§18.3 - Discharge and Payment of Environmental Claims

§18.3 DISCHARGE AND PAYMENT OF ENVIRONMENTAL CLAIMS

Three primary issues determine the treatment of a debtors environmental liabilities in bankruptcy. First, because only debts owed on claims are discharged, the determination of whether an environmental obligation constitutes a claim under §101(5) of the Code, 11 U.S.C. §101(5),is critical. Second, if an environmental obligation constitutes a claim, the determination of when the claim arose will dramatically affect its treatment in the bankruptcy case. Third, the priority of an environmental claim in relation to other claims depends on the claim at issue. In particular, certain claims may be entitled to priority treatment as administrative expenses under §507(a)(1) of the Code, 11 U.S.C. §507(a)(1).

(1) Definition of claim

One of the main reasons to file a bankruptcy petition is to obtain a discharge of all debts. Under §101(12) of the Code, 11 U.S.C. §101(12), debt is defined as liability on a claim. Thus, whether a particular obligation is indeed a claim under the Code is of paramount importance in determining if it is discharged.

Under §101(5)(A) of the Code, 11 U.S.C. §101(5)(A), claim is broadly defined to include any 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. The Bankruptcy Code and the policies underlying it favor a broad reading of the term claim. Johnson v. Home State Bank, 501 U.S. 78, 80-81, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991).

(2) Discharge of claims in bankruptcy

Central to the Chapter 11 bankruptcy reorganization process, and consistent with the notion of a fresh start, is the rule that, except as provided for under the plan of reorganization, liability for all claims against the debtor existing on the date the plan of reorganization is confirmed is discharged, regardless of whether a proof of claim was filed. 11 U.S.C. §1141(d). As a practical matter, claims that arise after the petition date but before the confirmation date are administrative claims that would be entitled to first priority treatment in a liquidation and are therefore paid in full under the plan of reorganization. See §18.3(6)(b), below.

In a Chapter 7 case, individuals receive a discharge of all debts arising before the bankruptcy petition. Corporations do not receive a discharge in a Chapter 7 case. However, the corporation will be liquidated, with all assets distributed to its creditors, and will not otherwise be available to be held liable for its debts.

Certain debts are not dischargeable. Section 523 of the Code lists many exceptions to discharge, two of which are particularly important for environmental claims. Debts not listed on the debtors bankruptcy schedules in time to permit the creditor to file a proof of claim are not dischargeable unless the creditor had actual knowledge of the bankruptcy in time to file a proof of claim. 11 U.S.C. §523(a)(3); see In re Chicago, Milwaukee & St. Paul & Pac. R.R., 3 F.3d 200 (7th Cir. 1993) (unscheduled environmental claim held dischargeable when claimant with actual knowledge of bankruptcy case and environmental contamination failed to timely file a proof of claim); see also Ninth Ave. Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716 (N.D. Ind. 1996)In re Placid Oil Co., 753 F.3d 151 (5th Cir. 2014) (former employee's claim for asbestos exposure was discharged; debtor's publication of claims bar date notice in Wall Street Journal constituted sufficient constructive notice to satisfy due process requirements for discharge); (if the claimant had actual or constructive knowledge that a release or threatened release of hazardous substances had occurred, bankruptcy court may discharge CERCLA claims); cf. AM Intl, Inc. v. Datacard Corp., 106 F.3d 1342, 1348 (7th Cir. 1997) (CERCLA claim not discharged because claimant did not have sufficient information such as visible signs of contamination, soil testing, EPA involvement, or publicized spills, to tie debtor to environmental contamination prior to plan confirmation).

