Source: https://www.martindale.com/bankruptcy-law/article_Modrall-Sperling_2207258.htm
Timestamp: 2019-04-19 02:33:43+00:00

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This article examines the sometimes uneasy intersection between laws addressing responsibility for environmental liabilities and the protections afforded to debtors under the United States Bankruptcy Code. Following a number of industrial related environmental incidents and mishaps, in 1976 Congress passed the Resource Conservation and Recovery Act of 1976 ("RCRA"), by which Congress intended to reduce generation of toxic and hazardous wastes and ensure the proper disposal, treatment, and storage of such wastes. Soon thereafter in 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") to redress decades of unregulated contamination by imposing cleanup costs on contaminators.1 Liability for violations of these statutes effectively transforms an entity into an environmental debtor of federal or state governments, or both.
A. Environmental Injunctions and Clean Up Orders in Bankruptcy "Claims"
Because only "claims" are dischargeable in bankruptcy, only those liabilities of the debtor properly classified as a right to payment will be discharged.15 The liabilities that fail to come within the Code's definition of a "claim" survive bankruptcy and a debtor is still liable for such claims after discharge.16 Courts thus have had to grapple with the question of whether injunctions and clean up orders under RCRA and CERCLA are "claims" for purposes of the Code.
Generally, courts have held that a debtor's obligation to comply with a RCRA or CERCLA clean up order or injunction is not a right to payment.17 Because these obligations do not amount to a right to payment they are not a "claim" within the meaning of the Code and remain in place, unaffected by a debtor's bankruptcy discharge.18 Less clear is the treatment of a RCRA or a CERCLA clean up order or injunction that in bankruptcy has the effect of a money judgment.
Two cases, Ohio v. Kovacs and a subsequent Second Circuit case, Chateaugay I, seem to create two propositions regarding clean up orders that have the effect of a money judgment.19 First, when an injunction or court order, even impliedly, converts equitable relief to a money judgment, such an order is then a "claim" within the meaning of the Code.20 Because the once equitable relief is now a claim, it is also subject to the discharge provisions of Chapter 7 and Chapter 11, permitting a debtor-PRP to reduce its environmental liabilities in bankruptcy.21 Second, because only those injunctions that can be reduced to a money judgment may be a "claim" and because the express statutory language of RCRA does not allow for a cause of action for a money judgment, injunctions or clean up orders under RCRA can never be a claim within the meaning of the Bankruptcy Code.22 Allowing a debtor-PRP to reduce its environmental liabilities, especially in cases like Kovacs and Chateaugay I, where the debtor knew its actions violated the law, while comporting with the meaning of the Code conflicts with the purpose of CERCLA to hold those responsible for contaminating the environment and endangering human health.
One recognized exception to Section 362 is an action enforced by a governmental body pursuant to its police power.27 The Code, however, provides an exception to the governmental body police powers exception.28 While a governmental body enforcing actions pursuant to its police powers is excepted from the Stay provisions, actions by this power are not excepted if the governmental body seeks to enforce a money judgment, essentially an exception to the exception.29 But the Code fails to define what types of judgments qualify as "money judgments" within the meaning of either Section 362 or the larger Code itself.30 Accordingly, controversy arises when a governmental body takes an action, such as imposing a clean-up order or injunction that is not a money judgment on its face, but which does require a debtor-PRP to expend money to clean up a contaminated site or otherwise comply with an environmental statute.
Generally, Section 507 of the Code—"Priorities"—proscribes the order by which creditors' claims and expenses are paid out of the bankruptcy estate.42 Section 503—"Allowance of Administrative Expenses"—provides an exception to the general payment scheme in 507 for certain categories of expenses and establishes a different priority for certain types of claims in bankruptcy.43 Section 503 provides an expense priority for any goods or services rendered to the estate after the date of filing, or rather "post-petition," that are "[ ] actual, necessary, costs and expenses for preserving the estate."44 In order to obtain an administrative expense the goods or services rendered to the estate must (1) be actual, (2) be necessary, (3) preserve the estate, and (4) occur post-petition.45 Claims and expenses outside of these four criteria do not meet the special priority requirements and are subject to the priority payment established in Section 507. The Code's Section 503 administrative expense priority criteria cause a handful of conflicts with the practical abilities to remediate environmental contamination.
