Environmental Law Section Lessons Learned From Recent Environmental Bankruptcy Cases

1. Environmental Law Section Lessons Learned From Recent Environmental Bankruptcy Cases Andrea Madigan, US EPA Region 8 January 26, 2010

2. The views expressed in this presentation do not necessarily reflect those of the United States Environmental Protection Agency

3. Topics for Discussion Injunctive Obligations and Bankruptcy Claims Section 363 Sales Estimation of Environmental Claims

4. Injunctive Obligationsand 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.

5. Injunctive Obligationsand 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?

6. Injunctive Obligationsand 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.

7. Injunctive Obligationsand 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.

8. 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)

9. Injunctive Obligationsand 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

10. Injunctive Obligationsand 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

11. 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 non-dischargeable even though CERCLA has an independent provision on cost recovery

12. Injunctive Obligationsand 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)

13. Injunctive Obligationsand 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

14. Injunctive Obligationsand 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-debtor-owned property. See, e.g., In re Torwico Electronics, 8 F3d 146 (3rd Cir 1993) (cleanup obligations run with the waste)

15. Injunctive Obligationsand Bankruptcy Claims • In re CMC Heartland Heartland Partners, 966 F2d 1143 (7th Cir 1992); Liability springs anew based on post-bankruptcy 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)

16. 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

17. 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. ,

18. 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)

19. 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

20. Purposes Served by Estimation • Estimation of claims can be used for following purposes: • Allowance of claims • Plan feasibility • Determination of reserves to pay claims • Determination for voting purpose • Resolving Objections

21. 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

22. 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