A Quagmire of Obligations

CERCLA Basics

CERCLA permits the government to clean up a site or to compel PRPs to perform the cleanup. In either case, the government is entitled to recover response costs from PRPs. Cooper Indus., Inc. v. Aviall Servs., Inc., 543 U.S. 157, 161 (2004).

Generally, in CERCLA cost recovery actions, each PRP is jointly and severally liable for all of the government's response costs. Liability may be apportioned among PRPs only in narrow instances where a PRP can establish it caused a distinct harm or only part of a single, divisible harm. See, e.g., United States v. Burlington N. & Santa Fe Ry. Co., 502 F.3d 781, 793-800 (9th Cir. 2007).

The Supreme Court has confirmed that PRPs faced with joint and several liability may recover from other PRPs in two ways. In Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. at 167, the Court held that CERCLA ' 113(f) permits a PRP to seek contribution from other PRPs provided that: 1) the government has commenced a cost recovery suit against the PRP; or 2) the PRP has entered into a judicially or administratively approved settlement with the government. In a contribution action, the court allocates response costs among co-PRPs based on equitable factors such that each PRP is only responsible for its fair share of the costs.

In United States v. Atlantic Research Corp., 127 S. Ct. 2331, 2338 (2007), the Court held that CERCLA ' 107(a) also permits a PRP that performs a voluntary or administratively compelled cleanup to bring a direct action against other PRPs to recover costs.

Based on these provisions and analogous state statutes, PRPs have asserted claims against ASARCO for its allocable share of past costs incurred at the sites and costs that may be incurred in the future for which ASARCO bears partial or full responsibility.

CERCLA Joint and Several Liability in Bankruptcy

Whether a debtor is jointly and severally liable for response costs can have a tremendous impact on a bankruptcy case. For example, if jointly and severally liable, ASARCO estimates its exposure for just five sites at more than $6 billion. If, however, ASARCO is only severally liable, ASARCO estimates its exposure at the same sites to be less than $728 million.

Notwithstanding CERCLA's rule of joint and several liability, ASARCO has maintained that, because of the bankruptcy filing, its liability should be limited to its allocable share based on the equitable factors used to allocate liability among PRPs in contribution actions.

Whether joint and several liability under CERCLA applies in bankruptcy would seem to be controlled by Butner v. United States, 440 U.S. 48 (1979), and its progeny. In Butner, the Supreme Court held that non-bankruptcy law governs the substance of claims in bankruptcy and that 'undefined considerations of equity' provide no basis for departing from that law. The Court has consistently applied this principle to reject special bankruptcy rules for adjudicating claims not founded in the Bankruptcy Code. See Travelers Cas. & Sur. Co. of Am. v. Pacific Gas & Elec. Co., 127 S. Ct. 1199 (2007) (rejecting special bankruptcy rule categorically disallowing certain contractual claims for attorneys' fees); Raleigh v. Illinois Dep't of Rev., 530 U.S. 15 (2000) (rejecting special bankruptcy rule reversing burden of proof on tax claim).

Indeed, the only bankruptcy decision to address this question, In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992), flatly rejected a special bankruptcy rule abrogating joint and several liability under CERCLA. Like ASARCO, the debtors in that case argued that the equitable nature of bankruptcy required that the government's response cost claims be limited to the debtors' equitable share of liability. The court, however, held that, absent a finding of divisibility, the debtors would be jointly and
severally liable.

Although this issue has been raised in ASARCO, it has not been necessary for the bankruptcy court to rule on the issue. A ruling adverse to ASARCO would greatly reduce its leverage in settlement negotiations with the government and significantly alter the landscape of any reorganization plan.

Discharge of Cleanup Obligations in Bankruptcy

ASARCO reports that it has spent millions of dollars during bankruptcy cleaning up contaminated property it owns, and that post-bankruptcy cleanup obligations will cost millions more. ASARCO has asserted that it is not required to clean up property it no longer owns or possesses, and any such obligations are dischargeable in bankruptcy as general unsecured claims.

