Environmental Liabilities and PRP Insolvency Managing Environmental Obligations and Meeting Remediation Requirements

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THURSDAY, APRIL 4, 2013

Presenting a live 90-minute webinar with interactive Q&A

Milissa A. Murray, Of Counsel, Bingham, Washington, D.C.

Michael S. McDonough, Partner, Pillsbury, Los Angeles

William F. Govier, Of Counsel, Lesnick Prince & Pappas, Lesnick Prince & Pappas

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Environmental Issues in Bankruptcy

Strafford Webinar

April 4, 2013

Milissa Murray

Bingham McCutchen LLP

Mike McDonough

Pillsbury Winthrop LLP

Bill Govier

Lesnick Prince & Pappas LLP

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I. Introduction

• Environmental claims and obligations pose unique issues in bankruptcy – their treatment often highlights the tension between the “fresh start” policy underlying the Bankruptcy Code and the “polluter pays” principle behind environmental statutes.

• Broadly speaking, the primary holders of environmental claims in bankruptcy cases are the government and private parties aggrieved by the debtor’s failure to clean up its mess (or compensate for its toxic torts).

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Introduction (cont’d)

• Whether private or governmental, environmental creditors rarely emerge after bankruptcy unscathed by the reduction, capping or elimination (a/k/a “reorganization”) of the debtor’s environmental liabilities and obligations.

• The treatment of environmental claims in bankruptcy will vary widely depending upon the legal basis for the claim; whether it is direct or in contribution; who is asserting it; and whether it is contingent.

• Parties who share environmental liabilities with the debtor face particularly challenging obstacles to securing the debtor’s fair share of cleanup costs. Nevertheless, there are preventative measures PRPs and remediating PRP groups can take to minimize the risks and consequences of disallowance of their claims in the bankruptcy of another PRP.

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Common Themes

• Right to a money recovery vs. injunctive relief

• Claims by government vs. claims by private parties

• Obligation to maintain environmental compliance

during bankruptcy

• Timing/priority of payment for ongoing cleanup

• Joining of contract or common law claims

• Rights of subsequent property purchasers

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II. Bankruptcy Law Overview

• Goals: fresh start (discharge); avoiding race to the

courthouse (equitable distribution to creditors)

• Means: Debtor gets breathing room (automatic stay);

Assets at petition date used to satisfy pre-petition

debts; Trustee may abandon burdensome estate

property; Trustee may reject or assume executory

contracts; “Claims” are defined broadly; notice to

creditors may be constructive and remote.

• Chapters 7 (liquidation); 11 (restructuring); 13

(consumer); 15 (cross border) and 9 (municipalities)

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Key Bankruptcy Issues

• Automatic stay – Section 362

• Abandonment of property that is burdensome to

estate and rejection or assumption of executory

contracts – Sections 554 and 365, respectively.

• Dischargable claims; definition of “claim” (Section

101(5); notice (Section 342)

• Releases/third-party releases (Ch.11 Disclosures and

Plans)

• Claims resolution process: allowance and estimation

(Chapter 5)

• Priority of claims - Administrative priority claims

(Section 503)

• Contingent contribution claims – Section 503(e)(1)(B)

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Key Bankruptcy Issues (cont’d)

• Duty to manage estate property and operate in

compliance with environmental laws and

regulations (28 USC §959)

• Settlements of claims and regulatory obligations

• Section 363 sales; “free and clear” orders;

government’s ability to object to sales; liabilities

that may survive against the asset purchaser

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III. Environmental Laws Potentially Implicated in Bankruptcies

• Most Commonly Implicated

• CERCLA/Superfund

• RCRA

• Other Laws Potentially Implicated

• State hazardous waste cleanup

laws

• Common law (e.g., nuisance,

trespass)

• Clean Air Act

• Clean Water Act

• Oil Pollution Act

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CERCLA (Superfund) (42 U.S.C. 9601 et seq.)

