Maryland Issues Notice of Intent to Sue for Pennsylvania Fracking Fluid Release

Posted on July 26, 2011 by Chester Babst

The increasingly controversial issues surrounding the extraction of natural gas by “fracking” took an unusual turn on May 2, 2011 when the Attorney General for the State of Maryland notified Chesapeake Energy Corporation and its affiliates of the State’s intent to sue for violations of the Clean Water Act (“CWA”) and the Resource Conservation and Recovery Act (“RCRA”). The notice letter followed from the alleged release of “thousands of gallons” of hydraulic fracturing fluids (“frack fluids”) from the failure of a natural gas well located in Bradford County, Pennsylvania on April 19, 2011. The frack fluids reportedly entered Towanda Creek, a tributary of the Susquehanna River, which eventually flows into Maryland and empties into the Chesapeake Bay. According to the May 2, 2011 press release from the Attorney General’s office, “at the close of the required 90-day notice period, the State intends to file a citizen suit and seek injunctive relief and civil penalties under RCRA for solid or hazardous waste contamination of soils and ground waters, and the surface waters and sediments of Towanda Creek and the Susquehanna River. The State also intends to seek injunctive relief and civil penalties under the CWA for violation of the CWA's prohibition on unpermitted pollution to waters of the United States.” The press release noted that “the Susquehanna River supplies drinking water for approximately 6.2 million people and sensitive fish populations like the American shad and striped bass are moving into the Susquehanna flats at this time of year. Exposure to toxic and carcinogenic chemicals in unknown quantities creates a risk of imminent and substantial endangerment to humans using Pennsylvania and Maryland waterways for recreation and to the environment.”


The notice of intent to sue is another example of the increased scrutiny directed toward hydraulic fracturing activities associated with the Marcellus Shale, an enormous geological formation underlying much of Pennsylvania and portions of West Virginia, Ohio and New York. Hydraulic fracturing refers to the process by which water, sand and a limited amount of chemicals are injected into a rock formation to fracture it, allowing the natural gas to be released and extracted. Much attention has been directed toward the chemicals used during the fracking process. U.S. EPA recently issued its plan to study the effects of fracking, with the initial report due in 2012 and the final report due in 2014. It also issued information requests earlier this month to six large natural gas producers in Pennsylvania, asking for information regarding how wastewater will be recycled or disposed. In addition, plaintiffs’ lawyers and citizens have begun filing toxic tort claims for alleged property damages and personal injuries caused by fracking, and Marcellus Shale activities in general.


Bradford County is located in north central Pennsylvania and borders New York State. The prospect of a suit by Maryland for a release in Pennsylvania at a significant remove from Maryland raises many novel issues, not the least of which is the question of standing.

Supreme Court to Give Unilateral Administrative Orders a Constitutional Checkup

Posted on July 22, 2011 by Donald Fowler

Yesterday, Ted Garrett posted a blog on the Supreme Court’s grant of certiorari in Sackett v. EPA, 2011 WL 675769 (No. 10-162, June 28, 2011) which involves appeal of an EPA enforcement order under the Clean Water Act (CWA). His blog notes that the Court declined to review a similar appeal brought by GE under CERCLA. In an earlier blog post I summarized that GE petition which posed the following questions with respect to CERCLA’s unilateral administrative order (UAO) provisions:

  1. Does a UAO’s imposition of either significant response costs or significant decreases in a PRP’s stock price and credit rating constitute a deprivation of property under the Due Process Clause?
  2. Does CERCLA’s UAO scheme impermissibly coerce compliance in violation of the Due Process Clause by conditioning any judicial review of a UAO upon the threat of treble damages and fines that accumulate at EPA’s sole discretion?

Given the Supreme Court’s denial of the GE petition on June 6, 2011, it is somewhat surprising that the Court granted certiorari on June 28 in the Sackett appeal where the issues to be considered are:

  1. May Petitioners seek pre-enforcement judicial review of the administrative compliance order pursuant to the Administrative Procedure Act, 5 U.S.C. §704?
  2. If not, does Petitioners’ inability to seek pre-enforcement judicial review of the administrative compliance order violate their rights under the due process clause?

