a

GAO

United States Government Accountability Office

Report to Congressional Requesters

August 2005 ENVIRONMENTAL 

LIABILITIES

EPA Should Do More 

to Ensure That Liable 

Parties Meet Their 

Cleanup Obligations

GAO-05-658
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-658.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact John B. 

Stephenson at (202) 512-3841 or 

stephensonj@gao.gov. 

Highlights of GAO-05-658, a report to 

congressional requesters 

August 2005

ENVIRONMENTAL LIABILITIES 

EPA Should Do More to Ensure That 

Liable Parties Meet Their Cleanup 

Obligations 

While more than 231,000 businesses operating in the United States filed for 

bankruptcy in fiscal years 1998 through 2003, the extent to which these 

businesses had environmental liabilities is not known because neither the 

federal government nor other sources collect this information. Information 

on bankrupt businesses with federal environmental liabilities is limited to 

data on the bankruptcy cases that the Justice Department has pursued in 

court on behalf of EPA. In that regard, the Justice Department initiated 136 

such cases from 1998 through 2003. 

In seeking to hold liable businesses responsible for their environmental 

cleanup obligations, EPA faces significant challenges that often stem from 

the differing goals of environmental laws that hold polluting businesses 

liable for cleanup costs and other laws that, in some cases, allow businesses 

to limit or avoid responsibility for these liabilities. For example, businesses 

can legally organize or restructure in ways that can limit their future 

expenditures for cleanups by, for example, separating their assets from their 

liabilities using subsidiaries. While many such actions are legal, transferring 

assets to limit liability may violate federal law in some cases. However, such 

cases are difficult for EPA to identify and for the Justice Department to 

prosecute successfully. In addition, bankruptcy law presents a number of 

challenges to EPA’s ability to hold parties responsible for their cleanup 

obligations, challenges that are largely related to the law’s intent to give 

debtors a fresh start. Moreover, by the time a business files for bankruptcy, 

it may have few, if any, assets remaining to distribute among creditors. The 

bankruptcy process also poses procedural and informational challenges for 

EPA. For example, EPA lacks timely, complete, and reliable information on 

the thousands of businesses filing for bankruptcy each year. 

Notwithstanding these challenges, EPA could better ensure that bankrupt 

and other financially distressed businesses meet their cleanup obligations by 

making greater use of existing authorities. For example, EPA has not 

implemented a 1980 statutory mandate under Superfund to require 

businesses handling hazardous substances to demonstrate their ability to 

pay for potential environmental cleanups—that is, to provide financial 

assurances. EPA has cited competing priorities and lack of funds as reasons 

for not implementing this mandate, but its inaction has exposed the 

Superfund program and U.S. taxpayers to potentially enormous cleanup 

costs at gold, lead, and other mining sites and at other industrial operations, 

such as metal-plating businesses. Also, EPA has done little to ensure that 

businesses comply with its existing financial assurance requirements in 

cleanup agreements and orders. Greater oversight and enforcement of 

financial assurances would better guarantee that cleanup funds will be 

available if needed. Also, greater use of other existing authorities—such as 

tax offsets, which allow the government to redirect tax refunds it owes 

businesses to agencies with claims against them—could produce additional 

payments for cleanups from financially distressed businesses. 

The burden of cleaning up 

Superfund and other hazardous 

waste sites is increasingly shifting 

to taxpayers, particularly since 

businesses handling hazardous 

substances are no longer taxed 

under Superfund and the backlog 

of sites needing cleanup is growing. 

While key environmental laws rely 

on the “polluter pays” principle, the 

extent to which liable parties cease 

operations or restructure—such as 

through bankruptcy—can directly 

affect the cleanup costs faced by 

taxpayers. GAO was asked to (1) 

determine how many businesses 

with liability under federal law for 

environmental cleanups have 

declared bankruptcy, and how 

many such cases the government 

has pursued in bankruptcy court; 

(2) identify challenges the 

Environmental Protection Agency 

(EPA) faces in holding bankrupt 

and other financially distressed 

businesses responsible for their 

cleanup obligations; and (3) 

identify actions EPA could take to 

better ensure that such businesses 

pay for their cleanups. 

What GAO Recommends

GAO’s nine recommendations 

include EPA’s (1) implementing a 

financial assurance mandate for 

businesses handling hazardous 

substances and (2) enhancing its 

oversight and enforcement of 

existing financial assurances and 

authorities. EPA generally agreed 

with many of the 

recommendations, stating its intent 

to further evaluate some of them. 
Page i GAO-05-658 Environmental Liabilities

Contents

Letter 1

Results in Brief 3

Background 6

The Number of Business Bankruptcies Involving Environmental 

Liabilities Is Not Known 17

EPA Faces Significant Challenges When Seeking to Hold Businesses 

Responsible for Their Cleanup Obligations, Particularly 

Businesses in Bankruptcy and Other Financial Distress 21

EPA Could Make Greater Use of Available Authorities and 

Enforcement Tools to Pursue Hazardous Waste Cleanup Costs 

from Bankrupt and Other Financially Distressed Businesses 33

Conclusions 58

Recommendations for Executive Action 62

Agency Comments and Our Evaluation 64

Appendixes

Appendix I: Objectives, Scope, and Methodology 66

Appendix II: Chronology of EPA’s Efforts to Develop Financial Assurance 

Requirements for Businesses Handling Hazardous 

Substances 68

Appendix III: Comments from the Environmental Protection Agency 69

GAO Comments 77

Appendix IV: GAO Contact and Staff Acknowledgments 81

Related GAO Products 82

Tables Table 1: Financial Assurance Mechanisms Generally Accepted by 

EPA 40

Table 2: Relative Financial Risk, Necessary Oversight and 

Enforcement Effort, and Costs of Financial Assurance 

Mechanisms 42
Contents

Page ii GAO-05-658 Environmental Liabilities

Abbreviations

BLM Bureau of Land Management

CERCLA Comprehensive Environmental Response, Compensation and 

Liability Act

EFAB Environmental Financial Advisory Board

EPA Environmental Protection Agency

IG inspector general

NPL National Priorities List

RCRA Resource Conservation and Recovery Act

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Page 1 GAO-05-658 Environmental Liabilities

United States Government Accountability Office

Washington, D.C. 20548

A

August 17, 2005 Letr

The Honorable James M. Jeffords

Ranking Minority Member

Environment and Public Works Committee

United States Senate 

The Honorable Patrick J. Leahy

Ranking Minority Member

Committee on Judiciary 

United States Senate 

The Honorable Barbara Boxer

The Honorable Maria Cantwell

United States Senate

Key federal environmental statutes, such as the Resource Conservation and 

Recovery Act (RCRA) and the Comprehensive Environmental Response, 

Compensation, and Liability Act (CERCLA),1 which established the 

Superfund program, require that parties statutorily responsible for 

pollution bear the cost of cleaning up contaminated sites.2

 In many cases, 

liable parties have met their cleanup responsibilities. However, parties 

responsible for cleaning up some Superfund sites include businesses that 

no longer exist, having been liquidated through bankruptcy or otherwise 

dissolved. In the past, most of the costs for these “orphan” Superfund sites 

were borne by a Superfund trust fund supported primarily by a tax on 

crude oil and certain chemicals and an environmental tax on corporations. 

However, authority to collect these taxes expired in 1995, and the fund is 

now mostly depleted. As a result, the government—the Environmental 

Protection Agency (EPA)—now largely pays for hazardous waste cleanups 

with appropriations from the general fund when responsible parties do 

not.3

 

1

For simplicity in this report, the Comprehensive Environmental Response, Compensation, 

and Liability Act of 1980 will generally be referred to as the Superfund law.

2

The Superfund law generally applies to cleanups of contaminated sites that are no longer in 

use. RCRA generally applies to operating businesses that treat, store, or dispose of 

hazardous wastes.

3

See GAO, Superfund Program: Current Status and Future Fiscal Challenges, GAO-03-850

(Washington, D.C.: July 31, 2003). 
Page 2 GAO-05-658 Environmental Liabilities

In light of the substantial federal deficit, EPA’s management of its financial 

risks associated with Superfund and RCRA is increasingly important. For 

example, the extent to which responsible parties with liabilities cease 

operations or restructure—often through bankruptcy proceedings—can 

directly affect the Superfund costs that will be borne by the government. 

According to recent studies, it will cost $140 million, on average, to clean 

up each of the 142 largest Superfund sites, for a total of almost $20 billion.4

Importantly, cleanups at 60 of these megasites are already being funded 

either wholly or partially by EPA. In addition, the cleanup burden borne by 

EPA and other government entities will be increased if operating 

businesses, including those regulated under RCRA, fail to fulfill their 

cleanup obligations. For example, businesses may simply close and 

abandon contaminated properties—or they may go through bankruptcy 

proceedings—leaving contaminated properties for state programs or EPA’s 

Superfund program to clean them up. 

In implementing the Superfund and RCRA programs, EPA uses some risk 

management approaches, such as requiring that certain responsible 

parties—generally businesses—provide the agency with evidence of their 

ability to pay their expected future cleanup costs because the cleanups 

often take many years and the financial position of liable businesses can 

change during that time. Financial assurances are meant to assure EPA that 

the businesses will have the money to finish the cleanups in the future. 

Thus, when negotiating Superfund and RCRA cleanup agreements with 

EPA, businesses generally agree to provide financial assurances aimed at 

demonstrating their ability to meet the requirements of the agreements.5

These financial assurances include bank letters of credit, trust funds, and, 

under certain conditions, guarantees that businesses or their parent 

corporations have the financial wherewithal to meet the obligations. 

According to EPA officials, businesses file for bankruptcy protection 

generally for economic reasons unrelated to environmental liabilities, with 

some notable exceptions. When businesses file for bankruptcy in 1 of 90 

U.S. bankruptcy courts, they seek either to liquidate all assets and go out of 

business or to reorganize—which can include a partial liquidation—and 

4

National Advisory Council for Environmental Policy and Technology Superfund 

Subcommittee Final Report, April 2004, and Katherine N. Probst and David M. Konisky: 

Superfund’s Future: What Will It Cost? (Washington, D.C.: Resources for the Future, 2001).

5

Permits are also a vehicle for establishing financial assurance requirements for businesses 

required to obtain RCRA operating permits.
Page 3 GAO-05-658 Environmental Liabilities

remain in business. EPA has set up an informal process to identify 

bankruptcy cases that involve environmental liabilities and to assess 

whether the assets available for creditors, which include EPA, warrant 

referring a case to the Department of Justice, which files claims in 

bankruptcy court on behalf of EPA. 

In this context, our objectives were to (1) determine how many businesses 

with liability under federal law for environmental cleanups have declared 

bankruptcy and how many such cases the Justice Department has pursued 

in bankruptcy court, (2) identify key challenges that EPA faces in holding 

bankrupt and other financially distressed businesses responsible for their 

cleanup obligations, and (3) identify any actions EPA could take to better 

ensure that bankrupt and other financially distressed businesses pay the 

costs of cleaning up their hazardous waste sites to the maximum extent 

practicable.

To address these objectives, we reviewed federal statutes and policies 

associated with hazardous waste management and cleanup, the federal 

bankruptcy code and procedures, and academic and professional literature 

addressing the intersection of environmental and bankruptcy law, 

corporate limited liability, forms of business organization, and asset 

management. In addition, we interviewed EPA headquarters and regional 

enforcement officials about how the agency identifies, pursues, and 

recovers federal environmental liabilities from financially distressed or 

bankrupt businesses; the challenges EPA faces in these tasks; and the 

extent to which the agency has used available authorities and enforcement 

tools in this effort. We also analyzed bankruptcy data for fiscal years 1998 

through 2003 from the Administrative Office of the U.S. Courts. In addition, 

for the same period, we analyzed Justice Department data on bankruptcies 

involving environmental liabilities that the department pursued in 

bankruptcy court on behalf of EPA. More detail on our scope and 

methodology can be found in appendix I. We performed our work between 

September 2003 and July 2005 in accordance with generally accepted 

government auditing standards. 

Results in Brief While national bankruptcy data show that more than 231,000 businesses 

operating in the United States filed for bankruptcy in fiscal years 1998 

through 2003, the extent to which these businesses had existing 

environmental liabilities is not known because neither the federal 

government nor other sources collect this information. EPA seeks to 

identify information on those business bankruptcies that involve 
Page 4 GAO-05-658 Environmental Liabilities

environmental liabilities owed to EPA by, among other things, reviewing 

bankruptcy notices. However, EPA does not maintain information on the 

results of its reviews of bankruptcy cases. According to EPA officials, the 

agency does not maintain information on the results of all of its reviews of 

bankruptcy cases—including whether environmental liabilities are 

involved—because of the large volume of bankruptcy notices it receives 

and the limited resources available to track such information. Thus, 

information on businesses in bankruptcy proceedings with federal 

environmental liabilities is limited to data on the bankruptcy cases that the 

Justice Department has pursued in court on behalf of EPA and other 

agencies. In that regard, the Justice Department initiated 136 such cases 

from 1998 through 2003, most of which were for hazardous waste liabilities 

under Superfund and RCRA. 

In seeking to hold bankrupt and other financially distressed businesses 

responsible for their cleanup obligations, EPA faces significant challenges 

that often stem from the differing goals of environmental laws that hold 

polluting businesses liable for cleanup costs and other laws that, in some 

cases, allow businesses to limit or avoid responsibility for those liabilities. 

For example, businesses can legally reorganize or restructure in ways that 

can limit their future expenditures for environmental cleanups by 

separating their assets from their liabilities using subsidiaries. Importantly, 

the long-term nature of many environmental cleanups—particularly under 

Superfund—gives businesses a significant amount of time to make such 

corporate changes. While many such actions are legal, transferring assets 

to limit liability may be prohibited under certain circumstances. However, 

such cases are difficult both for EPA to identify and for the Justice 

Department to prosecute successfully. In addition, federal bankruptcy law, 

like corporate law, presents a number of significant challenges to EPA’s 

efforts to hold bankrupt and other financially distressed businesses 

responsible for their cleanup obligations. Bankruptcy law serves both to 

provide insolvent debtors a measure of financial relief—including a fresh 

start—and to equitably distribute their funds to maximize creditors’ 

interests in receiving payment. However, these goals can conflict with the 

Superfund and other environmental laws, which generally require the 

cleanup of environmental contamination and the imposition of costs on the 

parties responsible for the pollution. These challenges are partly related to 

the bankruptcy law’s discharging of a debtor’s liability for pre-bankruptcy 

debts. Moreover, by the time a business files for bankruptcy, it may have 

few, if any, assets remaining to distribute among creditors. The bankruptcy 

process also poses procedural and informational challenges for EPA. For 

example, EPA’s efforts to identify bankruptcies that may warrant pursuit in 
Page 5 GAO-05-658 Environmental Liabilities

bankruptcy court are hampered by the lack of timely, complete, and 

reliable information on the many thousands of businesses filing for 

bankruptcy each year. 

Notwithstanding these inherent challenges, EPA could better ensure that 

bankrupt and other financially distressed businesses carry out their 

cleanup responsibilities by making greater use of existing authorities and 

enforcement tools. For example, EPA has not yet implemented a 1980 

statutory mandate under Superfund to require businesses handling 

hazardous substances to maintain financial assurances that would provide 

evidence of their ability to pay to clean up potential spills or other 

environmental contamination that could result from their operations. By its 

inaction on this mandate, EPA has continued to expose the Superfund 

program, and ultimately the U.S. taxpayers, to potentially enormous 

cleanup costs at facilities that currently are not required to have financial 

assurances for cleanup costs, such as many gold, lead, and other hardrock 

mining sites and metal-plating facilities. Although implementing the 

requirement could help avoid the creation of additional Superfund sites and 

could provide funds to help pay for cleanups, EPA has cited, among other 

things, competing priorities and lack of funds as reasons for having made 

no progress in this area for nearly 25 years. Additionally, although EPA’s 

current practice is to include requirements in settlement agreements and 

orders under Superfund and RCRA for businesses to provide financial 

assurances within a specified period of time, EPA has done little to ensure 

that the businesses comply with the financial assurance requirements. For 

example, EPA has not collected data on the financial assurances 

businesses are required to have in place under the Superfund and RCRA 

corrective action programs, such as the type of assurance required, the 

amount of financial assurance they provide, and whether the financial 

assurance is still authorized or is in force. The one study on this issue, 

conducted by an EPA regional office, found that (1) about half of the 

responsible parties subject to Superfund financial assurance requirements 

in that region were not in compliance with them and (2) the agency could 

not locate relevant financial assurance documents to evaluate compliance 

in many cases—22 percent. Providing greater oversight and enforcement of 

financial assurances would better guarantee that cleanup funds will be 

available if needed. 

In addition to financial assurances, EPA has on occasion used other 

enforcement authorities to obtain payments for cleanups. For example, in a 

few instances, EPA has used tax offsets, which allow the federal 

government to redirect tax refunds it owes businesses to federal agencies 
Page 6 GAO-05-658 Environmental Liabilities

with claims against these businesses. Greater emphasis on and use of such 

authorities could produce additional payments for cleanups from bankrupt 

and other financially distressed businesses. We are making nine 

recommendations to the Administrator, EPA, aimed at improving EPA’s 

ability to ensure that liable parties meet their environmental cleanup 

obligations, including implementing the statutory mandate under 

Superfund to develop financial assurance regulations for businesses 

handling hazardous substances; enhancing its efforts to manage and 

enforce its existing financial assurance requirements; evaluating the 

financial assurances the agency accepts; and seeking opportunities to more 

fully use its enforcement tools, particularly tax and other offsets. In 

commenting on a draft of the report, EPA generally agreed with many of 

the recommendations and said the agency will further evaluate the others 

(app. III contains EPA’s comments and our responses).

Background At the federal level, the cleanup of hazardous waste sites is primarily 

addressed under the Superfund and RCRA corrective action programs. The 

Superfund program is directed primarily at addressing contamination 

resulting from past activities at inactive or abandoned sites or from spills 

that require emergency action. The RCRA corrective action program 

primarily addresses contamination at operating industrial facilities. In 

addition to these cleanup response programs, another RCRA program—the 

closure/post-closure program—is designed to prevent environmental 

contamination by ensuring that hazardous waste facilities are closed in a 

safe manner and monitored after closure to the extent necessary to protect 

human health and the environment. 

CERCLA created the Superfund program, under which EPA may compel 

parties statutorily responsible for contaminated sites to clean them up or to 

reimburse EPA for its cleanup costs.6

 In many cases, liable parties have met 

their cleanup responsibilities under Superfund. For example, EPA has 

reported that, as a result of its enforcement activities, liable parties 

6

Courts have interpreted the liability of responsible parties under CERCLA to be strict, joint 

and several, and retroactive. Under strict or “no fault” liability, a party may be liable for 

cleanup even though its actions were not considered improper when it disposed of the 

wastes. Under joint and several liability, when the harm done is indivisible, one party can be 

held responsible for the full cost of the remedy even though that party may have disposed of 

only a portion of the hazardous substances at the site. Under retroactive liability, parties can 

be held responsible for actions that took place before CERCLA was enacted. 
Page 7 GAO-05-658 Environmental Liabilities

participate in cleanup work at about 70 percent7 of the sites on the 

Superfund National Priorities List (NPL), EPA’s list of seriously 

contaminated sites.8

 However, in some cases, parties responsible for the 

contamination cannot be identified (for example, at long-abandoned 

landfills where many parties may have dumped hazardous substances) or 

the parties do not have sufficient financial resources to perform or pay for 

the entire cleanup. In the latter case, EPA often settles environmental 

claims with businesses for less than the cleanup costs if paying for the 

cleanup would present “undue financial hardship,” such as depriving a 

business of ordinary and necessary assets or resulting in an inability to pay 

for ordinary and necessary business expenses. (EPA said it also often 

settles environmental claims for less than the total cleanup costs if the 

agency believes making the business pay the full cost would be 

inequitable.) Further, when parties file for bankruptcy protection, EPA’s 

recovery of cleanup costs may be reduced or eliminated, particularly when 

there are few other parties with cleanup liabilities at the Superfund site.

To help EPA pay for cleanups and related program activities, the Superfund 

law established a trust fund. Among other things, the trust fund can be used 

to pay for cleaning up sites on the NPL. Cleaning up NPL sites has often 

been a very lengthy process—in many cases, it has taken 10 to 20 years. 

The cleanup process begins when EPA either conducts cleanup studies for 

the sites or negotiates with liable parties to conduct such studies. These 

studies identify the types and quantities of contamination at sites and 

consider alternative cleanup remedies. EPA then chooses the cleanup 

7

This percentage does not address the percentage of cleanup costs paid by liable parties 

versus that paid by the government. According to EPA, the agency has information on 

cleanup amounts liable parties commit to through enforcement instruments but does not 

have access to information on amounts the liable parties actually spend at the cleanup sites. 

