IN RE BABCOCK & WILCOX CO.

• Decision Date: 22 February 2010
• Docket Number: Civil Action No. 09-3684.,Bankruptcy No. 00-10992 "B".
• Citation: 425 B.R. 266
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: In re BABCOCK & WILCOX COMPANY.

425 B.R. 266

In re BABCOCK & WILCOX COMPANY.

Civil Action No. 09-3684. Bankruptcy No. 00-10992 "B".

United States District Court, E.D. Louisiana.

February 22, 2010.

COPYRIGHT MATERIAL OMITTED

Jan Marie Hayden, Tristan Manthey, Heller, Draper, Hayden, Patrick & Horn, LLC, New Orleans, LA, Neal R. Brendel, K&L Gates LLP, Pittsburgh, PA, for Babcock & Wilcox Company.

ORDER AND REASONS

SARAH S. VANCE, District Judge.

Before the Court are cross-appeals from the April 8, 2009 order entered by the United States Bankruptcy Court, Eastern District of Louisiana, in which the Bankruptcy Court limited creditor PMAC Ltd.'s claim to $147,203.99. In re Babcock & Wilcox Co., 413 B.R. 337, 339 (Bankr. E.D.La.2009). For the following reasons, the Court VACATES the Bankruptcy Court's order and REMANDS with instructions to dismiss PMAC's claim.

I. BACKGROUND

A. FACTUAL BACKGROUND

1. The Koppel Plant

PMAC's bankruptcy claim concerns the allocation of environmental liabilities between PMAC and B & W in an amended 1990 Purchase & Sale Agreement ("PSA"). Before 1988, B & W was in the business of manufacturing and selling steel tubing for various applications and purposes. See PMAC Statement of Undisputed Facts, PMAC Br., App. A. B & W's Tubular Products Division conducted these operations in several separate manufacturing facilities in Pennsylvania and Texas. Id. The Koppel Plant, located in Koppel, Pennsylvania, was one such facility. See Joint Stipulations of Fact ("JSF"), Item #3. The Koppel plant used electric arc furnaces to melt steel and produce carbon and alloy steel. Id. A byproduct of this process is electric arc furnace dust ("EAF Dust"), a known hazardous substance and source of environmental liability. See id. at Item # 4.

In December of 1989, B & W and PMAC began negotiations over the sale of B & W's Tubular Products Division, including the Koppel Plant. See PMAC Statement of Undisputed Facts, PMAC Br., App. A. The parties entered into a Letter Agreement of Understanding, negotiated the terms of the sale, and finalized the PSA on January 15, 1990. Id. at Ex. A. The parties amended the PSA on June 25, 1990 and closed the deal on October 4, 1990. JSF, Item #34. In total, PMAC purchased the Koppel Plant and four other manufacturing facilities from B & W for a purchase price of approximately $50 million. See PSA Section 3.06, B & W Br., Ex. C. On the date of closing, PMAC assigned its rights to the Koppel Plant and another purchased facility to Koppel Steel Corporation ("KSC") for $94.9 million. See PMAC-KSC Agreement, B & W Supp. Manual Attach., Ex. A.

2. The PSA

B & W and PMAC recognized that potential environmental liabilities existed at the Koppel Plant. The parties apportioned the environmental liabilities in various provisions of the PSA, including Sections 3.03, 3.04, and 6.08. JSF, Item # 22 and #25. The Bankruptcy Court, in interpreting these provisions, focused on the "as is, where is, with all faults" nature of the agreement. See In re Babcock & Wilcox Co., 413 B.R. at 339. The tenor of the agreement is one of an "as is" sale, with the exception of certain specific liabilities discussed below. See PSA, Section 4, B & W Br., Ex. C. Under the PSA, PMAC assumed post-closing liabilities, assigned B & W certain specific pre-closing liabilities, and gave B & W the option to assume the remaining liabilities. See id. at Section 3.03(e) and 6.08(a). The various provisions of the PSA set out this structure as follows.

Sections 3.03 and 3.04 outline the liabilities that PMAC expressly assumed and excluded, respectively. Id. at Item #22. In Section 3.03(e), PMAC assumes those pre-closing environmental liabilities provided in Section 6.08 of the PSA. Id. at Item #25. Section 3.04 then indicates that PMAC is not subject to liabilities in existence before the closing and not specifically assumed in Section 6.08. Id. at Item # 22. Of particular note, Section 3.04(h) exempts PMAC from liability related to the EAF Dust pile at the Koppel Plant and the landfill to which B & W was transferring and disposing the EAF Dust. Id.

