April 8, 2010

Nationwide bankruptcy filings have skyrocketed.  According to Automated Access to Court Electronic Records (AACER), a database used by attorneys and lenders to track bankruptcy filings, 345 businesses filed for bankruptcy each day in the first quarter of 2010.  That number is up from last year.  Although economic conditions are improving, many experts believe that bankruptcy filings will continue at a steady pace until at least 12 to 18 months after the economy actually turns around.

If a company files for bankruptcy, can it escape liability associated with contaminated property? Will a buyer inherit a prior owner’s environmental liability?  What steps can a buyer or seller take to limit their exposure to cleanup costs?

Due to the turbulence in the financial markets, many Chapter 11 debtors cannot secure debtor in possession financing.  For many, the only way to raise funds may be to sell off assets, including real estate.  The bankruptcy code permits companies to push sales through quickly.  Debtors can sell assets “fee and clear” of claims, interests and liens.

Will such a sale eliminate environmental liability?  The short answer is probably not.  Most likely a purchaser or surviving entity may not be off the hook.

There always has been tension between the bankruptcy code with its policy of permitting businesses to get a “fresh start” and environmental laws that provide that “the polluter must pay.”  If environmental concerns are not covered in the bankruptcy proceedings and claims have not been resolved, a purchaser or a new entity that emerges from bankruptcy may face liability concerns.  The trend in recent cases is to limit the discharge of environmental claims to pre-petition cleanup costs incurred by the government.  Ongoing cleanup costs and obligations remain and must be addressed during and after the bankruptcy filing.

How can a party limit their environmental liability when dealing with commercial or industrial property in the bankruptcy context?

As with any other real estate transaction, potential purchasers, investors and lenders should conduct thorough due diligence.  To identify environmental concerns, a qualified consultant should be retained to conduct a Phase I Environmental Site Assessment.  If pollution is found in subsequent testing, a deal may proceed.  Cleanup plans can be developed to address contamination.  Federal and state grant monies and liability protections may be available.

Any party involved in a real estate transaction needs to understand the environmental condition of the property and assess both the short and long term risks before moving forward with the deal.

Joseph Maternowski, a lawyer practicing environmental law, serves as Chair of Hessian & McKasy’s Environmental Law Attorney Practice Group.  He also currently serves as Chair of the Minnesota State Bar Association’s Environmental, Natural Resources and Energy Law Section.  In his practice as an environmental attorney, Mr. Maternowski counsels clients on liability concerns.  Mr. Maternowski’s practice varies from advising clients on environmental issues arising in real estate and business transactions to litigation of matters involving contaminated property.  Mr. Maternowski’s calls upon his colleagues at Hessian & McKasy to assist with real estate, bankruptcy and workout related matters.

Mr. Maternowski also assists clients on compliance and permitting matters and represents parties before the Minnesota Pollution Control Agency (MPCA) and the U.S. Environmental Protection Agency (EPA). To learn more about Mr. Maternowski’s background please visit:http://www.enviroattorney.net/attorneys/josheph_g_maternowski.php

The views expressed here are my own and do not reflect the views of my employer, Hessian & McKasy, P.A.

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