Underground Storage Tanks Bankruptcy Issues: Case Examples

Underground Storage Tanks and Bankruptcy

Two Case Examples: In re Caribbean Petroleum and In re Getty Petroleum

Marketing

ASTSWMO MeetingApril 28, 2016

Donald G. Frankel

Senior Counsel – Regional Bankruptcy Coordinator

U.S. Department of Justice

Environment and Natural Resources Division

Environmental Enforcement Section

[email protected]; 617-450-0442

*This presentation represents the views of Mr. Frankel, not the Department of Justice.

In re Caribbean Petroleum Corp. (Bankr. D. Del. No. 10-12553) –

Background • Chapter 11 case filed in August 2010

• CAPECO operated a tank farm in Puerto Rico involving 40 above-ground tanks with a capacity of 95 million gallons

• CAPECO was also a leading distributor of gasoline in Puerto Rico with 172 service stations - 116 locations owned by CAPECO and 56 locations leased from third-party landowners

• Explosion at facility in 2009 brought about bankruptcy filing

In re Caribbean Petroleum Corp – Proof of Claim• United States filed a proof of claim. US asserted over $20 million in general unsecured

claims. Claims were for Oil Pollution Act cleanup costs and CERCLA response costs, as well as pre-petition Clean Water Act penalty amounts (unspecified). POC also included claims under RCRA for penalties for pre-petition violations of the UST regulations at the CAPECO service stations. The UST pre-petition penalty claim was for an unspecified amount.

• US POC noted that US had an administrative expense claim for post-petition violations of environmental law, including violations of the UST Regulations. UST post-petition penalty claim was for an unspecified amount.

• US POC also asserted administrative expense claim for post-petition cleanup costs at debtor-owned property.

• US also filed a protective claim asserting that work obligations set forth in statutes, regulations, court orders, administrative orders, licenses and permits were not “claims” under the Bankruptcy Code and had to be complied with by the Debtor. US also asserted that Debtor had to comply with law with respect to the property it owned under 28 U.S.C. § 959(b).

In re Caribbean Petroleum Corp - Settlement of Monetary Claims• United States entered into Settlement Agreement with respect to

general unsecured claim and administrative expense claim

• The settlement agreement gave the U.S. a $18,725,130 general unsecured claim. Of that amount, $377,650 was for pre-petition UST violations. The general unsecured claims in the case ultimately paid out at about ten cents on the dollar.

• The settlement agreement gave the U.S. a $8,200,000 administrative expense claim. Most of this was for post-petition response costs. $95,759 was for post-petition UST violations. These amounts were paid at 100 cents on the dollar.

In re Caribbean Petroleum Corp – Sale Issues

• CAPECO was a Chapter 11 liquidation. CAPECO sold all of its assets, including 147 of the 172 service station locations (mostly owned by CAPECO, but some leased), to Puma Energy Caribe LLC (“Puma”) for $82 million under Section 363 of the Bankruptcy Code. EPA insisted that the sale order include protective language to make clear that the “free and clear” language of Section 363 of the Bankruptcy Code did not provide protection to the purchaser to the extent that the purchaser was liable as the current owner or operator of the property after the sale (as opposed to being liable as a successor to CAPECO). The language also says that the purchaser must comply with applicable non-bankruptcy permit transfer obligations.

In re Caribbean Petroleum Corp – Sale Issues

• The protective language we request in Section 363 sales is as follows:

• “Nothing in this Order or the Asset Purchase Agreement releases, nullifies, precludes or enjoins the enforcement of any environmental liability to a governmental unit that any entity would be subject to as the owner or operator of property after the date of entry of this Order. Nothing in this Order or the Asset Purchase Agreement authorizes the transfer or assignment of any governmental (a) license, (b) permit, (c) registration, (d) authorization, or (e) approval, or the discontinuation of any obligation thereunder, without compliance with all applicable legal requirements under police or regulatory law. Nothing in this Order divests any tribunal of any jurisdiction it may have under environmental law to interpret this Order or to adjudicate any defense asserted under this Order.”

• If you have a case involving a sale of assets that include USTs, ask the debtor to include this protective language in the sale order. If the debtor will not agree, ask the court to include the language.

In re Caribbean Petroleum Corp – Purchaser Agreement to Bring USTs Into Compliance• As a part of the Section 363 sale, EPA also entered into a Compliance

and Prospective Purchaser Agreement with Puma whereby Puma agreed to bring the USTs at the service stations it acquired into compliance in accordance with a schedule set forth in the agreement and to implement corrective action where required by the applicable regulations. EPA, in turn, agreed to give Puma some time to bring the service stations into compliance without seeking penalties or injunctive relief during that period of time.