8

To determine which sites are eligible for listing on the NPL, EPA uses its Hazard Ranking 

System, a numerical scoring system that assesses the hazards a site poses to human health 

and the environment as its principal determining factor. Once EPA has determined that the 

risks posed by a site make it eligible for the NPL, EPA regions then consider many other 

factors in selecting the sites to submit to EPA headquarters for proposal to the NPL, 

including the availability of alternative federal or state programs that could be used to clean 

up the site, the status of responsible parties associated with the site, and the cleanup’s cost 

and complexity. 
Page 8 GAO-05-658 Environmental Liabilities

remedies it considers most appropriate and performs the cleanups itself or 

negotiates settlements with liable parties for them to finance and perform 

cleanups.9

Historically, a tax on crude oil and certain chemicals and an environmental 

tax on corporations were the primary sources of revenues for the 

Superfund trust fund; however, the authority for these taxes expired in 

1995. The trust fund continues to receive revenues in the form of recoveries 

of Superfund-related costs from liable parties, interest on the fund balance, 

fines and penalties, and general revenue fund appropriations that 

supplement the trust fund balance. Since fiscal year 2000, the Superfund 

program has increasingly relied on revenue from general revenue fund 

appropriations.10 For fiscal year 2004, for example, EPA’s Superfund 

appropriation of $1.2 billion was from general revenue only.11 In contrast, 

through the 1990s, Superfund trust fund revenues other than general fund 

appropriations provided more than $1 billion a year in program funding.12

Further, appropriations for the Superfund program (from both general 

revenue and trust fund revenues) has decreased from $1.9 billion to $1.2 

billion, in constant 2003 dollars, from fiscal year 1993 to fiscal year 2004. 

Although funding for the Superfund program has decreased, sites continue 

to be added to the NPL to address serious risks to health and the 

environment. As of September 30, 2004, there were 1,236 NPL sites.13

According to a recent study, the cleanup costs for a majority of these sites 

are under $50 million each and will cost $12 million on average. However, 

9

In reality, sites rarely move through the cleanup process in a linear, step-by-step manner. 

Most sites are divided early in the cleanup process into multiple projects, known as 

operable units. Cleanup activity at sites with multiple operable units is generally staggered. 

Operable units may move through the cleanup pipeline at different paces because of a 

number of factors, such as the availability of funding, the complexity of the cleanup, or the 

level of cooperation of responsible parties. The discovery of new information about the site 

can even push an operable unit backward to an earlier stage of the cleanup process. 

10See GAO, Superfund Program: Breakdown of Appropriations Data, GAO-04-787R

(Washington, D.C.: May 14, 2004). 

11EPA officials noted that in fiscal year 2004, the agency also received $148 million from 

settlement payments from liable parties.

12For the first half of the 1990s, the trust fund received the Superfund taxes. 

13Of the 1,236 sites currently on the NPL, 158 are federal facilities. These properties are 

owned or used by a federal agency, typically either the Department of Defense or the 

Interior.
Page 9 GAO-05-658 Environmental Liabilities

there are 142 Superfund megasites—NPL sites whose cleanup is estimated 

to cost more than $50 million each—for which the average cost is expected 

to be $140 million. According to EPA estimates, the vast majority of costs 

for most NPL sites will be incurred getting to the construction completion 

stage.14 EPA officials said that 933 NPL sites have reached the construction 

complete stage as of July 2005. 

Despite EPA’s significant progress, a backlog of NPL sites is ready to 

proceed to construction of a long-term cleanup remedy—which is typically 

the most expensive stage of a cleanup. The decrease in Superfund funding 

in recent years and this backlog of sites ready for additional funding may 

make the already lengthy NPL cleanup process even lengthier. According to 

EPA, many sites in this backlog are large, complex, and costly.15 Further 

complicating the funding situation, as we reported in 2003, the number of 

sites that do not have an identifiable nonfederal source to fund their 

cleanup is growing, and several factors indicate the potential for additional 

growth in the future.16 For example, officials in 8 of the 10 EPA regions 

noted that they expected more liable parties to declare bankruptcy in the 

future. Thus, the number of taxpayer-funded cleanups could increase, 

especially at sites where there are no (or few) other liable parties.

14According to EPA, “construction completion” means that physical construction (if needed) 

to address contamination at an NPL site—such as construction of a pump-and-treat system 

to address groundwater contamination—is complete, regardless of whether final cleanup 

levels have been achieved; all immediate threats from the contamination have been 

addressed, and all long-term threats are under control. Most of these sites then enter into 

the operation and maintenance phase, when the responsible party or the state ensures that 

the cleanup remedy continues to be protective of human health and the environment. 

Eventually, when EPA and the state determine that no further remedial activities at the site 

are appropriate, EPA deletes the site from the NPL.

15EPA, Superfund: Building on the Past, Looking to the Future (Washington, D.C.: Apr. 22, 

2004).

16GAO-03-850. We also reported that states play a significant role in the cleanup of hazardous 

waste sites. However, many state cleanup programs have limited capacity to address costly 

and complex sites that do not have responsible parties to pay for the cleanup.
Page 10 GAO-05-658 Environmental Liabilities

In contrast to the Superfund program, the corrective action program under 

the Resource Conservation and Recovery Act of 1976 (RCRA), as amended, 

primarily addresses contamination at operating industrial facilities.17

Among other things, RCRA regulates the management of hazardous waste 

from “cradle to grave”—that is, from the time hazardous waste is created 

and throughout its lifetime, even after it enters a landfill or is incinerated. 

While EPA has overall responsibility for implementing the act, and retains 

enforcement authority, it has authorized most states to administer all or 

part of RCRA’s hazardous waste program. 

RCRA requires owners and operators of hazardous waste facilities—those 

used to treat, store, or dispose of hazardous waste and often called 

“TSDFs”—to obtain operating permits specifying how hazardous waste will 

be safely managed at the facilities. Owners and operators of hazardous 

waste facilities are also required to prepare closure plans and cost 

estimates for removing or securing wastes, decontaminating equipment, 

and other activities required when they eventually cease operations—such 

as capping a landfill when it is full. In addition, under the RCRA corrective 

action program, these owners or operators must clean up contamination 

occurring at their facilities.18 This is consistent with one of RCRA’s primary 

purposes, which is to ensure the proper management of hazardous waste 

so as to minimize present and future health and environmental threats. 

17While RCRA primarily applies to operating facilities, it may also apply to facilities that are 

no longer operating. RCRA is an amendment to the Solid Waste Disposal Act of 1965, the 

first federal law regulating solid wastes—a broad category of materials including such 

materials as garbage from homes or businesses and waste materials resulting from 

industrial, commercial, or agricultural activities. Under the general statutory RCRA 

definition, a waste is considered hazardous if either (1) the waste has at least one of the 

following characteristics—it is ignitable, reactive, corrosive, or contains certain toxic 

constituents such as arsenic or lead (sometimes called characteristic wastes) or (2) the 

agency has specifically named the waste on a list of products or chemicals, such as 

pesticides or acids, that the agency has determined are hazardous (sometimes called listed 

wastes). For purposes of permitting and other RCRA Subtitle C requirements, a waste is 

considered hazardous if it is a solid waste, which is not exempted or excluded by the 

Subtitle C regulations, and if it is either specifically listed as a hazardous waste or meets the 

characteristics of a hazardous waste in those regulations. 

18The corrective action can be specified in the facility’s operating permit or in a separate 

corrective action permit. Such permits must require the facility to provide financial 

assurance that the cleanup actions specified in the permit will be carried out. EPA may also 

use its enforcement authority to require facilities to clean up hazardous waste 

contamination by issuing to the facility an enforcement order specifying the corrective 

action it must take.
Page 11 GAO-05-658 Environmental Liabilities

A 2002 EPA study on the implementation of RCRA’s corrective action 

program reported that nearly 900 facilities had undertaken cleanup 

measures and/or had selected a cleanup remedy by 1997.19 EPA reported 

that spills were a major source of contamination at over half of the 

facilities. The study suggests that those industries with a high risk for 

contamination requiring clean up under the corrective action program 

include chemical manufacturing, wood preserving, petroleum refining or 

other manufacturing industries, and the service sector that includes dry 

cleaning. In addition, EPA reported that required cleanups under the RCRA 

corrective action program could be as costly as cleanups at many 

Superfund sites—EPA estimated that between 2 and 16 percent of the 

nearly 900 RCRA facilities would have total cleanup costs in excess of $50 

million. 

RCRA’s closure/post-closure and corrective action programs regulate 

facilities that treat, store, or dispose of hazardous wastes—but, 

importantly, RCRA does not regulate some facilities that make or use 

hazardous substances that are not considered listed or characteristic 

hazardous wastes under RCRA, but that nevertheless may in some 

circumstances present a high risk for environmental contamination. 

Businesses may generally store waste on site in compliance with specified 

requirements for up to 90 days without needing a permit or being subject to 

the regulations governing hazardous waste storage facilities.20 Thus, for 

example, chemical companies that manufacture and sell highly hazardous 

substances, such as chlorine products, may not be required to obtain a 

RCRA permit if they do not store their hazardous waste—even though the 

products themselves may pose environmental risk.

RCRA authorizes EPA to issue regulations for the operation of hazardous 

waste treatment, storage, and disposal facilities, including such additional 

qualifications as to financial responsibility as may be necessary or 

19Using a stratified random sample of 65 of these facilities, this study examined relevant 

information on industries at risk for environmental contamination and on costs of these 

cleanups. 

20Specifically, a generator may generally accumulate hazardous waste on site for 90 days or 

less provided that, among other things, the waste is placed in containers, tanks, containment 

buildings, or on drip pads in compliance with applicable EPA regulations. Generators of 

hazardous waste are also required to comply with certain RCRA requirements intended to 

ensure the safe management of hazardous wastes. 
Page 12 GAO-05-658 Environmental Liabilities

desirable.21 EPA has issued regulations under the closure/post-closure 

program requiring that owners and operators of certain hazardous waste 

facilities provide evidence to EPA, or a state regulator, that they have 

sufficient financial resources to clean up as required for proper closure, 

and, if necessary, for post-closure care.22 EPA regulations also require a 

facility seeking a permit to provide financial assurances to cover any 

corrective action responsibilities identified in the permit.23 The principal 

purpose of financial assurance requirements is to ensure that the parties 

responsible for environmental contamination assume the costs of cleanup 

rather than forcing the general public to pay for or otherwise bear the 

consequences of businesses’ environmental liabilities.24 That is, financial 

assurances can help ensure that resources are available to fulfill the 

businesses’ cleanup obligations as they arise. The fact that the parties 

responsible for the contamination are also responsible for cleaning it up 

encourages businesses to adopt responsible environmental practices.

Under the RCRA closure and post-closure and other EPA programs, 

financial assurances can include, among other things, bank letters of credit 

that guarantee payment by the financial institutions that issue them and, 

under certain conditions, guarantees that businesses or their parent 

corporations have the financial wherewithal to meet their obligations. 

While EPA has not issued financial assurance regulations under the RCRA 

corrective action program, EPA typically requires that owners and 

operators provide financial assurances for cleanups of spills or other 

contamination at hazardous waste facilities in administrative orders the 

2142 U.S.C. § 6924(a)(6). Financial responsibility may be established in accordance with EPA 

regulations by any one or a combination of the following: insurance, guarantee, surety bond, 

letter of credit, or qualification as a self-insurer. 42 U.S.C. § 6924(t)(1). 

22See RCRA closure/post-closure financial assurance regulations at 40 C.F.R. Part 264, 

Subpart H.

2340 C.F.R. § 264.101(b). See footnote 18.

24Financial assurance requirements serve several purposes, including fairness, economic 

efficiency, and pollution deterrence. See James Boyd, Financial Responsibility for 

Environmental Obligations: Are Bonding and Assurance Rules Fulfilling Their Promise?

(Washington, D.C.: Resources for the Future, August 2001). Courts have recognized that 

financial assurance regulations play a critical role in deterring environmental misconduct 

and ensuring the safe design and operation of hazardous waste facilities, e.g., Safety-Kleen v. 

Wyche, 274 F.3d 846, 866 (4th Cir. 2001).
Page 13 GAO-05-658 Environmental Liabilities

agency issues under this program.25 Also, as noted above, EPA regulations 

require a facility seeking a permit to provide financial assurances to cover 

any corrective action responsibilities identified in the permit. Since, as 

discussed above, generators of hazardous waste generally are not subject 

to the RCRA corrective action and closure and post-closure requirements, 

they are not required to provide financial assurances for any RCRA 

cleanups that may be needed as a result of their operations.

EPA also has not issued financial assurance regulations for the Superfund 

program, but in some cases does require liable businesses to obtain 

financial assurances demonstrating their ability to pay cleanup costs for 

existing contamination at Superfund sites. Specifically, when EPA reaches 

settlement agreements with parties regarding site cleanups, the agency 

generally requires the businesses to provide financial assurance 

demonstrating their ability to pay for the agreed-upon cleanup activities. In 

this regard, EPA has included financial assurance requirements in its 

“model agreements” for staff to use in negotiating Superfund settlements. 

However, if EPA and a liable party do not reach a settlement, there is no 

regulatory requirement under Superfund that the party provide financial 

assurance that it will be able to pay its cleanup liabilities. There is, 

however, a statutory mandate under Superfund law that EPA has not 

implemented requiring it to issue financial assurance regulations for 

facilities that handle hazardous substances. As discussed further in this 

report, these regulations could cover a number of facilities not currently 

covered by financial assurances under RCRA.

Businesses that may incur environmental liabilities under Superfund or 

RCRA run the gamut in terms of organization type and size—they include 

large U.S. and international corporations as well as small businesses, such 

as sole proprietorships. These entities may be publicly held—that is, their 

stock is traded on public stock exchanges—or they may be closely 

(privately) held. The different forms of organization—such as corporations 

and partnerships—have different legal and tax attributes. A corporation is 

a legal entity that exists independently of its owners or investors, called 

shareholders. A key attribute of corporations is that they limit the liability 

of their owners, the shareholders. That is, corporations are liable for the 

debts and obligations of their businesses, while the shareholders are liable 

only for what they have invested. In contrast to shareholders, the owners of 

25Although EPA has not issued financial assurance regulations for the corrective action 

program, the agency issued guidance on this topic in 2003.
Page 14 GAO-05-658 Environmental Liabilities

unincorporated businesses, such as partnerships and sole proprietorships, 

are generally liable for all debts and liabilities incurred by their businesses 

but also have tax advantages that corporation owners do not. However, 

another unincorporated organizational form that is relatively new but is 

becoming more popular for businesses of all sizes—the limited liability 

company—provides owners limited liability similar to a corporation as well 

as tax treatment similar to partnerships and sole proprietorships.26 Like 

many corporations, these “hybrids” can have any number of investors 

(owners), and the investors may include partnerships, corporations, 

individuals, and others.27

In general, more financial and ownership information is available about 

publicly held corporations, which must comply with more federal reporting 

requirements, such as those of the U.S. Securities and Exchange 

Commission (SEC), than about privately held corporations. Information 

about limited liability companies, including those in offshore locations 

such as the Bahamas, may be limited or unavailable. Information may also 

be limited or unavailable about special purpose entities—legal entities 

created to carry out a specified purpose or activity, such as to consummate 

a specific transaction or a series of transactions with a narrowly defined 

purpose. Some large corporations, such as Enron, allegedly have used 

special purpose entities to hide the true financial condition of the 

companies.28 Following the bankruptcy of Enron and other corporate 

failings, the Congress passed the Sarbanes-Oxley Act of 2002 to protect 

investors by improving the accuracy and reliability of corporate 

disclosures. Among other things, the law includes requirements governing 

financial disclosures and audits for publicly held corporations. 

In addition, in 2003 the Financial Accounting Standards Board, the 

organization that establishes financial accounting and reporting standards 

26Limited liability companies originated in Wyoming in 1977. Today, all states allow this form 

of business organization.

27Certain corporations, called subchapter S corporations, also provide limited liability and 

more favorable tax treatment but ownership is limited in terms of the number of allowable 

owners and type of owners. For example, all shareholders in a subchapter S corporation 

must be individuals.

28The May 1, 2003, Justice Department indictment of former Enron officials included 

charges of conspiring to improve Enron’s balance sheet using special purpose entities. See 

also Special Purpose Entitles: Uses and Abuses, Presentation to the International Monetary 

Fund by Janet Tavakoli, President, Tavokoli Structured Finance, April 2005.
Page 15 GAO-05-658 Environmental Liabilities

for the private sector, issued revised guidance on accounting for special 

purpose entities and is currently working on further accounting guidance 

for them. 

While some financially distressed businesses simply cease operations, 

others file for bankruptcy protection. The bankruptcy code is a uniform 

body of federal law that governs all bankruptcy cases and gives debtors—

individuals or businesses—a fresh start or some measure of relief from 

burdensome debts. 29 Filing a bankruptcy petition gives the petitioner some 

immediate relief in the form of an automatic stay, which generally bars 

creditors from commencing or continuing any debt collection actions 

against the entity while it is in bankruptcy.30

In bankruptcy, debt can be placed in one of three broad categories: 

secured, priority unsecured, and general unsecured, which are generally 

satisfied in that order when a debtor’s assets are distributed in a 

bankruptcy proceeding. The actual, necessary costs and expenses of 

preserving the bankruptcy estate are administrative expenses, which must 

be paid in full before any other class of claims are paid. By definition, 

administrative expenses must be incurred post-petition because the 

bankruptcy estate is created by the filing of the bankruptcy petition. 

Response costs incurred by EPA under the Superfund law post-petition 

with respect to property of the estate may be entitled to administrative 

priority. However, environmental response costs at property the debtor 

does not own are typically considered general unsecured debts, and often 

are paid at pennies on the dollar—if at all—in a bankruptcy proceeding. 

The two types of bankruptcy cases most relevant to EPA are chapter 7 

business liquidations and chapter 11 corporate reorganizations. Businesses 

file for bankruptcy under chapter 7 when they are ceasing operations.31

29The bankruptcy code was substantially revised in April 2005, primarily to address 

consumer bankruptcies.

30Environmental enforcement actions seeking injunctive relief against companies in 

bankruptcy are generally excepted from the automatic stay pursuant to the "police power" 

exemption in the bankruptcy code. Administrative or judicial proceedings to fix the amount 

of a penalty or establish the amount of cost recovery owed are also exempt from the 

automatic stay. However, once a penalty is assessed or a judgment is obtained, the 

automatic stay prohibits collection activities other than through the bankruptcy process.

31In some cases, companies filing for bankruptcy protection under chapter 11 also cease 

operations and go through liquidation rather than reorganization.
Page 16 GAO-05-658 Environmental Liabilities

While some financially distressed businesses cease operations without the 

formality of bankruptcy proceedings, those that file under chapter 7 use a 

court-supervised procedure in which a trustee collects the assets of the 

business (the bankruptcy estate), reduces them to cash, and makes 

distributions to creditors. In many chapter 7 cases, however, few or no 

assets are available for distribution. 

Alternatively, businesses facing financial difficulties may want to continue 

to operate. These businesses can use the chapter 11 bankruptcy process to 

restructure unmanageable debt burdens. Most bankruptcy claims EPA 

pursues in court are chapter 11 reorganizations. EPA’s goals in participating 

in chapter 11 cases include collecting environmental costs owed to the 

government, ensuring that the debtor complies with applicable 

environmental laws and regulations, and ensuring that cleanup obligations 

are satisfied. The chapter 11 debtor generally has 120 days during which it 

has the exclusive right to file a plan of reorganization. However, the 

bankruptcy court can extend or reduce this period.32 The debtor must 

provide creditors with a disclosure statement containing information 

adequate to enable creditors to evaluate the plan, including how the 

existing debts will be paid. The court ultimately approves (confirms) or 

disapproves the plan of reorganization. Confirmation of the plan generally 

discharges eligible debts that were incurred prior to the plan’s 

confirmation. Certain cleanup obligations, however, such as future cleanup 

liabilities under RCRA, are not dischargeable under bankruptcy. The debtor 

normally goes through a period of consolidation and emerges with a 

reduced debt load and a reorganized business. However, many chapter 11 

reorganizations are not successful in that many reorganized businesses 

subsequently fail and go through liquidation. 

Bankruptcy cases are heard by U.S. bankruptcy judges in 90 federal 

bankruptcy courts, which are under 12 regional federal appellate circuit 

courts.33 In many instances, applicable law on key questions is unsettled 

and interpretations may vary among the circuits. For example, 

32Bankruptcy courts routinely grant extensions of this exclusivity period, according to the 

chair of EPA’s bankruptcy work group. For example, the exclusivity period has been 

repeatedly extended during the 4 years since W.R. Grace and Company filed for bankruptcy 

in April 2001. 

