Left Holding the Bag: Are Injunctions to Clean Contaminated Sites Dischargeable in Bankruptcy?

For some time, there has been confusion over when a civil injunction is dischargeable in bankruptcy. In United States v. Apex Oil Co.,[1] the Seventh Circuit Court of Appeals helped to clear this up when it held that a cleanup injunction, granted under authority of the Resource Conservation and Recovery Act (RCRA), which did not grant a party the right to receive money damages, could not be considered a debt that arose before the date of bankruptcy confirmation and was therefore not dischargeable in bankruptcy.[2] The first part of this article will discuss the Bankruptcy Code definitions, which the Seventh Circuit relied on in making their determination. The second section will analyze the two types of injunctions that the Seventh Circuit declared are dischargeable in bankruptcy. The third part will analyze the court’s decision and reasoning, concluding with a summary of the court’s decision and this argument.

In Apex, the Seventh Circuit reviewed the district court’s determination that Apex Oil’s corporate predecessor had created an environmental nuisance that created “hazards to health and the environment.”[3] The district court tracked the long and confusing history of Apex Oil as far back as 1940 and determined that Apex is a “successor-by-merger” to the companies who collectively owned the refinery during the period that nearby groundwater was contaminated.[4] The district court ultimately found that Apex was “jointly and severably liable for the contamination at the Hartford [, Ill.,] site” and ordered Apex Oil to comply with an injunctive order to clean the site and abate the nuisance that their corporate predecessor had caused.[5]

Relevant Code Definitions
The question presented on appeal was “whether the government’s claim to an injunction was discharged in bankruptcy and therefore cannot be renewed in a subsequent lawsuit.”[6] To answer this question, the Seventh Circuit began by analyzing several definitions under the Bankruptcy Code.           

Generally, when a bankruptcy judge confirms a debtor’s plan in a chapter 11 proceeding, “any debt that arose before the date of confirmation” is discharged.[7] A debt is further defined as a “liability on a claim.”[8] A claim is defined as either a “right to payment”[9] or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, un-matured, disputed, undisputed, secured or unsecured.”[10]

On appeal, Apex argued that because it would have to spend money in order to comply with the injunction, the injunction required an equitable remedy, which gave rise to a right to payment under § 101 of the Bankruptcy Code. Because it gave rise to a right to payment, Apex argued, the obligation to comply with the injunction was a debt that arose before the date of confirmation and was therefore discharged in their predecessor’s bankruptcy. The Seventh Circuit disagreed with Apex’s position, noting that the critical language at issue in this case was “gives rise to a right to payment” under § 101(5)(B) and held that an injunction only gives rise to a right of payment in two instances, neither of which are applicable in this case.[11]
                                                                                                          
Two Instances that an Injunction Gives Rise to a Right to Payment
According to the Seventh Circuit, there are only two instances when an injunction will give rise to a right to payment and will therefore be discharged in bankruptcy.[12] First, some equitable remedies “are orders to pay” and therefore are dischargeable.[13] Second, when specific performance is no longer obtainable, the right to specific performance is transformed into a money judgment instead and will be dischargeable.[14]

Injunctions that are Orders to Pay        
Equitable remedies such as “backpay orders in employment cases and orders of equitable restitution” are orders to pay and therefore give rise to a right to payment.[15] For example, in Eden v. Robert A. Chapski Ltd.,[16] the Seventh Circuit affirmed a district court’s determination that an order of equitable restitution was not discharged in the debtor’s bankruptcy.[17] In this case, upon dissolving a couple’s marriage, a county court ordered the husband to compensate his former wife and her attorney for fees incurred in the divorce proceeding.[18] The husband later filed for bankruptcy protection under chapter 13.[19] The circuit court, agreeing with the district court’s determination that this equitable restitution was a debt in the nature of “alimony, maintenance or support,” held that it was therefore not discharged upon the husband’s exit from bankruptcy.[20] As illustrated in the above restitution case, an injunction in the form of an equitable remedy that orders a debtor to pay money to another party will give rise to a right to payment and will be discharged in debtor’s bankruptcy.[21]

Injunctions that Require Specific Performance but are No Longer Capable of Performance
As the Apex court noted, “if the holder of an equitable claim can, in the event that the equitable remedy turns out to be unobtainable, obtain a money judgment instead, the claim is dischargeable.”[22] For example, this occurs when a party has a decree for specific performance, but it is unenforceable because performance is no longer possible. That party will then be entitled to a money judgment for the value of the performance.[23] For instance, in UFG LLC. v. Southwest Corp.,[24] a buyer sought specific performance from a seller, who defaulted on its promise to sell a piece of property.[25] Because the property at issue in that case had already been sold, it was beyond the control of the parties and specific performance could not be granted, therefore, the buyer was entitled to legal damages for breach of the contract.[26]Legal damages are “such damages as may fairly and reasonably be considered as arising naturally from the breach itself, or as may be reasonably supposed to have been within the contemplation of the parties at the time they entered into the contract as a probable result of the breach.”[27] Since specific performance could not be granted, the court awarded a money judgment instead.[28]

As illustrated, where specific performance is ordered, but is no longer possible, the court can turn the equitable claim into a money judgment.[29] In that instance, the injunction will give rise to a right to payment and will be discharged in bankruptcy.[30]

Spending Money to Comply with an Injunction Is Not Enough
A party will often need to spend money in order to comply with an injunction requiring the cleanup of a contaminated site. In Apex, Apex argued that it could only comply with the injunction by spending money and, therefore, the injunction gave rise to a right of payment.[31]

