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Judge Carey (Bankr. D. Del.) Applies Grossman’s “Exposure” Test and “Fair Contemplation” Test to Environmental Claims

By Erin R. Fay and Sophie E. Macon

It is settled law in the Third Circuit that a claim generally “arises” when a party is exposed pre-confirmation to a product or conduct giving rise to an injury that underlies a “right to payment” under the Bankruptcy Code. See Wright v. Corning, 679 F.3d 101 (3d Cir. 2012); Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s), 607 F.3d 114, 125 (3d. Cir. 2010). The Third Circuit noted in Grossman’s, however, that it was not deciding when an environmental cleanup claim might arise where conflicting statutory frameworks exist. In West Salem Storage, LLC v. Exide Techs. (In re Exide Techs.), the Judge Carey of the Delaware Bankruptcy Court was faced with determining whether just such environmental cleanup claims arose before or after confirmation of a chapter 11 plan (that would discharge such claims). The Court held that whether it applied Grossman’s “exposure” test or the Ninth Circuit’s “fair contemplation” test, the environmental claims were discharged through the confirmed plan.

By way of background, West Salem purchased certain contaminated industrial property in 2011 that Exide Technologies had previously owned. In 1999, state regulators had restricted the property to industrial-only uses due to discovery of lead contamination in the property’s soil. From 2011-2017, West Salem leased the property to tenants for commercial and recreational uses. In February 2017, regulators discovered “high levels” of lead inside a structure on the property and closed the building.

Exide filed its second chapter 11 petition in March 2013 and its plan was confirmed in March 2015. West Salem was not listed as creditor in the bankruptcy filings and was not provided actual notice of the filing or plan. After incurring significant cleanup costs and other damages, West Salem filed an adversary proceeding seeking a declaratory judgment that Exide’s confirmed plan had not discharged West Salem’s claims.

Exide argued that, under the Grossman’s “exposure” test, West Salem’s claim arose either (a) prior to 2002, when the contaminating “conduct” occurred, or (b) in 2011, when West Salem purchased the property. West Salem argued that Grossman’s does not apply to environmental claims and that the Court should apply the Ninth Circuit’s “fair contemplation” test to its environmental claims. See California Dept. of Health Servs. v. Jensen (In re Jensen) to. 995 F.2d 925 (9th Cir. 1993). Under such test, future “response and natural resources damages” arising from pre-petition conduct are “claims” only if such costs “can be fairly contemplated by the parties at the time of the debtors’ bankruptcy.” Parties are deemed to “fairly contemplate” potential liability “when there are sufficient indicia of future costs based on prepetition conduct.”

West Salem further argued that, prior to discovery of the interior contamination in 2017, there was not “sufficient indicia” of future liability such that it should have “fairly contemplated” the costs associated with the interior lead contamination. The Court disagreed, holding that the deed restrictions imposed by state regulators on the property met the fair contemplation test. The Court also found that under the Grossman’s “exposure” test, West Salem’s claim arose in 2011 when it took title to the property and was put on notice about the lead pollution.

In addition, the Court held that West Salem was an unknown creditor because it was not listed in Exide’s books and records (instead Exide’s books and records listed a successor in the chain of title to whom the debtor sold the property) and that Exide had no obligation to undertake a title search or to send a notice to the property address. As an unknown creditor, West Salem was provided adequate notice through publication. For all these reasons, the Court granted Exide’s motion to dismiss West Salem’s complaint.

A copy of the Court’s opinion is available here.