Court Rules Purchaser of Coal Plant Assets Acquired “Free and Clear” Is Liable For Pre-Closing NSR Violations

A federal district court ruled that purchaser of a coal-fired power plant was held liable as a successor for violations of the New Source Review program that had occurred prior to the transaction. The court said the purchaser had expressly assumed the liabilities even though the order of the bankruptcy court approving the sale provided that the purchaser was not to be considered a successor of the seller of the plant.

In United States v. La. Generating, LLC, 2011 U.S. Dist. LEXIS 137973 (M.D. La. 12/1/11), the Cajun Electric Power Cooperative (Cajun Electric) began constructing the “Big Cajun II” (BCII) coal-fired power plant in 1976 amendments to the Clean Air Act (CAA). Big Cajun began operating in 1981. In 1994, Cajun Electric filed a chapter 11 bankruptcy proceeding and a bankruptcy trusts was appointed in 1995.

Meanwhile, in 1994 and 1995, Cajun Electric upgraded the turbines of Units 1 and 2 (“the 1994/95 work”). Cajun Electric did not obtain a Preventing of Significant Deterioration (PSD) permit prior to starting work. In 1998 and 1999, Cajun Electric replaced portions of the primary boiler reheaters (“the 1998/99 work”) also without obtaining a PSD permit. The cost of each project was estimated at $5 million.

As part of the Cajun Electric bankruptcy reorganization plan, the trustee solicited bids for substantially all of Cajun Electric’s assets, including BCII. After a protracted auction process, a subsidiary of NRG Energy, Louisiana Generating, LLC (LaGen), submitted a final bid that was accepted by the trustee and memorialized in what was called the Fifth Amended Asset Purchase Agreement (APA).

The APA provided, inter alia, that the bankruptcy court confirmation order would state that LaGen would not assume or be liable for any liabilities of Cajun Electric except for “Assumed Liabilities and any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of law.” The definition of “Environmental Liabilities” included any known or reasonably expected liability or obligation….. under any Environmental Law.” [emphasis added]. The APA also contained representations that the company was in material compliance with all environmental laws permits, had obtained all permits necessary to operate the business and that no other permits were required for the business.

In October 1999, the bankruptcy court issue an order approving the sale “free and clear” under section 363 of the Bankruptcy Code.  “free and clear”. The confirmation order also provided that LaGen was not a successor and “shall not have any liability for any claims against [Cajun Electric] as a result of s purchase of the Acquired Assets”. LaGen acquired BCII in April 2000.

In September of 2001, LaGen submitted a revised Title V permit application for BCII. While the application was still pending, EPA issued a notice of violation (“NOV”) regarding the 1998/99 work. Despite the NOV, the state issued the Title V permit and renewed this permit in 2011. The EPA did not formally object to the issuance of the permit or its renewal.

In 2009, the federal government filed a lawsuit against LaGen seeking civil penalties and injunctive relief for violations of the CAA New Source Review (NSR) permit program for Prevention of Significant Deterioration (PSD) and the Title V permit. Under the NSR/PSD, a new major source or an existing major source that is to undergo a physical change or change in operation (modification) that will result in a significant net increase in pollutants must apply for a pre-construction permit and install pollution control technology  known as Best Available Control Technology (BACT).  Work that qualifies as “routine maintenance, repair and replacement” is exempt from the NSR program.

The parties each filed motions for summary judgment. LaGen argued that the CAA only imposed liability on the person owning or operating the facility when the violation occurs and prohibited the application of successor liability.  Specifically, LaGen argued that the express language of section 165 of the CAA and the implementing regulations of 40 CFR 52.21 imposed the obligation to obtain a PSD permit on the owner or operator who actually engaged in the construction or modification project that triggers the requirements. Likewise, LaGen said the State Implementation Plan (SIP) only prohibited construction without a permit. In other words, LaGen argued PSD was a pre-construction program and there was nothing in the statutory or regulatory language extended PSD obligations to cover operation by entities, including a purchaser who acquired a plant after construction is completed from operating the source without a PSD permit. [emphasis added].

LaGen also pointed to a line of cases holding that violations of the PSD pre-construction permitting requirements occur at the time of construction and do not extend to post-construction operations. LaGen also claimed that a substantial majority of district courts have held that PSD imposes a one-time permitting obligation and that these cases have rejected any argument based on a “continuing violation” theory. Since the alleged modifications occurred prior to LaGen’s acquisition of the Units 1 and 2, LaGen said it could not have complied with or violated the obligation to comply with PSD prior to the commencement of the projects. Moreover, since PSD liability could not attach to the owner of acquired assets by operation of law, LaGen asserted that it could not assumed liabilities for the 1998/99 work under the APA.

The court rejected the notion that successor liability was precluded under the CAA, saying the doctrine was so well established that Congress would have to expressly exclude its application in a statute. Then ignoring the express language of the order issued by the bankruptcy court, the court proceeded with a successor liability analysis. Pointing to the language of APA section 2.4 that the purchasers assumed “any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of Law”, the court concluded that LaGen assumed any environmental liability that it knew about or reasonably expected at the time of the signing of the Fifth APA.

The court said the 1998/99 work was the type of liability that LaGen could have assumed under APA Section 2.4. The court noted that when NRG first considered purchasing the BCII assets in 1996, a member of NRG’s due diligence team was concerned about the 1994/95 work and that the trustee had notified all of the bidders about the 1998/99 work but NRG did not perform any due diligence regarding potential PSD applicability. The government argued that this was evidence that NRG effectively hid its head in the sand while the defendant said it relied on the trustee’s representations that the plant was in compliance with environmental laws. As a result, the court said there was a genuine dispute if the Defendant knew or reasonably expected the 1998/99 work to BCII Units 1 and 2 created liability under the CAA that precluded granting of summary judgment

The defendant also argued that the government’s PSD claim was barred by the statute of limitation. LaGen said the five-year SOL began to run in 1998 when construction on the units began and had expired in 2003-six years before the government brought its action. The government, on the other hand, asserted that the SOL was tolled because the PSD violation was ongoing. The court agreed that since the CAA did not have a period of limitation period for enforcement actions, the general five-year statute of limitations found in 28 U.S.C. § 462 applied. However, the court ruled that while the applicable caselaw suggested that the SOL had not expired, the government was only able to seek penalties for the five years preceding the time the suit was filed.

The government also asserted that LaGen had submitted a deficient Title V permit by not identifying the applicability of the PSD program. Under EPA’s “no look back” policy, LaGen argued it had no obligation to evaluate prior projects when completing its Title V permit. The court ruled that even if an application had no “look back” obligation, it has an ongoing duty to supplement or correct applications “upon becoming aware of such failure or incorrect submittal.

LaGen said its certification obligation could be based only on a reasonable belief at the time of the submission. The court disagreed, saying that an applicant to perform a reasonable inquiry. Moreover, since LaGen had not properly supplemented its Title V permit to reflect the PSD and BACT applicability, the court declined to find that EPA’s failure to object to the permit renewal precluded the enforcement action. To hold otherwise, the court said, would be to encourage and reward sources for not being forthright in their Title V permit applications.