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Maryland Court Questions When Debts are Incurred
Pursuing Chapter 11 bankruptcy can prove to be an advantageous and appealing option for individuals as well as companies faced with a large amount of financial liabilities. Filing for Chapter 11 bankruptcy both results in the placement of a bar on any pending legal action against a company and provides businesses with the chance to discharge liabilities after confirming the details of a reorganization plan, which typically involves paying only a portion of all debt owed.
A decision from the beginning of October, 2021, by a federal district court in Maryland, highlights that after receiving a reorganization plan, businesses can avoid liabilities without facing payment obligations. The case also examines some important issues regarding when debts are considered to have been accrued and how conflicting intentions between environmental claims and bankruptcy orders balance out.
The Role of CERCLA Cases in Bankruptcy
The notion that bankruptcy should give a debtor a “fresh” beginning by releasing the debtor from liability associated with certain debts is often found to be in conflict with the environmental law rationale that polluters should be forced to pay for committing environmental harm. In an attempt to reconcile these two laws, courts frequently find less certainty than either body of laws is designed to provide. The Comprehensive Environmental Response Compensation and Liability Act was created in 1980 to respond to health disasters brought on by the disposal of hazardous substances. The recent 68th Street Site Work Group case questions under what bankruptcy situations a fine associated with a CERCLA violation can be discharged.
How the Schumacher Case Arose
In the 68th Street case, a plaintiff who incurred substantial costs for cleanup due to a 2017 agreement with both the Environmental Protection Agency (EPA) and Maryland state initiated legal action against the defendant, Schumacher & Seiler.
The plaintiff argued that Schumacher was partially liable because the company had thrown away materials categorized as hazardous on a contamination site, which had not been used for over three decades. Maryland state as well as the EPA began notifying potentially liable parties in the late 1990s.
The Schumacher company then filed a summary judgment motion based on the argument that potential liability the company had due to contamination of the site was discharged during Chapter 11 proceedings in the early 1990s.
Bankruptcy Code states that with some exceptions, confirming a reorganization plan releases a debtor from financial liabilities incurred before this date. The court then held that the central issue in the matter was whether Schumacher’s debt was incurred before 1992.
The Three Techniques for Deciding When Debt is Incurred
The District Court held that courts typically utilize one of three techniques in deciding whether a debt was incurred. The following three techniques exist:
- The “right to pay” strategy. Courts have characterized this strategy as the option that gives the least weight to bankruptcy law’s motivation to provide debtors with a new beginning at a credit rating. If a creditor lacked any right to receive compensation by a debtor when the confirmation of a reorganization plan occurred, a debt is viewed as not having yet been incurred. As a result, this debt is not viewed as discharged.
- The “fair contemplation” strategy. Even if a creditor lacks the right to be compensated by a debtor when a debt is confirmed, a debt under this principle is viewed as arising if debtor liability could have been “fairly contemplated” when the debtor filed for bankruptcy.
- The “conduct” or “underlying act” strategy. Claims under this perspective are considered to exist provided that the underlying act happened before the debtor filed for bankruptcy regardless of whether the creditor’s right to be compensated by the debtor exists.
Under the “right to pay” and “fair contemplation” approaches, the claim against the defendant is not viewed as having occurred at the time of the plan’s confirmation. Because the plaintiff was yet to collect costs associated with remediation yet and also given that no effort by the EPA or Maryland had yet been taken to identify potentially liable parties. Additionally, Schumacher was yet to dispose of materials categorized as hazardous. As a result, the underlying act introduced liability occurred long before Schumacher filed for bankruptcy.
The District Court’s Approach
The District Court applied the “underlying act” strategy as the method that most took the Bankruptcy Code’s intent into consideration. The Bankruptcy Code classifies debt as any type of liability associated with a claim. A “claim” constitutes an argument to payment regardless of whether this amount is later reduced due to liquidation or judgment.
The court found that this definition of “claim” cannot be fully combined with the “right to pay” approach’s requirement that creditors have the right to receive compensation when the debtor files for bankruptcy.
In arriving at its decision, the District Court depended on the Circuit Court’s precedent. The Appellate Court had applied the “underlying act” strategy in various cases, but never before in a situation involving costs associated with cleaning up the environment. The plaintiff claimed that following the approach in situations involving environmental liability undermined the Comprehensive Environmental Response, Compensation, and Liability Act’s goal of accountability for polluters.
Relying on another district court’s ruling, the court ultimately rejected the argument that after a bankruptcy claim is introduced, it can change based on the nature of the claim. The other court ruled that the question of if a claim was incurred necessitates considering the law that addresses the body of the claim instead of just bankruptcy code.
Because each event triggering Schumacher’s liability for cleaning up the site occurred before the reorganization plan’s confirmation and the liability was released from the debts before the plan’s confirmation courts, the District Found that Schumacher’s liability was discharged. Consequently, the court awarded summary judgment to Schumacher.
The Impact of the Case
68th Street Site Work Group emphasizes how varying outcomes can occur given which of the three approaches to debt a court utilizes. The case also emphasizes that when bankruptcy cases introduce issues from other areas of law, courts often still adhere to bankruptcy law.
Contact an Experienced Bankruptcy Lawyer
Bankruptcy law is constantly evolving and full of nuances. If you are navigating a bankruptcy or related matter, you should not hesitate to obtain the assistance of a skilled attorney. Contact attorney Melanie Tavare today to schedule a free case evaluation.
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