Environmental Claims: Twenty Years Later

by Pepper Hamilton LLP
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In re Solitron Devices, Inc., 510 B.R. 890 (Bankr. S.D. Fla. 2014)

A Chapter 11 debtor moved to reopen its bankruptcy case more than 15 years after it was closed in order to enforce the plan confirmation order to prevent claims by a state environmental agency and other potentially responsible parties for clean-up costs at a landfill.

The threshold issue was whether the state environmental agency (NYSDEC) had a “claim” that could have been discharged. Section 101 of the Bankruptcy Code defines “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured …” The court noted that the 11th Circuit held in the context of a products liability case that “claims” should be read broadly to include all legal obligations “no matter how remote or contingent.”

The 2d Circuit addressed contingent claims for future clean-up costs in the frequently cited case of In re Chateaugay Corp, 944 F.2d 997 (2nd Cir. 1991). In that case the debtor gave notice to the EPA in all 50 states and the District of Columbia of contingent environmental claims. The EPA filed claims totaling $32 million for response costs under CERCLA at 14 sites. The EPA determined that this was a non-exhaustive list of sites, but did not file contingent claims with respect to potential sites for future clean-up costs.

The debtor’s plan sought to discharge all claims for pre-petition conduct, whether the EPA knew about the existence of the claims or not. In concluding that response expenses incurred post-petition from pre-petition conduct could be discharged, the 2d Circuit found that there was sufficient contemplation of those claims. The gleaned from Chateaugay is that the “agencies need to be capable of fairly contemplating any unmatured contingent claims at the time of the bankruptcy.” Generally courts have taken a very expansive view of what can be “fairly” contemplated.

The events leading up to this case were as follows:

  • 1961 – 1987: The debtor operated a manufacturing plant facility in Tappan within five miles of a Clarkstown landfill.
  • November 1979: NYSDEC sent the debtor a letter stating that it had been “cited on October 30, 1979 for delivering a ‘dumpster with refuse’ from its Tappan facility to the Clarkstown landfill on October 27, 1979.”
  • June 1989: The landfill was listed in the state registry of inactive hazardous waste disposal sites.
  • August 1989: NYSDEC and the town of Clarkstown entered into a consent order to clean-up the landfill that required the town to assist in identifying all parties responsible for contamination. There is no evidence that the town identified the debtor before confirmation of its plan.
  • October 1989: NYSDEC and the town entered into a contract that provided for state reimbursement of 75% of the costs of clean-up.
  • Summer/Fall 1990: Remedial investigation began.
  • December 1990: The landfill closed.
  • January 1992: The debtor filed for bankruptcy.
  • October 1992: The debtor obtained an order establishing a bar date for filing claims that specifically included entities with claims arising out of any environmental contamination.
  • The notice specifically identified the Tappan facility and stated that the bar date applied to environmental claims against the debtor notwithstanding that they “may be contingent or may not have occurred, matured or become fixed or liquidated prior to [the bar date].” The debtors specifically sent notice to NYSDEC, and it did not file a proof of claim.
  • August 1993: The debtor’s plan of reorganization was confirmed, and a confirmation order was entered that included an injunction preventing discharged claimholders from proceeding against the reorganized debtor.
  • April 1995: NYSDEC completed its final report. It stated that remedial investigation took place during 1990 with additional work between summer of 1991 to fall of 1993.
  • July 1996: The bankruptcy case was closed.
  • 2002: NYSDEC sent notices of potential liabilities to various potentially responsible parties (PRPs) regarding landfill contamination, including the debtor. Some of the PRPs formed a joint defense group (JDG).
  • March 2011: NYSDEC filed suit against the town of Clarkstown and the JDG members.
  • 2011: A consent decree settled all claims against the JDG defendants for $4 million (later reduced to $3.75 million).
  • August 2013: The JDG filed a complaint against the debtor and other PRPs who had not participated in the settlement seeking contribution.
  • January 2014: The debtor filed an emergency motion to reopen the Chapter 11 case and to enforce the order confirming the plan of reorganization that enjoined prosecution of discharged claims.

In this case the court found that (1) the conduct occurred pre-petition, (2) there was an identifiable relationship between NYSDEC and the debtor, (3) prior to bankruptcy the landfill had been identified as a polluted site, and (4) NYSDEC (a) knew that the debtor had been cited for improper dumping at the landfill, (b) knew that the debtor had a facility five miles from the landfill, and (c) had specific notice that the debtor was seeking to include any potential environmental claims in its bankruptcy case.

A key fact appeared to be the October 1979 letter that alleged that at least eleven 55-gallon drums of oily substances were transported from the debtor’s facility to the landfill. Although NYSDEC argued that this was not sufficient since the notice was sent many years before the relevant events, the court disagreed. “Notice that something happened does not become stale or irrelevant just because years have passed or the entity receiving notice simply forgets about it.”

Given the broad definition of claim and the fact that if NYSDEC reviewed its records it would have seen the citation that “conclusively linked” the debtor to the landfill, the court found that all of the state environmental claims were discharged in the bankruptcy.

The court acknowledged that the JDG did not even exist at the time the plan was confirmed. However, the court noted that a PRP’s contribution right is contingent on common liability of the defendants. Since the state claim against the debtor had been discharged, it concluded that the debtor and the JDG did not have common liability.

The fact that the JDG did not exist until after the bankruptcy also meant that the bankruptcy court did not have jurisdiction to enjoin the JDG since the JDG did not have a discharged claim, and thus did not violate the confirmation order. Consequently, although the bankruptcy court determined that the JDG did not have a claim against the debtor, the court noted that it was up to the district court to dismiss the JDG claims.

It seems surprising that a single letter sent more than ten years before NYSDEC began investigating and remediating a landfill was sufficient to cause the NYSDEC claims to be discharged. However, given this type of decision, it is not hard to understand why the EPA and state agencies are very aggressive in carving out environmental claims from plan confirmation discharge provisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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