Predicting how the Fourth Circuit would rule at the intersection of environmental and bankruptcy law, District Judge Stephanie A. Gallagher of Baltimore held that claims for environmental pollution are discharged if the pollution occurred before the chapter 11 filing.
In her October 12 opinion, Judge Gallagher said that environmental claims are discharged even if response costs were not incurred until after bankruptcy and even if the debtor was not identified as a potentially responsible party until after bankruptcy.
The opinion is notable for Judge Gallagher’s succinct summary of the three approaches courts have taken to decide whether environmental liabilities are discharged in bankruptcy. Under at least one of the theories, the debt would not have been discharged.
CERCLA Response Costs Incurred After Discharge
The facts were straightforward and typical of many environmental claims arising in bankruptcy under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA.
Between the 1950s and the early 1970s, the corporate debtor deposited hazardous chemicals in a landfill. The debtor filed a chapter 11 petition in 1992 and confirmed a chapter 11 plan the same year.
The U.S. Environmental Protection Agency gave notice in 1999 to potentially responsible parties, or PRPs. The debtor had not been identified as a PRP before bankruptcy.
In 2017, the EPA entered into a consent decree with some of the PRPs, whom we shall refer to as the settling defendants. The settling defendants did not begin incurring response costs until 2006.
In Judge Gallagher’s court, the settling defendants sued the debtor in 2000 for its share of the response costs incurred under the consent decree. The debtor filed a motion for summary judgment, contending that the 1992 chapter 11 discharge cut off liability. The settling defendants argued that the debt was not discharged because they had not begun incurring response costs until 14 years after discharge.
Judge Gallagher agreed with the debtor, granted the motion and dismissed.
‘Conduct’ Test Discharges CERCLA Claims
Because the claim against the debtor was for contribution, Judge Gallagher said that the debtor’s liability would depend on when both the debtor and the settling defendants became liable to the government. In turn, the discharge of the CERCLA claims would depend on when the claims “arose.”
Two policies were at odds, Judge Gallagher said. Bankruptcy aims to give the debtor a “fresh start,” while CERCLA “casts a broad net” of liability to clean up hazardous waste.
Circuits have taken different approaches in deciding whether bankruptcy discharges a CERCLA claim.
Sporting a narrow interpretation of a “claim,” the “right to payment” approach “prioritizes” CERCLA, Judge Gallagher said, and is “the least deferential” to bankruptcy law.
In the Third Circuit, the right-to-payment approach discharges environmental liability only if all four CERCLA elements existed before bankruptcy. One of the elements had not been met because the debtor had not been identified as a PRP before bankruptcy.
The debtor’s liability would not have been discharged if the right-to-payment standard applied. However, Judge Gallagher said that the “right to payment approach has come under criticism for subjugating bankruptcy law and, thus, undermining the goals of bankruptcy.”
Although not in CERCLA cases, Judge Gallagher said that the Fourth Circuit employs the “underlying acts” or “conduct” approach, which says that a claim exists if the underlying acts occurred before bankruptcy, citing Grady v. A.H. Robins Co., Inc., 839 F.2d 198 (4th Cir. 1988), and Holcombe v. US Airways, Inc., 369 F. Appx. 424 (4th Cir. 2010).
Judge Gallagher said that the “underlying acts” standard “respects the intent of the Bankruptcy Code,” which defines “claim” more broadly than the traditional cause of action, no matter how distant or contingent. She acknowledged that the test “has been criticized for undermining CERCLA’s goal of polluter accountability, which would be rendered ineffectual if polluters could evade response costs and action obligations by filing for bankruptcy before EPA became aware of their polluting.”
Judge Gallagher saw herself bound by Fourth Circuit precedent to apply the “more debtor-friendly ‘underlying acts’ or ‘conduct’ approach.” She granted the motion for summary judgment and dismissed the suit because the debts had been discharged since the underlying acts took place before bankruptcy.
A Third Approach
In a footnote at the end of the opinion, Judge Gallagher mentioned that some courts “in recent years” employed a third approach known as the “fair contemplation” test. She said it “attempts to strike a middle ground between the competing objectives of CERCLA and the Bankruptcy Code by” having claims arise when all future response costs resulting from prepetition conduct can be fairly contemplated.
Whatever the merits of the third standard, Judge Gallagher said it “contravenes existing Fourth Circuit precedent in the bankruptcy context.”
Predicting how the Fourth Circuit would rule at the intersection of environmental and bankruptcy law, District Judge Stephanie A. Gallagher of Baltimore held that claims for environmental pollution are discharged if the pollution occurred before the chapter 11 filing.
In her October 12 opinion, Judge Gallagher said that environmental claims are discharged even if response costs were not incurred until after bankruptcy and even if the debtor was not identified as a potentially responsible party until after bankruptcy.
The opinion is notable for Judge Gallagher’s succinct summary of the three approaches courts have taken to decide whether environmental liabilities are discharged in bankruptcy. Under at least one of the theories, the debt would not have been discharged.