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When Statutory Schemes Collide: The Intersection of Bankruptcy and Environmental Law

By: M. Natasha Labovitz, Elie J. Worenklein and Emily F. MacKay

There is an inherent conflict between the primary goal of bankruptcy law, which seeks to rehabilitate a distressed debtor by providing a fresh start, and environmental law, whose purpose is to hold businesses fiscally responsible for their negative impacts on the environment. Recent decisions from Delaware indicate that, in certain circumstances, bankruptcy courts may favor bankruptcy objectives over environmental law concerns by allowing debtors – and their non-regulatory creditors – to use the Bankruptcy Code to escape the burden of liabilities that state regulatory agencies had argued were non-dischargeable. These decisions highlight the value-add of well-structured bankruptcies for companies facing extensive environmental liability, providing a benefit for debtors, their creditors, and possible investors or acquirers.


Exide Holdings

Exide Holdings, Inc. (Case No. 20-11157, Bankr. D. Del.) sought approval from its Delaware bankruptcy court to abandon a former battery recycling facility in Vernon, California. Under Supreme Court precedent, Midlantic Nat’l Bank v. N.J. Dep’t of Env’t Prot., 474 U.S. 494 (1986), debtors are not permitted to abandon property that presents an imminent danger to public health. The California Department of Toxic Substances Control (“DTSC”) filed an objection arguing that Exide sought to inappropriately leave environmental pollution for the state to clean up, asserting that the bankruptcy abandonment power cannot override environmental laws. 


Judge Sontchi confirmed Exide’s plan and overruled DTSC’s objection, noting that “[t]he issue is not whether the lead at Vernon is dangerous – it is. The question is whether abandonment of the site presents an imminent danger – it does not.” The evidence demonstrated that the site was constantly monitored, dangerous polluted areas were contained, and contractors in place were ready to work if paid.


The Court squarely addressed the tension between environmental and bankruptcy laws, noting that the issue was not whether Exide ought to pay its debts, but that Exide could not pay its debts. The Court explained that Exide was unable to remediate the environmental damage because under the Bankruptcy Code, “any money available is subject to senior, secured liens that are superior to Exide’s environmental obligations,” and the Court “[lacks] the power to override that law.”  Accordingly, “[w]hile every effort should be made to have polluters pay to clean up their pollution, if that is not possible it must fall to the government to do so. Abandonment is the only realistic outcome that is consistent with the law.”


In re La Paloma Generating Co.

In another Delaware bankruptcy case, La Paloma Generating Co., No. 16-12700, 2017 WL 5187116 (Bankr. D. Del. November 9, 2017), owner of a natural gas fired electricity generation facility in California, sought to sell substantially all of its assets free and clear of all liens, claims and interests. (For disclosure, certain of the authors represented La Paloma.)  The California Air Resources Board argued that any purchaser would need to satisfy approximately $63 million of emissions obligations as a condition to acquiring and operating Exide’s assets.  


The Court approved the asset sale free and clear of those pre-sale environmental obligations, relying on section 363(f) of the Bankruptcy Code, which permits a debtor to sell property free and clear of interests if applicable non-bankruptcy law permits such a sale. Judge Sontchi explained that nothing in the California emissions law imposed successor liability on the buyer: the regulation did not expressly provide for successor liability, did not make a purchaser of the facility liable for the former owner’s emissions, and did not explicitly state the need for a purchaser to satisfy regulatory obligations based on the pre-sale period.  More generally, the Court noted that environmental liabilities are not excluded from the free-and-clear treatment afforded by section 363(f).