The "interface" between the Bank-ruptcy Code and various state and federal environmental laws can best be analogized to the Titantic’s now infamous meeting with an iceberg several decades ago. The problem facing bank-ruptcy attorneys in this area has been determining which set of laws represents the Titantic and which set represents the iceberg. Recently, the Sixth Circuit had occasion to address this issue in the case of Norpak v. Eagle-Picher Industries Inc. (In re Eagle-Picher), 131 F.3d 1185 (6th Cir. 1997), in the context of determining Eagle-Picher’s objection to the claim of Norpak Corp. under the provisions of 11 U.S.C. §502(e)(1)(B).

Section 502(e)(1)(B) provides, in pertinent part:

[T]he court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured, the claim of a creditor, to the extent that—...

(B) such claim for reimbursement or contribution is contingent as of the time of allowance or dis-allowance of such claim for reimbursement or contribution...

11 U.S.C. §502(e)(1)(B).

In numerous cases, both chapter 11 debtors-in-possession (DIP) and chapter 7 trustees have used this provision to defeat claims of parties who are seeking contribution or indemnification from the debtor for future environmental liabilities. See, generally, In re New York Trap Rock Corp., 153 B.R. 648 (Bankr. S.D.N.Y. 1993). See, also, In re Charter Company, 862 F. 2d 1500 (11th Cir. 1989). This use of §502(e)(1)(B) has generated a great deal of case law and scholarly com-mentary¹ concerning how this section should be applied.

Courts generally have held that in order for a claim to be disallowed under §502(e)(1)(B), the debtor must be able to establish 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.² In re Dant & Russell Inc., 951 F.2d 246 (9th Cir. 1991). However, courts often have refused to apply the literal language of this section, holding that this provision 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). See, also, In re Hemingway Transport Inc., 993 F. 2d 915, 924 (1st Cir. 1993):

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...the goals of environmental clean-up laws are being given higher deference than the goals of the Bankruptcy Code.

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The onerous CERCLA remediation process may take years to complete, leaving PRPs [potentially respon-sible parties] holding the bag; that is, holding unallowable contingent claims for contribution or reimbursement against the chapter 7 estate, claims typically totaling millions of dollars. In such circumstances, §502(e)(1)(B) may operate to preclude innocent PRPs from recovering CERCLA response costs from a chapter 7 estate even though the estate clearly is responsible for all or part of the environmental contamination. If the EPA opts to refrain from par-ticipating in any distribution from the chapter 7 estate, as it may do simply by not filing a proof of claim... Thus, sometimes the fundamental policy embodied in Bankruptcy Code §502(e)(1)(B) may promote an expeditious administration of the chapter 7 estate, see In re American Continental Corp., 119 B.R. 216, 217 (Bankr. D.Ariz.1990), at the expense of a fundamental CERCLA policy: the equitable allocation of environmental clean-up costs among all responsible parties.³

The Norpak Analysis

The facts underlying Norpak’s claim were typical of many environmental cases. In 1956, Vincent Corica purchased property from the debtor that it had used as a plant for the production of pulverized lead used in the production of lead-based paint ("Property"). Norpak is a company owned by Corica, and Norpak and another Corica entity currently own the Property. Not surprisingly, the debtor has been identified as a PRP that may be liable for environmental clean-up costs under both state and federal environmental laws. In order to protect any claims that it may have against the debtor, Norpak timely filed a proof of claim, for reimbursement of future environmental costs that Norpak may incur during the debtor’s chapter 11 proceeding. No other environmental proofs of claim involving the Property, including claims of the Environmental Protection Agency (EPA) and state environmental officials, were filed against the debtor before the expiration of the bar date for the filing of claims. The debtor objected to the allowance of Norpak’s claim under §502(e)(1)(B).

In a brief opinion for In re Eagle-Picher Industries Inc., 177 B.R. 869 (Bankr. S.D. Ohio 1995), the bankruptcy court sustained the debtor’s objection to Norpak’s claim based in large part on an earlier decision, In re Eagle-Picher Industries Inc., 144 B.R. 765 (Bankr. S.D. Ohio 1992), which dis-allowed environmental claims for future clean-up costs under §502(e)(1)(B). The earlier Eagle-Picher decision relied upon the district court’s analysis from In re Hemingway Transport Inc., 126 B.R. 656 (D. Mass. 1991), concerning the allowability of future environmental claims under §502(1)(e)(B). The district court in Hemingway was, however, ultimately reversed on this issue by the First Circuit. Apparently none of the parties in the Norpak litigation discussed the First Circuit’s Hemingway decision, as it is neither addressed by the bankruptcy court in its decision nor by the Sixth Circuit in its opinion. The district court affirmed the bankruptcy court’s decision without a separate, published opinion.

