Transcript Bankruptcy and Environmental Issues

Using the Bankruptcy Code and
Distressed Asset Sales to Facilitate
Brownfield Redevelopment
Joel M. Gross
Arnold & Porter LLP
Brownfield Conference 2009
November 17, 2009
Six questions
1. What is the Bankruptcy Code and why should I care?
2. Does the Bankruptcy Code eliminate cleanup obligations
for a property that a reorganizing company owns?
3. Does the Bankruptcy Code eliminate cleanup obligations
for a property that a reorganizing does not own?
4. Can a company in bankruptcy abandon contaminated
property?
5. Does a purchaser of contaminated property in bankruptcy
avoid cleanup liability?
6. How can a trust mechanism be used to address
contaminated property in bankruptcy?
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1. What is the Bankruptcy Code
 Set forth in 11 U.S.C.
 Replaced the Bankruptcy Act of 1898
 Provides comprehensive provisions for the administration
of bankruptcy cases
 Various chapter options for determining the procedures to
apply
 Most germane are Chapters 7 and Chapter 11, and
especially Chapter 11
 It does not address CERCLA or other environmental
claims
 The debtor is the “debtor”
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Main Types of Bankruptcy
1. Individual Chapter 7 - a liquidation of the debtor's assets
and distribution among creditors based on priority scheme of
the Bankruptcy Code. A trustee will be appointed to take
charge of and liquidate the debtor's property.
2. Business liquidation - generally done under Chapter 7, but
sometimes done under Chapter 11. If it is a chapter 7, there
will be a trustee. If done under chapter 11, the debtor will
likely remain in possession of its property.
3. Business reorganization under Chapter 11 - a
reorganization to allow the business to continue operating.
Requires proposal and confirmation of a plan of
reorganization. Generally, there will be a debtor-inpossession and no trustee.
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1. Why should I care?
 Enormous amounts of activity involving contaminated sites
and bankruptcy
• Asarco, W.R. Grace, Lyondell, General Motors, etc.
• There are different rules that apply, which creates
opportunities and also pitfalls
• Pitfalls include the injunctions created by the automatic
stay and discharge provisions, and deadlines for filing
claims
• Opportunities include potential for creative settlements
resulting from increased government focus.
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2. Does the Bankruptcy Code eliminate cleanup obligations
for a property that a reorganizing company owns?
 Short answer:
 Probably not if it still owns the property when it emerges from
bankruptcy
 New liability for continued ownership
 Therefore better to get rid of the property pre-emergence
 But query whether under Supreme Court decision in Burlington
Northern, reorganized company can argue for apportionment
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Discharge
1. Individual gets a discharge under Section 727
 Subject to exceptions (i) where debtor gets no discharge or (ii) where
certain claims are not dischargeable (e.g. penalties)
2. Liquidating business entities get no discharge
3. Reorganizing entity gets a discharge under Section
1141(d)(1):
 “Except as otherwise provided in this subsection, in the plan or in the
order confirming the plan, the confirmation of a plan—(A) discharges
the debtor from any debt that arose before the date of such
confirmation…”
 Not subject to exceptions
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» The “Claim” concept
1. "Claim" is a key, double edged concept in bankruptcy.
2. “ ‘Debt’ means liability on a claim” (section 101(12)
3. It can be a good thing to have a claim.

A creditor with a "claim" can share in the distribution of assets under
a plan of reorganization
4. It can be a bad thing to have a claim.