• Authorizes the federal government to respond to/clean

up releases/threatened releases of wide variety of

hazardous substances

• Imposes strict liability on PRPs,

including owners & operators

(now or at the time of disposal),

arrangers, transporters (42

U.S.C.§9601(a))

• Government can either force

PRPs to clean up, or can clean up

itself and then seek

reimbursement from PRPs

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• PRPs can sue for cleanup cost recovery (42 U.S.C.

§ 9607(a)(4)(B)), or for cost contribution from

other co-liable PRPs (42 U.S.C. §9613(f))

• Certain exceptions to liability for bona fide

prospective purchasers, contiguous owners,

innocent landowners

• Cleanup can proceed even if one or more PRPs

settles with the government, is in bankruptcy or

otherwise unavailable - but impacts cost allocation

• Multi-PRP working group often left to pursue other

nonparticipating PRPs to recover costs from them

CERCLA (Superfund) (42 U.S.C. 9601 et seq.)

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• Regulation of generation, treatment, storage, transport

& disposal of “hazardous wastes”

• “Corrective action” may be required to force owner or

operator to clean up hazardous waste contamination

RCRA (42 U.S.C. 6901 et seq.)

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• EPA can order permitted owner/operator to perform

corrective action to clean up site

• EPA can order immediate cleanup where wastes

cause “imminent & substantial endangerment”

• RCRA does not authorize monetary relief in lieu of

cleanup

• Government cannot force reimbursement after it conducts

RCRA cleanup, it can only require cleanup at PRP’s

expense

• U.S. v. Apex Oil, 579 F.3d 734 (7th Cir. 2009)

RCRA (42 U.S.C. 6901 et seq.)

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Other Relevant Laws

• Clean Water Act/Oil Pollution Act

• Strict liability for cleanup costs, natural resource damages,

penalties

• EPA can issue administrative orders for cleanup, prevention

of actual/threatened discharges of oil or hazardous

substances to “navigable waters”

• Can also bring civil action for penalties/injunction

• Clean Air Act

• EPA can issue administrative orders to stop pollution, or

seek penalties

• State cleanup laws

• Mini-CERCLA, hazardous waste laws, water quality laws

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IV. Application of Bankruptcy Concepts to Environmental Issues and Claims

• Section 362 — Automatic Stay: scope and police powers

exception — cleanup orders and financial assurance

obligations

• Abandonment of contaminated property — Section 554 and

Midlantic National Bank case

• Notice and Claims process —

• known vs unknown environmental creditors; schedules

• filing proofs of claim; timing and surrogate claims

• liquidation and estimation of environmental claims

• Disputed claims reserves/motions

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Application (cont’d)

• Only “prepetition” “claims” can be discharged. So

when do environmental claims arise (for discharge

and notice purposes) and what are environmental

obligations that may not qualify as “claims” and thus,

are non-dischargeable?

• Debtor’s continuing obligations at Debtor-owned vs.

non-owned/operated sites

• Discharge — certain cleanup obligations are not

discharged — Apex Oil

• When can cleanup costs give rise to a priority

administrative expense claim?

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V. Disallowance of Contingent Contribution Claims ~ Section 502(e)(1)(B) of the Bankruptcy Code

• Elements: (i) co-liability to a creditor, (ii) contingent

claim, (iii) for contribution or reimbursement

• Effect on PRP claims

• CERCLA 107(a) claims — Atlantic Research

• CERCLA 113 contribution claims — Aviall, Niagara

Mohawk, Agere

• Lyondell and Chemtura

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V. Disallowance of Contingent Contribution Claims (cont’d)

• Contract claims — PRP Agreements, leases, pre-

bankruptcy settlements and indemnification

agreements, consent decrees

• Common law claims of trespass, nuisance,

negligence, contribution, equitable indemnity, and

abnormally dangerous activity

• Other cases — conforming and conflicting

• Impact of PRP claim disallowance on significance

of governmental claims against debtor and

government settlements

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VI. Minimizing the Harsh Effects of Section 502(e)(1)(B)

In Consent Decrees with Government

• Get to the negotiating table — seek to participate in

any government/PRP debtor negotiations

• Address allocation and application of government’s

bankruptcy recoveries

• Limit contribution protection — seek government

agreement to limit debtors’ contribution protections,

including by expressly excluding 3rd party claims for

costs incurred prior to the effective date of the

settlement from the scope of “matters covered.”

