Seventh Circuit Rules That RCRA Cleanup Obligation Survives Bankruptcy

The Seventh Circuit recently ruled[1] that a pre-petition cleanup obligation under RCRA § 7003 cannot be discharged in bankruptcy. The decision significantly weakens the “fresh start” afforded by the Bankruptcy Code. Companies that have emerged from bankruptcy should reassess their risk of future environmental liability from pre-bankruptcy activities, and may expect EPA, states and other PRPs to use the precedent to more aggressively pursue their participation in cleanup activities going forward.

The question before the Court was whether the government’s right to require cleanup under RCRA § 7003 is a dischargeable “claim” under the Bankruptcy Code. The Court held that cleanup obligations survive whenever the government cannot seek alternative monetary relief, and that RCRA § 7003 does not allow the government to collect payment in lieu of performance. Therefore, cleanup obligations under RCRA § 7003 are not discharged. In this case, Apex is left responsible for a cleanup that the company claims may cost $150 million.

Background[2]

The Apex environmental claim arose from an oil plume at a refinery complex in Hartford, Illinois that had migrated beneath residential areas. EPA determined that the site posed an “imminent and substantial” danger under RCRA § 7003, and sought the cooperation of various parties to undertake cleanup. Between 1967 and 1988, Apex’s predecessor, Clark Oil and Refining Corporation, had owned and operated one of the Hartford refineries.

Clark Oil and its affiliates filed for Chapter 11 bankruptcy protection in 1987. The company divested itself of the refinery in a court-approved sale and emerged from bankruptcy in 1990 as Apex. Pursuant to 11 U.S.C. § 1141, the Bankruptcy Court’s Confirmation Order had discharged Apex of all pre-confirmation debts and claims. Thus, when – many years following its reorganization – EPA sought Apex’s participation in the Hartford cleanup, Apex took the position that the Confirmation Order had discharged whatever right EPA may have had to that relief.

EPA sued Apex in the Southern District of Illinois, seeking a declaration that EPA’s right to relief under RCRA § 7003 was not discharged in the 1990 bankruptcy proceedings The District Court agreed and ruled in favor of EPA. Apex appealed to the Seventh Circuit.[3]

Statutory Background[4]

The Bankruptcy Code defines the term “debt” as “liability on a claim,” and defines “claim” more specifically as any:

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) 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, [etc].

The right to payment and the right to an equitable remedy are both “debts” (or “claims”) that may be discharged in bankruptcy. But, rights to equitable remedy are dischargeable only if they “give rise to a right to payment.” In the case of an equitable claim – including EPA’s cleanup claim under RCRA § 7003 – the question before the court is whether the claim “gives rise to a right to payment.”

A. When Does an Equitable Claim “Give Rise to Right of Payment”?

Apex argued that the underlying purpose of the Bankruptcy Code and controlling Supreme Court precedent requires courts to allow discharge of any equitable obligation that imposes a cost on the debtor. Apex emphasized that the Bankruptcy Code’s purpose is to give debtors a “fresh start,” and that courts have generally read the limited allowance for discharge on equitable claims broadly in order to give life to this purpose. Apex urged the Court to view equitable claims under what it called a “practical effects test”: if the “practical effect” of performance of an equitable obligation is to impose cost on the debtor, discharge serves the purpose of giving the debtor a “fresh start.” Apex found the origins of its proposed test in Ohio v. Kovacs,[5] the first Supreme Court case to find that environmental cleanup obligations could be discharged in bankruptcy, and pointed to a line of Sixth Circuit authority that had applied Kovacs in this fashion.[6]

But the Seventh Circuit had not interpreted Kovacs in same manner. In In re Udell,[7] the Court had held that the proper test of dischargeability is whether “the right to payment is an ‘alternative’ to the right to an equitable remedy.”[8] EPA advocated the “alternatives” test as set forth in Udell, but added a nuance to protect its authority to pursue costs under Section 7003: according to EPA, the deciding factor was not whether the government could seek some alternative remedy under another statute, but whether the debtor could decide to pay money rather than comply with its obligations. To cover its bases fully, EPA also raised doubts about its jurisdiction under the statutes cited by Apex, a reversal of the usual incentives – EPA arguing for limited jurisdiction, a regulated entity arguing for a broader interpretation.

