United States v. Apex Oil Co., Inc.

United States v. Apex Oil Co., Inc.

 
A RCRA cleanup order is not dischargeable in bankruptcy because the government cannot demand payment of cleanup costs in lieu of compliance with the order, says the Seventh Circuit in Apex Oil. In so holding, the court rejected the "expenditure test," explaining that discharge must be limited to claims that give rise to a right to payment because the equitable decree cannot be executed. This commentary discusses this important decision.

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The authors write: The United States Court of Appeals for the Seventh Circuit has provided some clarification on an issue at the intersection of environmental and bankruptcy law, holding that the obligation to comply with a Resource Conservation and Recovery Act ("RCRA") cleanup order was not a "claim" discharged in a prior chapter 11 bankruptcy. The decision, United States v. Apex Oil Co., Inc.,579 F.3d 734 (7th Cir. 2009), effectively required Apex Oil Company ("Apex Oil"), the successor to the reorganized debtor, to pay a contractor to perform the cleanup, at an estimated cost of $150 million, of contamination caused by the predecessor. The Seventh Circuit grappled with the difficult question of whether a mandatory cleanup injunction falls within the broad definition of "claim" in the bankruptcy laws. Under the Bankruptcy Code, only obligations that are "claims" are subject to payment and discharge when a plan of reorganization is confirmed by the bankruptcy court. See 11 U.S.C. § 1141(d). Non-claim obligations pass through the bankruptcy unaffected and continue to be retained as liabilities of the reorganized debtor. Finding that RCRA provides no cause of action for recovery of cleanup costs or payment of damages, only a right of injunctive relief, the Seventh Circuit held that the obligation under the cleanup order was not a "claim" for bankruptcy purposes and therefore passed through the prior bankruptcy.

Background. The Apex Oil case involves an action by the federal government against an oil refining company that reorganized under chapter 11 in the late 1980s. Fifteen years after the company's plan of reorganization was confirmed, the United States sued Apex Oil, seeking an injunction under section 7003(a) of RCRA, 42 U.S.C. § 6973(a), to compel Apex Oil to cleanup groundwater contamination resulting from the prepetition operations of Apex Oil's corporate predecessors at a site in Hartford, Illinois. In 2008, the United States District Court for the Southern District of Illinois held that Apex Oil was lable for the hydrocarbon plume at he Hartford site and ordered the company to abate the contamination and all conditions associated with it. See United States v. Apex Oil Co., Inc., 2008 U.S. Dist. LEXIS 59973 (S.D. Ill. July 28, 2008). Apex Oil appealed to the Seventh Circuit, arguing that the government's claim had been discharged in the bankruptcy 15 years earlier.
 
The Seventh Circuit's Analysis. The Court of Appeals rejected Apex Oil's argument and held that the obligation to perform a mandatory cleanup injunction under RCRA was not a "claim" discharged in Apex Oil's bankruptcy, even though the reorganized debtor could comply only by hiring a contactor to perform the cleanup at an estimated cost of $150 million. The Seventh Circuit reasoned that, because section 7003(a) of RCRA only provided the government with a right to injunctive relief, and not a right to cost recovery, the government's right to an injunction under the statute was not convertible into a right to payment. 579 F.3d at 736. Judge Posner, writing for the court, explained that the definition of a "claim" in section 101(5)(B) of the Bankruptcy Code, 11 U.S.C. § 101(5)(B) includes "a right to an equitable remedy for breach of performance" only if the breach "gives rise to a right to payment." According to the court, only two types of injunctions give rise to an alternate right of payment: (1) injunctions that are no longer capable of performance, such as an injunction to do something that is no longer possible and (2) injunctions that actually call for the payment of money, such as restitution orders. Id. at 735-36. Because the cleanup was capable of being performed, and because there is no authority under RCRA to require the payment of money in lieu of performance of a cleanup injunction, breach of the cleanup injunction did not give rise to a "right of payment" and therefore was not a "claim" discharged in the prior bankruptcy. The court rejected Apex Oil's argument that it could comply only by spending money, and therefore the injunction did give rise to a right of payment, reasoning that "virtually all equitable decrees" impose costs of the defendant. Id. at 738.
 
 
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Authors Strochak and Yates are also co-authors of the Collier Monograph: Environmental Issues in Bankruptcy, which is available from the LexisNexis Store.