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In PRP Agreements with Members

• Consider use of a trust to collect assessments and pay costs (See

Chemtura)

• Consider how assessments of costs are allocated and characterized

• Consider effect of providing for refunds and adjustments in

allocations

• Consider avoiding balloon payments at end of cleanup which might

be avoided in bankruptcy

• PRP agreements from which members cannot easily withdraw are

more likely to be characterized as executory contracts

• Consider obtaining collateral to secure payment of the members’

obligation or other financial assurances

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VII. Governmental Settlements in Bankruptcy

• Why debtors settle: who plays, and who pays (Apex — a game changer)

• Court approval: CERCLA standard vs. Bankruptcy Code standard — timing and substance

• Environmental Response Trusts (ERTs)

• Role of other PRPs in settlement process

• Use/restrictions/application of settlement proceeds

• Contribution protection issues

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VIII. Plan Releases, Exculpation and Bar Orders

• Discharge provisions in Plan

• Debtor releases

• Third party releases

• Purported release and discharge of RCRA liability

and equitable remedies that are not “claims” (When breadth of release of debtor or reorganized

debtor appears to include non-dischargeable

liabilities)

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IX. Filing and Defending Proofs of Claim

• Critical to file claims by the “claims bar date” — Do

not be late

• Consider law in the applicable jurisdiction on

502(e)(1)(B) and whether and how to characterize

an environmental claim and whether to include

contribution claim for future cleanup costs under

CERCLA if a breach of contract or state law cause

of action for damages is a viable alternative

• Consider filing a “surrogate” proof of claim on

behalf of appropriate regulatory agencies

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X. Specific Concerns for Lenders and Potential Purchasers

• Foreclosures

• 363 sales

• Government super liens

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Foreclosures

• There are many ways to become a PRP...

• Traditionally, a lender, including a secured lender,

is insulated from environmental liability of the

borrower so long as the lender acts only as a

lender and does not expand its role to include

management or operation of the debtor’s business

• CERCLA 101(20) embodies this “safe harbor”

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Foreclosures (cont’d)

• In a restructuring or other distressed context, a lender

must pay attention to any level of “management” it may wish to provide a struggling borrower

• “Lender liability” could become direct

“environmental liability”

• Foreclosing lenders taking title to property impacted by

hazardous substances can be at risk if they participate

in the management of that property and don’t act

quickly to divest the property

• Liability could arise under CERCLA, RCRA, CWA,

CAA, state laws and regulations, even common law

(toxic) tort theories

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Foreclosures (cont’d)

• Some safe harbors exist:

• CERCLA has a lender liability exemption if lender

(1) holds indicia of ownership primarily to protect its

security interest and (2) has not participated in the

management of the site

• Lenders may also seek protection under CERCLA’s

“innocent landowner” defense by making “all

appropriate inquiries”

• A subjective determination made by a court

• RCRA also has a (more limited) lender liability

exemption

• CWA and CAA - no exemption

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Foreclosures (cont’d)

• Due diligence and caution are the rules of the day

when contemplating foreclosure of property that is

or may have contamination issues

• Due diligence could be extensive, and should be

documented, before initiating foreclosure

proceedings

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363 sales

• In bankruptcy, a company can use section 363 of

the Bankruptcy Code to sell estate assets “free and

clear of any interest in such property”

• The free and clear nature of the sales benefit the

debtor by maximizing sale value

• Benefits to the buyer typically include good faith

findings and, importantly, protection from successor

liability

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363 sales (cont’d)

• Notwithstanding a Bankruptcy Court order limiting

successor liability, a purchaser should not assume

that it is protected from environmental liability

• The state and federal government will pursue a 363

purchaser, and may prevail given the public

policies at issue

• Diligence and investigation before the purchase is

key

• Again, there are many ways to become a PRP...

