August 21, 2020

U.S. Court of Appeals Holds That Climate Change Tort Claims Are Dischargeable in Bankruptcy

Holland & Knight Energy and Natural Resources Blog
Dianne R. Phillips | Maria de la Motte
Energy and Natural Resources Blog

On May 6, 2020, in the case of In re Peabody Energy Corporation, 958 F.3d 717 (8th Cir.), the U.S. Court of Appeals for the Eighth Circuit held, in an apparent case of first impression, that state statutory and common-law climate change tort claims are dischargeable in bankruptcy and were in fact discharged in this case, affirming the decisions of the lower courts.1

The case involves Peabody Energy Corporation (PEC), which successfully emerged from its Chapter 11 bankruptcy with a confirmed plan of reorganization effective April 3, 2017. Several months later, on July 17, 2017, it was sued, along with nearly 40 other defendants in the fossil fuel industry, by three separate counties in California alleging the defendants were responsible for greenhouse gas emissions between 1965 and 2015, which have led to sea level rise and damage to property. The complaints asserted a number of causes of action grounded in common-law theories, including claims for strict liability – failure to warn, strict liability – design defect, negligence, negligence – failure to warn, trespass, private nuisance and two statutory claims for public nuisance under California's Public Nuisance Enabling Statute (Cal. Civ. Proc. Code § 731) for violation of California's statutory public nuisance law (Cal. Civ. Proc. Code § 3480). Relief sought included compensatory damages, equitable relief, punitive damages, attorneys' fees, disgorgement of profits and cost of suit.

When confronted with a motion of the reorganized debtor, PEC, seeking an order to enforce the discharge and injunction provisions of the Chapter 11 plan filed in the Bankruptcy Court, the plaintiffs sought to avail themselves of an exception to discharge contained in the plan related to ongoing, post-petition liabilities or obligations to a governmental unit under any applicable environmental law. Plaintiffs argued that the claims should not be dismissed because 1) they alleged the torts were ongoing and 2) the purpose of the lawsuits was to ensure the defendants bore the burden of the foreseeable environmental harm that is being, and will increasingly be, caused by the defendants' products.

All three courts found these arguments unavailing for several reasons. Relying on a textual analysis, the bankruptcy court concluded that the state common-law and statutory claims did not fall within the definition of environmental laws contained in the plan. That definition included "all federal, state and local statutes, regulations and ordinances concerning pollution or protection of the environment, or environmental impacts on human health and safety, including [ten federal statutes] and any state or local equivalents of the foregoing." Specifically, even though the theories were asserted to address an alleged environmental harm, they were not pursuant to environmental laws and would unreasonably expand the environmental exceptions from discharge to effectively read the term "environment" out of the definition. Next, relying upon the so-called pecuniary interest rule developed under the automatic stay provisions of the bankruptcy code, the bankruptcy court found the claims were not brought under a police or regulatory law and were designed simply to recover money, namely damages and disgorgement of 50 years' worth of profits. The Court of Appeals agreed:

The bankruptcy court pointed out that our court has held, in construing that provision, that when the government's actions "would result in an economic advantage to the government or its citizens over third parties in relation to the debtor's estate," then the government is not exercising its police or regulatory power. It is acting as a creditor.2

It didn't matter that the claim asserted was based on a California statute which provided for equitable relief or that it was for the benefit of the public brought in the name of the People of the State of California. All three courts found that because the plaintiffs chose not to participate or file a claim in PEC's bankruptcy, despite notice, any pre-petition or pre-confirmation claim they may have had was discharged.

Notes

1 In re Peabody Energy Corp., 2017 WL 4843724 (Bankr. E.D. Mo. 2017), aff’d, 599 B.R. 610 (E.D. Mo. 2019)

2 958 F.3d at 723

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