Courts have determined that monetary claims for response costs wholly incurred pre-petition or for future response costs arising out of wholly pre-petition actions causing contamination do meet the four criteria required under Section 503(b)(1)(A) to be an administrative expense.51 Accordingly, costs or expenses incurred as a result of these wholly pre-petition expenses or actions causing contamination are general unsecured claims paid according to the priority established by Section 507.52 Less evident is the priority assigned to environmental liabilities when the actions causing contamination occurred wholly pre-petition, but the costs to clean up the contamination occurred wholly post-petition.
Likewise, courts grant an administrative expense priority for the cost to bring a site into compliance with environmental laws because compliance with these laws is a "benefit" to the estate, i.e., one that in effect has "preserved" the estate by conferring such a beneficial interest upon it.55 Allowing this priority makes it less likely that the public will end up footing a huge bill for response costs because they are given a priority, as opposed to being a general unsecured claim, which regularly do not get paid in bankruptcy because of shortfalls in the estate.
Currently, the per turbine "installed cost" of the average turbine in the U.S., meaning a turbine with a 2.0-2.5 kilowatt ("kw") rating, costs $1 million dollars.64 Depending on the physical location of the turbine, offshore or onshore for example, turbines are 200-500 feet in height, utilize 60 acres per installed kwh, and contain a vast array of moving metal parts and lubricating liquids for proper operation of the turbine65 As a result, proper, yet costly, maintenance of these turbines is critical to ensuring protection of human and environmental health. Given the nature of the industry as one whose profitability is largely intertwined with the political climate, highly leveraged, capital intensive, and subject to the volatile commodities market, wind farm developers are potential candidates for bankruptcy because even a small downward move in the price of electricity could significantly impact a developer's bottom line.
In terms of the actual process, fracking utilizes "frack fluid"—a mixture of water, chemicals and propants injected at high pressure to prop open subterranean rock spaces so that oil may flow out after the frack fluid is withdrawn.70 Fracking is generally understood to at least create a potential for environmental contamination if there is inadequate "casing" of the wells to protect water bearing formations passed through to get to the deeper zones being fracked. Fracking is likewise capital intensive, highly leveraged, and risky. Because in many instances the bankruptcy courts do not uniformly recognize the underlying policy interests of environmental statutes and because the nature of these industries makes them vulnerable to market changes, it is wise to consider protection outside of the Code to guard against potential environmental contamination.
Planning for bankruptcy during the negotiation process involving a wind or oil and gas lease while the lessee is still solvent provides the parties with the best chance of ensuring protections against environmental liabilities and the inadvertent loss of those protections due to the desirable, but sometimes conflicting, goals of the Code and the laws ensuring environmental protection and responsibility.
1 Sandra Franco and Melissa Murray, Treatment of Environmental Liabilities in Bankruptcy, (1999), http://www.bingham.com/Publications/Files/2011/04/Treatment-of-Environmental-Liabilities-in-Bankruptcy.
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Process.aspx (last visited March 30, 2014).
4 Lisa E. Waisbren, Abandonment of Toxic Wastes Under Section 554 of the Bankruptcy Code, 71 Marq. L. Rev., 353 (1986).
5 See Waisbren, supra note 4 at 354.
6 A detailed discussion of the RCRA and CERCLA legal regimes, which are used here as examples of environmental laws, and exactly how environmental laws give rise to liabilities that may or may not become the subject of bankruptcy proceedings under the Code, are generally beyond the scope of this article.
