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Status of Unilateral Administrative Orders When Issued to Bankrupt Companies for Property They Do Not Own

Federal environmental law authorizes the Environmental Protection Agency (“EPA”) to issue Unilateral Administrative Orders (“UAOs”) requiring parties to undertake response actions, like cleanup, for contaminated properties.  Under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERLCA”), or Superfund law, these UAOs can assign liability not only to property owners, but also to generators and transporters of hazardous waste who have contributed to contamination of a property.  See 42 USC § 9607.  What happens to these UAOs when a company that does not own a contaminated property but contributed to the contamination (i.e. a third party), undergoes bankruptcy?  The question of whether these UAOs constitute dischargeable claims when issued to bankrupt companies for the contamination of property they do not own is unsettled in current law.

A core principle of bankruptcy law holds that only liabilities that are classified as claims are dischargeable.  Under the Bankruptcy Code, a claim is defined as: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach ofperformance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured; 11 USC § 101.  Liabilities that are not classified as claims go through the bankruptcy undischarged, and attach to the reorganized debtors.  Whether UAOs are dischargeable, then, depends on whether they can be understood as “claims.”

Debtors going through bankruptcy will thus aim to have as many of their liabilities as possible defined as “claims,” so that the claims get discharged and do not attach to the reorganized debtor.   Under CERCLA, the government can issue UAOs to liable parties to clean up contaminated sites for which they are responsible.  CERCLA, though, preserves another option for the government:  it authorizes the government to perform the cleanup itself and receive reimbursement of the costs of cleanup from the liable parties.  See 42 USC § 9607.  Debtors have argued that this option is a “right to payment” within the definition of “claim” under §101(5) of the Code.  In In re Chateaugay Corp., 944 F.2d 997, 1008 (2d Cir. 1991), the Second Circuit stated that “an order to clean up a site, to the extent that it imposes obligations distinct from any obligation to stop or ameliorate ongoing pollution, is a ‘claim’ if the creditor obtaining the order had the option, which CERCLA confers, to do the cleanup work itself and sue for response costs, thereby converting the injunction into a monetary obligation.”   This holding applies to UAOs, which, as discussed, are orders which require parties to undertake a response action, usually a clean up.

Moreover, debtors can argue that they must spend money in order to comply with an UAO, thus making the UAO equivalent to a “right to payment.”  For example, in Ohio v. Kovacs, 469 U.S. 274, 282 (1985) the Court noted that, because the only way the debtor could implement the state’s injunctive remedy was to pay for someone else to perform the cleanup, the state’s injunctive obligation was a claim subject to discharge in bankruptcy.

On the other hand, because the EPA does not want UAO’s discharged in bankruptcy, the EPA can argue that UAOs are not claims subject to discharge because CERCLA does not authorize governments to accept money as an alternative to compliance with cleanup orders.   In Chateaugay, the Second Circuit found that, “since there is no option to accept payment in lieu of continued pollution, any order that to any extent ends or ameliorates continued pollution is not an order for breach of an obligation that gives rise to a right of payment and is for that reason not a ‘claim’.”  Chateaugay, 944 F.2d at 1008.  The EPA can also argue that the debtors’ equivalency argument is unpersuasive because it is irrelevant whether debtors must spend money to comply with UAOs.  In United States v. Apex Oil Co., 579 F.3d 734, 738 (7th Cir. 2009), the Court found that discharging a claim under 101(5)(B) of the Bankruptcy Code must be limited to situations in which the claim “gives rise to a right of payment because the equitable decree cannot be executed, rather than merely imposing a cost on the defendant, as virtually all equitable decrees do.”

In rebutting the EPA’s position, debtors will attempt to distinguish these cases and rely on other case law in support of their position that such claims are dischargeable.  Although the Chateaugay court held that CERCLA cleanup orders, to the extent that they remediate ongoing pollution, are not dischargeable claims, debtors are likely to argue that Chateaugay is distinguishable form the UAO context since the subject sites in that case were properties owned by the debtor, which unarguably must be cared for in compliance with all applicable environmental laws, regardless of bankruptcy.  EPA can deny this distinction, arguing instead that the court’s reasoning is Chateaugay applies both to debtor-owned and third party sites.

Moreover, in Apex Oil, the Seventh Circuit held that an EPA cleanup order issued to a debtor under the Resource Conservation and Recovery Act (“RCRA”) to clean up a third party site was not a “claim.”  RCRA, however, unlike CERCLA, does not authorize the government to perform the cleanup on its own and then seek reimbursement from the liable parties.  Debtors can thus distinguish Apex Oil by arguing that RCRA is not an “alternate right to payment” statute and that RCRA UAOs, as opposed to CERLCA UAOs, are not within the definition of “claim.”

