A Tale of Two Cities: Recent Decisions as to When a CERCLA Claim Arises and How an Environmental Claim May Be Disallowed Under Section 502(e)(1)(B)

A Tale of Two Cities: Recent Decisions as to When a CERCLA Claim Arises and How an Environmental Claim May Be Disallowed Under Section 502(e)(1)(B)

Journal Issue: 
Column Name: 
Journal Article: 

Faithful readers of this column are well aware that the conflict between the "fresh start" policies of the Bankruptcy Code and the comprehensive liability policies of state and federal environmental laws has been raging for a long period of time. While this war has not lasted as long as the "Hundred Years War," it has gone on long enough for more than one battle to be fought over the same ground.


This article discusses three recent cases that revisit two earlier "Toxins-Are-Us" articles: Ames & Bowles, "The When and Where of Environmental Claims in Bankruptcy," 15 ABI Journal 8 (August 1996) and Bowles, "Norpak v. Eagle-Picher Industries: Rewriting or Summarizing Hemingway Transport?", 17 ABI Journal 18 (May 1998).

Back to the Future (Chapters X and 11)

The question of when an environmental claim arises for purposes of bankruptcy law has bedeviled federal courts for a number of years, given the difficult nature of detecting environmental contamination, and the fact that a significant number of potentially responsible parties (PRPs), which otherwise might be held liable for clean-up costs, filed bankruptcy before either a particular toxic waste site was uncovered or the clean-up laws were enacted. See, generally, In re Jensen, 995 F. 2d 925 (9th Cir. 1993). One of the most unusual issues is whether the "final decrees" entered in Bankruptcy Act reorganizations or the orders of confirmation entered in Bankruptcy Code cases discharge environmental claims that arise under laws enacted after the bankruptcy cases themselves were filed. See In re Chicago, Milwaukee, St. Paul & Pacific R. Co., 78 F.3d 385 (7th Cir. 1996); Matter of Penn Central Transport Co., 944 F.2d 164 (3rd Cir. 1991).

Recently, two decisions from federal courts in New York, In re The Duplan Corp., 229 B.R. 609 (S.D.N.Y. 1999), aff'g, 209 B.R. 324 (Bankr. S.D.N.Y. 1997) and In re Manville Forest Products Corp., 225 B.R. 862 (Bankr. S.D.N.Y. 1998), addressed this issue.

In Duplan, the issue was whether a final decree in a chapter X Bankruptcy Act case discharged claims brought by PRPs under CERCLA. On August 31, 1976, Duplan filed in the Southern District of New York a proceeding under the Bankruptcy Act that was ultimately converted to a chapter X case. In June 1981, the debtor's chapter X plan was confirmed, approximately one year after CERCLA was enacted. In 1983 a final decree, closing the bankruptcy case and discharging the debtor from its pre-petition liabilities was entered. The final decree also enjoined all parties from attempting to collect their pre-petition obligations from the reorganized debtor.

As in all environmental/bankruptcy cases, the story does not end there. In 1989, various property owners in the Virgin Islands commenced a lawsuit for the clean-up of a contaminated aquifer. Chemicals from one of the debtor's Virgin Island plants caused part of the contamination of the aquifer. Ultimately,1 some of the defendants (the primary distributees of the reorganized debtor's assets, hereinafter "defendants") in this lawsuit filed an action in the U.S. Bankruptcy Court for the Southern District of New York to enjoin parties asserting statutory CERCLA claims ("CERCLA creditors"), from proceeding, as those claims had been discharged by the final decree issued in the debtor's chapter X bankruptcy. The sole bankruptcy issue before the court was whether these CERCLA claims arose before the filing of the debtor's chapter X petition.

