Reducing Environmental Risk

Bankruptcy Does Not Discharge All Liability to Cleanup a Contaminated Site: Part I

The United States District Court for the Southern District of New York recently confirmed that a party’s liability to clean up a contaminated property was not discharged as part of a Chapter 11 reorganization, since such liability was not a “claim” under the Bankruptcy Code. See In re Mark IV Industries, Inc., 2011 U.S. Dist. LEXIS 110595 (S.D.N.Y., Sept. 28, 2011). 

Mark IV Industries, Inc. (“Mark IV”) purchased a previously contaminated property in New Mexico in 1987, and in 1990, that state’s Environment Department (“NMED”) began an investigation into the contamination of groundwater from the property, pursuant to the New Mexico State Water Quality Act (“WQA”). In accordance with the requirements of the WQA, in 1995, Mark IV implemented a remediation plan; in 1996, it voluntarily submitted a Stage 1 abatement plan to NMED; in 2007, it submitted a Stage 2 abatement plant; but in 2008, Mark IV ceased cleanup at the property. Mark IV filed for bankruptcy in 2009, and its reorganization was approved and became effective later that year.

This case began in 2009 when Mark IV sought a declaratory judgment against NMED in Bankruptcy Court that its liability to clean up the contaminated property was discharged under section 101(5)(B) of the Bankruptcy Code. NMED counterclaimed, seeking declaratory judgment and an injunction requiring Mark IV to finish cleaning up property.

A “claim” under of Chapter 11 of the Bankruptcy Code is defined as a:

(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.

11 U.S.C. § 101(5). An order of the Bankruptcy Court confirming a reorganization plan discharges a debtor from any debt arising prior to confirmation, thereby extinguishing that debtor’s personal liability on his creditors’ “claims.” See 11 U.S.C. § 1141(d)(1)(A). In this case, Mark IV argued that the “environmental injunction” requiring it to clean up the property under the WQA was a dischargeable “claim” under Section 101(5) of the Bankruptcy Code.

In considering the extent to which an environmental cleanup obligation constitutes a “claim” – and is dischargeable – under section 101(5)(B), the Bankruptcy Court considered the following cases:

  • In Ohio v. Kovacs, 469 US 274 (1985), the Supreme Court of the United States held that a right to cost recovery was a “claim” under the Bankruptcy Code, which can be dischargeable. In that case, the only performance required by the government was payment of money (i.e., cost recovery) under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).
  • In In re Chateaugay Corporation, 944 F.2d 997 (2d Cir. 1991), the court attempted to clarify the distinction between environmental injunctions that are “claims” and those that are not: if an injunction was the option the agency chose in lieu of incurring response costs by doing the work itself, then the environmental injunction was a “claim” and was dischargeable; but where there is no such option, i.e., where only one remedy – enjoining the party to do a cleanup – is available, then the environmental injunction is not a “claim” and is not dischargeable. To put it another way, if a cleanup order has “dual objectives” then it is not a dischargeable claim.
  • In In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), the court held that it is irrelevant that the enforcing agency could have obtained a payment under a different statutory provision; only the statute under which the enforcing agency acts is relevant. As well, the court confirmed that liability for ongoing pollution cannot be a dischargeable “claim” under the Bankruptcy Code. In that case, the court found that an environmental injunction was not a claim where a seepage pit continued to leak hazardous substances into surrounding environment.
  • Finally, in United States v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009), cert. denied, 131 S.Ct. 67 (2010), the court concluded that there is a general understanding among courts that the discharge of a “claim” must be limited to cases in which the claim gives rise to a “right to payment” because the equitable decree (i.e., enjoining a party to do something) cannot be executed. For example, in that case, the environmental injunction sought by the government was imposed under the federal Resource Conservation and Recovery Act (“RCRA”), which requires only clean up, and does not have an alternative cost recovery aspect. The court concluded that because there was no “right to payment,” there could be no dischargeable “claim.”

Thus, the Bankruptcy Court in In re Mark IV Indus. distilled a three-part test (from Kovacs and Chateauguay) to determine whether an environmental injunction is a “claim” that may be discharged:

  1. “Whether the debtor is capable of executing the equitable decree, [i.e., performing the act that the statute authorizes a court to force upon the debtor,] or can he only comply by paying someone else to do it?”
  2. “Whether the pollution is ongoing?”
  3. “Whether the enforcing agency has a right to payment in lieu of enforcing the injunction?”

See In re Mark IV Indus., at *19-20 (internal quotations omitted).

In applying this test, the Bankruptcy Court concluded the following:

  1. Although Mark IV did not possess the site, it had access to site for purposes of complying with the cleanup order, and was therefore capable of executing the environmental injunction imposed by the NMED.
  2. The issue of ongoing pollution could not be determined on a motion for summary judgment (as it was then presented to the court) because there remained genuine issues of fact in dispute, but that it was unnecessary to determine this factor because it was not dispositive.
  3. Because NMED proceeded under the WQA, which does not authorize NMED to undertake cleanup and then recover response costs as an alternative, the NMED had no right to payment in lieu of enforcing the injunction for Mark IV to clean up the property.

See In re Mark IV Indus., at *20-21.

Thus, the Bankruptcy Court held that the environmental injunction against Mark IV issued by NMED pursuant to the WQA was not a “claim,” and was therefore not dischargeable under the Bankruptcy Code. Mark IV was still responsible for completing the remediation and abatement program on the property.

Mark IV appealed this decision to the District Court for the Southern District of New York.



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