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Federal-State Cooperation Pays Bonuses in Environmental Bankruptcy Cases
Karen Cordry, Bankruptcy Counsel
What's the recipe for obtaining full payment–with interest–for close to $2 billion in environmental remediation costs from a bankrupt debtor? Start with dedicated staff from numerous states with affected sites working closely with the U.S. Department of Justice and Environmental Protection Agency, mix in a lot of hard work preparing cases and negotiating settlements, add a healthy dollop of better management and labor relations by the debtor, season with higher prices for the copper the debtor produces B and, oh yes, garnish with a $6 billion fraudulent transfer judgment against a solvent defendant. The result is the confirmed plan in the case of Asarco, LLC and its various affiliates.
Asarco was a major operator of mining facilities throughout the United States, which, while now mostly shut down, had contaminated their surroundings and created hundreds of millions of dollars of remediation liabilities. When it filed bankruptcy in 2005, Asarco was a victim of falling commodity prices and mismanagement by its parent that left its labor relations in a shambles and caused a crippling strike. Those problems were compounded by the removal of assets by the parent that left Asarco in a severe liquidity crisis at the same time it faced those staggering environmental costs. Commentaries at the time suggested the bankruptcy case would make Asarco a poster child for the notion that polluters could enter bankruptcy and shed their liabilities without regard for the impact on the surrounding communities. The final result was 180 degrees from that initial assessment and succeeded the wildest expectations of environmental agencies going into the case.
Far from simply eliminating those liabilities without payment, Asarco confirmed a plan that resulted in payment, on Dec. 9, 2009, of almost $1.8 billion, including $775 million to the United States, $697 million placed into custodial trusts to cover ongoing clean up costs in 14 States (Alabama, Arizona, Arkansas, Colorado, Idaho, Illinois, Indiana, Montana, New Mexico, Ohio, Oklahoma, Texas, Utah and Washington) and an additional $322 million paid directly to those and other states (California, Kansas, Missouri, Nebraska, and New Jersey) for other claims.
Such results are certainly not the norm in bankruptcy B and, in this case, major factors included a rebound in copper prices during the case, changes in management that restored good employee working relationships and the aforementioned $6 billion judgment against the parent for the removal of those assets. As a result, the parent and another company engaged in a bidding war that resulted in the "full payment with interest" plan. But, before that point was reached, much hard work was required by the states and the federal government to ensure that their claims would get the best possible treatment whether those other favorable factors had occurred or not.
After their filing, the debtors sought to put their claims on a fast track for "estimation," a process used in bankruptcy to reach a "quick and dirty" resolution of claims amounts so that they can be worked into the calculations for plan confirmation. While useful to a debtor, that process can be highly problematic for environmental claims where the extent of contamination is often not fully known, much less the nature and costs of the remediation efforts, or whether the debtor can be held legally responsible. As a result, the governmental entities were forced to approach these claims on something of an emergency basis to be able to investigate, quantify them, and be prepared to defend them on a highly expedited schedule. The work of doing so was greatly assisted by the unstinting work of all of the governmental entities and the strong cooperation between those entities.
Because the United States had the largest claims and had a national presence, it took the lead in coordinating the efforts and worked exceedingly well with all of the states. NAAG staff, Bankruptcy Counsel Karen Cordry and Environmental Counsel Paula Cotter, assisted throughout with the process of bringing the states and federal agencies together to foster this cooperative effort. As a result, the governments were able to collectively enforce demands for a reasonable timetable and structure for the preparations for the estimation process and, in the end, satisfactorily resolve all of their claims. While it was not initially clear those amounts could be paid in full, the efforts ensured that environmental claims would be treated fairly despite the complex problems in presenting them. And, when the proverbial pot of gold at the end of the bankruptcy rainbow did appear, that work resulted in full payment of the amounts currently incurred and ample funds being set aside for future costs.
While Asarco was the first example of this recent federal-state cooperation, it is by no means the last. The recent economic downturn has resulted in several other cases where environmental concerns have been major factors. Those cases include the Chemtura Corporation, the Lyondell Chemical Company, Tronox Incorporated B and General Motors Corporation. In the first three cases, the states and the federal government have followed the model from Asarco–the United States has taken the lead, but worked closely with the states. In many cases, the parties have filed joint briefs and other pleadings in order to coordinate their positions. Again, NAAG staff has worked with the states throughout to assist in coordination, to provide input on bankruptcy issues, and to assist in drafting and editing documents. In Lyondell and Chemtura, the governments are opposing efforts by the companies to obtain an early (and, the governments believe, premature) decision on whether their environmental claims may be discharged. In Tronox, the parties are working towards a consensual plan.
As to General Motors, while it certainly did not file because of environmental obligations, any manufacturing entity of its size and age will inevitably have cleanup obligations at its plants. The relationship between the states and the United States is somewhat different in this case, in that the United States was deeply involved with General Motors in filing its case and structuring the sale of its assets. The states filed a number of objections to the original sales documents, including several with respect to the treatment of environmental claims. The objections went primarily to the need for greater clarity and the states were able in the end to resolve them with new General Motors and the United States.
In addition to the assumption of liability by new General Motors for the plants that it bought, the sale terms also included a provision for an infusion from the U.S. Treasury of more than $1 billion of cash into old General Motors (the liquidating entity) to pay for its wind down costs. Hundreds of thousands of dollars of that amount was set aside to deal with remediation expenses. Since the sale was consummated, the states and the United States have again been working together to determine the liabilities at those sites and the funding necessary to complete the cleanup. The dual role of the United States in the case does infuse added complexities, but the states continue to work with the United States to the greatest extent possible.
One interesting issue that the states have been working on is ensuring that old and new General Motors remain active in a nationwide program that provides incentives for recyclers to remove switches containing mercury from cars that are on the way to being melted down. With pressure from a number of state agencies, old General Motors has voluntarily resumed participation in that program for now. Because the program is slated to continue until 2017, though, it is likely that new General Motors will have to be brought into the picture as well–an effort that may again require discussion and cooperation between the states, the United States, and the new company.
In all of these cases, it is clear that having government agencies speak with one voice benefits them in their efforts to protect the public interest and obtain compensation for their environmental claims. It is also, though, a benefit to debtors seeking to resolve these issues consensually. Bankruptcy is a forum in which the ability to make deals, quickly and economically, can be crucial in the debtor's effort to survive and emerge as a renewed and viable entity. Being able to deal with environmental issues on a collective basis and reach a global settlement may be crucial to putting a confirmable plan together. That was the case with the Circle K Corporation, as far back as 1992, where the states were able to work through NAAG bankruptcy staff to negotiate a settlement that provided for payment of $30 million to 30 states for cleanup of leaking underground storage tanks. The same is true now.
In recognition of that fact, and the invaluable assistance of the United States in reaching those results, a plaque was presented to Alan Tenenbaum, national bankruptcy coordinator for the U.S. Department of Justice at the October bankruptcy conference in Nashville, noting that he was receiving it as a representative of all of the federal staff whose work with the states has been so crucial over the last several years. We look forward to continuing the relationship in the future, even if the pending cases may not provide results as spectacular as in Asarco.
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CA DOJ Advanced Training Center
Contact: Judy McKee
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Providence, Rhode Island
Contact: Karen Cordry
Division of Public Safety
University of Pennsylvania
Contact: Judy McKee
Contact: Bill Malloy