33Bankruptcy judges are judicial officers of the district courts and are appointed for 14-year 

terms by the court of appeals for the appellate circuit in which the bankruptcy court is 

located. A bankruptcy court order is appealed first to the relevant federal district court and 

then to the relevant court of appeals.
Page 17 GAO-05-658 Environmental Liabilities

interpretations may vary concerning the extent to which post-petition 

response costs incurred by EPA under CERCLA with respect to property of 

the bankruptcy estate may be entitled to administrative priority. Businesses 

may generally file for bankruptcy protection in a bankruptcy court in a 

state either in which (a) their facilities are located or (b) they are 

incorporated. In fact, many businesses file for bankruptcy protection in the 

second and third circuits, which include Delaware and the Southern 

District of New York.

EPA has established a bankruptcy work group comprised of several EPA 

headquarters staff members, along with one or two staff members from 

each of the 10 regions, many of whom are Superfund enforcement 

attorneys who handle bankruptcy matters as a collateral duty. The work 

group helps identify bankruptcy cases in which EPA may have a claim and 

assists in resolving other issues that involve contaminated property or 

otherwise affect EPA’s interests in bankruptcies, among other things. In 

addition, several Justice Department attorneys participate in the work 

group.

The Number of 

Business Bankruptcies 

Involving 

Environmental 

Liabilities Is Not 

Known

Information on the number of bankruptcies involving environmental 

liabilities is very limited. For example, while the bankruptcy courts collect 

data on the number of businesses that file for bankruptcy each year and the 

Administrative Office of the U.S. Courts maintains these data in a national 

database, neither the courts, EPA, nor private providers of business data 

collect information on how many of these businesses have environmental 

liabilities.34 Thus, although national bankruptcy data show that 231,630 

businesses operating in the United States filed for bankruptcy in fiscal 

years 1998 through 2003—an average of about 38,600 businesses a year—

how many of these had environmental liabilities is not known. Currently, 

information on bankrupt businesses with federal environmental liabilities 

is limited to data on the bankruptcy cases that the Justice Department has 

pursued in court on behalf of EPA and other agencies, such as the 

Department of the Interior. In fiscal years 1998 through 2003, the Justice 

Department filed 136 such claims, 112 of which related to hazardous waste 

liabilities under Superfund and RCRA. The gap in data between businesses 

that file for bankruptcy and those with environmental liabilities that the 

Justice Department has pursued in court is large: what is not known is how 

34Private sources of data on business bankruptcies include companies such as Dun and 

Bradstreet and Moody’s Investors Service.
Page 18 GAO-05-658 Environmental Liabilities

many of the other 231,494 businesses that filed for bankruptcy during this 

time period had environmental liabilities.

EPA may learn of bankruptcy filings that involve environmental liabilities 

in various ways—for example, from the businesses themselves or from 

other federal or state agencies. However, the most systematic notification 

is from the bankruptcy courts. These courts mail notices of filings to EPA 

when the agency is listed as a creditor in the bankruptcy filing.35 Although 

EPA reviews information about the businesses identified in the bankruptcy 

notices to determine whether it should request the Justice Department to 

pursue an environmental claim in the bankruptcy proceedings, the agency 

does not keep records on the bankruptcy filings it has researched, its basis 

for deciding whether to pursue a claim related to environmental liabilities, 

or the characteristics of the businesses involved, such as industry type. 

Among the factors EPA considers in deciding whether to pursue a claim in 

bankruptcy court is whether the debtor has any assets remaining to be 

divided among creditors. In many cases, particularly when the company is 

ceasing operations under chapter 7, EPA decides not to pursue a claim in 

bankruptcy court because it concludes that the business involved has few, 

if any, remaining assets. Similarly, EPA may choose not to pursue a claim 

when the claim is small relative to the resources needed for the 

government to pursue it. 

According to EPA officials, the agency does not routinely collect or 

maintain information on the bankruptcy cases it reviews but decides not to 

pursue in bankruptcy because of the volume of bankruptcy notices it 

receives—including many that do not involve EPA liabilities—and the 

limited resources available to track such information. While EPA would 

incur a cost to routinely collect and maintain information about 

bankruptcies involving environmental liabilities—including those that EPA 

decides not to pursue—such information would be useful as a management 

tool, for example, in identifying (1) the types of businesses that have 

avoided or limited their environmental liabilities by filing for bankruptcy 

protection and (2) individual business owners who have a history of filing 

for such bankruptcy protection. 

The 112 companies with hazardous waste liabilities that the Justice 

Department pursued in bankruptcy court between 1998 and 2003 represent 

a variety of industries, including some that could be expected to have 

35These notices may be sent to EPA regional offices or to EPA headquarters.
Page 19 GAO-05-658 Environmental Liabilities

significant environmental liabilities, such as chemical companies, metal 

finishers, hazardous waste recyclers, and paper mills. Other companies, 

such as Fruit of the Loom and Kmart Corporation, represent industries not 

immediately associated with a great likelihood of creating environmental 

liabilities.36 Most of the companies for which the Justice Department filed a 

bankruptcy claim on behalf of EPA were undergoing reorganization in 

bankruptcy rather than liquidating and going out of business. Further, 100 

of the cases involved liabilities under the Superfund program, and 12 

involved liabilities under RCRA.37 As of February 2005, 35 of the 112 

bankruptcy cases the Justice Department pursued had essentially been 

completed, and more than half—59—were still ongoing. For example, W. R. 

Grace and Company and many of its subsidiaries filed for bankruptcy 

under chapter 11 in April 2001, and this bankruptcy case is still under way 

as of July 2005. The remaining 18 cases were dismissed by the bankruptcy 

court for various reasons. In such cases, EPA and other creditors are no 

longer barred from pursuing claims against these businesses directly. 

However, EPA may have little success in recovering costs or ensuring 

compliance with environmental responsibilities if these businesses are, in 

fact, financially distressed. 

Over time, the current information gap that exists between businesses 

filing for bankruptcy and the subset of those for which the Justice 

Department files an environmental claim in bankruptcy court may be 

reduced because of new filing requirements that became effective recently. 

Since 2003, bankruptcy petitions and the accompanying Statement of 

Financial Affairs have required companies filing for bankruptcy to provide 

information identifying sites they own or possess that have actual or 

potential environmental problems, including any sites that pose or 

36Fruit of the Loom, a leading international apparel company, filed for bankruptcy in 1999. 

The company’s significant environmental obligations principally pertain to environmental 

management and cleanup costs at seven sites owned by a related corporation, formerly 

owned by Fruit of the Loom. Kmart Corporation, one of the largest discount retailers in the 

United States, had environmental liabilities associated with disposal of hazardous waste 

products from its auto repair shops when it filed for bankruptcy in 2002.

37Some of the cases cover environmental liabilities under both Superfund and RCRA and 

some cases also include claims under other environmental laws, such as the Clean Water 

Act or the Clean Air Act.
Page 20 GAO-05-658 Environmental Liabilities

allegedly pose an imminent threat to public health and safety.38 However, 

this additional environmental information is not yet readily available 

electronically from the 90 bankruptcy courts in the United States. That is, 

the systems cannot be queried to identify filings with information on sites 

with environmental liabilities. However, EPA has sought assistance in this 

regard from the U.S. trustees who participate in all bankruptcy cases 

except those filed in Alabama and North Carolina.39 In August 2004, the 

Acting General Counsel, Executive Office for U.S. Trustees, sent a 

memorandum to all U.S. trustees instructing them to coordinate with EPA 

in bankruptcy cases involving contaminated property. 

The trustees are to alert the appropriate EPA contact by email when they 

become aware of an affirmative response to the questions asking 

petitioners to identify sites with actual or potential environmental 

liabilities, and to attach the bankruptcy petition and appropriate schedules. 

EPA officials told us that they have received some notifications from U. S. 

trustees since this August 2004 memorandum.

Because these environmental disclosure requirements are relatively new, 

little is known about the thoroughness and accuracy of the data on 

environmental liabilities that companies in bankruptcy have submitted to 

the courts. We note that the information businesses provide about their 

environmental liabilities would likely be subject to the same data quality 

issues as other self-reported data. For example, studies on other 

bankruptcy filing information from debtor companies, such as information 

on assets and liabilities, have found that such self-reported data tend to be 

flawed.40 Consequently, it is too soon to know the extent to which this 

38Specifically, the Statement of Financial Affairs requires that companies filing for 

bankruptcy identify every site for which they have received a notice of potential 

environmental liability or reported a release of a hazardous substance. They must also 

identify all legal proceedings under any environmental law to which they have been a party. 

In addition, Exhibit C of the bankruptcy petition requires that debtors identify any property 

they own or possess that poses, or is alleged to pose, a threat of imminent harm to public 

health or safety. However, according to EPA officials, debtors rarely complete Schedule C.

39The U.S. Trustees program, a component of the Justice Department, is responsible for 

overseeing the administration of bankruptcy cases in all but two states. The program has 21 

regional U.S. Trustees offices and an executive office in Washington, D.C. The 

Administrative Office of the U.S. Courts, part of the judicial branch, oversees the 

administration of cases filed in bankruptcy courts in Alabama and North Carolina. 

40For example, see Jennifer Connors Frasier, “Caught in a Cycle of Neglect: The Accuracy of 

Bankruptcy Statistics,” Commercial Law Journal (Winter 1996).
Page 21 GAO-05-658 Environmental Liabilities

additional information provided to bankruptcy courts will help fill the 

existing data gap relating to bankrupt companies with environmental 

liabilities.

EPA Faces Significant 

Challenges When 

Seeking to Hold 

Businesses 

Responsible for Their 

Cleanup Obligations, 

Particularly Businesses 

in Bankruptcy and 

Other Financial 

Distress 

In its efforts to hold businesses responsible for their cleanup obligations, 

particularly when they are in bankruptcy or other financial distress, EPA 

faces significant challenges, often stemming from the differing goals of 

environmental laws that hold polluting businesses liable for cleanup costs 

and other laws that, in some cases, allow businesses to limit or avoid 

responsibility for such liabilities. Further, the complexities of the federal 

bankruptcy code and its associated procedures, along with the 

complexities of the environmental cleanup process and EPA’s many 

information needs when dealing with bankruptcies, present challenges to 

EPA’s ability to hold businesses responsible for their environmental 

cleanup obligations.

Businesses Can Organize 

and Restructure Themselves 

in Ways That May Allow 

Them to Limit Their 

Expenditures for 

Environmental Cleanups

A key legal attribute of corporations is that the liability of their owners—

the shareholders—is limited. That is, corporations are liable for the debts 

and obligations of their businesses, while the shareholders are liable only 

for what they have invested. Aimed at encouraging shareholder investment 

to generate capital, the limited liability principle enables corporations to 

engage in enterprises that might not attract sufficient funding if 

shareholders were not protected in this way. Shareholders generally 

include individuals, corporations, and unincorporated business forms, such 

as partnerships. 

Many businesses take advantage of this limited liability principle to protect 

their assets by using a parent and subsidiary corporate structure in which 

the subsidiary is largely or wholly owned by the parent corporation—in 

other words, the parent is the subsidiary’s shareholder. For example, using 

this structure, a subsidiary that is engaged in a business that is at risk of 

incurring substantial liability, such as mining or chemical manufacturing, 

can protect its assets by transferring the most valuable ones—such as 

equipment and patents—to a related entity, such as the parent or other 

subsidiary engaged in less risky endeavors. The high-risk subsidiary can 

continue to use the transferred assets, as appropriate, by leasing or renting 
Page 22 GAO-05-658 Environmental Liabilities

them. It has become common practice for experts in asset protection to 

recommend that corporations protect their assets in this way. A goal is to 

continually draw down on the subsidiary’s remaining assets, such as cash 

from the sale of equipment, to pay operating expenses, including rental and 

lease payments and salaries. If a liability arises, under the limited liability 

principle, the high-risk subsidiary’s remaining assets may be reached—but 

generally not those of the parent corporation or other subsidiaries to which 

assets were transferred. And if the subsidiary incurs an environmental 

liability and does not have sufficient resources to fund the cleanup, the 

burden for the cleanup may be shifted to taxpayers. For example, the 

subsidiary could plead financial hardship, and under its ability-to-pay 

process, EPA may reduce the amount of funding the subsidiary has to 

provide, with the balance coming from the Superfund trust fund in the 

absence of other liable parties. Alternatively, the subsidiary could seek 

reorganization under the bankruptcy act, which could result in the 

discharge of the liability.

While these asset protection strategies are generally legal depending on the 

circumstances, it is generally unlawful to transfer assets with the intent to 

hinder or defraud creditors. Under federal bankruptcy law, a transfer may 

be invalidated if it occurred within 1 year prior to the bankruptcy filing and 

if the transfer (1) occurred with the intent to defraud creditors or (2) in 

certain circumstances yielded less than reasonably equivalent value for the 

debtor.41 In addition, most states have enacted the Uniform Fraudulent 

Transfer Act, which contains prohibitions on fraudulent transfers 

analogous to the bankruptcy provision. Creditors generally must seek to 

invalidate such transfers within 4 years of their occurrence. 

Perhaps for these reasons, publications by financial and legal advisors have 

suggested that asset transfers be implemented in stages over time to avoid 

41EPA officials noted the agency’s recent participation in a successful challenge to a 

fraudulent transfer associated with an ongoing bankruptcy case. The Department of Justice, 

on behalf of EPA, intervened in an action brought against Sealed Air Corporation by the 

official bankruptcy committees representing personal injury and property damage claimants 

of W.R. Grace. The committees contended that (1) the sale of one of W.R. Grace’s divisions 

was fraudulent under New Jersey’s fraudulent transfer statute because W.R. Grace was not 

paid a reasonably equivalent value for the Sealed Air division and (2) W.R. Grace was 

rendered insolvent by the transaction. In its complaint, Justice alleged a fraudulent transfer 

claim under the Federal Debt Collection Procedures Act against Sealed Air Corporation. 

The Justice Department was granted leave to intervene to specifically assist with the fair 

valuation of environmental liabilities at the time of the contested transaction. According to 

EPA, the parties have reached a settlement agreement, which includes cash and stock 

valued at more than $1 billion, that has been submitted to the bankruptcy court for approval.
Page 23 GAO-05-658 Environmental Liabilities

calling attention to them.42 The goal is to make them indistinguishable from 

ordinary business decisions and transactions and to implement them as 

early as possible, preferably well in advance of claims. From an asset 

protection standpoint, this approach makes sense because it helps protect 

transfers from legal challenges by the mere passage of time. However, the 

use of such strategies by parties liable for environmental cleanups presents 

a significant challenge to EPA in obtaining cleanup costs because it is hard 

for the agency to know about such transfers, much less obtain sufficient 

information to successfully challenge them within the time permitted by 

law or to challenge businesses’ claims that paying the cleanup costs 

represents an undue economic hardship. Further, because businesses 

typically are aware of Superfund liabilities for many years before they 

actually have to fund the cleanups, they have ample time to reorganize and 

structure themselves in ways that can limit the expenditures they may be 

required to make in the future. For example, it is not unusual for it to take 

10 or more years in total for sites to be placed on the National Priorities 

List, for cleanup remedies to be selected, and for the cleanups to be 

conducted.

In addition, to protect assets even further, businesses may be structured 

with multiple organizational layers—beyond the two-tier parent/subsidiary 

construct—as well as with different types of corporate entities, such as 

limited liability companies. As outlined in a recent book on asset 

protection, dispersing assets among as many different types of entities and 

jurisdictions as possible is also a useful way to protect them from 

creditors.43 The goal of this approach is to create complex structures that, 

in effect, provide multiple protective trenches around assets, making it 

challenging and burdensome for creditors to pursue their claims. Because 

it is easier and less costly to set up and maintain limited liability companies 

than corporations, this relatively new hybrid form of business organization 

facilitates the establishment of complex, multi-layered businesses using 

corporations and limited liability companies.44

42For example, see Asset Protection: Concepts and Strategies for Protecting Your Wealth,

Jay D. Adkisson and Christopher M. Riser, McGraw-Hill, 2004.

43Ibid.

44From a regulatory standpoint, limited liability businesses can be more difficult to monitor 

than corporations because they are required to provide only limited information to the 

public. 
Page 24 GAO-05-658 Environmental Liabilities

Creditors may go to court to obtain the assets of a corporation’s 

shareholders (including, for example, a parent corporation) to satisfy the 

corporation’s debts. This is called “piercing the corporate veil,” and it is 

difficult to achieve.45 EPA occasionally attempts to secure cleanup costs 

from a parent corporation under a veil-piercing theory. However, these 

cases are extremely complex and resource intensive, according to EPA 

officials. The strategy recommended to businesses to use multiple 

organizational layers to protect assets recognizes this challenge and seeks 

to make any challenge as difficult and costly as possible. Along these lines, 

an EPA enforcement official—who said that EPA is seeing more and more 

cases in which companies are restructuring using various layers and 

thereby shielding corporate assets—noted that the “transaction cost” for 

EPA to try to follow such cases to ensure that these companies satisfy their 

environmental liabilities can be prohibitively high.

Finally, some EPA officials stated that a 1998 Supreme Court case has 

further complicated efforts to obtain cleanup costs from parent 

corporations. Under the Superfund law, past and present owners and 

operators are among the parties generally liable for cleanup costs at a 

contaminated site. The Supreme Court decision in United States v. 

Bestfoods held that a corporate parent could be liable (1) indirectly (as an 

owner) if the corporate veil could be pierced; and (2) directly (as an 

operator) if the corporate parent actively participated in, and exercised 

control over, the operations of the contaminated facility itself.46 The 

Bestfoods decision confirmed that the government could hold a parent 

corporation directly liable under the Superfund law for a subsidiary’s 

cleanup costs under certain circumstances. However, EPA officials noted 

that prior to the Bestfoods decision, some courts had found a parent 

corporation liable where it exercised control over the subsidiary even if the 

parent did not control the contaminated facility. In addition, while the 

Bestfoods case recognized that the government could hold a parent 

corporation directly liable under the Superfund law, these officials stated 

that the case also helped establish a road map for observing corporate 

formalities that companies could follow to insulate themselves from this 

liability.

45For example, the Supreme Court has stated that “Ordinarily a corporation which chooses 

to facilitate the operation of its business by the employment of another corporation as a 

subsidiary will not be penalized by a judicial determination of liability for the legal 

obligations of the subsidiary." United States v. Bestfoods, 524 U.S. 51, 61 (1998). 

46524 U.S. 51 (1998).
Page 25 GAO-05-658 Environmental Liabilities

Legal and Informational 

Challenges Constrain EPA’s 

Ability to Hold Businesses 

in Bankruptcy Responsible 

for Their Cleanup 

Obligations

An obvious challenge that EPA faces when it attempts to ensure that 

businesses in bankruptcy carry out their environmental cleanup obligations 

is that the businesses may have little or no financial resources to pay EPA 

or any other creditors. However, EPA faces further challenges when 

companies file for bankruptcy, stemming from the differing goals of the 

bankruptcy code and federal environmental laws, the complexities of 

bankruptcy procedures and environmental cleanup programs, and EPA’s 

many information needs when dealing with bankruptcies.

Differing Statutory Goals and 

Program Complexities Present 

EPA with Challenges

Federal bankruptcy and environmental laws seek to address vastly 

different problems using solutions that frequently come into conflict. 

Specifically, while environmental laws generally impose cleanup costs on 

the parties responsible for pollution, one purpose of bankruptcy law is to 

give the debtor a fresh start by discharging existing claims against the 

debtor, including environmental claims in some cases. For example, when 

businesses with liability under the Superfund law file for bankruptcy 

protection, payment of cleanup costs may be nonexistent or substantially 

reduced in some cases, depending in part on the type of financial assurance 

the businesses agreed to provide under settlement agreements to meet the 

obligations.47 As a result, cleanup costs may be shifted to the general 

public, especially when the site has no other liable parties.48

The inherent conflict between the goals of environmental cleanup laws and 

the bankruptcy code represents only the first of several key challenges EPA 

faces in attempting to hold businesses in bankruptcy responsible for their 

environmental cleanup obligations. For example, conflicts relating to the 

47As discussed in the next section of this report, some financial assurances that businesses 

provide to EPA to show their ability to meet their financial obligations make specific funds 

available to EPA for cleanups in the event businesses default, while others do not. However, 

if the party with Superfund liabilities has not reached a settlement agreement with EPA, it is 

not required to provide a financial assurance. Moreover, enforcing financial assurance 

requirements against bankrupt parties under Superfund may be more difficult than under 

programs such as the RCRA closure/post-closure program that have comprehensive 

financial assurance regulations in place. See, e.g., Safety-Kleen v. Wyche, 274 F.3d 846, 864-

65 (4th Cir. 2001) (upholding state enforcement of RCRA closure/post-closure financial 

assurance regulations against a party in bankruptcy).

