Last month, District Court Judge Shira A. Scheindlin of the Southern District of New York affirmed a bankruptcy court ruling which held that the environmental cleanup obligations of debtor Mark IV Industries, Inc. were not discharged in bankruptcy.2 Given the current legal landscape, Mark IV may make the likelihood of discharging environmental claims even more difficult, potentially undermining chapter 11 as an optimal alternative for companies saddled with environmental liabilities.

Businesses considering filing Chapter 11 for bankruptcy protection may not necessarily be able to avoid certain environmental cleanup obligations. The underlying policy goals of bankruptcy and environmental laws are in direct conflict in that bankruptcy law seeks to promote financial rehabilitation by discharging a debtor's past obligations in order to promote financial rehabilitation while environmental law seeks to ensure that the government can order responsible parties to clean up contamination, including historical pollution caused by business predecessors.

When a company that has been designated a responsible party for environmental cleanup costs files for bankruptcy protection, the ramifications of the filing are not limited to a determination of whether the remediation costs are dischargeable claims. Another important issue is the circumstances under which contribution claims asserted by parties coliable with the debtor will be allowed or disallowed in the bankruptcy case. This question was the subject of rulings handed down early in 2011 by the New York bankruptcy court presiding over the chapter 11 cases of Lyondell Chemical Co.

On April 20, 2010, an explosion on the Deepwater Horizon oil drilling rig located off the coast of Louisiana killed eleven crewmen and set off what is now considered the largest offshore oil spill in U.S. history. As a result, BP p.l.c. (“BP”), the parent company of the British Petroleum multinational corporation, faces mounting liabilities related to the damages caused by the disaster and hundreds of lawsuits that have been filed in numerous U.S. state and federal courts.

Summary

In a 5 page decision signed May 4, 2011, Judge Walsh of the Delaware Bankruptcy Court held that a proceeding initiated by a Debtor, seeking contribution relating to environmental claims is non-core. Judge Walsh’s opinion is available here (the “Opinion”).

Background

1117387 Ontario Inc., by court order in October 2003, was placed under receivership for defaulting on payment of a mortgage. In October 2008, the Court was asked to approve the receiver’s third report and the proposed sale of the mortgaged lands. A complicating factor was that the mortgaged lands were subject to environmental contamination as a result of a neighbouring oil and gas facility.