The most recent decision in Flake v. Schrader-Bridgeport Int’l, Inc., 2011 U.S. Dist. LEXIS 30372  (M.D. Tenn., Mar. 23, 2011) is just another chapter in this long-running environmental saga involving a successor liability, bankruptcy, toxic tort and environmental justice issues along with a piece of American automotive history. This well-traveled case began in a Tennessee county court in 1994, moved to the federal bankruptcy court and federal district court in New York, went back to Tennessee for rulings by a federal district court, and is now on appeal to the Court of Appeals for the Sixth Circuit.

The story begins simply enough in the 1920s when Scovill, Inc acquired the A. Schrader Co, a manufacturer of the Schrader pneumatic tire valve (a/k/a the American valve). From 1964 to 1985, the Schrader Automotive division of Scovill, Inc. operated a plant located in Dickson, Tennessee. The plant was leased from the Dickson County Industrial Development Authority (IDA). The plant used TCE as a degreaser.

In 1985, Scovill was acquired by First City Industries (First City) who began to divest the firm of its non-core assets. As part of this strategy, the Dickson plant was closed. Around this time, the state started to become concern about potential groundwater contamination from a local landfill that had received wastes from the Dickson plant and other manufacturers in the areas.

Scovill decided to spin-off its Schrader Automotive division into a newly formed subsidiary, Schrader Automotive, Inc. (SAI). Pursuant to an October 1985 transfer agreement, SAI acquired all of the assets and liabilities of the Schrader Automotive division. SAI agreed to indemnify Scovill from all known and unknown liabilities relating to the Schrader Automotive Division’s business.

In March 1986, ArvinMeritor, Inc. (Arvin) agreed to purchase SAI. The purchase Agreement attempted to disclaim any liability on the part of Arvin relating to Dickson County by expressly affirming that SAI was not the owner of the Dickson Plant and that Arvin would not be assuming any liabilities relating to the operation of the Dickson Plant. To facilitate the transaction, SAI and Scovill entered amended the 1985 Transfer Agreement to unwind or rescind the SAI’s obligation to indemnify Scovill for claims arising from the Dickson Plant. Scovill released SAI and also agreed to indemnify SAI as well as Arvin for any breach of any representation or warranty by Scovill under the 1986 Agreement. Scovill’s indemnification obligation was guaranteed by First City.

In 1988, Scovill exercised its option to purchase the Dickson Plant from the IDA and then sold the Plant to Tennsco Corporation (“Tennsco”). In the mid-1990s Arvin sold SAI which was merged with Bridge Products, Inc. SAI was the surviving entity and changed its corporate name to Schrader-Bridgeport International, Inc (SBI).

Between 1985 and 1988, Saltire worked with the state to obtain closure of the facility’s hazardous waste management units. However, the closure did not include groundwater analysis and EPA launched its own RCRA Facility Assessment in 1987 that resulted in the identification of 15 solid waste management units. Scovill entered into a RCRA 3008(h) order to implement corrective actions.

First City filed for bankruptcy protection and as part of pre-packaged chapter 11 plan of reorganization, Alper Holdings (Alper) began the controlling shareholder of First City and assumed the obligations of First City under the Arvin Guaranty. By this time, Scovill changed its name to Saltire Industries, Inc. (Saltire). Alper and Saltire entered into a management agreement in where Alper agreed to manage Saltire’s various environmental matters. Nicholas Bauer was appointed as Saltire’s Vice President of Environmental Affairs but he was paid by Alper and sometimes represented himself as an Alper official. He also worked out of an office in Virginia where Alper was authorized to do business.

