Upholding Bankruptcy Judge Kevin J. Carey, a district court in Delaware ruled that fines for violating environmental regulations are dischargeable in a corporate debtor’s chapter 11 reorganization.
The debtor was battery maker Exide Technologies. The company recycled lead batteries at a California plant closed after the chapter 11 filing in 2015.
The procedural history is complicated, but it comes down to this: California environmental regulators filed a proof of claim for almost $40 million in penalties arising from noncompliance with environmental regulations. The state contended that the claim was nondischargeable and that some of the claim was entitled to administrative priority.
After confirmation, the debtor objected to the claim. In April 2019, Judge Carey ruled that the claim was discharged and not entitled to administrative priority. Judge Carey stepped down from the bankruptcy bench a few months later, returning to private practice.
The regulators appealed, but District Judge Leonard P. Stark affirmed on March 24.
The state proffered a creative theory based on the notion that the fines and penalties were the result of the debtor’s fraud in certifying compliance with environmental laws. With allegations of fraud in hand, the regulators contended that the claim fell within Section 523(a)(2)(A).
That section excepts a debt from discharge if the claim was for “money [or] property . . . obtained by . . . false pretenses, a false representation, or actual fraud . . . .”
Although most nondischargeable debts of an individual are discharged as to corporate debtors in chapter 11, Section 1141(d)(6)(A) provides that confirmation of a plan does not discharge a debt of the kind covered by Section 523(a)(2)(A) and (a)(2)(B) as to a corporate debtor in chapter 11.
In large part, Judge Stark regurgitated Judge Carey’s analysis and opinion.
To begin with, the two judges concluded that the claim best fits within Section 523(a)(7), as a fine or penalty owing to a governmental unit that “is not compensation for actual pecuniary loss . . . .” Of course, debts covered by that section are discharged as to corporations under Section 1141.
While recognizing there is overlap among some categories of nondischargeable debts, Judge Stark agreed with Judge Carey that the claim fell squarely within Section 523(a)(7), making it dischargeable.
Judge Stark still needed to explain why the claim did not also fall within Section 523(a)(2)(A), where it would have been nondischargeable. The explanation was simple.
A claim falls under that section only if it was for “money [or] property . . . obtained by . . . false pretenses, false representation, or actual fraud.”
Quoting Judge Carey, Judge Stark said the claim did not fall under Section 523(a)(2)(A) because it did “‘not represent the amount of loss . . . cause[d] by any alleged misrepresentations of the Debtors; they are noncompensatory penalties for violating emission standards.’”
Not falling within Section 523(a)(2)(A), the claim was discharged.
On the claim for administrative priority, Judge Stark again quoted Judge Carey, this time for correctly relying on Third Circuit precedent. Those cases hold that punitive fines are not entitled to priority, regardless of whether they are denominated as civil, criminal or quasi-criminal.
So long as the purpose is to deter, a fine does not carry administrative priority because there is no benefit to the estate. In other words, Judge Stark said, “compensatory fines and penalties may be treated as administrative expenses, but punitive fines and penalties, like those here, cannot.”
Upholding Bankruptcy Judge Kevin J. Carey, a district court in Delaware ruled that fines for violating environmental regulations are dischargeable in a corporate debtor’s chapter 11 reorganization.
The debtor was battery maker Exide Technologies. The company recycled lead batteries at a California plant closed after the chapter 11 filing in 2015.
The procedural history is complicated, but it comes down to this: California environmental regulators filed a proof of claim for almost $40 million in penalties arising from noncompliance with environmental regulations. The state contended that the claim was nondischargeable and that some of the claim was entitled to administrative priority.
After confirmation, the debtor objected to the claim. In April 2019, Judge Carey ruled that the claim was discharged and not entitled to administrative priority. Judge Carey stepped down from the bankruptcy bench a few months later, returning to private practice.
The regulators appealed, but District Judge Leonard P. Stark affirmed on March 24.