In its appeal, Norpak challenged the bankruptcy court’s decision on two grounds: (1) that the debtor is not "co-liable" with Norpak for the clean-up costs associated with the Property; and (2) that Norpak’s claim is not for "reimbursement or contribution" for purposes of §502(1)(e)(B).

Unlike the First Circuit in Hemingway,⁴ the Sixth Circuit took a fairly simple approach to the question of whether the debtor was "co-liable" with Norpak for the future environmental clean-up expenses. The Sixth Circuit held that the issue of "co-liability" turned upon whether the governmental agencies, which could press environmental claims against Norpak and the debtor, still had claims against the debtor. After noting that neither the EPA nor state authorities had filed timely proofs of claim in this case, the Sixth Circuit remanded the case to the bankruptcy court to determine whether these creditors could still file "late" claims in the debtor’s bankruptcy proceeding under the "excusable neglect" doctrine of Pioneer Investment Services v. Brunswick Associates Limited Partnership, 507 U.S. 380 (1993), or otherwise assert a claim against the debtor.⁵ The court held that if neither the EPA nor the state still had viable claims against the debtor, then Norpak’s claim should not be disallowed under §502(e)(1)(B), as the debtor and Norpak would not be co-liable on these claims.

The Sixth Circuit rejected Norpak’s argument that its claim against the debtor was not for reimbursement or contribution. The court held that the technical label, which could be applied to Norpak’s claim, would not determine the applicability of §502(e)(1)(B).⁶

While the majority opinion in Norpak is an important clarification of the application of §502(1)(e)(B) to future environmental claims, it is the concurrence by Chief Judge Boyce Martin that makes this opinion valuable. Writing separately to emphasize the underlying holding of Norpak, Judge Martin stated:

The majority opinion requires the disallowance of contingent claims against debtors when the debtor and claimant are potentially co-liable to a third party. Debtors could, however, argue that if that third party does actually bring a claim against the debtor, the majority opinion still allows the debtor to raise its bankruptcy as a defense. This is, in fact, what Eagle-Picher concedes it plans to do if the EPA or the New Jersey Department of Environmental Protection and Energy bring a claim against it. In doing so, Eagle-Picher is clearly relying on the hope that Norpak’s claims will be disallowed, its bankruptcy defense will be accepted, and it will be able to walk away from the mess it made without bearing any responsibility for it. This cannot be allowed. To read this case as allowing such a scenario contravenes Congress’s clear intention in passing CERCLA. By passing CERCLA, Congress intended to respond efficiently and expeditiously to toxic spills, and to hold those parties responsible for the release of environmental toxins liable for the costs of the clean-up. See, e.g., B.F. Goodrich Co. v. Murtha, 958 F.2d 1192, 1198 (2nd Cir. 1992). Interpreting Pioneer Investment Services or the majority’s opinion as allowing polluters to circumvent CERCLA’s goals would be tanta-mount to turning a blind eye to clear Congressional mandate. Such flagrant disregard for legislative intent should not be tolerated.

131 F. 3d 1191 [emphasis in original text].

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(1)(e)(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(1)(e)(B) to disallow PRP claims, it is only a small lifeboat for the passengers on the good ship Bankruptcy (a/k/a Titantic).

Footnotes

¹ Note, Bankruptcy versus Environmental Liability: Discharging Future CERCLA Liability in Chapter 11, 14 Cardozo L. Rev. 1999 (1993); Ames, Kilpatrick, Salerno & Coston, Hemingway Revisted,14 ABI J. 8 (No. 4 May 1995); Bowles & McAnulty, The Latest Hemingway Novel: The Old Toxic Waste Pit and The Wetlands, 12 ABI J. 31 (No. 7 Sept. 1993). Return to Text

² Although it has apparently never been addressed, it would appear that in cases involving highly contaminated property, such as a former lead processing plant, a PRP could argue that the claim was merely unliquidated as to its amount and not contingent as to liability, where the debtor and not the PRP, either generated or improperly disposed of the toxic waste. Return to Text

³ For a detailed discussion of the Hemingway decision, see the article cited in footnote 1. Return to Text

⁴ See 993 F. 2d at 925-934, where the First Circuit performs an intricate analysis of §502(1)(e)(B), holding that claims for future clean-up costs could not be disallowed unless either the governmental agencies responsible for the enforcement of environmental law had properly filed their own claims or a "surrogate claim" had been filed under §501(b) of the Code. Return to Text

⁵ During the appeal of this case, the debtor and the EPA entered into a consent agreement that may have given the EPA a claim against the debtor concerning this property. Return to Text

⁶ 131 F.3d at 1190-1191 ("If Norpak and Eagle-Picher are co-liable, then it is irrelevant that Norpak can also concoct an alternative theory on which to premise its claim against Eagle-Picher such as diminution of value of the property due to Eagle-Picher’s contamination of that property.") Return to Text