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Elizabeth Warren's Work in the CMC Heartland Case

posted by Adam Levitin

Elizabeth Warren’s bankruptcy work continues to be in the news, now with a Washington Post article on her work in the CMC Heartland case. Unfortunately, the Washington Post completely misses the point about why Elizabeth decided to work on this case. Let me correct the record about Elizabeth’s (very limited) role in the CMC Heartland case.

Background

In CMC Heartland, Elizabeth was retained by a railroad, CMC Heartland, to write a memo to the Solicitor General's Office arguing that the Solicitor General should urge the Supreme Court to hear a case between CMC Heartland and Union Pacific because of the case's importance to bankruptcy law. Irrespective of the merits of the case, it absolutely raised an important bankruptcy law issue; Elizabeth was spot on in arguing (unsuccessfully) that it was a case the Supreme Court should have considered.

Here's the background. In the 1970s, a railroad company, the “Milwaukee Road,” filed for bankruptcy. As part of that bankruptcy, Union Pacific purchased a rail yard in Washington State from the debtor. The purchase included an indemnification for environmental liability. The company that subsequently emerged from bankruptcy was called CMC Heartland.

A decade after the sale (and well after the conclusion of the bankruptcy), Washington State passed a new environmental law that required a cleanup of the rail yard. Union Pacific paid for the cleanup, but sought to have CMC Heartland—the reorganized debtor—foot the bill based on the indemnification agreement. CMC Heartland argued that it shouldn't be liable because Union Pacific had never filed a claim in the bankruptcy based on the indemnification agreement, so all of its liability under the indemnification agreement was discharged in the bankruptcy. Union Pacific countered that the discharge covered only liabilities that existed at the moment of the discharge, not liabilities that arose in the future. Hence a "future claims" problem.    

The 7th Circuit Court of Appeals agreed with Union Pacific, so the environmental indemnification was discharged only for liabilities that existed at the time of the discharge, not ones that arose in the future like under the new Washington State law.  

CMC Heartland Was About Which Railroad Would Pay for the Clean Up, Not Whether Someone Would Pay

The first point that the Post gets wrong is that this case was not about a choice between protecting the environment and protecting the bankruptcy system. There was no question that the site would be cleaned up (and it has been). One business had already paid for the clean up and was seeking reimbursement from another for it. Nor was there any question of whether public money would be used for the clean up. All of the quotations from environmentalists complaining about bankruptcy being used to dodge environmental responsibilities are disconnected from the actual facts of the case. 

The only question in CMC Heartland was which private company would pay for the cleanup that had already happened and therefore what rule that would set up for the bankruptcy system going forward. Put another way, it is simply incorrect to suggest that this case was about helping businesses get out of environmental liability. It was a case about which business had the liability.

Elizabeth Warren's Memo to the Solicitor General Underscored Why the CMC Heartland Case Was Important for Bankruptcy Law Generally

Elizabeth's memo to the Solicitor General pointed out that letting stand the appellate court ruling that CMC Heartland was liable for the cleanup expense would undermine the bankruptcy system. Elizabeth's memo explained why providing the debtor with a “fresh start” was so critical, and why that required a process to resolve all possible claims against the debtor at one time. As Elizabeth wrote in her memo:

The extent to which a bankruptcy filing resolves all the claims based on the debtor's pre-filing past is a question that goes to the essence of what bankruptcy should accomplish...If an obligation of the debtor is not dealt with in the bankruptcy, then the obligation may survive after the bankruptcy case is completed...[and] creditors who have a claim tied to the debtor's pre-bankruptcy past may disrupt the debtor's post-bankruptcy future.

Elizabeth's memo also emphasized how the CMC Heartland case disincentivized investment in bankrupt companies by firms like CMC Heartland that wanted to put the debtor's assets back to productive use. As Elizabeth observed, CMC Heartland meant that parties that provided rescue financing could find themselves subject to unanticipated liabilities years after their acquisitions.  

CMC Heartland Needs to Be Seen in the Context of Elizabeth's Other Work on Future Claims

The other thing the Post story misses is that Elizabeth's work in CMC Heartland reflects only part of her work on future claims. Elizabeth consistently urged the broadest possible coverage of future claims in the Chapter 11 process, not just in CMC Heartland, but also in cases like LTV and Fairchild Aircraft and Piper Aircraft. But Elizabeth also urged a process to ensure that debtors would address all future claims in their bankruptcies and that there would be adequate representation of parties with future claims and funds set aside to cover such future claims equally with existing claims. This would have required companies to set aside funds to pay for future environmental claims. She worked on processes to cover future claims in number of asbestos bankruptcy cases as well as in Dow Corning, but her concern over the issue is best seen in Piper Aircraft, where she filed an amicus brief on behalf of herself (not any client).

In Piper, Elizabeth argued that the bankruptcy should appoint a “future claims representative” to represent parties who might in the future have claims from defective aircraft so they could be represented fairly in the bankruptcy process, while also ensuring a fresh start for the reorganized debtor. Elizabeth's work in Piper is simply the corollary to her position in CMC Heartland. Together, they stand for the idea of a clean fresh start while treating future claimants—whether tort or environmental—fairly. This is a difficult thread for a reporter not versed in bankruptcy law to see. But to a bankruptcy scholar, it is a pretty clear and consistent theme that results in the best possible policy—one that both preserve jobs and makes it more likely for tort claimants to get paid.

As I observed in a prior blog post, when one looks at the total picture of Elizabeth Warren's bankruptcy consulting work, amicus briefs, and pro bono representations, what one sees is a picture of a leading bankruptcy scholar who chose to get involved in litigation very selectively in order to for principles that make the bankruptcy system work better and more fairly. That’s a great thing. That’s exactly the position Elizabeth—and anyone who cares about the bankruptcy system or the health of the economy—should have been taking. To suggest that there was anything untoward about her work in CMC Heartland is absurd.

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