Who’s Gonna Clean Up This Mess?!!

Who’s Gonna Clean Up This Mess?!!

Chrysler’s and GM’s recent sales through the Bankruptcy Courts of New York’s Southern District have raised the question of whether some jurisdictions provide more receptive forums than others for getting a “distressed M&A” transaction accomplished.  This sort of “forum shopping” is both a well-established concept in commercial insolvency practice and an integral part of reorganization planning.

Last week, a 7th Circuit decision highlighted another area where geography – at least as it concerns the choice of a Bankruptcy Court – can have an important effect on the outcome of a Chapter 11 case, as well as on a reorganized debtor’s post-confirmation operations: The resolution of environmental liabilities.

U.S. v. Apex Oil Company involved an environmental injunction obtained against Apex Oil, successor-by-merger to Clark Oil and Refining Corporation.

Clark Oil, its corporate parent, and a number of affiliates filed related Chapter 11 cases 12 years ago, in 1987.  Clark was subsequently merged into Apex, and a Chapter 11 Plan confirmed in the debtors’ related Chapter 11 cases.  Nearly two decades later, in 2005, the Environmental Protection Agency sought an injunction requiring Apex to clean up a contaminated site in Hartford, Illinois, which housed an oil refinery once owned by Clark.

Chief US District Court Judge David Herndon of Illinois’ Southern District conducted a 17-day bench trial in early 2008 and, in July 2008, issued a 178-page decision finding that, in fact, contamination was present at the site and that it was Apex’s responsibility to clean it up.

Apex appealed, arguing that confirmation of the Chapter 11 Plan and discharge obtained in Clark Oil’s Chapter 11 case 2 decades earlier precluded enforcement of the more recent federal injunction.  In essence, Apex argued that Section 101 of the Bankruptcy Code defines a “claim” as a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.”  Since cleaning up the contaminated Hartford, Ill. refinery site in response to the federal injunction would obviously require the significant expenditure of money, Apex reasoned that this obligation was effectively a “claim” subject to the earlier Chapter 11 discharge, and could not be enforced.

Judges Posner, Cudahy, and Kanne of the 7th Circuit were not persuaded.  Judge Posner’s comparatively brief, 12-page decision issued last week held that the EPA’s federal injunction at issue did not give rise to a “claim” as that term is defined by the Bankruptcy Code . . . and, therefore, could not be discharged by means of Clark Oil’s Chapter 11 Plan.

Consequently, Apex now holds the clean-up tab for the old Clark refinery.

In order to hand Apex that tab, Judge Posner and his colleagues distinguished Apex’s case from a 1985 Supreme Court decision – Ohio v. Kovacs, 469 U.S. 274 – which involved Ohio’s appointment of a receiver to remediate environmental claims after the debtor failed to abide by a state court consent decree requiring him to do so.  The Supreme Court found that these enforcement efforts constituted a dischargeable “claim” in Kovacs’ bankruptcy.

The result in Apex was different because, in Judge Posner’s view, the receiver in Kovacs sought money for clean-up, whereas the EPA in Apex merely sought clean-up . . . from Apex.  And, in fact, the federal statute under which the EPA sought remediation (the federal Resource Conservation and Recovery Act – “RCRA”) affords only this relief – and nothing more.

Juge Posner’s analysis of RCRA relies in part on earlier 7th Circuit precedent (AM Int’l. v. Datacard Corp., 106 F.3d 1342) – which itself relies on other Supreme Court precedent (Meghrig v. KFC W., Inc., 516 U.S. 479) – to hold that RCRA doesn’t allow a party obtaining a “clean-up” order to clean up a contaminated site itself, then sue for response costs in lieu of seeking an injunction.  For this reason, he held, RCRA cannot “give rise to a right to payment” for purposes of a bankruptcy discharge.

The 7th Circuit panel acknowledged that Apex’s case is similar to U.S. v. Whizco, 841 F.2d 147 – in which the 6th Circuit reached a conclusion opposite from Judge Posner and his 7th Circuit colleagues.   But where Apex is concerned, that is no matter.  As Judge Posner sees it, the 6th Circuit’s rationale “cannot be squared with . . . [7th Circuit] decisions [such as Datacard] which hold that cost incurred [to comply with an equitable order] is not equivalent to the ‘right to payment’ . . . .”

Though the 7th Circuit’s understanding of RCRA is based in part on Supreme Court precedent, few decisions outside either the 6th or 7th Circuit appear to discuss its application in the bankruptcy context.  Moreover, other Supreme Court precedent (such as Kovacs) holds that, at least in certain circumstances, equitable remedies (such as appointment of a receiver) are, in reality, “claims” within the meaning of the Bankruptcy Code – and, therefore, can be discharged.

As a result, the resolution of environmental claims in bankruptcy appears to turn not only on the “clean-up” statute at issue – or, more specifically, its remedies – but also on the jurisdiciton where the debtor’s bankruptcy case is filed.

So who’s gonna clean up this environmental mess?

That depends, at least in part, on which court first decides the claims resolution mess.

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