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We Really Mean It, CLEAN UP THAT MESS!

Posted on: October 26, 2010

Following the Seventh Circuit’s decision Apex Oil, the SDNY has already begun to sustain post-confirmation environmental liabilities where previously the trend – esp. in New York – had favored discharge. We reported on Apex Oil last week – see our Points entry entitled “Clean Up That Mess.

It’s the case in which Judge Posner allowed the federal environmental agency to impose a cleanup order against a post-confirmation successor corporation. Judge Posner reasoned that, since the EPA had issued its order under the hazardous waste statute (RCRA) instead of the Superfund statute (CERCLA), and since the waste statute does not empower the agency to impose monetary liability as such, the order was an equitable order for which no monetary claim was possible. Without a monetary-claim alternative, the obligation to perform the order was not a “claim” and had not been discharged upon confirmation. The Supreme Court recently declined to review Apex Oil, despite a clear split between the Seventh and Sixth Circuits. Now we know that Apex Oil finds favor in New York as well.

In re Mark IV Industries (Mark IV Industries v. New Mexico Envir. Dept., Case No. 09-12795, Adv. Proc. No 09-1507 (Bankr. S.D.N.Y. Oct. 21, 2010), pitted Mark IV Industries against the New Mexico Environmental Department (NMED). For some years prior to its 2009 Chapter 11 filing, Mark IV had been conducting environmental assessments and remediation work at a site it had once owned and operated to make electronic circuit boards. NMED and the current site owner filed about $2 million in proofs of claim, but NMED reserved the right to argue that its claims were not dischargeable. When the court later confirmed the plan, the confirmation order allowed NMED to pursue its argument about discharge. Battle was joined when Mark IV sought declaratory judgment.

The Bankruptcy Court for the Southern District of New York reviewed the legal landscape, pointing to familiar landmarks such as Chateaugay (SDNY) and Kovacs (S.Ct.) and a sampling of cases from other circuits. What is interesting is the prominence afforded Apex Oil in the opinion: the Mark IV Industries decision cites and quotes it several times and sets it on par with Chateaugay, which has long been the touchstone case out of SDNY on the tricky terrain of environmental bankruptcy law. Relying comfortably on Apex Oil, the court’s opinion drives inexorably toward the conclusion that Mark IV’s obligation to remediate its predecessor’s property was not discharged. The court noted that, as the EPA had done in Apex Oil, NMED issued its order under a statute that did not empower the agency to collect remediation costs, only to order the remediation. Consequently, SDNY determined that the obligation underlying the order was not dischargeable, since it was an equitable remedy for which no monetary remedy was available as an alternative.

The importance of Mark IV Industries is that it has brought Apex Oil into the Southern District of New York. In doing so, the SDNY has amplified the Seventh Circuit’s decision and approved its central tenet, which is that a government agency can preserve its remediation claims, despite intervening restructuring, by making sure to proceed under a statute that permits equitable remedies but not monetary remedies. Without cutting back on Chateaugay, the SDNY has defined the path forward for agencies seeking to tag post-confirmation companies with pre-confirmation remediation obligations. In the landscape of environmental bankruptcies, the ground has shifted. Successor companies and 363 buyers will need to recalibrate their upfront risk assessment accordingly.

Kevin Ewing is also a regular contributor to Bracewell & Giuliani’s Energy Legal Blog.