'Fresh Start' Leads To Bankruptcy Discharge of Environmental Contamination Claims

At the time West Salem bought the property, its prior tenants had been using the property for commercial and recreational activities. In November 2011, the DEQ informed West Salem that those uses were acceptable as long as there was no contact with the contaminated soil. In 2017, the DEQ informed West Salem that the deed restriction on the property required further investigation and remediation efforts, and the building on the property would be tested for lead dust and residue. After learning that dust samples from inside the building contained high levels of lead, the DEQ, Oregon Health Authority and Oregon OSHA required closure of the building until cleaning and further assessment was completed. Ultimately, West Salem incurred approximately $1.2 million of expenses related to the investigation and remediation of lead, plus another $202,000 in compensation to tenants for damages.

West Salem then filed a complaint against the reorganized Exide debtor seeking a declaration that the confirmed plans from Exide's two prior bankruptcy cases did not discharge West Salem's claims against Exide based on the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and Oregon's state law equivalent. In response, Exide filed a motion to dismiss.

West Salem argued its claims against Exide arose after the court confirmed Exide's Chapter 11 plan in 2015. West Salem also argued dismissal of its claims would be improper because it did not receive appropriate notice of the bankruptcy case. Exide argued the complaint should be dismissed because West Salem's claims arose before Exide filed the 2013 bankruptcy and, consequently, were subject to the discharge, release and injunction provisions of Exide's 2015 confirmed plan, and West Salem was an unknown creditor who received appropriate constructive publication notice of the bankruptcy case.

After reviewing the appropriate standard for a motion to dismiss, the court began by quoting decisions by the U.S. Court of Appeals for the Third Circuit regarding future claims in bankruptcy. The court observed that in the Third Circuit, “a claim arises when an individual is exposed prepetition to the debtor's product or conduct giving rise to an injury that underlies a right to payment,” see, Jeld-Wen v. Van Brunt (In re Grossman's), 607 F.3d 114, 125 (3d. Cir. 2010). The court reasoned that individuals “must recognize that by being exposed to a debtor's product or conduct, they might hold claims even if no damage is then evident.” West Salem argued it was not exposed to Exide's product or conduct prior to Exide's bankruptcy. However, the court stated West Salem's claims were based on costs incurred cleaning up contamination resulting from the debtor's prepetition products and conduct. Also, West Salem knew when it purchased the property that it was subject to the easement of equitable servitude, which put West Salem on notice of the property's exposure to lead and environmental contamination that could give rise to an injury. Therefore, even though West Salem was not aware of an injury, under the Grossman's test, its claims arose prepetition.

West Salem argued that even though it knew of prior contamination on the property, at the time it purchased the property in 2011, the DEQ had clarified that commercial and recreational uses were permitted as long as there was no contact with contaminated soil. Only later, in 2017, did the DEQ further investigate and cause West Salem to incur significant remediation costs and other damages. West Salem argued that it could not have “fairly contemplated” that it would incur those additional costs prior to Exide's 2013 bankruptcy. The court found that argument unpersuasive. The opinion quotes paragraphs from the equitable servitude provisions in the deed that discuss the contamination of the property. In light of those provisions, the court concluded that West Salem had information when it purchased the property that enabled it to fairly contemplate incurring future costs. As such, whether the court applied the Grossman's test or the “fair contemplation” test, the outcome was the same: the claims arose prior to Exide's bankruptcy.

The court also concluded that the debtor had provided West Salem with appropriate constructive notice of the 2013 bankruptcy. The court noted that inadequate notice precludes the discharge of a claim in bankruptcy. In the bankruptcy context, whether notice is reasonable depends on whether the creditor is known or unknown. A known creditor is entitled to actual notice of the bankruptcy. An unknown creditor is not. Instead, a debtor satisfies its notice obligation to unknown creditors by constructive notice of the claims bar date by publication.

A creditor is known if its identity is reasonably ascertainable by the debtor. A creditor's identity is reasonably ascertainable if it can be identified through reasonably diligent efforts. Impractical and extended searches are not required. Instead, the requisite search focuses on the debtor's own books and records, and further searches generally are not required. In this case, Exide sent the notice of its bankruptcy to the property's owner as reflected in its books and records, not to West Salem. In response, West Salem argued that Exide should have sent the notice to the property addressed to “current occupant,” or done a title search. The court rejected those arguments. As a result, the debtor's publication notices provided West Salem with sufficient constructive notice of the bankruptcy.

Conclusion

After many decades and myriad decisions across the federal circuits, the issue of discharge and disposition of environmental claims in bankruptcy cases remains a complex and fact intensive matter. One can conclude the principle of promoting the fresh start for a debtor by implementing the discharge provisions of the Bankruptcy Code carries great weight in bankruptcy jurisprudence.

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Andrew C. Kassner is the chairman and chief executive officer of Drinker Biddle & Reath. He chaired the corporate restructuring group for almost 20 years. He can be reached at [email protected] or 215-988-2554. Joseph N. Argentina Jr. is an associate in the firm's corporate restructuring practice group in the Philadelphia and Wilmington, DE, offices. He can be reached at [email protected] or 215-988-2541. This article also appeared in The Legal Intelligencer, the Philadelphia-based ALM sibling of The Bankruptcy Strategist.