Scary Stories and the Limited Liability Polluter in Chapter 11

Abstract

A recent high-profile bankruptcy filing by Asarco has generated numerous demands among legal commentators, policy-makers, and the media for reform of bankruptcy law, environmental law, corporate law, or perhaps all three. The concern is that the current structures of these three areas of the law permit firms to strategically use bankruptcy to inappropriately displace hundreds of millions of dollars of environmental liability onto taxpayers. However, these demands for reform are occurring in a complete absence of data about whether and to what extent inappropriate strategic use of bankruptcy in this manner actually occurs.

We conducted an empirical analysis of Chapter 11 bankruptcies filed in 2004 and closed by mid-2006 to try to determine the extent to which environmental liabilities drive bankruptcy filings, with an eye to examining several questions regarding the relationship between the firm's bankruptcy filing and its liability for environmental matters.

Our findings suggest that Asarco is an atypical case and that the strategic use of chapter 11 to avoid environmental obligations is an uncommon phenomenon. We conclude with suggestions about how to improve the reporting of environmental issues in bankruptcy, and also with a cautionary note about reforming bankruptcy, environmental, or corporate law based on anecdotal, rather than empirical, evidence.

Keywords: Bankruptcy, Corporate Law, Environmental Law