Restructuring

Contributed by Danielle Donovan
What do you get when you combine a 20+ year old bankruptcy, a contaminated landfill, and a state regulatory agency that moves at a glacial pace? The answer: In re Solitron Devices, Inc., a recent decision from the Bankruptcy Court for the Southern District of Florida. In Solitron, a joint defense group sued Solitron under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) for contribution for contamination that potentially occurred between 1961 and 1987. Solitron filed an emergency motion to reopen two chapter 11 cases and a motion to enforce the bankruptcy court’s order confirming its plan. Because the regulatory agency had notice of the bar date and failed to file a proof of claim for what the court found to be a prepetition claim, the court granted the motion to reopen and granted in part the motion to enforce. The motion to enforce was granted to the extent that the court concluded that the agency’s claim was discharged and that the joint defense group had no legal basis to pursue a CERCLA contribution claim against Solitron.
Here’s the backstory:
From 1961 to 1987, Solitron operated a manufacturing facility in Tappan, New York, which was located five miles from a Clarkstown landfill. Way back in 1979, the New York State Department of Environmental Conservation (NYSDEC) cited Solitron for contamination. By 1989, the landfill was listed as an inactive hazardous waste disposal site. The NYSDEC and the town of Clarkstown entered into a consent order, which obligated the town to clean up the landfill and entitled the town to state assistance in completing the job. The town was required to assist the NYSDEC in identifying all potential responsible parties (PRPs). On December 31, 1990, the landfill was closed. On January 24, 1992, Solitron filed for bankruptcy. It was thus undeniable that any contribution to the contamination by Solitron took place prior to the filing of the bankruptcy cases.
Solitron sent out a notice of a special bar date to creditors whose claims, if any, arose out of environmental contamination allegedly caused by the debtors. The notice specifically identified the Tappan facility as one that may have caused environmental contamination and stated that any injury caused as a result may give rise to a claim against the debtors, notwithstanding the fact that such claims may be contingent or may not have occurred, matured or become fixed or liquidated prior to such date. Solitron mailed the notice to the NYSDEC at three separate addresses.
What did the NYSDEC do in response? It never filed any proofs of claim.
After the NYSDEC completed its investigation of the landfill, it issued a report of decision in 1995. According to the report, the investigation took place in 1990, 1991 and 1993. Therefore, even though the report was not issued until 1995, it establishes that the investigation was initiated long before Solitron confirmed its plan.
In 2002, the NYSDEC sent notices of potential liability to Solitron and other PRPs. A group of PRPs formed a joint defense group. Now, fast forward to 2011 when the State of New York and the NYSDEC filed suit against the town and the members of the joint defense group. The parties entered a consent decree, which settled all claims against the joint defense group defendants for approximately $4 million. In August 2013, the joint defense group filed a third-party complaint against Solitron seeking contribution under CERCLA.
Solitron sought to enjoin the joint defense group from pursuing the contribution suit because the confirmation order discharged the NYSDEC’s claim. Solitron further argued that because it had no liability to the NYSDEC and because common liability is a requirement for CERCLA contribution claims, the joint defense group had no legal basis to pursue the claim. In response, the joint defense group argued that the NYSDEC did not have a prepetition claim because the NYSDEC was unaware of Solitron’s potential pollution of the landfill until 1995, which was long after the court entered the confirmation order.
Remember that citation in 1979? What about when the NYSDEC investigation took place? The court did too. Nevertheless, the court went through painstaking detail to explain why the NYSDEC did, in fact, have a prepetition claim.
Section 101(5) of the Bankruptcy Code defines a “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured…” The Eleventh Circuit reads section 101(5) broadly to include “all legal obligations of the debtor, no matter how remote or contingent.” In other words, a creditor may have a bankruptcy claim even if the events have not yet occurred which would support a cause of action under non-bankruptcy law.
The Eleventh Circuit has not specifically addressed the issue of when environmental cleanup costs become a claim in bankruptcy. However, in answering the question, the court applied the Eleventh Circuit’s analysis of In re Chateaugay Corp., a preeminent decision on this issue. The Second Circuit in Chateaugay held that the relationship between environmental regulating agencies and those subject to regulation provides sufficient “contemplation” of contingencies to bring most ultimately maturing payment obligations based on prepetition conduct within the definition of a “claim.” In In re Piper Aircraft Corp., the Eleventh Circuit discussed Chateaugay in the products liability context and held that a products liability claim arises in bankruptcy when “(i) events occurring before confirmation create a relationship, such as contact, exposure, impact, or privity, between the claimant and the debtor’s product; and (ii) the basis for liability is the debtor’s prepetition conduct in designing, manufacturing and selling the allegedly defective or dangerous product.”
Using the Piper test, the Solitron court held that the NYSDEC had a prepetition claim that was discharged all the way back in August 1993 when Solitron confirmed its plan. The parties had a tangible prepetition relationship. If any polluting conduct occurred, it occurred prepetition. It is undisputed that the NYSDEC was aware of Solitron’s pollution of the landfill, as it was documented in the 1979 citation letter and the NYSDEC report. Moreover, the NYSDEC was put on specific notice that Solitron was attempting to include any potential environmental claims in its bankruptcy case.
The joint defense group argued that even if the NYSDEC’s claim was discharged, the joint defense group’s claim was not because, among other reasons, the group was not formed until 2002. Although the court agreed with the joint defense group on this point (there was no prepetition relationship between the debtors and the group), it disagreed that the group had a legal basis to proceed against Solitron in the contribution lawsuit. The joint defense group sued Solitron under section 113(f)(1) of CERLA, which provides that PRPs may seek contribution from other PRPs. In United States v. Atlantic Research Corp., the Supreme Court held that section 113(f)(1) permits suit before or after the establishment of common liability. Because the NYSDEC held a prepetition claim that was discharged, Solitron and the joint defense group did not have common liability to the NYSDEC. No common liability, no contribution claim. The court did note, however, that even though the joint defense group had no legal basis to pursue the CERCLA contribution claim, because the group did not have a claim that had been discharged, it was up to the district court to dismiss the claim if the group decided to proceed.
Solitron indicates that, in order to preserve their contingent claims in bankruptcy cases, environmental protection agencies may have to engage in due diligence with respect to companies in bankruptcy much earlier than they would at their typical pace of cleaning up contaminated sites and pursuing PRPs. Otherwise, debtor PRPs like Solitron may escape their responsibility to contribute to the cleanup even though they have contributed to a big mess.