Vedder Thinking | Articles Keep Your Eyes on the Clock! Second and Tenth Circuits Nix Bankrupt Company's Contribution Claims for Environmental Cleanup Costs
In two recent decisions, ASARCO LLC v. Goodwin, 756 F.3d 191 (2d Cir. 2014) and ASARCO LLC v. Union Pacific Railroad Co., 755 F.3d 1183 (10th Cir. 2014), the Second Circuit and the Tenth Circuit each held that a reorganized bankruptcy debtor's direct contribution claims against other potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq., were time barred because the three-year statute of limitations began when the bankruptcy court approved the debtor's settlement agreements with the government (rather than when the debtor's plan of reorganization subsequently became effective). These circuit courts also held that, because the reorganized debtor and the debtor-in-possession were the same entity for subrogation purposes, the reorganized debtor was not entitled to pursue subrogation claims against other potentially responsible parties.
Why These Decisions Are Important
These decisions are germane to bankrupt companies that face significant environmental cleanup liabilities, as well as to potentially responsible parties that may be co-liable with a bankrupt company. Bankruptcies involving companies with significant environmental liabilities tend to be lengthy and complex, with Chapter 11 plans being confirmed several years after case commencement. These decisions demonstrate that, if a bankrupt company is able to reach a settlement with the government relatively early in the bankruptcy case, it would be unwise for that company to wait until its Chapter 11 plan is confirmed to begin pursuing direct contribution claims against other potentially responsible parties for environmental cleanup costs. Additionally, although courts have held that (for certain purposes) a reorganized debtor is a different entity than the debtor prior to reorganization, one should not assume that they would be considered different entities for subrogation purposes.
Old ASARCO's Settlements
The Tenth Circuit case arose from pollution at a site in Denver (the Denver Site) where ASARCO LLC (Old ASARCO), Union Pacific Railroad Company (Union Pacific) and Pepsi-Cola Metropolitan Bottling Co., Inc. (Pepsi) had each operated. Before Old ASARCO commenced its Chapter 11 bankruptcy case, the U.S. Environmental Protection Agency filed a CERCLA action against Old ASARCO in connection with the Denver Site. In 2009, Old ASARCO entered into a comprehensive settlement agreement with the EPA, which provided that Old ASARCO would pay approximately $1.5 million to resolve its CERCLA liabilities at the Denver Site. On June 5, 2009, the bankruptcy court in Old ASARCO's Chapter 11 case approved that settlement.
The Second Circuit case arose from contamination at two different sites located in Washington State (the Washington Sites) where Old ASARCO and corporations run by the late John D. Rockefeller had each owned and operated facilities at different periods in time. Certain governmental entities filed proofs of claim in Old ASARCO's bankruptcy case, asserting claims for remediation costs, future response costs and natural resource damages. On April 18, 2008 and June 5, 2009, respectively, the bankruptcy court approved settlement agreements between Old ASARCO and the claimants relating to each of the Washington Sites. Under those settlements, the claimants were granted general unsecured claims of approximately $50 million.
ASARCO's Chapter 11 Plan
ASARCO's Chapter 11 plan became effective on December 9, 2009. The payments required under the settlement agreements were made on or about that date.
The Chapter 11 plan provided that, on its effective date, Old ASARCO's property and assets would be vested with reorganized ASARCO (Reorganized ASARCO). It also provided that, after the plan's effective date, Old ASARCO's corporate existence would continue as Reorganized ASARCO and that Old ASARCO's equity holders would hold the equity interests in Reorganized ASARCO.
Reorganized ASARCO's Contribution Suits against the Third Parties
Reorganized ASARCO filed suit against the trustees of Mr. Rockefeller's residuary trust in the U.S. District Court for the Southern District of New York in connection with the Washington Sites. It also filed suit against Union Pacific and Pepsi in the U.S. District Court for the District of Colorado in connection with the Denver Site. The complaints asserted two common claims against each defendant: (1) a direct contribution claim under CERCLA § 113(f) and (2) a contribution claim as Old ASARCO's subrogee under CERCLA §§ 107 and 113.
Importantly, each of the suits was filed more than three years after the bankruptcy court approved Old ASARCO's governmental settlements with respect to the applicable sites.