Because of the expense involved, the debtor's ability to discharge cleanup obligations can have a significant impact on a bankruptcy case. The extent to which a debtor-PRP must clean up property turns on whether the cleanup obligations can be discharged as a bankruptcy claim. The Bankruptcy Code defines a claim, in pertinent part, as a 'right to an equitable remedy for breach
of performance if such breach gives rise to a right to payment.' 11 U.S.C. ' 101(5)(B). The question is whether the debtor's breach of its cleanup obligations gives rise to a right to payment as an alternative to the equitable remedy, typically an injunction, requiring the cleanup.

The leading case on the issue is Ohio v. Kovacs, 469 U.S. 274 (1985). There, Kovacs agreed to a cleanup order on behalf of himself and his company. When the cleanup was not performed, the state obtained appointment of a receiver, who took possession of the site and divested Kovacs of his assets. Kovacs then filed for bankruptcy, and the Supreme Court held that his cleanup obligations under the order were dischargeable.

In reaching its holding, the Court reasoned that the receiver had completely disabled Kovacs from performing the cleanup himself and that the only performance the state sought from Kovacs was the payment of money. In these circumstances, the Court held that the state had converted the cleanup order into a dischargeable obligation to pay money.

The Court, however, emphasized that 'anyone in possession of the site ' must comply with the environmental laws of the State of Ohio. Plainly, that person or firm may not maintain a nuisance, pollute the waters of the State, or refuse to remove the source of such conditions.' 469 U.S. at 285.

Courts have relied on Kovacs both to preclude debtors from discharging obligations to clean up contaminated property they own or possess, and to permit debtors to discharge such obligations at contaminated sites they do not own or possess. Compare In re CMC Heartland Partners, 966 F.2d 1143 (7th Cir. 1992) (holding that debtor who is current owner of property must comply with environmental laws because such obligations 'run[] with the land'), with United States v. Whizco, Inc., 841 F.2d 147 (6th Cir. 1988) (holding debtor's obligations under order to clean up and reclaim abandoned mines are discharged to extent debtor would have to spend money to comply with order).

However, in In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), a decision that continues to generate considerable debate, the Third Circuit construed Kovacs narrowly to preclude the debtor from discharging its obligations under an order requiring the debtor to clean up property it operated before bankruptcy pursuant to a lease. Even though the debtor had moved from the site almost four years before filing bankruptcy, the court held that the debtor had continuing obligations under state law to clean up waste posing an ongoing hazard at the site. According to the Third Circuit, the obligations 'run with the waste.' See also AM Int'l, Inc. v. Datacard Corp., 106 F.3d 1342, 1348 (7th Cir. 1997) (refusing to recognize discharge of debtor's obligations under order obtained by private party to clean up property debtor had sold before bankruptcy and no longer possessed).

ASARCO has relied on Kovacs for the proposition that its cleanup obligations at sites it no longer owns or possesses are dischargeable. Although the government, not surprisingly, has taken a contrary position, it has not actively pursued enforcement of orders requiring ASARCO to clean up such sites.

Abandonment of Contaminated Property in Bankruptcy

An issue lurking in the background in ASARCO is whether ASARCO could avoid its cleanup obligations by abandoning owned property. Bankruptcy Code ' 554 provides that a debtor may, subject to court approval, abandon property of the estate that is burdensome or of inconsequential value and benefit. As discussed below, abandonment probably does little to help a reorganizing Chapter 11 debtor like ASARCO avoid its cleanup obligations.

Limitation on Abandonment: 'Imminent and Identifiable Harm'

The leading case on abandonment of contaminated property is Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1986). The Midlantic court held that ' 554 does not authorize abandonment of property in contravention of state laws reasonably designed to protect the public's health or safety from identified hazards. The court cautioned that this exception is narrow: it does not 'encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.' Id. at 507 n.9.