• Consider such agreements when there is a proposed 363 sale involving USTs.

In re Caribbean Petroleum Corp – Abandonment Issues

• With respect to the USTs owned by CAPECO that were not sold to Puma, CAPECO filed an abandonment motion. These USTs were located on property that CAPECO had been leasing from third-party landowners. CAPECO had also entered into franchise agreements at these properties with the landowner or other persons. CAPECO had installed the USTs at these locations and was the registered owner of the USTs. A total of about 40 service stations and 100 USTs were involved.

• The abandonment motion raised issues under Midlantic National Bank v. New Jersey Dept of Envt’l Protection, 474 U.S. 494 (1986). Section 554 of the Code allows a debtor to abandon property of the estate that is burdenomse to the estate or that is of inconsequential value and benefit to the estate. However,in Midlantic , the Court held that a trustee may not abandon property “in contravention of a state statute or regulation that is reasonable designed to protect the public health or safety from identified hazards.” The Court held that abandonment was improper without “formulating conditions” that adequately protect public health and safety. The Court noted that this was a “narrow” exception and that abandonment should not be limited by statutes or regulations not “reasonably calculated to protect the public health or safety from imminent and identifiable harm.”

In re Caribbean Petroleum – Abandonment Issues• There are two lines of cases under Midlantic. One requires that the

party opposing abandonment prove that the particular property poses an imminent and identifiable harm to the public health or safety. Another line of cases, which are more favorable to the government, only requires proof that the abandonment would violate applicable environmental laws. See In re Howard, 533 B.R. 532 (Bankr. S.D. Miss. 2015) (court discusses both lines of cases and adopts view that property must pose a risk of imminent harm).

• There was no financial assurance available in the CAPECO bankruptcy, as CAPECO had relied on meeting a financial strength test. Normally, financial assurance is not property of the estate and can be used in a bankruptcy to cover corrective action and other obligations.

In re Caribbean Petroleum Corp –Abandonment Issues• After the filing of the abandonment motion, EPA worked with the Puerto

Rico Environmental Quality Board to gather as much information as possible concerning the status of the USTs at the service stations at issue as well as concerning any contamination at the service station locations.

• EQB had a list of leaking tanks, its LUST list. But the information on the list turned out, in some cases, to be dated or inaccurate. EQB agreed to go out into the field and take samples at the monitoring wells at each of the service stations. We were trying to build the best case we could in order to oppose the abandonment motion. It is critical to get actual up-to-date environmental data in order to oppose an abandonment motion. Consider asking the court for additional time to gather such data. EPA and the state should work together on this fact gathering.

In re Caribbean Petroleum Corp –Abandonment Issues• CAPECO argued that the USTs did not pose a risk of imminent and

identifiable harm to the public.

• CAPECO also argued that the government could look to other parties to bring the USTs into compliance or to implement corrective action, such as the landowners (under Section 7003 of RCRA or other statutes) as well as the operators of the USTs to the extent that they were not the same party as the landowners (under Section 7003 of RCRA or under the UST regulations).

• CAPECO also argued that it had limited funds to address any environmental issues associated with the USTs. This is a critical issue in any abandonment motion.

In re Caribbean Petroleum Corp –Abandonment Issues• EPA ultimately agreed to a Stipulation whereby EPA agreed not to oppose the

motion to abandon the USTs and, in exchange, CAPECO agreed to deposit $850,000 into a fund to be administrated by EQB to address any contamination issues at these service stations. Under the Stipulation, EQB can only spend money at a service station if the owner/operator first contributes at least $10,000 to the investigation or cleanup (unless EQB cannot locate an owner/operator or the owner/operator demonstrates an inability to pay the $10,000). EQB is to spend no more than $50,000 for studies and $100,000 for remediation at any single service station, unless the water supply is threatened. EQB is to consider the ability of other responsible parties to address the contamination before spending money in the fund.

• Puma contributed an additional $150,000 to be put in a separate fund to be used by EQB at any service station in Puerto Rico. So the total available was $1 million.

• File a proof of claim that includes a general unsecured claim for penalties for pre-petition violations of the UST regulations and that also asserts, in a protective fashion, that the debtor (or trustee in a Chapter 7 case) must comply with the UST regulations under 28 U.S.C. § 959(b)

• File an administrative expense claim with respect to post-petition violations of the UST regulations and with respect to post-petition cleanup costs incurred at debtor-owned property. You will get paid at 100 cents on the dollar.

