Bankruptcy Loses Arguments for Special Relief Under Prepetition Agreements for Environmental Liability

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A recent case from the U.S. District Court for the Southern District of New York addressed the recurring conflict between the goals of bankruptcy law, which seeks to give debtors a fresh start, and the goals of federal and state environmental cleanup laws, which seek to ensure remediation of contaminated properties. The court’s decision provides useful insight regarding when and how bankruptcy law should convert a prepetition contractual obligation to remediate a site into a claim to be managed like any unsecured creditor claims in a bankruptcy proceeding.

In Route 21 Associates of Belleville v. MHC, Inc., the parties’ dispute involved responsibility for remediating contamination of a site Route 21 had long ago bought from a company to which MHC is a successor in interest. About a year after purchasing the site from MHC’s predecessor, Route 21 discovered contamination, and MHC’s predecessor remediated that contamination and warranted that the site was clean. But seven years later, Route 21 discovered more contamination in the form of a leaking underground storage tank. Route 21 sued MHC under the New Jersey Spill Compensation and Control Act, a state law equivalent to the federal Superfund law. The parties eventually settled this action. MHC’s predecessor agreed to do two things as part of the settlement. First, it agreed to remediate the newly-discovered contamination under the direction of the New Jersey Department of Environmental Protection (“NJDEP”) to a sufficient degree of cleanliness so as to obtain a “no further action” letter from the state. Second, it agreed to indemnify Route 21 for any future environmental clean-up liability Route 21 might incur as a result of the past contamination

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