Bankruptcy and Environmental Issues

The interplay between environmental laws such as CERCLA and the US Bankruptcy Code (the “Code”) is complex because the laws have opposing goals. The Code is designed to give companies a “fresh start” while environmental laws often look backwards under their “polluter must pay” framework. Thus, if environmental issues are not adequately addressed in a bankruptcy proceeding, the environmental claims may not be discharged and a purchaser of corporate assets or the new company that has emerged from bankruptcy could find itself saddled with unexpected environmental liabilities.

In past recessions, companies frequently filed petitions for reorganization under chapter 11, obtained debtor-in-possession (DIP) financing to fund ongoing operations and then went through a lengthy process of developing a plan of reorganization. A reorganization plan identifies the debtor’s creditors and their claims in a disclosure statement, and then describes how those claims will be treated according to the priorities of the Code.

However, during the Great Recession many debtors could not  obtain DIP financing. As a result, many debtors sought to restructure and raise cash by selling assets under section 363 of the bankruptcy code which enables the debtor to sell assets quickly. The assets are sold “free and clear” of liens and interests. The bankruptcy courts are divided on whether section 363 applies to environmental liabilities. As a result, purchasers frequently try to have the bankruptcy court order provide that they are acquiring assets free of environmental liability or that the purchaser will not be considered a “successor” for purposes of environmental liability. Usually, though, and especially when the purchaser will be acquiring real estate, the environmental liability may follow the purchaser.

Full and accurate disclosure of environmental liabilities is critical in 363 sales to demonstrate to courts that the sale is providing fair value and has been done in good faith.  Likewise, full disclosure of environmental liabilities is important in a traditional plan of reorganization to ensure that creditors with environmental claims are identified, the environmental claims are addressed, and that the discharge and the injunction barring claims against the reorganized debtor can be enforced.

We work with bankruptcy counsel representing debtor to identify environmental liabilities and potential claimants, prepare disclosure statements and negotiate settlements with government environmental authorities and creditors as part of reorganization plans or 363 agreements. We have also helped trustees and lenders providing DIP financing evaluate environmental risks associated with bankruptcy estates. We have also assisted responsible parties with contribution claims against debtors including preparing proofs of claims and helping with claim estimation procedures.

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