 

Sackett v. EPA, S. Ct. No. 10-1062. In fact, that second question, which was drafted by the Court itself and not by the Sackett petitioners, is uncannily similar to the second issue raised in the GE petition. What’s going on here?


The facts in Sackett are these. Mr. and Mrs. Sackett bought a small parcel of property – roughly ½ acre – near Priest Lake, Idaho for the purpose of building a house. Although the lots on either side were undeveloped, the lots between the Sacketts’ property and the lake were developed with permanent structures, and the entire area was a built out area zoned for residential use, with sewer hookups and local building permits. The Sacketts began earth moving work with permits in hand, only to receive an order from EPA pursuant to the CWA telling them that they had illegally filled jurisdictional wetlands and that they were required not only to cease further filling but to remove the prior fill and replant the area with indigenous wetland plants. The effect of the order was to preclude any development of the Sacketts’ property.


Upon receiving the order, Mr. and Mrs. Sackett asked EPA to conduct an administrative hearing to contest whether their property in fact contained wetlands within EPA’s jurisdiction. When EPA ignored their request, the Sacketts sued EPA, challenging EPA’s exercise of jurisdiction. EPA moved to dismiss, arguing that pre-enforcement review of compliance orders is precluded by the CWA. In response, the Sackett’s argued that they were entitled to seek review of EPA’s exercise of jurisdiction under the Administrative Procedure Act (“APA”). The district court agreed with EPA, reasoning that pre-enforcement review of administrative compliance orders is barred by the Clean Water Act’s statutory scheme and that preclusion of pre-enforcement review did not violate the Sacketts’ due process rights.


On appeal, the Ninth Circuit affirmed. It held, first, that review under the APA is not available where the relevant statute precludes judicial review, and – though the CWA does not expressly preclude review of administrative compliance orders – it found a clear intent to preclude such review in the statutory scheme. In so holding, the Ninth Circuit joined the ranks of the four other circuit courts that have considered the question, as well as the majority of district courts that have ruled on the issue.


The court then considered and rejected the Sacketts’ due process argument. The Sacketts had argued that, absent pre-enforcement judicial review, their only avenue to judicial review was to defy the order and await an EPA enforcement action. That course of action, however, carries with it the risk of large daily civil penalties (up to $37,500 per day) and potential criminal sanctions as well – in short, penalties so onerous as to foreclose access to the courts as a practical matter in violation of Ex Parte Young, 209 U.S. 123 (1908), and its progeny. The Ninth Circuit nonetheless found the consequences of noncompliance with a CWA order were not so onerous as to create a constitutionally intolerable choice for two reasons:

 

  • First, the court concluded that the Sacketts could avoid potential penalties by applying for a permit to fill their property and then immediately appeal the agency’s permit denial to district court. Setting aside the oddity of a proceeding to contest a permit denial where the primary argument is that the agency lacked jurisdiction to issue the permit in the first place, the Court’s conclusion ignores two important practical realities – (1) EPA and the Corps of Engineers typically will not act on a permit application while a compliance order is outstanding, and (2) as the Supreme Court observed in Rapanos v. U.S., 547 U.S. 715,721 (2006), the permit application process typically takes years to conclude and costs the applicant hundreds of thousands of dollars, none of which is likely to be reimbursable even if the applicant later prevails on its jurisdictional challenge.
  • Second, the court noted that the award of civil penalties is ultimately committed to judicial, not agency, discretion and that a court must take into account a wide range of equitable factors in determining the amount of the penalty. Thus, the Ninth Circuit reasoned, the Sacketts can refuse to comply and have their day in court before any penalties are assessed. However, absent some guarantee that no penalty will be assessed where an order recipient has presented a substantial, good faith, albeit unsuccessful, challenge to the order, the fact that it will be a court, rather than EPA, that considers whether to assess potentially ruinous civil penalties offers scant comfort to folks in the Sacketts’ position.

