NYLJ: “Environmental Obligations Meet Bankruptcy Discharge-Who Wins?” 3/7/11
Uniondale, March 7, 2011 — Aaron Gershonowitz and Brian J. Hufnagel have published an article in the latest issue of the New York Law Journal. The article is titled, “Environmental Obligations Meet Bankruptcy Discharge-Who Wins?”
This article will discuss what happens when a party seeks the protection of the bankruptcy courts from costs and expenses related to environmental obligations. In such cases, the goals of environmental law and bankruptcy law are clearly in conflict and courts have had difficulty determining which environmental obligations are dischargeable in bankruptcy. One thing that is clear, however, is that the answer lies primarily in bankruptcy law. That is, an injunction requiring remediation of soil or groundwater is dischargeable if it is a “claim” as that term is defined in §101(5)(b) of the Bankruptcy Code. 11 U.S.C. § 101(5)(b).
A confirmed chapter 11 plan of reorganization “discharges the debtor from any debt that arose before the date of such confirmation.” 11 U.S.C. § 1141(d)(1)(A). Debt in bankruptcy is defined as “liability on a claim.” 11 U.S.C. § 101(12). The definition of a claim is generally held to be broadly defined. Section 101(5)(b) defines a claim to include equitable obligations if breach of the equitable obligation “gives rise to a right of payment.” Thus, to determine which environmental injunctions are subject to discharge, a court must examine the terms of the injunction and the law upon which the injunction is based to determine whether the injunction may give rise to a right of payment.
Two recent decisions help define the line between environmental injunctions that are dischargeable and those that are not. In United States v. Apex Oil Co., 579 F.3d 734 (7th Cir 2009), cert. denied 131 S. Ct. 67 (Oct. 4, 2010), the court held that an injunction requiring remediation under the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 6973, did not give rise to a right of payment and was therefore not dischargeable. The Seventh Circuit’s reasoning was followed by the Bankruptcy Court for the Southern District of New York in New Mexico Env’t Dep’t v. Mark IV Indus., Inc. (In re Mark IV Indus., Inc.), 438 B.R. 460 (Bankr. S.D.N.Y. 2010); appeal docketed, No. 11-cv-00648 (S.D.N.Y. Jan. 31, 2011).
In Apex Oil, the Environmental Protection Agency obtained an injunction requiring remediation. Apex claimed that the injunction was based on activities of a predecessor company that had been discharged in bankruptcy and that its obligations under the injunction were discharged in the bankruptcy case. Apex further argued that it would cost $150 million to retain someone to perform the remediation and that the obligation to remediate was thus, a monetary claim.
The court began its analysis by examining the first case in which the Supreme Court dealt with the conflict between environmental remediation obligations and bankruptcy: Ohio v. Kovacs, 469 U.S. 274 (1985). In Kovacs, the State of Ohio obtained a clean-up order and when Kovacs refused, the State obtained appointment of a receiver to take possession of Kovacs’ personal assets to use the assets to perform the work. Kovacs filed for bankruptcy and the State sought an order from the bankruptcy court that Kovacs’ environmental obligations were not dischargeable. The Supreme Court held, however, that because the State had performed the remediation and was now merely seeking reimbursement for costs, the environmental obligation was a dischargeable claim. In effect, the State had already turned the remediation obligation into a monetary claim.
The procedural posture of Kovacs, i.e., the fact that the receiver had seized the assets, performed the remediation and was now looking for reimbursement, made the case difficult to apply and subsequent decisions debated which factors a court should examine to determine whether an injunction was a “claim.” Should a court focus its inquiry on the language of the injunction or on the terms of the statute or regulation at issue? See, e.g., In re CMC Heartland Partners, 966 F.2d 1147 (7th Cir. 1992) and LTV Corp. v. LTV Steel Co., (In re Chateaugay Corp.), 944 F.2d 997 (2d Cir. 1991).
In Chateaugay, the leading Second Circuit decision on the discharge of environmental obligations in bankruptcy, the debtor owned or operated dozens of inactive hazardous waste sites and the court needed to decide which of the EPA’s injunctions would be discharged and which would not. The District Court examined the underlying substantive law to determine which injunctions would be dischargeable. Under CERCLA §107, the EPA can obtain an injunction requiring remediation, but it also has the option to perform the remediation and sue to recover its costs. This optional right to payment made a §107 injunction a “claim” under §101(5)(b) of the Bankruptcy Code. CERCLA §106, however, does not provide for a right of payment and therefore the District Court concluded that if an injunction was issued pursuant to §106, it would not be dischargeable.
The Second Circuit discussed a variety of means of drawing the line between environmental injunctions that survive bankruptcy and those that do not. The distinction drawn by the Second Circuit was slightly different from that of the District Court. The Second Circuit examined the injunctions themselves, not the underlying regulatory scheme and drew the line between those injunctions intended to remedy past contamination, which can be treated as a monetary obligation and discharged, and those that are intended to prevent future contamination, which cannot be discharged.