In December 2003, a number of plaintiffs filed suit against Saltire and Alper Holdings, alleging property damage and personal injuries from TCE in the groundwater. Partly to manage the environmental liabilities related to the Dickson plant, Saltire filed a chapter 11 petition in 2004. Arvin filed a claim against Saltire pursuant to the Indemnity that was disallowed after Saltire filed an objection and Arvin decided not to oppose the motion. Arvin reasoned it had a full guarantee from Alper that would provide greater protection than an unsecured claim in the bankruptcy proceeding. SBI did not file a proof of claim, though. A liquidating plan of reorganization was confirmed in 2006. As part of the plan, Alper negotiated a settlement on behalf of Saltire with the creditors committee where Alper agreed to forego its claims against Saltire and to pay $1 million to Saltire.

In 2004 and 2005, residents filed claims against Saltire, Alper, Schrader and ArvinMeritor alleging personal injury and property damage claims arising out of the contamination of a spring flowing through their property by the Dickson manufacturing plant. The Flake plaintiffs wanted to bottle and sell water from the spring and asserted their plans were upended when they learned that the wells on their property were contaminated. Other plaintiffs asserted property damage and personal injury claims.

In 2007, Scovill reached a $15MM settlement with its insurer that resolved the plaintiffs’ claims arising out of remediation of the Dickson Plant as well as liabilities associated with other facilities. The bankruptcy court issued a Stipulation and Order Approving Settlement that allowed plaintiffs’ claims for personal injury and property damage in the aggregate amount of $1.5 million, and expressly released Scovill/Saltire from any and all other claims.

Schrader notified Alper of a claim under the Guarantee in 2006 and then filed a complaint against Alper in 2007. This action prompted Alper to file its own chapter 11. The plaintiffs filed claims in the Alper bankruptcy case. Schrader also filed claims for past and future defense costs relating to the toxic tort litigation as well as indemnification. In a series of opinions in 2008, the bankruptcy court ruled that Alper could not be held liable for claims arising out of the Dickson plant and disallowed the claims. In re Alper Holdings USA, 2008 Bankr. LEXIS 86, (Bankr. S.D.N.Y. Jan. 15, 2008); In Re Alper, 2008 Bankr. LEXIS 522 (Bank. S.D.N.Y. 2/25/08), In re Alper Holdings USA, Inc., 386 B.R. 441 (Bankr. S.D.N.Y. 2008). The rulings said that Alper could not be directly liable for causing the contamination because Alper had no connection or relationship to Saltire or Dickson County until seven years after the Dickson Plant closed in 1985. The court also concluded that Alper’s “indirect, incidental” ownership interest in Saltire through First City did not retroactively make Alper liable for what went on in the Dickson Plant prior to its closure. The court also said that the plaintiffs had failed to plead sufficient facts to show that Alper had direct liability for negligent remediation when it effectively loaned Bauer, its employee, to Saltire to supervise the remediation. Finally, the court found that Alper had no indirect liability to the on either an alter ego or veil piercing theory, holding that neither the existence of a management agreement nor the common employee between the parent and subsidiary justified the extraordinary remedy of piercing the corporate veil. The plaintiffs appealed but the bankruptcy court rulings were affirmed. In re Alper Holdings USA, 398 B.R. 736 (S.D.N.Y. 2008).

Alper also objected to the Schrader claim, asserting they should be disallowed under section 502(e)(1)(B) of the Bankruptcy Code because they were contingent claims for reimbursement or contribution from an entity that is co-liable with the debtor. The bankruptcy court found that Alper was obligated under the Guaranty to indemnify Schrader for its past legal fees and expenses and that these were not contingent liabilities since these costs had already been incurred. Thus, the court overruled the objection. However, the court said the claims for future costs and indemnification were clearly claims for contribution or reimbursement, and contingent since the amount of the ultimate liability was unknown. Schrader argued that it could not be co-liable with Alper under 502(e)(1)(B) because Tennessee law no longer recognizes the common law doctrine of joint and several liability. However, the court said that the toxic tort plaintiffs had alleged that Alper and Schrader were liable as the corporate successors to Saltire for the negligent actions of Saltire. These allegations were in stark contrast to those asserted against ArvinMeritor which had been sued based upon its own subsequent and independent negligent and grossly negligent conduct. Accordingly, the court disallowed the Schrader claims for future costs and indemnity. In re Alper Holdings USA, 2008 Bankr. LEXIS 2634 (Bank. S.D.N.Y 9/18/08).

