Point/Counterpoint: Shaking off the Mothballs

Counterpoint: Mothballing and the Balance of Pain
By Greg Rogers

Change does not automatically occur when people see what is in it for them, but people do change when they perceive that the pain of changing is less than the pain of not changing. Properties with known or suspected contamination are mothballed because corporate decision makers perceive the pain of doing so to be less than the pain of going to market.
The pain of change (going to market) is fear — fear of personal accountability for voluntarily exposing the organization to an indeterminate and potentially catastrophic loss. Right or wrong, many attorneys advise their clients that they have no legal duty under environmental laws to investigate owned properties with suspected but unconfirmed contamination. Let the sleeping dog lie.
On the other hand, if one investigates and confirms contamination above regulatory levels, there is a clear legal duty to notify the government and thereafter take necessary corrective action, no matter what the cost. This legal analysis is the root of the “don’t ask, don’t tell” policy.
The pain of not changing (mothballing) is cognitive — not emotional — and far less compelling. Mothballing undeniably results in non-value-added carrying costs for insurance, taxes, maintenance and security. It also carries the risk that conditions will get worse over time leading to future uninsured toxic tort claims that could have been avoided. And, of course, mothballing denies the company of any net proceeds from the sale of the property.
Opportunity costs associated with mothballing, however, are rarely measured and evaluated. The decision to mothball therefore carries little or no risk of personal accountability for decision makers. Mothballing is the safe choice.
Mothballing will persist until the balance of pain is reversed and the fear of mothballing exceeds the fear of going to market. Short of fundamental changes in our nation’s environmental laws, there is only one way for this to happen. Corporate decision makers must perceive and fear personal accountability for the severe potential consequences under the federal securities laws of systematically failing to estimate the liabilities associated with known or reasonably suspected contamination.
For now, the mothballers and their professional advisors are, for the most part, blissfully ignorant of the trap that has been set by the Sarbanes-Oxley Act and certain recently adopted financial accounting and auditing standards. The July 2004 GAO report avoided the thorny issue of “don’t ask, don’t tell.”
Mothballers, however, should not take comfort. A dynamic interaction of governmental and market forces is irreversibly driving corporate America towards increased environmental transparency and accountability — outcomes that are incompatible with willful blindness. The question is not if, but when, the balance of pain will shift. The wise will begin preparing for the future today.
There is a modern parable that if you throw a frog into boiling water, he will jump out, but if you increase the heat of the water slowly, he will get accustomed to the increasing heat and eventually get cooked. Attention mothballing frogs, “The water is heating up!”

Greg Rogers, J.D., CPA, practices environmental law with Guida, Slavich & Flores, P.C., in Dallas, Texas. Any opinions expressed in this article are the views of the author and do not necessarily represent the views of Guida, Slavich & Flores.