7 See Franco, supra note 1 at 343.
10 See id. at 344-47.
12 See 11 U.S.C. §105(A)-(B) (2013).
15 11 U.S.C. §727(b); 11 U.S.C. §523(a)(3); 11 U.S.C. §1141.
16 See 11 U.S.C. §727(b); 11 U.S.C. §1141.
17 AM Int'l v. Datacard Corp., DBS, Inc., 106 F.3d 1342 (7th Cir. 1997); In re Chateaugay I, 944 F.2d 997 (2d Cir. 1991); In re Torwico Elec., Inc., 8 F.3d 146 (3d Cir. 1993).
18 AM Int'l, 106 F.3d at 1342; Chateaugay I, 944 F.2d at 997; Torwico, 8 F.3d 146.
19 Ohio v. Kovacs, 469 U.S. 274, 279 (1985); Chateaugay I, 944 F.2d at 997.
20 Chateaugay I, 944 F.2d at 999.
21 11 U.S.C. §727(b) (2013); 11 U.S.C. §523(a)(3)(2013).
22 42 U.S.C. § 6972(a); see Kovacs, 469 U.S. at 278; see Chateaugay I, 944 F.2d at 997.
23 11 U.S.C. §362(a)(1)-(8) (2013).
24 See 11 U.S.C. §362(a)(1)-(3) (2013).
25 Penn Terra Ltd. v. Dep't of Envt'l Resources, 733 F.2d 267, 271 (3d Cir. 1984).
26 11 U.S.C. §362(b) (2013).
27 11 U.S.C. §362(b)(4) (2013).
30 See 11 U.S.C. §101; see 11 U.S.C. §362 (containing no definition for "money judgment").
31 Penn Terra Ltd., 733 F.2d at 267; City of New York v. Exxon Corp., 932 F.2d 1020 (2d. Cir. 1991) is another leading circuit case addressing whether compelling the debtor-PRP to comply with an injunction is the equivalent of a money judgment stayed by section 362. The Second Circuit paralleled Penn Terra's reasoning to determine expenditure of money alone does not convert an injunction to a money judgment stayed by section 362. Id.
32 Penn Terra Ltd., 733 F.2d at 267.
38 New York v. N. Storonske Cooperage Co., 174 B.R. 366 (N.D.N.Y. 1994); Chateaugay I, 944 F.2d at 997.
39 Penn Terra Ltd., 733 F.2d at 278.
42 11 U.S.C. §503 (2013).
44 11 U.S.C. §503(b)(1)(A) (2013) (emphasis added).
47 See Franco, supra note 1 at 351.
51 In re Nat'l Gypsum, 139 B.R. 397 (N.D. Tex. 1992); In re Mahoney-Troast Construc. Co., 189 B.R. 57 (Bankr. D.N.J. 1995).
52 In re Nat'l Gypsum, 139 B.R. at 397; In re Mahoney-Troast Construc. Co., 189 B.R. at 57.
53 Chateaugay I, 944 F.2d at 1010-11; In re Conroy, 24 F.3d 568 (3d Cir. 1994); In re Wall Tube & Metal Prod. Co., 831 F.2d 118, 123-124 (6th Cir. 1987).
54 Penn Terra Ltd., 733 F.2d at 278.
55 Wall Tube & Metal Prod. Co., 831 F.2d at 123-124.
http://dsireusa.org/incentives/incentive.cfm?Incentive&under;Code=US13F (last visited March 30, 2014).
59 See Loder, supra note 56; see Database for State Renewables & Efficiency, supra note 56.
61 Humphrey, supra note 57.
66 Loder, supra note 56.
70 FracFocus, Hydraulic Fracturing and How it Works, http://fracfocus.org/hydraulic-fracturing-process (last visited March 30, 2014).
71 Humphrey, supra note 57.
75 11 U.S.C. §541 (2013).
76 Nat'l Gypsum, 139 B.R. at 397; Mahoney-Troast Construc. Co., 189 B.R. at 57.
78 11 U.S.C. §541 (2013).

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