Restructuring

Co-authored by Matthew Morton
In a pair of bench decisions in the chapter 11 cases of Lyondell Chemical and Chemtura Corporation, Bankruptcy Judge Robert Gerber applied section 502(e)(1)(B) of the Bankruptcy Code to disallow environmental contribution claims asserted against the debtors by co-liable parties.  The decisions clarify a murky area at the intersection of the environmental and bankruptcy laws.
Section 502(e)(1)(B) requires disallowance of a claim held by a creditor if (a) the claim is contingent at the time of its allowance or disallowance, (b) the claim is for reimbursement or contribution, and (c) the debtor and the creditor are co-liable on the underlying obligation giving rise to the claim.  To disallow a claim under this section, a debtor must prove all three prongs.  The policy behind the statute is to protect the bankruptcy estate against the risk of double payment on claims; without it, a debtor could be liable to both the primary creditor (an environmental agency) and co-liable parties seeking contribution.  Debtors facing environmental cleanup liabilities often invoke section 502(e)(1)(B) to seek disallowance of claims of other potentially responsible parties (“PRPs”) for environmental remediation at a site where the other PRPs have not expended any funds in connection with the site cleanup.
The Bankruptcy Code does not define the term “contingent.”  Thus, courts construe the definition of “contingent” for purposes of section 502(e)(1)(B) based on case law.  On January 4, 2011 and January 13, 2011, respectively, the bankruptcy court for the Southern District of New York issued bench rulings in the Lyondell and Chemtura cases holding that environmental contribution claims remain contingent until the co-liable creditor actually pays for the cleanup or otherwise expends funds on account of the claim.
Prior to the commencement of the Lyondell and Chemtura chapter 11 cases, certain debtors and private parties were named as PRPs for past and estimated future response costs for environmental cleanup under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601 et seq. (“CERCLA”).  The private parties filed proofs of claim asserting contribution claims for past and future estimated costs.  In response, the debtors moved to disallow solely the claims for future cleanup costs under section 502(e)(1)(B).  One of the Lyondell PRPs objected and argued that a claim is only contingent when it has not accrued under applicable law, regardless of whether an actual payment is made.  Since the PRP’s contribution claim against the debtors had arguably accrued under CERCLA, the PRP asserted that no portion of its claim remained contingent.  Certain other PRPs cited to the Delaware bankruptcy court decision in In re RNI Wind Down Corp., 369 B.R. 174 (Bankr. D. Del. 2007) for the proposition that their claims for future response costs were not contingent, but instead simply unliquidated.  Both debtors, however, claimed that the Second Circuit Court of Appeals’ decision in In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991), was controlling authority in the Second Circuit for the proposition that contribution claims under CERCLA are contingent until costs for remediation work are actually expended or paid.
As an initial matter, the bankruptcy court did not read the Chateaugay decision to expressly hold that claims are contingent until a creditor actually spends money.  Even though he did not find Chateaugay controlling on this point, Judge Gerber ultimately agreed with decisions by other bankruptcy courts in the Southern District of New York and Delaware standing for the same proposition.  Citing In re Drexel Burnham Lambert Group, Inc., 148 B.R. 983 (Bankr. S.D.N.Y. 1992 ) and In re APCO Liquidating Trust, 370 B.R. 625 (Bankr. D. Del. 2007), Judge Gerber found that the key inquiry was not whether liability had accrued, but whether the co-liable party had actually paid money for investigation and cleanup.  Moreover, since the PRPs had not expended any amounts on future cleanup costs, the bankruptcy court rejected nearly all of the PRP objections and held that such contribution claims relating to the future costs remained both contingent and unliquidated.  The bankruptcy court cited to its reasoning in the September 2010 Chemtura decision, 436 B.R. 286 (Bankr. S.D.N.Y. 2010), about which we previously blogged, to distinguish its holding from the RNI Wind Down decision, which the bankruptcy court held had a very limited application.  The bankruptcy court reasoned that its decisions advanced both bankruptcy policy and CERCLA’s policy goal of encouraging expeditious cleanup because claimants are encouraged to remediate promptly by the threat of disallowance of claims that have not been fixed.
Both the Lyondell and Chemtura decisions clarify that an environmental cleanup contribution will remain continent, and subject to disallowance under section 502(e)(1)(B), to the extent the creditor has not made an actual payment or expended funds on account of the claim prior to the hearing on allowance or disallowance.  Of course, even if a claim is found to be contingent, it will only be disallowed if the other two prongs of section 502(e)(1)(B) are satisfied – that is, it must be a claim for “reimbursement or contribution” and the debtor and creditor must be co-liable on the primary claim.  Thus, even in circumstances where the creditor has not expended funds on a claim, and therefore has a contingent claim, the creditor still may argue it is not co-liable with the debtor.