Real estate in bankruptcy generally concerns debtors, creditors, the trustee, and maybe some tenants. But when that real estate is environmentally contaminated for some reason, then the number of participants swells to include nearby parties who might be affected and environmental regulators. Bankruptcies involving environmental laws are almost always long, complex, and business related. So what are the basics?
(1) Who is the “potentially responsible party” (PRP)? Whenever a property is environmentally contaminated, for legal purposes often the law considers the landowner or its tenant as responsible for handling the damage. Adjacent landowners or other injured parties won’t be PRPs, but they may be creditors to PRPs if they are the ones filing bankruptcy.
(2) When is an environmental claim a bankruptcy claim? In bankruptcy, claims are rights to payment from a debtor. When the responsibility for cleaning up environmental damage becomes a bankruptcy claim isn’t as clear cut as when a debt is created by a legal contract.
Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also known as the “superfund” law) regulators can either order PRPs to clean up their properties or do so themselves and charge the PRPs. Because this option can be quantified as a right to payment from the debtor, PRPs can discharge it in bankruptcy.
The Resource, Conservation, and Recovery Act is similar to the CERCLA, but it doesn’t offer PRPs the option of letting regulators clean up the property. As a result, it creates no claims in bankruptcy. It’s important for PRP-debtors and their creditors to recognize which law applies in the context.
(3) What does a PRP-debtor need to do? Independent of other bankruptcy duties, PRP-debtors maintaining their use of the property (usually their businesses) must comply with regulators’ orders to clean up the damaged properties. The automatic stay does not apply to regulators’ authority to compel environmental remediation. The Bankruptcy Code considers any fines or penalties regulators levy against PRPs as administrative expenses under section 503(b)(1)(C). These are priority claims.
(4) What do environmental creditors to PRPs need to do? For one, they need to know or be on notice of the contamination and the PRP’s liability for it. The law does not look favorably on debtors who cause injuries and discharge them before anyone else realizes the injuries occurred in the first place. Non-environmental creditors, e.g. the PRP’s lenders, don’t need to worry so much.
(5) What does the trustee do? Trustees prefer properties that can be quickly sold to pay creditors and do not like cleaning up environmental contaminants. Accommodating regulators also complicates their work. They can try to resell contaminated properties to other parties hoping they will take on the costs and efforts. Alternatively, they can abandon such properties back to debtors.
Environmental claims, or worse, environmental damage that might not have amounted to a claim yet, are among the most difficult issues to deal with in bankruptcy or against a bankrupt creditor. It’s necessary to consult with an experienced New York bankruptcy lawyer to understand your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York Bankruptcy Bruce Weiner for a free initial consultation.