48At some Superfund NPL sites, such as large hazardous waste landfills, there may be 

hundreds or even thousands of liable parties from whom EPA may attempt to obtain 

cleanup costs. If one liable party at such a Superfund site files for bankruptcy, EPA may 

compel other liable parties to pay for the cleanup rather than having to turn to taxpayers for 

funding. However, EPA will not do so when it believes seeking such payments would be 

inequitable under the circumstances. 
Page 26 GAO-05-658 Environmental Liabilities

timing of events can have a significant impact on EPA’s ability to recover 

costs in bankruptcy proceedings. One timing issue relates to the 

interpretations by various bankruptcy courts of when an environmental 

liability arises as a claim subject to discharge in bankruptcy. For example, 

bankruptcy courts in the Second Circuit49—where many chapter 11 

bankruptcies are filed—generally hold that a claim arises when a release of 

a hazardous substance into the environment (such as a spill) occurs.50 In 

many bankruptcy cases involving responsible parties under Superfund, the 

relevant releases took place prior to the filing of the bankruptcy petition, 

making all claims for such releases subject to discharge even if EPA has not 

yet incurred cleanup or other response costs. 

Another challenge EPA faces is the need to provide timely estimates of 

cleanup costs that will form the basis for claims. Bankruptcy courts aim to 

resolve cases expeditiously and set specific time frames for proceedings, 

but it can be difficult for EPA to estimate the dollar amount of cleanup 

work needed at sites within the court’s time frames. In particular, 

Superfund sites often require long-term investigations to both identify the 

nature and extent of contamination and to develop cleanup requirements 

and cost estimates. For many Superfund NPL sites, these processes may 

take a number of years. Depending upon where EPA is in these processes, 

it may be challenging to provide an estimate of future cleanup costs. For 

example, the extent of contamination may still be unknown or the cleanup 

remedy may not yet have been determined. Nonetheless, the Justice 

Department must submit a “proof of claim” in the bankruptcy court in 

order for EPA to have a chance for any cost recovery. With incomplete 

information regarding future cleanup costs, EPA may underestimate these 

costs in its claims to bankruptcy courts. Further, if EPA provides a cost 

estimate that the court rejects because it considers the estimate to be 

speculative, or if EPA does not have the time or resources to develop an 

estimate to support its bankruptcy claim, the government can lose any 

opportunity to recover at least some of the cleanup costs for such sites.51

49The Second Circuit includes the states of Connecticut, New York, and Vermont. 

50Other courts have considered a broader array of factors in deciding whether a claim 

subject to discharge has arisen, e.g., Matter of Chicago, Milwaukee, St. Paul, and Pacific R. 

Co., 974 F.2d 775, 782-86 (7th Cir. 1992).

51When a debtor in a chapter 11 bankruptcy continues to own the site under the 

reorganization plan, EPA may hold the reorganized company responsible for cleanup costs 

incurred after the bankruptcy ends, but not for those incurred prior to the court’s 

acceptance of the reorganization plan.
Page 27 GAO-05-658 Environmental Liabilities

Provided that EPA is able meet these challenges and develops a 

supportable claim for the Justice Department to file in the bankruptcy case, 

provisions of the bankruptcy code may result in the claim being assigned a 

low status in the distribution of the debtor’s assets. Many of EPA’s claims 

may be considered general unsecured claims—the last to be paid after 

claims for creditors holding secured and priority unsecured claims have 

been paid. Further, although EPA may submit a claim for environmental 

penalties and/or fines, under chapter 7, these claims may rank even lower 

than most other unsecured claims. In some cases, a bankruptcy judge may 

deem certain EPA claims to be entitled to priority as administrative 

expenses—for example, if the expenses were incurred to address 

conditions endangering public health and the environment. Often, however, 

insufficient funds are available from the bankruptcy estate to pay cleanup 

and/or closure costs, or they provide only “pennies on the dollar” of the 

claims amounts when a debtor’s assets are distributed. In these cases, the 

responsibility for cleaning up a Superfund site or closing and monitoring an 

RCRA hazardous waste facility may fall to EPA or a state agency unless, for 

example, other liable parties pay the cleanup costs or sufficient financial 

assurances are in place to cover these costs. 

Another important challenge facing EPA in bankruptcy cases results from 

the automatic stay provision, which preserves the status quo during 

bankruptcy proceedings, both giving debtors a “breathing spell” from their 

creditors and preventing the piecemeal distribution of a debtor’s remaining 

assets in ways that could be preferential to some creditors and detrimental 

to others. However, the bankruptcy code expressly allows an exemption 

from the automatic stay for a governmental unit to begin or continue a 

proceeding to enforce its police or regulatory power, or to carry out a court 

judgment (other than a money judgment) to enforce its police or regulatory 

power. If EPA can successfully argue that the environmental proceedings 

fall within this exception to the stay, it can take action in federal district 

court while the bankruptcy proceedings continue. If EPA is unsuccessful in 

avoiding the automatic stay, it must pursue the claim in the bankruptcy 

court, along with other creditors. The key to when a court will permit an 

environmental action to avoid application of the automatic stay is how the 

court defines the phrase “money judgment.”

As we reported in 1986, the stay can interfere with efforts of federal and 

state agencies to ensure that owners carry out their environmental 

responsibilities, such as cleaning up and properly closing hazardous waste 
Page 28 GAO-05-658 Environmental Liabilities

facilities according to RCRA requirements.52 For example, although 

companies undergoing liquidation under chapter 7 are required to comply 

with federal and state environmental laws to the same extent as any other 

party, they may argue that the automatic stay allows them to avoid 

expending funds to carry out compliance actions. Companies reorganizing 

under chapter 11 are also obliged to comply with environmental laws while 

they are in bankruptcy proceedings even if it requires the debtor to incur 

additional expenses. Moreover, EPA enforcement officials noted, during a 

company’s period of reorganization under chapter 11, EPA can pursue 

administrative expense penalties if the company continues to operate in 

violation of environmental laws, and has in some cases been successful in 

this regard. However, an EPA enforcement official also noted that the 

agency has limited leverage to ensure that such companies continue facility 

closures, site cleanups, and other environmental responsibilities during the 

bankruptcy proceedings—that can take years to complete—unless EPA 

can convince a bankruptcy judge that a company must carry out these 

activities to address an imminent threat to human health or the 

environment.53 

The automatic stay also prevents creditors, such as federal and state 

agencies, from immediately collecting on certain court judgments. Thus, 

while courts may order businesses to pay environmental fines and/or 

cleanup costs to EPA, the government’s ability to collect these payments 

may be reduced or negated by bankruptcy filings. For example, in August 

2003, W.R. Grace and Company, the primary liable party at the Libby 

Asbestos Superfund site in Libby, Montana, was ordered by a U. S. district 

court to reimburse EPA $54.5 million for costs the agency had incurred in 

investigating and conducting certain emergency cleanup actions at the 

site.54 (Total long-term cleanup costs at this site are expected to rise to at 

least $179 million.) However, because W.R. Grace filed for bankruptcy 

protection in 2001 and is protected by the automatic stay, the company 

does not have to pay this judgment until the reorganized company emerges 

52GAO, Hazardous Waste: Environmental Safeguards Jeopardized When Facilities Cease 

Operating, GAO/RCED-86-77 (Washington, D.C.: Feb. 11, 1986). 

53As noted above, the bankruptcy code includes an exception to the automatic stay, known 

as the police and regulatory powers exception, which can permit certain environmental 

enforcement actions to proceed during bankruptcy despite the automatic stay. Thus, EPA 

can continue compliance enforcement efforts outside the bankruptcy proceedings.

54W.R. Grace appealed this ruling in November 2003. The case was still pending before the 

U.S. Circuit Court of Appeals for the Ninth Circuit as of June 2005.
Page 29 GAO-05-658 Environmental Liabilities

from bankruptcy.55 Moreover, EPA officials noted that because any 

reimbursement of the $54.5 million will be subject to the repayment terms 

agreed to in the company’s reorganization plan, it has not yet been 

determined how much the federal government will be reimbursed for these 

cleanup costs. However, according to the lead EPA attorney working on 

this case, it is likely that creditors, including EPA, will receive a substantial 

return in this bankruptcy case once the company’s reorganization plan has 

been confirmed by the court.56 In the meantime, according to EPA, the 

agency continues to pay for and oversee the cleanup work to address the 

most hazardous conditions at the site, at an estimated cost to taxpayers of 

$18 million per year over the past several years.

Information Gaps Regarding 

Bankruptcies Also Present EPA 

with Challenges 

In evaluating bankruptcy filings to determine whether EPA should request 

that the Justice Department pursue cases in bankruptcy court, EPA faces 

further challenges because it does not consistently have accurate and 

readily available information on which to base these evaluations. As a 

result, EPA cannot be assured that it is aware of all relevant bankruptcy 

filings. 

EPA officials have acknowledged that the agency could miss identifying 

some relevant bankruptcy cases. According to the chair of EPA’s 

bankruptcy work group, one of the more common reasons EPA is likely to 

miss identifying some relevant bankruptcies is that the debtor fails to 

include EPA on its list of creditors in bankruptcy filings, which means that 

bankruptcy courts will not send the notices of bankruptcy filing that are 

routinely sent to creditors to inform them of the filings. In addition, EPA 

could also miss relevant bankruptcy cases for other reasons, including the 

following:

• Because businesses may change their names over time for various 

reasons—including reorganizations and mergers—and because a 

business filing for bankruptcy may be affiliated with a number of

different company names, EPA staff may not recognize the business 

55W.R. Grace and Company filed for protection under chapter 11 of the bankruptcy code in 

April 2001 and remains in bankruptcy as of June 2005. 

56According to this EPA attorney, W. R. Grace has proposed a plan of reorganization, which 

is moving through the confirmation process by the bankruptcy court, that would pay all 

creditors, including EPA, 100 percent of claims allowed by the court. However, the plan may 

not be approved as proposed, this official noted; thus, EPA and other creditors may not 

receive the full amount of their allowed claims. 
Page 30 GAO-05-658 Environmental Liabilities

name or names cited in bankruptcy filings. In addition, owners of 

businesses sometimes file for bankruptcy in their own names, rather 

than in the business names, which EPA may be more likely to recognize.

• Data quality problems in EPA’s Superfund database limit the usefulness 

of automated searches to match the businesses associated with the 

bankruptcy notices sent to EPA with businesses with environmental 

liabilities nationwide.57 Further, even if EPA staff search program and 

enforcement databases to identify contaminated sites associated with a 

company, the searches may not be reliable because the current name or 

names associated with the bankruptcy filing may not be reflected in 

EPA’s databases. For this reason, some EPA staff do not routinely search 

these databases for such matches because the information is likely to be 

incomplete or outdated. However, EPA’s most recent bankruptcy 

guidance, discussed later, recommends that staff search the Superfund 

and other relevant databases to help them determine whether an 

environmental claim or issue of interest is involved.

• EPA officials said that the agency has some difficulty identifying from its 

program and enforcement databases which companies have large 

liabilities, particularly when those liabilities are dispersed across states 

in several regions. As a result, certain companies in bankruptcy may not 

capture EPA’s attention as being worthwhile cases for the government to 

pursue. 

Overall, EPA’s current system of identifying bankruptcies of concern to the 

agency relies heavily on the availability of staff with knowledge of the 

companies and their related environmental liabilities to identify cases that 

the agency should pursue in bankruptcy court in time to meet the court’s 

deadlines. Although the chair of EPA’s bankruptcy work group believes that 

their current approach to timely identification of relevant bankruptcies has 

worked well under these limitations, she acknowledged that EPA has no 

assurance that it has not missed some relevant bankruptcies. As discussed 

above, EPA does not maintain records on all bankruptcy cases that the 

agency has identified and researched, and the reason the cases were either 

pursued in bankruptcy court or not. Consequently, information to evaluate 

EPA’s efforts in identifying and researching relevant bankruptcies is not 

57EPA, Office of Inspector General, Information Technology: Comprehensive 

Environmental Response, Compensation, and Liability Information System (CERCLIS) 

Data Quality, 2002-P-00016 (Washington, D.C.: Sept. 30, 2002).
Page 31 GAO-05-658 Environmental Liabilities

available. Further, because the bankruptcies of small and medium-sized 

businesses are not as widely reported in the business press, EPA is more at 

risk of not identifying relevant bankruptcies of such companies. 

Some members of EPA’ s bankruptcy work group noted that, in their view, 

developing a fail-safe system for identifying relevant bankruptcies could 

require significant additional resources and might not be a cost-effective 

endeavor. For example, in many bankruptcy cases there may be few, if any, 

assets available for distribution to creditors. Nonetheless, on May 10, 2005, 

EPA issued an interim protocol for coordination of bankruptcy matters 

under the Superfund program that, among other things, (1) recommends 

actions to better ensure that EPA receives relevant bankruptcy notices and 

(2) identifies additional actions that may be relevant in bankruptcy cases 

other than filing claims, such as opposing abandonment of contaminated 

properties and objecting to terms of plans of reorganization or sales of 

property. Further, available technologies, such as an EPA Intranet site, 

could be an efficient and effective tool for the agency to track bankruptcy 

cases it identifies and reviews. For example, such a site could contain an 

EPA data sheet on each bankruptcy case identified, as well as key court 

documents as appropriate and available, that would be readily accessible 

to EPA staff across the agency to review and update.

Even when EPA identifies relevant bankruptcy filings to assess, the agency 

is hampered by other information limitations. For example, as previously 

discussed, in many cases, EPA does not yet have adequate information on 

the extent of contamination at relevant sites and has difficulty in 

developing supportable cleanup cost estimates for the claim in the 

bankruptcy case. In other cases, the bankruptcy filings include lengthy lists 

of sites, some of which EPA may have no information about, including 

whether there is any liability under federal environmental law. Lack of 

information about sites can present challenges to EPA in negotiating 

bankruptcy settlement agreements with large companies, such as Exide 

Technologies and Kaiser Aluminum, which cover numerous contaminated 

sites. An EPA attorney who worked on the Kaiser Aluminum case said that 

the tight time frames under which they had to obtain information about the 

relevant contaminated sites and the significantly larger resources the 

company had to support its negotiations made this effort challenging. 

Another challenge EPA faces is that companies may send EPA notice of 

their bankruptcy filings identifying sites with no related enforcement 

actions. According to an EPA official, if a company provides EPA with 

notice of its bankruptcy filing and EPA does not submit a proof of claim in 
Page 32 GAO-05-658 Environmental Liabilities

the bankruptcy court—likely in this situation since EPA would not be 

aware of any environmental hazard—the claim could be discharged in the 

bankruptcy process.58 Consequently, reviews of the environmental 

disclosures in Exhibit C of the debtor’s bankruptcy petition and the 

Statement of Financial Affairs are important to identify those sites for 

which EPA may file a claim as well as those sites about which the agency 

has no knowledge and can potentially challenge discharge requests to the 

bankruptcy court.59 We note that EPA’s May 10, 2005, interim bankruptcy 

protocol recommends that the agency’s bankruptcy coordinators review 

these documents in determining whether an environmental claim or issue 

of interest is involved. 

Finally, it is a challenge for EPA to have timely and accurate information to 

identify those instances in which fraudulent transfers of assets may have 

occurred and which a bankruptcy court would nullify if such transfers were 

brought to its attention. Generally, EPA has limited, if any, information on 

the complex organizational structures businesses may be using and on any 

transfers among entities that may have taken place. Similarly, information 

is not readily available about privately held corporations or limited liability 

companies—an organizational form being used by many businesses. For 

instance, limited liability companies registered in Nevada do not have to 

provide information about all of the owners, making it difficult for EPA or 

others to identify transactions among related companies that may be 

illegal. Because the liable parties often are aware of environmental 

liabilities for years before they must pay for the cleanups, they have time to 

reduce their net worth by making business decisions that result in the 

redistribution of assets—and thus make these resources unavailable for 

payment of environmental liabilities. According to an EPA enforcement 

official, it is extremely difficult for the agency to look back on the business 

decisions a company has made over three or more years to determine 

whether its actions may have been fraudulent. 

58According to EPA, this occurs because some courts have held that a claim for cleanup 

costs arises under the Superfund law when a hazardous substance release (e.g., leakage 

from buried drums) occurs, regardless of whether the release was detected before the 

bankruptcy filing and whether EPA has actually incurred any costs; other courts have not 

adopted this view of when a claim arises. 

59Along these lines, an August 1999 United States Attorneys publication noted that if some 

companies succeed in using bankruptcy to shed environmental liabilities of which EPA is 

not yet aware, their competitors may also file for bankruptcy reorganization to obtain the 

same business advantage. See United States Attorneys’ Bulletin, Environmental Issues in 

Bankruptcy Cases: Protecting the Public Interest from Overzealous Debtors, August 1999.
Page 33 GAO-05-658 Environmental Liabilities

EPA Could Make 

Greater Use of 

Available Authorities 

and Enforcement Tools 

to Pursue Hazardous 

Waste Cleanup Costs 

from Bankrupt and 

Other Financially 

Distressed Businesses

EPA has authorities and enforcement tools that it could use more fully to 

obtain cleanup costs from liable businesses, especially those in bankruptcy 

or other financial distress. Specifically, EPA has not implemented a 1980 

statutory mandate under the Superfund law to require that businesses 

handling hazardous substances maintain financial assurances that would 

provide evidence of their ability to pay to clean up potential spills or other 

environmental contamination that could result from their operations. As a 

result of EPA’s inaction, the federal treasury continues to be exposed to 

potentially enormous cleanup costs associated with businesses not 

currently required to provide financial assurances. Also, although EPA 

requires financial assurances from businesses entering into settlement 

agreements and orders under Superfund and, as a matter of policy, includes 

them in settlement agreements and orders under RCRA, the agency has 

done little to ensure compliance with these requirements. EPA has on 

occasion used other enforcement authorities, including (1) obtaining 

offsets, which allow the government to redirect payments or tax refunds it 

owes businesses to federal agencies with claims against these businesses 

and (2) filing liens on property for which the government has incurred 

expenses under Superfund.60 Greater use of these authorities could 

produce additional payments for cleanups from liable businesses, even in 

bankruptcies. 

EPA Has Not Implemented a 

Statutory Mandate under 

Superfund to Establish 

Financial Assurance 

Requirements for Certain 

Businesses Handling 

Hazardous Substances

Despite a requirement to do so in the 1980 statute creating the Superfund 

program, EPA has not issued regulations requiring certain businesses that 

handle hazardous substances to demonstrate their ability to pay for 

environmental cleanup costs.61 Specifically, the statute required EPA to 

issue requirements “that classes of facilities establish and maintain 

evidence of financial responsibility consistent with the degree and duration 

of the risk associated with the production, transportation, treatment, 

storage or disposal of hazardous substances.”

Such regulations could help to fill several significant gaps in EPA’s 

environmental financial assurance coverage, thereby reducing the risk that 

the general public (i.e., taxpayers) will eventually have to assume financial 

responsibility for cleanup costs. One gap involves types of waste that are 

60A lien is a claim against property for the payment of a debt or obligation.

61Section 108(b)(1) of CERCLA.
Page 34 GAO-05-658 Environmental Liabilities

excluded from RCRA coverage. Some wastes associated with mining 

activities can result in substantial cleanup costs but are excluded from the 

definition of hazardous wastes and, therefore, are not regulated under 

RCRA’s hazardous waste provisions. A second gap in EPA’s financial 

assurance coverage is that hazardous waste generators (such as metalplating facilities and dry cleaners) are generally not required to maintain 

any financial assurances. Specifically, businesses may generally store 

waste in compliance with specified requirements for up to 90 days without 

needing a permit or being subject to the regulations governing hazardous 

waste storage facilities. Finally, a third gap is that none of EPA’s current 

financial assurance regulations require companies or industries that pose a 

significant risk of environmental contamination to provide assurance that 

they could meet cleanup obligations associated with future accidents or 

spills of hazardous substances or wastes.62 These gaps may be more 

significant since the authority for an environmental tax on corporations, 

crude oil, and certain chemicals, which had largely funded the Superfund 

program, expired in 1995. As a result, the federal government’s general 

appropriations fund is increasingly funding the cleanups paid for by the 

Superfund trust fund when responsible parties do not. For example, for 

fiscal year 2004, EPA’s appropriation for the Superfund program was from 

general revenues only.63

Regarding the financial assurance requirements in the Superfund statute, 

which could help to address these gaps, the statute requires EPA to develop 

financial assurance regulations for businesses handling hazardous 

substances. As previously noted, EPA was to use a risk-based approach for 

both (1) identifying the entities that would be covered and (2) specifying 

the financial assurance coverage they would be required to have.64 The law 

requires EPA to give priority in developing these requirements to those 

62RCRA’s closure and post-closure financial assurances cover normal costs of closing and 

conducting post-closure care, and do not cover cleanups stemming from accidental 

releases. The financial assurance regulations also require regulated facilities to carry thirdparty liability insurance, but these policies only cover third-party bodily injury and property 

damage from hazardous releases, not the actual cleanup costs.

