Environmental Contamination Claims Discharged in Bankruptcy
Left to right: Andrew Kassner and Joseph Argentina of Drinker Biddle & Reath.
One of the powerful benefits of bankruptcy is the ability to obtain a “fresh” start by obtaining a discharge of most, but not all claims that arose prior to the filing of the bankruptcy case. But when does a claim arise? This issue is especially complex when environmental contamination claims are involved. Environmental contamination can exist for years—even decades—before its effect ripens into damage or injury. Courts have developed different tests for determining when environmental claims arise for the purpose of determining whether they are discharged in bankruptcy. The dischargeability of environmental claims was recently addressed in a decision issued by Judge Kevin J. Carey of the U.S, Bankruptcy Court for the District of Delaware in In re Exide Technologies, Case No. 13-11482 (Adv. No. 17-51826) (Bankr. D. Del. March 28, 2019). The court held the claims at issue had been discharged in the Exide bankruptcy case.
The Lead Discharge and the Bankruptcy Discharge
According to the opinion, the plaintiff alleged Exide Technologies or its corporate predecessors owned property located in Salem, Oregon from 1983 to 2002. Exide was the world’s largest manufacturer of automotive batteries at that time. In the early 1990s, the Oregon Department of Environmental Quality became aware of lead contamination in soil on the property that resulted from Exide’s operations. In November 1999, the DEQ determined no further remedial action was required and directed that deeds transferring title to the property contain an easement of equitable servitude limiting site usage to industrial operations only.
Exide filed a Chapter 11 case in April 2002. The debtor sold the property to Faries Salem Properties on June 28, 2011, as authorized by an order of Bankruptcy Court. Exide’s Chapter 11 plan of reorganization was confirmed in April 2004.
Nine years later, in June 2013, Exide filed a second Chapter 11 case. Faries Salem was listed as an unsecured creditor, and the debtor sent notices to Faries Salem. However, Exide was not aware that in 2011 Faries Salem sold the property to West Salem Storage. As such, Exide did not provide actual notice of its bankruptcy to West Salem. West Salem’s complaint requesting that the Bankruptcy Court determine its claims were not discharged alleged that during Exide’s 2013 bankruptcy case, “West Salem did not know that lead was present in the building on the property at levels that would require it to vacate its tenants and conduct substantial investigation, remediation and restoration work at the property.” The court approved Exide’s Chapter 11 plan in 2015, which contained discharge, claim holder release and injunction provisions.
At the time West Salem bought the property, its prior tenants had been using the property for commercial and recreational activities. In November 2011, the DEQ informed West Salem that those uses were acceptable as long as there was no contact with the contaminated soil. In 2017, the DEQ informed West Salem that the deed restriction on the property required further investigation and remediation efforts, and the building on the property would be tested for lead dust and residue. After learning that dust samples from inside the building contained high levels of lead, the DEQ, Oregon Health Authority and Oregon OSHA required closure of the building until cleaning and further assessment was completed. West Salem vacated five tenants and delayed entry by a sixth. Ultimately, West Salem incurred approximately $1.2 million of expenses related to the investigation and remediation of lead, plus another $202,000 in compensation to the tenants for damages.
West Salem then filed a complaint against the reorganized Exide debtor seeking a declaration that the confirmed plans from Exide’s two prior bankruptcy cases did not discharge West Salem’s claims against Exide based on the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and Oregon’s state law equivalent. In response, Exide filed a motion to dismiss.
The Claims Were Discharged
West Salem argued its claims against Exide arose after the court confirmed Exide’s Chapter 11 plan in 2015. West Salem also argued dismissal of its claims would be improper because it did not receive appropriate notice of the bankruptcy case. Exide argued the complaint should be dismissed because West Salem’s claims arose before Exide filed the 2013 bankruptcy and, consequently, were subject to the discharge, release and injunction provisions of Exide’s 2015 confirmed plan, and West Salem was an unknown creditor who received appropriate constructive publication notice of the bankruptcy case.
After reviewing the appropriate standard for a motion to dismiss, the court began by quoting decisions by the U.S. Court of Appeals for the Third Circuit regarding future claims in bankruptcy. Such claims involve “two competing concerns: the Bankruptcy Code’s goal of providing a debtor with a fresh start by resolving all claims arising from the debtor’s conduct prior to its emergence from bankruptcy; and the rights of individuals who may be damaged by that conduct but are unaware of the potential harm at the time of the debtor’s bankruptcy,” as in Wright v. Owens Corning, 679 F.3d 101,105 (3d Cir. 2012).