Against this backdrop, the Supreme Court granted certiorari. There had been some indication in recent decisions that the Court was interested in revisiting Ex Parte Young, which has received scant attention in many decades. See, e.g., Free Enterprise Fund v. Public Accounting Oversight Board, 130 S. Ct. 3138, 3151 (2010) (“[w]e normally do not require plaintiffs to ‘bet the farm by taking the violative action’ before ‘testing the validity of the law,’” citing Ex Parte Young). But why this case and not GE’s challenge to CERCLA’s UAO provisions? Two differences between the CWA and CERCLA may provide an explanation. First, section 106(b)(1) of CERCLA permits imposition of penalties for violations of a UAO only where the violation (or failure to comply) is willful and “without sufficient cause.” The CWA contains no similar “defense”, which the government argued in the GE case was a constitutionally significant escape clause under Ex Parte Young. Second, Section 106(b)(2) of CERCLA gives a UAO recipient who chooses to comply with an unlawful order the opportunity to seek reimbursement of its costs of compliance, at least in certain circumstances. Again, the CWA contains no such provision, and again the government argued in the GE case that the reimbursement provision had constitutional significance. Whether or not those differences do, indeed, rise to constitutional significance, it is true that they would have made the constitutional analysis in the GE case more complicated than in Sackett.


Of course, the Court may well avoid the due process issue in Sackett by ruling that the CWA does not preclude pre-enforcement review. Should it reach the due process issue and decide in favor of petitioners, however, its opinion will bear close examination, as it may have significant implications for recipients of administrative compliance orders under CERCLA, the Clean Air Act, and many other statutes.


Watch this space.
 

Supreme Court to Review Lawfulness of EPA Enforcement Orders

Posted on July 21, 2011 by Theodore Garrett

The U.S. Supreme Court will hear a lawsuit challenging the constitutionality of EPA compliance orders under the Clean Water Act. Sackett v. EPA, 2011 WL 675769 (No. 10-162, June 28, 2011). The petition for a writ of certiorari was granted to consider: “(1) whether petitioners may seek pre-enforcement judicial review of the order pursuant and (2) if not, does the unavailability of such review violate petitioners’ rights under the Due Process Clause?” Because of EPA’s broad authority to issue orders under the Clean Water Act and other statutes, the Sackett case will be of broad interest to environmental lawyers.

The facts are as follows. The Sacketts graded a lot in a residential subdivision in order to build a home. Thereafter, EPA issued an order to the Sacketts claiming that they violated the Clean Water Act by filling a wetland without a permit. The order directed the Sacketts to remove the fill, replace lost vegetation, and monitor the site for three years. The Sacketts did not agree that their property was a wetland and asked EPA for a hearing, which EPA allegedly ignored. The Sacketts then filed suit demanding an opportunity to contest the basis for the compliance order, which was dismissed by the district court. The Ninth Circuit affirmed the dismissal on appeal, holding that the Clean Water Act precludes review of pre-enforcement actions, such as compliance orders. The Ninth Circuit rejected the Sackett’s due process argument, noting that the Sacketts can raise their defenses if and when EPA seeks to enforce the compliance order in federal court.

The Sackett’s petition for certiorari argues that the Ninth Circuit’s decision leaves property owners like the Sacketts in an impossible situation: “either go through with the permit process that you believe is completely unnecessary and spend more money than your property is worth to "purchase" your chance at your day in court; or invite an enforcement action by EPA that may give you your day in court but only at the price of ruinous civil penalties and, depending on EPA's ire, criminal sanctions for underlying violations of the CWA.”

The Sackett case raises significant issues applicable to the Clean Water Act that may have implications for other environmental statutes such as the Clean Air Act under which EPA may issue enforcement orders and that do not expressly bar pre-enforcement review.

General Electric unsuccessfully challenged EPA’s use of enforcement orders issued under CERCLA. Although the Supreme Court declined to review the GE case, CERCLA practitioners will be interested to see if the Court’s opinion has implications for EPA Superfund orders. Stay tuned.

