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Debtors with Environmental Liabilities May Not Be Able to Get a “Fresh Start”



June 28, 2010

By: Karen A. GiannelliChristina C. FullamIrvin M. Freilich

Post-bankruptcy liabilities under various federal environmental statutes, including the Superfund statute, may be affected by the Seventh Circuit’s recent decision in United States of America v. Apex Oil Co., Inc., 579 F.3d 734 (7th Cir. 2009). The Bankruptcy Code generally offers debtors a “fresh start” by allowing the discharge of certain claims or debts. A debt is a liability on a claim, 11 U.S.C. § 101(12), and a claim is defined as the right to payment or “to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” 11 U.S.C. §101(5). Determining which types of environmental claims are equitable, as opposed to monetary, in nature, and if equitable, whether they “give rise to a right to payment,” is often a difficult task. Wholly equitable relief is not generally viewed as a “claim” and is therefore not usually dischargeable in bankruptcy.

The Apex Oil decision addresses this very interesting clash between environmental and bankruptcy law. There, the Seventh Circuit explored whether an injunction requiring the debtor to perform an environmental cleanup under § 7003 of the Resource Conservation and Recovery Act (“RCRA”) constituted a claim dischargeable in bankruptcy, and it concluded that these types of injunctions do not constitute “claims” dischargeable under the Bankruptcy Code. Apex Oil, 579 F.3d at 737-39.

Apex, which had reorganized in bankruptcy, had been ordered to perform an environmental remediation of its property. It did not have the in-house capability to clean up the contaminated site, and would have needed to pay an estimated $150 million to a third party to conduct the remediation to comply with the injunction. Id. at 736. The Environmental Protection Agency (“EPA”) argued that an injunction issued pursuant to § 7003 of RCRA, 42 U.S.C. § 6973 ordering the cleanup of a contaminated site was not a debt as defined by the Bankruptcy Code.

On review, the Seventh Circuit noted that if an equitable order, such as one for specific performance that is ultimately reduced to a money judgment, or for backpay in employment cases, amounts to an order to pay, then it is dischargeable in bankruptcy. Apex Oil, 579 F.3d at 736. However, the Court then specifically explained that injunctions requiring a party to clean up contamination under §7003 of RCRA cannot be viewed as an obligation to pay money because that section of RCRA “does not authorize any form of monetary relief.” Apex Oil, 579 F.3d at 736-37.

Thus, the Circuit Court rejected Apex’s argument that the cost of complying with the equitable decree is a money claim, and should therefore be dischargeable. Id. at 737. The court opined that “[a]lmost every equitable decree imposes a cost on the defendant, whether the decree requires him to do something, as in this case, or, as is more common, to refrain from doing something.” Id. at 737. The court likewise rejected Apex’s arguments that certain cases that allowed the discharge of the costs of compliance with equitable environmental liabilities, including the Supreme Court’s decision in Ohio v. Kovacs, 469 U.S. 274 (1985), and the Sixth Circuit’s decision in United States v. Whizco, 841 F.2d 147, 150-51 (6th Cir. 1988), should apply, holding Kovacs distinguishable on its facts and Whizco irreconcilable with more recent case law.

Apex Oil filed its petition for certiorari to the United States Supreme Court in February 2010, and its petition is currently pending before the Court. Any decision made by the Court in this case may well affect the way in which environmental liability under federal statutes, including the Comprehensive Environmental Response, Compensation and Liability Act of 1990 (“CERCLA” or “Superfund”), is handled in bankruptcy proceedings.

CERCLA authorizes both monetary and injunctive relief against parties responsible for pollution. Wholly monetary relief probably would be dischargeable under the Apex Oil analysis. However, orders issued by the government under § 106 of CERCLA compelling parties to remediate a site or to take other necessary steps to protect human health and the environment, as well as administrative consent orders entered into pursuant to §§ 106 and 107 of CERCLA are generally viewed as a form of equitable relief, and under the Apex Oil decision, may not be dischargeable. Additionally, ongoing contamination from prior operations that continues to migrate into soil or groundwater, and continues to endanger human health and the environment, may be viewed as a future obligation because of its continuing nature. These obligations are most likely not dischargeable in bankruptcy. See, e.g., Matter of CMC Heartland Partners, 966 F.2d 1143, 1146-47 (7th Cir. 1992) (an order under § 106 to clean up pollution that meets the “imminent and substantial endangerment” requirement may not be dischargeable).

The issues presented by the Apex Oil decision are far-reaching and unresolved. The issue of whether injunctive relief under environmental laws is dischargeable in bankruptcy has yet to be determined by the Supreme Court, and the circuit split on this complex issue underscores the need for resolution. Until the Supreme Court clarifies the law in this area, there will continue to be uncertainty in environmental litigation, negotiation of settlements, bankruptcy restructuring, and business planning.