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I Cant Do What Jurisdictional Issues in Approving CERCLA Settlement Agreements in Bankruptcy Proceedings

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Due to the Supreme Court's pronouncement in its Marathon1 decision, bankruptcy judges must operate under "limited" jurisdictional power. Most limitations on a bankruptcy judge's authority have been fully explored and addressed in the 17 years since Marathon. Recently, however, the U.S. District Court for the Eastern District of Texas revisited the Marathon jurisdictional morass in Southern Pacific Transportation Co. v. Voluntary Purchasing Groups Inc., 252 B.R. 373. (E.D. Tex. 2000), where it addressed a bankruptcy court's ability to consider settlements arising under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

Southern Pacific involved the bankruptcy of Voluntary Purchasing Groups Inc. (VPG), a non-profit agricultural cooperative engaged in the wholesaling of agricultural chemicals and lawn and garden fertilizers. VPG ran into problems when environmental authorities discovered it had released hazardous substances and contaminated the ground near one of its chemical plants. Southern Pacific Transportation Co. and Southwest Railway Co. (collectively, the "railroads") owned property near the plant and also had a track and unloading pit on VPG's property. Both VPG and the railroads were ordered to clean up their properties.

Further investigations revealed that VPG also had contaminated another tract of land and contaminated the land at its headquarters in Bonham, Texas.2

VPG was forced to file for chapter 11 protection when a series of personal-injury lawsuits were filed against it relating to injuries suffered as a result of the contamination.3 The railroads also sued VPG for indemnification and contribution arising from its costs to clean up their property. VPG filed a reorganization plan, amended five times, that incorporated the terms of a CERCLA environmental settlement agreement (CERCLA Agreement) reached between VPG and the state of Texas. The VPG plan ultimately was approved, although the railroads vigorously objected, partly because they believed the bankruptcy court did not have jurisdiction to confirm a plan that incorporated and approved a CERCLA Agreement. The railroads argued that because the approval of the CERCLA Agreement involved the substantial and material consideration of a federal statute other than the Bankruptcy Code, the bankruptcy court lacked jurisdiction to approve it. The railroads also objected to the bankruptcy court's issuance of two mandatory injunctions in connection with the approval of the VPG plan.


...it is not uncommon for mandatory withdrawal of the reference to occur in cases involving the resolution of issues under CERCLA.

On appeal, the district court held that the bankruptcy court lacked jurisdiction to approve the CERCLA Agreement and to issue the mandatory injunction implementing the CERCLA Agreement. The district court found that the mandatory withdrawal of the reference provision of §157(d) of Title 28 mandated such a result. Section 157(d) requires a matter to be withdrawn from a bankruptcy court when "substantial and material" consideration of a non-bankruptcy federal statute is involved, as opposed to situations where the bankruptcy court must only follow the "straightforward application of a federal statute to a particular set of facts."4 The district court pointed out that Congress enacted the mandatory withdrawal of the reference to ensure that federal district courts, as opposed to bankruptcy courts, would address issues that involved a considerable interpretation of non-bankruptcy federal law.

The district court held that the approval of the CERCLA Agreement involved a substantial and material interpretation of CERCLA and, therefore, could not be decided by the bankruptcy court. Approving the CERCLA Agreement required a court to determine if the agreement was "fair, reasonable and faithful to the objectives of CERCLA."5 An inquiry into these elements required a court to make specific factual findings regarding potential liability under CERCLA and necessarily required substantial and material considerations of that law. The district court drew support from In re National Gypsum Co., where the district court held that withdrawal of the reference was required for CERCLA claims as they related to issues such as dischargeability, estimation of claims, liability standards and priority.6 The district court also based its decision on the fact that the policies underlying CERCLA (namely the imposition of liability and the prompt clean-up of contaminated sites) were at odds with the underlying policies of the Bankruptcy Code and the fact that the bankruptcy court itself questioned its jurisdiction over the CERCLA Agreement.7

Besides vacating the confirmation order and ordering the reference to be withdrawn on the CERCLA settlement agreement, the district court also remanded on the issues of whether the VPG plan met the new value exception to the absolute priority rule and whether the best interests of creditors test had been satisfied.8

As the National Gypsum court pointed out, it is not uncommon for mandatory withdrawal of the reference to occur in cases involving the resolution of issues under CERCLA.9 The Southern Pacific case is different because the district court held that bankruptcy courts do not have the ability to approve a CERCLA Agreement and related mandatory injunctions as part of its confirmation of a reorganization plan. Practitioners would be well-advised to consider having CERCLA settlement issues decided by a federal district court, rather than a bankruptcy court, through withdrawal of the reference prior to a hearing on the confirmation of a plan that incorporates any CERCLA Agreement.


Footnotes

1 Northern Pipeline Construction Co. v. Marathon Pipe Line Co., et al, 458 U.S. 50, 102 S.Ct. 2858 (1982). Return to article

2 See Southern Pacific, 252 B.R. at 378. Return to article

3 See Id. at 378-79. Return to article

4 See Id. at 382 (citing AT&T v. Chateaugay Corp., 88 B.R. 581, 583 (S.D.N.Y. 1988)). Return to article

5 See Id. at 383 (citing United States v. Wallace, 893 F. Supp. 627, 632 (N.D. Tex. 1995)). Return to article

6 134 B.R. 188 (N.D. Tex. 1991). Return to article

7 See Southern Pacific, 252 B.R. at 384-85. Return to article

8 See Id. at 388-91. Return to article

9 See Id. at 192. Return to article

Journal Date: 
Sunday, April 1, 2001

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