The other important category of potentially nondischargeable debts consists of debts for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit that are not compensation for actual pecuniary loss. 11 U.S.C. §523(a)(7). Compare In re Renfrow, 112 B.R. 22 (Bankr. W.D. Ky. 1989) (civil penalties assessed against Chapter 7 debtor for violations of Kentucky coal mining statute were not dischargeable because the intent of the statute was to protect the environmental welfare of people and property in state, and thus the civil liabilities were not pecuniary in nature), with In re Kovacs, 29 B.R. 816 (Bankr. S.D. Ohio 1982), later proceeding, 717 F.2d 984 (6th Cir. 1983), affd sub nom. Ohio v. Kovacs, 469 U.S. 274, 105 S. Ct. 705, 83 L. Ed. 2d 649 (1985) (state court judgment requiring the debtor to clean up industrial waste found dischargeable because it compensated the state for pecuniary loss); see also Durham Inland Wetlands & Watercourses Agency v. Jimmo (In re Jimmo), 204 B.R. 655 (Bankr. D. Conn. 1997) (although fine imposed for noncompliance with Connecticut Inland Wetlands and Watercourses Act was a nondischargable civil penalty, the attorney fees, because they were compensatory to plaintiff, and the committees fees and costs for remediation, because they were compensation for actual pecuniary loss, were dischargable). Although civil penalties may not be discharged by an individual debtor, they are dischargeable by a reorganized corporate debtor. 11 U.S.C. §523(a)(7).

(3) Environmental liabilities as claims

Generally, environmental obligations are treated as claims under the Code, with the exception of certain remedial and injunctive obligations. Actions seeking reimbursement of costs incurred to clean up a site or civil penalties constitute claims under the Code. See, e.g., In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); In re Jensen, 995 F.2d 925 (9th Cir. 1993).

However, certain injunctive remedies may not be dischargeable. For instance, if an injunction is not a claim because it does not give rise to a right for payment, the obligation may not be discharged in the bankruptcy proceeding. An order requiring the debtor to discontinue some polluting activitya prohibitory injunctionis probably not a claim. Because such orders do not give rise to a right to payment, they do not meet the statutory definition of claim set forth above. Therefore, prohibitory injunctions may be enforced against the bankruptcy debtor.

Mandatory injunctions directing the debtor to clean up the property or take other affirmative acts are more difficult to categorize. Some courts have found that if the debtor was required to spend money to comply with an order, the obligation constituted a claim. Ohio v. Kovacs, 469 U.S. 274, 283, 105 S. Ct. 705, 83 L. Ed. 2d 649 (1985); see also United States v. Whizco, Inc., 841 F.2d 147 (6th Cir. 1988) (obligation to perform reclamation work was a claim for bankruptcy purposes to the extent it required the debtor to spend money). But see AM Intl, Inc. v. Datacard Corp., 105 F.3d 1342, 1348 (7th Cir. 1997) (cleanup order dischargeability turns on whether the order can be converted into a monetary obligation, and because Resource Conservation and Recovery Act does not allow party to clean up site and sue for response costs in lieu of seeking an injunction, the cleanup order was not dischargeable).

The Supreme Court held in Kovacs that a state injunction ordering the individual owner of a site to clean up hazardous waste became a right to payment when the state obtained the appointment of a receiver for the site, thereby dispossessing the owner and preventing him from performing the mandated cleanup work himself. Kovacs, 469 U.S. at 282‑83. Because the individual Chapter 7 debtor could only comply with the order by paying money, the cleanup injunction was a dischargeable claim. Kovacs, 469 U.S. at 282-83.

However, in Chateaugay, 944 F.2d 997, the Second Circuit held that neither a prohibitory nor mandatory injunction directing the debtor to clean up its property is a claim under the Bankruptcy Code. Instead, the debtors obligation to comply with the orders passed through to the reorganized company. Chateaugay, 944 F.2d at 1009. The court distinguished its holding from Kovacs by limiting the case to facts whereby the debtor was in possession of the property at issue. Chateaugay, 944 F.2d at 1009. But see In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993) (holding that an order to clean up contamination was not a claim even though the order concerned contamination on property no longer owned or operated by the debtor), cert. denied, 511 U.S. 1046 (1994); Indus. Salvage Inc. v. Illinois (In re Indus. Salvage), 196 B.R. 784, 789 (Bankr. S.D. Ill. 1996) (when debtors retain full control of landfills after bankruptcy, order to close landfills and post a performance bond does not transform the closure obligation into a right to payment merely because it require[d] the expenditure of money); In re Lewis, 215 B.R. 880, 881 (D. Alaska 1997) (when not disposing of property with environmental obligations, debtor must comply with state laws because requirement to clean up property cannot be discharged if debtor remains in possession).

In the case of United States v. Apex Oil Co., Inc., 579 F.3d 734 (7th Cir. 2009), cert. denied, 131 S. Ct. 67...