Recent Supreme Court Decision On CERCLA Could Have Significant Impact In Bankruptcy Cases

Reprinted from the October 2007 ABI Journal, Vol XXVI, No.8, with permission from the American Bankruptcy Institute (www.abiworld.org)

A recent U.S. Supreme Court decision that resolved a long-standing controversy in environmental law could have a significant impact in bankruptcy cases. United States v. Atlantic Research Corp.,¹ decided in June, involved the interpretation of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA").² The Supreme Court held that a private party may recover funds it expends for environmental cleanup from other parties liable for the cleanup not only under § 113(f) of CERCLA, which provides for contribution among potentially responsible parties (PRPs) targeted by the government, but also under § 107(a) of CERCLA, which permits parties to recover the costs of voluntary cleanups.

While, for the reasons explained below, Atlantic Research could have an impact on bankruptcy cases, it did not involve bankruptcy. The plaintiff, Atlantic Research Corporation ("ARC") retrofitted rocket motors for the U.S. government from 1981 through 1986. It performed the work on land it leased at the Shumaker Naval Ammunition Depot, a facility operated by the Defense Department. Using a high-pressure water spray, ARC removed rocket propellant from the motors. It then burned the propellant. This process produced wastewater and burned fuel that contaminated the soil and groundwater at the site. ARC voluntarily cleaned up the site, for which it was only partly responsible, at its own expense and then sought to recover some of its costs by suing the United States under both § 107(a) and § 113(f) of CERCLA.³ After the suit was filed, the Supreme Court handed down its decision in Cooper Industries, Inc. v. Aviall Services, Inc.,⁴ which held that a private party could seek contribution under CERCLA § 113 only after being sued by the government under either § 106 or § 107(a) of CERCLA.⁵ Because it had not been sued by the government, ARC amended its complaint to seek relief under § 107(a) and federal common law. The United States moved to dismiss arguing that ARC was a PRP and, as such, was not authorized to assert a claim under § 107(a). The district court agreed and granted the government’s motion to dismiss, but the Eighth Circuit reversed, holding that a PRP may assert a direct cost recovery claim under § 107(a).⁶ The Supreme Court affirmed the Eighth Circuit’s decision.

Section 107(a) of CERCLA defines four categories of PRPs that are liable for, among other things, "(A) all costs of removal or remedial action incurred by the United States Government or a State or an Indian tribe not inconsistent with the national contingency plan" and "(B) any other necessary costs of response incurred by any other person consistent with the national contingency plan."⁷ The issue before the Supreme Court in Atlantic Research was whether PRPs fall within the scope of the phrase "any other person" under § 107(a)(4)(B) of CERCLA and are therefore entitled to bring suit under that provision. The United States argued that "any other person" excludes all of the entities listed in § 107(a)(1)-(4) including all PRPs. ARC argued that "any other person" includes anyone (including all PRPs) other than the entities expressly authorized to sue under § 107(a)(4)(A), i.e., the United States, States and Indian tribes.

The Supreme Court agreed with ARC. It held that § 107(a) and §  113(f) create two separate and distinct remedies that complement each other: § 107(a) authorizes a party (including a PRP) to file a cost recovery action (as distinguished from a claim for contribution) if the party incurs clean-up costs; § 113(f)(1) authorizes a PRP with common liability stemming from an action brought against it under § 106 or § 107(a), to file a claim for contribution.

A detailed analysis of the Supreme Court’s holding in Atlantic Research and the prior conflicting case law is beyond the scope of this article. Our focus, instead, is on the potential impact of the decision on bankruptcy cases. This potential impact was anticipated, at least to some extent, by the Reading Company, which filed an amicus curiae brief in Atlantic Research specifically focused on the potential impact of a decision allowing private parties to assert claims under § 107(a) on bankruptcy cases.

The Reading Company had received a bankruptcy discharge under § 77 of the former Bankruptcy Act (governing railroad reorganizations)⁸ on or about January 1, 1981, approximately three weeks after CERCLA was enacted. The Reading Company was concerned about the potential impact that a decision allowing private party claims under § 107(a) might have upon the effectiveness of its bankruptcy discharge. Noting the tension between the policy goals of CERCLA (prompt cleanup of contamination and comprehensive assessment of liability) and the policy goals of bankruptcy law (affording an honest debtor comprehensive relief from liability and a "fresh start"), the Reading Company identified two major problems that would result from authorizing PRPs to assert claims under § 107(a): (1) a settlement or discharge of CERCLA liability to the government during a bankruptcy case would have diminished value to the debtor; and (2) debtors obtaining bankruptcy discharges would be unable to determine the effect of their discharge on CERCLA liability related to operations started and finished before the bankruptcy ended.⁹

To demonstrate the legitimacy of its concerns, the Reading Company pointed to its own experience in addressing major environmental liabilities. It noted that one site at which it had incurred significant environmental liability prior to filing for bankruptcy involved over 600 PRPs, only 36 of whom were sued by the government.¹⁰ "Faced with what could be hundreds of post-bankruptcy claims by PRPs, the former debtor would need to be able to demonstrate that each and every such CERCLA § 107(a)(4)(B) claim somehow was discharged or settled during its bankruptcy. As a practical matter, that burden is not sustainable, and it is highly unlikely that all such claims could be recognized and discharged in a bankruptcy."¹¹

