1. Using the Bankruptcy Code and Distressed Asset Sales to Facilitate Brownfield Redevelopment Joel M. Gross Arnold & Porter LLP Brownfield Conference 2009 November 17, 2009

2. 2 Six questions 1.What is the Bankruptcy Code and why should I care? 2.Does the Bankruptcy Code eliminate cleanup obligations for a property that a reorganizing company owns? 3.Does the Bankruptcy Code eliminate cleanup obligations for a property that a reorganizing does not own? 4.Can a company in bankruptcy abandon contaminated property? 5.Does a purchaser of contaminated property in bankruptcy avoid cleanup liability? 6.How can a trust mechanism be used to address contaminated property in bankruptcy?

3. 3 1. What is the Bankruptcy Code  Set forth in 11 U.S.C.  Replaced the Bankruptcy Act of 1898  Provides comprehensive provisions for the administration of bankruptcy cases  Various chapter options for determining the procedures to apply  Most germane are Chapters 7 and Chapter 11, and especially Chapter 11  It does not address CERCLA or other environmental claims  The debtor is the “debtor”

4. 4 Main Types of Bankruptcy 1.Individual Chapter 7 - a liquidation of the debtor's assets and distribution among creditors based on priority scheme of the Bankruptcy Code. A trustee will be appointed to take charge of and liquidate the debtor's property. 2.Business liquidation - generally done under Chapter 7, but sometimes done under Chapter 11. If it is a chapter 7, there will be a trustee. If done under chapter 11, the debtor will likely remain in possession of its property. 3.Business reorganization under Chapter 11 - a reorganization to allow the business to continue operating. Requires proposal and confirmation of a plan of reorganization. Generally, there will be a debtor-in- possession and no trustee.

5. 5 1. Why should I care?  Enormous amounts of activity involving contaminated sites and bankruptcy Asarco, W.R. Grace, Lyondell, General Motors, etc. There are different rules that apply, which creates opportunities and also pitfalls Pitfalls include the injunctions created by the automatic stay and discharge provisions, and deadlines for filing claims Opportunities include potential for creative settlements resulting from increased government focus.

6. 2. Does the Bankruptcy Code eliminate cleanup obligations for a property that a reorganizing company owns?  Short answer:  Probably not if it still owns the property when it emerges from bankruptcy  New liability for continued ownership  Therefore better to get rid of the property pre-emergence  But query whether under Supreme Court decision in Burlington Northern, reorganized company can argue for apportionment 6

7. 7 Discharge 1.Individual gets a discharge under Section 727  Subject to exceptions (i) where debtor gets no discharge or (ii) where certain claims are not dischargeable (e.g. penalties) 2.Liquidating business entities get no discharge 3.Reorganizing entity gets a discharge under Section 1141(d)(1):  “Except as otherwise provided in this subsection, in the plan or in the order confirming the plan, the confirmation of a plan—(A) discharges the debtor from any debt that arose before the date of such confirmation…”  Not subject to exceptions

8. 8 » The “Claim” concept 1."Claim" is a key, double edged concept in bankruptcy. 2.“ ‘Debt’ means liability on a claim” (section 101(12) 3.It can be a good thing to have a claim.  A creditor with a "claim" can share in the distribution of assets under a plan of reorganization 4.It can be a bad thing to have a claim.  A creditor with a claim can have its claim “discharged.” It will then be barred, and enjoined, from recovering on the claim after the company emerges from bankruptcy.

9. 9 Very Broad Definition of “CLAIM” Bankruptcy Code 11 U.S.C. § 101(5) (A)right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or…... (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

10. 10 Ohio v. Kovacs, 469 U.S. 274 (1985) 1.Owner of large drum site was ordered to clean it up. When he didn't, a receiver was appointed. Owner then filed for bankruptcy. After the bankruptcy, the State of Ohio tried to enforce the clean up order 2.The Supreme Court held that an injunction to clean up a hazardous waste site gave rise to a right to payment against the former site owner, where a receiver had been appointed pre-petition to take control of the site, thereby dispossessing the owner, and where the State of Ohio was found to be seeking money to clean up the site. Accordingly, Ohio had a "claim" that was discharged. 3.Court states that it does not question "that anyone in possession of the [hazardous waste] site...[including] the bankruptcy trustee must comply with the environmental laws of the State of Ohio. Plainly that person or firm may not maintain a nuisance, pollute the waters of the State or refuse to remove the source of such conditions." 4.Bottom line - It was good to be dispossessed