• If a motion to abandon is filed, gather as much evidence as possible concerning the environmental condition at the location in question in order to oppose the motion. Determine what line of Midlantic cases is applicable in your jurisdiction. The Court is likely to allow the abandonment unless you can show some sort of imminent risk to the public. See In re Sheffield, 162 B.R. 339 (Bankr. M.D. Ala. 1993) (landowners objected to trustee motion to abandon USTs; court allows trustee to abandon USTs where there is no evidence of environmental problems and rules that trustee does not have to expend estate funds to determine if there is an environmental problem).

In re Caribbean Petroleum – Lessons Learned

In re Caribbean Petroleum – Lessons Learned

• If there is a Section 363 sale, insist on getting protective language in the sale order.

• Keep in mind the availability of other sources to fund corrective action, such as financial assurance (unless the assurance was based on the debtor’s strong financial position) as well as other responsible parties (landowners; operators).

In re Caribbean Petroleum Corp – Documents Being Made Available• United States Proof of Claim

• CAPECO’s motion seeking abandonment of USTs

• Stipulation settling abandonment motion

• Puma prospective purchaser agreement

In re Getty Petroleum Marketing Inc. (Bankr. S.D.N.Y.)

No. 11-15606

• Getty was a major marketer of petroleum in the United States

• Getty itself did not own the real property at its service stations, but was a marketer that leased property and then entered into franchise agreements.

• Market conditions and other factors caused Getty to file for Chapter 11 bankruptcy protection.

In re Getty Petroleum – Background

• United States filed a proof of claim asserting a claim of over $700 million related to the liability of Getty in connection with the Newtown Creek Superfund Site in New York City. Getty had a terminal along Newtown Creek. EPA has not yet selected a remedy, but the remedy cost is expected to be in excess of $700 million. Also asserted a $60 million claim for natural resource damages.

• POC also asserted that Getty was required to comply with all regulatory requirements while in bankruptcy, including the UST regulations.

• We settled the claim based on Getty’s equitable share for a total allowed claim of $16 million. The ultimate payout was about five cents on the dollar.

In re Getty Petroleum – Abandonment Issues

• Getty had leasehold and franchise agreements at over 800 service stations.

• During the bankruptcy, Getty filed motion to reject most of these leases. Such motions called for the transfer of the USTs at these locations to the real property owner. Since the real property owner was a viable entity for most of the service stations, there was no need to object to the transfer as a “de facto” abandonment.

• The Unsecured Creditors Committee filed a motion for an order directing Getty to abandon 150 USTs at 49 different service stations located in seven states. Subsequently, the Creditors Committee took the position that the motion should have involved far fewer USTs, as it had determined that Getty did not in fact own certain of the USTs subject to the motion.


• In opposing the abandonment motion, EPA took the position that the government should be given additional time to determine the status of each of the USTs in question, including regulatory compliance as well as contamination of the properties in question.

• EPA pointed out that the Committee’s own motion indicated an estimate of over $500,000 to implement corrective action with respect to the USTs subject to the motion, and that a prior cost estimate prepared by Getty had indicated costs of over $1 million.

• We also argued that the Committee’s view that the USTs would be abandoned to the landowners might not be correct under Bankruptcy law (abandonment is usually back to the debtor itself) and that, in any event, there had been no showing that the landowners had the financial resources to implement any needed corrective action.

• New York and City of New York (the landlord at one of the properties) also filed objections to the abandonment motion. EPA and the states should work together in these cases.


• We ultimately entered into a settlement with respect to the motion to abandon. That agreement provided as follows:• The abandonment order ultimately applied to only 20 USTs at eight service station

locations in New York, New Jersey and Pennsylvania.• In order to abandon any of these USTs (except for one facility in Staten Island, NY),

Getty was required to provide a Certification stating that the product lines had been blown back or drained, that the tanks had been emptied to the extent possible (but no more than ½ inch of residue); that sacrificial anodes had been tested and sacrificial anodes had been installed at tanks using impressed current for cathodic protection; and that all fills, pumps have been capped and secured with a combination lock. (The tank at the Staten Island location had to be removed.) The Certification also had to include a statement describing the general environmental conditions at the site based, in part, on groundwater sampling, and that the abandonment of the UST did not pose an imminent and identifiable risk of harm to the public.


• Under the agreement, as set forth in a court order, any party can object to the conclusion in the Certification that the tanks do not pose an imminent and identifiable risk of harm to the public and may raise any argument pursuant to Midlantic. If an objection is raised, the Bankruptcy Court will determine whether abandonment is appropriate. Several certifications have been filed to date. We have not objected to abandonment of any of those USTs.

• The agreed-to court order also provides that Getty may sell or transfer the USTs to the landowner or operator of the USTs, as long as Getty provides a disclosure to the transferee concerning the potential liability associated with ownership of the USTs pursuant to a Disclosure and Transfer Agreement, the transferee registers with the appropriate state agency as the owner or operator of the USTs, and the state approves the transfer.