CMC Heartland Partners was the result of a bankruptcy reorganization affecting the assets of several railroads. In CMC Heartland, the EPA had issued an order under CERCLA 106, requiring CMC Heartland and General Motors to cleanup a site known as Wheeler Pit, which had been owned by one of the railroads and after the bankruptcy reorganization was owned by CMC Heartland. CMC Heartland argued that this injunction was a claim that had been discharged in bankruptcy. It further argued that EPA knew about its claims with regard to Wheeler Pit prior to the bankruptcy proceeding and lost those claims by not asserting them in the bankruptcy proceeding. The court disagreed, reasoning that because CMC Heartland is the owner of the site it has a current obligation to remediate the site.
The court examined the relationship between CERCLA sections 106 and 107 and concluded that while section 107 generally requires remediation of past contamination, which would be dischargeable, it also creates an obligation that runs with the land. Any owner of Wheeler Pit would have an obligation to remediate. Thus, CMC Heartland’s obligation is a post bankruptcy obligation arising from the ownership of the land and not from the disposal of waste by its predecessor in interest.
The court addressed the possibility that EPA had merely repackaged the pre-petition section 107 claim, which was discharged in bankruptcy, as a section 106 claim based on current ownership. EPA, however, had made a finding that hazardous substances in groundwater were evidence that hazardous substances were currently leaching from Wheeler Pit. CMC Heartland disputed this, but under section 106, any judicial review of the order must wait until after remediation. This factual issue was thus, not before the bankruptcy court.
The Apex Oil Court faced a RCRA clean up order, similar to the section 106 order in CMC Heartland, however, unlike CMC Heartland, Apex Oil was not the owner of the contaminated property. Judge Posner began his analysis by rejecting Apex Oil’s argument that because the cost of compliance was quantifiable, the claim was a monetary claim. The court rejected that argument because it would make virtually all equitable decrees dischargeable. The question, the court reasoned is not whether the cost of compliance is quantifiable; the question is what EPA is requiring – are they requiring performance or payment. The court next examined the impact of the Kovacs decision, noting that the Supreme Court had allowed the discharge of an equitable claim for remediation. The court noted that the plaintiff in Kovacs was seeking money rather than remediation. Here, however, the plaintiff was only seeking remediation. Thus, the court concluded that the government’s injunction was not discharged because the government was seeking remediation and not money.
In Mark IV, the New Mexico Environment Department was attempting to enforce remediation orders on an entity that was a former owner and operator at the contaminated site, but did not own the site at the time of the bankruptcy. The Bankruptcy Court for the Southern District of New York examined the case law and concluded that three factors needed to be examined to determine whether a remediation injunction is a dischargeable claim.
First, the court must examine whether the debtor is able to perform the remediation required by the injunction. This factor was significant in Kovacs where the debtor did not have possession of the property that needed to be remediated and the State had a receiver take Kovacs’ assets, leaving Kovacs with no means to perform the work required by the injunction. Because Kovacs had no means to perform, all the State could demand at that point was money, which made the State’s claim dischargeable. The court noted that access for a debtor is not the same as current ownership. The current owner of a site would be plainly prepared to invite the debtor back to complete remediation rather than do it itself.
The second factor the court examined is whether the pollution is ongoing. The court cited CMC Heartland for the proposition that to avoid the conclusion that the agency is simply repackaging a damages claim as an injunctive claim, the agency must show that there are releases or threatened releases at the site. Where there is continuing contamination, the debtor is not in a position in which it can pay money and obtain the right to continue to pollute.
Third, if the pollution is not ongoing or the order imposes obligations to cleanup past contamination, does the agency have the option under statute to remove the waste itself and seek reimbursement. The court noted that in Chateaugay and Apex Oil, remediation injunctions were not dischargeable because the relevant statutes did not permit the agency to remediate and seek cost recovery.
Based on these factors, the court found that Mark IV’s obligations were not dischargeable. Mark IV is not the owner of the site, but does have access to the site for purposes of remediation. Whether there is ongoing pollution was a disputed fact that the court could not determine without a hearing. And, the agency does not have the option to remediate and seek cost recovery under the statute being enforced.
Mark IV argued that the agency did have the option to remediate and seek cost recovery and therefore the claim is dischargeable. The court noted that Mark IV is correct that the agency could have proceeded under different statutory provisions, which provide the right power to remediate and seek cost recovery, but that is not relevant. The court must look to the statute being enforced to see if it provides an alternative monetary claim, not to whether the agency could have used another statute. Thus, the conclusion that this injunction was a dischargeable claim, was based on the agency’s choice of how to proceed.
Courts have had difficulty determining whether injunctions requiring remediation of contaminated sites are dischargeable in bankruptcy. Apex Oil and Mark IV may represent a trend toward finding such injunctions to be not dischargeable. A better reading of the cases, however, indicates that these cases represent a change in how the regulatory agencies act rather than a change in the way courts view environmental agency injunctions. Agencies now understand that an injunction aimed only at past activity is likely to be dischargeable. Agencies also recognize that an injunction whose authority is a statutory provision that permits the agency to seek a monetary remedy is likely to be dischargeable. Thus agencies seeking to avoid discharge of their injunction in bankruptcy know to draft their remediation orders in terms of the present problem (even if the present problem is the result of old contamination) and to use statutes that do not include a monetary remedy.
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