Permit as Shield Against Environmental Claims Under State Tort Law - At Least in the Fourth Circuit

Posted on July 20, 2011 by Allan Gates

In the 1980s a group of Vermont landowners challenged the legality of a New York paper mill’s wastewater discharges into Lake Champlain. The Vermonters argued that the paper mill’s discharges in New York constituted a nuisance because of the injuries they caused in Vermont. They sought monetary damages and injunctive relief under Vermont tort law. The paper company argued that the discharges from its mill were authorized by its NPDES permit, and the company contended that the Clean Water Act preempted state tort claims of this sort – at least when the tort claims challenged conduct authorized by a permit issued pursuant to the Act. The U.S. Supreme Court sided with the Vermont landowners, but with a twist. The Court held that the Clean Water Act preempted tort claims based on Vermont law against a source permitted in New York, but it did not preempt tort claims based on New York law, the law of the state where the source was permitted. The Court rejected the notion that the paper mill’s permit was a complete shield against all state law tort claims. The Court reasoned that the savings provision of the Clean Water Act left New York free to impose legal restrictions under state law –including state tort law— that were more stringent than the requirements of the Clean Water Act. International Paper Co. v. Ouellette, 479 U.S. 481 (1987).


For more than twenty years following the Supreme Court’s decision in Ouellette, the law on this question seemed well-settled: federal environmental statutes do not preempt the state tort law of the “source” state; and permits issued under federal environmental programs do not provide a shield against tort claims based on the law of the source state. The recent decisions in the Second Circuit and the Supreme Court in American Electric Power v. Connecticut did not disturb this view of the law because the tort claims in AEP were based on federal common law, not state law of the source state.

A recent decision in the Fourth Circuit has turned the seemingly well-settled view of the law on its head. The Fourth Circuit’s decision arose out of a suit by the State of North Carolina against TVA. North Carolina claimed that NOx and SOx emissions from TVA coal-fired electric generating stations located in Tennessee and Alabama were causing health problems and other environmental damage in North Carolina. The state alleged that TVA’s emissions constituted a public nuisance under the tort law of the states where the facilities were located; and North Carolina sought injunctive relief requiring the prompt installation of more advanced emissions controls than required by the facilities’ air permits. The district court ultimately found TVA liable and ordered injunctive relief with respect to the four TVA facilities closest to North Carolina. In a remarkably strident decision, the Fourth Circuit reversed the district court and remanded with instructions to dismiss the case. North Carolina v. TVA, 615 F.3d 291 (4th Cir. 2010).


The Fourth Circuit’s opinion examined at length the regulatory structure created by the Clean Air Act and concluded that Congress intended to preempt state tort law claims of the sort asserted by North Carolina, even when those claims were based on tort law of the source state. In so holding, the Fourth Circuit made no attempt to distinguish Ouellette. Nor did it suggest that the Clean Air Act differed in any material respect on this point from the statute involved in Ouellette, the Clean Water Act. Indeed, the Fourth Circuit repeatedly cited those portions of the majority opinion in Ouellette which found that Vermont law was preempted, but the Fourth Circuit largely ignored the portion of Ouellette which held New York tort law to be intact and available.


The Fourth Circuit also concluded, ostensibly as an independent ground for its decision, that the district court erroneously applied North Carolina law rather than the law of the source states. One cannot help but question the strength of the court’s conviction in this conclusion, however, because the proper remedy for application of the wrong state’s law would be to remand the matter for further consideration based on the correct state law, not to direct dismissal of the action as ordered by the Fourth Circuit.


The Fourth Circuit also found that even if the district court did apply the correct state law, it reached the wrong conclusion. According to the Fourth Circuit, it was inconceivable that the source states would have concluded that the TVA facilities in question constituted a nuisance since those states had issued permits allowing TVA to operate in the manner challenged by North Carolina. The Fourth Circuit’s opinion on this point relied on Alabama and Tennessee cases which held that conduct expressly authorized by law would not constitute a nuisance; but the Fourth Circuit did not address the savings clauses in the Alabama and Tennessee environmental statutes, nor did it discuss decisions in those states which held that environmental permits did not block nuisance claims under their respective state’s laws.

