Archive for the ‘Other Nationally Significant Cases’ Category
Tuesday, October 26th, 2010
In a partial reversal of a decision from Bayou Group LLC's bankruptcy case, the U.S. District Court for the Southern District of New York reconsidered a controversial ruling that sent shivers down the spines of institutional investors in 2008. See In re Bayou Group , LLC, No. 09 Civ. 02577 (S.D.N.Y. Sept. 17, 2010). Specifically, the District Court found the Bankruptcy Court's legal reasoning faulty in deciding that, as a matter of law, all money paid out to redeeming investors within the reachback period could be avoided as a fraudulent conveyance, even though many of these investors had been defrauded themselves. The District Court's recent ruling may do little, however, to help clarify a murky area for institutional investors, leaving them confused as to how they can not only guard against investment risk in unforeseen fraudulent endeavors, but protect themselves from disgorgement of any return they may have innocently received therefrom once a bankruptcy is filed.
The Bayou Bankruptcy
In 1996, Sam Israel, Daniel Marino and James Marquez created the Bayou Fund, a hedge fund aimed at attracting large, institutional investors. Although the Fund began losing money from the outset, and never actually turned a profit thereafter, the Fund's managers manufactured the illusion of profitability by issuing fraudulent financial reports claiming extraordinary annual profits. Israel and Marino misappropriated new investor money for their own personal gain, and created a fictional accounting firm to act as an "independent" auditor verifying their financial statements. Additionally, to avoid detection of their fraud, as well as to lend credence to their financial claims, the Fund regularly honored requests from individual investors who wished to redeem their investments. In so doing, the Fund managed to evade investigation, and therefore, legal inquiry. In sum, the Fund had amassed over $450 million in investments by the time it announced its voluntary liquidation in July 2005.
The Bankruptcy Code provides that, upon a showing of actual or constructive fraud, a trustee in bankruptcy may avoid certain transfers made up to two years prior to the initiation of the bankruptcy case (or up to four years under the law of most states, and six years under New York law), whether or not the recipient was complicit in the fraudulent activity. Accordingly, the trustee in Bayou’s bankruptcy case sought to exercise those avoidance powers as to all Bayou investors who had redeemed their investments prior to the bankruptcy filing, recovering both the principal investment as well as the fictional profits received. In siding with the trustee, the Bankruptcy Court noted that all dividends paid out to investors within the framework of this type of investment scheme – i.e., a "Ponzi" scheme – necessarily constituted actual fraud as a matter of law and had to be returned to the estate for equitable redistribution for the benefit of all creditors. The Court went even further in announcing that any "red flag" that puts an investor on notice "of some potential infirmity in the investment" defeats any possible assertion of a good faith defense. Accordingly, the Court's broad standard, in effect, precluded redeeming investors from raising any defense whatsoever, regardless of the fact that the recipients were themselves victims of the Ponzi scheme.
Bayou Revisited
In September 2010, the U.S. District Court for the Southern District of New York reviewed the Bankruptcy Court's decision. Although the earlier decision was largely affirmed, the District Court ordered a new trial allowing the redeeming investors to rebut the presumption of actual fraud. Specifically, the District Court held that the earlier decision employed the wrong standard in assessing what level of suspicion should prompt a reasonable investor to conduct further investigation.
Although the District Court recognized the difficulty in "attempting to apply absolute rules in this area," Judge Gardephe nevertheless noted that the Bankruptcy Court's reasoning on this point cited no legal authority. Judge Gardephe stated further that the Bankruptcy Court "committed legal error" by substantially broadening the well-established legal threshold at which an investor should be required, at the risk of being deemed complicit in the fraud, to conduct a diligent investigation. In so finding, the District Court Judge opined that before imposing such an onerous burden, bankruptcy courts have required the existence of some objective information indicating either that the investment entity was insolvent or that there was a fraudulent purpose in making a transfer, such that the investor is put on "inquiry notice" of a fraudulent scheme – by contrast, the Bankruptcy Court's lower threshold would preclude an investor from asserting their innocence upon the trustee's mere showing of some "infirmity" in the fund.
Under the Bankruptcy Court's ruling, individual investors, who likely lack the means to conduct a meaningful investigation, inherited an affirmative obligation to personally monitor each entity in which they entrust their money. As a consequence, any showing of a "red flag" or "infirmity" in the investment would leave an investor with the Hobson's Choice of either expending significant personal resources to expose a potentially fraudulent scheme (and therefore prohibiting itself from redeeming upon discovery of a fraud), or immediately trying to redeem its investment (and thus subjecting itself to the avoidance powers of the bankruptcy trustee). In reviewing that decision, the District Court presented a litany of "infirmities" which could potentially fall under the Bankruptcy Court's new umbrella, including "resume puffing, lying to employees or any other act of dishonesty, a failure to pay personal taxes, an unjustified refusal to pay a vendor, sexual harassment or sexual affairs," which might constitute sufficient notice requiring an investor to conduct an independent investigation and, as a matter of law, risk liability for receiving a fraudulent conveyance.
Instead, the District Court held that the appropriate inquiry is not whether there was reason to doubt the financial integrity of Bayou, but rather, whether a reasonably prudent institutional investor would suspect either that Bayou might be insolvent or that a transfer from Bayou might be made with a fraudulent purpose. Because the Bankruptcy Court had not considered these issues and potential inquiries, the District Court believed that the Court's decision was premature. Accordingly, Judge Gardephe ordered a new trial on the issue of whether the investors had sufficient information to put them on inquiry notice. The District Court further instructed that, if a factual finding reveals that the investors were on inquiry notice, two additional queries must then be resolved: first, did the investors conduct a diligent investigation under the circumstances; and second, would a diligent investigation have uncovered Bayou's fraud. However, despite the District Court's admonitions against troubling scenarios under the Bankruptcy Court's standard, Judge Gardephe did not offer any specific guidance as to what should prompt a diligent inquiry. On the contrary, Judge Gardephe recognized that the investigation requirement is largely illusory, stating that upon discovery of a "red flag", the "sensible" investor will redeem rather than spend "more time and money on further inquiry."
The Aftermath
Unfortunately, the Bankruptcy Code does not define "good faith", and courts have been wary of assigning any concrete parameters to the term. In the aftermath of the District Court's reversal of the Bayou decision, while an investor has gained a greater chance of asserting a good faith defense, an open question remains as to what, if anything, might rise to the level of inquiry notice as a matter of law. The District Court observed that the lack of clarity affords a necessary flexibility, particularly in negotiating the underlying tension between protecting creditors on the one hand, and promoting the ease of commercial transactions on the other. That flexibility, however, is not likely to provide much comfort to the institutional investor faced with the dilemma of retrieving invested money from an enterprise in which they have a colorable suspicion of fraudulent activity vs. conducting an independent investigation and awaiting the distribution procedures of a bankruptcy proceeding.
Authored by:
Jeffrey N. Shah
212-634-3086
jshah@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
Monday, September 20th, 2010
In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.
In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.
Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, 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, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.
The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.
Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.
As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.
The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.
Authored by:
Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com
Posted in Other Nationally Significant Cases | Comments Off
