Confirmation Order Insufficient to Prevent Lawsuit over Contaminated Real Estate

Releases in conformation orders do not always protect against subsequent litigation or liability. DVL Inc. and DVL Kearney Holdings LLC (collectively, “DVL”) filed a lawsuit in the U.S. District Court for the District of New Jersey against Congoleum Corp., which in turn sued Bath Iron Works Corp. (BIW) as a third-party defendant concerning a contaminated piece of land. Previously, Congoleum had gone through a bankruptcy where it settled asbestos-related personal-injury claims and the confirmation order contained certain releases of liability.

The specific issue of releases in the confirmation order came before the district court in BIW’s motion to dismiss the complaint. The U.S. District Court for the District of New Jersey held that while generally confirmation orders have a res judicata effect, the debtors’ confirmation order was insufficient to also release environmental claims at the motion-to-dismiss stage.[1]

Background

Congoleum occupied the real property located at 160-94 Passaic Avenue in Kearny, N.J., from the late 1880s to 1959. On the property, Congoleum manufactured products for the U.S. military, including maintaining a research-and-development laboratory and manufactured commercial products, all of which used a variety of chemicals. Congoleum’s use of a cooling system and the various chemicals in the manufacturing process caused environmental damage to the property and its surroundings. DVL then purchased the property in 1960 but did not discover the contamination until 2015. Ultimately, DVL spent almost $20 million in remediation costs to redevelop the area.

After paying for the remediation, DVL sued Congoleum to recover damages under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), under the New Jersey Spill Compensation and Control Act (NJ Spill Act), and under common law for public nuisance, negligence, strict liability for abnormally dangerous activity, and unjust enrichment. Congoleum denied any liability and filed a third-party complaint against BIW as the responsible party.

Before addressing the substantive argument, the district court took great care to explain the relationship between BIW and Congoleum. Originally, Congoleum-Narin Inc. owned the Property. In 1968, Congoleum-Narin Inc. merged with Bath Industries and became Congoleum Corp. This company was involved in transactions with affiliates of BIW. In 1984, liabilities related to the property were transferred to another Congoleum Corp. In 1986, the flooring operations were transferred to Resilco Inc. The historical operations liabilities were transferred, however, to Congoleum Industries Inc. (CII). CII then changed its name to BIW Industries and merged into BIW, taking on the liabilities related to the property. Resilco changed its name to Congoleum Corp.

When Congoleum filed a chapter 11 bankruptcy in 2003, it was in a dispute with its insurer over personal-injury claims related to asbestos-containing products. Eventually, Congoleum settled with its insurer, which allowed it to confirm a plan. As part of the settlement, the insurer required that the debtors make representations regarding liability, including the responsibility of certain affiliated entities for the obligations of the Congoleum flooring business. Specifically, the confirmation order stated, “[T]he Court finds that the following Century Additional Named Insured have no responsibility for any of the liabilities of the Congoleum Flooring Business (as defined in the Century Settlement):… Bath Iron Works Corp.”

Congoleum argued that the effect of the provision was confined to asbestos personal-injury claims and not environmental matters, and that it related to the period of 1965-86. Congoleum further argued that a reservation in the plan provided that “damages, cost recovery contribution, reimbursement and indemnity … under applicable Environmental Laws shall survive the Reorganization cases [and] shall not be discharged, impaired or adversely affected by this Plan.” In its motion to dismiss, BIW argued that judicial estoppel barred Congoleum’s claims, because Congoleum was contradicting a position in its prior bankruptcy case. Second, BIW argued that DVL’s claims and BIW’s cross-claims are barred by res judicata, because the confirmation order was a final order with preclusive effect. Finally, BIW argued that Congoleum is prevented from pursuing the claims based on equitable estoppel, because BIW relied to its detriment on Congoleum’s position in the bankruptcy case.