Plaintiffs then turned their attention to Schrader-Bridgeport International, Inc (SBI), its parent, Tomkins plc, and Arvin. First, the district court disposed with the claims against Tomkins, ruling in 2010 that general involvement with the subsidiary corporation’s performance, finance and budget decisions, and general policies and procedures was insufficient basis to assert personal jurisdiction over the parent much less pierce the corporate veil. Flake v. Schrader-Bridgeport Int’l, Inc, 2010 U.S. Dist. LEXIS 23951 (M.D.Tenn. 3/15/10).

Turning to the claims against SBI and Arvin, the court also rejected plaintiff’s motion for partial summary judgment that the defendants were the successor in interest to Scovill, and Schrader Automotive. The court agreed with SBI that none of the exceptions to the general rule of non-liability for purchasers of corporate assets applied. The court said that Scovill retained responsibility for the Dickson Plant under the 1986 agreement. Likewise, Arvin did not acquire the plant in the 1995 agreement. Indeed, the court observed that Scovill continued to list the plant on its insurance policy after the 1986 transaction. Thus, the court held, so there was no assumption of liability.

The plaintiffs also asserted that SBI and Arvin were liable under the mere continuation theory. The facts that plaintiffs relied on were that Schrader Automotive Group employees became SAI employees and performed the same work after the transfer to SAI, Plaintiffs also pointed to the fact that Arvin and Schrader Automotive Group had the same general manager. The court ruled there was no successor liability under a mere continuation theory because there was no common identity of stock, shareholders and directors among SBI and Scovill or Arvin.

Plaintiffs had also pointed to an affidavit that SAI removed waste materials from the Dickson Plant. However, the court said the public records reflected that Scovill was the cleanup lead for the property. Moreover, the court said the contamination described in the affidavit related to metal sludge materials deposited offsite from the Dickson Plant and was unrelated to plaintiffs’ claims about TCE-contaminated groundwater.

Finally, the court said that even if SBI or Arvin could be considered to be successors to SBI’s, their liability would be limited to the extent of Scovill’s liability. However, the court explained, plaintiff’s settlement with Scovill settled SBI’s liability. As a result, the settlement also extinguished SBI’s and ArvinMeritor’s liability for those claims.

In Shelton Property Rural Acreage, LLC v Placid Oil Co., 2011 U.S. App. LEXIS 16681 (5^th Cir. 8/10/11), Placid Oil operated oil wells on leased property from 1942 to 1956. In 1986, Placid filed a chapter 11 bankruptcy proceeding. The bankruptcy court issued a confirmation order in 1988 that contained a discharge of all claims except those created or assumed by the reorganization plan. The order also included a discharge for any future claims for damages that occurred prior to the discharge.

In 2002, Shelton Property Rural Acreage, LLC (Shelton) purchased the property that had been leased by Placid. After discovering contamination associated with the prior drilling operations,Shelton commenced a lawsuit against Placid in state court. Placid filed an adversary proceeding with the bankruptcy court, arguing that since the property owner at the time of the bankruptcy proceedings had not filed a proof of claim for any alleged environmental damage to the property, Shelton’s claim had been discharged by the bankruptcy court’s 1988 order.

In response,Shelton argued the discharge should not apply to its claim because the prior landowner had not receive adequate notice of Placid’s bankruptcy proceeding. Shelton asserted that the prior owner should have been considered a known creditor because a water study published in 1958 had showed that water wells on the property were contaminated due to oil and gas activities. Moreover,Shelton said an article in a June 1964 issue of Oil and Gas Journal discussed that the Little River bordering Shelton’s property was being polluted due to unlined oil and gas pits.

