Ct Says NJ Brownfield Agreement Not Enough to Establish Innocent Party Status

The brownfield reforms that swept the country in the 1990s created new tools for developers of contaminated sites to help minimize their liability. Some of the reforms like the CERCLA Bona Fide Prospective Purchaser (BFPP) liability protection are self-implementing while others such as prospective purchaser agreements, covenants not to sue or letters stating that the developer is not a responsible party must be requested by the property owner. The outcome might have been different in Route 21 Associates of Belleville v. MHC, Inc., 486 B.R. 75 (S.D.N.Y. 2012) if the property owner had entered into a prospective purchaser agreement (PPA) with the New Jersey Department of Environmental Protection (NJDEP).

In this case, RT21 Associates of Belleville (RT21) purchased property in Belleville, New Jersey (the “Site”) from the Walter Kidde Division of Kidde, Inc (Kidde) in March 1983.  Kidde represented in the purchase agreement that RT21 “would not be responsible by reason of the violation of any law, rule or regulation regarding toxic volatile organic or environmental hazardous substances.”

In 1991, RT21 discovered a previously unknown leaking underground storage tank. After further investigation uncovered other areas of contamination, RT21 entered into a memorandum of agreement (MOA) with the NJDEP n 1993 to remediate the site. RT21  then filed a lawsuit against Kidde under the New Jersey Spill Compensation and Control Act (Spill Act) which the parties eventually settlement in 1996. Under the 1996 settlement agreement Kidde agreed to remediate all areas of concern and obtain a “no further action” letter from NJDEP. Kidde also agreed to indemnify RT21 for any clean-up liability for the pre-existing contamination.

Kidde’s cleanup progressed slowly over the next decade and proposed sales to K-K-Mart and Home Depot fell through because of concerns over the contamination. To facilitate a sale to Lowe’s, RT21 entered into a Brownfield Redevelopment Agreement (Brownfield Agreement) with NJDEP in 2006. The Brownfield Agreement provided that RT21 would be the primary party responsible for remediating the site and would be eligible for reimbursement of 75% of its eligible remediation costs.

In December 2007, RT21 entered into an addendum to the 1996 Agreement (2007 Addendum) with MHC, Inc which had acquired Kidde. MHC was a subsidiary of Millennium Chemicals Inc. (“Millennium Chemicals”) which, in turn, was an affiliate of Lyondell Chemical Company (Lyondell).

The 2007 Addendum provided that RT21 would complete the remedial investigation for the groundwater and soil, obtain an NFA letter for the soils, obtain approval of a RAW for the onsite groundwater. MHC, on the other hand, agreed to reimburse RT21 for the 25% of costs that were not covered by the Brownfield Agreement, maintain the groundwater and vapor recover systems and obtain a NFA letter for both onsite and offsite groundwater.

RT21 obtained an NFA letter for soils in early 2009 at a cost of approximately $2.4MM. RT21 also submitted to NJDEP a remedial action workplan (RAWP) for the onsite groundwater at a cost of approximately $1.049MM. NJDEP approved the RAWP in 2010, which completed RT21’s obligations under the 1996 Agreement. However, Lyondell and its affiliates filed a voluntary chapter 11 bankruptcy petition in January 2009.

RT21 filed a proof of claim seeking $1,049MM as an administrative expense. In the rider to its claim, RT21 estimated the groundwater remedy could cost $6.6 million based on a fixed price remediation contract. MHC filed an objection seeking to disallow RT21’s claim under 502(e) of the Bankruptcy Code as contingent, unliquidated claims asserting that .

The bankruptcy court approved a reorganization plan in April 2010. The plan provided for creation of the Millennium Custodial Trust (MCT) which became the parent of certain former debtor affiliates of Lyondell, including MHC. MCT was tasked with liquidating the assets of these debtors. Pursuant to the plan, MHC rejected many of its executory contracts including the agreements with RT21.