63In addition to the appropriated funds in fiscal year 2004, EPA officials noted that $148 

million was deposited into Superfund special accounts, which receive payments from liable 

parties for past and future cleanup costs.

64The provision calls for the use of essentially the same financial assurance mechanisms 

allowed under the RCRA regulations for financial assurance for the costs of closure and 

post-closure care of hazardous waste facilities. See table 1 for a description of these 

mechanisms.
Page 35 GAO-05-658 Environmental Liabilities

classes of facilities, owners, and operators that the agency determined 

present the highest level of risk of injury. Once identified, the different 

classes of facilities that handle hazardous substances—which could, for 

example, include all businesses in a given industry or all those handling a 

specific hazardous substance—would be required to maintain evidence of 

financial ability to cover actual and potential cleanup costs consistent with 

the degree and duration of risk associated with the production, 

transportation, treatment, storage, or disposal of hazardous substances.65

Implementation of this requirement could help to close the financial 

assurance gaps discussed above because under the Superfund law EPA 

could require financial assurances for cleaning up existing and future 

contamination at facilities that handle hazardous substances but are not 

subject to RCRA’s closure/post-closure or corrective action programs, 

including many mining sites and facilities that generate, but do not treat, 

store, or dispose of hazardous waste. EPA may also wish to give priority in 

developing these requirements to facility owners whose prior actions 

indicate they may pose a high risk of default on their environmental 

obligations. Factors EPA may wish to consider in evaluating owner risk 

include compliance history—such as a history of noncompliance with 

environmental laws, including cleanup obligations, and magnitude of past, 

current, and potential environmental liabilities.

In applying the Superfund law’s risk-based criterion for developing 

financial assurance requirements, EPA may want to consider hardrock 

mining a high priority—for example, gold, copper, and iron ore mining—

because it presents taxpayers with an especially serious risk of having to 

pay cleanup costs associated with wastes from thousands of abandoned, 

inactive, and operating mines on private lands in the United States. Using a 

statutory provision that allows solid waste from certain mining activities to 

be excluded from regulation as hazardous waste under RCRA, EPA has 

excluded several types of mining wastes from the definition of hazardous 

waste under RCRA, characterizing them as “low toxicity, high volume 

65The law requires EPA to establish a minimum level of financial responsibility the agency 

believes is appropriate, to be based on the payment experiences for site cleanups by the 

Superfund, commercial insurers, and court settlements and judgments. Further, the law 

specifies that if the owner or operator of a facility required to have financial assurance is in 

bankruptcy, any guarantor providing evidence of financial responsibility for the owner can 

be directly liable for releases of hazardous substances from the facility. The law also directs 

EPA to cooperate with the commercial insurance industry to the maximum extent 

practicable in developing these financial assurance requirements.
Page 36 GAO-05-658 Environmental Liabilities

wastes.”66 This exclusion has resulted in a significant gap in financial 

assurance, as discussed above. In addition, mining activities on private 

lands are not covered by the financial assurance requirements the 

Department of the Interior’s Bureau of Land Management (BLM) requires 

for mines on federal land it manages.67 However, some mining facilities 

handle hazardous substances as defined under the Superfund law, and 

therefore financial assurance regulations issued under the Superfund law 

could apply to these facilities.68

According to the EPA Inspector General, mining sites can cause significant 

environmental problems, and these sites are typically large, complex, and 

costly to clean up. A March 2004 report by EPA’s Office of Inspector 

General identified 63 hardrock mining sites on the Superfund’s National 

Priority List (NPL) and another 93 sites with the potential of being added to 

the list.69 At least 19 of the 63 existing NPL mining sites had estimated 

cleanup costs of $50 million or more. In total, the 63 sites were estimated to 

cost up to $7.8 billion to clean up, $2.4 billion of which is expected to be 

borne by taxpayers rather than the parties responsible for the 

66In October 1980, RCRA was amended by adding section 3001(b)(3)(A)(ii), known as the 

Bevill amendment, to exclude, among other things, "solid waste from the extraction, 

beneficiation, and processing of ores and minerals" from regulation as hazardous waste 

under Subtitle C of RCRA. This exclusion applied pending completion of a study and a 

report to Congress, and pending a determination by the EPA Administrator either to 

promulgate regulations under Subtitle C or to declare such regulations unwarranted. Since 

completing the required report, EPA has concluded that twenty mineral processing wastes 

qualify for the Bevill exclusion as "low toxicity, high volume wastes." Other mineral 

processing wastes are regulated under Subtitle C of RCRA, provided they meet the 

definition of hazardous waste. 

67Our report Hardrock Mining: BLM Needs to Better Manage Financial Assurances to 

Guarantee Coverage of Reclamation Costs, GAO-05-377 (Washington, D.C.: June 20, 2005) 

recommends ways for BLM to better manage financial assurances it requires of operators to 

guarantee reclamation costs if they fail to reclaim BLM-managed lands after operations 

cease.

68Most states with significant hardrock mining have established their own statutory 

programs and regulate mine activities through mine permits. However, EPA’s Inspector 

General has reported that some state statutes and regulations do not provide for adequate 

financial assurances for hardrock mines. EPA, Office of Inspector General, EPA Can Do 

More to Minimize Hardrock Mining Liabilities, E1DMF6-08-0016-7100223 (1997).

69EPA, Office of Inspector General, Nationwide Identification of Hardrock Mining Sites, 

2004-P-00005 (Washington, D.C.: Mar. 31, 2004). The report noted that its inventory may be 

understated because, among other things, it did not include sites where it was too early in 

the evaluation process to determine whether the sites had the potential to cost the 

Superfund trust fund $1 million or more. 
Page 37 GAO-05-658 Environmental Liabilities

contamination. The EPA Inspector General reported that at least one 

“clearly viable” party has been identified for 70 percent of the 63 NPL 

mining sites (including 11 percent where the viable party was a federal 

agency, such as the Department of the Interior). However, the report also 

emphasized that EPA should be concerned about the viability of these 

parties over time because of the long-term nature of the cleanup liabilities 

at mines. For example, the report states that the projected operation and 

maintenance period for the cleanup remedy ranges from 40 years to “in 

perpetuity.” The costs to taxpayers would increase if the liable parties 

expected to pay for the cleanup remedies proved to be unable to do so.70

Some mine owners have defaulted on environmental liabilities associated 

with their mines on multiple occasions, and the cleanup costs for these 

sites are being or are expected to be borne largely by taxpayers. These 

owners may reasonably be viewed as at high risk for defaulting on 

environmental obligations associated with mines or businesses that they 

currently own. For example, one individual is associated with several 

businesses that have filed for bankruptcy protection.71 Like other mine 

owners with serial bankruptcies involving contaminated mining sites, this 

owner continues to operate businesses with significant contamination that 

need to be cleaned up, potentially via the Superfund. If EPA developed and 

implemented the financial assurance regulations that the Superfund law 

requires, EPA could require such owners to provide financial assurances 

now for existing and future cleanups, thereby reducing the amount that 

taxpayers would otherwise likely be required to pay. 

A Superfund site in Delaware provides an example of the exposure of the 

federal treasury to enormous cleanup costs associated with industries not 

currently required to provide EPA with financial assurances because, as 

generators of hazardous waste, they were not covered by RCRA’s financial 

assurance requirements. In the 1980s, when this facility was owned by 

70In addition, taxpayers may also pay for the cleanups to the extent that EPA settles with 

liable parties for less than the full cost of the cleanups. According to EPA, the agency often 

settles for less than the full cleanup cost as a result of equitable factors.

71In one case, the company (MagCorp) filed for Chapter 11 bankruptcy protection 7 months 

after the Justice Department initiated a lawsuit on behalf of EPA for fines of approximately 

$900 million for toxic waste violations. The bankruptcy court permitted the owner to sell 

MagCorp’s assets to a new company (US Magnesium) controlled by the same owner, and the 

bankruptcy case was subsequently converted to a Chapter 7 liquidation with essentially no 

assets available to pay creditors. This sale may substantially impede government efforts to 

collect the penalties.
Page 38 GAO-05-658 Environmental Liabilities

Standard Chlorine Corporation, it experienced two major chemical 

releases—including a 569,000-gallon release of hazardous chemicals that 

contaminated soil, sediment, a groundwater aquifer, and nearby surface 

water. Because the facility did not treat or dispose of hazardous waste, and 

did not store waste for more than 90 days, however, Standard Chlorine did 

not have to provide financial assurance under RCRA for the cleanups.72 In 

1987, EPA added the site to the Superfund NPL because of the extensive 

contamination. Subsequently a limited liability business, Charter Oak 

Capital Partners LP, established a subsidiary corporation called Metachem 

Products, which acquired substantially all of Standard Chlorine’s assets 

including the facility in 1998, and Metachem accordingly became liable for 

the Superfund cleanup. However, in May 2002, Metachem declared 

bankruptcy and abandoned the chlorinated benzene manufacturing facility. 

EPA estimates that it has incurred about $28 million in cleanup costs to 

date at this site and that the total cleanup cost will eventually rise to $100 

million. 

Despite the clear benefits that EPA could derive from implementing 

financial assurance requirements under the Superfund statute, over the 

past 25 years, EPA has made only sporadic efforts to do so. For example, 

EPA took some steps early on to identify high-priority classes of facilities 

but did not complete this effort, although the statute included a December 

1983 deadline for this task (see app. II for more detail). In 1983, the 

Director of EPA’s Office of Solid Waste stated that resources were 

insufficient to develop and implement the Superfund financial assurance 

requirements. But EPA never asked the Congress to provide additional 

funds for this purpose. 

In 1987, we recommended that EPA set milestones leading to the timely 

implementation of Superfund financial assurance regulations, but EPA did 

not implement this recommendation.73 More recently, an April 2004 internal 

review of EPA’s Superfund program recommended that the Office of Solid 

Waste and Emergency Response study whether promulgating new 

72As noted above, a generator may generally accumulate hazardous waste on site for 90 days 

or less provided that, among other things, the waste is placed in containers, tanks, 

containment buildings, or on drip pads in compliance with applicable EPA regulations. 

Generators of hazardous waste are also required to comply with certain RCRA requirements 

intended to ensure the safe management of hazardous wastes. 

73GAO, Hazardous Waste: Issues Surrounding Insurance Availability, GAO/RCED-88-2

(Washington, D.C.: Oct. 16, 1987).
Page 39 GAO-05-658 Environmental Liabilities

regulations under the broad financial assurance authorities contained in 

the Superfund law could reduce future Superfund liabilities with respect to 

facilities not covered under RCRA financial assurance requirements. In 

response to this recommendation, EPA created a work group that is 

collecting and evaluating information on the industries and types of 

facilities that have been listed on the Superfund program’s National 

Priorities List (NPL).74

While this study should provide useful and relevant information to EPA—in 

particular on gaps in the coverage of RCRA’s corrective action program—

we believe that the issue for implementing the financial assurance 

requirement under the Superfund law is broader than the question of which 

industries have sites that have been listed on the NPL. That is, the key issue 

is identifying industries at high risk for environmental contamination. EPA 

and the states have a wealth of information from both existing studies and 

from the knowledge base of EPA’s and states’ enforcement staff across the 

country. For example, EPA’s 2002 study on the almost 900 RCRA facilities 

undergoing cleanup measures under the corrective action program 

provides relevant information on industries at risk for environmental 

contamination and on the costs of those cleanups. 

EPA Does Not Effectively 

Manage Its Existing 

Portfolio of Financial 

Assurances for Cleanups

In addition to not establishing the financial assurance requirements called 

for in the Superfund law, EPA is not ensuring that the benefits that could be 

derived from its existing financial assurance requirements for Superfund 

and RCRA corrective action cleanups are realized. Specifically, in 

negotiating compliance orders and settlements for these cleanups, EPA 

generally accedes to the financial assurance mechanism the liable party 

suggests without routinely determining the risk of the proposed 

mechanism in light of such factors as the strengths and limitations of the 

various mechanisms, the financial histories of liable parties, any existing 

agreements that have reduced the amounts businesses are required to pay 

for cleanups on the basis of ability-to-pay analyses, and the estimated total 

environmental liability of individual parties. In addition, EPA has increased 

the financial risk to the government by not providing adequate oversight 

and enforcement to ensure that the parties responsible for Superfund and 

RCRA cleanups obtain and maintain the required financial assurances. EPA 

74The NPL is EPA’s list of seriously contaminated sites, and placement on this list is limited, 

in part, by funding for the program. Thousands of contaminated sites exist that are not on 

the list or subject to RCRA’s corrective action program.
Page 40 GAO-05-658 Environmental Liabilities

has acknowledged that its enforcement of financial assurances has been 

inadequate and has initiated some actions to address this problem. 

EPA Allows Companies to 

Choose among Financial 

Assurance Mechanisms That 

Carry Varying Degrees of 

Financial Risk to the 

Government, Rather Than Taking 

into Account Information on the 

Extent of Default Risk That 

Companies May Pose

EPA has generally given companies significant flexibility to choose the type 

of financial assurance mechanism they will use to demonstrate their ability 

to meet their obligations under the RCRA corrective action and Superfund 

programs. While the closure/post-closure program has regulations 

governing financial assurances, the corrective action and Superfund 

programs do not. EPA generally accepts the same financial assurance 

mechanisms in the Superfund and RCRA corrective action programs as are 

outlined in the RCRA closure/post-closure regulations. Under the 

closure/post-closure regulations EPA must generally accept the financial 

assurance mechanism chosen by the party, so long as the party meets the 

relevant regulatory requirements for that mechanism. The financial 

assurance mechanisms EPA generally accepts in all three programs are 

outlined in table 1. 

Table 1: Financial Assurance Mechanisms Generally Accepted by EPA 

Source: EPA closure and post-closure regulations.

a

To be approved, a surety company must be listed on U.S. Department of the Treasury’s Circular 570.

Mechanism Description 

Corporate financial test A company may demonstrate its ability to meet its obligations by passing one of two financial tests, one 

of which evaluates certain financial ratios, and one of which requires a minimum bond rating. Both 

tests require that the company have at least $10 million in tangible net worth and demonstrate that this 

tangible net worth is equal to at least 6 times the sum of the current estimates of the cleanup, 

closure/post-closure, or other costs for which the company is using the financial test as its financial 

assurance. Use of the corporate financial test is also called self-insurance.

Corporate guarantee A company may demonstrate its ability to meet its obligations by obtaining a written guarantee from an 

affiliated entity, such as a parent corporation. For EPA to accept this guarantee, the affiliated entity 

must meet one of the two corporate financial tests described above. 

Insurance Ability to meet obligations may be demonstrated by an insurance policy covering the estimated cost of 

these obligations. 

Letter of credit To demonstrate its ability to meet its obligations, a company may provide an irrevocable standby letter 

of credit issued by a financial institution guaranteeing payment of the obligations up to a specified 

amount. 

Surety bond A company may obtain a bond from an approved surety companya

 guaranteeing that its obligations will 

be met. 

Trust fund A company may establish a trust fund with a financial institution to demonstrate its ability to meet its 

obligations. The release of funds from the trust fund may be directed only by EPA or other regulator. 
Page 41 GAO-05-658 Environmental Liabilities

Financial assurance mechanisms vary in 

• the financial risks they pose to the government—and thus to taxpayers 

who may ultimately have to pay for environmental cleanups if the 

responsible parties default on their obligations; 

• the oversight and enforcement challenges they pose to the regulators, 

such as EPA, who are responsible for enforcing them; and 

• the costs companies may incur to obtain them. 

For example, as shown in table 2, while the costs to companies of the 

corporate financial test and the corporate guarantee mechanisms are low 

compared with other forms of financial assurance, the relative financial 

risk to the government and the amount of oversight needed are relatively 

high. In contrast, letters of credit present comparatively low financial risk 

to the government and need less oversight but impose relatively high costs 

on companies. In essence, as the table shows, those financial assurance 

mechanisms that impose the lowest costs on the companies using them 

also typically pose the highest financial risks to the government entity 

accepting them. We note that EPA continues to allow financial assurances 

that are simply promises to pay—the corporate financial test and the 

corporate guarantee—even though its 2003 guidance on financial 

assurance for the RCRA corrective action program underscores the 

importance of having resources set aside “in the event a company hits a 

financial decline.”
Page 42 GAO-05-658 Environmental Liabilities

Table 2: Relative Financial Risk, Necessary Oversight and Enforcement Effort, and Costs of Financial Assurance Mechanisms

Mechanism

Relative financial risk to the 

government

Oversight and enforcement effort 

needed Cost to the company 

Corporate 

financial test

High

If a company that passed the test later 

files for bankruptcy or becomes 

insolvent, the company in essence is 

no longer providing financial 

assurance because it may no longer 

have the financial capacity to meet its 

obligations. Such financial 

deterioration can occur quickly. While 

companies no longer meeting the 

financial test are to obtain other 

financial assurance, they may not be 

able to obtain or afford to purchase it.

High

The test requires regulators to have 

expertise in financial analysis and 

monitor companies’ financial 

condition. For example, the 

regulator is expected to review 

companies’ annual financial 

submissions showing that they 

continue to pass the test. 

Regulators should also monitor the 

business press for adverse news 

about the company, indicating that it 

may no longer pass the test. 

Low

The corporate financial test and the 

corporate guarantee (discussed below) 

are the lowest-cost options for 

companies because they do not have to 

set aside funds for future payments or 

pay fees or premiums to third parties, 

such as banks.

Corporate 

guarantee

High

Same issues as with the corporate 

financial test.

High

Same issues as with the corporate 

financial test.

Low

See discussion concerning the corporate 

financial test.

Insurance Varies

Several factors affect financial risk. 

For example, “captive” insurance 

companies—those not independent of 

the liable business—can pose greater 

risk than independent insurance 

providers. Also, if there is conflicting 

language between an insurance 

policy and EPA’s regulatory 

requirements, recovery on the policy 

may be delayed.

Moderate

However, extent of oversight 

needed can vary based on the type 

of insurance. Captive insurance, in 

particular, poses many of the same 

challenges as the corporate 

financial test and corporate 

guarantee (see above) because the 

captive insurer is not a true thirdparty provider of assurance. Even 

with an independent insurance 

provider, however, significant 

oversight is needed. 

Moderate

However, cost can vary based on the 

type of insurance. For example, captive 

insurance can pose lower costs than 

insurance from an independent provider. 

Also, many independent providers are 

underwriting environmental insurance 

using finite or fully funded policies—

which limit their risk. Such policies 

resemble trust funds and, like trusts, 

present higher costs to the company than 

do conventional insurance policies. 

Letter of credit Low

Financial institutions issuing letters of 

credit are required to pay the amounts 

specified if EPA requests such 

payments within the periods of time 

specified in the letters.

Low

Requires periodic monitoring to 

verify that the letter of credit 

remains in force and is maintained 

in a secure place and that the 

financial institution issuing the letter 

of credit is still viable. 

High

Companies typically pay fees to obtain 

letters of credit and may be required to 

set aside substantial collateral. Fees may 

be up to 1 percent of the amount 

guaranteed, depending on the 

company’s creditworthiness, according to 

EPA.
Page 43 GAO-05-658 Environmental Liabilities

Source: GAO analysis. 

a

In some cases, EPA allows performance bonds to be used; the surety guarantees that it will either 

perform the required work or will pay out the amount specified in the bond upon receiving notification 

from the regulator that the company for which the surety has provided a performance bond has failed 

to carry out its obligations.

The mechanisms that pose the greatest financial risk to the government—

the corporate financial test, the corporate guarantee, and some insurance 

products—also require specialized expertise to oversee. Concerns have 

been raised, both within EPA and by others, that the corporate financial 

test and the corporate guarantee offer EPA minimal long-term assurance 

that the company with environmental liability will be able to fulfill its 

financial obligations. In 2000, the Department of the Interior’s Bureau of 

Land Management (BLM) identified similar concerns when it decided to 

prohibit new corporate guarantees for future reclamation work to restore 

lands when mining operations cease. In making this decision, BLM cited 

both the agency’s lack of expertise to perform the periodic reviews of 

companies’ assets, liabilities, and net worth that would be necessary to 

oversee guarantees and the fact that even with annual reviews by skilled 

staff, a default risk would remain.75

Further, some concerns about the financial test, such as the following, stem 

from limitations inherent in relying on financial indicators rather than 

secured guarantees: 

Surety 

Bond

Low to moderate

Surety companies are required to pay 

the amounts specified in the bonds 

upon receipt of demand letters by the 

regulator.a

Low to moderate

Periodic monitoring is required to 

verify that the bond remains in force 

and that the surety company is still 

approved. 