Section 6.08(a) delineates the pre-closing environmental liabilities PMAC expressly assumes. Id. at Item # 25. It does so by establishing a procedure for the parties to discover environmental problems before closing and apportion liability for them. Id. First, PMAC was responsible for conducting an environmental audit before March 15, 1990. PMAC was then to provide the written results of this audit to B & W. Id. Next, PMAC was to compile a list of environmental issues for which it wanted B & W to assume liability, known as "Identified Actions." Id. B & W then had the option to assume or reject liability for the Identified Actions. Id. If B & W chose not to assume liability for any of PMAC's Identified Actions, PMAC was left with two alternatives: terminate the transaction and receive a refund for any deposit it had made, or proceed with the transaction and assume liability for any disputed Identified Action. Id. Thus, if B & W refused any of PMAC's Identified Actions and PMAC still wanted to go forward with the deal, PMAC assumed the liability for the action. Id.

Section 6.08(b) addresses responsibility for post-closing environmental liabilities. Id. Thus, Section 6.08(a) and 6.08(b) differ in terms of the time of "discovery" of the environmental problem. Section 6.08(a) covers those discovered before closing, and Section 6.08(b) those discovered after closing. Under Section 6.08(b), B & W assumed liability for the first $250,000 of remediation costs for environmental problems discovered after but within five years of closing. Id. The parties agreed to apportion costs in excess of $250,000 between them, with B & W bearing two-thirds and PMAC bearing one-third of any remaining costs. Id. The PSA is silent as to remediation costs for environmental problems discovered after five years of closing.

3. Burgess & Niple Environmental Audit

Burgess & Niple, an environmental consulting firm hired by PMAC, did the environmental audit under Section 6.08(a) of the PSA. Id. at Item #27. Burgess & Niple produced a detailed report of its audit, which it delivered to PMAC on February 28, 1990 ("February 28 Report"). Id. at Item # 28. The February 28 Report identifies 78 environmental issues or concerns at the Koppel Plant. Id. The report assesses each environmental issue in terms of its risk of environmental impact and concomitant remediation cost. See February 28 Report, B & W Supp. Manual Attach., Ex. B. The report divides each environmental issue into one of three categories: those carrying significant risk, those carrying intermediate risk, and those carrying low risk.¹Id. The February 28 Report also provides estimated remediation costs for all "Known Environmental Issues" and "Significant Environmental Issues." Id. The report provides no cost estimate for those environmental issues categorized as having either "intermediate risk" or "low risk." Id.

On March 15, 1990, PMAC provided B & W with a version of the Burgess & Niple environmental audit ("March 15 Report"). JSF, Item #29. The March 15 Report differed from the February 28 Report in a significant way. Compare March 15 Report, B & W Supp. Manual Attach., Ex. C; with February 28 Report, B & W Supp. Manual Attach., Ex. B. The March 15 Report did not include those environmental problems in the February 28 Report categorized as having intermediate or low risk. Id.

4. First Amendment to the PSA

After the Section 6.08 audit, the parties adopted the First Amendment to the PSA to resolve environmental issues raised by the audit. JSF, Item # 32; First Amendment to PSA, B & W Br., Ex. D. In the main, PMAC assumed liability for existing environmental problems identified in the March 15 Report in exchange for a credit against the purchase price. First Amendment to PAS, B & W Br., Ex. D. At the time the parties negotiated the amendment, they knew B & W would apply to the EPA for a permit to carry out its agreement to remove the EAF Dust, including transferring the dust to a landfill and closing the landfill. The parties also knew the EPA would perform a site assessment at Koppel as part of the permit process. In addition, the parties knew the EPA could condition its permit on remediation of areas apart from those containing EAF Dust. In light of this information, the parties negotiated Section 2(b) to deal with remedial action arising from the EPA permit process. The meaning of Section 2(b) is at issue in this appeal, but it provides as follows.

Seller agrees to promptly and diligently undertake, whether before or after the Closing, all remedial actions necessary to clean up any Solid Waste Management Unit (as defined by the Resource Conservation Recovery Act "RCRA") or Areas of Concern identified by the EPA and/or the PA DER as a result of the April, 1990 EPA and PA DER site assessment of the Koppel Plant and any other follow-up assessment or investigation related to the April, 1990 site assessment in connection with the RCRA Part B Closure of the Koppel Landfill and any Areas of Concern identified, provided such actions are based on conditions in existence at the Koppel Plant at or prior to the Effective Time (the "Koppel Site Assessment"). Seller shall bear any and all costs associated with such remedial activities and shall use its best efforts not to disturb or injure any part of the Acquired Assets comprising the Koppel Plant or interfere with the operations of the Koppel Plant. Seller shall indemnify and hold Buyer, its successors and assigns, and all of their respective shareholders, partners, officers, employees and agents harmless from and against any cost, expense, claim, action, liability and obligation including, without limitation, reasonable counsel fees, in any way arising from or relating to such remedial actions pursuant to Article X of the Agreement, except that any amounts required to be paid by Seller under this paragraph 2(b) shall

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