In re Getty Petroleum – Lessons Learned

• It is sometimes unclear whether the debtor or some other party actually owns the USTs in question. There can often be disputes between landowners, franchisee/operators, and petroleum marketers concerning ownership of tanks and responsibility for environmental issues under lease agreements and franchise agreements. Note that these contractual and lease obligations are also affected by the bankruptcy and it may be that these contractual obligations can be rejected by the debtor (subject to the counter party having a general unsecured claim).

• Often debtors are willing to negotiate a resolution of a motion to abandon property. Terms of the settlement will turn on strength of the evidence concerning risk posed by the USTs or any contamination at the service station as well as on whether the debtor has any assets available to deal with the problem. Bankruptcy, to a large extent, is a big negotiation process involving all interested parties. Don’t be afraid to ask the debtor for what you want, but be prepared to justify your request.

• Consider whether other responsible parties will have the financial resources to address any contamination. Also consider the strength of your case against such parties.

In re Getty Marketing – Lessons Learned

• We did not issue an order to Getty or CAPECO during the bankruptcy proceedings. But you should consider whether your case is a good case to seek to enforce injunctive orders or agreements (consent decrees or administrative agreements) against the debtor requiring regulatory compliance or corrective action. This can involve orders issued or agreements entered into prior to bankruptcy or orders issued against a debtor after a petition has been filed. If you are going to issue a new order after the petition is filed, consider whether to first seek a declaration that your order is covered by the police and regulatory exception to the automatic stay.

• Whether such orders or agreements can be enforced during the bankruptcy will depend on whether the court views the order as covered by the police and regulatory power exemption of Section 362(b)(4) of the Bankruptcy Code (allowing enforcement of police and regulatory judgments that are not “money judgments”). See, e.g. Penn Tera Ltd. V. Dept. of Environ. Resources, 733 F.3d 267 (3d Cir. 1984) (cleanup order was not viewed as a money judgment).

• Whether such orders or agreements can be enforced after a debtor’s bankruptcy case is over and the debtor has obtained a discharge will depend on whether or not the order is viewed as a “claim” or a non-dischargeable injunctive obligation. Courts have taken different approaches to this question. See e.g., In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991) (cleanup order not a claim if it seeks to stop ongoing pollution); In re Torwico Electronics, 8 F.3d 146 (3d Cir. 1993) (same); United States v. Apex Oil, 579 F.3d 734 (7th Cir. 2009) (RCRA 7003 order not a claim because government had no right to payment as an alternative to seeking compliance with order); United States v. Whizco, 841 F.2d 147 (6th Cir. 1988)(if an injunction requires the debtor to spend money, it is a claim).


• Under the federal and state statutes governing USTs, there is generally a right to issue an order requiring cleanup as well as a right to clean up the contamination and seek cost recovery from responsible parties. Orders issued under such statutes are likely to be treated, in bankruptcy, similarly to orders issued under Section 106 of CERCLA, as CERCLA also has a cost recovery provision. Chateaugay is the leading case in this area. To the extent you issue an order under Section 7003 of RCRA, or other statute that does not have a cost recovery option, your argument that your order is not a “claim” may be stronger. See Apex Oil, In re Mark IV Industries, Inc., 459 B.R. 173 (S.D.N.Y. 2011) (cleanup order issued under New Mexico Water Quality Control Act was not a claim; Act had no alternative for government to clean up and seek cost recovery and availability of cost recovery under other statutes is not to be considered)


• We have not discussed plans of reorganization or plans of liquidation in Chapter 11 cases. If you are involved in a Chapter 11 case, you must pay close attention to the terms of any such plan, especially the releases and injunctions set forth in such plans. We generally seek protective language for such plans stating that, with respect to environmental liability, nothing in the plan provides a release for such liability with respect to governmental units to the extent it is not a “claim” and nothing provides a release of such liability with respect to governmental units for any person other than the debtor (i.e., not third-party releases will be applicable to the government with respect to environmental liability). You can also object to a plan if it fails to provide sufficient funding to address environmental obligations of the debtor, both in cases where the debtor is reorganizing and will continue to operate as well as cases where the debtor is liquidating. Plan can only be confirmed if “feasible” and complies with law.

In re Getty Petroleum – Documents being made available• Proof of Claim filed by United States

• Creditors Committee abandonment motion

• US Objection to abandonment motion

• New York City objection to abandonment motion

• State of New York objection to abandonment motion

• Agreed-to order concerning abandonment motion

• Certification filed by Getty with respect to UST it sought to abandon