Moderate to high

Companies pay annual premiums to 

surety companies and generally are 

required to provide substantial cash 

collateral. 

Trust fund Low

There is a risk that the trust may not 

be fully funded if the company is 

allowed the flexibility of paying over 

time.

Low to moderate

Periodic monitoring is required to 

ensure, among other things, that the 

financial institution has the authority 

to act as trustee. 

High 

The company must set aside funds into 

the trust to cover its anticipated 

obligations. In addition, the company 

usually pays a fee for the administrative 

services provided by the trustee. 

(Continued From Previous Page)

Mechanism

Relative financial risk to the 

government

Oversight and enforcement effort 

needed Cost to the company 

75See GAO, Hardrock Mining: BLM Needs to Better Manage Financial Assurances to 

Guarantee Coverage of Reclamation Costs, GAO-05-377 (Washington, D.C.: June 20, 2005) 

for examples of BLM’s inability to collect funds for reclamation when operators of hardrock 

mines using corporate guarantees filed for bankruptcy.
Page 44 GAO-05-658 Environmental Liabilities

• The corporate financial test rests on the assumption that a company’s 

recent financial performance is a reasonable predictor of its financial 

future. However, the financial test cannot anticipate sudden changes in 

market conditions or other factors that can dramatically change a 

company’s financial picture—and a company’s ability to meet its 

environmental obligations. 

• Once a company’s financial condition declines to the point that the 

company can no longer pass the financial test, it can be very difficult for 

the company to meet the requirements, or pay the costs, of obtaining an 

alternative form of financial assurance from a third-party provider. 

• The financial test is only as sound as the data used to calculate the 

financial ratios underpinning the test—if a company’s accounting of its 

net assets or liabilities is questionable, or the quality of its assets is 

weak, one or more of the ratios may not represent the company’s true 

financial condition. EPA officials noted that the passage of the SarbanesOxley Act of 2002, with its requirements aimed at improving the 

accuracy and reliability of corporate disclosures, may have reduced 

some of these data-related concerns about the financial test, at least for 

publicly held companies. 

In addition to these limitations, weaknesses in the financial test itself are 

actively under discussion. For example, EPA’s Environmental Financial 

Advisory Board, a federal advisory committee that provides advice and 

recommendations to EPA on environmental finance issues, has been 

charged by EPA with reviewing financial assurance mechanisms. In March 

2005, the project work group leading this review submitted to the full board 

for consideration the first draft of a proposed letter to the EPA 

Administrator commenting on the financial test. In this draft letter, the 

work group stated that the current test is “an inadequate mechanism for 

determining financial capacity.” The draft letter also stated that while the 

EPA financial test is transparent and objective, the test is not sufficiently 

comprehensive in what it assesses, does not examine and incorporate 

historical trends, and is not sufficiently rigorous to protect against 

manipulation. The membership of the full board is reviewing the draft 

letter, and the board has received substantive comments on the draft letter 

from outside parties. The work group is reviewing comments on the draft 

letter and expects to develop a revised draft letter for full board review and 

approval outlining the board’s findings and recommendations concerning 

the financial test. 
Page 45 GAO-05-658 Environmental Liabilities

Another concern about the financial test relates to the threshold a company 

must meet to qualify for the test—a company must have at least $10 million 

in tangible net worth. EPA has not adjusted the standard since 1982 when 

the RCRA financial assurance regulations were implemented.76 The 

Environmental Financial Advisory Board subcommittee noted that the $10 

million threshold may be inadequate and should either be recalibrated or 

have standards of proportionality. We believe that the $10 million standard 

is likely to no longer be appropriate given, for example, the rate of inflation 

since 1982.

In addition, the financial test requires that EPA and state regulators have 

the financial skills to assess whether a company’s representation of its 

financial condition is reasonable. An EPA regional enforcement official 

said that the assessment of whether a company meets the financial test can 

be particularly difficult given that companies have an incentive to pass the 

test—therefore, companies may try to paint their financial position as 

“rosier” than it actually is to avoid having to pay for higher-cost financial 

assurance. (As recent court cases, such as those involving Enron and 

Worldcom, have shown, serious misstatements of financial position aimed 

at demonstrating strong financial position may occur for a number of other 

reasons as well—for example, to protect or improve the value of the 

corporate stock.) Because EPA and state staff who oversee the 

implementation of these mechanisms may not have sufficient expertise to 

provide the desired level of financial analysis, the Environmental Financial 

Advisory Board’s March 2005 draft letter to the EPA Administrator noted 

that the financial test may be better served if companies retained credit 

services to provide independent financial analysis.

Moreover, in a March 2001 report, EPA’s Inspector General identified other 

factors that complicate overseeing the financial test.77 In this report, 

officials cited difficulties in predicting companies’ long-term financial 

viability. For example, in reviewing the financial assurances of a sample of 

hazardous waste facilities required to have financial assurances, the 

Inspector General found that some facilities that had established financial 

assurance through the corporate financial test no longer met the 

requirements of the test a year later. Other difficulties officials cited in 

76EPA last evaluated the net worth requirement in 1991. 56 Fed. Reg. 30201.

77EPA, Office of Inspector General, RCRA Financial Assurance for Closure and PostClosure, 2001-P-007 (Washington, D.C.: Mar. 30, 2001).
Page 46 GAO-05-658 Environmental Liabilities

overseeing the financial test included evaluating data from companies that 

have hazardous waste facilities in many states and factoring in the impact 

of mergers and acquisitions, among other things. 

In a 2003 paper summarizing its review of RCRA financial assurances, the 

Association of State and Territorial Solid Waste Management Officials78

reported that waste and remediation managers from various states believe 

that EPA should reconsider the financial test and corporate guarantee as 

financial assurance mechanisms due to the financial meltdown of Enron 

and many other publicized financial scandals of Fortune 500 companies 

with audited financial statements.79 The paper states that EPA’s position is 

that eliminating these financial assurances could add substantially to the 

cost of the financial assurance regulations.80 

As table 2 shows, the corporate financial test and the corporate guarantee 

are the least costly financial assurances for companies to use, so 

eliminating them would increase compliance costs. At the same time, these 

two financial assurance mechanisms are the most costly for the 

government because of the high oversight costs associated with them, as 

discussed above, and because the government, rather than the companies, 

is carrying the default risk. 

In addition to the risks posed by the use of the corporate financial test and 

the corporate guarantee, the use of insurance polices as financial 

assurance has typically presented higher financial risk to the government 

than letters of credit, surety bonds, and trust funds. For example, concerns 

have been raised about the increased use of policies written by “captive” 

insurance companies—that is, by wholly-owned subsidiaries controlled by 

parent companies and established to insure the parent companies or other 

subsidiaries. 

78The Association of State and Territorial Solid Waste Management Officials is an 

organization that supports state environmental agencies and trust territories by focusing on 

their solid and hazardous waste programs, Superfund and state cleanup programs, 

underground storage tank programs, and other programs.

79Association of State and Territorial Solid Waste Management Officials (ASTSWMO), 

Financial Assurance Review Paper (Washington, D.C.: April 21, 2003).

80CERCLA and RCRA both specifically authorize self-insurance as a form of financial 

assurance. 42 U.S.C. § 9608(b)(1); 42 U.S.C. § 6924(t)(1). However, both statutory provisions 

give EPA broad discretion in determining the circumstances under which the agency 

accepts self-insurance. Moreover, neither provision specifically applies to financial 

assurances included in corrective action orders issued under RCRA.
Page 47 GAO-05-658 Environmental Liabilities

In 2001, for example, EPA’s Office of Inspector General found that financial 

assurance provided by a “captive” company did not provide adequate 

assurance of funding for closure and post-closure activities at hazardous 

waste facilities.81 EPA acknowledges that the financial health and solvency 

of a captive insurance company may be closely connected to the financial 

condition of the company with environmental liabilities, and therefore, if 

the company faces financial difficulties, the insurer may also be in financial 

distress and not be able to cover claims made on its policies. 

The Congress has also raised questions about the use of insurance as 

financial assurance at solid waste landfills, which have a separate set of 

financial assurance regulations.82 A June 2000 House committee report 

directed EPA to conduct a study of financial assurance agreements at solid 

waste landfills to determine if sufficient safeguards have been properly 

maintained and future liabilities minimized. According to the EPA official 

responsible for preparing this report, the concerns that led to this mandate 

dealt largely with captive insurance. EPA’s draft report in response to the 

mandate was being reviewed within the agency as of June 2005; no 

expected issuance date has been announced yet. Because the report is still 

in draft form, EPA officials were not willing to discuss its findings or 

potential recommendations. 

Moreover, independent of issues associated with captive insurance 

policies, insurance policies covering corrective action or Superfund 

cleanups can require significant oversight on the part of regulators. For 

example, since insurance policies may contain exclusions that limit their 

coverage, the regulator must carefully review a policy being used as 

financial assurance to verify that it fully covers the anticipated 

environmental claims. Also, the regulator must remain aware of the 

insurer’s status—under current EPA requirements, the insurer is not 

required to inform the regulator if its license to operate is revoked or it 

becomes insolvent. In addition, EPA officials noted that insurers will 

sometimes include language in the policy that conflicts with EPA’s 

81See footnote 77.

8240 C.F.R. Part 258, Subpart G.
Page 48 GAO-05-658 Environmental Liabilities

regulatory requirements, which may delay recovery on the policy.83 The 

Association of State and Territorial Solid Waste Management Officials has 

voiced concerns about the level of oversight required of insurance as 

financial assurance, and in 2003, recommended that EPA update its 

guidance on financial assurances, particularly its guidance on insurance 

issues, such as how to make claims on policies. 84

In addition to the financial risks to the government resulting from the use 

of certain financial assurance mechanisms, as discussed above, several 

other financial risk factors affecting liable parties’ ability to fulfill their 

cleanup obligations make it all the more important that EPA or state 

regulators, if applicable, ensure that liable parties provide solid financial 

assurances that will be available when needed. These risk factors include 

(1) the financial histories of liable parties, (2) any existing agreements that 

have reduced the amounts businesses are required to pay on the basis of 

ability-to-pay analyses, and (3) the estimated total environmental liability 

of individual parties. When EPA or a state regulator agrees to a liable 

party’s use of a financial assurance mechanism, it would be prudent for the 

agency to consider these factors as well as the risk to the government 

associated with the mechanism itself.

In some cases, EPA or state regulators have encountered individuals or 

companies with track records that indicate that they are unlikely to have 

the financial resources or the willingness to carry out their environmental 

cleanup responsibilities. The histories of these parties may indicate that 

they are at high risk of failing to comply with future requirements, such as 

83Under the financial assurance regulations for closure/post-closure, an insurer must submit 

a certificate to EPA providing, among other things, that any provision of the policy that is 

inconsistent with EPA regulations is automatically amended to eliminate any inconsistency. 

40 C.F.R. § 264.151(e). While EPA officials believe this certificate resolves any conflict 

between the regulations and the policy, they acknowledge it may be necessary to litigate the 

issue, leading to a delay in recovery. A recent federal appellate court analyzing an analogous 

issue held that in a conflict between EPA’s financial assurance regulations for underground 

storage tanks and a state statute, EPA’s regulations governed the dispute. In Zurich 

American Insurance v. Whittier Properties, 356 F.3d 1132 (9th Cir. 2004), the court held 

that EPA’s financial assurance regulations governing underground storage tank (UST) 

operators provided for the exclusive remedy of prospective cancellation of a UST insurance 

policy where the operator had obtained the policy fraudulently. The court held that because 

EPA’s regulations provided the exclusive remedy, the insurer could not benefit from a state 

statute authorizing rescission of the policy in the event of fraud, and therefore could not 

avoid paying on the policy. 

84See footnote 79.
Page 49 GAO-05-658 Environmental Liabilities

cleanup requirements under the corrective action program. Parties that 

present such high risks to EPA and state regulators could be required to 

obtain strong financial assurances to ensure that their environmental 

responsibilities are fulfilled. 

Also, large liabilities—which may stem from one or more megasites either 

under Superfund and/or RCRA or from a series of smaller sites—expose 

EPA and taxpayers to significant financial risk, especially if there is only 

one or a few parties liable for the cleanups. In such cases, choosing 

financial assurance mechanisms that provide relatively low financial risk to 

the government—that is, that provide at least some actual funding—is 

particularly important. However, EPA and state staff overseeing financial 

assurances generally do not have information readily available about a 

company’s total environmental liabilities across the United States, nor 

would they typically have access to information about (1) environmental 

obligations a company may have in other countries or (2) the extent to 

which the company may be using the same financial assurance mechanism 

to back up numerous environmental obligations.85 As a result, these 

regulators may, for example, approve the financial test for financial 

assurance at a RCRA site or sites without considering a company’s liability 

for a large Superfund site in another state. 

Finally, for RCRA sites, typically an owner or operator is responsible for 

the cleanup. Similarly, at some Superfund sites, there may be few, even only 

one, liable parties. Along these lines, EPA enforcement officials said that 

strong financial assurances are particularly critical when a site’s cleanup 

costs are large, but the number of liable parties is small. At such sites, 

strong financial assurances are likely to be the only way to avoid having 

taxpayers pay for these cleanups should the liable party experience 

financial reverses, file for bankruptcy, or restructure in a way that leaves 

the party with insufficient assets to pay for the cleanup. 

85EPA officials noted that under the RCRA closure/post-closure program, an owner or 

operator of a RCRA treatment, storage, or disposal facility who uses the financial test or 

corporate guarantee is required to (1) disclose other sites for which it is using the financial 

test and the current closure or post-closure cost estimates for each of these sites and (2) 

provide a list of facilities that are not covered by the financial test submission and the 

current estimated costs of closure and post-closure care for these other facilities. 
Page 50 GAO-05-658 Environmental Liabilities

EPA Has Further Increased the 

Financial Risk to the 

Government by Not Providing 

Adequate Oversight and 

Enforcement of Financial 

Assurance Requirements for 

Cleanups

EPA has conducted limited enforcement of its existing financial assurance 

requirements. As a result, the agency has not ensured that the parties 

responsible for Superfund and RCRA corrective action cleanups obtain and 

maintain the financial assurances they are required to provide to 

demonstrate their ability to meet these environmental obligations. In fact, 

the agency lacks basic information about its portfolio of financial 

assurances. That is, EPA does not have data on the financial assurances 

that businesses are required to have in place for Superfund and RCRA 

cleanups, such as the type of assurance required, the amount of financial 

assurance provided, and whether the financial assurance is still authorized 

or is in force.86

Further, in late 2003, one EPA regional office conducted an assessment of 

financial assurances for Superfund cleanup settlements negotiated in that 

region and found significant noncompliance with financial assurance 

requirements. Specifically, EPA officials found that only 30 percent of the 

liable parties subject to financial assurance requirements in Superfund 

settlements, consent decrees, and EPA cleanup orders were in compliance 

with these requirements. Overall, the responsible parties at 48 percent of 

these sites appeared to be out of compliance with relevant financial 

assurance requirements. In addition, the regional staff reported that 22 

percent of the cases needed additional follow up and review because, 

among other things, EPA could not locate the financial assurance 

documents and thus could not determine whether the liable parties were in 

compliance with the financial assurance requirements. (In some cases, EPA 

had the responsibility for maintaining the financial assurance documents, 

and in others that responsibility had been delegated to state regulators.) 

The staff member leading the assessment reported that locating the original 

financial assurance documents within the region’s records was “painfully 

slow.” 

Moreover, EPA’s key databases for Superfund and RCRA do not contain 

data elements related to financial assurances. In addition, although EPA’s 

regional offices are responsible for ensuring compliance with Superfund 

settlement agreements, including financial assurance requirements, the 

regional offices have generally not tracked information on their portfolios 

of financial assurances supporting settlements for cleanups in their 

86For example, the use of the corporate guarantee is no longer authorized if the company 

providing the guarantee no longer meets EPA’s financial test. Other forms of financial 

assurance, such as bonds and insurance, may lapse for various reasons. 
Page 51 GAO-05-658 Environmental Liabilities

regions. For example, we asked several EPA regional offices to provide 

information on the Superfund settlements negotiated in their offices such 

as (1) the number of settlements backed by financial assurances and (2) the 

number, if any, not in compliance with this requirement. Regional EPA 

officials told us that information was not readily available, and that 

obtaining it would entail going back to each individual settlement 

agreement to identify the financial assurance mechanism, if any, and then 

determining the current status of the financial assurance. The situation 

with financial assurances under the RCRA corrective action program is 

more complex. While EPA has overall responsibility for implementing the 

act, and retains enforcement authority, it has authorized most states to 

administer the corrective action program. As a result, to obtain information 

on these financial assurances, EPA would have to request that the states 

gather this information and provide it to EPA.

Lacking data on the financial assurances that are required, EPA cannot be 

assured that all appropriate financial assurances are in place and available, 

as needed. In addition, the data limitations preclude EPA and state officials 

from conducting other analyses and enforcement-related tasks, such as 

determining whether the financial assurances that a company provides will 

be adequate given the company’s cleanup liability across the nation and 

analyzing the effectiveness of the various types of financial assurance in 

providing funding for cleanups. 

Enforcement officials both at EPA headquarters and several regional 

offices acknowledged that the agency has often paid scant attention to 

oversight and enforcement of financial assurance requirements in cleanup 

settlements and cleanup orders. According to EPA officials, the agency’s 

focus in the Superfund program has been on the environmental issues 

associated with cleanups, such as ensuring that appropriate cleanup 

remedies are chosen and that the liable parties begin the agreed-upon 

cleanup work. Consequently, when EPA negotiates and enforces cleanup 

settlements, enforcing financial assurance requirements, including 

reviewing complex financial data about responsible parties, typically takes 

a back seat to environmental concerns. According to one regional attorney, 

there are a number of important issues to resolve in negotiating 

settlements, and ensuring that a strong financial assurance mechanism is in 

place often becomes a “B list” issue during negotiations. Moreover, one 

official noted that EPA tracks whether its regional enforcement officials 

reach a settlement with liable parties as a key measure of enforcement 

activity—but there is no such results-oriented measure concerning 

enforcement of financial assurances. In addition, the existing model 
Page 52 GAO-05-658 Environmental Liabilities

language for Superfund settlements does not require that the financial 

assurance be obtained by the time the settlement is signed. Rather, the 

party agreeing to the settlement has 30 days after signing it to obtain 

financial assurance and notify EPA. This arrangement has precluded an 

assessment of the assurance before the settlement is signed. 

Once a Superfund settlement has been signed, enforcement of financial 

assurances—to ensure that they were actually obtained, are sufficient to 

cover anticipated cleanup costs, and remain in force—is likely to remain a 

low priority, according to some EPA enforcement officials. An EPA official 

explained that this enforcement responsibility typically falls to the 

remedial project manager, who has overall responsibility for the site 

cleanup. This remedial project manager’s expertise is typically in 

engineering and environmental cleanup issues, not financial matters such 

as determining whether a liable party’s corporate guarantee provides 

adequate protection against default on the party’s cleanup obligations. 

Moreover, if EPA discovers at some point that the liable party’s financial 

assurance is no longer adequate, EPA is often reluctant to insist that the 

company incur the additional cost of obtaining further financial assurance 

as long as the company is carrying out at least some of the cleanup work, 

according to some enforcement officials. In fact, EPA and Justice 

Department officials have noted that at times they are faced with this 

dilemma: whether to require companies to use some of their limited 

resources to obtain secure financial assurances versus applying those 

funds directly to the cleanups. 

EPA has begun to recognize that its limited enforcement of its financial 

assurance requirements for Superfund and RCRA cleanups, as well as these 

requirements for closure and post-closure activities at hazardous waste 

facilities, is exposing taxpayers to significant risk of having to pay cleanup 

costs at many current and future Superfund sites. As a result, EPA’s 

enforcement office has begun several initiatives concerning financial 

assurances:
Page 53 GAO-05-658 Environmental Liabilities

• EPA has added financial assurances to its national enforcement 

priorities beginning in fiscal year 2006.87

• EPA has taken steps to evaluate the addition of data elements, such as 

the type of financial assurance provided and the name of the company 

providing it, to its key databases for Superfund and RCRA programs. 

EPA estimates that the Superfund database’s revisions will be in place 

by the end of fiscal year 2005. The data elements are expected to be 

added prospectively, that is, EPA would add information about financial 

assurances in new Superfund settlements and consent decrees to the 

database as they are reached, but information about existing financial 

assurances would not likely be added. Because the RCRA database 

additions involve coordinating with states and tribes authorized to 

implement RCRA, they are expected to take longer, and no estimate of 

implementation date has been made.

• EPA has begun efforts to increase the expertise of officials who enforce 

its financial assurance requirements. For example, the agency has 

developed a course on financial assurance mechanisms for officials who 

enforce RCRA financial assurance requirements. 

