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Governmental Agency Can’t Foot the Bill by Repackaging its Claim

By: Christina Mavrikis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

        In In re G-I Holdings, Inc., the Third Circuit of the United States Court of Appeals held that the New York City Housing Authority (“NYCHA”) could not repackage a claim for damages against G-I Holdings in the hopes of circumventing federal bankruptcy laws.[1] G-I Holdings was the manufacturer of housing products containing asbestos.[2] Seeking to address its asbestos related lawsuits, in 2001 GI Holdings filed for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of New Jersey.[3] NYCHA submitted a half-billion dollar claim against G-I Holdings for property damage to its buildings.[4] NYCHA claimed it had to take expensive measures to remove asbestos containing material from its buildings.[5] In 2009, the District Court for the District of New Jersey and the Bankruptcy Court for the District of New Jersey approved a plan of reorganization that disposed all covered claims against G-I Holdings.[6] Claim holders were also barred from reasserting such claims.[7]

        Three years later, NYCHA sought an injunction from the United States Bankruptcy Court for the District of New Jersey to compel G-I Holdings to remove any asbestos containing material in NYCHA buildings.[8] NYCHA argued that it held inherent regulatory power as a governmental agency to compel G-I Holdings to “remediate the ongoing environmental harm resulting from the asbestos containing material it produced.”[9] The Bankruptcy Court rejected this theory, and granted G-I Holding’s motion to dismiss.[10] NYCHA appealed, and the District Court for the District of New Jersey affirmed the Bankruptcy Court’s decision.[11] NYCHA then appealed the District Court’s decision.[12]

        The Third Circuit agreed with the lower courts and rejected NYCHA’s argument.[13] The asbestos contained in the apartments only became a health hazard when it was removed or disturbed during renovations.[14] According to the Third Circuit, NYCHA was not confronted with ongoing pollution that had to be remediated, but instead was faced with additional costs to remove the asbestos containing material.[15] The Third Circuit described these costs as “property damage,” and held that NYCHA was merely attempting to “foot the bill for remediation of a past harm.”[16] Such claims were discharged in G-I Holding’s bankruptcy, and NYCHA could not repackage its forfeited claim for damages.[17]

        A debtor’s “obligation” may be a “claim” or a “rule.”[18] A claim is “any right to any equitable remedy.”[19] On the other hand, a “rule” is an obligation and is non-dischargeable by the reorganization plan.[20] For example, the government has the power to enforce environmental laws.[21] A monetary penalty or a request for reimbursement for remedial work would be a claim.[22] In this instance, the government requested money; thus, its claim was dischargeable in bankruptcy.[23] On the other hand, the government's right to compel performance of cleanup or to require compliance with environmental laws is a non-dischargeable “rule” that its debtor is obligated to follow.[24] A debtor cannot claim that it is unable to comply with costly environmental laws because it is in bankruptcy.[25] Debtors still have the obligation to abide by the law.[26] In In re Torwico Electronics, Inc., the Third Circuit held that “a debtor cannot maintain an ongoing nuisance in direct violation of state environmental laws,” and that “the state can exercise its regulatory powers and force compliance with its laws, even if the debtor must expend money to comply.”[27]

        There is a major distinction between mandatory injunction-type obligations and money claims based on environmental contamination liability.[28] The Third Circuit was not persuaded by NYCHA’s assertion that its claim was a “non-dischargeable injunctive claim for pollution abatement.”[29] Government entities, like NYCHA, that have not been given authority to enforce environmental laws cannot suddenly claim to have the right to do so in order to repackage a claim for monetary damages.[30] If the court believes that the government is looking for a payday by circumventing the bankruptcy reorganization plan, then the court will reject the government’s non-dischargeable claim argument.[31]



[1] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *1 (3d Cir. July 18, 2016).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *1 (3d Cir. July 18, 2016).

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *1 (3d Cir. July 18, 2016).

[12] Id.

[13] Id.

[14] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *2 (3d Cir. July 18, 2016).

[15] Id.

[16] Id.

[17] Id.

[18] Michael L. Bernstein and George W. Kuney, Claim and “Rule”: Environmental Claims Again, § 13.23 Bankr. Practice, 346 (2015).

[19] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *2 (3d Cir. July 18, 2016).

[20] Id.

[21] Michael L. Bernstein and George W. Kuney, Claim and “Rule”: Environmental Claims Again, § 13.23 Bankr. Practice, 346 (2015).

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Michael L. Bernstein and George W. Kuney, Claim and “Rule”: Environmental Claims Again, § 13.23 Bankr. Practice, 346 (2015).

[27] In re Torwico Elecs., Inc., 8 F.3d 146, 149 (3d Cir. 1993).

[28] Thomas J. Salerno, Craig D. Hansen, G. Christopher Meyer, Jacob Schuster & George Basharis, Money Damages Claims versus Injunctive Relief, § 14.46, Advanced Ch. Eleven Bankr. Prac. (2016).

[29] In re G-I Holdings Inc., No. 15-2164, 2016 WL 3878160, at *1.

[30] Id.

[31] Id.