In the last several years, a few bankruptcies have triggered significant redistributions of environmental liabilities at CERLA Superfund sites. General Motors, Lyondell, Solutia (originally part of Monsanto) and Tronox (once part of Kerr-McGee) are the latest examples.

When there is a major bankruptcy, your company may find out that it is…was…in business with a well-known company that is now going to discharge future environmental liabilities very quickly.

In 2006, the Financial Accounting Standards Board released Statement 157 on Fair Value Measurement. This standard applies not just to assets, but to environmental liabilities as well. One new obligation is that environmental remediation liabilities (covered under FASB 5) and asset retirement obligations(FASB 143) now need to contain a company’s definition of counterparty risk.

Counterparty risk is the expected value of default from a company on the other side of a transaction.

If your company if jointly funding an RI/FS with a ten-party group, and two of those parties go bankrupt, your company may not see any future cash calls paid for the RI/FS, and may be implementing the remedy without them. Filing a claim with the bankruptcy court, typically through common counsel, is often the only step available in this game of musical chairs.

The rule for PRP bankruptcies: next time the music stops, get ready to file aclaim.