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— Bankruptcy —
The auto industry's woes have brought renewed attention to the Bankruptcy Code and the possibility of industrial asset acquisitions out of Chapter 11. In many industries, this attention should extend to environmental liabilities, since they can hamstring a restructuring -- just ask Asarco LLC -- or choke a surprised 363 buyer. The Code does a poor job defining how to balance corporate debt relief against public aversion to orphaned environmental problems, so judges have had to strike their own balances based on loosely defined precedent. Given our current recession, judges may be tempted to strike a new balance that favors debt relief. Now is a good time to review the status quo.
Even DIPs must comply with environmental law. The bankruptcy court cannot simply abrogate statutory environmental obligations. The debtor-in-possession must continue to spend the money necessary to comply with environmental laws and permits, and such expenditures can be given priority for payment as administrative expenses. A purchaser of assets out of bankruptcy (363 buyer) must also comply with applicable environmental law, simply by virtue of owning or operating the assets. Permits remain enforceable. Environmental permits impose compliance obligations that restructuring permittees must continue to meet. In fact, environmental agencies have successfully initiated permit enforcement during bankruptcy under the regulatory powers exception to the automatic stay. For industrial DIPs and for 363 buyers, the continuing validity of environmental permits is crucial, since industrial assets have little value without the permission to operate them. On-site contamination follows the assets. Environmental law vests the reorganized debtor or 363 buyer with responsibility for the assets it owns or operates, and the bankruptcy court is not in a position to interfere. Consequently, reorganization plans generally do not seek to discharge prepetition responsibility for on-site contamination. Prepetition off-site contamination can be discharged -- maybe. Where off-site contamination gives rise to a monetary liability (cost reimbursement for remediation) that is known and incurred prepetition, it tends to be viewed as a dischargeable claim like any other. It gets tricky when postpetition claims are filed for postpetition costs arising from prepetition hazardous releases. New York allows the reorganized company to reject such claims on the theory that they were discharged in Chapter 11, even if the prepetition release was undiscovered before plan confirmation. But courts elsewhere may not allow rejection unless, at the time of reorganization, the debtor and claimant "fairly contemplated" the liability arising from the prepetition release. For these courts, "fair contemplation" -- whatever that means -- must be evident for the liability to be dischargeable in bankruptcy. Liability under cleanup injunctions can be discharged if the injunction primarily protects the government's money rather than the public's health. Courts have struggled to define a litmus test for deciding whether the law authorizing a given injunction is mainly focused on protecting human health and the environment or ensuring that the debtor/DIP pays for the remediation. If the former, the claim is generally not dischargeable; if the latter, it generally is. Mass tort claims are dischargeable, but a separate trust fund may be set up to capture known and expected future claims if the set of injured people is large and uncertain. Personal injury claims pending at the time of the Chapter 11 petition can be treated and discharged as any other claims would be. But if the exposure has affected a large, poorly defined class of people, one can foresee post-confirmation claims by claimants who were exposed prepetition but hadn't discovered their illness by the time of plan confirmation. In these cases, a bankruptcy court can issue an injunction that channels future claimants to a trust fund for recovery on their future claims; these claimants are barred from pursuing the reorganized debtor directly. Channeling injunctions are most apt to be used when all the elements of a mass tort -- except the manifestation of the injury itself -- are known to have occurred before the petition. In Travelers v. Bailey, the Supreme Court recently provided reassurance that such injunctions work. As industrial Chapter 11 cases pile up, DIPs and 363 buyers will need to keep a close eye on the environmental issues and on the judges who, as ever, will be striking the environmental-bankruptcy balance. Kevin Ewing is partner in Bracewell & Giuliani LLP 's environmental strategies group. |
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