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Delay Stymies Creditor’s Action; Environmental Claim Against Chapter 11 Debtor Was Discharged

landfill-in-malacca (1)A military/aerospace manufacturer that may have contributed to the environmental contamination of a landfill was not obligated to pay for the cleanup of the site because the manufacturer’s creditors did not act to pursue the debtor until after the deadline for claims had passed. The U.S. Bankruptcy Court for the Southern District of Florida‘s ruling highlights the importance of creditors’ timely and pro-active pursuit of claims, given the strength of the discharge provisions in bankruptcy law.

The debtor business was Solitron Devices, Inc., a manufacturer of military and aerospace devices. Solitron had a facility in Tappan, New York, five miles from a landfill in Clarkstown, and may have contributed to the contamination of that landfill in the 1970s and 1980s.

In 1992, Solitron filed for Chapter 11 bankruptcy in Florida. As part of that bankruptcy, the court approved notice procedures for supplemental creditors, including parties injured by any environmental contamination Solitron may have caused. The court set the claim deadline as November 24, 1992. The bankruptcy court later approved a reorganization of the debtor’s business and instituted an injunction preventing creditors from pursuing the reorganized business.

In 2002, six years after the bankruptcy case closed, the New York State Department of Environmental Conservation sent out notices of potential liability to several companies, including Solitron. Then, another decade later, a group of businesses that had been pursued by the New York environmental authorities and had settled with the state for $3.75 million decided to seek contribution from Solitron and obtain a court order forcing it to pay part of their settlements with the state.

Solitron asked the bankruptcy court to throw out the companies’ action. The court agreed with the debtor. The issue ultimately was one of timeliness. The state had a valid claim against Solitron. The state received timely notice of the deadline by which it had to assert that claim. The state never submitted a proof of claim, so any debt Solitron owed it was discharged in the bankruptcy.

The policy behind bankruptcy is strongly rooted in giving the debtor a fresh start and in “bringing all potential claims into the case and discharging as many debts as possible.” Allowing creditors holding environmental claims to escape discharge would be distinctly at odds with this public policy. This is especially true when the creditor has a claim that arose prior to the filing of the bankruptcy petition and has open eyes about its rights, as the state did in this case. The state knew that the landfill was polluted, that Solitron’s plant was only five miles from the landfill, that the debtor was seeking to include all environmental claims against it under its bankruptcy filing, and that Solitron had received citations for improper dumping at Clarkstown. This was enough notice to the state that it should have known that, to preserve its claim, it needed to act.

Also of note, the court rejected the argument that the state was not “on notice” about the dumping citations because the letter citing Solitron dated to 1979. The fact that the letter was old did not serve to diminish the effectiveness of the notice. “Notice that something happened does not become stale or irrelevant just because years have passed or the entity receiving notice simply forgets about it,” according to the court.

The discharge provisions of the bankruptcy law are sweeping, since the policy underpinning bankruptcy seeks to discharge as many debts as possible. That is why, regardless of whether you are a debtor or a creditor, you should act promptly and seek knowledgeable counsel regarding your or your debtor’s obligations. For advice and representation about your bankruptcy issues, talk to the Florida bankruptcy attorneys at Stok Folk + Kon. Whether you are a Chapter 11 debtor or a creditor, our attorneys can give your the assistance and counsel you need to protect your interests.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

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