The Effect of Joint and Several Liability Under Superfund on Brownfields

Abstract

In response to claims that the threat of environmental liability under the Superfund law deters the acquisition of potentially contaminated sites (or "brownfields") for redevelopment, the federal government has adopted programs to protect purchasers from liability. This protection may be unwarranted, however, if sellers can simply adjust property prices downward to compensate buyers for this liability. We present a model of joint and several liability under Superfund that allows us to distinguish four different reasons that this liability may discourage the purchase of brownfields. The previous literature has overlooked the effects that we identify, which all arise because a sale may increase the number of defendants in a suit to recover cleanup costs. Our analysis suggests that the brownfields problem may be more widespread than one might infer from the prior literature. Furthermore, the effects that we identify may distort not only the incentives to sell property subject to Superfund liability but also any decision of any party subject to any joint and several liability if that decision could affect the number of other defendants liable for the same harm. CONTENTS

An Empirical Analysis of Cost Recovery in Superfund Cases: Implications for Brownfields and Joint and Several Liability

“…Chang and Sigman () identify several additional reasons that Superfund liability could discourage efficient transactions by imposing an implicit tax on these transactions, even if all PRPs are solvent rather than judgment‐proof. To illustrate these effects, Chang and Sigman () use a formal model of joint and several liability developed earlier by Chang and Sigman () to generate predictions of the effects of Superfund liability on settlement rates.…”

“…Chang and Sigman () identify several additional reasons that Superfund liability could discourage efficient transactions by imposing an implicit tax on these transactions, even if all PRPs are solvent rather than judgment‐proof. To illustrate these effects, Chang and Sigman () use a formal model of joint and several liability developed earlier by Chang and Sigman () to generate predictions of the effects of Superfund liability on settlement rates. Chang and Sigman () tested predictions about the probability and speed of settlement in an empirical analysis of Superfund cases but did not study the effects of this liability regime on the amounts recovered by the government and thus did not shed light on the brownfields problem.…”

“…Chang and Sigman () predict that an increase in the number of PRPs would have three distinct effects that would increase the government's expected recovery and thereby discourage sales of contaminated property. First, as long as the outcome at trial for the buyer is not perfectly correlated with the outcome at trial for any other PRP, then a sale would increase the amount of damages that the government can expect to recover from the PRPs at trial and would increase the expected liability of the buyer and the seller taken together.…”

“…If outcomes at trial are sufficiently correlated among defendants, however, then settlement negotiations can add yet another reason for the risk of Superfund liability to inhibit development of contaminated property: an increase in the number of defendants may increase the government's ability to exploit the race among the defendants to settle, as noted by Easterbrook et al (). Furthermore, Chang and Sigman () note that a larger number of defendants seems likely to reduce the defendants' bargaining power by making cooperation among them in settlement negotiations more difficult.…”

“…Thus, these effects would each imply that the government would recover a larger amount as the number of PRPs increases. Chang and Sigman () predict that as a matter of theory the first and third effects would be most important when the number of PRPs is small and that the amount recovered by the government would increase at a diminishing rate as the number of PRPs grows, that is, recovery should be concave in N , where N is the number of liable parties. Empirical evidence also confirms that litigation costs increase relative to clean‐up costs as the number of PRPs increases, holding other factors constant, and that this increase also appears to be the most dramatic for sites with relatively few PRPs (Acton & Dixon :51–52, 61; Dixon :176–77; Dixon et al :37).…”