Applying these principles, courts typically permit abandonment unless the contamination poses an actual danger of imminent and identifiable harm to the public health and safety. See, e.g., In re L.F Jennings Oil Co., 4 F.3d 887, 890-91 (10th Cir. 1993) (permitting abandonment when state failed to introduce sufficient data to establish such a threat and had indicated it was not considering further action at site).

Effect of Abandonment on Cleanup Obligations

The utility of abandonment depends on what happens to the abandoned property. While ' 554 does not specify to whom estate property is abandoned, its legislative history explains that property may be abandoned to any party with a possessory interest in the property. See In re Interpictures Inc., 217 F.3d 74, 76 (2d Cir. 2000). That party is typically the debtor.

In a Chapter 7 case, abandonment of contaminated property to the debtor allows the trustee to avoid cleanup obligations as owner of that property. In a Chapter 11 liquidation, the debtor typically ends up as an assetless shell without resources to clean up abandoned property. Consequently, the cleanup proponent's recourse when property is abandoned to a liquidating debtor is limited to filing a claim for cleanup costs. However, in a Chapter 11 reorganization such as ASARCO, abandonment to the debtor would seem to accomplish little as the reorganized debtor will continue as owner. See CMC, supra.

Disposition of PRP Claims

In ASARCO, approximately 73 PRPs are potentially liable with ASARCO to the government for past and future cleanup costs. Because future cleanup costs may not be established for many years, the government often files contingent, unliquidated claims for such costs. PRPs generally file related claims for the debtor's share of any such costs they may be required to pay the government in the future based on joint and several liability. ASARCO has objected under Bankruptcy Code ' 502(e)(1)(B) to certain PRPs' contingent reimbursement and contribution claims for future costs. That section provides for disallowance of a PRP's contingent reimbursement and contribution claims where the PRP is co-liable with the debtor to the government. ASARCO maintains that, unless such claims are fixed at the time of allowance, ' 502(e)(1)(B) requires that they be disallowed to prevent ASARCO from being held liable to both the government and co-PRPs for the same claim.

Section 502(e)(1)(B) is intended to avoid exposing the estate to multiple claims for the same underlying obligation. In the context of environmental claims, the section prevents such 'double-dipping' by disallowing PRP claims in favor of government claims. In re Hemingway Transp., Inc., 993 F.2d 915, 923 (1st Cir. 1993).

Section 502(e)(1)(B) can work a harsh result, however, if the government never files a claim against the bankruptcy estate as the potential for liability to the government alone can trigger application of the provision to a PRP's claim. In that case, the PRP can be held fully liable to the government for all response costs, while the debtor avoids any liability. To avoid that result, the Bankruptcy Code permits the debtor and the PRP to file claims on the government's behalf. 11 U.S.C. ' 501; Fed. R. Bankr. P. 3004, 3005. If the government never enforces its claim, the distribution can be paid into trust to ensure the PRP does not receive a windfall if the government does not seek to recover the debtor's share from the PRP. See, e.g., Hemingway, 993 F.2d at 934 n.26 (suggesting lower court consider use of trust).

To avoid the potential pitfalls of ' 502(e)(1)(B), PRPs have sought to establish direct claims against the debtor. The Supreme Court recently reinvigorated such efforts with Atlantic Research's affirmation that a PRP performing a voluntary or administratively compelled cleanup may bring a direct cost recovery action against other PRPs under CERCLA ' 107(a). Indeed, it has been argued in ASARCO that, unlike a contribution claim under CERCLA ' 113(f), a direct claim under ' 107(a) is not a claim for reimbursement or contribution founded on co-liability to the government, and therefore ' 502(e)(1)(B) does not apply.

