- Many businesses are currently facing restructuring and bankruptcy because of the COVID-19-related economic downturn.
- Debtors restructuring under Chapter 11 U.S. Bankruptcy Code must be aware that there might be exemptions to the automatic stay for environment obligations and that bankruptcy won’t allow discharge of some environmental obligations.
- Holland & Knight offers a summary of common problems that can arise when environmental and bankruptcy law intersect.
Bankruptcy may be a sign there is an economic downturn. Because many state and federal environmental laws seek to hold responsible parties in cases of contamination. However, it can take several years for a release. The https://bankruptcyhq.com/ offers debtors a fresh chance. However, because these issues are often very fact-dependent courts will have to apply differing rules to treat them. Although this alert addresses some important topics, it does not provide a complete overview of all possible problems in this complex area.
NOT ALL ENVIRONMENTAL OBLIGATIONS ARE SUBJECT TO THE AUTOMATIC STAY
An obligation or claim regarding the environmental environment is not subject to the automatic stay. This is something to consider.
Chapter 11 debtors have to comply with the environmental law before they can file their plan to organize.4 Courts might also consider similar facts in contradictory ways. It is therefore important to get legal counsel who is well-versed in this field.
The automatic stop is not applicable to proceedings to fix penalties amounts, natural damage amounts, and involve the share cost to be allocated to under the Comprehensive Environmental Response, Compensation and Liability Act.6 According to the pecuniary motive test, reviewing courts examine whether the proceeding primarily concerns government’s monetary interests or matters of public safety.
Enforcement of financial judgments will be subject to an automatic stop.
NOT ALL ENVIRONMENTAL “CLAIMS” ARE DISCHARGEABLE
Chapter 11 allows debtors filing bankruptcy to discharge all claims without having to file for bankruptcy.11 The Bankruptcy Code describes a claim as “right or payment” or a “right, equitable remedy or breach of performance” if it gives rise to a payment rights.12 Courts have had to interpret this definition within the context of environmental obligations.
COMPLIANCE TO ENVIRONMENTAL RULES AND REGULATIONS
Chapter 11 creditors must adhere to environmental laws once they are reorganized.
FINES AND PENALTIES
But, penalties or fines paid to a government agency may not be dischargeable in bankruptcy. Some courts have included fines and penalties (or administrative and legal expenses incurred in the arrangement of remediation efforts by state agencies) as part and parcel of the “cost and necessity to do business” for debtors24. Some courts have held that penalties are intended to deter rather than punish debtors.
PRE-PETITION Monetary Claims VS. INJUNCTIONS
It is often questioned whether an environment injunction, consent, or any other such obligation concerning pre-petition activity by the debtor constitutes any prepetition claim that can be discharged in bankruptcy. 26
Sometimes courts will assess whether or not the debtor can clean up the mess.
It is difficult to determine whether the pollution continues. The question of whether ongoing pollution is allowed to continue can be difficult for courts to answer.
An example of a case involving U.S. Environmental Protection Agency’s decision to take the action it wants (or have a state agency finish it) and then request reimbursement for the costs highlights how important it is to understand the underlying environmental laws. CERCLA, for example, allows EPA the ability to remediate a contaminated site and then sue PRPs. 36 Courts also conduct a similar analysis on state statutes.
DETERMINING WHEN CLAIM ARISES
It is possible that environmental claims may be complicated, especially if the threshold question of whether a claim was made prior to petition can prove difficult. These claims may include future costs, natural damages, and claims for future payments costs. A majority of courts agree that an environmental suit arises when a potential claimant can link a bankruptcy debtor with a recognized release a hazardous chemical. Consider when there could be a relationship leading to liability.
You may have limited rights to sell property
A second question arises at the intersection of bankruptcy law with environmental legislation. It was allowed to be abandoned if it didn’t “aggravate the current situation, create a genuine crisis nor increase the likelihood for disaster or intensify polluting agent involvement.” “46 Oklahoma courts approved abandonment where it did not “aggravate or create a genuine situation nor increase disaster likelihood or intensify polluting agent involvement.” The approach of 46 Minnesota courts was slightly different. They used a balance test to determine: (1) the danger to the public’s health and safety; (2) the extent and severity of the possible harm; (3) how expensive it would take to bring the property up to compliance with environmental laws; (4) and (5) how much money they have available to clean up the mess. “47
PURCHASERS IN THE 363 SALES SHOULD CONTINUE TO USE ALL APPROPRIATE REQUESTS
Section 363 (f) of Bankruptcy code allows debtors to dispose of assets after giving notice to creditors and receiving bankruptcy court approval. To establish a defense, you can also conduct All Appropriate Inquiries.
BankruptcyHQ Creditors Rights and Bankruptcy Group offer legal guidance regarding bankruptcy and restructuring questions. They are well-equipped to assist with environmental concerns that might arise during bankruptcy.
2 11 U.S.C. § 362(b)(4).
4 See In re Commonwealth Oil Refining Co., 805 F.2d 1175 (5th Cir. 1986) (U.S. EPA’s RCRA enforcement action not stayed; before filing its plan of reorganization, debtor was required to cease treating, storing and disposing of waste without EPA permit and submit closure and post-closure plans for its disposal facilities).
