The Effect of Bankruptcy on Environmental Obligations
| Publication year | 1992 |
| Pages | 915 |
| Citation | Vol. 21 No. 5 Pg. 915 |
1992, May, Pg. 915. The Effect of Bankruptcy on Environmental Obligations
In the last two decades, the U.S. Congress and state legislatures have enacted numerous comprehensive environmental laws. These laws are intended to prevent further contamination of the environment and to impose liability on those responsible for prior contamination. The scope of their interpretation is broad: liability may be strict; liability may extend to contamination occurring prior to their enactment; statutes of limitations may run for extended periods of time; and one party may be held financially responsible for the entire cost of cleanup, subject only to a right of contribution or indemnification from others jointly liable.
As the appropriate governmental agencies begin enforcing these laws, and as parties bring suit to recover cleanup costs from others, many businesses and individuals may find themselves subject to environmental obligations far beyond their ability to pay. Bankruptcy may prove to be a viable alternative for them. This article presents an overview of the impact of bankruptcy on environmental obligations. It also provides suggestions on how a bankruptcy reorganization best can be structured to deal effectively with those obligations.
The goals of the Bankruptcy Code ("Code") and the various environmental laws inherently conflict. The Code is designed to provide individuals and businesses with the opportunity for a fresh start by discharging, or restructuring and potentially reducing to an affordable level, obligations incurred prior to the bankruptcy filing. In contrast, the environmental laws create liability, virtually unlimited by time or cost, for cleaning up the environment. The bankruptcy courts have wrestled with these conflicting goals in an effort to resolve the conflict equitably.
The Code broadly defines a claim as a "right to payment" encompassing virtually any financial obligation, whether liquidated, matured or contingent.(fn1) Congress intended that all legal obligations of the debtor, no matter how remote or contingent, be dealt with in a bankruptcy case.(fn2) While it would be anticipated that any environmental obligations arising out of contamination occurring prior to the bankruptcy filing could be adjusted in the bankruptcy proceeding, some courts interpret the definition of claim more narrowly when considering environmental obligations.
Environmental contamination occurring prepetition, for which a judgment for cleanup costs has entered, clearly gives rise to a claim under the Code.(fn3) However, courts differ over whether a claim has arisen under environmental laws in cases where contamination has occurred but no enforcement action has begun. Some courts interpret the definition of claim expansively, finding that response costs are prepetition claims dischargeable in bankruptcy, regardless of when the response costs are incurred, as long as the costs concern a release of hazardous waste that occurred prior to the bankruptcy filing.(fn4) These courts find that the claim arises on the discharge, or threatened discharge, of the hazardous substance.
Other courts impose a more restrictive interpretation on when an environmental claim arises. They hold that future response costs based on the debtor's prepetition conduct are claims (1) only to the extent that they were fairly contemplated by the parties at the time of the bankruptcy filing or (2) where response costs actually were incurred prepetition.(fn5) Under such an interpretation, the only environmental obligations that will be treated as bankruptcy claims are those subject to pending enforcement proceedings as of the bankruptcy filing or otherwise known by the appropriate governmental agencies. These decisions are premised on the argument that, in cases where neither the appropriate governmental agency nor any other potentially responsible party knows of the contamination, there is no "right to payment" from the debtor. Therefore, no "claim" exists under the Code. Such obligations may survive the bankruptcy unaffected
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