Transcript No Slide Title

Environmental Law Section
Lessons Learned From Recent
Environmental Bankruptcy Cases
Andrea Madigan, US EPA Region 8
January 26, 2010
The views expressed in this
presentation
do not necessarily reflect those of the
United States Environmental
Protection Agency
Topics for Discussion
 Injunctive Obligations and Bankruptcy
Claims
 Section 363 Sales
 Estimation of Environmental Claims
Injunctive Obligations
and Bankruptcy Claims
 Injunctive obligations are any environmental
obligation other than the obligation to pay the
government or co-liable parties money.
 Injunctive obligations can include cleanup,
investigation, emissions limitations, etc.
 Injunctive obligations can be imposed by
statutes, regulations, permits, or court or
administrative orders.
Injunctive Obligations
and Bankruptcy Claims
 Are environmental injunctive obligations
“claims” subject to discharge in bankruptcy?
 In chapter 11 reorganizations, pre-confirmation
“claims” may be discharged.
 “Claim” is defined to include “a right to an
equitable remedy for breach of performance if
such breach gives rise to a right to payment.”
 Does the breach of environmental injunctive
obligations give rise to a right to payment?
Injunctive Obligations
and Bankruptcy Claims
 The “claim” definition excludes equitable
remedies for which:

specific performance is required

and damages are not an adequate
substitute.
 Such equitable remedies do not give rise
to a right to payment.
Injunctive Obligations
and Bankruptcy Claims
Courts have held:
 A debtor’s refusal to perform cleanup
does not give rise to a right to payment;
and
 A polluter may not pay the government in
lieu of cleaning up its waste.
 AM Int’l, Inc. v. Datacard Corp, 106 F3d 1342 (7th Cir






1997)
In re CMC Heartland Partners, 966 F2d 1143 (7th Cir
1992)
In re Torwico Electronics, 8 F3d 146 (3d Cir 1993)
In re Commonwealth Oil Refining Co, 805 F2d 1175 (5th
Cir 1986)
Penn Terra, Ltd. v. Department of Environmental
Resources, 733 F2d 267, (3d Cir 1984)
United States v. Hubler, 117 BR 160 (W.D. Pa. 1990)
In re Chateaugay Corp, 112 BR 513 (S.D.N.Y. 1990),
affirmed, 944 F2d 997 (2d Cir 1991)
Injunctive Obligations
and Bankruptcy Claims
 Debtors argue that governments can
convert cleanup obligations into
monetary claims (i.e., governments can
perform cleanup themselves and sue to
recover their costs)
 This is the “alternative right to payment”
theory
Injunctive Obligations
and Bankruptcy Claims
 Debtors also argue that cleanup obligations are
“claims” because money must be spent to
comply
 This “expenditures test” is based principally on
US v Whizco, 841 F2d 147 (6th Cir 1988)
 Whizco held that the automatic stay barred
enforcement of an individual chapter 7 debtor’s
mine reclamation obligation
US v Apex Oil, 579 F3d 734
(7th Cir. 2009)
 The 7th Circuit stated that equitable
remedies are dischargeable only if they
cannot be performed
 The analysis in Apex suggests that
CERCLA cleanup orders are nondischargeable even though CERCLA has
an independent provision on cost
recovery
Injunctive Obligations
and Bankruptcy Claims
 The expenditures test in Whizco has been
roundly rejected by other circuits
 Penn Terra Ltd. v Dept of Environmental Resources,
733 F2d 267 (3d Cir 1984)
 Safety-Kleen v Wyche, 274 F3d 846 (4th Cir 2001
 In re Commonwealth Oil Refining Co, 805 F2d 1175
(5th Cir 1986)
Injunctive Obligations
and Bankruptcy Claims
 Debtors also argue that injunctive obligations at
“third party sites” are dischargeable
 “Third party sites” are sites that are neither
owned nor operated by the debtor
 Debtors cite 28 U.S.C. § 959(b) and argue that
the Code distinguishes between debtor- and
non-debtor-owned property
 Section 959(b) requires a debtor to manage its
property in accordance with nonbankruptcy law
Injunctive Obligations
and Bankruptcy Claims
 However, § 959(b) governs a debtor’s obligations during
bankruptcy
 In contrast, the Code’s provisions on claim and discharge
pertain to a reorganized debtor’s obligations after
bankruptcy
 Also, unlike § 959(b), the Code’s definition of “claim”
does not distinguish between debtor- and non-debtorowned property. See, e.g., In re Torwico Electronics,
8
F3d 146 (3rd Cir 1993) (cleanup obligations run with the
waste)
Injunctive Obligations
and Bankruptcy Claims
 In re CMC Heartland Heartland Partners, 966 F2d 1143
(7th Cir 1992); Liability springs anew based on postbankruptcy ownership or operation of contaminated
property
 Automatic Stay
During
the bankruptcy case, the issue is the police and
regulatory exception to the automatic stay, not whether a
claim is dischargeable
Section
362(b)(4) allows enforcement of governments’
police and regulatory power, including enforcement of a
judgment other than a money judgment. See, e.g., Penn
Terra (compliance costs ≠ money judgment)
Section 363 Sales
 Section 363 of the Bankruptcy Code governs
sales of estate property
 Under
§ 363(f), a sale may be free and clear of
certain interests
 Claims and interests attach to proceeds of sale
Section 363 Sales
In re General Motors, 407 BR 463 (S.D. N.Y 2009)
the court recognized the limits of section 363(f):
Under section 363(f), there could be no successor liability
imposed on the purchaser for the seller[’s] . . . obligations
related to cleanup costs . . . But the purchaser would
have to comply with its environmental responsibilities
starting with the day it got the property, and if the property
required remediation as of that time, any such
remediation would be the buyer’s responsibility . . . ‘[A
free and clear sale] doesn’t absolve you from compliance
with the law going forward.
,
Section 363 Sales
 Sale of substantially all assets of the estate
under Section 363
 Sub Rosa plans
 Reorganization v Liquidation
 In re Chrysler, 576 F3d 108 (2d Cir 2009)
Estimation
 Bankruptcy Code expressly provides for
an estimation procedure 11 U.S.C. §
502(c)
 Key consideration for estimation in
bankruptcy court is whether liquidation of
claim outside of the bankruptcy court
would unduly delay the bankruptcy
proceeding
Purposes Served by
Estimation
 Estimation of claims can be used for
following purposes:
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Allowance of claims
Plan feasibility
Determination of reserves to pay claims
Determination for voting purpose
Resolving Objections
Basis For Estimatation
 Bankruptcy Courts have broad discretion in
conducting estimation hearings.
 Courts should use whatever method is best
suited to the circumstances. See e.g.
Bittner v. Borne Chemical Co, 691 F2d 134 (3d
Cir 1982) discussing varying methods that may
be used to estimate claims
Estimation or Liquidation of
Claim
 Although courts have stated that
estimation is not a liquidation of the
claim and estimation is the bankruptcy
court’s best estimate in order to allow the
bankruptcy proceeding to move forward,
as a practical matter, it may be
determinative of the amount of the claim