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August 27, 2009

RCRA Injunction Requiring $150 Million Cleanup Not Dischargeable in Bankruptcy

By: Bridget M. Lee — Filed under: Bankruptcy, Citizen Suits, RCRA — Posted at 9:30 am

On August 25, the Court of Appeals for the Seventh Circuit held that an injunction imposed pursuant to the Resource Conservation and Recovery Act (RCRA) against Apex Oil Inc. requiring Apex to remediate contamination at a former oil refinery in Hartford, Illinois was not discharged in Apex’s Chapter 11 bankruptcy.  United States v. Apex Oil Co., Inc., — F.3d —, 2009 WL 2591545 (7th Cir. 009).  Apex argued that the government’s remediation injunction, which was estimated to require expenditures of approximately $150 million, was a “right to payment” that had been properly discharged in bankruptcy proceedings.  The circuit court rejected this argument.

Writing for the court, Judge Richard A. Posner concluded that a RCRA injunction to remediate does not qualify as a claim that can be discharged in bankruptcy because it does not give rise to a “right to payment” as that phrase is defined by the Bankruptcy Code.  Unlike CERCLA, RCRA does not entitle the government to a monetary payment of cleanup costs by a responsible party; instead, it allows the government to secure equitable relief requiring a responsible party to abate an environmental hazard.

According to the Judge Posner, the fact that Apex did not have the ability to conduct the cleanup itself and would have to spend money to comply with the remediation injunction did not create a dischargeable claim.  He reasoned that whether the defendant conducts a cleanup or hires a third party to do so proves irrelevant to the question of whether a “right to payment” exists since “[a]lmost every equitable decree imposes a cost on the defendant. ”

August 11, 2009

EPA Must Issue Financial Assurance Regulations Under Superfund, Court Holds; EPA Has Discretion On Timeline

By: Ashley S. Miller — Filed under: Bankruptcy, CERCLA/Superfund, Citizen Suits, Enforcement, Solid Waste — Posted at 9:00 am

Almost thirty years after Congress instructed EPA to require facility owners and operators to set aside funds for the cleanup of property that may be contaminated by hazardous substances, a federal court in California has held EPA may take additional time to draft and issue the regulations.  The court held that while Congress required EPA to issue such regulations, it granted EPA some discretion in when to do so.   EPA has stated that it intends to require financial assurance for hardrock mining facilities first, and will also assess the need to regulate hazardous waste generators, hazardous waste recyclers, metal finishers, wood treatment facilities, and chemical manufacturers.

The regulations at issue are required under the federal Superfund law, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), passed in 1980.   The statute is commonly said to have been motivated by the notorious hazardous waste contamination discovered buried at Love Canal, NY.   Section 108 of CERCLA requires EPA to issue financial assurance requirements for certain types of facilities, based on the risk of injury from hazardous substances in operations at those facilities.  The regulations, once issued, would require the operator of a covered facility to set aside funds or otherwise make funds available for a possible future cleanup of hazardous substances at the property.  Without such funds, costly cleanups may force potentially responsible parties into bankruptcy leaving taxpayers with the bill, or lengthy litigation may ensue over the allocation of costs.   EPA was first required to publish a notice of those classes of facilities which presented the “highest level of risk of injury”  by December 11, 1980.  CERCLA § 108(b)(1).

The December 1980 deadline passed, without EPA publishing the required notice.  The statutory requirement languished, until in recent years it received renewed attention.  EPA was sued in federal court in 2008, on the theory that EPA had failed to perform a non-discretionary duty under CERCLA.  The suit was brought under to CERCLA’s citizen suit provision, which allows a private litigant to force non-discretionary agency action.  In February 2009, the Northern District of California held in Sierra Club v. Johnson (N.D. Cal. No. C 08-01409) (“Johnson“), that EPA had a mandatory duty to publish classes of facilities which presented the greatest risk of injury.  In July, 2009, EPA published a notice these classes of facilities in the Federal Register, pursuant to the court’s order.  In its notice, the agency determined that it would promulgate the first financial assurance requirements for hardrock mining facilities, based on the extent of contamination from such facilities, and the high costs of cleanup.