The Court rejected Apex’s argument that the dispositive factor should be cost of compliance by the debtor, stating flatly that this “does not comport with the language of the Bankruptcy Code.”[9] The Court also reasoned that the Bankruptcy Code creates only a limited opportunity to discharge equitable claims, undercutting the argument that all such claims are dischargeable, and hence undercutting Apex’s argument.[10] Agreeing with EPA, the Court reasoned that the logical conclusion of Apex’s argument was that every equitable claim would be dischargeable, because injunctive relief invariably imposes cost (whether the cost of taking action, or of refraining from acting).[11] If all equitable claims that imposed costs on the debtor were dischargeable, the Court worried that “it is unlikely that the state could effectively enforce its laws.”[12]

Ignoring EPA’s emphasis on options available to the debtor, the Court ruled that “[t]he natural reading of [the definition of “claim”] is that if the holder of an equitable claim can, in the event the remedy turns out to be unobtainable, obtain a money judgment instead, the claim is dischargeable.”[13] Regarding Kovacs – the lynchpin of Apex’s “practical effects test” (unmentioned by the Court) – the decision was disposed of in a single paragraph. Citing Udell, the Court held simply that Kovacs was distinguished by the appointment of a receiver prior to the bankruptcy, meaning that the relief being sought was monetary, not equitable.[14] Regarding the Sixth Circuit precedent cited by Apex in support of the “practical effects test,” in the Court’s words, it simply “cannot be squared” with the Seventh Circuit’s analysis.[15]

B. Does RCRA § 7003 Allow EPA To Obtain Payment in lieu of Performance?

Having decided that the government’s equitable claims could – in theory – be discharged if the government could obtain monetary relief in lieu of performance, the Court then examined whether the government could obtain a money judgment under RCRA § 7003. That section allows the government to seek an injunction to restrain a person from ongoing activities that contribute to an imminent and substantial endangerment to health or the environment, and “to order such person to take such other action as may be necessary.”

The district court had held that this language did not allow the government to seek monetary relief. The lower court relied on Mehgrig v. KFC Western, Inc.,[16] in which the Supreme Court had ruled that RCRA § 7002 (providing for RCRA citizen suits in language that is nearly identical to RCRA § 7003) did not provide for monetary relief. Finding no relevant difference between the language of Sections 7002 and 7003, the district court extended the logic of Mehgrig to Section 7003.

Apex – again operating under reversed incentives – argued that notwithstanding the similar language of the two sections, Congressional grants of equitable jurisdiction should be read more broadly when public interests are at stake (as they are in the case of environmental cleanup obligations). Furthermore, Apex pointed out that EPA itself had published RCRA guidance in which it argued that Mehgrig should not be extended to Section 7003,[17] and claimed that EPA’s negotiating position when it first approached Apex was that if Apex did not enter into a consent order, EPA would perform the cleanup itself and seek payment under Section 7003.

EPA, certainly cognizant of its prior positioning, urged the Seventh Circuit not to decide whether Mehgrig should be extended to Section 7003. EPA contended that “the option to clean up a mess left by someone else and then sue for recovery of the associated costs was [historically] not seen as an adequate substitute for a cleanup injunction.” In this instance, EPA argued money was no substitute. Thus, “because potential cost recovery under RCRA Section 7003 would not even qualify as an alternative right to payment for breach of an injunctive obligation,” EPA argued that the Court need not decide the government’s rights under Section 7003.

Apex, for its part, argued that even if EPA could not recover money under RCRA § 7003, EPA could have availed itself of other environmental statutes that do allow for monetary recovery. Allowing EPA to limit the Court’s analysis to RCRA § 7003 essentially meant that the outcome of this and similar cases would turn on EPA’s artful pleading.

Apparently unswayed by either party, the Seventh Circuit adopted the reasoning of the district court. Taking the step that EPA had urged it to avoid, it extended Mehgrig to Section 7003. Ruling that the “relevant language” of the two sections “is identical,” the Court concluded that earlier cases that had allowed monetary relief under § 7003 “are dead” after Mehgrig.[18] With respect to the environmental policy questions involved – whether its ruling would disincentivize reorganization in favor of liquidation, thus shifting cleanup costs to the government – the Court concluded that the government’s decision to pursue Apex evidenced the government’s decision “that it is better off on balance if the cost of clean up is not dischargeable.”[19] With respect to what effect, if any, its decision would have on the Bankruptcy Code’s underlying policy of fresh start, the Court did not opine.[20]

Conclusion

The impact of this decision is for now limited to the Seventh Circuit. Unless and until the Supreme Court resolves the issue (it has declined to do so once in the past),[21] debtors may point to the Sixth Circuit precedent relied upon (albeit unsuccessfully) by Apex. Furthermore the decision does not apply in situations where the government has the right to convert an injunction into a claim for payment. In such a case, the injunction may meet the definition of “claim” as understood even by the Seventh Circuit.

For more information regarding issues of environmental law and bankruptcy, please contact Adam Orford or any member of Marten Law Group’s Waste Cleanup practice.