The bankruptcy court upheld the discharge and the Fifth Circuit affirmed. The appeals court said there was no specific information in the record to suggest that Placid knew of any claims related to property it leased from Shelton’s predecessor. The court said no environmental complaints had been made between 1956 and 1986. The court rejected Shelton’s assertion that the environmental damage was easily identifiable since it had taken Shelton six years to notice the damage. Finally, the court noted that Placid had tens of thousands of former leaseholds and it would have been unreasonable to require Placid to give each lessor actual notice of the bankruptcy. In light of this evidence, the appeals court agreed that Shelton’s predecessor was an unknown creditor who was only entitled to notice by publication. This requirement was satisfied when Placid published notice of its bankruptcy on three separate occasions in the Wall Street Journal.

It is unclear of Shelton performed any environmental due diligence prior to acquiring the property. However, a good historical search would have revealed the prior oil leasing activities, could have identified the responsible party and revealed the bankruptcy proceeding. If Shelton had been armed with this information prior to taking title, it could have explored various risk management strategies instead of becoming forced to bear the full brunt of the cleanup.

The second our series of recent cases involving the due care element of the CERCLA third party defense is State of New York v Adamowicz, 2011 U.S. Dist. LEXIS 102988 (E.D.N.Y. 9/13/11) where a property owner was unable to establish that it exercised due care despite spending over $1MM addressing environmental concerns at its site. The problem was that it waited too long to respond to the environmental concerns caused by its tenant.

In this case, National Heatset Printing (NHP) entered into a five-year lease in 1983 for a building located in East Farmingdale, New York.  NHP used the premises for lithographic tri-color printing and generated a variety of hazardous wastes including wastes solvents and used inks. A the time of the lease, the property was owned by the Michael Adams Co., Inc with partial ownership interests held by Michael Adamowicz individually and as trustee of the Michael Adamowicz IV trust, and Mary Adamowicz, as trustee for the Bonnie Anne Fraser and Mary Margaret Fraser trusts. The One Adams Blvd. Realty Co (OABR) partnership managed the property.

Soon after the lease, the Suffolk County Department of Health Services (“SCDHS”) notified NHP that its discharge of wastewater into the on-site leaching pools was a violation of state and county environmental laws. The SCDHS advised NHP that it either had to connect the discharge to the municipal sewer system or cease all industrial discharge. Two years later, the SCDHS observed waste drums stored outside without secondary containment and soil stained from inks and oils. MHP entered into an Order on Consent with SCDHS that required NHP to clean out the leaching pools and bring its facility into compliance. The property was eventually connected to the municipal sewer system in January 1987 but the liquids and sludges in the leaching pools were not removed despite a series of notices in 1988 from the SCDHS to both NHP and the property owner. In November 1988, SCDHS issued a complaint against Adamowicz.

Meanwhile, NHP filed a chapter 11 bankruptcy petition in November 1987 that was converted to a Chapter 7 case in 1988. The bankruptcy court ruled that the NHP lease was terminated as of June 17, 1988 and that OABR could take possession of the property by that date. The court issued the final decree for the Chapter 7 bankruptcy in December 1992.

In 1988, OABR began implementing response actions at the site. These actions included retaining consultants to remove the contents of the leaching pool, investigating the pool’s connection to an overflow pool, removing drums and containers abandoned by NHP, implementing a remedial investigation and a treatment system for the PCE.

In 1990, the OABR partnership acquired title to the site. Also that year, Elizabeth Fraser succeeded Mary Adamowicz as trustee. In 1996, the OABR partnership conveyed the Site to OABR Corp.