Similar arguments have met with mixed success in the past. Compare In re Eagle-Picher Indus., Inc., 131 F.3d 1185 (6th Cir. 1997) (possibility that government could file claim after claims bar date sufficient to create co-liability under ' 502(e)(1)(B) for purposes of disallowance of PRP's direct claims), with In re Dant & Russell, Inc., 951 F.2d 246 (9th Cir. 1991) (prohibition against contingent, co-liable claims under ' 502(e)(1)(B) did not prevent direct claim under CERCLA
' 107(a) for future cleanup costs where government had not compelled further cleanup). This issue was recently briefed and argued in ASARCO and has been taken under advisement.

Conclusion

The intersection of bankruptcy and environmental law has been referred to as the 'Clash of the Titans.' We hope this overview will be a useful starting point for parties attempting to negotiate this unsettled and complex area of the law. While we await further developments in ASARCO, to date, resolution through settlement has prevailed. Unless the Supreme Court provides clarity, this area of the law will continue to present the parties with the choice of settlement or costly litigation.

Eric R. Wilson is a partner at Kelley Drye & Warren LLP, resident in the New York office. Mark W. Page is special counsel at the firm, resident in the Chicago office. Their practices focus on corporate restructuring, bankruptcy and creditors' rights, including the representation of PRPs and other creditors. This article reflects the opinions of the authors and does not represent the views of Kelley Drye & Warren LLP or its clients. You can contact the authors by e-mailing [email protected] or [email protected].

Pending in bankruptcy court in Corpus Christi, TX, is In re ASARCO, LLC, et al., the largest environmental bankruptcy case ever filed. Founded in 1899, ASARCO had diverse mining, smelting, and refining operations across the country. Unfortunately, ASARCO's 108 years of operation left a legacy of environmental liability spanning roughly 94 sites in 21 states. As a result, the United States, 16 states, and 73 private potentially responsible persons (PRPs) asserted more than $6 billion in environmental claims against ASARCO's bankruptcy estate.

At present, ASARCO is concluding the estimation of such claims for purposes of allowance (not just for plan voting or feasibility) at more than 30 sites. The estimation proceedings involve numerous unsettled issues arising at the intersection of the Bankruptcy Code and environmental law, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The Bankruptcy Code is premised on granting the debtor a discharge of its pre-bankruptcy obligations while CERCLA was enacted to ensure PRPs are held accountable for the cleanup of contaminated property. When a PRP becomes a debtor, courts struggle to reconcile the competing objectives of these comprehensive statutes.

This article provides an overview of four significant areas of contention. It starts with a brief summary of CERCLA to serve as a foundation for the discussion of bankruptcy issues that follows. It then addresses the scope of the debtor's liability for cleanup costs, discharge of the debtor's obligations to clean up contaminated property, abandonment of contaminated property, and treatment of contingent PRP reimbursement and contribution claims.

CERCLA Basics

CERCLA permits the government to clean up a site or to compel PRPs to perform the cleanup. In either case, the government is entitled to recover response costs from PRPs. Cooper Indus., Inc. v. Aviall Servs., Inc. , 543 U.S. 157, 161 (2004).

Generally, in CERCLA cost recovery actions, each PRP is jointly and severally liable for all of the government's response costs. Liability may be apportioned among PRPs only in narrow instances where a PRP can establish it caused a distinct harm or only part of a single, divisible harm. See, e.g., United States v. Burlington N. & Santa Fe Ry. Co. , 502 F.3d 781, 793-800 (9th Cir. 2007).

The Supreme Court has confirmed that PRPs faced with joint and several liability may recover from other PRPs in two ways. In Cooper Industries, Inc. v. Aviall Services, Inc. , 543 U.S. at 167, the Court held that CERCLA ' 113(f) permits a PRP to seek contribution from other PRPs provided that: 1) the government has commenced a cost recovery suit against the PRP; or 2) the PRP has entered into a judicially or administratively approved settlement with the government. In a contribution action, the court allocates response costs among co-PRPs based on equitable factors such that each PRP is only responsible for its fair share of the costs.

In United States v. Atlantic Research Corp. , 127 S. Ct. 2331, 2338 (2007), the Court held that CERCLA ' 107(a) also permits a PRP that performs a voluntary or administratively compelled cleanup to bring a direct action against other PRPs to recover costs.

Based on these provisions and analogous state statutes, PRPs have asserted claims against ASARCO for its allocable share of past costs incurred at the sites and costs that may be incurred in the future for which ASARCO bears partial or full responsibility.

CERCLA Joint and Several Liability in Bankruptcy

Whether a debtor is jointly and severally liable for response costs can have a tremendous impact on a bankruptcy case. For example, if jointly and severally liable, ASARCO estimates its exposure for just five sites at more than $6 billion. If, however, ASARCO is only severally liable, ASARCO estimates its exposure at the same sites to be less than $728 million.

Notwithstanding CERCLA's rule of joint and several liability, ASARCO has maintained that, because of the bankruptcy filing, its liability should be limited to its allocable share based on the equitable factors used to allocate liability among PRPs in contribution actions.

Whether joint and several liability under CERCLA applies in bankruptcy would seem to be controlled by Butner v. United States , 440 U.S. 48 (1979), and its progeny. In Butner, the Supreme Court held that non-bankruptcy law governs the substance of claims in bankruptcy and that 'undefined considerations of equity' provide no basis for departing from that law. The Court has consistently applied this principle to reject special bankruptcy rules for adjudicating claims not founded in the Bankruptcy Code. See Travelers Cas. & Sur. Co. of Am. v. Pacific Gas & Elec. Co. , 127 S. Ct. 1199 (2007) (rejecting special bankruptcy rule categorically disallowing certain contractual claims for attorneys' fees); Raleigh v. Illinois Dep't of Rev. , 530 U.S. 15 (2000) (rejecting special bankruptcy rule reversing burden of proof on tax claim).

Indeed, the only bankruptcy decision to address this question, In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992), flatly rejected a special bankruptcy rule abrogating joint and several liability under CERCLA. Like ASARCO, the debtors in that case argued that the equitable nature of bankruptcy required that the government's response cost claims be limited to the debtors' equitable share of liability. The court, however, held that, absent a finding of divisibility, the debtors would be jointly and
severally liable.

Although this issue has been raised in ASARCO, it has not been necessary for the bankruptcy court to rule on the issue. A ruling adverse to ASARCO would greatly reduce its leverage in settlement negotiations with the government and significantly alter the landscape of any reorganization plan.

Discharge of Cleanup Obligations in Bankruptcy

ASARCO reports that it has spent millions of dollars during bankruptcy cleaning up contaminated property it owns, and that post-bankruptcy cleanup obligations will cost millions more. ASARCO has asserted that it is not required to clean up property it no longer owns or possesses, and any such obligations are dischargeable in bankruptcy as general unsecured claims.

Because of the expense involved, the debtor's ability to discharge cleanup obligations can have a significant impact on a bankruptcy case. The extent to which a debtor-PRP must clean up property turns on whether the cleanup obligations can be discharged as a bankruptcy claim. The Bankruptcy Code defines a claim, in pertinent part, as a 'right to an equitable remedy for breach
of performance if such breach gives rise to a right to payment.' 11 U.S.C. ' 101(5)(B). The question is whether the debtor's breach of its cleanup obligations gives rise to a right to payment as an alternative to the equitable remedy, typically an injunction, requiring the cleanup.

The leading case on the issue is Ohio v. Kovacs , 469 U.S. 274 (1985). There, Kovacs agreed to a cleanup order on behalf of himself and his company. When the cleanup was not performed, the state obtained appointment of a receiver, who took possession of the site and divested Kovacs of his assets. Kovacs then filed for bankruptcy, and the Supreme Court held that his cleanup obligations under the order were dischargeable.

In reaching its holding, the Court reasoned that the receiver had completely disabled Kovacs from performing the cleanup himself and that the only performance the state sought from Kovacs was the payment of money. In these circumstances, the Court held that the state had converted the cleanup order into a dischargeable obligation to pay money.