• In late 2004, EPA made available three cost-estimating tools to help 

regulators estimate the appropriate level of financial assurances needed 

in the RCRA corrective action program. EPA has also begun to fund 

training in the use of cost-estimating software for its staff and state 

agency personnel.

• In response to a recommendation in EPA’s April 2004 internal Superfund 

review, as discussed earlier, EPA has begun a study that, among other 

things, will assess the extent to which facilities that had been required to 

have financial assurances under RCRA’s hazardous waste program have 

become taxpayer-funded Superfund cleanups. Also, EPA’s Office of 

Inspector General initiated a review in late 2004 on the effectiveness of 

RCRA’s financial assurance requirements.

87EPA has financial assurance requirements not only for the programs discussed in this 

report, but also for other areas, such as the Underground Storage Tank Program and the 

Underground Injection Control Program for deep injection wells. In 2003, we reported on 

financial assurances for Class 1 deep injection wells, which are built to contain hazardous 

liquid waste below the lowest underground source of drinking water. See GAO, Deep 

Injection Wells: EPA Needs to Involve Communities Earlier and Ensure That Financial 

Assurance Requirements Are Adequate, GAO-03-761 (Washington, D.C.: June 13, 2003).
Page 54 GAO-05-658 Environmental Liabilities

EPA Could More Fully 

Utilize Other Enforcement 

Authorities, Such as 

Claiming Payments the 

Government Owes to Liable 

Businesses and Filing Liens 

on Superfund Properties

In addition to financial assurances, EPA has other enforcement authorities 

available under certain circumstances to help obtain payments for 

cleanups. For example, EPA may in appropriate circumstances (1) seek, in 

cooperation with the appropriate federal agency, tax refund or other 

administrative offsets, which allow the federal government to redirect 

payments or tax refunds it owes businesses to federal agencies with claims 

against these businesses and (2) file liens on property for which the federal 

government has incurred expenses under the Superfund law. These 

authorities may be used regardless of whether a liable party is in 

bankruptcy. Under the bankruptcy code, offsets and these liens may be 

considered secured claims—that is, those the debtor must pay first—which 

can greatly increase the likelihood that EPA will recover at least some of its 

cleanup costs in bankruptcies. 

EPA May Obtain Tax Refund and 

Other Administrative Offsets to 

Help Pay for Costs of 

Environmental Cleanups

An administrative offset is a procedure allowing a federal agency to obtain 

monies owed to it by a party from payments that the federal government 

owes the same party, such as tax refunds or payments under government 

contracts. EPA officials noted an important advantage of offsets as 

opposed to claims in bankruptcy court: to the extent that the offsetting 

amount will cover the dollar amount of EPA’s claim, the claim will be paid 

in “full dollars.” In contrast, claims in bankruptcy court, as previously 

discussed, may result in a payment of only pennies on the dollar amount of 

the claim. According to EPA and Justice Department enforcement officials, 

the agency has obtained tax refund offsets in several bankruptcy cases and 

other administrative offsets in two cases in the past few years. EPA 

officials noted one such example: in July 2004, after United Airlines filed 

for bankruptcy protection, EPA reached a settlement with the company on 

its environmental liabilities that included a provision to recover $550,000 

through an offset of a federal tax refund. 

EPA officials also described an instance in which they had not been 

successful in obtaining an offset. Officials in EPA’s Philadelphia office told 

us of their failed attempt to obtain an offset from Exide Technologies when 

it filed for bankruptcy reorganization in 2002. One of these officials 

estimated that the company had an environmental liability of about $80 

million from more than 100 contaminated sites. EPA officials believed the 

company had significant government contracts and tried to identify those 

contracts and the amount the government owed the company at that time. 

However, these officials said they were unable to obtain this information in 

time—that is, before the government paid Exide. (Under the Prompt 

Payment Act, an agency acquiring property or services from a business 
Page 55 GAO-05-658 Environmental Liabilities

concern must make payments by the required payment dates or pay an 

interest penalty to the business on the amount due, and thus information 

on pending government payments must be gathered quickly.) To gain the 

benefit of administrative offsets to help recover some cleanup costs, EPA 

would need to quickly identify government payments owed to bankrupt or 

financially distressed companies with environmental liabilities and process 

its offset claim before the government paid the contractor or vendor.88

To date, EPA has provided little guidance to its enforcement staff on how to 

use its offset authority in recovering cleanup costs. For example, EPA’s 

guidance for participating in bankruptcy cases mentions offsets but does 

not provide any instruction on the necessary steps in obtaining an offset, 

such as coordination that may be needed with the Internal Revenue Service 

for a tax refund offset. Similarly, in training sessions on bankruptcy issues 

for EPA attorneys that we observed in 2004, EPA and Justice Department 

bankruptcy experts encouraged the use of offsets, but did not include any 

specific information on how to obtain offsets or refer participants to any 

guidance on doing so. Particularly given the time-critical nature of any 

attempt to obtain offsets, procedures and guidance to staff to facilitate the 

use of offsets would both encourage staff to use these tools, when 

appropriate, and support their efforts to do so. For example, guidance to 

EPA staff on how to quickly obtain information on government contracts or 

grants may have helped them identify potential offsets for some 

environmental liabilities associated with bankruptcies. In addition, an 

agencywide process for identifying tax payments due to businesses would 

enable the agency to routinely identify whether businesses filing for 

bankruptcy that have environmental liabilities are owed any tax refunds.

88Although in some cases, EPA could miss out on opportunities for recoveries because 

certain payments had already been made, for ongoing relationships with contractors, 

grantees, or vendors, the offset authority could be used against future payments to these 

entities.
Page 56 GAO-05-658 Environmental Liabilities

EPA’s Authority to File Liens on 

Superfund Properties Can Help 

the Agency Recover Costs 

Associated with Environmental 

Cleanups 

Under the Superfund law, EPA has a lien, or legal claim, on property if the 

government has incurred costs associated with cleanup at the property.89

According to a relevant House committee report, one purpose of the lien 

was to prevent the unjust enrichment of the responsible party, who might 

otherwise benefit from the rise in property value resulting from the 

property’s cleanup. According to EPA, liens can provide the agency with 

leverage in obtaining cleanup costs generally, and can also assist the 

agency in obtaining cleanup funds under bankruptcy proceedings because 

liens are classified as secured claims—the highest priority category for 

receiving payments from a debtor in a bankruptcy. Thus, a lien can greatly 

increase the likelihood that EPA will recover at least some of its cleanup 

costs in bankruptcy cases. 

However, to establish the priority of a property lien under the Superfund 

program among other secured parties and creditors, EPA must file notice 

of the lien (sometimes called “perfecting a lien”) in the appropriate 

governmental office in the state where the property is located.90

Importantly, the automatic stay provision under bankruptcy law generally 

prohibits filing or enforcing a lien after a debtor has filed for bankruptcy. In 

addition, the priority of property liens is typically based on their filing 

dates. Thus, it is to EPA’s advantage to file Superfund liens as soon as 

possible to secure EPA’s financial interest in them and to receive as high 

priority for that interest as possible. An example of the benefit liens can 

provide is a bankruptcy case cited by EPA in which the agency recovered 

$10 million in satisfaction of its property lien. (The property was sold for 

$24 million at an auction conducted by the bankruptcy court.) If, however, 

EPA does not routinely consider and analyze the use of liens at Superfund 

sites to protect the government’s financial interest where cost 

89Section 107(l) of the Superfund law establishes a federal lien in favor of the United States 

upon property which is subject to or affected by a removal or remedial action. The lien 

applies to all property upon which the response action has been taken, not just the portion 

affected by the cleanup activities, and applies to all future costs incurred at the site.

90EPA’s lien guidance advises regional officials, who are responsible for filing such notices, 

to consider filing notice of a lien whenever applicable, and, in making such decisions, to 

take into account such considerations as whether the property’s value will significantly 

increase as a result of the cleanup work and whether there is a likelihood that the owner 

will file for bankruptcy. EPA Memorandum: Guidance on Federal Superfund Liens, 

September 22, 1987.
Page 57 GAO-05-658 Environmental Liabilities

reimbursement may otherwise be difficult or impossible, the agency can 

miss opportunities to have status as a secured creditor in bankruptcy 

cases.91

In addition, having Superfund liens can also help EPA negotiate settlements 

with liable parties at Superfund sites, according to EPA. For example, 

according to EPA, the liens cover the entire property for which Superfundrelated costs have been incurred, not just contaminated areas—and owners 

of some properties may wish to sell “clean” portions of their properties. 

Such owners would have an incentive to have the lien released, which 

would happen only if they conducted the cleanup or reimbursed EPA for 

cleanup costs. In fact, EPA has identified instances in which even the threat 

of filing a lien has produced agreements for payments with uncooperative 

parties. With filed liens, the agency may also become aware of assets 

businesses may wish to sell to affiliated parties, and which EPA could 

challenge under fraudulent transfer laws, because such transactions would 

need to be approved by the agency. 

Since the lien provision was added to the Superfund law in 1986, EPA has 

issued guidance to it staff on filing liens and has encouraged staff to do so. 

For example, in 2002, EPA’s Director of the Office of Site Remediation 

Enforcement issued a memorandum encouraging the filing of liens to 

secure response costs in Superfund cases. Also, in training sessions on 

bankruptcy issues for EPA enforcement attorneys, such as those we 

observed in 2004, EPA and Justice Department experts in bankruptcy 

encouraged these attorneys to file Superfund liens whenever possible. 

However, we found that EPA headquarters does not require that its regions 

report information to them on liens they have filed, and that overall the 

agency has little centralized information on such liens. For example, 

although the principal database used to manage the Superfund program 

contains data fields for such liens, an EPA official with expertise in this 

database said that the agency has little confidence in the completeness or 

accuracy of these fields. Also, the lien-related fields were added in the late 

1990s, so liens filed before that time are not likely to be included in the 

national database. Thus, it is not clear whether EPA has made good use of 

its authority to file Superfund liens. 

91We recognize that there is a transaction cost in filing Superfund liens and that this cost 

should be balanced against the prospect of more certain cost recovery for the government. 

In some cases, a lien may provide no potential cost recovery to EPA because the land has 

little or no value.
Page 58 GAO-05-658 Environmental Liabilities

In addition, it is not clear that the agency is consistently and timely aware 

of EPA property liens that it should pursue in bankruptcy cases. For 

example, EPA officials indicated that the agency generally relies on its 

enforcement attorneys to have knowledge of its Superfund liens at sites for 

which the attorneys have enforcement responsibility. However, the 

reliability of this informal system is questionable in light of such things as 

the often voluminous Superfund files we have observed—a wall of floor-toceiling shelves can be filled with files from just one case—staff changes 

over time, and the need for the relevant staff to be available when the 

notice of bankruptcy is circulated via email. In addition, agency guidance 

on bankruptcy cases does not specifically require staff to routinely 

determine, when reviewing notices of bankruptcy filings, whether EPA has 

filed a lien that could become a secured claim in the bankruptcy 

proceedings. Finally, we note that EPA officials highlighted the fact that 

lien filings are not included in the agency’s performance measures, and that 

greater attention can be expected to be given to those activities that are 

counted, such as reaching Superfund settlements.

Conclusions The need for EPA to fully use its existing authorities to execute the 

“polluter pays” principle underlying the Superfund and RCRA laws is even 

more compelling today than it was during the 1980s and 1990s when 

corporate taxes—largely assessed on businesses at risk for environmental 

pollution—provided about $1 billion a year for Superfund cleanups. Now, 

without revenue from Superfund taxes, the cleanup burden has 

increasingly shifted to the general public—and at a time when large federal 

deficits are likely to constrain EPA’s ability to obtain such funding for these 

cleanups. In addition, over time, businesses have become more 

sophisticated in using the limited liability principle to protect their assets 

by separating them from their liabilities. They use the traditional corporate 

parent/subsidiary structure as well as relatively new business forms—

limited liability companies and partnerships—often in complex, 

multilayered organizational structures. The result is that businesses of all 

sizes can easily limit the amounts they may be required to pay for 

environmental cleanups under Superfund and RCRA. Compounding the 

problem, from EPA’s perspective, is the long-term nature of many of the 

cleanups, which provides businesses with ample time to implement 

complex asset protection plans. Finally, it has become more common and 

acceptable for businesses to use the bankruptcy courts as a reorganization 

tool that enables businesses to emerge with discharged or reduced 

environmental liabilities.
Page 59 GAO-05-658 Environmental Liabilities

Collectively, these factors present serious challenges to EPA in attempting 

to enforce environmental laws and to ensure that polluters pay for 

cleanups. For example, the ease with which companies can protect their 

assets can actually encourage businesses to take more risks in their 

operations, thereby increasing the risks of environmental contamination. 

Importantly, this situation also presents a significant management 

challenge for EPA in determining whether businesses have resources 

available to meet their environmental obligations. These challenges can 

seriously hamper EPA’s ability to achieve its primary mission of protecting 

human health and the environment because they present formidable 

obstacles to obtaining the funding needed for cleanups. That is, it is 

increasingly difficult for EPA to obtain funding to clean up not only existing 

Superfund sites but also those still in the Superfund pipeline. Thus, we 

believe it is imperative for EPA to increase its focus on financial 

management and to fully use its existing authorities to better ensure that 

those businesses that cause pollution also pay to have their contaminated 

sites cleaned up.

In this regard, EPA has not used its authority under the Superfund law to 

require businesses that handle hazardous substances to provide financial 

assurances covering existing and potential cleanups. This statutory 

mandate recognizes that businesses likely to cause environmental 

contamination and endanger public health can reasonably be expected to 

incur a business cost in order to ensure that they will have the financial 

wherewithal to pay for spills and other contamination, whenever they may 

occur, consistent with the degree of risk their operations pose to public 

health and the environment. Under this statutory mandate, EPA is to 

require, as appropriate, financial assurances from businesses to protect 

public health and the environment prospectively. This requirement may be 

viewed as akin to mortgage companies’ requirements that borrowers 

provide homeowners insurance to protect the value of the assets against 

possible damage, except that this requirement is not directed at all 

businesses—it is directed at those at risk for contaminating the 

environment. 

Importantly, using this authority would help to close gaps in EPA’s existing 

financial assurance requirements: it would require some businesses not 

subject to RCRA’s financial assurance coverage, such as producers of 

certain mining wastes that have caused enormous environmental harm, to 

obtain financial assurance because of the environmental problems their 

operations are likely to continue to cause. It would also close the gap that 

exists under RCRA’s financial assurance requirements, which generally 
Page 60 GAO-05-658 Environmental Liabilities

extend to businesses that treat, store, or dispose of hazardous waste, but 

not to businesses that generate hazardous waste, even though they may be 

at high risk for environmental problems, such as chemical spills.

In 1980, when the Superfund financial assurance requirement was enacted 

by the Congress, it required EPA to first identify the classes of facilities 

with the highest risk of harm. This task is much easier today because EPA 

and the states now have 25 years of experience with Superfund and 29 

years with RCRA. We believe EPA can expeditiously implement the 

requirement to identify those industries with the highest risk of 

environmental harm and establish appropriate risk-based financial 

assurance requirements for them. For example, EPA should be able to 

gather relevant information from Superfund and RCRA program data, 

studies, and the many officials involved with these programs over the 

years, among other sources, to identify those industries that pose high 

levels of environmental risk.

Further, to ensure that financial assurances the agency requires under the 

Superfund and RCRA corrective action programs actually provide funding 

for cleanups in the event the liable parties default on their environmental 

obligations, it is critically important that EPA effectively oversee and 

enforce the financial assurances that businesses provide to the agency. The 

fact that EPA currently cannot even readily identify the financial 

assurances that should be in force is a clear indication of inadequate 

oversight and enforcement. As a result, there is an increased risk that 

taxpayers, rather than the parties responsible for the contamination, will 

ultimately have to pay for the cleanups of contaminated sites under 

Superfund and RCRA. Although EPA has begun some efforts to increase its 

oversight and enforcement of financial assurances, the agency will need to 

sustain and increase such efforts if financial assurances are to achieve their 

intended goal of ensuring that responsible parties, not U.S. taxpayers, pay 

to clean up hazardous waste sites. 

Also, we believe that EPA should evaluate the degree of financial risk and 

the oversight costs it is appropriate for the agency to bear. Fundamentally, 

it is a question of whether the industries that pose environmental risk or 

the government charged with protecting the environment should carry the 

financial risk for the contamination that the industries may cause. 

Considering the often very long-term nature of the cleanups—during which 

time it would be reasonable to expect businesses to set aside increased 

resources—as well as the resources and skills necessary to oversee the 

unsecured financial assurances, continuing to, in effect, subsidize 
Page 61 GAO-05-658 Environmental Liabilities

businesses by accepting unsecured assurances may be a luxury the 

government can no longer afford.

More specifically, in its evaluation, EPA should consider the different 

financial risks that the various financial assurances pose to the 

government. This is especially important in light of the problems that we, 

the EPA Inspector General, state regulators, and others have identified, 

particularly with respect to the corporate financial test, corporate 

guarantee, and captive insurance. For example, to effectively oversee some 

of the financial assurances, EPA staff—and state staff handling RCRA 

financial assurances for EPA—must have a high level of expertise in 

financial management and insurance, among other fields. However, EPA 

has not taken into account either the variations in number of staff or levels 

of expertise needed that are associated with overseeing and enforcing the 

various financial assurances. Doing so, however, could provide EPA with 

the opportunity to both minimize the costs the government needs to bear to 

effectively oversee and enforce its financial assurance portfolio and reduce 

the government’s financial risk for environmental cleanups. For example, 

when faced with the trade-off between allocating staffing resources to 

oversee unsecured financial assurances and meeting other agency 

responsibilities, BLM decided to no longer accept corporate guarantees, in 

part because of the oversight challenges they present. In so doing, BLM 

shifted more of the financial risk to the businesses they regulate who have 

to purchase financial assurances from independent third parties, such as 

banks.

In addition to financial assurances, greater use of other enforcement 

authorities, such as offsets and Superfund liens, could help EPA recover 

more costs from parties liable for environmental cleanups in some cases. 

Although offset authorities are limited to situations in which the 

government owes the company a tax refund or some other payment, a 

greater willingness by EPA to use these authorities—and to establish 

procedures and provide direction to staff in how to use these authorities—

could help the government better ensure that parties responsible for 

pollution pay the associated cleanup costs to the maximum extent 

practicable. For example, when liable parties are unwilling to fulfill their 

financial obligations for cleanups, EPA officials should routinely explore 

whether tax offsets may be available. Staff should be provided with policies 

and procedures detailing the steps that need to be taken to use these 

enforcement tools effectively.
Page 62 GAO-05-658 Environmental Liabilities

Finally, companies with environmental liabilities that file for bankruptcy 

present another set of management challenges to EPA. Under its current 

process for identifying and reviewing bankruptcies, the agency cannot be 

confident that companies with EPA liabilities are held responsible for their 

cleanup obligations to the maximum extent practicable because the agency 

cannot ensure that it has identified (1) those bankruptcies for which it 

should request the Justice Department to file claims with the bankruptcy 

courts for cleanup funds and (2) any existing rights the agency has that can 

give its bankruptcy claims a priority status, such as liens on Superfund 

properties, which significantly improves the agency’s chances of 

recovering funds under bankruptcy proceedings. Importantly, EPA also 

needs to review the specific sites identified in bankruptcy proceedings for 

purposes other than filing claims. One such purpose is to help ensure that 

discharges for businesses reorganizing under bankruptcy proceedings are 

not approved for contaminated sites that EPA has not been previously 

aware of. 

To its credit, EPA has established a bankruptcy work group that seeks to 

identify relevant bankruptcy filings to pursue and bankruptcy actions to 

monitor, such as notices to abandon property. However, the process the 

agency uses to identify relevant bankruptcy cases and actions is informal 

and essentially undocumented. As a result, it is not clear whether EPA is 

devoting sufficient time and resources to maximize the cleanup funds it can 

obtain under bankruptcy proceedings and to ensure that businesses are not 

receiving discharges of environmental liabilities inappropriately. We 

believe that EPA should build on the existing informal processes the 

agency is using and formalize and document its process for identifying 

relevant bankruptcy proceedings. In addition, we believe that EPA 

guidance on bankruptcy cases should be revised to emphasize some 

important actions that are not sufficiently addressed in existing guidance, 

such as routinely identifying contaminated sites identified in bankruptcy 

filings about which EPA is not familiar so that the agency can take 

appropriate steps to ensure that courts do not inappropriately discharge 

such environmental liabilities. 

Recommendations for 

Executive Action

To close gaps in financial assurance coverage that expose the government 

to significant financial risk for costly environmental cleanups, the EPA 

Administrator should expeditiously implement the statutory mandate 

under Superfund to develop financial assurance regulations for businesses 

handling hazardous substances, first addressing those businesses EPA 
Page 63 GAO-05-658 Environmental Liabilities

believes pose the highest level of risk of environmental contamination, as 

the statute requires.