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Governmental Super Liens

• Even in the absence of foreclosure or bankruptcy,

many states (as well as local governments) permit

governmental “super liens” covering the clean up

costs of governmental entities

• Many times, these liens take priority over all prior

liens, including first mortgages and other first

priority liens

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Governmental Super Liens (cont’d)

• So a first lien, secured lender could be “minding its

own business” and be primed by an environmental

lien

• Reinforces the need for due diligence in advance, as

well as proper covenants and reporting requirements

in your documents in case hazardous substances are

found, and especially if a governmental agency has

undertaken clean up at a site

Milissa A. Murray

Of Counsel, Environmental, Land Use and Natural Resources

Bingham McCutchen LLP

m.murray@bingham.com

202.373.6511

Milissa Murray is a seasoned commercial litigator with more than 20 years’ experience in the resolution of complex business, environmental and bankruptcy disputes. She is a member of Bingham’s Environmental Land Use and Natural Resources Group and a co-founder of the Environmental Liabilities in Bankruptcy Practice.

Her practice encompasses all aspects of complex commercial litigation at both the state and federal levels, with particular emphasis on environmental, bankruptcy, regulatory, real estate, contract and telecommunications law. She has extensive experience in all facets of litigation, trial practice and the development of alternative dispute resolution strategies, including pre-suit counseling and planning (including settlement and cost/benefit analyses and development of litigation budgets), discovery, electronic discovery, motions practice, settlement negotiations, mediation, trial, appeals and administrative and governmental investigations and enforcement proceedings. Milissa has appeared in numerous federal bankruptcy, district and circuit courts across the country and in many state tribunals including the highest Maryland appellate courts.

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Michael S. McDonough

Partner, Environmental, Land Use and Natural Resources

Pillsbury Winthrop Shaw Pittman LLP

michael.mcdonough@pillsburylaw.com

213.488.7555

Mr. McDonough is a partner in Pillsbury’s Los Angeles Environment, Land Use & Natural Resources section. He represents Fortune 500 companies, municipalities and private entities in complex environmental litigation, administrative and enforcement matters at the federal, state and local levels. Mr. McDonough also provides client compliance counseling on issues ranging from climate change and air quality enforcement, to soil and water quality issues, to environmental management and ISO 14001 issues. His practice focuses on defending enforcement actions, bringing regulatory challenges, and litigating with state and federal regulatory agencies, including the U.S. Environmental Protection Agency, the U.S. Department of Justice, the California Air Resources Board, the California Energy Commission, the South Coast Air Quality Management District and the Bay Area Air Quality Management District, among others. He represents a range of Fortune 500 companies from a variety of industries, including energy production and importing, petroleum refining, freight transportation, consumer products, automobile manufacturing, aerospace, chemical manufacturing, and electronics manufacturing.

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William F. Govier

Of Counsel, Financial Restructuring

Lesnick Prince & Pappas LLP

wgovier@lesnickprince.com

213.493.6581

Bill represents clients in complex workout and insolvency matters in domestic, cross-border and multinational restructurings, including a special emphasis on Latin American restructurings. Bill has represented institutional, high-yield and distressed debt investors, trade creditors, official and ad hoc creditors’ committees, as well as DIP agents and lenders in such engagements. Bill also represents a wide variety of investors, including hedge funds and private equity funds are well as strategic investors, in distressed debt transactions, including acquiring assets and companies out of bankruptcy estates. He also represents debtors in both domestic and cross-border financial restructurings.

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