The Second Circuit in Chateaugay held that response costs incurred by EPA under CERCLA were pre-petition claims, dischargeable in bankruptcy, regardless of when such costs were incurred, so long as such costs concerned release or threatened release of hazardous waste that occurred before the debtor filed its Chapter 11 petition.  On the other hand, it held that an order obtained by EPA against debtor that to any extent ends or ameliorates continued pollution, is not a dischargeable claim, because the EPA may not accept payment in lieu of continued pollution.  However, an order to clean up site, to the extent that it imposes obligations distinct from any obligations to stop or ameliorate ongoing pollution, is a dischargeable claim to extent EPA has option, which CERCLA confers, to do cleanup work itself and sue for response costs, thereby converting injunction into monetary obligation.  Furthermore, the Second Circuit concluded that a cleanup order issued by the EPA under CERCLA “that accomplishes the dual objectives of removing accumulated wastes and stopping or ameliorating ongoing pollution emanating from such wastes is not a dischargeable claim.” The Third Circuit also took this approach in In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), finding that the debtor’s injunctive obligation was not a dischargeable claim because the debtor had no option to pay for the right to allow its wastes to continue to seep into the environment.

The Chateaugay Court analyzed Sections 106 and 107 of CERCLA and Section 101(5) of the Bankruptcy Code, and approached the question as whether the injunctive order at issue was devised to end or ameliorate “current,” “continued” or “ongoing” population originating from hazardous waste.   Therefore, the Court set forth an “ongoing pollution test” as the major determinant of whether injunctive orders should be dischargeable claims or not.  However, while the Court set up this test, it did not set forth what standards should be used in determining if there is “ongoing” or “continued” pollution.  Without further clarification from the courts, it is still unclear how the court will determine if an injunctive order will be dischargeable or not.  For example, does an abandoned site that stores drums that slowly leach contaminants constitute ongoing pollution?  Furthermore, there are threshold issues that the courts must iron out: for example, how much pollution must be discharged in order to trigger the test? Therefore, while a vague test has been established, it is unclear how the test will be applied going forward.

Debtors main argument is that Chateaugay’s “ongoing pollution” standard does not govern in the case of third party owned property, because the court’s holding is limited to debtor owned property. However, it can be argued that Chateaugay is controlling in cases of third party liability because nothing in Chateaugay’s analysis of CERCLA and section 101(5) of the Bankruptcy Code supports distinguishing between debtor owned and non-debtor owned contaminated sites.  In fact, the more appropriate interpretation of Section 106(a) of CERCLA is that this section creates a single standard for the issuance of UAOs, irrespective of debtor owned or non-debtor owned property: that there be an “imminent and substantial endangerment to the public health or welfare or the environment because of an actual or threatened release of a hazardous substance from a facility.” 42 USC § 9696.  This standard does not authorize distinguishing between debtor owned or non-debtor owned property.  Furthermore, just as CERCLA does not authorize the EPA to accept payment in lieu of continued pollution at debtor-owned sites, it similarly does not authorize the EPA to accept payment in lieu of continued pollution at non-debtor owned sites.

Finally, debtor’s argument that because CERCLA affords the EPA an alternate right to payment through the Section 107’s authorization of a cost recovery action, injunctions issued under section 106 of CERCLA are dischargeable claims is unpersuasive.  CERCLA contains several distinct enforcement provisions, which the EPA can choose to pursue at its own discretion.  If EPA chooses to seek injunctive relief pursuant to Section 106 of CERCLA to end or ameliorate continued pollution, the mere fact that EPA has other choices, including recovery of response costs under Section 107(a), should not affect it’s choice.  Furthermore, CERCLA’s Section 107(a) enforcement authorization is, in reality, not a viable choice for EPA, since the Superfund is essentially broke, and EPA does not have the money to itself undertake response actions.  Therefore, the existence of another option which is, in reality, not a viable option at all, should not affect EPA’s other options.  In sum, it seems clear that the solution to this problem will depend on further interpretation by courts of the “ongoing pollution” test.  As the contours of this test become defined, both in terms of when the test is triggered and the actual test itself, interested parties will be able to more readily predict the case when a UAO issued to a third party debtors will constitute a dischargeable claim.

—- Anisha Sud is an editor with MJEAL

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.


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