The court then observed that in the Third Circuit, “a claim arises when an individual is exposed prepetition to the debtor’s product or conduct giving rise to an injury that underlies a right to payment,” see Jeld-Wen v. Van Brunt (In re Grossman’s), 607 F.3d 114, 125 (3d. Cir. 2010). The court reasoned that individuals “must recognize that by being exposed to a debtor’s product or conduct, they might hold claims even if no damage is then evident.” West Salem argued it was not exposed to Exide’s product or conduct prior to Exide’s bankruptcy. However, the court stated West Salem’s claims were based on costs incurred cleaning up contamination resulting from the debtor’s prepetition products and conduct. Also, West Salem knew when it purchased the property that it was subject to the easement of equitable servitude, which put West Salem on notice of the property’s exposure to lead and environmental contamination that could give rise to an injury. Therefore, even though West Salem was not aware of an injury, under the Grossman’s test, its claims arose prepetition.
West Salem argued that the Third Circuit had expressly declined to decide whether the test announced in Grossman’s would apply to environmental claims. Instead, West Salem urged the court to adopt the “fair contemplation” test articulated by the Ninth Circuit Court in California Department of Health Services v. Jensen (In re Jensen), 995 F.2d 925 (9th Cir. 1993). The “fair contemplation” test provides that “all future response and natural resource damages costs based on pre-petition conduct that can be fairly contemplated by the parties at the time of the debtors’ bankruptcy are claims under the BankruptcyCode.” Potential liability is fairly contemplated “when there are sufficient indicia of future costs based on prepetition conduct—including knowledge by the parties of a site for which a debtor may be liable as a potentially responsible party (PRP) under CERCLA, notification by the EPA of PRP liability, commencement of investigation or cleanup activities, or the incurrence of response costs.”
West Salem argued that even though it knew of prior contamination on the property, at the time it purchased the property in 2011, the DEQ had clarified that commercial and recreational uses were permitted as long as there was no contact with contaminated soil. Only later, in 2017, did the DEQ further investigate and cause West Salem to incur significant remediation costs and other damages. West Salem argued that it could not have “fairly contemplated” that it would incur those additional costs prior to Exide’s 2013 bankruptcy. The court found that argument unpersuasive. The opinion quotes paragraphs from the equitable servitude provisions in the deed that discuss the contamination of the property. In light of those provisions, the court concluded that West Salem had information when it purchased the property that enabled it to fairly contemplate incurring future costs. As such, whether the court applied the Grossman’s test or the “fair contemplation” test, the outcome was the same: the claims arose prior to Exide’s bankruptcy.
The court also concluded that the debtor had provided West Salem with appropriate constructive notice of the 2013 bankruptcy. The court noted that inadequate notice precludes the discharge of a claim in bankruptcy. The due process clause of the U.S. Constitution requires notice that the Third Circuit described as “reasonably calculated to reach all interested parties, reasonably conveys all required information and permits a reasonable time for a response,” see Chemetron v. Jones, 72 F.3d 341, 346 (3d. Cir. 1995). In the bankruptcy context, whether notice is reasonable depends on whether the creditor is known or unknown. A known creditor is entitled to actual notice of the bankruptcy. An unknown creditor is not. Instead, a debtor satisfies its notice obligation to unknown creditors by constructive notice of the claims bar date by publication.
A creditor is known if its identity is reasonably ascertainable by the debtor. A creditor’s identity is reasonably ascertainable if it can be identified through reasonably diligent efforts. Impractical and extended searches are not required. Instead, the requisite search focuses on the debtor’s own books and records, and further searches generally are not required. In this case, Exide sent the notice of its bankruptcy to the property’s owner as reflected in its books and records, not to West Salem. In response, West Salem argued that Exide should have sent the notice to the property addressed to “current occupant,” or done a title search. The court rejected those arguments. First, the debtor would have had to conduct title searches of over 200 properties. An effort of that scale is not necessary. Second, the debtor was not required to provide “back-up notices” beyond the information reflected in its books and records. Therefore, West Salem was not entitled to actual notice of the bankruptcy. As a result, the debtor’s publication notices provided West Salem with sufficient constructive notice of the bankruptcy.
Conclusion
After many decades and myriad decisions across the federal circuits, the issue of discharge and disposition of environmental claims in bankruptcy cases remains a complex and fact intensive matter. One can conclude the principle of promoting the fresh start for a debtor by implementing the discharge provisions of the Bankruptcy Code carries great weight in bankruptcy jurisprudence.
Andrew C. Kassner is the chairman and chief executive officer of Drinker Biddle & Reath, a national law firm with more than 635 lawyers in 12 offices. He chaired the corporate restructuring group for almost 20 years. He can be reached at andrew.kassner@dbr.com or 215-988-2554.
Joseph N. Argentina Jr. is an associate in the firm’s corporate restructuring practice group in the Philadelphia and Wilmington, Delaware, offices. He can be reached at joseph.argentina@dbr.com or 215-988-2541.