The Reading Company also noted the complex and sometimes difficult issue of determining whether and when a particular party is deemed to hold an environmental claim susceptible to discharge in bankruptcy.¹² For a person to be deemed to hold an environmental claim, it will generally be necessary to establish the existence of some sort of relationship between that person and the debtor or other facts sufficient to impute at least a "contingent" claim to the putative claimant prior to the conclusion of the bankruptcy.¹³ Therefore, while the scope of "claim" under the Bankruptcy Code is broad, there will be instances in which it will be difficult, if not impossible, for the court to find that a PRP held and could have asserted a claim to recover response costs from the debtor prior to the conclusion of the debtor’s bankruptcy case. The Reading Company gave the example of numerous PRPs having generated hazardous waste that they sent to the same landfill. While each generator would likely know the owner or operator of the landfill, the generators might or might not know each other. Thus, if one generator filed for bankruptcy, the others might be unaware of that fact, having had no relationship with the debtor.¹⁴

Also consider the following hypothetical: Company A owns a contaminated site at which Company B has been identified by the EPA as a PRP. Company B files a chapter 11 petition. It then files a plan of reorganization that resolves its CERCLA liability to the EPA and Company A and provides for a comprehensive discharge of all of its environmental liabilities. The bankruptcy court confirms the plan. After Company B emerges from bankruptcy, Company A transfers the site, which is still partly contaminated, to Company C. Prior to Atlantic Research, Company B would have been fairly confident that it would have no liability under CERCLA to Company C because, as a result of its bankruptcy plan and the confirmation order,¹⁵ Company B no longer had "common liability" to the government, a predicate for liability under CERCLA § 113(f), and Company C, as the private owner of the site, could not assert a claim against Company B under § 107(a).¹⁶ However, as a result of Atlantic Research, Company C may have a claim against Company B under § 107(a), and that claim would not have been affected by Company B’s bankruptcy discharge because the claim did not arise until after Company B’s bankruptcy case was over. Thus, Atlantic Research may expand significantly the number of claimants who potentially might pursue CERCLA claims against a reorganized debtor subsequent to its emergence from bankruptcy.

Another potential problem for debtors in bankruptcy raised by Atlantic Research arises from the fact that "common liability," which is an element of a claim under CERCLA § 113(f), is not an element of a claim under CERCLA § 107(a). Under § 502(e)(1)(B) of the Bankruptcy Code,¹⁷ if a creditor asserts a claim for reimbursement or contribution against the debtor based upon an obligation on which both the creditor and the debtor are liable to a third party and the claim is contingent at the time the bankruptcy court considers it, the claim will be disallowed.¹⁸ A classic example is a claim for subrogation or reimbursement filed by a guarantor against the bankruptcy estate of the principal obligor where the guarantor has not yet paid the creditor. Another example is a claim filed by a PRP under CERCLA § 113(f) against a debtor for contribution as to future environmental response costs that the PRP expects to incur at a contaminated site at which the debtor is also a PRP. Most courts have held that the latter type claim will be disallowed under § 502(e)(1)(B).¹⁹

As a result of Atlantic Research, a PRP seeking to recover future response costs from a debtor may assert the claim under CERCLA § 107(a) and argue that the claim is not barred because the claimant is not "liable with the debtor" to the government under that section (in contrast to § 113(f)) and, therefore, one of the elements for disallowance under § 502(e)(1)(B) is absent.²⁰ Indeed, in at least one recorded case such a theory has already been asserted. In In re APCO Liquidating Trust²¹ the claimant, the City of Wichita, Kansas, whose claim for contribution under § 113(f) of CERCLA was disallowed by the bankruptcy court under § 502(e)(1)(B) of the Bankruptcy Code, sought in the alternative to assert a claim under § 107(a) of CERCLA based upon Atlantic Research, which had been decided earlier that month. However, the bankruptcy court disallowed the § 107(a) claim without reaching the merits. The City’s claim was based upon a pre-bankruptcy judgment which expressly awarded the City a contribution claim under § 113(f) of CERCLA. The bankruptcy court held that in order to assert a § 107(a) claim, the City would need to obtain relief from the judgment under Fed. R. Civ. P. 60(b). Since there was no basis for relief under that rule, the City was barred from asserting a claim under § 107. ²²

It is too early to tell what impact the Supreme Court’s decision in Atlantic Research will have on bankruptcy cases. However, it is very likely that this decision will receive a great deal of attention and require a significant amount of analysis by debtors seeking to free themselves of CERCLA liability through bankruptcy proceedings, non-debtor potentially responsible parties seeking to maximize their recoveries from debtors, and the current owners of property who believe that they may hold a private claim under § 107 of CERCLA against a party whose CERCLA liability regarding the site was previously discharged in bankruptcy.

Footnotes

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