RCRA Cleanup Obligation Not Dischargeable in Bankruptcy

December 8, 2009
by ANGELA PAPPAS
Client Alert Newsletter December 2009

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a federal district court decision holding that a cleanup obligation imposed pursuant to the Resource Conservation and Recovery Act ("RCRA") against Apex Oil Company ("Apex") was not discharged by the Chapter 11 bankruptcy of Apex's corporate predecessor.

The main issue addressed in U.S. v. Apex Oil Co., was whether an injunction issued by the U.S. Environmental Protection Agency ("EPA"), requiring Apex to cleanup contamination at a former Hartford, Illinois refinery, constituted a "claim" under section 101(5) of the Bankruptcy Code, and was thus dischargeable in bankruptcy. Apex argued that, based on the Bankruptcy Code's definition of "claim," the injunction was a "right to payment" because it would require Apex to expend approximately $150 million to comply, and was therefore properly discharged by the bankruptcy proceedings of its corporate predecessor. The Seventh Circuit disagreed and concluded that a RCRA injunction is equitable in nature because it does not allow the government to seek payment in lieu of performance, irrespective of Apex's cost to comply. Accordingly, the cleanup obligation imposed by the injunction was not discharged and Apex must now comply.

The decision is significant because it undermines the overarching "fresh start" policy of the Bankruptcy Code, particularly at a time when companies are increasingly looking to bankruptcy to shed some of its debt in the hopes of surviving these difficult economic times. Those companies faced with potential RCRA liability and considering Chapter 11 reorganization will now need to evaluate whether bankruptcy is a viable option in light of this opinion.