Environmental Liabilities and PRP...
Transcript of Environmental Liabilities and PRP...
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
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
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
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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