The Court, however, emphasized that 'anyone in possession of the site ' must comply with the environmental laws of the State of Ohio. Plainly, that person or firm may not maintain a nuisance, pollute the waters of the State, or refuse to remove the source of such conditions.' 469 U.S. at 285.

Courts have relied on Kovacs both to preclude debtors from discharging obligations to clean up contaminated property they own or possess, and to permit debtors to discharge such obligations at contaminated sites they do not own or possess. Compare In re CMC Heartland Partners , 966 F.2d 1143 (7th Cir. 1992) (holding that debtor who is current owner of property must comply with environmental laws because such obligations 'run[] with the land'), with United States v. Whizco, Inc. , 841 F.2d 147 (6th Cir. 1988) (holding debtor's obligations under order to clean up and reclaim abandoned mines are discharged to extent debtor would have to spend money to comply with order).

However, in In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), a decision that continues to generate considerable debate, the Third Circuit construed Kovacs narrowly to preclude the debtor from discharging its obligations under an order requiring the debtor to clean up property it operated before bankruptcy pursuant to a lease. Even though the debtor had moved from the site almost four years before filing bankruptcy, the court held that the debtor had continuing obligations under state law to clean up waste posing an ongoing hazard at the site. According to the Third Circuit, the obligations 'run with the waste.' See also AM Int'l, Inc. v. Datacard Corp. , 106 F.3d 1342, 1348 (7th Cir. 1997) (refusing to recognize discharge of debtor's obligations under order obtained by private party to clean up property debtor had sold before bankruptcy and no longer possessed).

ASARCO has relied on Kovacs for the proposition that its cleanup obligations at sites it no longer owns or possesses are dischargeable. Although the government, not surprisingly, has taken a contrary position, it has not actively pursued enforcement of orders requiring ASARCO to clean up such sites.

Abandonment of Contaminated Property in Bankruptcy

An issue lurking in the background in ASARCO is whether ASARCO could avoid its cleanup obligations by abandoning owned property. Bankruptcy Code ' 554 provides that a debtor may, subject to court approval, abandon property of the estate that is burdensome or of inconsequential value and benefit. As discussed below, abandonment probably does little to help a reorganizing Chapter 11 debtor like ASARCO avoid its cleanup obligations.

Limitation on Abandonment: 'Imminent and Identifiable Harm'

The leading case on abandonment of contaminated property is Midlantic National Bank v. New Jersey Department of Environmental Protection , 474 U.S. 494 (1986). The Midlantic court held that ' 554 does not authorize abandonment of property in contravention of state laws reasonably designed to protect the public's health or safety from identified hazards. The court cautioned that this exception is narrow: it does not 'encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.' Id. at 507 n.9.

Applying these principles, courts typically permit abandonment unless the contamination poses an actual danger of imminent and identifiable harm to the public health and safety. See, e.g., In re L.F Jennings Oil Co., 4 F.3d 887, 890-91 (10th Cir. 1993) (permitting abandonment when state failed to introduce sufficient data to establish such a threat and had indicated it was not considering further action at site).

Effect of Abandonment on Cleanup Obligations

The utility of abandonment depends on what happens to the abandoned property. While ' 554 does not specify to whom estate property is abandoned, its legislative history explains that property may be abandoned to any party with a possessory interest in the property. See In re Interpictures Inc., 217 F.3d 74, 76 (2d Cir. 2000). That party is typically the debtor.

In a Chapter 7 case, abandonment of contaminated property to the debtor allows the trustee to avoid cleanup obligations as owner of that property. In a Chapter 11 liquidation, the debtor typically ends up as an assetless shell without resources to clean up abandoned property. Consequently, the cleanup proponent's recourse when property is abandoned to a liquidating debtor is limited to filing a claim for cleanup costs. However, in a Chapter 11 reorganization such as ASARCO, abandonment to the debtor would seem to accomplish little as the reorganized debtor will continue as owner. See CMC, supra.

