts of God
  2. Acts of War
  3. Another type of Superfund liability defense is the "third party" defense in which the party claiming defense has no relationship or control over the party which did the actual contaminating. Unfortunately, this defense is very narrow.
  4. The "I didn't know" argument is often invoked when it comes to family inheritance and family trusts, usually with drastic results. Mr. Martin Shelton is an attorney with Stack & Associates in Atlanta, Georgia who specializes in land usage law. His example of environmental liability: A wood-treating business is owned and operated by a family composed of brothers and sisters. The wood-treating plant is located in a small southern town and the family owns the land on which the wood-treating plant is located. One of the siblings dies and leaves his interest in the business and land to his children. Eventually, the business goes bankrupt and ceases operations. Environmental contamination is subsequently discovered on the business property and the state environmental regulatory agency orders the property to be cleaned up. The surviving siblings who once owned and operated the business declare bankruptcy thereby leaving the inheritors with the cost of the environmental clean up.

    The same holds true for family trusts. In the court case of Briggs & Stratton v. Concrete Sales & Services (1998), the US District Court for the Middle District of Georgia held that "trustees are subject to liability under CERCLA in their fiduciary capacity to the extent of the trust assets." In clarifying Superfund liability, the court is saying that "not knowing" what occurs on the property held by a family trust may be no defense at all. This scenario is especially important when a lessee contaminates property leased by the family trust.

  5. The last type of defense to Superfund's environmental liability is called the "innocent purchaser" defense. This is perhaps the most well used defense to Superfund liability.

    In order to invoke the innocent purchaser defense, "all appropriate inquiry" must be made to the property in question prior to purchasing or inheriting the property. The term "all appropriate inquiry" is another broadly interpreted phrase. Typically, it involves an environmental site assessment of the property which is usually performed by an environmental consultant who has specialized knowledge and experience in this area.

    In practical terms, this means that when a family business owner attempts to sell the business in preparation for retirement, a perspective buyer will most often perform an environmental site assessment to determine potential environmental liability, either because they are a knowledgeable buyer such as a large corporation, or their lending institution has requested that an environmental site assessment be performed. It is at this point that the business owner discovers the hidden time bomb in the family business assets. Upon learning of contamination to the property, the perspective buyer may deduct the estimated cost of clean up from the sales price. Unfortunately, environmental clean up and associated consulting costs can easily exceed the value of the property, in which case the perspective buyer may choose to walk away from the purchase.

Bottom line on environmental liability

Bottom line on environmental liability? Just as with any liability, protecting the assets of the family business from hidden environmental liability should be a priority. This includes not only protecting the business from previous contamination that may have occurred, but also insuring that the business is currently operating in a way that minimizes future contamination which may negatively impact the assets of the family business.

Environmental management system

An Environmental Management System under ISO 14000 offers an alternative to the traditional "command and compliance" system of dealing with environmental liability and a way to integrate environmental factors into the business' strategy and operations in a positive manner.


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