United States: Environmental Enforcement: Sometimes Bankruptcy Provides A Respite, And Sometimes It Doesn’t

Last Updated: March 10 2014
Article by Vicki R. Harding

In re Edison Mission Energy, 502 B.R. 830 (Bankr. N.D. Ill. 2013) –

Pre-bankruptcy the Sierra Club filed a citizen suit complaint with the Illinois Pollution Control Board (IPCB) against a power company requesting penalties and an order requiring it to cease violating state environmental regulations by reducing sulphur dioxide emissions from its coal plants.  After the power company and a number of its affiliates filed bankruptcy, the Sierra Club asked the bankruptcy court to either confirm that the automatic stay was not applicable on the basis that the IPCB proceeding was as an action to enforce police or regulatory powers, or alternatively to grant relief from the stay for cause to permit the action to go forward.

The debtor in question, Midwest Generation, LLC (MWG) was described as "a leading independent power producing enterprise specializing in developing, operating, and selling energy and capacity from approximately 40 generating facilities in 12 states and the Republic of Turkey."  Among other things, MWG operated coal plants located in Illinois.

Section 9 of the Illinois Environmental Protection Act (IEP Act) provides:

No person shall:  (a) cause or threaten or allow the discharge or emission of any contaminant into the environment in any State so as to cause or tend to cause air pollution in Illinois, either alone or in combination with contaminants from other sources, or so as to violate regulations or standards adopted by the Board under this Act.

Similarly, there is an IPCB regulation prohibiting emission of contaminants that would "cause or tend to cause air pollution in Illinois, ... or so as to prevent the attainment or maintenance of any applicable ambient air quality standard."   The Illinois Pollution Control Board determined that Section 9 is violated if predicted sulphur dioxide emission levels exceed EPA standards.

The Sierra Club contended that its investigations showed that MWG coal plants emitted significant amounts of sulphur dioxide, which posed a threat to human health and the environment.  Accordingly, it filed a complaint against MWG with the IPCB alleging that its coal plant sulphur dioxide emissions violated Illinois law because emissions were at levels that would cause violations of EPA limits, thus causing "air pollution" in violation of Illinois law.  It sought entry of an order requiring MWG to comply by reducing sulphur dioxide emissions from its coal plants.

After MWG filed bankruptcy, the Sierra Club sough a bankruptcy court order authorizing it to continue pursuing the IPCB action.  In support of its request, the Sierra Club first argued that the automatic stay (which generally applies to any judicial, administrative or other action or proceeding) was not applicable in this case because the IPBC proceeding came within the exception in Section 362(b)(4) of the Bankruptcy Code relating to "an action or proceeding by a governmental unit... to enforce such governmental unit's or organization's police and regulatory power."  As a threshold matter, the court noted that an action (1) must be brought by a governmental unit, and (2) must relate to public safety and health as opposed to a government's pecuniary interest, in order to come within the exception.

Although the Sierra Club acknowledged that it was not a governmental unit, it argued that it was acting as an agent of either the Illinois Attorney General or the Illinois Environmental Protection Agency.  (Interestingly, the Illinois Attorney General and the Illinois Environmental Protection Agency did not take a position on the Sierra Club's request.)  As support it cited a 7th Circuit decision concluding that a "private attorney general" can be considered an agent of a governmental unit.  However, the bankruptcy court did not agree that the decision was relevant to this case.  It concluded that even though the IEP Act allowed private groups to prosecute environmental actions, the police and regulatory power exception did not apply.

The Sierra Club next argued that it should be granted relief from the automatic stay for cause under Section 362(d)(1) of the Bankruptcy Code.  Although there is no definition of "cause" in the Bankruptcy Code, the 7th Circuit uses a three factor balancing test to determine whether cause exists:  "(1) whether any great prejudice to either the bankrupt estate or the debtor will result from continuation of the civil suit; (2) whether the hardship to the [non-bankruptcy party] by maintenance of the stay considerably outweighs the hardship of the debtor and (3) whether the creditor has a probability of prevailing on the merits."

With respect to the first factor, the Sierra Club contended that the IPCB proceeding would "merely expedite" compliance that would be applicable upon emergence from bankruptcy in any event.  The court took note of upcoming deadlines for state action to address EPA regulations in this area, and commented that "the Sierra Club seeks to insure that Illinois will be protected from pollution in the interim while other statutory deadlines play out."  MWG argued that allowing the action to proceed would be duplicative and wasteful, but in the court's opinion it would be beneficial to the debtors and their successors (referring to proposed purchasers) since "resolution of these unavoidable problems is in all parties' best interest."

An additional argument that the court found compelling was that there was nothing to stop the Sierra Club from bringing a postpetition suit to address the alleged emissions.  28 U.S.C. §959(a) provides:

Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their actions or transactions in carrying on business connected with such property.  Such action shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.

Section 959(b) goes on to require that these parties manage and operate property in compliance with applicable state law "in the same manner that the owner or possessor thereof would be bound to do if in possession thereof."  Since the Sierra Club would be entitled to bring a new post-petition action regarding compliance with the IEP Act without court permission, allowing the pending proceeding to go forward instead would not result in any prejudice.

On the matter of hardship to the Sierra Club, it argued that there would be a significant hardship since otherwise it would be unable to protect the residents of Illinois and assure compliance with environmental laws.  The court agreed.  Also, although the Sierra Club could have brought a postpetition action to accomplish the same result, that would require it to incur additional costs.

On the other side of the equation, MWG claimed that it would suffer a significant hardship if forced to participate in the IPCB proceeding because the bankruptcy reorganization required its full attention.  The court dismissed this contention, commenting that the debtors had team of highly qualified professionals and the court had little doubt that the debtors had sufficient resources to defend the IPCB action while simultaneously pursuing reorganization.  And the court again commented that resolution of the proceeding would likely be of benefit to MWG and the debtors.  In sum, it considered the hardship to MWG to be de minimis in comparison to the hardship to the Sierra Club and people of Illinois.

With respect to probability of success on the merits, MWG argued in part that the Sierra Club was seeking to enforce federal guidelines that were not enforceable on their own.  In addition, the state process for implementation of the Clean Air Act gave Illinois until April 2015 to propose a plan for achieving the updated EPA sulphur dioxide standard, and nonattainment areas were not required to meet the new standard until October 2018.  The court brushed this argument aside on the basis that Illinois law immediately prohibits emissions that threaten public health and safety, and Illinois may apply more stringent requirements and require compliance at an earlier point in time than under federal law.

Consequently, the court lifted the stay for cause to permit the pending IPCB action to proceed, although the Sierra Club was prohibited from seeking to enforce any monetary penalties that might be awarded.

Although the court goes to great lengths to discuss a variety of the factors that it found weighed in favor of the Sierra Club, the Section 959 argument seems particularly compelling: If the Sierra Club could just file a new complaint post-petition to litigate the exact same issues (as the court found it could do), what would be the point in continuing to stay the original proceeding?  This case also serves as a useful reminder that the statutory provisions governing a bankruptcy are not limited to the Bankruptcy Code (i.e. Title 11).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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