Analysis: Judicial Estoppel

The district court stated that there is no rigid test for judicial estoppel; instead, courts consider three factors in deciding whether it should apply: There must be (1) irreconcilably inconsistent positions that are (2) adopted in bad faith, and (3) a showing that estoppel addresses the harm and the lesser sanction is sufficient.[2]

According to BIW, Congoleum’s reorganization depended on its CFO’s testimony that BIW was not liable for any of the liabilities of Congoleum’s Flooring Business. That testimony, BIW argued, was irreconcilably inconsistent with Congoleum’s current argument that BIW was liable for any environmental damage done to the property. The district court determined that the application of judicial estoppel turned on the element of bad faith. Where bad faith is a fact-bound issue, the district court determined that it could not be determined on a motion to dismiss without discovery and a developed record. Thus, the district court denied the motion as to the judicial estoppel grounds.

Analysis: Res Judicata

Next, the district court looked at the issue of res judicata. It stated, “A party seeking to invoke res judicata must establish three elements: (1) a final judgment on the merits in a prior suit involving (2) the same parties or their privies, and (3) a subsequent suit based on the same cause of action.”[3] The district court, citing Travelers Indent. Co. v. Bailey, stated that confirmation orders “raise the res judicata bar as to the parties and those in privity with them, ‘not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.’”[4] The district court also noted, however, that the Third Circuit previously warned that bankruptcy cases are not like civil litigation and could encompass a multitude of claims.[5] Thus, a court must take care when applying res judicata to a confirmation order, as a confirmation order does not bar every conceivable claim. Therefore, the court must look to the underlying facts, theory of the case, and relief sought against the parties in the proceeding to see if the claim is sufficiently close to a claim actually litigated in the case that it would be reasonable to bring both claims at the same time in the bankruptcy.

BIW asserted that the confirmation order released it of any liability relating to not only asbestos personal-injury liability, but of all liabilities of the Congoleum flooring business. BIW also asserted that this finding was binding on both Congoleum and DVL. Congoleum, in contrast, asserted that BIW was not a formal party in the bankruptcy and that the claims do not overlap and therefore it is not bound by the finding. DVL asserted that it was not a party in the bankruptcy, there was no final decision on the merits, and that the claims are substantially different.

Based on the parties’ assertions, the district court looked at the underlying bankruptcy and the confirmation order. The bankruptcy proceedings that led to the settlement and confirmation order related to asbestos claims asserted against Congoleum. The confirmation order contained a specific finding that additional named insureds had no responsibility for any liabilities of the Congoleum flooring business, which included BIW. The plan (which was attached to the confirmation order as an exhibit), however, contained a provision that carved out environmental liability from any discharge or release.

The district court determined that at the motion-to-dismiss stage, it could not rule on the potential conflict. Accordingly, the district court was faced with a potential inconsistency between the confirmation order and the plan and denied the motion to dismiss on res judicata grounds.

Analysis: Equitable Estoppel

Finally, the district court looked at BIW’s issue of equitable estoppel. “A party seeking to invoke equitable estoppel must establish three elements: (1) a misrepresentation by another party; (2) which [the party] reasonably relied upon (3) to [the party’s] detriment.”[6] BIW asserted that it relied on Congoleum’s representation to BIW and the bankruptcy court that BIW would not have any liability of any kind related to the Congoleum flooring operations when Congoleum sought approval of the settlement.

The district court stated that it had insufficient facts into evidence to make a determination that Congoleum made a misrepresentation and that BIW reasonably relied on it. Therefore, the motion to dismiss as to equitable estoppel was also denied.

Conclusion

Although the Congoleum confirmation order arguably released Congoleum’s claims against BIW or gave grounds to estop Congoleum’s claims, the district court denied BIW’s motion to dismiss. While the denial of its motion to dismiss is not fatal to BIW ultimately prevailing on its res judicata and estoppel defenses, it does provide a warning to parties negotiating for releases in confirmation orders. Releases in confirmation orders and plans should be abundantly clear as to what specific liabilities are being resolved or released. At a minimum, a lack of clarity will result in unwanted litigation costs.