Disposition of PRP Claims

In ASARCO, approximately 73 PRPs are potentially liable with ASARCO to the government for past and future cleanup costs. Because future cleanup costs may not be established for many years, the government often files contingent, unliquidated claims for such costs. PRPs generally file related claims for the debtor's share of any such costs they may be required to pay the government in the future based on joint and several liability. ASARCO has objected under Bankruptcy Code ' 502(e)(1)(B) to certain PRPs' contingent reimbursement and contribution claims for future costs. That section provides for disallowance of a PRP's contingent reimbursement and contribution claims where the PRP is co-liable with the debtor to the government. ASARCO maintains that, unless such claims are fixed at the time of allowance, ' 502(e)(1)(B) requires that they be disallowed to prevent ASARCO from being held liable to both the government and co-PRPs for the same claim.

Section 502(e)(1)(B) is intended to avoid exposing the estate to multiple claims for the same underlying obligation. In the context of environmental claims, the section prevents such 'double-dipping' by disallowing PRP claims in favor of government claims. In re Hemingway Transp., Inc., 993 F.2d 915, 923 (1st Cir. 1993).

Section 502(e)(1)(B) can work a harsh result, however, if the government never files a claim against the bankruptcy estate as the potential for liability to the government alone can trigger application of the provision to a PRP's claim. In that case, the PRP can be held fully liable to the government for all response costs, while the debtor avoids any liability. To avoid that result, the Bankruptcy Code permits the debtor and the PRP to file claims on the government's behalf. 11 U.S.C. ' 501; Fed. R. Bankr. P. 3004, 3005. If the government never enforces its claim, the distribution can be paid into trust to ensure the PRP does not receive a windfall if the government does not seek to recover the debtor's share from the PRP. See, e.g., Hemingway, 993 F.2d at 934 n.26 (suggesting lower court consider use of trust).

To avoid the potential pitfalls of ' 502(e)(1)(B), PRPs have sought to establish direct claims against the debtor. The Supreme Court recently reinvigorated such efforts with Atlantic Research's affirmation that a PRP performing a voluntary or administratively compelled cleanup may bring a direct cost recovery action against other PRPs under CERCLA ' 107(a). Indeed, it has been argued in ASARCO that, unlike a contribution claim under CERCLA ' 113(f), a direct claim under ' 107(a) is not a claim for reimbursement or contribution founded on co-liability to the government, and therefore ' 502(e)(1)(B) does not apply.

Similar arguments have met with mixed success in the past. Compare In re Eagle-Picher Indus., Inc., 131 F.3d 1185 (6th Cir. 1997) (possibility that government could file claim after claims bar date sufficient to create co-liability under ' 502(e)(1)(B) for purposes of disallowance of PRP's direct claims), with In re Dant & Russell, Inc., 951 F.2d 246 (9th Cir. 1991) (prohibition against contingent, co-liable claims under ' 502(e)(1)(B) did not prevent direct claim under CERCLA
' 107(a) for future cleanup costs where government had not compelled further cleanup). This issue was recently briefed and argued in ASARCO and has been taken under advisement.

Conclusion

The intersection of bankruptcy and environmental law has been referred to as the 'Clash of the Titans.' We hope this overview will be a useful starting point for parties attempting to negotiate this unsettled and complex area of the law. While we await further developments in ASARCO, to date, resolution through settlement has prevailed. Unless the Supreme Court provides clarity, this area of the law will continue to present the parties with the choice of settlement or costly litigation.

Eric R. Wilson is a partner at Kelley Drye & Warren LLP, resident in the New York office. Mark W. Page is special counsel at the firm, resident in the Chicago office. Their practices focus on corporate restructuring, bankruptcy and creditors' rights, including the representation of PRPs and other creditors. This article reflects the opinions of the authors and does not represent the views of Kelley Drye & Warren LLP or its clients. You can contact the authors by e-mailing [email protected] or [email protected].