A creditor with a claim can have its claim “discharged.” It will then
be barred, and enjoined, from recovering on the claim after the
company emerges from bankruptcy.
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Very Broad Definition of “CLAIM”
Bankruptcy Code 11 U.S.C. § 101(5)
(A) right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured; or…...
(B) right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or
not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured.
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Ohio v. Kovacs, 469 U.S. 274 (1985)
1.
2.
3.
4.
Owner of large drum site was ordered to clean it up. When he didn't, a
receiver was appointed. Owner then filed for bankruptcy. After the
bankruptcy, the State of Ohio tried to enforce the clean up order
The Supreme Court held that an injunction to clean up a hazardous waste site
gave rise to a right to payment against the former site owner, where a receiver
had been appointed pre-petition to take control of the site, thereby
dispossessing the owner, and where the State of Ohio was found to be seeking
money to clean up the site. Accordingly, Ohio had a "claim" that was
discharged.
Court states that it does not question "that anyone in possession of the
[hazardous waste] site...[including] the bankruptcy trustee must comply with
the environmental laws of the State of Ohio. Plainly that person or firm may
not maintain a nuisance, pollute the waters of the State or refuse to remove the
source of such conditions."
Bottom line - It was good to be dispossessed
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28 U.S.C. 959(b)
1. “Except as provided in section 1166 of title 11, a trustee,
receiver or manager appointed in any cause pending in any
court of the United States, including a debtor in possession,
shall manage and operate the property in his possession as
such trustee, receiver or manager according to the
requirements of the valid laws of the State in which such
property is situated, in the same manner that the owner or
possessor thereof would be bound to do if in possession
thereof.”
2. Regulatory compliance is always required
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OWNED SITES …
1. Appears to be consensus that bankruptcy does not alter the
landscape materially
2. Debtor can be ordered to do cleanups, and has to comply with
the law (28 U.S.C. § 959(b))
3. If EPA or States does a cleanup during bankruptcy, it will be
have an administrative expense claim entitled to first priority
4. If Debtor owns the property when it emerges from
bankruptcy, it will remain liable
 There could be arguments to limit that liability to that related to the
post-bankruptcy ownership, but they haven't been successful, largely
because of joint and several liability, but Burlington Northern may
change that
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3. Does the Bankruptcy Code eliminate cleanup obligations
for a property that a reorganizing does not own?
 Debtor can still be liable for property it does not own as a
former owner/operator at time of disposal, a generator or a
transporter
 Bankruptcy is likely to have a more material effect on the
cleanup obligation
 Monetary obligations will likely be viewed as claims and
discharged.
 But there is an open issue as to the extent as to which the
government can issue cleanup orders.
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Can a liable non-owner be ordered to perform
clean-up?
1. Issue can arise both during bankruptcy (automatic stay issues)
and after bankruptcy (discharge/"claim" issue)
2. Central open issue in this area
3. Less important in cases where claims are worth more
4. Argument for NO
 Cleanup Order is seeking to have debtor spend money
 Kovacs and Midlantic support the result
 Allowing enforcement effectively prioritizes cleanup
claims over other claims, which should not be done
without explicit statutory authorization
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Argument for “YES”
1. Government is seeking cleanup, not money
2. Government sometimes cannot spend the money it gets, if all
it gets is money and not cleanup
3. In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993),
cert. denied, 114 S. Ct. 1576 (1994)
 Debtor must comply with State of New Jersey's ECRA cleanup order
even though debtor no longer owned or operated contaminated real
property
 Cleanup obligations run with the hazardous waste
 Delaware is in the Third Circuit
4. Apex Oil decision—Seventh Circuit
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4. Can a company in bankruptcy abandon
contaminated property?
 Short answer
 Bankruptcy Code does allow for abandonment of burdensome
property
 But the Supreme Court has said the right to abandon is somewhat
limited by environmental laws
 And in Chapter 11 cases it is not clear who the abandonment would
be to
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Abandonment authority - Section 554
“After notice and a hearing, the trustee may
abandon any property of the estate that is
burdensome to the estate or that is of
inconsequential value and benefit to the
estate.”
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Midlantic National Bank v. New Jersey Dep't of
Environmental Protection, 474 U.S. 494 (1986)
A Trustee tried to abandon contaminated property. The
Supreme Court held that the abandonment authority was not
unlimited and that abandonment of contaminated property should
not be permitted in violation of state law except on conditions
that insure the protection of public health and the environment.
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Midlantic Footnote
“This exception to the abandonment power vested in
the trustee by § 554 is a narrow one. It does not
encompass a speculative or indeterminate future
violation of such laws that may stem from
abandonment. The abandonment power is not to be
fettered by laws or regulations not reasonably
calculated to protect the public health or safety from
imminent and identifiable harm.”
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5. Does a purchaser of contaminated property in
bankruptcy avoid cleanup liability?
 Section 363 of the Bankruptcy Code provides for sale of the debtor’s
property:
• The trustee may sell property under … this section free and clear
of any interest in such property of an entity other than the estate,
only if—
– (1) applicable nonbankruptcy law permits sale of such property
–
–
–
–
free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to
be sold is greater than the aggregate value of all liens on such
property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable
proceeding, to accept a money satisfaction of such interest.
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 Section 363 sales are often accompanied by broad
“cleansing orders”
Essential to give notice to the government, which may
well object
Government position—cleanup obligations are not
interests in property and essentially run with the land.
Best to combine bankruptcy protections with nonbankruptcy protections (e.g. bona fide prospective
purchaser)
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6.
How can a trust mechanism be used to address
contaminated property in bankruptcy?
 Used with increased frequency, usually with




government buy in
Property is transferred to the trust
Debtor funds trust and has no further obligations for
cleanup
Government, the beneficiary, gets guaranteed pot of
money to fund cleanup
Trustee may be an environmental consultant,
accountant, lawyer, former government official
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
Issues
• Amount of funding
• Selection of trustee
• Protection of trustee (indemnity,
insurance, court order)
• Tax structure
• Residual value of property
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