5 Compare In re Goodwin, 163B.R. 825 (Bankr. D. Idaho 1993) (Idaho Department of Health and Welfare’s suit seeking injunction stayed as a pre-petition claim because under the applicable statute, the state could have sought money damages instead) and City of New York v. Exxon Corp., 932 F.2d 1020 (2d Cir. 1991) (New York City’s suit for CERCLA recovery not stayed, which sought reimbursement of waste removal costs, natural resource damages, and a declaratory judgment that debtor was liable for future costs).
6 See U.S. v. Jones & Laughlin Steel Corp., 804 F.2d 348 (6th Cir. 1986) (Judicial proceeding to fix the amounts debtor owed to various government entities not stayed, as resolution represented a regulatory action and would not affect the assets available to other creditors). See also City of New York v. Exxon Corp., 932 F.2d 1020 (2d Cir. 1991); U.S. v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988); In re Commerce Oil Co., 847 F.2d 291 (6th Cir. 1988); U.S. v. Sugarhouse Realty, 162 B.R. 113 (E.D. Pa. 1993); U.S. v. Alsol Corp., 2014 WL 46775 (D.N.J. Jan. 2, 2014).
7 See In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988).
9 See U.S. v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988); In re Commonwealth Oil Refining Co., 805 F.2d 1175, 1183 (5th Cir. 1986); Penn Terra Ltd. v. Dep’t of Envtl. Res., 733 F.2d 267, 272 (3d Cir. 1984); U.S. v. Sugarhouse Realty, 162 B.R. 113, 117 (E.D. Pa. 1993).
10 See U.S. v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988); U.S. v. Alsol Corp., 2014 WL 46775 (D.N.J. Jan. 2, 2014).
12 11 U.S.C. § 101(5)(A-B).
13 See Ohio v. Kovacs, 469 U.S. 274, 285 (1985); In re CMC Heartland Partners, 966 F.2d 1143, 1146 (7th Cir. 1992); In re Industrial Salvage, Inc., 196 B.R. 784, 790 (Bankr. S.D. Ill. 1996).
14 See generally U.S. v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009); In re Torwico Electronics, Inc. v. N.J. Dep’t of Envtl. Prot., 8 F.3d 146 (3d Cir. 1993); In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); In re Taylor, 572 B.R. 592 (Bankr. E.D.N.C. 2017); Mark IV Industries Inc. v. N.M. Env’t Dep’t, 438 B.R. 460 (Bankr. S.D.N.Y. 2010); In re Industrial Salvage, Inc., 196 B.R. 784 (Bankr. S.D. Ill. 1996).
15 See, e.g., In re Jager, 609 B.R. 156 (Bankr. W.D. Penn. 2019); In re Lewis, 215 B.R. 880 (Bankr. D. Alaska 1997).
16 See, e.g., In re Peabody Energy Corp., 958 F.3d 717 (8th Cir. 2020) (state statutory and common law tort claims discharged in bankruptcy as claims to recover money, not claims brought under the police or regulatory power of the state); In re G-I Holdings Inc., 654 Fed. Appx. 571, 574 (3d Cir. 2016) (New York City Housing Authority’s claims seeking asbestos removal discharged in bankruptcy as a monetary claim for property damage, not a regulatory action to abate ongoing pollution). For further discussion of the Eighth Circuit’s recent decision in In re Peabody Energy Corp., see Holland & Knight’s Energy and Natural Resources Blog: “U.S. Court of Appeals Holds That Climate Change Tort Claims Are Dischargeable in Bankruptcy,” Aug. 21, 2020.
17 See generally Ohio v. Kovacs, 469 U.S. 274 (1985); In re Nat. Gypsum Co., 139 B.R. 397 (Bankr. N.D. Tex. 1992).
18 See, e.g., Ohio v. Kovacs, 469 U.S. 274, 283-85 (1985); In re Peabody Energy Corporation, 958 F.3d 717, 724 (8th Cir. 2020); In re Chateauguay Corp., 944 F.2d 997, 1008 (2d Cir. 1991); In re G-I Holdings Inc., 654 Fed. Appx. 571, 572 (3d Cir. 2016); In re Jimmo, 204 B.R. 655, 660 (Bankr. D. Conn. 1997).
19 See, e.g., In re Chemtura Corp., 439 B.R. 561, 570 (Bankr. S.D.N.Y. 2010); In re Texaco Inc., 182 B.R. 937, 953-54 (Bankr. S.D.N.Y. 1995).
20 See, e.g., Cumberland Farms v. Fla. Dep’t of Envtl. Prot., 116 F.3d 16, 20 (1st Cir. 1997); In re Jimmo, 204 B.R. 655, 659 (Bankr. D. Conn. 1997).
21 See In re Exide Technologies, 613 B.R. 79, 81 (Bankr. D. Del. 2020), appeal docketed, No. 20-8023 (3d Cir. April 23, 2020).