EPA did not limit its inquiry to hardrock mining; the notice also stated that EPA will examine the need for financial assurance at the following types of facilities: “hazardous waste generators, hazardous waste recyclers, metal finishers, wood treatment facilities, and chemical manufacturers.”  74 Fed. Reg. 37,219.  EPA states that it intends to publish a notice of this “second wave” of types of facilities by December, 2009.  Id.

However, the Northern District of California held that EPA is under no date-certain deadline to issue the financial assurance requirements.  Instead, the court held, “that although Section 108(b) requires EPA to promulgate financial responsibility regulations and incrementally impose such requirements, Section 108(b) provides EPA with discretion as to when to promulgate such regulations.  Unlike the duty to publish notice of classes, Section 108(b) does not include a date-certain deadline for the promulgation of financial responsibility regulations …” Johnson, Order, at 4-5 (Aug. 5, 2009).  In so doing, the court rejected “a bright line rule that only duties with date-certain deadlines are non-discretionary for the purpose of citizen suits under CERCLA,” and instead looked to legislative history to help determine whether EPA’s duty to promulgate regulations by a particular date was non-discretionary.   Id. at 5.

To maintain a claim that EPA has “unreasonably delayed” its duties under CERCLA, the court held that plaintiffs may continue to press their claims under another statute, the Administrative Procedure Act (APA), but must do so in another court.  The court stated, “plaintiffs may bring an APA claim in the Court of Appeals for the D.C. Circuit alleging EPA unreasonably delayed in promulgating the financial responsibility regulations required under Section 108(b).”  Id. at 6.  Unless and until such a litigation is brought and decided, the timeline for financial assurance requirements under CERCLA will remain unclear.

EPA that although Section 108(b) requires EPA to promulgate
financial responsibility regulations and incrementally impose such requirements, Section 108(b)

July 29, 2009

Class Action Challenges Adequacy of Environmental Disclosures in Spinoff of Subsidiary

On July 10, 2009, the Alaska Electrical Pension Fund (“Fund”) filed a class action in the U.S. District Court for the Southern District of New York against the Kerr-McGee Corporation (“Kerr-McGee”) and several of its officers and directors.  (See Complaint, Alaska Electrical Pension Fund v. Kerr-McGee Corp., 2009 Civ. 6220 (S.D.N.Y. July 10, 2009).)

The Fund alleges that Kerr-McGee made false and misleading statements in a public offering incident to the spin-off of Tronox Corporation (“Tronox”), which at the time of the offering was a wholly-owned subsidiary of Kerr-McGee.  (Id. at 5.)  The registration statement for Tronox stated:

As of September 30, 2005, our financial reserves for all active and inactive sites totaled $239.4 million, $160.6 million of which are classified as noncurrent liabilities.  We believe we have reserved adequately for the reasonably estimable costs of known environmental contingencies.  However, additional reserves may be required in the future due to the previously noted uncertainties.

The complaint alleges that: (1) Kerr-McGee knew these estimates materially underestimated actual environmental liability because an internal investigation had determined that Tronox’s environmental liabilities were at least $400 million and perhaps as high as $900 million; (2) Kerr-McGee purposefully chose not to reveal these estimates to investors, thereby allowing Kerr-McGee to profit significantly from Tronox’s inflated stock price; and (3)  Tronox operated as an independent company for only a short period before earnings losses due to negative environmental assessments caused stock prices to plummet.  Tronox filed for bankruptcy in January 2009.

Lawsuits of this type are likely to become more common in tough economic times, as environmental costs contribute (or are perceived to contribute) to declines in stock price.  Great care is necessary to accurately disclose environmental risks in public offerings and to make such disclosure consistent with internal assessments so that disclosure cannot be second-guessed with the benefit of 20-20 hindsight.