The Pain that Comes along with Walking a Mile in Your Own Shoes … Circuits Refuse to Allow Reorganized Debtors to "Step in the Shoes" of Debtors in Possession as Subrogees

Contributed by Jessica Diab

Walk a mile in my shoes
Walk a mile in my shoes
Yeah, before you abuse, criticize and accuse
Walk a mile in my shoes

(Elvis Presley, “Walk a Mile in My Shoes”)

Walk a mile in these Louboutins
But they don’t wear these *%!# where I’m from
I’m not hating, I’m just telling you
I’m tryna let you know what the %#!* that I’ve been through

(Iggy Azalea, “Work”)

Whether blue suede or Louboutins, people have been asked to “walk a mile in my shoes” as a means of seeking empathy from others.  Unfortunately, as recently noted by the Second Circuit Court of Appeals and Tenth Circuit Court of Appeals, debtors are stuck in their own shoes and must live with the consequences of their conduct.  In two decisions arising from the Asarco chapter 11 case, the Second and Tenth Circuit Courts simultaneously considered whether Asarco, a reorganized debtor, could seek contribution from other potentially responsible parties under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) more than three years after the court approved settlements of certain environmental cleanup claims brought against Asarco by various governmental entities and agencies.  These decisions also considered whether, postconfirmation, a reorganized debtor may assert claims on the grounds that it is subrogated to the rights of the debtor in possession.  In both cases, the circuit courts held that the claims for contribution were time-barred and that, based on the terms of the debtor’s plan, the reorganized entity was not a separate legal entity from the debtor in possession and therefore, could not “step in the shoes” of the debtor in possession as a subrogee.
In August 2005, Asarco, a mining, smelting, and refining company, filed for chapter 11 protection in the United States Bankruptcy Court for the Southern District of Texas.  Asarco’s filing was precipitated by massive asbestos and environmental liabilities.  Among others, various United States agencies (including the EPA), the State of Washington, and the Port of Everett, filed claims for the cost of resolving the environmental damage caused by Asarco’s release of hazardous substances at the various sites owned or operated by Asarco.  These proofs of claim asserted liability under, among other things, CERCLA, which imposes liability for cleanup costs on a variety of potentially responsible persons (“PRPs“), including the owners or operators of hazardous waste sites.  Under CERCLA, a PRP that has been sued and then settles through either an administrative or judicially approved settlement may seek contribution from other PRPs.
As part of its chapter 11 bankruptcy, Asarco reached settlements with the governmental entities that had asserted environmental cleanup claims against it.  The bankruptcy court approved the settlement agreements, which granted each claimant a prepetition, general unsecured claim against Asarco’s estate.  The plan provided that all environmental unsecured claims, including the settled claims, would be paid in full on the effective date.
After emerging from chapter 11, the reorganized Asarco pursued its right under CERCLA to require other PRPs to reimburse it for those parties’ fair share of the environmental damages.  The reorganized Asarco filed complaints in New York and Colorado seeking, among other things, contribution, directly and on a subrogation theory, contending that it was entitled to assert a contribution claim as a subrogee of itself, as debtor in possession.  Each complaint was filed more than three years after the settlement agreement was approved by the bankruptcy court, but within three years of the effective date.  In response, the PRPs argued that the action should be dismissed because the contribution claims were time-barred, and the reorganized entity could not establish that it was a subrogee of itself as debtor in possession.
Issue 1:  The Contribution Claims
Pursuant to CERCLA, the statute of limitations for a direct claim of contribution is three years after the date of entry of a judicially approved settlement.  The issue on appeal before both circuits was whether “entry of a judicially approved settlement” referred to the date upon which the bankruptcy court approved the settlement agreements, which, in each case, was outside the three-year period, or some later date such as the date the upon which the claimants received payments under the plan or the bankruptcy court entered the confirmation order.
The reorganized Asarco argued that the bankruptcy court’s order approving the settlement did not constitute a final judicially approved settlement because the approval was preliminary and subject to a confirmed and effective plan.  According to the reorganized Asarco, the most logical triggering event for the statute of limitations was the chapter 11 plan’s effective date because it was only upon the judicial confirmation of the plan and the effective date that the contribution amounts were finally determined.  Both circuit courts rejected these arguments.  The plain language of CERCLA states that the statute of limitations begins on the “date of . . . entry of a judicially approved settlement” and does not make any reference to the date of payment.  According to the circuit courts, each settlement resolved Asarco’s liability to that claimant and was effective once approved by the bankruptcy court.  The Second Circuit also noted that, from a policy perspective, the statute of limitations should accrue from the date on which the bankruptcy court approves a settlement because a reorganization plan could take several years, and tying the statute of limitations to that date would do nothing to ensure the principal purpose of the limitations period in this setting, namely, “ensuring that the responsible parties get to the bargaining-and-clean-up table sooner rather than later.”
Issue 2:  The Subrogation Claims
The reorganized Asarco also asserted that it was entitled to contribution as a subrogee of the debtor in possession.  Subrogation refers to the substitution of one party for another whose debt the party pays, entitling the paying party to the rights and remedies that otherwise would belong to the debtor.  As noted by the Second Circuit, subrogation exists where one person is allowed to “stand in the shoes of another” and assert that person’s rights against a third party.  A person’s payment of his own debt, however, does not entitle the person to subrogation.  Under CERCLA, the statute of limitations for claims based on rights subrogated by reason of payment of a claim is three years from the date of payment.  On these facts, Asarco’s claim for contribution as a subrogee, if successfully established, would not have been time-barred.
To establish that it was a subrogee of the Asarco debtor in possession’s right to contribution, the reorganized Asarco, which paid the settled amounts pursuant to the plan, needed to establish that it was a separate legal entity from the debtor in possession.  In an effort to do so, Asarco argued that, from a pure bankruptcy law perspective, once a plan becomes effective, the “debtor” ceases to exist, and the reorganized entity is a new entity not subject to the jurisdiction of the bankruptcy court.  In addition, Asarco argued that the plan itself provided that the reorganized entity was a separate legal entity by stating that the reorganized Asarco would not be “responsible for any successor or transferee liability of any kind or character.”
The circuit courts, however, found that other provisions of the plan suggested the contrary.  In particular, the circuit courts pointed to provisions in the plan providing that the reorganized Asarco would be vested with (1) all the estate property and assets of the debtor Asarco and (2) any and all claims and causes of actions that were owned by the debtor Asarco or its estate as of the effective date, including claims against other PRPs for environmental contribution.   Both circuit courts held that these plan provisions confirmed that the debtor in possession was not a separate legal from the Asarco that emerged from bankruptcy.  Accordingly, the reorganized Asarco was “still wearing its own shoes; it agreed to pay and paid its own debts” and was not entitled to a claim for contribution based on a theory of subrogation.
These two cases focus primarily on a debtor’s right to seek contribution under CERCLA.  Unsurprisingly, many debtors who seek contribution will do so under the common law theory of contribution or a statutory scheme other than the CERCLA.  Nonetheless, this case serves as a friendly reminder to debtors, especially those who file for bankruptcy as a result of ensuing litigation, to consider whether they have potential claims for contribution, under CERCLA or otherwise, and when the statute of limitations begins to run on such claims.  As these two decisions point out, failure to do so might require the debtor to embark on a long, lonely, and expensive walk in its own [insert uncomfortable footwear brand here]!