North Carolina filed a petition for certiorari. Amici briefs in support of the petition were filed by the American Lung Association, the American Thoracic Society, Defenders of Wildlife, National Parks Association, Parks Conservation Association, Natural Resources Defense Council, Sierra Club, a group of environmental and administrative law professors, and the states of Maryland, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, and Vermont. Among other things, the petition argued that the Fourth Circuit’s decision was contrary to Ouellette and conflicted with decisions in the Second and Sixth Circuits. Not surprisingly, North Carolina’s cert. petition attracted significant attention from those who follow the Supreme Court docket. In the end, however, the Supreme Court will never have a chance to act on North Carolina’s petition for certiorari. After repeated extensions of the time for it to respond to the cert petition, TVA entered into a settlement with North Carolina and other parties that resolved the merits of North Carolina’s claims. As part of the settlement, North Carolina agreed to withdraw its petition for certiorari.


The net result for Ouellette is that the Fourth Circuit’s opinion North Carolina v. TVA is left standing as a significant obstacle to any environmental tort claim that challenges activities authorized by an environmental permit, even if the tort claim is based on the law of the source state. Stated differently, environmental permits may now serve as shields against all tort claims, including claims based on the law of the source state, despite the presence of any savings provisions in the state and federal environmental statutes in question.


As a minor footnote, the Fourth Circuit’s revisionist treatment of Ouellette is particularly ironic because the author of the Fourth Circuit opinion, Judge J. Harvie Wilkinson, once served as a law clerk to Justice Lewis Powell, the author of the majority opinion in Ouellette, and even wrote a flattering memoir of his clerkship entitled Serving Justice.

Assessing the Assessor: Are We Headed to Heightened Scrutiny of the Phase I Environmental Site Assessment?

Posted on July 19, 2011 by Charles Efflandt

Phase I Environmental Site Assessments (Phase I ESAs) are conducted: (1) to assess environmental and health risks related to the acquisition and development of real property and (2) as a critical component of establishing the Bona Fide Prospective Purchaser (BFPP) or related defenses to “owner” liability under CERCLA. A recent ACOEL posting discussed the importance of compliance with post-closing BFPP obligations. What about the adequacy of the Phase I ESA process itself?

 

 

A Phase I ESA must satisfy the requirements of “All Appropriate Inquiry” (AAI), which have been incorporated in the ASTM E 1527-05 Standard. Phase I ESAs are not, however, typically examined by environmental agencies and there is a dearth of judicial interpretation of the AAI requirements. To date, the determination of AAI compliance and BFPP status has been the province of the regulated and not the regulators.

 

The scenario is familiar. A transaction includes the acquisition of commercial property. The client has a general notion of AAI and the importance of the Phase I ESA to achieve BFPP status. The client usually does not know, or care to know, the specific elements of AAI. The Phase I ESA often becomes a transactional commodity to be purchased from the lowest bidder. Lawyers are content to accept the results of the bidding war, relying on the self-certification of the Environmental Professional (EP) that the assessment is compliant with the ASTM Standard. The ESA is conducted, the report issued and the transaction closed with everyone satisfied that environmental risk management has been adequately addressed. This process appears appropriate, at least when agencies or courts are not called upon to perform a more rigorous evaluation.

A February 14, 2011 report issued by the EPA Office of Inspector General (OIG) may serve as the impetus for a more cautious approach to selecting the EP in transactional and Brownfield grant matters and for more carefully evaluating Phase I reports. The OIG report documents the results of its evaluation of 35 AAI/Phase I reports generated by EPs for Brownfields Program grantees. The OIG concluded that none of the Phase I reports satisfied all of EPA’s AAI rule requirements. OIG criticized EPA for its complete reliance on EP self-certifications of compliance, its failure to establish accountability for compliant reports and the lack of procedures for reviewing reports to determine compliance with AAI requirements.

