The ongoing debate about the treatment of cleanup orders in bankruptcy looks to be getting a lot more interesting in the Second Circuit.
In a decision (.pdf) that could signal important precedent in the making, the United States District Court for the Southern District of New York granted the government’s motion to withdraw the reference (.pdf) of an adversary proceeding filed by debtor Chemtura Corporation in the context of its chapter 11 cases.
Chemtura’s amended complaint (.pdf) against the EPA and numerous state environmental agencies (originally filed (.pdf) in November 2009) seeks a declaratory judgment that the Debtors’ environmental obligations relating to sites that
(i) the Debtors no longer owned or operated as of their March 18, 2009 petition date or
(ii) are and always have been owned by third parties unaffiliated with the Debtors, are dischargeable “claims” within the meaning of section 101(5) of the Bankruptcy Code.
Opposing the government’s effort to resolve the matters in District Court, Chemtura had asserted that its complaint involved “settled” provisions of CERCLA that could be addressed by the Bankruptcy Court. Similarly, in support of the Debtors’ opposition to withdraw the reference, the Creditors’ Committee had argued that the adversary proceeding simply required application of the Second Circuit’s decision in In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991). District Judge Richard Berman disagreed, and held that withdrawal of the reference was mandatory because analysis of the issues raised in the Chemtura adversary proceeding requires “considerably more” than routine application of CERCLA (potentially RCRA as well) and bankruptcy law. More importantly, the Court stated that it faced “an issue of first impression” in the Second Circuit that is not answered by Chateaugay, agreeing with an argument made by the government (.pdf) in support if its withdrawal motion.
In Chemtura, the Debtors are seeking a ruling that would render Chateaugay’s holding – that an injunctive order obtained under CERCLA that to any extent ends or ameliorates continued pollution is not a dischargeable “claim” – inapplicable to property that is neither owned nor operated by the Debtors. As we recently wrote, when a debtor-PRP (“potentially responsible party”) is saddled with joint-and-several responsibility to remediate sites that the debtor no longer even owns or operates, reorganization efforts can be substantially (or completely) impeded and the recoveries of non-environmental creditors significantly diluted. If the Chemtura matter does not settle and the Southern District (and perhaps ultimately the Second Circuit) proceeds to rule on the dischargeability question on the merits, the stage is set for a precedential decision – one that would implicate far more than just the Chemtura estates, and could serve as an important venue consideration for any company with significant environmental liabilities facing the possibility of a chapter 11 filing.