Recent Developments at the Intersection of Bankruptcy and Environmental Law

By Thomas Goslin (Weil, Gotshal, & Manges LLP)

Retired U.S. Bankruptcy Judge Robert E. Gerber once observed that issues as to the interplay between environmental law and bankruptcy are among the thorniest on the litigation map.  Difficulties navigating this interplay largely stem from the inherent conflict between the goals of bankruptcy and environmental laws, with the former aimed at providing debtors with a fresh start, while the latter cast a broad net to hold parties (even some innocent parties) responsible for past harm to the environment.  Despite the fact that modern environmental laws have been on the books for over 40 years, and that bankruptcy laws were first enacted in the earliest days of the Republic, relatively few courts have had occasion to opine on the treatment of a bankrupt debtor’s environmental liabilities.  As such, those stuck at the intersection of bankruptcy and environmental law often lack clarity as to how or whether a debtor’s environmental liabilities can be addressed through a restructuring.  This is particularly true when the liabilities arise from contaminated property owned by a debtor, which generally cannot be discharged in a chapter 11 case.

Two recent bankruptcy cases, however, have provided debtors and their advisors with new options for managing environmental liabilities associated with contaminated land.  As discussed in detail in the article, developments in the pending chapter 11 case of Exide Holdings Inc. have both expanded the universe of cases where an environmental trust may provide an avenue for relief, as well as provided much needed clarity on when and under what circumstances a debtor may abandon contaminated real property under section 554 of the bankruptcy code.  In a separate case, involving defense contractor Wellman Dynamics Corporation, the debtor and one of its secured creditors were able to negotiate a novel settlement with state and federal environmental regulators, which facilitated the sale of the debtor’s operations, including heavily contaminated land, under an arrangement where the buyer would fund remediation efforts based on an ability-to-pay formula tied to revenues generated from the acquired operations.  While dire circumstances in both cases no doubt contributed to the unique results, the outcomes suggest that there may be more options available for debtors seeking to address liabilities arising from contaminated real property than previously thought.         

The full article is available here.