Environmental Leader

The bankruptcy and reorganization of General Motors and Chrysler, as well as a number of industry suppliers, have resulted in a massive downsizing of the industry. This will have a significant impact on the cleanup of contaminated properties throughout the country.

While plant and dealership closures and the related economic effects have been the focus of much commentary, little public attention has been focused on the future cleanup of contaminated properties. Ed Montgomery, the Obama Administration’s Director of Recovery for Auto Communities and Workers, and the U.S. Environmental Protection Agency have discussed taking an approach similar to that used for closed military bases (the Base Realignment and Closure Act, or BRAC) as an option for addressing the environmental and community impacts associated with plant closures, but no legislation has been proposed and no funding has been appropriated for such a program.

Also, a BRAC-type approach would probably only address facilities that the auto makers decommission going forward. That is, it would not address historic sites that Chrysler and GM formerly operated and closed many years ago, or non-owned or operated off-site disposal locations, most of which may have multiple potentially responsible parties (PRPs). How these and other sites will be handled, what role the government will play, and what impact it will have on the remaining PRPs that are financially viable remains to be seen. One thing is certain: numerous parties, properties and communities throughout the country will be affected.

The GM and Chrysler Bankruptcies

In the GM and Chrysler bankruptcies, the court approved Section 363 bankruptcy sales that allowed the purchasers (i.e., new GM and new Chrysler) to acquire only those assets that they valued, leaving with the liquidating bankrupt entities (i.e., old GM or Chrysler) the existing and future environmental liabilities associated with the assets that they did not sell.

For example, in the GM bankruptcy, old GM (Motors Liquidation Co.) retained about 100 factory sites, some of which will require remediation in excess of $100 million. It is estimated that old GM has $530 million in environmental liabilities and only $1.2 billion to wind down – the majority of which likely will be used for administrative fees and other claims with higher priority in the bankruptcy.

So who will ultimately pay for the environmental liabilities of the former entities? The GM and Chrysler sites orphaned through the bankruptcy process where GM or Chrysler would have been the sole PRP liable for the cleanup will likely be addressed by the federal, state and local governments (i.e., the taxpayers). At non-owned sites, where GM or Chrysler was one of several PRPs (e.g., off-site disposal locations), it is likely that the other solvent PRPs will be left to pick up the newly orphaned shares.

Why?

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is a powerful statute that has traditionally allowed EPA to pursue any PRP – big pocket or small – to recoup remediation costs it has incurred at a site, or to order certain PRPs to clean up the site.

Stated differently, CERCLA has been interpreted to grant EPA broad discretion to pursue claims against a PRP who may only be responsible for a fraction of the contamination at a site and obtain a judgment for the entire cleanup – including contamination for which the PRP was not responsible (i.e., any party which contributes a molecule of a hazardous substance to a site may be liable for the entire cleanup, including the liability of orphan shares and parties who refuse to cooperate).

EPA has used the threat of joint and several liability to encourage PRPs to enter into consent decrees or administrative orders where they agree to be liable for the entire cleanup. This is the likely course of action that federal and state agencies will pursue at off-site disposal locations where old GM or old Chrysler is one of a number of PRPs.

Potential Impact to PRPs

Given CERCLA and the structure of the GM and Chrysler bankruptcies, at sites where there are multiple PRPs, each PRP may be considered jointly and severally liable and left to assume old GM and old Chrysler’s “orphan shares.”

These multiple-PRP sites can generally be broken into two categories: (1) sites where the PRPs, including old Chrysler or old GM, have already entered into a consent decree or executed an agreement or order with a state environmental agency or the U.S. EPA, and (2) sites where PRPs have yet to resolve their liability in a binding document. At sites where there is an existing consent decree or order, there is often a provision stating that the financial insolvency of one party (e.g., old GM or old Chrysler) does not relieve the other PRPs from their contractual obligations addressed by the decree, agreement, or order and that each party is jointly and severally liable for completing the environmental cleanup.

At some sites, PRPs may have “cashed out” with GM or Chrysler via a side agreement and have been relying upon GM or Chrysler to implement the cleanup. At these sites, it is likely that a state environmental agency or the U.S. EPA will look to the remaining financially viable entities to complete the cleanup. PRPs will need to review such decrees, agreements, and orders to evaluate their obligations and potential liability, which may include an obligation to step forward and assume control of a remedy that they may not have actively monitored for years. At sites where liability has yet to be fully or formally resolved, PRPs may be able to argue that they should not have to cover the insolvent party’s share, and a recent Supreme Court case may bolster this argument.

Burlington Northern May Help

The U.S. Supreme Court’s decision in Burlington Northern & Santa Fe Rwy. Co. v. United States, 129 S.Ct. 1870 (Case No. 07-1601, May 4, 2009) may provide some relief to PRPs, as it arguably has opened a door for avoiding joint and several liability in some circumstances. In Burlington, the Supreme Court rejected the DOJ’s view that the contamination could not be apportioned and that the remaining solvent PRPs (two railroad companies) should bear 100 percent of the remediation costs, including a 91 percent orphan share for which they were not responsible.

The Court ruled that “apportionment is proper [in a CERCLA action] when there is a ‘reasonable basis’ for determining the contribution of each cause to a single harm.”

The practical effect of this opinion is two-fold: (1) given the relatively simplistic factors the Court relied upon in finding a “reasonable basis” for apportioning the harm, Burlington arguably lowered the factual burden a PRP must meet to avoid joint and several liability and (2) the Supreme Court indicated (at least implicitly) that the inequity of forcing the government to pay for an orphan share plays no role in the common law apportionment analysis.

This decision should be helpful for PRPs seeking to avoid being allocated all cleanup costs at sites where environmental liabilities of the PRPs and old GM or old Chrysler were not formally resolved in a binding document, and to a lesser degree at sites where the government seeks to enforce an existing agreement with old GM or old Chrysler and other solvent parties.

Applying Burlington Northern to Old GM and Old Chrysler Environmental Liabilities

After Burlington, an agency may not have as much leverage to force the remaining PRPs to agree to assume the full liability for old GM or old Chrysler’s orphan shares if the PRPs can demonstrate that joint and several liability should not be imposed. That is, an agency may be more willing to settle for an amount that is less than the full cleanup costs rather than litigate the “divisibility of harm” issue.

Even at sites where PRPs have already entered into decrees, agreements, or orders in which old Chrysler or old GM was a party but has discharged its liability in the bankruptcy proceeding, principles of equity and fairness underlying the Burlington decision may permit PRPs an opportunity to negotiate modifications to a remedy (i.e., reopen a Record of Decision to allow for a less costly cleanup to account for the new orphan share).

Given the role the federal government has had in the bankruptcies of GM and Chrysler, particularly the government’s ownership interest in new GM, pundits will be monitoring the policies and decisions of the Obama Administration in dealing with the newly orphaned environmental liabilities of GM and Chrysler.

This article was contributed by Thomas P. Wilczak, Todd C. Fracassi and Mark A. Erman, who serve as attorneys at Pepper Hamilton LLP.