In addition, to better ensure that the financial assurances EPA does require 

under the Superfund and RCRA corrective action programs provide 

sufficient funds for cleanups in the event liable parties do not fulfill their 

environmental obligations, EPA should enhance its efforts to manage and 

enforce the financial assurance requirements for Superfund and RCRA 

corrective action cleanups by taking the following actions:

• Evaluate the financial assurances the agency accepts in light of such 

factors as the financial risks EPA faces if liable parties do not meet their 

cleanup obligations; the varying financial risks posed by the individual 

financial assurance mechanisms; the agency’s capacity to effectively 

oversee the various financial assurance mechanisms—in particular, the 

expertise of staff (federal and state) and the number of staff; the 

information gaps the agency faces in overseeing the various financial 

assurances; and the concerns about certain financial assurances, such 

as the corporate financial tests, corporate guarantees, and captive 

insurance, that have been brought to the agency’s attention by state 

regulators, the EPA Inspector General, and others. 

• If EPA continues to accept the corporate financial tests and corporate 

guarantees as financial assurance in these programs, it should revise 

and update its financial tests to address the deficiencies identified by 

the EPA Inspector General and others. 

• Implement changes to Superfund and RCRA databases to support the 

efficient identification of EPA’s portfolio of financial assurances and 

populate these databases with information on all financial assurances 

that liable parties should have in force, developing quality controls to 

ensure data reliability. 

• Develop a strategy to effectively oversee the agency and state portfolios 

of financial assurances to ensure that all required financial assurances 

are in place and sufficient in the event the related businesses encounter 

financial difficulties, including bankruptcy. Such a strategy should 

include ensuring that adequate staffing resources with relevant 

expertise are available.

• Require that financial assurances be in place before EPA and liable 

parties finalize Superfund settlement agreements.
Page 64 GAO-05-658 Environmental Liabilities

In addition, to better ensure that EPA holds liable parties responsible for 

their cleanup obligations to the maximum extent practicable, the agency 

should seek opportunities to more fully use its enforcement tools, 

particularly tax and other offsets, and provide specific guidance to their 

staff on how and when to use these tools. For example, EPA should 

routinely take advantage of tax offsets when liable parties are not meeting 

their obligations—not just when parties file for bankruptcy. 

To better ensure that EPA identifies relevant bankruptcy filings to pursue 

and bankruptcy actions to monitor, EPA should develop a formal process 

for monitoring bankruptcy proceedings and maintain data on bankruptcy 

filings reviewed, for example using an EPA Intranet site that would be 

readily available to all relevant staff. 

Finally, we recommend that EPA revise and update its guidance on 

participation in bankruptcy cases to more clearly identify some actions 

needed to better protect the government’s interest, such as steps to take to 

better ensure that the courts do not inappropriately discharge 

environmental liabilities and to specify that staff evaluating new 

bankruptcy filings should routinely determine whether EPA has any 

existing liens related to the filings. 

Agency Comments and 

Our Evaluation

We provided EPA with a draft of this report for review and comment. In 

commenting on the draft, EPA generally agreed with many of the 

recommendations and said the agency will further evaluate its response to 

others. Appendix III contains the full text of the agency’s comments and 

our responses.

As arranged with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

report date. At that time, we will send copies to the Administrator, EPA; the 

Attorney General, Department of Justice; the Director, Office of 

Management and Budget; appropriate congressional committees; and other 

interested parties. In addition, the report will be available at no charge on 

the GAO Web site at http://www.gao.gov.
Page 65 GAO-05-658 Environmental Liabilities

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841 or stephensonj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix IV.

John B. Stephenson 

Director, Natural Resources 

and Environment
Page 66 GAO-05-658 Environmental Liabilities

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

GAO was asked to (1) determine how many businesses with liability under 

federal law for environmental cleanups have declared bankruptcy and how 

many such cases the Justice Department has pursued in bankruptcy court; 

(2) identify key challenges that EPA faces in holding bankrupt and other 

financially distressed businesses responsible for their cleanup obligations; 

and (3) identify actions EPA could take, if any, to better ensure that 

bankrupt and other financially distressed businesses pay the costs of 

cleaning up their contaminated sites to the maximum extent practicable.

To determine how many businesses with liability under federal law for 

hazardous waste cleanup costs have declared bankruptcy, we obtained 

bankruptcy case filing information from the Administrative Office of the 

U.S. Courts, which compiles data on the number of bankruptcy filings. 

Specifically, we obtained bankruptcy case filing information on the number 

of business bankruptcy filings under Chapters 7, 11, and 13 of the 

bankruptcy code for fiscal years 1998 through 2003. While the bankruptcy 

courts collect data on the number of businesses that file for bankruptcy 

each year and the Administrative Office of the U.S. Courts maintains these 

data in a national database, neither the courts, EPA, nor private providers 

of business data collect information on how many of these businesses have 

environmental liabilities. As a result, we were not able to report on the 

number of business bankruptcies with hazardous waste liabilities. To 

determine how many bankruptcy cases with liability under federal law the 

Justice Department has pursued in bankruptcy court on behalf of EPA, we 

spoke with officials from the Justice Department about the cases it 

received from EPA to determine which cases the department had pursued. 

We obtained data on the cases the Justice Department pursued on behalf of 

EPA where a proof of claim was filed for fiscal years 1998 through 2003. 

To identify key challenges that EPA faces in holding bankrupt and other 

financially distressed businesses responsible for their cleanup obligations 

and to identify actions EPA could take to better ensure that bankrupt and 

other financially distressed businesses pay the costs of cleaning up their 

hazardous waste sites to the maximum extent practicable, we reviewed 

federal statutes and policies associated with hazardous waste management 

and cleanup, the federal bankruptcy code and procedures, and academic 

and professional literature addressing the intersection of environmental 

and bankruptcy law, corporate limited liability, forms of business 

organization, and asset management. We also interviewed enforcement 

officials from EPA headquarters and its 10 regional offices about how the 

agency identifies, pursues, and recovers federal environmental liabilities 

from financially distressed or bankrupt businesses; the challenges EPA 
Appendix I

Objectives, Scope, and Methodology 

Page 67 GAO-05-658 Environmental Liabilities

faces in these tasks; and the extent to which the agency has used available 

enforcement tools in this effort. Finally, we attended EPA-sponsored 

training sessions on RCRA closure and post-closure financial assurances 

and on bankruptcy-related issues for EPA attorneys in order to learn more 

about these challenges as well as the financial assurances and other 

enforcement tools and procedures available to EPA to address these 

challenges.

We performed our work between September 2003 and July 2005 in 

accordance with generally accepted government auditing standards.
Page 68 GAO-05-658 Environmental Liabilities

Appendix II

Chronology of EPA’s Efforts to Develop 

Financial Assurance Requirements for 

Businesses Handling Hazardous Substances ApendxiI

December 1980 Congress enacted the Comprehensive Environmental Compensation, 

Response, and Liability Act of 1980 (CERCLA, or the Superfund law), 

calling for, among other things, EPA to develop financial assurance 

requirements for businesses handling hazardous substances to 

demonstrate their ability to pay for environmental cleanup costs (CERCLA 

Section 108(b)(1)). 

Early 1980s EPA and its contractors produced issue papers on such topics as gaps in 

existing financial assurance requirements, the definition of "facility," and 

data sources for classifying facilities.

1983 In May, EPA published a Federal Register notice announcing the beginning 

of a process of identifying facility classes and seeking public comment on 

several issues related to identifying risk-based classes of industries and 

facilities handling hazardous substances. In November, the Director of 

EPA’s Office of Solid Waste informed the Assistant Administrator for the 

Office of Solid Waste and Emergency Response that work on the facility 

classification effort was being halted because of a lack of contract funding 

and staff availability. In December, the statutory deadline passed for EPA to 

identify classes of facilities for which regulations would first be developed. 

1987 EPA revisited the Superfund financial assurance requirements as part of a 

broader review of the Superfund program spurred by the 1986 amendments 

to the Superfund law. According to EPA officials, the agency developed 

recommendations to the Assistant Administrator for the Office of Solid 

Waste and Emergency Response for developing the regulations. However, 

EPA never acted upon these recommendations. 

2004 An EPA internal review of the Superfund program recommended that the 

Office of Solid Waste and Emergency Response study whether 

promulgating financial assurance regulations under CERCLA could reduce 

Superfund liabilities for facilities not covered under RCRA financial 

assurance requirements. In response, EPA created a work group that is 

collecting and evaluating information on the types of facilities that have 

become Superfund National Priorities List sites as well as the industries 

represented among these sites. 
Page 69 GAO-05-658 Environmental Liabilities

Appendix III

Comments from the Environmental 

Protection Agency ApendxiI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix III

Comments from the Environmental 

Protection Agency

Page 70 GAO-05-658 Environmental Liabilities
Appendix III

Comments from the Environmental 

Protection Agency

Page 71 GAO-05-658 Environmental Liabilities

See comment 1.
Appendix III

Comments from the Environmental 

Protection Agency

Page 72 GAO-05-658 Environmental Liabilities

See comment 2.

See comment 3.

See comment 4.

Now on p. 50.
Appendix III

Comments from the Environmental 

Protection Agency

Page 73 GAO-05-658 Environmental Liabilities

See comment 5.

See comment 6.

See comment 7.
Appendix III

Comments from the Environmental 

Protection Agency

Page 74 GAO-05-658 Environmental Liabilities

See comment 8.

Now on p. 42.
Appendix III

Comments from the Environmental 

Protection Agency

Page 75 GAO-05-658 Environmental Liabilities

See comment 9.

See comment 10.

See comment 11.

Now on pp. 18 and 30.
Appendix III

Comments from the Environmental 

Protection Agency

Page 76 GAO-05-658 Environmental Liabilities
Appendix III

Comments from the Environmental 

Protection Agency

Page 77 GAO-05-658 Environmental Liabilities

The following are GAO’s comments on the Environmental Protection 

Agency’s letter dated July 14, 2005.

GAO Comments 1. We acknowledge and commend EPA for the actions the agency has 

initiated and for its plan to develop and implement other actions to 

improve compliance with the enforcement of financial assurance 

requirements, as EPA highlights in this and the next three paragraphs. 

The management challenges EPA faces in this regard are complex, but 

the potential benefits the agency can receive from effective financial 

assurances are substantial. We believe that if EPA implements our 

recommendations as part of its compliance and enforcement efforts 

focusing on financial assurance, EPA’s ability to hold liable parties 

responsible for their environmental cleanup obligations will be 

substantially improved.

2. Although we obtained information about region III’s review of financial 

assurances, we did not cite it in our report for several reasons. For 

example, unlike the other regional review, the region III review is not a 

compliance audit of financial assurances in Superfund settlements. As 

such, this review does not identify either Superfund settlement 

agreements that do not include financial assurances or the number of 

sites that do not have settlements in place. In addition, the reported 

financial impact on the government for the sites in region III’s review is 

preliminary and will remain so until the cleanups at the sites reviewed 

are completed because the financial assurances may not reflect the 

actual cleanup costs. For example, as discussed earlier, EPA often 

settles for less than the full cleanup cost as a result of equitable factors 

or ability-to-pay issues. In addition, the financial assurances may relate 

to work to identify the potential cleanup remedies and not to the cost of 

the cleanup, which may not yet be known. An example of a case 

included in the study that substantially understates the negative impact 

on the Superfund and the taxpayers is the Metachem/Standard Chlorine 

case discussed in our report. According to the official who conducted 

this review, while the review identifies a loss of $3.75 million associated 

with the Metachem site, EPA expects the government will have to 

spend about $100 million to clean up the site.

3. We disagree with EPA’s view that the report does not highlight the 

preventive aspect of financial assurance. In discussing the purpose of 

financial assurance, the draft and final reports point out that the fact 

that the parties responsible for the contamination are also responsible 
Appendix III

Comments from the Environmental 

Protection Agency

Page 78 GAO-05-658 Environmental Liabilities

for cleaning it up encourages businesses to adopt responsible 

environmental practices. While EPA’s comments acknowledging the 

benefits of prospective financial assurance are limited to the RCRA 

closure and post-closure programs, we hope that the agency recognizes 

that these same preventive benefits can be more broadly attained by 

implementing the financial assurance requirements mandated by the 

Superfund law under section 108(b), which also provide for prospective 

financial assurances from businesses at risk for environmental 

contamination.

4. EPA’s comment suggests that the agency’s enforcement options are 

limited under its RCRA corrective action and Superfund programs 

because the agency has not developed financial assurance regulations 

for these programs. If this is the case, EPA should seek to correct this 

situation as it develops specific goals to address financial assurance as 

a national enforcement priority.

5. We have revised the final report to reflect that under EPA’s current 

regulations for financial assurance for closure and post-closure, facility 

owners and operators may choose any of the permissible mechanisms, 

as long as the mechanism meets the regulatory standards. However, 

these regulations do not apply to the Superfund and RCRA corrective 

action programs, and therefore do not constrain EPA’s authority to 

accept or decline a proffered financial assurance mechanism related to 

a cleanup under these programs. Similarly, with respect to insurance, 

the RCRA regulations EPA cites apply only to the closure and postclosure programs. Thus, for Superfund and RCRA corrective action, 

regulatory vigilance over the terms of the policies is still necessary.

6. The Superfund law requires EPA to develop financial assurance 

regulations for classes of facilities that pose a risk for environmental 

contamination, starting with those that pose the “highest level of risk of 

injury.” This requirement is not, as EPA’s comments suggest, limited to 

those that pose the highest risk for financial assurance failure. Our 

recommendation is for EPA to comply with the requirements in the 

Superfund statute. In its comments, EPA misstates the GAO 

recommendation by focusing on classes of facilities at risk for financial 

assurance failure. We are concerned that the agency is narrowly 

construing a broad statutory mandate that requires the agency to 

establish, as appropriate, prospective financial assurance requirements 

for entities at risk for environmental pollution. Further, EPA may miss 

the forest for the trees by focusing too narrowly on its ongoing study of 
Appendix III

Comments from the Environmental 

Protection Agency

Page 79 GAO-05-658 Environmental Liabilities

NPL Superfund sites as a basis or rationale for implementing the 

section 108(b) mandate. The universe of businesses at risk for 

environmental contamination is much broader than Superfund NPL 

sites—for example, NPL sites represent about 10 percent of 

contaminated sites identified in the Superfund database. Finally, we did 

not conclude, as EPA asserts, that EPA should pursue section 108(b) 

rule makings to the exclusion of other options. Nonetheless, we reject 

any assertion by EPA that implementing section 108(b) is optional. EPA 

is required to carry out the terms of the statute, and nothing in section 

108(b) authorizes EPA to determine that such actions are unnecessary. 

By passing section 108(b), the Congress has determined that its 

provisions are necessary; should EPA believe otherwise, it must seek 

legislative relief. During the 25 years section 108(b) has been in effect, 

EPA has not sought amendment or repeal of the requirement.

7. EPA’s comment that it will not consider whether to implement section 

108(b) until certain evaluations are complete indicates that it views 

implementation of the statutory mandate under the Superfund law to 

establish financial assurance for classes of facilities at high risk for 

environmental contamination as optional. However, as noted above, it 

is not. We believe the efforts of the Environmental Financial Advisory 

Board (EFAB) and EPA under the 120-day study may provide important 

and useful information to aid EPA’s implementation of section 108(b) 

and the agency’s other financial assurance responsibilities. However, 

these efforts cannot provide a basis for the agency to simply decline to 

carry out the actions required under section 108(b).

8. Our report provides some general information and issues about 

insurance as one of the approved financial assurance mechanisms. 

However, the scope of our work did not include an analysis of the types 

of insurance products currently available or of all of EPA’s actions 

regarding insurance products. Instead, our work focused on issues and 

concerns about some insurance products identified by the EPA 

Inspector General and others. 

9. In response to the questions posed by our requesters, we report the 

number of business bankruptcies and inform readers that information 

to identify how many of these bankruptcies involved environmental 

liabilities does not exist. We also report, as requested, on the number of 

bankruptcy cases that EPA and the Justice Department have pursued in 

bankruptcy court. EPA believes that this information in the first section 

of the report will lead readers to conclude that the agency is not willing 
Appendix III

Comments from the Environmental 

Protection Agency

Page 80 GAO-05-658 Environmental Liabilities

to pursue more environmental bankruptcy cases. We disagree. For 

example, we report that without information on the number of 

bankruptcy cases involving environmental liabilities, EPA’s efforts in 

identifying and pursuing relevant bankruptcies cannot be evaluated. 

Further, our report provides information on some of the reasons EPA 

may choose not to pursue bankruptcy cases in court—for example, 

many chapter 7 bankruptcies involve businesses with few or no assets.

10. Our report accurately reflects that EPA does not maintain information 

on bankruptcies it does not pursue. EPA’s comments show that only 

one region maintains such data. Further, while EPA states that there 

have been discussions concerning collecting these data agencywide, 

the agency does not report a decision or plan to do so.

11. The fact that one region is documenting its decisions regarding 

bankruptcy cases does not demonstrate that the agency as a whole is 

taking steps to better track and document all bankruptcies of which it 

receives notice. We note that expanding the use agencywide of the 

close-out memo used by region III is the type of action/documentation 

we had in mind in recommending that EPA develop a formal process 

for monitoring bankruptcy proceedings and maintaining data on 

bankruptcy filings reviewed.
Page 81 GAO-05-658 Environmental Liabilities

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact John B. Stephenson, (202) 512-3841

Staff 

Acknowledgments 

In addition to the individual named above, Christine Fishkin, Assistant 

Director; Nancy Crothers; Richard Johnson; Les Mahagan; and Susan 

Swearingen made key contributions to this report. Also, Catherine Hurley; 

William O. Jenkins, Jr.; Jean McSween; Jamie Meuwissen; Mary 

Mohiyuddin; Jennifer Popovic; Aaron Shiffrin; and Gary Stofko made 

important contributions. Finally, Greg Carroll; Terrance N. Horner, Jr.; Mike 

Kaufman; Jerry Laudermilk; Karla Springer; and Joseph D. Thompson 

provided important assistance during final report review.
Page 82 GAO-05-658 Environmental Liabilities

Related GAO Products

Superfund Program: Breakdown of Appropriations Data. GAO-04-787R. 

Washington, D.C.: May 14, 2004.

Superfund Program: Updated Appropriation and Expenditure Data.

GAO-04-475R. Washington, D.C.: February 18, 2004.

Superfund Program: Current Status and Future Fiscal Challenges. GAO03-850. Washington, D.C.: July 31, 2003.

Hazardous Materials: EPA’s Cleanup of Asbestos in Libby, Montana, and 

Related Actions to Address Asbestos-Contaminated Materials. GAO-03-

469. Washington, D.C.: April 14, 2003. 

Superfund: Half the Sites Have All Cleanup Remedies in Place or 

Completed. GAO/RCED-99-245. Washington, D.C.: July 30, 1999.

Superfund: Progress Made by EPA and Other Federal Agencies to Resolve 

Program Management Issues. GAO/RCED-99-111. Washington, D.C.: April 

29, 1999. 

Hazardous Waste: Progress under the Corrective Action Program Is 

Limited, but New Initiatives May Accelerate Cleanups. GAO/RCED-98-3. 

Washington, D.C.: October 21, 1997. 

Superfund: Duration of the Cleanup Process at Hazardous Waste Sites on 

the National Priorities List. GAO/RCED-97-238R. Washington, D.C.: 

September 24, 1997. 

Superfund: Number of Potentially Responsible Parties at Superfund Sites 

Is Difficult to Determine. GAO/RCED-96-75. Washington, D.C.: March 27, 

1996. 

Superfund: EPA Has Opportunities to Increase Recoveries of Costs. 

GAO/RCED-94-196. Washington, D.C.: September 28, 1994.

Hazardous Waste: An Update on the Cost and Availability of Pollution 

Insurance. GAO/PEMD-94-16. Washington, D.C.: April 5, 1994. 

Superfund: More Settlement Authority and EPA Controls Could Increase 

Cost Recovery. GAO/RCED-91-144. Washington, D.C.: July 18, 1991. 
Related GAO Products

Page 83 GAO-05-658 Environmental Liabilities

Hazardous Waste: Funding of Postclosure Liabilities Remains 

Uncertain. GAO/RCED-90-64. Washington, D.C.: June 1, 1990. 

Superfund: A More Vigorous and Better Managed Enforcement Program 

Is Needed. GAO/RCED-90-22. Washington, D.C.: December 14, 1989.

Hazardous Waste: Environmental Safeguards Jeopardized When 

Facilities Cease Operating. GAO/RCED-86-77. Washington, D.C.: Feb. 11, 

1986. 

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