Environmental Liabilities and PRP Insolvency Managing Environmental Obligations and Meeting Remediation Requirements

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Environmental Liabilities and PRP Insolvency Managing Environmental Obligations and Meeting Remediation Requirements THURSDAY, APRIL 4, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 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

6 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). 6

7 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. 7

8 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 8

9 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) 9

10 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) 10

11 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 11

12 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 12

13 CERCLA (Superfund) (42 U.S.C 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 13

14 CERCLA (Superfund) (42 U.S.C et seq.) 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 14

15 RCRA (42 U.S.C et seq.) 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 15

16 RCRA (42 U.S.C et seq.) 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) 16

17 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 17

18 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 18

19 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? 19

20 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 20

21 V. Disallowance of Contingent Contribution Claims (cont d) Contract claims PRP Agreements, leases, prebankruptcy 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 21

22 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 3 rd party claims for costs incurred prior to the effective date of the settlement from the scope of matters covered. 22

23 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 23

24 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 24

25 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) 25

26 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 26

27 X. Specific Concerns for Lenders and Potential Purchasers Foreclosures 363 sales Government super liens 27

28 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 28

29 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 29

30 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 30

31 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 31

32 363 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 32

33 363 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... 33

34 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 34

35 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 35

36 Milissa A. Murray Of Counsel, Environmental, Land Use and Natural Resources Bingham McCutchen LLP 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. 36

37 Michael S. McDonough Partner, Environmental, Land Use and Natural Resources Pillsbury Winthrop Shaw Pittman LLP 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 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. 37

38 William F. Govier Of Counsel, Financial Restructuring Lesnick Prince & Pappas LLP 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. 38