 

Although many of the AAI deficiencies cited by OIG were arguably very minor, the message sent was clear: Noncompliant Phase I ESAs introduce risk that the environmental conditions of a property have not been adequately assessed for the purpose of making informed property use and redevelopment decisions or for identifying risks to human health and the environment. OIG’s recommendations were equally clear - stop relying on EP self-certifications and develop a process for more careful scrutiny of AAI reports to determine actual compliance. The issues raised by the OIG report can, of course, be easily transformed into legal arguments in court where BFPP status may be in issue.

 

I suspect that many of us have been lulled to sleep by the self-certifications of the EP. Has the time arrived to more carefully assess the assessor and treat the Phase I ESA as a site-specific professional evaluation and not a low-bidder commodity required simply to seal the deal?

WHY INSTITUTIONAL INVESTORS CARE ABOUT CORPORATE SUSTAINABILTY

Posted on July 13, 2011 by Christopher Davis

Institutional investors, including pension funds, insurance companies, foundations and university endowments, own about 70 percent of the stock of the world’s largest companies. As part of their fiduciary duty to maximize the long-term, risk-adjusted value of their investments, more institutional investors are becoming “active shareowners,” pressing companies whose shares they own to adopt sustainable business practices on a variety of environmental, social and governance (ESG) issues. This trend has important implications for corporate management and their advisors.

 

Recent events including the BP Deepwater Horizon oil spill, the Massey Big Branch mine explosion and the TEPCO Fukushima Daiichi nuclear power plant meltdown highlight the potential for poorly managed environmental and safety risks to result in destruction of shareholder value. By contrast, there is evidence from Sustainable Asset Management, and from investment consultant Mercer, that companies with superior ESG performance also have superior financial performance. Thus, how companies address these so-called “nonfinancial” business risks and opportunities is of increasing interest to investors.

 

Indications that institutional investors are paying greater attention to ESG factors include:

In recent years there has been a proliferation of research, data and ratings of companies’ ESG performance. One example is the scores that the Carbon Disclosure Project gives to companies based on their reporting and management of greenhouse gas (GHG) emissions. Financial data provider Bloomberg now offers ESG data on a wide range of companies on its terminals. Analysts at both socially responsible investment (SRI) funds and increasingly at mainstream investment firms analyze and report on companies’ ESG performance, and companies are ranked and selected for their ESG performance for indexes such as the Dow Jones Sustainability Index. The net result is that ESG factors are starting to be incorporated in corporate valuations, and this trend is likely to accelerate.

 

Given increasing investor interest in these factors, it behooves corporate management and boards to focus on, improve and report their ESG performance.

 

A company should communicate the “business case” for its sustainability strategy to shareholders, customers and other stakeholders with whom the company engages, as a key driver of the company’s competitive positioning, risk management, reputation and brand. Managing ESG risks and opportunities, on issues ranging from climate change to workforce diversity, should be integrated into companies’ business strategy, and not merely assigned to the environmental, human resources or corporate social responsibility (CSR) departments.

Institutional investors’ attention to these issues is likely to increase, as “sustainable” or “responsible” investment becomes more widely accepted as fundamental to the fiduciary duty of asset owners and investment managers. Counsel can add value by helping their corporate clients recognize this trend, better assess and manage their ESG risks and opportunities, and review and revisit their mandatory and voluntary disclosures of these issues.

SIXTH CIRCUIT RULES THAT TWOMBLY AND IQBAL MUST BE STRICTLY APPLIED

Posted on July 13, 2011 by Jack Shumate

On June 21, the U.S. Court of Appeals for the Sixth Circuit held, in New Albany Tractor, Inc. v. Louisville Tractor, Inc. that the Supreme Court's rulings in Twombly and Iqbal must be strictly applied, mandating dismissal of a case in which the complaint failed to contain sufficient allegations of operative fact. What makes this decision significant is that the court recognized that the facts necessary to support the adequate allegations were probably only available from the files of the defendant; therefore, strict application of Twombly and Iqbal, denying the plaintiff access to the files in discovery, effectively denied the plaintiff any opportunity to bring the case. For this reason, the court also denied, as pointless, the plaintiff's alternative request for leave to amend its complaint.

For further information contact Jack Shumate or Sheldon Klein at 248.258.1616.
 