The district court in each case dismissed Reorganized ASARCO's claims. First, both courts held that Reorganized ASARCO's direct contribution claim under CERCLA § 113 was untimely because the three-year statute of limitations began when the bankruptcy court approved the applicable settlement agreements. The statute of limitations did not begin to run when the Chapter 11 plan became effective in December 2009. Second, with respect to Reorganized ASARCO's subrogation claim under CERCLA §§ 107 and 113, each district court held that under the Chapter 11 plan, Old ASARCO and Reorganized ASARCO were the same entity. Accordingly, Reorganized ASARCO was not Old ASARCO's subrogee, and the subrogation claims failed.
Reorganized ASARCO appealed both decisions.
The Circuit Courts' Analysis of Reorganized ASARCO's Direct Contribution Claim
CERCLA § 113 provides that no action for contribution for any response costs or damages may be commenced more than three years after "entry of a judicially approved settlement with respect to such costs or damages." In support of its claim for direct contribution under that statute, Reorganized ASARCO argued that the settlements did not become "judicially approved settlements" for purposes of CERCLA § 113 when the bankruptcy court approved them. Instead, Reorganized ASARCO argued that the settlement agreements became "judicially approved settlements" only after the Chapter 11 plan became effective and the settlement payments were actually made.
Each of the circuit courts disagreed with Reorganized ASARCO's interpretation of CERCLA § 113, noting that the statute looks to the date on which the judicial approval of the settlement is entered (and not to the date on which payment is required under the settlement). Settlements that are approved in bankruptcy cases under Federal Rule of Bankruptcy Procedure 9019 "meet the ordinary definition of a 'judicially approved settlement.'" Although the Tenth Circuit acknowledged that a Chapter 11 plan could very well propose to pay allowed claims less than in full, the amount of Old ASARCO's liability was determined when the bankruptcy court approved the settlement agreements. Thus, the circuit courts affirmed the dismissals of the direct contribution claims because each was filed more than three years after the bankruptcy court approved the applicable settlements.
Other courts presiding over Reorganized ASARCO's separate lawsuits against different third parties have also held that the statute of limitations began to run when the bankruptcy court approved the applicable settlement agreement. See, e.g., ASARCO LLC v. Xstrata PLC, 2013 WL 2949046 (D. Utah 2013); ASARCO LLC v. Atlantic Richfield Co., 2012 WL 5995662 (D. Mont. 2012).
The Circuit Courts' Analysis of the Subrogation Claim
Black's Law Dictionary defines "subrogation" as the "substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies or securities that would otherwise belong to the debtor." A party that pays its own debt (rather than paying another's obligation) is not entitled to subrogation.
Reorganized ASARCO asserted that it was entitled to subrogation because Reorganized ASARCO and Old ASARCO were different entities. In support of that proposition, Reorganized ASARCO argued that once a Chapter 11 plan becomes effective, the debtor-in-possession ceases to exist and a "reorganized debtor" that is not subject to the bankruptcy court's jurisdiction comes into being. The Tenth Circuit noted several cases stating that there is a distinction between a debtor and a reorganized debtor; however, those cases typically dealt with bankruptcy court jurisdiction issues, rather than subrogation.
To determine whether Reorganized ASARCO and Old ASARCO were different entities for purposes of subrogation, both circuit courts reviewed the Chapter 11 plan and concluded that Old ASARCO and Reorganized ASARCO were not different entities for that purpose. In support of their conclusion, the circuit courts noted the following provisions of the Chapter 11 plan:
- The Chapter 11 plan defined "Reorganized ASARCO" as "ASARCO and/or any of its successors...on or after the Effective Date."
- Old ASARCO's claims and causes of action were vested in Reorganized ASARCO.
- The equity holders of Reorganized ASARCO were the same as the equity holders of Old ASARCO.
These ASARCO decisions underscore the need for companies going through the bankruptcy process to pursue their contribution claims in a timely manner. Furthermore, while a reorganized debtor may be considered a different legal entity than a debtor-in-possession for some purposes, the terms of the Chapter 11 plan may very well lead a court to conclude otherwise for purposes of environmental subrogation claims.
If you have questions about the ASARCO decisions and their potential impact on your business, please contact Brett D. Heinrich at +1 (312) 609 7799, Michael J. Riela at +1 (212) 407 7766 or your Vedder Price attorney.