11. 11 28 U.S.C. 959(b) 1.“Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.” 2.Regulatory compliance is always required

12. 12 OWNED SITES … 1.Appears to be consensus that bankruptcy does not alter the landscape materially 2.Debtor can be ordered to do cleanups, and has to comply with the law (28 U.S.C. § 959(b)) 3.If EPA or States does a cleanup during bankruptcy, it will be have an administrative expense claim entitled to first priority 4.If Debtor owns the property when it emerges from bankruptcy, it will remain liable  There could be arguments to limit that liability to that related to the post-bankruptcy ownership, but they haven't been successful, largely because of joint and several liability, but Burlington Northern may change that

13. 3. Does the Bankruptcy Code eliminate cleanup obligations for a property that a reorganizing does not own ?  Debtor can still be liable for property it does not own as a former owner/operator at time of disposal, a generator or a transporter  Bankruptcy is likely to have a more material effect on the cleanup obligation  Monetary obligations will likely be viewed as claims and discharged.  But there is an open issue as to the extent as to which the government can issue cleanup orders. 13

14. 14 Can a liable non-owner be ordered to perform clean-up? 1.Issue can arise both during bankruptcy (automatic stay issues) and after bankruptcy (discharge/"claim" issue) 2.Central open issue in this area 3.Less important in cases where claims are worth more 4.Argument for NO  Cleanup Order is seeking to have debtor spend money  Kovacs and Midlantic support the result  Allowing enforcement effectively prioritizes cleanup claims over other claims, which should not be done without explicit statutory authorization

15. 15 Argument for “YES” 1.Government is seeking cleanup, not money 2.Government sometimes cannot spend the money it gets, if all it gets is money and not cleanup 3.In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), cert. denied, 114 S. Ct. 1576 (1994)  Debtor must comply with State of New Jersey's ECRA cleanup order even though debtor no longer owned or operated contaminated real property  Cleanup obligations run with the hazardous waste  Delaware is in the Third Circuit 4.Apex Oil decision—Seventh Circuit

16. 4. Can a company in bankruptcy abandon contaminated property?  Short answer  Bankruptcy Code does allow for abandonment of burdensome property  But the Supreme Court has said the right to abandon is somewhat limited by environmental laws  And in Chapter 11 cases it is not clear who the abandonment would be to 16

17. 17 Abandonment authority - Section 554 “After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.”

18. 18 Midlantic National Bank v. New Jersey Dep't of Environmental Protection, 474 U.S. 494 (1986) A Trustee tried to abandon contaminated property. The Supreme Court held that the abandonment authority was not unlimited and that abandonment of contaminated property should not be permitted in violation of state law except on conditions that insure the protection of public health and the environment.

19. 19 “This exception to the abandonment power vested in the trustee by § 554 is a narrow one. It does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.” Midlantic Footnote

20. 5. Does a purchaser of contaminated property in bankruptcy avoid cleanup liability?  Section 363 of the Bankruptcy Code provides for sale of the debtor’s property: The trustee may sell property under … this section free and clear of any interest in such property of an entity other than the estate, only if— – (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; – (2) such entity consents; – (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; – (4) such interest is in bona fide dispute; or – (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. 20

21.  Section 363 sales are often accompanied by broad “cleansing orders” Essential to give notice to the government, which may well object Government position—cleanup obligations are not interests in property and essentially run with the land. Best to combine bankruptcy protections with non- bankruptcy protections (e.g. bona fide prospective purchaser) 21

22. 6. How can a trust mechanism be used to address contaminated property in bankruptcy? 22  Used with increased frequency, usually with government buy in  Property is transferred to the trust  Debtor funds trust and has no further obligations for cleanup  Government, the beneficiary, gets guaranteed pot of money to fund cleanup  Trustee may be an environmental consultant, accountant, lawyer, former government official

23. 23  Issues Amount of funding Selection of trustee Protection of trustee (indemnity, insurance, court order) Tax structure Residual value of property