Mark IV Ruling: District Court Affirms Bankruptcy Court's Denial Of Discharge Of Environmental Obligations

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. In light of the importance of the issues involved, Mark IV will likely appeal Judge Scheindlin's decision to the Second Circuit.

BACKGROUND

When automotive parts manufacturer Mark IV Industries, Inc. and its affiliates (collectively, "Mark IV") filed chapter 11 bankruptcy proceedings in 2009, the company had been engaged in environmental cleanup efforts at a former manufacturing site in New Mexico for over 13 years. Despite years of cleanup efforts, Mark IV had been told by the New Mexico Environmental Department ("NMED") that a plume of contamination was still spreading at the site, requiring continuing cleanup obligations. Mark IV brought an adversary proceeding seeking a declaratory judgment that its obligation to clean up the site was discharged in bankruptcy. Bankruptcy Judge Stuart M. Bernstein denied Mark IV's request, holding that the debtor's environmental obligation regarding the New Mexico cleanup site did not constitute a "claim" in bankruptcy and was therefore not dischargeable.

APPLICABLE LAW

Confirmation of a chapter 11 plan of reorganization "discharges the debtor from any debt that arose before the date of such confirmation."3 While confirmation of a plan for a reorganizing debtor discharges all liability on claims arising prior to confirmation (versus a liquidating plan, which does not effectuate a discharge), bankruptcy has no effect on obligations that do not qualify as claims. The salient question in the Mark IV cases, therefore, was: which environmental obligations are considered "claims" in bankruptcy?

Under the Bankruptcy Code, a claim includes "a right to an equitable remedy for breach of performance if such breach also gives rise to a right to payment."4 In the environmental context, the issue typically arises where an entity is required to conduct a contaminated site investigation, cleanup, and/or pay a fine. Thus the issue is whether the breach of such cleanup obligation "gives rise to a right to payment," and thus constitutes a "claim."

In its analysis, the District Court reviewed both the text of the Bankruptcy Code and legal precedent addressing the extent to which an environmental cleanup...