Settling CERCLA Liabilities in Energy-Related Bankruptcy Cases

In the recent spate of energy-related bankruptcy cases, restructuring efforts have focused on the underlying business economics — debt-for-equity swaps, rejection of gathering agreements, lease and contract rejections to improve operational efficiencies, and similar efforts. To date, however, many of the cases largely have ignored environmental issues and claims. In the energy sector in particular, these environmental-related liabilities are often massive (sometimes totaling billions of dollars) and usually involve numerous governmental parties, including state and federal regulatory agencies. Environmental liabilities thus present significant challenges for bankruptcy attorneys and their clients.

Indeed, most bankruptcy lawyers are unfamiliar with the applicable regulatory regimes and the enforcement agencies. An energy debtor, for example, may have “decommissioning” obligations under federal and state laws and regulations but also may have cleanup liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which is enforced by the Environmental Protection Agency (EPA). Accordingly, it is not uncommon for a debtor to enter into settlement negotiations with all applicable regulatory agencies and ultimately reach a comprehensive settlement during its pending bankruptcy case.

That was the case in In re ASARCO LLC, which filed for bankruptcy in 2005.[1] Historically, ASARCO was a mining company, and during its bankruptcy case more than $6.5 billion of nonduplicated proofs of claim were filed against it relating to environmental liabilities.[2] Ultimately, ASARCO agreed to pay ~$1.79 billion to resolve environmental claims at 52 sites in 19 states when, in 2009, it entered into a comprehensive global settlement with regulators, including the EPA.[3] That settlement included allocating a $7.4 million payment for ASARCO’s alleged CERCLA liability related to the Lower Silver Creek/Richardson Flat Site (the “site”).[4]

Notwithstanding ASARCO’s bankruptcy settlement, CERCLA imposes cleanup liability on all potentially responsible parties (PRPs) and provides PRPs certain contribution and indemnification rights against other PRPs.[5] In essence, CERCLA apportions liability on a comparative-fault basis among PRPs, even when one of the PRPs is a debtor in bankruptcy. However, it is rare for a court to have determined each PRP’s apportioned liability for the cleanup of a site before a debtor PRP files for bankruptcy. Thus, while debtors likely want to reach settlements with regulators regarding their CERCLA liability, such settlements may not end disputes among PRPs and can result in post-emergence litigation over the proper allocation of cleanup liability.

A recent decision by the U.S. Court of Appeals for the Tenth Circuit arising from the ASARCO bankruptcy is illustrative.[6]

Following its emergence from bankruptcy, ASARCO initiated litigation against Noranda in June 2013, seeking contribution from Noranda under CERCLA § 113(f) because ASARCO believed it had paid more than its fair share to clean up the site.[7] Noranda sought summary judgment on the basis that ASARCO could not seek contribution from Noranda because ASARCO was judicially estopped from bringing such claims due to its bankruptcy settlement with federal and state environmental agencies, which included settling the debtor’s CERCLA liability for the site.[8]

Ultimately, the Tenth Circuit disagreed and ruled that ASARCO’s bankruptcy settlement did not prohibit ASARCO from later seeking contribution from Noranda.[9] Specifically, the court stated, “CERCLA allows a party to settle for an inexact amount and later seek contribution from other PRPs for any amounts it overpaid.”[10] The court added, “Were it otherwise, no party would settle before a mini-trial was held to determine its exact share of environmental liability — and then there would never be need for a contribution action by a settling party.”[11]

Two facts were critical to the court’s determination. First, ASARCO’s settlement with EPA and other governmental agencies “outlined how ... (b) ASARCO would receive contribution protection against other PRPs for the covered sites, and (c) neither the governments nor ASARCO were giving up claims they might have against non-settling parties related to the sites.”[12] Second, ASARCO’s plan of reorganization included a provision that “expressly reserved any contribution actions reorganized ASARCO might have against non-settling PRPs....”[13] Thus, despite the bankruptcy court’s determination that the settlement amount constituted ASARCO’s “share of the response costs” at the site,[14] the bankruptcy court “knew and approved of ASARCO’s preservation of contribution claims for the sites it settled.”[15]

The Tenth Circuit’s decision in ASARCO v. Noranda has several important implications for bankruptcy lawyers representing debtors and those representing non-debtor PRPs.

Debtors should feel reassured by the court’s decision that settlements with governmental agencies during their bankruptcy cases are encouraged and will be respected.[16] Moreover, debtors should not necessarily be discouraged from entering settlements merely because calculations of their liability for any specific sites are unavailable or imprecise. Accurate damages apportionment may not be known for a period of time, and if contribution rights are properly preserved, a debtor will not be without a remedy if it “overpays” in the settlement. But to preserve these CERCLA contribution rights, debtors should include explicit language in both their settlement agreements and their plans of reorganization identifying and preserving such rights, specifying the particular sites where possible.

Nondebtor PRPs should consider three potential strategies to protect themselves from situations like ASARCO. First, nondebtor PRPs may seek to join the settlement negotiations between the debtor and the governmental agencies as a means to potentially settle their own liabilities with the government. In doing so, such a settlement agreement and order approving such a settlement could bar debtor PRPs from seeking contribution from settling nondebtor PRPs in the future. Second, if accurate damages calculations are known or easily quantified by a nondebtor PRP, it should consider objecting to a settlement where the debtor’s damages allocations appear incorrect or inaccurate. Finally, nondebtor PRPs should consider objecting to “preservation of rights” language regarding contribution claims in settlement agreements and in debtors’ plans of reorganization.