In February 1994, the New York State Department of Environmental Conservation (“NYDEC”) notified Adamowicz that the agency was considering placing the site on the state superfund list but offered OABR the opportunity to voluntary undertake cleanup. When OABR Corp declined to remediate the site, the NYSDEC implemented response actions. During the investigation, the NYSDEC identified contaminated groundwater migrating toward a residential area that was served by private wells. In response, the Suffolk County Water Authority connected six residences and three businesses served by these wells to the public water supply at a cost of $24MM. By the 2009, the NYSDEC incurred $4MM in response costs and sought cost recovery under CERCLA.

The State of New York filed a motion for summary judgment against OABR Corp as the current owner and the trust beneficiaries. In an unpublished order dated March 31, 2011 (doc. 222), the court granted but denied the motion against the trust beneficiaries. The court denied a motion for reconsideration that is cited above.

The court found that OABR was liable both as a current owner and as a successor to the OABR partnership who had owned the property at the time of the releases identified by SCDHS. OABR asserted the third party defense, claiming it had not been in a contractual relationship with NHA when SCHDS had confirmed contamination in early 1988 because the November 1987 bankruptcy filing had the effect of terminating the lease. However, the court said the lease did not terminate until the lease was deemed rejected by the court in June 1988.

Moe relevant to our discussion, the court said that even if the lease had been severed by the bankruptcy filing in 1987 and that release occurred after that date, the OAB Defendants had failed to demonstrate that they satisfied the “due care” and “precautions” elements of the third party defense. In supporting its due care argument, the OABR defendants contend that they had spent over $1MM to address concerns of the state and country regulators since early 1988. The State responded that the February 1988 SCDHS letter had directed NHP and the owner to immediately remove all liquids and sludge from the leaching pools, that OABR Corp knew that NHP operated a photo-plate making and printing business, that the building was not connected to the public sewer system until 1987, and that NHP used leeching pools at the Site.

The Court agreed with the NYSDEC that OABR Corp had not established the due care and precautionary elements. First, the court said the defendant owners knew the nature of NHP’s business from the lease and periodic inspections by Adamowicz or his father. Second, the court noted the lease expressly gave the landlord the right to enter the premises if it was abandoned or the tenant had defaulted on its rent payments, and that this right of re-entry had been triggered by that time the state inspectors had observed staining and improperly stored drums. Despite knowing the site contained numerous leeching pools, that discharges to cesspool system where prohibited and the environmental conditions at the site, the court said the OABR defendants failed to take any action for five years. The court also observed that these events took place prior to NHP’s filing for bankruptcy and prior to the February 1988 SCDHS letter. Moreover, the noted that unlike other “due care” cases, OABR Corp was not a new owner confronting the scope of its duty to investigate a new property acquisition but instead it or its predecessor had been in possession of the site since at least 1980 and charged with the knowledge of the environmental conditions at the site. Accordingly, the court ruled that OABR Corp has not shown it is entitled to the protection of an affirmative defense under CERCLA.

The portion of the decision ruling that the trust beneficiaries of a distributed trust was also interesting and will be the subject of later post.

It seems like there were a lot of cases in 2011 involving commercial properties impacted by methane gas from former landfills. A recent case involved a novel question if the owner of a hotel damaged by methane gas migrating from a landfill could seek administrative claim status in a chapter 7 bankruptcy case.

In the case of In Re Resource Technology Corp, 2011 U.S. App. LEXIS 22022 (7^th Cir. 10/31/11), Congress Development Company (Congress) owned and operated a landfill in Hillside, Illinois. From 1992 to 1996, Congress used a flare system to control landfill gases. In 1996, Congress contracted with Resource Technology Corporation (RTC) to construct and operate a gas collection and control system (GCCS) that would replace the flare system. RTC, in turn, would convert the gas to electricity and then sell the electricity to power companies. In 1999, RTC filed a chapter 11 bankruptcy petition and continued to operate the GCCS as a debtor in possession (DIP) until 2003 when the bankruptcy court appointed a Chapter 11 trustee.