RT21 filed a motion seeking an order requiring MCT to comply with the Addendum, arguing that the contract was not executory because it had completed all of its obligations under the Addendum. RT21 also to have its cleanup costs afforded administrative expense priority. The bankruptcy court denied RT21’s specific performance claim, found that the 1996 Agreement and Addendum were executory contracts that had been properly rejected and that RT21’s claim was not entitled to administrative priority because the agreements were pre-petition transactions that did not provide a direct benefit to the post-petition estate. The court ruled that RT21 would have general unsecured claim for costs already incurred in cleaning up the Site in the amount of $1,019,358.40. However, the court disallowed RT21 claims for future, holding these were contingent claims for reimbursement that RT21 was co-liable with the debtor.

On appeal, the district court upheld the rejection of the specific performance claim breach of contract claims are usually converted into monetary damages and RT21 had not established that damages were not a “viable alternative” to performance of the agreements. In addition, the costs could be monetized in the form of invoices like those that RT21 had submitted in connection with its proof of claim. Moreover, unlike other cases relied upon by RT21, the court said RT21 was not trying to seek enforcement of an injunctive order issued under RCRA 7002.

The district court also agreed that RT21’s cleanup costs were not entitled to administrative priority treatment since section 503 of the Bankruptcy Code only authorized such treatment for costs incurred to cleanup property in which an estate has an interest in or owns and the debtor did not own or operate the property during the bankruptcy proceeding.

On the disallowance of the future costs under section 502(e), RT21 argued that its claim was in the nature of restitution or indemnity and not a claim for reimbursement or contribution. Moreover, RT21 argued it could not be co-liable with the debtor because it was an innocent purchaser. RT21 asserted that NJDEP had declared RT21 as an innocent party in the Brownfield Agreement. However, the court found Brownfield Agreement simply provided that RT21 had certified that it was not a person deemed liable for the contamination at the Site and had performed an environmental due diligence investigation. In other words, the court said, NJDEP had not made a determination that RT21 was an innocent party but simply that RT21 had assured NJDEP that it qualified for the state innocent purchaser defense.

The court also pointed out that RT21 had taken contradictory positions in the proceedings. The court noted that RT21 had argued to the bankruptcy court that it could face “untold liability” if specific performance was not awarded while its counsel told the district court that RT21 could walk away from the brownfield agreement, and keep any cash distribution without having to complete the cleanup in support of its contention that its claim for future costs should be allowed.

Finally, the court conceded that its ruling would produce a harsh result for RT21 that had incurred significant costs to remediate contamination it had not caused and as a general unsecured creditor might only receive a distribution from the bankruptcy estate of 1% of its costs. However, the court that the reality of chapter 11 bankruptcy proceedings are that they are not really controversies between creditors and a debtor but instead a battle group of creditors to allocate limited resources of the debtor to satisfy losses that many creditors will suffer. The court said that stripped to their essence, RT21’s arguments were an attempts to skip the line of creditors and get paid in whole dollars—whether by obtaining specific performance or by receiving administrative priority. While granting such relief to RT21 would make little difference to the liquidating debtor, the practical effect of such a ruling would be to further injure the debtor’s other creditors such as tort victims, vendors, and employees who have their own sympathetic circumstances.

Developers in New Jersey frequently enter into PPAs with NJDEP when developing residential properties or mixed use projects since the PPAs contain a covenant not so sue from the NJDEP that runs with the land. Though less common used for purely commercial properties, a PPA could have served as evidence that the NJDEP determined RT21 was an innocent party. This would have allowed RT21 to establish that it was not “co-liable with the debtor” and that it was not seeking a contribution claim for reimbursement but actually indemnity. These facts could have allowed the court to rule that the future costs were allowable claims. Granted, RT21’s claim would still be a general unsecured claim but this still would have resulted in a greater cash distribution.

If a PPA is not available, a property owner can try to add language to a voluntary cleanup agreement that it is not a responsible party. State cleanup agreements can also help with CERCLA contribution or cost recovery actions. For example, parties filing CERCLA contribution actions must show that their costs were incurred consistent with the National Contingency Plan (NCP). Some state regulatory programs provide that parties remediating a site under a state oversight document are presumed to be in compliance with the NCP. In addition, some state programs provide that a party remediating a site is presumed to have exercised “appropriate care”, thereby allowing the property owner to satisfy the post-acquisition continuing obligations of the BFPP liability protection.