The defendants argued that under United States v. LTV Corp., 994 F.2d 997 (2d Cir. 1991) the claims arose at the time the contaminants were released as part of the operation of the debtor's plant, and that therefore the CERCLA creditors' claims arose pre-petition and were discharged by the final decree. The CERCLA creditors argued that their claims did not arise until CERCLA was enacted, several years after the debtor's bankruptcy filing, and were not covered by the chapter X discharge under the holdings of LTV Steel Co. Inc. v. Shalala, 53 F.3d 478 (2d Cir. 1995) (involving claims under the Coal Act of 1993) and Matter of Penn Central Transp. Co., 944 F. 2d 164 (3rd Cir. 1991) (involving CERCLA claims). After wading through these arguments, the bankruptcy court agreed with the position of the CERCLA creditors and held that under Penn Central and Shalala, "the claims at issue here did not come into existence until CERCLA's enactment in 1980, after the filing of Duplan's petition and after the last day to file claims against the estate." In re Duplan Corp., 209 B.R. at 332-333.

On appeal, the district court affirmed the bankruptcy court, holding:

'[W]here there is no legal relationship defined at the time of petition,' that is, where the statute imposing the liability has not been enacted, 'it would be impossible to find even the remotest "right to payment."' Id. at 497 (quoting In re Chateaugay Corp., 154 B.R. at 419). Yet a "right to payment," as the court pointed out, is necessary to a bankruptcy claim. There is nothing in [Shalala] that indicates that its principle should not be applied in the environmental context. In its opinion, the [Shalala] court was plainly aware of [LTV Corp.] since it cited that case...And the [Shalala] court relied, in part, on Matter of Penn Central Transp. Co., 944 F.2d 164 (3d Cir.1991), cert. denied, 503 U.S. 906, 112 S.Ct. 1262, 117 L.Ed.2d 491 (1992), itself a case involving CERCLA.

The importance of Duplan is that it establishes that the Penn Central line of authority, which holds that pre-CERCLA bankruptcy cases do not discharge claims for statutory contribution under CERCLA even if the pollution that gave rise to the CERCLA claims occurred prior to the filing of the debtor's petition, applies in the Second Circuit. Given that many, if not a majority, of the large pre-Code reorganizations were filed in the Second Circuit, and that old hazardous waste is still being discovered, this otherwise "quaint" Bankruptcy Act decision should have an important impact in the environmental-bankruptcy area.

The second New York case, In re Manville Forest Products Corp. (MFPC), sets forth an unusual but important limitation on the Penn Central-Duplan line of authority. In MFPC, the reorganized debtor filed an adversary proceeding against the Olin Corp. to prevent Olin from pursuing certain environmental claims against the reorganized debtor. The basic facts surrounding this case are as follows. In 1966, Olin incorporated a wholly owned subsidiary ("Sub"), by transferring its forest product assets to it and receiving in return, among other considerations, a broadly worded indemnification agreement concerning liability related to any assets that Olin transferred to the Sub. This indemnification agreement was a good idea, as one of the assets transferred was a piece of contaminated real property (Plant 94). Olin obtained a similar indemnity agreement when it "spun-off" the Sub into a publicly owned company in 1974. Five years later, the Sub merged with JM Capital to become Manville Forest Products Corp.

In 1982, Manville filed its now-famous chapter 11 bankruptcy petition, and ultimately obtained confirmation of its plan of reorganization in 1984. Olin was an active participant in Manville's bankruptcy, as it filed a $7.5 million proof of claim based upon its claim for a pro rata share of tax liability related the Sub's spin-off. Olin never filed a claim related to the indemnity agreements. In 1996, the state of Louisiana made demands on both the reorganized debtor and Olin for remediation on the Plant 94 site. Olin sought indemnification under indemnity agreements it had with Manville, which triggered the bankruptcy court litigation.