Apex’s argument relied on the “expenditure test” as used in United States v. Whizco, Inc.,[32] where the United States sought to enjoin Whizco, a coal mining company, to obey orders from the Secretary of the Interior, which required Whizco to satisfy a “statutory obligation to reclaim their abandoned coal mine.”[33] The court acknowledged that in order to comply with this order, Whizco would have to expend money and thus, had to decide whether the discharge provisions of the Code applied to this mandatory injunction.[34] The Sixth Circuit agreed with Whizco that because money would have to be spent in order to reclaim the site, the injunction was a debt that was dischargeable in bankruptcy.[35] The court reasoned, “to the extent that fulfilling his obligation to reclaim the site would force the defendant to spend money, the obligation was a liability on a claim as defined by the Bankruptcy Code.”[36]

However, the Apex court rejected the holding in Whizco and the expenditure test, noting that “discharge must indeed be limited to cases in which the claim gives rise to a right to payment because the equitable decree cannot be executed, rather than merely imposing a cost on the defendant.”[37] The court noted that the expenditure test would make it difficult for states to enforce their laws because anytime an equitable decree forces a defendant to spend money, the defendant would be able to discharge that obligation in bankruptcy.[38] With this decision, the Seventh Circuit joined several other circuits that have rejected the reasoning of the expenditure test.

For example, in AM Int’l Inc. v. Datacard Corp.,[39]the court held that a plaintiff was entitled to an order directing defendant to clean up a contaminated site.[40] Because the order could not be converted to a monetary obligation, it was not discharged in debtor’s bankruptcy.[41] Similarly, in In re Chateaugay Corp.,[42] the court held that “where there is no right to such payment for cleanup or other remedial costs, claims for injunctive relief do not fall within the Bankruptcy Act and are not dischargeable.”[43] There, the court rejected the argument that “injunctive actions to remedy situations resulting from pre-petition conduct are dischargeable…merely because the debtor would be required to expend money in order to comply with the injunction.”[44] The court further noted that to accept this argument would render “the right to payment language set forth in the statute superfluous and would thus hardly be consistent with congressional intent.”[45]

Likewise, in In re Torwico Electronics Inc.,[46] the court held that the state’s attempt to force Torwico Electronics to clean up a waste site was not a claim under the Code.[47] The court noted that the state was not demanding the payment of money, “but rather that [Torwico] take action to ameliorate [an] ongoing hazard.”[48] Even though the debtor had to expend money in order to comply with the cleanup, its only obligation was to mitigate ongoing pollution and the state had no right to payment.[49] As illustrated in these cases, that a defendant must expend money in order to comply with an injunction for specific performance is not enough to make that injunction “give rise to a right to payment.”[50]

The Decision
The Seventh Circuit concluded that the cleanup injunction did not give rise to a right to payment and therefore was not a claim discharged in Apex’s bankruptcy. First, unlike in the cases where “the equitable remedy turns out to be unobtainable,” and the injunction becomes a money judgment instead, the cleanup here was still capable of being performed and was therefore unable to be transformed into a right to receive payment.[51]
Second, the court explained that the RCRA, which authorized the injunction, “does not entitle a plaintiff to demand, in lieu of action by the defendant that may include the hiring of another firm to perform a clean-up ordered by the court, payment of cleanup costs.”[52] Further, RCRA does not “authorize any form of monetary relief.”[53] The court held that the injunction only entitled the government to require the defendant to clean up the contaminated site at the defendant’s expense.[54]

In explaining their decision, the Seventh Circuit distinguished, and more narrowly applied, the Supreme Court’s holding in Ohio v. Kovacs.[55]The state of Ohio had obtained an injunction ordering the operator of an industrial and hazardous waste disposal facility to clean up a hazardous waste site.[56] When Kovacs failed to comply with the injunction, the state of Ohio had a receiver appointed who took possession of Kovacs’ assets and property in order to implement the injunction.[57] Before the receiver had completed the clean up, Kovacs filed for personal bankruptcy.[58] The Sixth Circuit agreed with the district court and bankruptcy court that Kovacs’ obligation under the injunction was a discharged debt.[59] The Sixth Circuit explained that the state of Ohio sought only a monetary payment and that a required payment of money was a liability on a claim that was dischargeable under the Bankruptcy Code.[60]

The Sixth Circuit stressed that, as a result of Kovac’s failure to clean up the hazardous material, the state of Ohio was seeking the payment of money from Kovacs.[61]The court noted that “in reality, the only type of performance in which Ohio is now interested is a money payment to effectuate the…cleanup.”[62] Additionally, the state of Ohio was pursuing payment as an alternative to personal performance of the injunction.[63]

In affirming this decision, the Supreme Court stressed that the state of Ohio was really seeking “money to defray cleanup costs.”[64] In fact, the state of Ohio’s counsel even agreed that after the receiver was appointed, the only performance sought was the payment of money.[65] Therefore, the cleanup order was “an obligation to pay money, an obligation that was dischargeable in bankruptcy.”[66]

Conclusion
The Seventh Circuit’s holding in Apex that the obligation to comply with a cleanup injunction under RCRA was not a claim discharged in bankruptcy, illustrates the intersection of bankruptcy and environmental law. Under the Bankruptcy Code, obligations that are “claims” can be discharged when a reorganization plan is confirmed by the bankruptcy court.[67] Obligations that are not “claims” will be unaffected by the bankruptcy and continue as liabilities of the debtor. Apex, and cases like it, demonstrate that an injunction, which only authorizes specific performance that is still obtainable or is otherwise not truly a claim for money, is not a “claim” under bankruptcy law and therefore is not dischargeable.[68]