In October 2002, Markwell Hillside LLC (Markwell) purchased a Holiday Inn hotel located next to the landfill. As it turns out, Markwell’s purchase was ill-timed as conditions at the landfill significantly deteriorated in 2002. According to an expert in the bankruptcy case, RTC did not properly operate or maintain the GCCS during its time in bankruptcy. The problems included a history of high-pressure gas readings, broken fittings, broken valves, broken wellheads, and broken sampling ports.

In September 2005, the bankruptcy court converted the RTC case to a Chapter 7 liquidation proceeding. A chapter 7 trustee was appointed and given operational control over RTC’s was its business operations were wound down. Four days after the chapter 7 trustee assumed control, the GCCS failed. Landfill gases migrated into the hotel through electrical outlets and floor cracks. The odors sickened guests and employees, resulting in a disastrous fall off in the hotel’s business for a period. Markwell subsequently filed its own chapter 11 proceeding.

The Illinois Environmental Protection Agency (IEPA) issued notices of violation to Congress and RTC after receiving odor complaints. The Chapter 7 trustee responded that the estate lacked the financial resources to fix the GCCS and estimated even if it had the funds, it would take a year to bring the GCCS into compliance. In January 2006, the bankruptcy court lifted the automatic stay and allowed Congress to take control of the GCCS. Congress then terminated its contract with RTC and began to rebuild the GCCS.

Landfill gas continued to enter the hotel. Markwell discovered explosive levels of methane gas at the hotel in February and March of 2006. This was apparently the final nail for Maxwell reorganization hopes. In September 2006, Markwell’s trustee sold the Holiday Inn for 20% of the value had there not been a methane problem.

In May 2006, Markwell’s trustee filed an administrative claim against RTC’s Chapter 7 estate seeking compensation for damages. Markwell alleged that RTC’s negligent maintenance of the GCCS had created a nuisance that damaged Markwell’s property and caused economic loss. The Markwell estate assigned its claim to Samuel Roti, Markwell’s sole member. Roti then amended the Chapter 7 claim, requesting compensation for out-of-pocket costs, loss of hotel revenue, damage to the land, and diminution in the hotel’s market value.

Creditors in a chapter 11 bankruptcy may seek administrative claim status for post-petition environmental claims on the basis that the chapter 11 DIP or trustee has an obligation to comply with environmental laws under 28 U.S.C. 959. However, Markwell never filed a claim against the chapter 11 estate. Instead, Roti sought what it characterized as a post-petition administrative claim against the chapter 7 trustee on the basis that it “operated” the GCCS for nearly four months.

The United States District Court for the Northern District of Illinois rejected the request for administrative priority status and the Court of Appeals for the Seventh Circuit affirmed. The appeals court noted that the trustee had been operating RTC’s system for only four days when the failure occurred. The court said the failure resulted from years of RTC’s neglect, there was no evidence that the chapter 7 trustee was aware of that neglect, did not exacerbate the problem, could not have done anything to prevent the failure within the few days that it had nominal control of the system, and could not have done anything to mitigate the damage afterward. The court is was possible that the Chapter 11 trustee may have had some responsibility for the neglect of the GCCS but there was no longer a Chapter 11 estate from which Roti could seek relief.

The appeals court acknowledged that the nuisance matured into a claim when the Chapter 7 trustee had possession of the GCCS and therefore could be viewed as occurring post-petition. However, since the acts causing the nuisance occurred prior to the time the chapter 7 trustee assumed control, the court said the trustee was “no more personally responsible for it than the owner of an apartment house is responsible for the murder of one of his tenants by another tenant.”

After concluding that the Chapter 7 estate and not the trustee was the proper tortfeasor, the court examined if the claim should be afforded administrative expense priority. The court said that while the chapter 7 trustee was given operational control, it was not the kind of operational control seen in chapter 11 cases where a trustee is managing an ongoing business to preserve and enhance the value of the bankruptcy estate. Instead, the court said, the trustee had neither the mandate nor resources to do anything but liquidate the estate.