In MFPC, Olin argued that since the Louisiana environmental protection statutes, which gave rise to its indemnity claims, were not enacted until after Manville filed its bankruptcy petition, Olin's contractual indemnity claims survived Manville's bankruptcy discharge, citing Shalala, Penn Central and Duplan. However, the MFPC court rejected this position based upon the nature of Olin's claim. Unlike the creditors in Shalala, Penn Central and Duplan, whose claims were posted upon a set of laws enacted post-petition, Olin's contractual indemnity claim is based upon a pre-petition legal relationship between the debtor and Olin, the indemnity agreements. Further, Olin was an active participant in the Manville bankruptcy, and at least had the chance2 "to file a proof of claim and estimate its indemnity claim under §502(c) of the Code." 225 B.R. at 868. Based upon the pre-petition contractual relationship between the parties, the MFPC court held that Olin's contractual indemnity claim was discharged by confirmation of the debtor's plan.

...it may be possible for a debtor to make a deal with the governmental entities...and to disallow the PRPs contribution claims under §502(e)(1)(B).

The MFPC decision represents the most detailed analysis of when (and how) a claim arises for purposes of the Bankruptcy Code in environmental liability cases. While this case seems, on the surface, to be at odds with Duplan, upon further examination, it is a logical extension of the pre-petition/post-petition theory behind the Duplan-Penn Central line of case. The one great unanswered question of MFPC is what effect the discharge of Olin's contract may have on any statutory contribution/indemnification claim Olin might have against the reorganized debtor under Louisiana law. If such rights exist under Louisiana law, the MFPC court must decide between two odd situations; it must either 1) determine that Olin has a post-petition claim against the reorganized debtor based upon the Duplan-Penn Central line of cases, when it has found a nearly identical contractual claim to be discharged by the confirmation of the Manville chapter 11 plan; or 2) rule that, because of the pre-petition relationship between Olin and Manville, any indemnity claim that Olin may have otherwise had against the reorganized debtor was discharged by the confirmation of Manville's chapter 11 plan, even though in absence of Olin's careful drafting of the indemnity agreements, Olin's statutory indemnity claim would not have been discharged under the Duplan-Penn Central line of authority. I leave this conundrum and the city of New York to this column's faithful readers, and travel to Cincinnati to update the proceedings in the continuing dispute between Norpak Corp. and Eagle-Picher Industries Inc. (EPI).

The Eagle Has Landed (and Taken Off Again)

When last we left the Norpak dispute, the Sixth Circuit had reversed the U.S. District Court's decision affirming the bankruptcy court's disallowance of Norpak's environmental contribution claims,3 and had remanded the case back to the bankruptcy court on the issue of whether EPI was co-liable with Norpak on the environmental claims of the New Jersey Department of Environmental Protection and Energy (NJDEPE) and the EPA. Norpak v. Eagle-Picher Industries Inc., 131 F.3d 1185, 1191 (6th Cir. 1997). Based on the language of this opinion, especially the concurring opinion of Chief Judge Boyce F. Martin, this author stated:

In conclusion, Norpak represents an important decision in the area of environmental/bankruptcy law. The Sixth Circuit's emphatic rejection of the possibility that debtors can escape environmental liability through a combination of governmental inaction and §502(e)(1)(B) is a clear indication that the goals of environmental clean-up laws are being given higher deference than the goals of the Bankruptcy Code. While DIPs and trustees may be able to find some solace in the fact that agreements with environmental agencies as to liability may allow the use of §502(e)(1)(B) to disallow PRP claims, it is only a small lifeboat for the passengers on the good ship Bankruptcy (a/k/a Titanic).4

In light of the bankruptcy court's decision on remand, §502(1)(e)(B) may be a much larger lifeboat for debtors than I originally predicted.5

