Reducing Environmental Risk

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

In our last post, “Bankruptcy Does Not Discharge All Liability to Cleanup a Contaminated Site: Part I,” we discussed the background of In re Mark IV Industries, Inc., 2011 U.S. Dist. LEXIS 110595 (S.D.N.Y., Sept. 28, 2011), describing the events that led up to the filing of the lawsuit and the Bankruptcy Court’s decision. In this post, we will discuss the decision of the United States District Court for the Southern District of New York on appeal.

As you’ll remember, the Bankruptcy Court distilled a three-part test 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 relevant part, the Bankruptcy Court held that because the applicable state statue, New Mexico’s Water Quality Act (“WQA”), only allows for an environmental injunction – and not an alternative right of payment – Mark IV’s liability to clean up a contaminated site was not a “claim” under the section 101(5)(B) of the Bankruptcy Code. Therefore, the liability was not discharged by the Chapter 11 reorganization; Mark IV was still liable for abatement of the groundwater contamination. Mark IV appealed this decision.

On appeal, the District Court for the Southern District of New York affirmed the Bankruptcy Court’s decision.

First, the District Court affirmed that courts must look only to the statute under which the enforcing agency applied the environmental injunction, noting that the “right to payment” under the Bankruptcy Code does not include “hypothetical remedies that the enforcing agency could have sought under other statutory authorities” and that Chateaugay “drew the line between claims and non-claims closer to the non-claim side.” In re Mark IV Indus., at *28-29 (citing In re Chateaugay Corporation, 944 F.2d 997, 1009 (2d Cir. 1991)). “Policy considerations support looking only to the statutory authority under which an enforcing agency has chosen to proceed.” In re Mark IV Indus., at *30.

Thus, looking only at the WQA, which does not provide for cost recovery as an option to requiring cleanup (similar to RCRA, as analyzed in United States v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009), which also does not provide for cost recovery), the court held that the NMED’s lack of a right of payment under the WQA “is dispositive.” See In re Mark IV Indus., at *33. Therefore, the environmental injunction requiring Mark IV to clean up the property is not a “claim” under the Bankruptcy Code and Mark IV’s liability under the WQA survives its Chapter 11 reorganization.

Second, although the District Court determined that the NMED’s lack of a right to payment under the WQA was dispositive in this case, it nevertheless considered if an analysis of whether the pollution is ongoing is a proper factor to be considered by the courts. See In re Mark IV Indus., at *35. The court noted: “While this principle is derived from the basic ‘right to payment’ language in [the Bankruptcy Code]. . . this does not mean that the Bankruptcy Court erred in analyzing ongoing pollution as a separate inquiry from a statutory right to payment.” In re Mark IV Indus., at *35-36.

The court reasoned that even if the enforcing agency has a monetary option under the applicable environmental statute, it would be “impermissible” to convert an injunction to stop ongoing pollution into a monetary sum. See In re Mark IV Indus., at *36. The court provided an example:

To the extent that the injunction [under CERCLA] is merely addressed at cleaning up the site, the EPA’s injunction is a dischargeable claim. However, an injunction under CERCLA imposing an obligation ‘to stop or ameliorate ongoing pollution,’ is not dischargeable, despite a statutory right to recover cleanup costs, because the injunction is addressed in part at remedying ongoing pollution.

In re Mark IV Indus., at *37. Nor does the ongoing pollution have to be result of current operations or activities under Chateaugay. See In re Mark IV Indus., at *40.

Therefore, even though the Bankruptcy Court in this case held that the issue of ongoing pollution was not appropriate for summary judgment (meaning there were facts still in dispute), the District Court determined that consideration of whether the pollution is ongoing is a proper factor for courts to consider in determining whether an environmental injunction constitutes a dischargeable “claim” under the Bankruptcy Code. “Because the line between a dischargeable and non-dischargeable environmental injunction is murky, the ‘ongoing pollution’ test provides a helpful way . . . to determine whether an injunction falls on the claim or non-claim side of the line.” In re Mark IV Indus., at *36.

Finally, the District Court also noted that Mark IV has a legal obligation to comply with the abatement plan (under NM Code R. §, and because Mark IV has access to site for purpose of complying with its legal obligation, it is irrelevant whether Mark IV owns the site. Thus, the first factor of the Bankruptcy Court’s test is also met. In re Mark IV Indus., at *40.

Considering Bankruptcy as a Way to Get Out of Cleaning Up a Site?

The District Court’s decision in Mark IV Industries confirms that bankruptcy may not always discharge liability to clean up contamination under environmental statutes.

As a general rule of thumb based on Mark IV Industries, if the government uses CERCLA as its legal authority, cleanup liability would constitute a dischargeable claim under the Bankruptcy Code. This is so because the government has alternative remedies of seeking either an injunction (to a party with access to effect a cleanup) or cost recovery (if the owner/operator refuses to do so and the government must). But note that this is true so long as the pollution is not ongoing, because the importance of immediate remediation of the pollution takes precedence over everything else and the significance of accomplishing that remediation cannot simply be converted to a monetary amount.

On the other hand, if the government invokes RCRA as its legal basis – which has no cost recovery option as a remedy – cleanup liability would not constitute a “claim” under the Bankruptcy Code; such liability would probably not be discharged by a Chapter 11 reorganization.

However, because there remains some nuance in applying these “rules” to your specific situation, in order to effectively determine whether or not bankruptcy would accomplish the objective of discharging a cleanup obligation under either federal or state law, you should review the facts and context of your business’ situation with your environmental attorney.



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