In re: Exide Technologies, LLC
MEMORANDUM
I. INTRODUCTION
Appellant South Coast Air Quality Management District (“District“), a state-level air-quality regulatory agency, has appealed the decision entered by the Bankruptcy Court in the Chapter 11 cases of reorganized debtor Exide Technologies (“Exide“) and certain of its affiliates (“Debtors“), dated April 30, 2019, In re Exide Technologies, 601 B.R. 271 (Bankr. D. Del. 2019) (“Decision“), which, inter alia, determined that (1) the District‘s pre-petition claims for non-compensatory environmental penalties for alleged air emission violations are not protected from discharge by the Bankruptcy Code and were subject to discharge upon confirmation of Exide‘s Chapter 11 plan, and (2) the penalties imposed for Exide‘s behavior during the bankruptcy are not administrative expenses entitled to priority status under
II. BACKGROUND
A. Exide‘s Bankruptcy and the District‘s Lawsuit
This appeal relates to Exide‘s former lead battery recycling facility located in Los Angeles County, Vernon, California (the “Vernon Facility“). Except for a temporary closure in 2013, Exide operаted the Vernon Facility from 2000, when it purchased the facility‘s owner, GNB Technologies Inc., until its permanent closure in 2015. (App. B0545)1 Until these closures, the Vernon Facility had been operated as a secondary lead and/or metal recycling operation on a nearly continual basis since 1922. (Id.) The Vernon Facility‘s primary function was to recycle lead from spent automotive batteries. Prior to 2013, it supplied a substantial share of Exide‘s lead requirements for its national manufacturing program.
The District is a public agency created in 1976 by the California legislature to facilitate compliance with the federal
Exide filed a voluntary petition for Chapter 11 proteсtion on June 10, 2013. The Bankruptcy Court entered an order setting October 31, 2013 as the deadline or “bar date” for creditors to assert claims against Exide by filing proofs of claim. (App. 0482) The bar date for governmental agencies is set by statute as 180 days from the date of the bankruptcy filing.
On the governmental bar date, the District filed a proof of claim (the “Original Proof of Claim“), alleging $38,915,000 in liquidated penalties related to Exide‘s ownership and operation of the Vernon Faсility (the “Original Penalties“). (App. B0845-53) The District‘s proof of claim listed five notices of violation (“NOVs“) the District had issued between October 30, 2012 and December 4, 2013, which alleged that Exide failed to submit required reports, exceeded airborne emissions levels, and failed to implement “good operating practices.” (App. B0849-53)
On January 16, 2014, the District filed a complaint in Los Angeles Superior Court asserting twelve causes of action alleging air quality violations that broadly overlapped the NOVs on which it based its Original Proof of Claim (“California Action“). (App. B076-88; B0507-08) The complaint sought to impose $40 million in fines on Exide. (App. B0788) Exidе notified the District of its view that the complaint was an attempt to collect the same penalties that had been identified in the Original Proof of Claim and was a violation of the Bankruptcy Code‘s automatic stay provision. (App. B0648-49) The parties stipulated to allowing the California Action to go forward for the sole purpose of determining the amount of the District‘s claim, reserving the question of whether the claim would be allowed and payable for the Bankruptcy Court. (App. B0507-10)
Exide removed the California Action to federal district court on diversity grounds, and then the District moved to remand. (App. B0208-34) (“Remand Motion“) The federal district court remanded on April 9, 2014. (App. B0235-238) (“Remand Order“) Following the remand, the District amended its California Action complaint three times, ultimately adding new claims for both pre- and post-petition conduct and increasing the amount of penalties it sought to impose to $80 million (the “Amended Penalties“). (App. B0789-844)
B. The Non-Prosecution Agreement
The District alleges that Exide received up to 40,000 spent batteries per day at the Vernon Facility and used hammers to crush and break them into three primary components: acid, lead, and crushed plastic casings. (D.I. 22 at 10 citing App. 026, App. 203) The District alleges that the cаsings are laced with lead and acid. (Id.) The District further alleges that Exide sprayed the casings with water and stored the resulting hazardous waste in van trailers on the grounds of the Vernon Facility, until they were transported elsewhere for disposal. (Id. citing App. 027, App. 204) The District has alleged that Exide was discharging lead in an unsafe manner while denying it was doing so in the annual compliance certifications that were a condition of Exide‘s permit. (D.I. 22 at 11) According to the District, Exide provided false certifications, as “Exide knew of its obligations to disclose violations, and it disclosed other violations” but never “disclose[d] thе leaking of lead-contaminated hazardous waste from van trailers parked in the facility.” (Id. citing App. 111-14,
On March 11, 2015, during the Chapter 11 cases, Exide and the United States Attorney for the Central District of California entered into a Non-Prosecution Agreement (“NPA“). (App. 018-033) In the NPA, Exide admitted to having committed a number of environmental violations at the Vernon Facility over the previous two decades and agrеed to permanently close the Vernon Facility. (App. B0529) Exide admitted to “knowingly storing corrosive and lead-contaminated hazardous waste inside leaking van trailers . . . parked at the [Vernon] Facility.” (App. 027) Pursuant to the NPA, the parties estimated that the direct costs of Exide‘s compliance (i.e., the closure and remediation efforts) would be between approximately $108 and $133 million. (App. B0537) The Bankruptcy Court entered an order approving the NPA on March 27, 2015. (App. B0524-26)
C. The Chapter 11 Plan Discharge and Injunction
On March 27, 2015, the Bankruptcy Court entered an order confirming Exide‘s plan of reorganization, pursuant to which, inter alia, certain holders of Exide‘s pre-petition indebtedness took equity in exchange for such debt, and general unsecured creditors received a pro rata interest in a trust funded with a small amount of cash and rights to the proceeds of certain other assets, including causes of action potentially to be pursued by a trustee. Under the plan, Exide‘s equity was cancelled and equity holders received no recovery.
The plan provided for a broad discharge and related injunctive relief. Specifically, Article 12.2 of the plan provides that all claims arising before the effective date of the plan “shаll be satisfied, discharged, and released in full, and the Debtor‘s liability with respect thereto shall be extinguished completely.” (App. B0518-19) Article 12.11 of the plan provides a permanent injunction against “commencing or continuing any action” related to claims that are discharged pursuant to the Plan. (App. B0523) The plan became effective on April 30, 2015, and “New Exide” emerged from bankruptcy. (App. B0007) As a result of the consummation of the plan, New Exide replaced every member of its board of directors. (App. B0515-17)
D. The Discharge Motion and Administrative Expense Objection
Following New Exide‘s emergence from bankruptcy, the District continued to amend its Complaint in the California Action. (B0789-844) (“Third Amended Complaint“) Exide filed a motion to enforce the Plan‘s discharge and injunction in the Bankruptcy Court. (App. B0618-29) (“Discharge Motion“) The District filed an administrative expense claim, seeking payment of penalties sought in the California Action. (App. B0650-57) Administrative expenses – which are statutorily defined as the “actual, necessary costs and expenses of preserving the estate,” such as “wages, salaries, and commissions for services rendered after commencement of the case” – receive priority оver pre-petition claims and, so, are paid out of the estate before pre-petition unsecured creditors are paid.
On January 31, 2018, the Bankruptcy Court heard oral argument. With respect to the Discharge Motion, the District‘s main contention was that the penalties asserted in each iteration of its complaint should be excepted from discharge under
(6) Notwithstanding paragraph (1), the confirmation of a plan does not discharge a debtor that is a corporation from any debt –
(A) of a kind specified in paragraph (2)(A) or (2)(B) of section 523(a) that is owed to a domestic governmental unit, or owed to a person as a result of an action filed under subchapter III of chapter 37 of title 31 or any similar State statute; . . .
Conversely, Exide argued that the District‘s claim sought to collect ordinary noncompensable penalties owed to a governmental unit pursuant to
With respect to the Administrative Expense Objection, Exide argued that the District‘s claim was not an administrative expense claim in any respect and was barred under the Third Circuit‘s decision in Pennsylvania Dep‘t. of Envtl. Res. v. Tri-State Clinical Labs., Inc., 178 F.3d 685, 698 (3d Cir. 1999) (“Tri-State“). Tri-State holds that criminal fines arising from post-petition behavior are not administrative expenses under
With respect to the relate back issue, Exide argued that the District‘s submissions and contentions after the bar date included wholly new allegations and sought to recover new claims that did not relate back to its Original Proof of Claim.
On April 30, 2019, the Bankruptcy Court issued its Decision, upholding Exide‘s position on each point. Following a detailed analysis, the Bankruptcy Court held that (i) the penalties the District sought in the Califоrnia Action are dischargeable and, therefore, cannot be asserted against New Exide, Exide, 601 B.R. at 280-84; (ii) the District‘s claims are not entitled to administrative expense priority status under
On May 13, 2019, the District timely appealed the Decision. (D.I. 1) The appeal is fully briefed. (D.I. 22, 23, 25, 28, 29, 31) While the District does not appeal the Bankruptcy Court‘s ruling that the District‘s post-bar date claims and those asserted in its amended complaints do not relate back to or supplement the District‘s Original Proof of Claim, the District does appeal the Bankruptcy Court‘s ruling with respect to the dischargeability of its claims and denial of administrative expense priority status. The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record and the decisional process would not be significantly aided by oral argument.
III. JURISDICTION AND STANDARD OF REVIEW
Pursuant to
IV. DISCUSSION
A. The District‘s Claims Are Subject to Discharge
In
The District argues that, based upon Exide‘s alleged misrepresentations, fraud, and fraud-like activities, the penalties imposed by the District are excepted from discharge as a “debt . . . for money . . . obtained by” fraud under
With respect to the District‘s claim for penalties, the Bankruptcy Court first observed that “[t]his debt falls squarely within
The Bankruptcy Court went on to consider the District‘s argument that a particular claim may be non-dischargeable under multiple provisions of the Bankruptcy Code. As the Bankruptcy Court observed, the Supreme Court has stated that while each provision of section 523 “covered distinctive types of claims,” there also “may be some overlap.” Id. at 282 (citing Husky Int‘l Elecs. Inc. v. Ritz, 136 S. Ct. 1581 (2016)). The Bankruptcy Court evaluated, and rejected, the District‘s argument that its claims should be considered a debt to the government for money obtained by fraud under
On appeal, the District argues that the Decision begins with a lengthy recitation of facts but nowhere “describes the fraud that forms the essential predicate of the Discharge Motion (i.e., the false certifications, concealed source test results, and manipulation of testing conditions), or the magnitude of Exide‘s releases of lead and arsenic into the air.” (D.I. 22 at 17) According to the District, these neglected contentions are sufficient to state a claim for application of the fraud exception from discharge. In the District‘s view, the fraud exception from discharge applies to all debts traceable to fraudulent acts of the Debtor (id. at 21-25), which here must include civil penalties that result from concealment of the scope and extent of lead and arsenic emissions rendering those penalties non-dischargeable (id. at 25-30). The District further contends that the Bankruptcy Court erroneously constructed the fraud exception by limiting
1. The District‘s Claim Falls Squarely Within § 523(a)(7)
The Bankruptcy Court correctly determined that the discharge exception applicable to the District‘s claim is
2. The District‘s Claim for Penalties Is Not A “Debt . . . for Money . . . Obtained by” Fraud
The Bankruptcy Court correctly declined the District‘s invitation to recast the District‘s claim for the Original Penalties as one for money obtained by fraud under
The first mention by the District of any false statement by Exide appeared in the District‘s Third Amended Complaint, which it filed in the California Action years after the bar date had passed. The Bankruptcy Court rejected the District‘s efforts to expand its claims through the amendment of the Original Proof of Claim based on the Third Amended Complaint, ruling that such claims do not relate back to the District‘s bar date filing. “The circumstances of this case do not support a determination that [the District‘s] new claims arise out of the same conduct, transaction or occurrence as listed in the Original Proof of Claim, which was limited and specific.” Exide, 601 B.R. at 294-95. The Bankruptcy Court‘s determination that the fraud-based claims asserted by the District did not relate back to the Original Proof of Claim was not appealed by the District.
Evеn assuming that the District had timely asserted claims including allegations of misrepresentation or fraud, the Court agrees with the Decision that the District‘s contention fails to satisfy the discharge exception. (D.I. 28 at 30-31) The discharge exception “for claims arising from fraud” under
3. The Bankruptcy Court Did Not Erroneously Limit Application of § 523(a)(2)(A)
The District urges the Court to hold that while its claim is clearly a governmental penalty that falls within
The
Third Circuit precedent holds that
The Court agrees with the Bankruptcy Court‘s understanding of both
B. The Bankruptcy Court Properly Denied Administrative Expense Priority
The District requested treatment of certain of its Amеnded Penalties as administrative expenses under
Requests for administrative priority are strictly scrutinized, and claimants bear a “heavy burden” to establish the statutory prerequisites. Calpine Corp. v. O‘Brien Envtl. Energy, Inc. (In re O‘Brien Envtl., Energy, Inc.), 181 F.3d 527, 533 (3d Cir. 1999). “As with all of the Bankruptcy Code‘s priority statutes, section 503(b)(3) is to be narrowly construed so that administrative expenses will be held to a minimum.” Leidos Eng‘g, LLC v. KiOR, Inc. (In re KiOR, Inc.), 567 B.R. 451, 458 (D. Del. 2017).
As the Bankruptcy Court correctly explained, the Third Circuit in Tri-State, 178 F.3d at 698, held that “punitive criminal fines arising from post-petition behavior are not administrative expenses under
Tri-State denied administrative expense status to the state‘s environmental fine because it was punitive, not compensatory. “[T]he sanction that was imposed as punishment . . . has nothing to do with compensation or proper business operatiоns. Rather, the purpose of this criminal fine is deterrence, retribution, and punishment.” 178 F.3d at 693. The Court agrees with the Decision that the same result applies here, where the District‘s fines are not compensatory but rather are strict-liability and do not represent a quid pro quo exchange for Exide‘s benefit.
The District‘s reliance on the Third Circuit‘s decision in Pennsylvania Department of Environmental Resources v. Conroy, 24 F.3d 568 (3d Cir. 1994), is unavailing. There, the state environmental agency stepped in to dispose of certain hazardous waste after the Chapter 11 debtor refused to do so. See id. at 569. Administrative priority was accorded to those costs because they were to “compensate fоr the costs [the state] incurred in obtaining authorization for the cleanup and in coordinating and monitoring the contractor‘s work.” Id. at 570 (emphasis added). Tri-State explained that Conroy “support[s] the distinction we draw [in Tri-State] between claims for compensatory expenses and those for criminal fines.” 178 F.3d at 693. Conroy and Tri-State, taken together, make clear that compensatory fines and penalties may be treated as administrative expenses, but punitive fines and penalties, like those here, cannot.4
The District argues that Exide‘s choice not to operate in compliance with applicable law during bankruptcy provided a benefit to the Exide, and administrative expenses must include nоn-compensatory civil penalties resulting from its violations. The District cites some out-of-circuit cases that have concluded that non-compensatory fines or penalties can qualify for administrative expense priority, but the Bankruptcy Court chose not to join these non-binding, extra-circuit decisions. This Court agrees with the Bankruptcy Court.
V. CONCLUSION
For the reasons set forth above, the Court will affirm the Decision. An appropriate Order follows.
March 24, 2020
Wilmington, Delaware
HONORABLE LEONARD P. STARK
UNITED STATES DISTRICT JUDGE