ELR Citation: ELR 20953
No(s). s. 92-1040 et al (1st Cir. May 4, 1993)

The court vacates a bankruptcy court's disallowance of a land developer's claim for future response costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) against the estate of parent and subsidiary companies in Chapter 7 liquidation. The developer purchased land contaminated with hazardous substances from the subsidiary after the subsidiary petitioned for Chapter 11 protection, and before the Chapter 11 reorganization was converted to a Chapter 7 liquidation. After the sale, the U.S. Environmental Protection Agency (EPA) discovered the contamination and ordered the developer to remove the hazardous substances. The developer initiated an adversary proceeding against the bankruptcy estate for CERCLA response costs incurred under the EPA administrative order and for future response costs required to complete the anticipated cleanup and remediation. The bankruptcy court determined that the developer's claim for past response costs was entitled to priority payment as an administrative expense, but disallowed the developer's claim for future response costs pursuant to Bankruptcy Code §502(e)(1)(B). The bankruptcy court held that the developer's claim was contingent and based on a debt for which the developer and the parent and subsidiary companies were jointly and severally liable.

On appeal, the court first holds that CERCLA claims may be disallowed under §502(e)(1)(B), because the Bankruptcy Code does not carve out an exception for joint and several tort-based obligations and CERCLA, either before or after enactment of the Superfund Amendments and Reauthorization Act (SARA), and does not exempt CERCLA contribution claims from the Code's normal claim procedures. The court also rules that there is no inherent incompatibility between §502(e)(1)(B) and the congressional policies underlying CERCLA.

The court next vacates the bankruptcy court's disallowance of the developer's claim for future response costs and directs the bankruptcy court on remand to prescribe a reasonable bar date by which the Chapter 7 trustee must elect whether to file a surrogate EPA claim pursuant to Bankruptcy Code §501(c). Any such surrogate claim must be filed without prejudice to the developer's right to submit a surrogate claim under §502(b). To prevent "double-dipping" into the assets of a bankrupt estate by persons holding the same claim against the estate, §502(e)(1) directs disallowance of a claim held by a party who is liable with the debtor estate to a creditor. Although EPA has elected not to file an allowable claim for response costs against the estate, it might do so in the future, raising the remote prospect of "double-dipping" if the developer's claim were allowed. However, §501(c), which allows a debtor or trustee to file a surrogate claim for the creditor, mitigates the harsh results of §502(e)(1). Resort to §501(c) or §501(b), which allows codebtors to file surrogate claims for creditors, would compel a set-aside for EPA's benefit at the time of distribution, regardless of its decision to refrain from filing a claim against the estate. The court directs that should the trustee or the developer not file a timely surrogate claim, the §502(e)(1)(B) objection should be dismissed, and the bankruptcy court should estimate the developer's direct claim against the estate pursuant to normal claim allowance procedures.

The court next holds that the developer's claims for future response costs may be entitled to priority under §503(a) as administrative expenses to preserve the estate. The $1.6 million purchase price for the property constituted consideration for the developer's right to contribution, and response costs subsequently incurred by the developer are a mere maturation of that right. The court holds that the developer's priority claim would not be disallowed under §502(e)(1)(B) if the developer is not strictly, jointly, and severally liable with the estate on the debt to EPA under CERCLA, and the developer would not be liable if it could validly assert the "innocent landowner" defense under CERCLA §107(b)(3). The court holds that on remand, the trustee has the burden of producing substantial evidence that the developer is not entitled to this defense, but the ultimate burden of proof remains with the developer. Further, the bankruptcy court must determine whether the developer made "all appropriate" inquiry pursuant to CERCLA §101(35) before it acquired the contaminated property. Should the bankruptcy court find that the developer did not have notice or actual knowledge of the contamination when it purchased the facility, the developer's claim for past and future response costs should be estimated and allowed as administrative expenses entitled to priority. If the developer did not take all appropriate steps to protect itself from CERCLA liability, the developer would not be entitled to administrative expense priority with respect to any allowable CERCLA claim.

The court affirms the bankruptcy court's denial of attorneys fees to the developer, because Congress did not consider, and SARA did not include, any attorney fee award amendment applicable to the private cost recovery provision in CERCLA §107(a)(4)(B). Finally, the court affirms the allowance of the developer's claim for past response costs as an administrative expense entitled to priority distribution, because the developer's entitlement to priority does not hinge on the bankruptcy court's determination of the merits of its innocent landowner defense. Also, its claim for past response costs escapes the §502(e)(1)(B) coliability problem encountered by its claim for future response costs, because its claim for past response costs became fixed when it incurred actual and necessary response costs before its claim was considered for allowance.

[Related decisions are published at 17 ELR 20709 and 22 ELR 20719.]

Counsel for Appellants
Roy P. Giarrusso, Louis N. Massery
Cooley, Manion, Moore & Jones
21 Custom House St., 6th Fl., Boston MA 02110
(617) 737-3100

Counsel for Appellee
William F. Mccauley, Martin P. Desmery
Craig & Mccauley
600 Atlantic Ave., Boston MA 02210
(617) 367-9500