Bankruptcy Impacts on Environmental Claims

By: Mary W. Koks
Presented at Mealey's Environmental Litigation Seminar
April 1, 2005

I. Introduction: Environmental Claims in a Bankruptcy Proceeding
Environmental Claims in a bankruptcy case can include statutory claims for remediation of environmentally contaminated property under federal and state environmental statutes, such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or the Resource Conservation and Recovery Act ("RCRA") and various state environmental liability statutes. Additional liabilities can also be imposed by virtue of state common law property damage claims asserted against a debtor including negligence, trespass, or nuisance. Finally, claims can arise from contract obligations for sales of property or assets of a company with environmental liabilities attached to those sales. These liabilities can arise immediately or not be known for years. The import of most environmental laws are that any person who has any potential liability for a contaminated site, must share in the exposure for the liability to clean up the site. Thus, environmental laws look more to an all encompassing liability scheme where liability is often joint and several if not staidly liable. Bankruptcy law, on the other hand, embraces a policy of providing a debtor in bankruptcy with a "fresh start" and looks to relieving the debtor of many obligations that would otherwise keep the debtor from emerging from the bankruptcy intact. Thus, the goals of these two areas of the law are diametrically opposed and often the courts struggle with reconciling the concepts and policies that are the foundation of each body of law.

It is presumed, for the purposes of this paper, that our audience is primarily environmental practitioners, who have a working knowledge of the environmental statutes that give rise to environmental obligations. Thus, we will not go in to the underlying statutory and common law basis for many of the environmental claims discussed herein. However, it is assumed that many of these environmental practitioners do not have an in depth background in the bankruptcy policies relating to treatment of claims under bankruptcy law and so we will first outline how the bankruptcy code treats different types of claims. This is not intended to be an in-depth discussion of substantive bankruptcy law, but is designed to familiarize the reader with certain bankruptcy concepts and how those apply to environmental claims that might be raised. We will discuss what an environmental "claim" is when it arises, and how it can be treated; when is an injunction allowed and when is it really just an environmental claim; how are cost recovery or contribution claims allowed and when are they discharged; when can a claim be an administrative expense; can environmentally contaminated properties he abandoned; how are plugging and abandonment requirements of state and federal law treated in bankruptcy and end with a brief discussion of successor liability.

II. How claims are treated in a bankruptcy case
A. Priority of payment under the bankruptcy scheme
1. Chapter 11 cases
The most simplistic description of determining whether a claim is pre-petition – or one that is included as part of the bankruptcy payout; or post petition – or one where the claim is not part of the bankruptcy is to think of "taking a picture" of the debtors debts as of the day of filing the bankruptcy petition (or in the case of a Chapter 11 reorganization case – as of the day that the plan of reorganization is confirmed). Any debt incurred prior to that day is part of the bankruptcy and the claims must be included in the plan. The plan, then, acts as a new contract between the debtor and its creditors to take care of all debts arising prior to that date. On the other hand, anything incurred after that date is a post petition claim and fully payable as if the bankruptcy does not exist. By way of a simple example, if the debtor is in the business of manufacturing widgets and you are a vendor who supplies the materials to manufacture the widgets, all the goods sold to the debtor prior to the bankruptcy, if not paid, constitutes pre-petition claims that you must file with the bankruptcy court to get paid through the plan. Any material you sell the debtor after the filing date, must be paid in the ordinary course of business as if the bankruptcy didn't exist. Thus, those post petition claims are "administrative" claims of the estate which are given first priority in payment both through the plan and after the plan is confirmed or paid in the ordinary course of business.1

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