On September 30, 1997, USEPA issued a general policy for evaluating the impact of ability to pay on settlements under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). The policy document establishes an "undue financial hardship" standard for determining a party's ability to pay its share of CERCLA cleanup costs and, if that threshold test is met, then employs a two-part analysis to determine an acceptable settlement amount which the party is able to pay.
USEPA may enter into ability-to-pay-influenced settlements with individuals or businesses for recovery of response costs and performance of cleanup work in appropriate cases. This settlement process is reserved for potentially responsible parties who can demonstrate to USEPA that the payment of the amount sought for CERCLA cleanup costs is likely to put the company out of business, impose an undue financial hardship, or otherwise jeopardize its viability. An undue financial hardship exists if USEPA finds that the satisfaction of a claim for CERCLA cleanup costs will result in lack of funds for ordinary and necessary business and living expenses.
The policy document outlines a two-part analysis for determining an acceptable settlement amount to be paid by a responsible party which establishes hardship for paying its share of cleanup costs. The first part of the analysis, referred to as the "balance sheet phase," includes a review of the candidate's assets, liabilities and equity. Under such a review, assets include cash, cash equivalents, accounts receivable, inventory and fixed assets. Liabilities include accounts payable, interest payable, notes payable and taxes. An owner's equity is the differential between the assets and liabilities, and includes the contributed capital and retained earnings.
The second part of the analysis, the "income and cash flow statement phase," focuses on the income and expenses of the candidate. The "available income" of a candidate is calculated over a five-year period for a CERCLA settlement. This analysis takes into consideration a candidate's revenues and expenses. Future earning potential is predicted by identifying ordinary and necessary future expenses based upon a review of budgets, projections and financial statements from prior years.
Through issuance of the new policy document, USEPA hopes to provide guidance to its enforcement personnel, affected parties and the public regarding the criteria employed to evaluate a proposal to enter into a CERCLA ability-to-pay settlement influenced by the responsible party's ability to pay.