Treatment of Environmental Claims Liability in Bankruptcy

Posted on July 7, 2011 by Robert L. Falk

When a company saddled with potential environmental liabilities seeks bankruptcy protection, the goals of Chapter 11—giving the reorganized debtor a “fresh start” and fairly treating similarly situated creditors—can conflict with the goals of environmental laws, such as ensuring that the “polluter pays.” Courts have long struggled to reconcile this tension. 

Environmental obligations arise in various forms and under numerous federal and state statutes. They include obligations to stop or contain ongoing pollution, to remediate contaminated sites, to reimburse other parties for remediation costs, and to pay fines and penalties. A number of factors, including the type of liability, the status of the contamination, and the statute under which the obligation arises, may have an impact on whether Chapter 11 provides protection to the post-petition entity, or whether the reorganized entity remains liable.

In order to resolve this issue in the Chapter 11 context, it must first be determined whether a particular environmental obligation is a “claim” under the Bankruptcy Code. Under the Bankruptcy Code, a claim includes “a right to an equitable remedy for breach of performance if such breach also gives rise to a right to payment.”[1] In the environmental context, the fundamental question is whether the breach of an environmental obligation “gives rise to a right to payment.” 

The only U.S. Supreme Court decision offering guidance on this issue is Ohio v. Kovacs decided in 1985.[2] In Kovacs, the State of Ohio obtained an injunction requiring a polluter to clean up a site. When the polluter failed to comply, the state appointed a receiver who took possession of the site and the polluter’s assets in order to implement the remediation. Before the cleanup was complete, the polluter filed for bankruptcy. In holding that the cleanup obligation was a claim dischargeable in bankruptcy, the Court observed that by dispossessing the debtor and removing his control over the site, the State prevented the debtor from conducting the cleanup himself. As a result, it held that the State was effectively seeking a money judgment, which is a “claim” subject to discharge under the Bankruptcy Code. 

Another leading case addressing this issue is United States v. LTV Corp. (In re Chateaugay Corp.).[3] In this decision, the Second Circuit distinguished between orders to clean up accumulated waste and orders to stop ongoing pollution. It held that when an order requires cleanup of contamination and the applicable government agency has the option of conducting the cleanup itself and seeking reimbursement, the obligation is a “claim” subject to discharge under Chapter 11 because its breach gives rise to a right to payment. On the other hand, the Second Circuit observed that an order to stop polluting does not create a claim subject to discharge in bankruptcy, because the enforcing agency may not accept payment and allow the party to continue polluting. Hence, such an order remains enforceable against the reorganized entity.

The two leading cases discussed above have not provided sufficient guidance to resolve all potential issues that arise concerning whether environmental liabilities are dischargeable in bankruptcy. For example, one issue with which bankruptcy judges have grappled is how to determine whether pollution is ongoing. See e.g., In re Oldco M Corp. (finding that debtor’s obligation to operate groundwater remediation system was not dischargeable because plume would otherwise continue to migrate).[4] Another is whether contribution claims arising in the environmental context are dischargeable. See e.g., In re Lyondell[5] andIn re Chemtura.[6] 

Conclusion

Entities considering bankruptcy as a means of averting environmental liabilities should pay close attention to emerging case law decisions when seeking to determine whether their environmental liabilities are dischargeable claims under the Bankruptcy Code. Debtors facing the risk that such potential claims may be disallowed may want also to consider the potential alternative of pursuing a sale of assets under section 363 of the Bankruptcy Code. 



[1] 11 U.S.C. § 101(5)(B) (emphasis added).

[2] 469 U.S. 274 (1985).

[3] 944 F.2d 997 (2d Cir. 1991).

[4] 438 B.R. 775 (Bankr. S.D.N.Y. 2010).

[5] In re Lyondell Chem. Co., No. 09-10023 (REG), 2011 WL 11413 (Bankr. S.D.N.Y. Jan. 4, 2011).

[6] In re Chemtura Corp., No. 09-11233 (REG), 2011 WL 109081 (Bankr. S.D.N.Y. Jan. 13, 2011).