It’s Okay to Reject Environmental Remediation Agreements

Route 21 Assoc. of Belleville, LLC v. Millennuim Custodial Trust (In re Lyondell Chemical Company). —-, 2013 WL 5733196 C.A.2 (N.Y.),2013.

The Second Circuit Summary Order’s terms render it of no precedential value. Nevertheless, the decision is instructive.

The Summary Order adopted the District Court’s decision which denied a purchaser of environmentally contaminated property’s motion: a.) to compel the debtor-seller’s specific performance of a site remediation agreement; and b.) for an administrative priority for the creditor’s future clean up costs claim. The Second Circuit restated the debtor’s right to reject the agreement as an executory contract, under 11 U.S.C. § 365, and the resulting claim’s treatment as a pre-petition claim, payable in bankruptcy dollars. The Court rejected the creditor’s argument that the inability to monetize its relief excepted it as a “claim”under the Bankruptcy Code.

The claim was denied an administrative priority because it arose from a rejected pre-petition agreement. Therefore, it was not a transaction between the creditor and debtor in possession benefitting the debtor-in-possession’s operations.

The adopted District Court decision opined:

“‘In general, only those costs incurred to cleanup property for which an estate has an interest in or owns may qualify as administrative expenses. . . .’clean-up costs arising from pre-petition activities not entitled to administrative expense priority’” Route 21 Associates of Belleville, Inc. v. MHC, Inc., 486 B.R. 75, 93 (S.D.N.Y. 2012)(Citations Omitted).

The court concluded, citing, In re Manville Forest Products, 209 F.3d 125, 120 (2d Cir. 2000), the Court concluded that “where debtor entered into pre-petition agreement, “[t]he fact that the contingency. . .-the environmental liability claim against [claimant]- materialized post-petition does not transmogrify the claim into a post-petition claim.”

The decision effectively okays a pre-petition jetison through sale of contaminated property with limited recourse to a debtor-seller. Buyers beware. Contaminated property owners may have a new life boat.