Toxins-Are-Us: Bankruptcy Treatment of Environmental Liabilities

Articles / Publications

A Refresher and Issues to Consider

Reprinted with permission from the ABI Journal, Vol. XL, No. 7, July 2021. 

Since taking office, President Joseph R. Biden has confirmed his commitment to addressing environmental issues. On April 9, 2021, he proposed allocating $14 billion toward initiatives to fight climate change, including large cash injections for environmental regulation and science research. With an increase in funding and a renewed commitment to environmental justice, we might see a jump in environmental liability claims in bankruptcy filings. This article provides a brief overview of environmental liability and how such liability is affected by a responsible party’s bankruptcy filing, touching on the dischargeability of claims, including through abandonment of assets, priority claims and successor liability in the § 363 sale context.

Obligations and Liability

In response to a growing problem of contaminated industrial sites where hazardous waste has been dumped, left out in the open or has not been properly managed, Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (as amended, CERCLA). CERCLA established prohibitions and requirements for closed or abandoned waste sites, provided for liability of parties responsible for releases of hazardous waste at these sites, and created a trust fund to allow the Environmental Protection Agency (EPA) to clean up sites when no responsible party can be identified. Thus, it informally became known as the “Superfund.”

Under CERCLA, a potentially responsible party (PRP) is strictly liable for the response costs incurred by the government or private parties to clean up the hazardous waste, and also for any resulting damage to natural resources. The following parties are PRPs: (1) the current owner or operator of the facility; (2) the party that owned or operated the facility at the time of the disposal of the hazardous substances; (3) the party that arranged for the disposal, treatment or transportation of the hazardous substances; or (4) any person or entity that accepted the hazardous substances for transport, disposal or treatment. In the bankruptcy context, environmental claimants will generally be a govern-mental unit, or an entity or individual PRP seeking contribution from the debtor.

Dischargeability of Claims

Whether an environmental obligation will be discharged typically comes down to three inquiries: whether the environmental liability is a “claim” under the Bankruptcy Code; whether the claim arose before or after plan confirmation (or the petition date in a chapter 7); and whether the creditor holding the claim had sufficient notice of the case and the debtor’s liability. Generally, chapter 11 allows debtors to discharge all claims arising before the bankruptcy, but the Code defines a “claim” as a “right of payment” or “right to an equitable remedy for breach of performance if such breach gives rise to a right of payment.” Whether certain environ-mental obligations are considered to be claims for the purpose of dischargeability under the Code has been the subject of considerable, and often varying, interpretation by courts.

Courts have generally held that a debtor’s obligation under a governmental cleanup order or injunction to abate pollution is not a claim within the meaning of the Code because it is not a right o payment.3 In Ohio v. Kovacs, however, the U.S. Supreme Court held that a debtor’s obligation to perform cleanup work at a contaminated site pursuant to a pre-petition order is dischargeable, but it relied on the fact that in this case, the liability had been reduced to a demand for money and limited dischargeability to only those parts of the cleanup order that involved the collection of money.

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