On remand, the bankruptcy court, in an unpublished decision, In re Eagle-Picher Industries Inc., Case No. 1-91-00100 (Slip Op. Oct. 14, 1998) ("Eagle-Picher"), again disallowed Norpak's claim. Addressing the issue remanded to it by the Sixth Circuit, Eagle-Picher confronted the issue of whether EPI was co-liable with Norpak as to the EPA and NJDEPE claims. Norpak argued that it was the only party liable to both the EPA and the NJDEPE because neither creditor had filed a claim in the EPI bankruptcy proceedings. Based upon this sole liability, Norpak concluded that its environmental reimbursement/contribution claims could not be disallowed under §502(e)(1)(B).6 EPI argued that it had entered into a settlement agreement with the EPA in 1996, which permitted the EPA to pursue its environmental claims arising from the Norpak/EPI contaminated property, even though it had not filed a proof of claim in EPI's chapter 11 case. Based on this agreement, the bankruptcy court found EPI had joint liability with Norpak, and that therefore Norpak's claim should be disallowed under §502(e)(1)(B).

Norpak had followed a different path in resolving its environmental problems in 1994 when it entered into an agreement with the NJDEPE to remediate the site at issue. The bankruptcy court's opinion does not address the issue of whether EPI has any liability to NJDEPE. The bankruptcy court does, however, consider Norpak's argument concerning its NJDEPE liability, but rejects its contention that it impacts the issue of EPI's joint liability on these environmental claims. This case has been appealed to the Bankruptcy Appellate Panel for the Sixth Circuit.

The significance of the Eagle-Picher decision is that it allows debtors facing environmental liabilities additional leeway in addressing those particularly troublesome claims. While it is no longer possible under Norpak v. Eagle-Picher Industries Inc., 131 F.3d 1185, 1191 (6th Cir. 1997) and In re Hemingway Transport Inc., 993 F.2d 915 (1st Cir. 1993), for debtors to raise a bankruptcy defense of discharge against governmental entities holding environmental claims, while at the same time disallowing claims for contribution by other PRPs arising from the same set of facts, it may be possible for a debtor to make a deal with the governmental entities (thereby creating joint liability) and to disallow the PRPs contribution claims under §502(e)(1)(B). After all, who are environmental officials more likely to pursue: a financially troubled debtor in bankruptcy, or a solvent entity sitting in the unprotected world of normal commerce? Only time will tell if this could be a viable strategy. Stay tuned to this column for further developments on this case.


1 This article omits any discussion of the twisted path this litigation took through the Virgin Island Federal District and Third Circuit Courts of Appeal to ultimately reach the Bankruptcy Court for the Southern District of New York, as such procedural riddles are beyond the scope of this piece. Return to article

2 One might ask whether this is a distinction without a difference, i.e., how could you estimate a claim under an indemnity agreement for damages arising from the possible passage of future laws? Return to article

3 See Bowles, "Norpak v. Eagle-Picher Industries: Rewriting or Summarizing Hemingway Transport?," 17 ABI Journal 18 (May 1998). Return to article

4 Id. Return to article

5 As this case is on appeal to the Bankruptcy Appellate Panel of the Sixth Circuit, I am constrained, as an employee of the U.S. Bankruptcy Court for the Western District of Kentucky, from making any comment about the current status of this matter, and shall limit my comments to an overview of the bankruptcy court's decision on remand. I have further chosen not to review any pleadings filed by either Norpak or EPI in this appeal. Return to article

6 See In re Dant & Russell Inc., 951 F.2d 246 (9th Cir. 1991), where the court stated:

Section 502(e)(1)(B) provides that "the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on...the claim of a creditor, to the extent that...such claim...is contingent as of the time of allowance or disallowance of such claim." 11 U.S.C. §502(e)(1)(B). The section is not intended to "immunize debtors from contingent liability, but instead protects debtors from multiple liability on contingent debts." In re Allegheny Int'l Inc., 126 B.R. 919, 923 (W.D. Pa. 1991). In order for a claim to be disallowed under §502(e)(1)(B), therefore, the debtor must be able to show the following three elements: (1) the claim is for reimbursement or contribution; (2) the claim is asserted by an entity co-liable with the debtor on a primary creditor's claim; and (3) the claim is contingent as of the time of disallowance. Return to article
Bankruptcy Code: 
Journal Date: 
Saturday, May 1, 1999