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The Intersection of Equitable Relief and Creative Problem Solving: Delaware Bankruptcy Court Approves Mandatory Settlement Procedures to Address Environmental Remediation Issues

Bankruptcy courts are granted, under Section 105(a) of the Bankruptcy Code, the equitable power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”  The reality of chapter 11 is that complex issues inevitably arise, and these issues will occasionally challenge the traditional methods and tools utilized by debtor’s counsel to craft an appropriate solution. Although it may not have been the original intent of Congress to imbue section 105(a) of the Bankruptcy Code with overt significance, it turns out that section 105(a) can and has served as a means to encourage creative problem solving in the chapter 11 context. A prime example of creative problem solving fueled by section 105(a) occurred at a critical juncture in the bankruptcy cases of one of the world’s largest lead-acid battery manufacturers, Exide Holdings, Inc. (Case No. 20-11157, Bankr. D. Del. 2020).

Exide Holdings, Inc. and its affiliated debtors (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on May 19, 2020 (the “Commencement Date”). The Debtors had previously filed for bankruptcy in 2002 and 2013, largely as a result of significant environmental remediation costs associated with the Debtors’ non-performing properties (collectively, the “NPPs”). In 2018 and 2019 alone, the Debtors spent approximately $35.6 million and $29.5 million, respectively, in environmental remediation costs. As such, contemporaneously with their chapter 11 petitions, the Debtors filed a motion requesting Judge Sontchi to implement mandatory settlement procedures at the outset of the chapter 11 cases (the “Settlement Procedures”) among the Debtors and various regulatory agencies (collectively, the “Agencies”).

The overarching goal of implementing the Settlement Procedures was to facilitate the orderly transfer of the NPPs from the Debtors’ liquidating estates in an efficient manner that minimized the risk of harm to public health and safety. The Settlement Procedures were divided into three stages. The first stage consisted of an initial settlement conference between the Debtors and the relevant Agency with respect to the applicable NPP at issue. If the parties were unable to reach a settlement within a prescribed time period, the parties transitioned to the second stage of the Settlement Procedures, which consisted of mediation with a bankruptcy court-appointed mediator. Finally, if the parties failed to reach a settlement through the mediation process within a prescribed time period, the parties were required to present Judge Sontchi with a proposed scheduling order setting forth applicable deadlines for the resolution of the Debtors’ proposed abandonment of the relevant NPP under section 554(a) of the Bankruptcy Code.

The Settlement Procedures constituted the first of their kind in the context of addressing complex environmental remediation issues in bankruptcy. The framework of the Settlement Procedures, including the mandatory participation in settlement and mediation discussions and the imposition of sanctions at the bankruptcy court’s discretion, mirrored the settlement procedures approved by Judge Peck in the chapter 11 cases of Lehman Brothers Holdings Inc. and its affiliated debtors (collectively, the “Lehman Debtors”). Although the Debtors relied in part on a Delaware Local Rule that permitted Judge Sontchi to assign a contested matter to mediation, the only statutory basis provided to approve the Settlement Procedures was section 105(a) of the Bankruptcy Code. Just as Judge Peck was faced with novel and complex issues upon the filing of the chapter 11 cases by the Lehman Debtors, Judge Sontchi was similarly faced with novel legal issues as a result of overseeing the administration of liquidating chapter 11 cases involving (i) approximately $817 million in debt, (ii) significant environmental remediation legal issues and costs, and (iii) the participation of a myriad of federal and state regulators across the United States.

In the absence of section 105(a) of the Bankruptcy Code, it is impossible to know whether the Settlement Procedures would have been proposed in the first place, much less approved by a bankruptcy judge. What is eminently clear, however, is the freedom and space that section 105(a) provides to debtors in the face of seemingly insurmountable obstacles. When debtors utilize section 105(a) of the Bankruptcy Code to implement a collaborative process that facilitates mutually beneficial value to key stakeholders, a bankruptcy judge is provided with the ability to positively impact the outcome of a chapter 11 case in ways that otherwise would not have been possible.

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