Non-Claim Status of Clean-Up Injunctions Limited to States

By: Klevis Peshtani

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Does the equitable right of an individual, whose property has been damaged by the debtor’s pollution, to injunctive clean-up relief constitute a “claim” that may be discharged in the debtor’s Chapter 11 bankruptcy?  Yes, according to the Pennsylvania Bankruptcy Court, which in Krafczek v. Exide

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  held that individual plaintiffs who are not exercising the state’s police and regulatory powers, cannot qualify for the narrow exclusion that allows for state enforcement actions to survive a Chapter 11 bankruptcy discharge.

The plaintiffs in Krafczek were a couple whose residence was located near the defendant’s battery recycling plant.[2]They sued Exide, alleging that contaminants from its factory were polluting the surrounding areas, including causing substantial pollution of their property.  They requested equitable relief to compel Exide to decontaminate their property.

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  A few months later, in a related case, the EPA obtained a Consent Decree requiring Exide to clean up all of the surrounding areas, including plaintiff’s property, but Exide failed in that effort and only partially cleaned up the plaintiff’s property.  Later Exide filed Chapter 11 and confirmed a plan that included a permanent injunction and discharge enjoining the continuation or prosecution of all claims against it.

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  The plaintiffs filed a timely proof of claim requesting monetary relief for the damages already caused, but not for the cost of remediation, since that was supposed to be carried out by Exide pursuant to the Consent Decree.  Plaintiffs asserted that under In re Torwico Electronics

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their right to injunctive clean-up relief survived bankruptcy because it did not constitute a claim.

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The debtor contended that the plaintiffs’ rights constituted a claim under § 101(5)

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of the Bankruptcy Code and was thus discharged.

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The Bankruptcy Code defines a “claim” as a “right to payment . . . [or] a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.”

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  Courts have recognized an exception for environmental injunctions requested by states that excludes some clean-up injunctions from the claim definition, thus allowing the clean-up obligation to survive discharge and remain enforceable against the debtor after bankruptcy.

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  However, this exception is very narrow and the state’s requested injunction must satisfy a series of conditions in order to qualify.  Specifically, the state’s demand:  (1) must not entitle it to any right to payment; (2) must require the debtor to ameliorate ongoing pollution; and, (3) the state must not have the option of remedying the defect itself and suing the debtor to recover the remediation costs.

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  Essentially, the test prevents the state from disguising what is essentially a claim for damages as a non-claim qualifying for the exception.

 

Krafczek is of interest because it adds a fourth condition to the narrow injunction exception.  Krafczek limits the exception to governmental environmental clean-up demands and bars individuals from utilizing it.

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  It is not clear why the court added that condition.   While the Krafczek court relied on the police and regulatory powers that the states have and individuals’ lack,

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there is nothing in the language of the claim definition to support such a distinction.  The prior case law did not draw an explicit distinction between state and individual claimants the way Krafczek does.

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  It is also unclear why the Krafczek court relied upon that distinction when it appeared unlikely that the Krafczeks could satisfy the existing test.  First, the Krafczeks had the option of cleaning up the pollution themselves and suing for the cost.  Second, they sued for already-suffered monetary damages, in addition to requesting that the debtor clean up the site.  Third, it is not clear that the lead pollution could be considered “ongoing” in the sense that a continuously leaking toxic pit could.

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