I Cant Do What Jurisdictional Issues in Approving CERCLA Settlement Agreements in Bankruptcy Proceedings

Journal Issue

Apr 2001

Column Name

Journal HTML Content

Due to the Supreme Court's pronouncement in its Marathon<a href="#1" name="1a">1</a> decision, bankruptcy judges
must operate under "limited" jurisdictional power. Most limitations on a bankruptcy
judge's authority have been fully explored and addressed in the 17 years since
Marathon. Recently, however, the U.S. District Court for the Eastern District
of Texas revisited the Marathon jurisdictional morass in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Pacific Transportation
Co. v. Voluntary Purchasing Groups Inc., 252 B.R. 373. (E.D. Tex.
2000)</a>, where it addressed a bankruptcy court's ability to consider settlements
arising under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA).

Southern Pacific involved the bankruptcy of Voluntary Purchasing Groups Inc.
(VPG), a non-profit agricultural cooperative engaged in the wholesaling of
agricultural chemicals and lawn and garden fertilizers. VPG ran into problems when
environmental authorities discovered it had released hazardous substances and contaminated
the ground near one of its chemical plants. Southern Pacific Transportation Co. and
Southwest Railway Co. (collectively, the "railroads") owned property near the plant
and also had a track and unloading pit on VPG's property. Both VPG and the
railroads were ordered to clean up their properties.

Further investigations revealed that VPG also had contaminated another tract of land
and contaminated the land at its headquarters in Bonham, Texas.<a href="#2" name="2a">2</a>

VPG was forced to file for chapter 11 protection when a series of personal-injury
lawsuits were filed against it relating to injuries suffered as a result of the
contamination.<a href="#3" name="3a">3</a> The railroads also sued VPG for indemnification and contribution arising
from its costs to clean up their property. VPG filed a reorganization plan, amended
five times, that incorporated the terms of a CERCLA environmental settlement
agreement (CERCLA Agreement) reached between VPG and the state of Texas. The
VPG plan ultimately was approved, although the railroads vigorously objected, partly
because they believed the bankruptcy court did not have jurisdiction to confirm a plan
that incorporated and approved a CERCLA Agreement. The railroads argued that because
the approval of the CERCLA Agreement involved the substantial and material
consideration of a federal statute other than the Bankruptcy Code, the bankruptcy
court lacked jurisdiction to approve it. The railroads also objected to the bankruptcy
court's issuance of two mandatory injunctions in connection with the approval of the
VPG plan.

<blockquote><blockquote>
<hr>
<big><center>
...it is not uncommon for mandatory withdrawal
of the reference to occur in cases involving
the resolution of issues under CERCLA.
</center></big>
<hr>

</blockquote></blockquote>

On appeal, the district court held that the bankruptcy court lacked jurisdiction
to approve the CERCLA Agreement and to issue the mandatory injunction
implementing the CERCLA Agreement. The district court found that the mandatory
withdrawal of the reference provision of §157(d) of Title 28 mandated such a
result. Section 157(d) requires a matter to be withdrawn from a bankruptcy court
when "substantial and material" consideration of a non-bankruptcy federal statute is
involved, as opposed to situations where the bankruptcy court must only follow the
"straightforward application of a federal statute to a particular set of facts."<a href="#4" name="4a">4</a> The
district court pointed out that Congress enacted the mandatory withdrawal of the
reference to ensure that federal district courts, as opposed to bankruptcy courts,
would address issues that involved a considerable interpretation of non-bankruptcy
federal law.

The district court held that the approval of the CERCLA Agreement involved a
substantial and material interpretation of CERCLA and, therefore, could not be
decided by the bankruptcy court. Approving the CERCLA Agreement required a court
to determine if the agreement was "fair, reasonable and faithful to the objectives
of CERCLA."<a href="#5" name="5a">5</a> An inquiry into these elements required a court to make specific
factual findings regarding potential liability under CERCLA and necessarily required
substantial and material considerations of that law. The district court drew support
from In re National Gypsum Co., where the district court held that withdrawal
of the reference was required for CERCLA claims as they related to issues such
as dischargeability, estimation of claims, liability standards and priority.<a href="#6" name="6a">6</a> The
district court also based its decision on the fact that the policies underlying
CERCLA (namely the imposition of liability and the prompt clean-up of
contaminated sites) were at odds with the underlying policies of the Bankruptcy Code
and the fact that the bankruptcy court itself questioned its jurisdiction over the
CERCLA Agreement.<a href="#7" name="7a">7</a>

Besides vacating the confirmation order and ordering the reference to be withdrawn
on the CERCLA settlement agreement, the district court also remanded on the issues
of whether the VPG plan met the new value exception to the absolute priority rule
and whether the best interests of creditors test had been satisfied.<a href="#8" name="8a">8</a>

As the National Gypsum court pointed out, it is not uncommon for mandatory
withdrawal of the reference to occur in cases involving the resolution of issues
under CERCLA.<a href="#9" name="9a">9</a> The Southern Pacific case is different because the district court
held that bankruptcy courts do not have the ability to approve a CERCLA
Agreement and related mandatory injunctions as part of its confirmation of a
reorganization plan. Practitioners would be well-advised to consider having CERCLA
settlement issues decided by a federal district court, rather than a bankruptcy
court, through withdrawal of the reference prior to a hearing on the confirmation
of a plan that incorporates any CERCLA Agreement.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Northern Pipeline Construction Co. v. Marathon Pipe Line Co., et al, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S. 50, 102 S.Ct. 2858 (1982)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Pacific, 252 B.R. at 378</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> See Id. at 378-79. <a href="#3a">Return to article</a>

<a name="4">4</a> See Id. at 382 (citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Chateaugay Corp., 88 B.R. 581, 583 (S.D.N.Y. 1988)</a>). <a href="#4a">Return to article</a>

<a name="5">5</a> See Id. at 383 (citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States v. Wallace, 893 F. Supp. 627, 632 (N.D. Tex. 1995)</a>). <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 188 (N.D. Tex. 1991)</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Pacific, 252 B.R. at 384-85</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> See Id. at 388-91. <a href="#8a">Return to article</a>

<a name="9">9</a> See Id. at 192. <a href="#9a">Return to article</a>

Journal Authors

Alison J. Brehm

John W. Ames

Journal Date

Sunday, April 1, 2001 - 12:00

Bankruptcy Rule

2001