Roti argued that estate had generated from revenue from the sale of energy and was therefore continuing the operation of the business.  However, the appeals court said the trustee did not operate the GCCS in any meaningful way during the brief period it was in charge. While there was some revenue generated from energy sales, the court said the proceeds were less than 10% of its normal revenue and insufficient to cover the GCCS operating costs. The court concluded that the continued operation of the GCCS in its diminished state should be more properly viewed as simply the exercise of the estate’s obligation to prevent further contamination. Thus, while Roti as assignee of Markwell, was simply a general creditor.

Commentary: When companies encounter financial difficulties, spending on environmental compliance is often one of the first expense items to be slashed. Even during a chapter 11 bankruptcy when the estate has obligations to comply with environmental laws, debtors will often spend the absolute minimum on environmental compliance to preserve estate cash. As a result, parties considering purchasing corporate assets in a bankruptcy proceeding should carefully assess review environmental compliance prior to acquiring the assets. Lenders also need to scrutinize environmental compliance before exercising rights that could provide them with control over a defunct borrower’s facility. There have been many cases where lenders have become saddled with the costs of disposing of hazardous wastes. We have several archived posts that discuss the potential risks facing lenders during bankruptcy proceedings

New Mexico had issued an order under its Water Quality Act to abate groundwater contamination eminating from septic field and lagoon on debtor’s property. The debtor argued that since the state was essentially requiring it to pay for the cleanup, the order should be considered a claim that could be discharged under the Bankruptcy Code. The state argued that the order was exempt as a regulatory action.

Relying on the Second Circuit’s LTV decision (In Re Chatageauy) and the Seventh Circuit’s Apex Opinion in In , United States Bankruptcy Court for the Southern District of New York ruled that the order was not a claim because NM had no right of payment under the state statute.

On appeal, debtor argued that NM had the ability to obtain payment under CERCLA and other laws, and therefore should be barred from enforcing the order. However, the District Court for the Southern District of New York said the analysis should be limited to the statute under which the state chose to issue the order, not other hypothetical remedies that might be available.

In re Mark IV Industries, 2011 U.S.Dist. LEXIS 110595 (S.D.N.Y. 9/28/11)

A Chapter 13 debtor had previously owned a gas station. After the New York State Department of Environmental Conservation (NYSDEC) issued a notice of violation involving failing to comply with underground storage tanks (USTs) regulations, the debtor filed its chapter 13 petition. In its Statement of Financial Affairs, the debtor disclaimed knowledge of environmental issues despite having received  the notice of violation. As a result, the NYSDEC was not included in list of creditors or any schedules of liabilities.. Because the agency was not aware of the bankruptcy proceeding, it did not file a claim or otherwise appear in the bankruptcy case.

A Chapter 13 plan was then approved by the court. The plan provided that the debtors would agree to make monthly payments to the chapter 13 trustee and that the debtor would surrender its property to the county for unpaid taxes. One year after the chapter 13 plan had been confirmed, NYSDEC filed motion to compel compliance under 28 under U.S.C. 959(b) which imposes obligations on trustee to comply with laws.

Because of the potential environmental liability associated with the property, the county did not take title to property. Because the plan had no provision for trustee to retain property, title revested to debtor by operation of law. The Court said the debtor fell within the scope of the parties subject to 959(b). Thus, the court ordered that any future surrender of the property would be conditioned on the debtor ensuring that steps are taken to comply with the NYSDEC Notice of Violation.

On NYSDEC’s motion to compel compliance, the court held that 959(b) did not create a remedy for failure to comply with environmental laws. Therefore, the court said it could not grant the relief sought by the NYSDEC. However, the court said that if debtor failed to comply with environmental laws, NYSDEC was free to either commence enforcement proceedings or move to dismiss the bankruptcy proceeding.

In re Wade Gollnitz, 2011 Bankr. LEXIS 3728 (W.D.N.Y. 9/28/11)