22 11 U.S.C. §§ 507(a), 503(b)(1)(A); see In re Chateaugay Corp., 944 F.2d 997, 1009-10 (2d Cir. 1991).
23 See Cumberland Farms v. Fla. Dep’t of Envtl. Prot., 116 F.3d 16, 22 (1st Cir. 1997) (“The payment of a fine for failing, during bankruptcy, to meet the requirements of Florida environmental protection laws is a cost ‘ordinarily incident to operation of a business’ in light of today’s extensive environmental regulations.”).
24 See Com. of Pa. Dep’t of Env. Res. v. Conroy, 24 F.3d 568, 569-71 (3d Cir. 1994).
25 See In re Exide Technologies, 613 B.R. 79, 89 (Bankr. D. Del. 2020), appeal docketed, No. 20-8023 (3d Cir. April 23, 2020).
26 Mark IV Industries Inc. v. N.M. Env. Dep’t, 438 B.R. 460, 467-68 (Bankr. S.D.N.Y. 2010).
27 See, e.g., Ohio v. Kovacs, 469 U.S. 274, 283 (1985); In re Torwico Electronics, Inc. v. N.J. Dep’t of Envtl. Prot., 8 F.3d 146, 151 (3rd Cir. 1993); In re Taylor, 572 B.R. 592, 603 (Bankr. E.D.N.C. 2017); Mark IV Industries Inc. v. N.M. Env. Dep’t, 438 B.R. 460, 469 (Bankr. S.D.N.Y. 2010).
28 See, e.g., U.S. v. Whizco, Inc., 841 F.2d 147, 151 (6th Cir. 1988); Gable v. Borges Const., Inc., 792 F. Supp. 2d 117, 123 (D. Mass. 2011).
29 See, e.g., U.S. v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009); In re Torwico Electronics, Inc. v. N.J. Dep’t of Envtl. Prot., 8 F.3d 146 (3d Cir. 1993); In re Commonwealth Oil Refining Co., 805 F.2d 1175, 1186 (5th Cir. 1986); Mark IV Industries Inc. v. N.M. Env. Dep’t, 438 B.R. 460, 467 (Bankr. S.D.N.Y. 2010); In re Industrial Salvage, Inc., 196 B.R. 784, 789 (Bankr. S.D. Ill. 1996).
30 See U.S. v. Hubler, 117 B.R. 160, 164-65 (W.D. Pa. 1990).
31 See generally In re Torwico Electronics, Inc. v. N.J. Dep’t of Envtl. Prot., 8 F.3d 146, 151 (3rd Cir. 1993).
32 See In re IT Group, Inc., Co. 339 B.R. 338, 342-43 (D. Del. 2006).
34 In re G-I Holdings Inc., 654 Fed. Appx. 571, 574 (3d Cir. 2016).
35 In re Chateaugay Corp., 944 F.2d 997, 1008 (2d Cir. 1991).
36 U.S. v. Apex Oil Co., 579 F.3d 734, 736-37 (7th Cir. 2009); In re Taylor, 572 B.R. 592, 603 (Bankr. E.D.N.C. 2017).
37 See, e.g., Mark IV Industries Inc. v. N.M. Env. Dep’t, 438 B.R. 460, 469 (Bankr. S.D.N.Y. 2010) (where New Mexico Water Quality Act did not allow the state to conduct the cleanup itself and recover costs, injunction was not a dischargeable claim).
38 See, e.g., In re Crystal Oil Co., 158 F.3d 291, 298 (5th Cir. 1998); In re Jensen, 995 F.2d 925, 930 (9th Cir. 1993); In re Nat. Gypsum Co., 139 B.R. 397, 409 (N.D. Tex. 1992); In re Motors Liquidation Co., 598 B.R. 744, 756 (S.D.N.Y. 2019).
39 In re Jensen, 995 F.2d 925, 930 (9th Cir. 1993) (internal citation omitted).
40 United Artists Theatre Circuit, Inc. v. Cal. Regional Water Quality Control Bd., 255 Cal. Rptr. 3d 796, 831 (2019).
41 In re Crystal Oil Co., 158 F.3d 291, 298 (5th Cir. 1998).
42 See, e.g., In re Parker, 313 F.3d 1267, 1269-70 (10th Cir. 2002); Grady v. A.H. Robins Co., 839 F.2d 198, 203 (4th Cir. 1988).
43 See In re Motors Liquidation Co., 598 B.R. 744, 755 (S.D.N.Y. 2019).
45 Midlantic Nat. Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494, 507 (1986).
46 In re Oklahoma Refining Co., 63 B.R. 562, 565 (Bankr. W.D. Okla. 1986). See also In re Smith-Douglass, Inc., 856 F.2d 12, 16 (4th Cir. 1988); In re Brio Refining, Inc., 86 B.R. 487, 489 (N.D. Tex. 1988).
47 In re Franklin Signal Corp., 65 B.R. 268, 272 (Bankr. D. Minn. 1986).
48 See, e.g., In re Peerless Plating Co., 70 B.R. 943, 946-47 (Bankr. W.D. Mich. 1987).