Category Archives: bankruptcy

Nuclear Bankruptcy: How the Environment is Protected in Business Bankruptcies By: Christian Strahl

Nuclear Bankruptcy: How the Environment is Protected in Business Bankruptcies
By Christian Strahl

One of the more unique aspects of the American legal system is our Bankruptcy Code. A person, municipality, or business entity can petition for bankruptcy and receive a discharge of all remaining obligations at the conclusion of their bankruptcy case if that person filed in good faith and complied with all other requirements.[1] The bankruptcy case operates differently depending on who or what is filing. If an individual is filing and plans to liquidate all non-exempt assets and start over, that individual files in Chapter Seven.[2] If an individual is filing but plans to pay creditors all of their disposable income for three to five years and then emerge debt-free, that individual files in Chapter Thirteen.[3] If a business entity wants or needs to file bankruptcy, it must do so in Chapter Eleven, the relevant chapter for business entities.[4]

Chapter Eleven is somewhat unique because the business entity debtor can either liquidate or reorganize.[5] If the debtor liquidates, all assets are sold and creditors are paid in order of priority; then the business entity ceases to exist at the end of the case. This is the way most people think of business bankruptcies — the entity declares bankruptcy and goes out of business. However, many cases filed under Chapter Eleven do not result in liquidation, but rather in a reorganization. When a business uses a bankruptcy case to reorganize, it crafts a plan of reorganization.[6] The plan separates the entity’s creditors into classes, and designates the equal treatment of the creditors in each class.[7] The plan of reorganization also determines what assets will be kept or abandoned,[8] what contracts will be assumed or rejected,[9] and generally how the business will be run post-bankruptcy. Then, once the plan of reorganization has been accepted, confirmed, and carried out, the business emerges from the bankruptcy and is hopefully a profitable entity in the future.

One potential problem with a business filing a bankruptcy, as opposed to an individual, is that business entities often hold massive or unique assets, such as production machinery or a coal mine. When a business petitions for bankruptcy, or is forced into bankruptcy by its creditors, these assets can pose a problem. For example, in not-too-distant diatribes, political candidates have talked about the coal industry and either bringing back the coal industry or letting go of it in favor of more sustainable energy production. The argument between those two points aside, a major theme is that coal mines are, or have been, going out of business. In most, if not all cases, this means a bankruptcy filed in Chapter Eleven. A coal mine or slurry pond that is left abandoned can obviously have innumerable negative environmental impacts, so what has happened to all these closed down coal mines when the business that owns them files bankruptcy? Taking that a step further, what would the effects on the environment be if, say, a nuclear power company that owns and operates nuclear power plants went out of business?

In March of 2017, Toshiba Corporation’s United States nuclear power company, Westinghouse Electric Company LLC filed bankruptcy.[10] This short article examines the environmental protections in place to protect the environment from toxic or hazardous assets such as coal mines and nuclear power plants.

First and foremost, when a business files for bankruptcy, it does not necessarily cease to exist or operate. The business becomes statutorily limited in what it can and cannot do, and how it uses or disposes of its assets; however, generally speaking the same controlling managers will continue to run the entity.[11] Thus, at first, the business will continue to manage itself as it has, and that managerial staff will be responsible for preventing adverse environmental impacts as they always have and there should be no additional environmental impact due to the bankruptcy case.

Secondly, the debtor in possession can be removed for cause and replaced with a trustee.[12] “For cause” includes fraud, dishonesty, incompetence, and gross mismanagement of affairs either before or during the commencement of the case.[13] Thus, if the debtor is seriously mismanaging the entity, the debtor can be replaced with a trustee. This finding of mismanagement could likely be predicated on the debtor in possession damaging the environment such that the Environmental Protection Agency or state regulators are imposing fines or other penalties on the entity. Thus a managerial staff that refuses to manage the environmental impacts of the business entity will most likely be replaced by a trustee who will.

Third, though the trustee or debtor in possession has the ability to abandon worthless or burdensome property of the estate,[14] there are special considerations when those assets are hazardous. In Midlantic National Bank v. New Jersey Department of Environmental Protection, the Supreme Court ruled that a bankruptcy trustee may not abandon hazardous property in violation of state law or regulation that is “reasonably designed to protect the public health or safety from identified hazards.”[15] Thus the trustee or debtor in possession, whose powers are largely interchangeable in business bankruptcy cases, can abandon property unless it would be against a state’s public health or safety law. This means, in the case of Westinghouse’s nuclear power plants, that no toxic waste or other hazards will be abandoned.

Finally, there are other federal statutory and regulatory safeguards in place to ensure that even in bankruptcy, businesses are not destroying the environment. For example, in 1986, an amendment to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) added a subsection that provides for a federal lien in favor of the United States government for all costs of removal or remedial action incurred by the United States on any real property owned by the liable party.[16] This means if the government has to step in to clean up during or after a business’s bankruptcy case, it will have a claim in the case in the form of a lien on the real property. Thus, even if everyone fails to protect the environment, the government will step in to clean up, assured that it will be paid because of the lien.

Overall, a nuclear power company filing for bankruptcy is never a good thing. However, everyone can sleep easy tonight knowing that the nuclear plant and all the potential hazards associated with it are not going to be simply left to waste away or turn our environment into a nuclear wasteland. All is well that ends well, even if it ends in bankruptcy.

[1] 11 U.S.C.A. § 727(a), (b).

[2] 11 U.S.C.A. § 109(b).

[3] 11 U.S.C.A. § 109(e).

[4] 11 U.S.C.A. § 109(d).

[5] 11 U.S.C.A. § 1123(b)(4) (specifying that a plan of reorganization can be used for liquidation).

[6] See 11 U.S.C.A. § 1121.

[7] 11 U.S.C.A. § 1123(a)(1).

[8] 11 U.S.C.A. 1123(b)(4), (6).

[9] Id. at (b)(2).

[10] See James Conca, Westinghouse Bankruptcy Shakes the Nuclear World, Forbes, (Mar. 31, 2017), https://www.forbes.com/sites/jamesconca/2017/03/31/westinghouse-bankruptcy-shakes-the-nuclear-world/#3ff108cd2688.

[11] See 11 U.S.C.A. § 1104(a) (stating that a trustee can be appointed for cause, but unless such cause is shown, the debtor remains in possession of the business).

[12] Id.

[13] Id.

[14] 11 U.S.C.A. § 554(a).

[15] Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494 (1986).

[16] 42 U.S.C. § 9607(l).

%d bloggers like this: