As revealed in a recent bankruptcy case, purchasers of contaminated property need to have a very clear understanding of their contractual remedies before proceeding with self-help. The case (In re Evans Industries, Inc., No. 10-30387 (5th Cir., June 21, 2011)), involved the sale of the debtor’s assets as a part of a Chapter 11 bankruptcy plan. The debtor/seller (Evans) had operated a business that made, filled and distributed steel drums and containers at five facilities. The purchaser (Greif) paid $11,250,000 for the bulk of Evans’ assets, and had continued to operate the drum/container business at the five facilities. However, $1,657,500 of the purchase price was placed in a holdback escrow account to fund certain expenses arising under the asset purchase agreement. 

Greif subsequently incurred $650,000 removing and properly disposing of hundreds of barrels containing hazardous waste at several of Evans’ former facilities. Greif then submitted a claim for reimbursement for its expenses from the holdback account. The bankruptcy court, and the federal district court on appeal, both ruled that Greif had no contractual right to seek reimbursement from the holdback account. Greif then appealed to the Fifth Circuit, which affirmed the lower court rulings.

The Fifth Circuit held that, with respect to two of the facilities, the leases had been rejected as part of the bankruptcy plan, and Greif had by separate agreement entered into leases for those facilities. Accordingly, the bankruptcy estate had no liability for contamination at those sites. At a third facility, the lease had been assumed by Evans, and as part of the assumption the landlord had been paid $300,000 to resolve all outstanding defaults under the lease. This meant that, when Greif took possession of the leasehold, there were no defaults under the lease. 

Greif also argued that Evans had breached environmental representations and warranties in the asset purchase agreement and had retained environmental liabilities under that agreement. The Fifth Circuit noted that, while that may have been the case, there was nothing in the asset purchase agreement that authorized Greif as the purchaser to engage in self-help and seek reimbursement from the holdback account. As a result, Greif’s claim for $650,000 in reimbursement was not valid under the asset purchase agreement.

This case is a stark reminder that purchasers who are considering a self-help remedy to address environmental conditions with the assumption that they can seek reimbursement from the seller should first review their contractual remedies very closely. In addition, where retaining self-help remedies is particularly important (i.e., if the seller is or may become insolvent or otherwise unable to complete its contractual obligations), close attention must be paid to drafting the contractual provisions that authorize self-help. For instance, what are the events of default that allow the purchaser to exercise that remedy, what notice and opportunity to cure rights does the seller retain, and how and when will the purchaser be reimbursed for costs incurred in exercising its self-help rights?   And, if additional security is provided in the form of an escrow fund, bond or similar financial assurance, the purchaser must ensure that it will have direct recourse to that security in the event it incurs costs exercising its self-help remedy.