• Seventh Circuit Says EPA's Claim for a RCRA Cleanup Order Based Upon a Well-Known Pre-Bankruptcy Release Was Not Discharged in Apex Oil Co.'s Bankruptcy, and Having to Engage Outside Company to Comply With Cleanup Estimated at $150 Million Does Not Convert the Order to a Right to Payment
  • September 18, 2009
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • In yet another blow to the bankruptcy “fresh start” policy and to those companies seeking to invoke Chapter 11 protection to avoid oppressive environmental obligations arising from pre-bankruptcy releases of hazardous wastes, the United States Seventh Circuit Court of Appeals recently held in U.S. v. Apex Oil Co., Inc., --- F.3d ----, 2009 WL 2591545 (7th Cir. 2009), that Apex Oil Company’s 1990 bankruptcy discharge does not extend to EPA’s petition for a RCRA cleanup order, effectively requiring Apex to engage outside services to undertake a $150 million cleanup. The contamination appears to have been well-known long before the bankruptcy, and Apex does not currently own or operate the site.

    EPA brought an action against Apex in 2005, 15 years after Apex’s bankruptcy discharge, pursuant only to Section 7003 of RCRA, alleging that Apex’s predecessor (which was also in the bankruptcy proceedings) contributed to oil contamination in a shallow aquifer under Harford, Illinois. EPA asserted that the claim had not been discharged and sought only a mandatory cleanup order. EPA moved for partial summary judgment on the discharge issue and the District Court granted it. After a 17-day bench trial Apex was found liable and a mandatory cleanup order was entered. 

    The Seventh Circuit affirmed the District Court’s determination that the cleanup injunction to which EPA is entitled under RCRA’s imminent and substantial endangerment authority is purely an equitable remedy that does not give rise to a right to payment, and is thus not a “claim” under the Bankruptcy Code. Because it was not a claim, it therefore was not discharged by Apex’s 1990 Chapter 11 Plan and Confirmation Order. Significantly, the Seventh Circuit rejected Apex’s argument that because EPA could have sought a money judgment under the Clean Water Act or sued for restitution of cleanup costs after EPA conducted its own cleanup, it had an alternative payment remedy and therefore the EPA claim was within the Bankruptcy Code’s definition of claim. Courts have long construed the term “claim” under the Bankruptcy Code broadly to foster Congress’ goal of a fresh start. 

    The Seventh Circuit considered whether RCRA Section 7003, under which the government can seek relief from those responsible for an imminent and substantial endangerment, is limited to equitable relief, the breach of performance for which does not give rise to a right to payment. The court relied heavily on Meghrig v. KFC Western, Inc., a 1996 Supreme Court decision that held only equitable relief in the form of an injunction is available in citizen suits under Section 7002 of RCRA. Because the two provisions are substantially the same, the Seventh Circuit in Apex said that KFC Western is determinative on the issue, holding: “…[RCRA] does not entitle a plaintiff to demand, in lieu of action by the defendant that may include the hiring of another firm to perform a cleanup ordered by the court, payment of clean-up costs.* * * [T]he government’s equitable claim, if well founded, as the district court ruled it to be, entitles the government only to require the defendant to clean up the contaminated site at the defendant’s expense.” The Seventh Circuit summarily rejected pre-KFC Western RCRA Section 7003 decisions to the contrary on the grounds that the identical language of 7003 and 7002 require an “identical conclusion with regard to a plaintiff’s right to seek a money judgment.”

    The Seventh Circuit also rejected Apex’s contention that because the cleanup order requires Apex to pay money to comply, it should be deemed a money claim. That position, the court said, does not comport with the language of the Bankruptcy Code: “the cost to Apex is not ‘a right [of the plaintiff] to payment.’” While the Seventh Circuit acknowledged that the case of U.S. v. Whizco, Inc., 841 F.2d 147, 150-51(6th Cir. 1988), supported Apex, it refused to follow that case believing that it could not be reconciled with the decisions that hold that “cost incurred is not equivalent to ‘right to payment.’” The court said it found “arbitrary,” Apex’s argument that all equitable claims are dischargeable in bankruptcy absent a specific Code exception.

    There have been other recent decisions likely to have a significant impact on companies’ future ability to use bankruptcy to avoid or reduce environmental obligations. Atlantic Research Corp. v. United States, 127 S. Ct. 2331 (2007) has breathed new life into environmental bankruptcy claims that previously were almost always disallowed. In that case, the Supreme Court held potentially responsible parties (“PRPs”) under CERCLA could bring CERCLA Section 107(a) direct claims against other PRPs. Because PRPs were limited to contribution claims prior to Atlantic Research, their contingent claims for reimbursement in bankruptcy were almost always disallowed under Section 502(e)(1)(B) of the Bankruptcy Code which requires the disallowance of any contingent claim for contribution of a creditor who is co-liable with the debtor on the underlying obligation that gives rise to the contribution claim.

    In addition, as a result of the recent holding in Sierra Club v. Johnson, No. C 08-1409, 2009 WL 482248 (N.D. Cal. Feb. 25, 2009), new financial assurance obligations are on the horizon designed to make it more difficult for companies in bankruptcy to push their cleanup obligations off on to other PRPs and the public. 74 Fed. Reg. 37,213 (July 28, 2009). These will require many companies, such as hazardous waste generators, hazardous waste recyclers, metal finishers, wood treatment facilities and chemical manufacturers, to pledge bonds or letters of credit, obtain environmental insurance, or maintain minimum financial thresholds to cover the cleanup costs of future contamination in the event of a company’s insolvency. Compliance with these obligations will be required to maintain permits necessary for operations, will be enforceable by the government in bankruptcy and will give significant priorities to the government’s claims in bankruptcy.

    All of these recent decisions are likely part of a trend to reduce the burden on the taxpayers of the environmental cleanup obligations that the bankrupt companies up until now have been largely able to avoid.