Type: Law Bulletins
Date: 07/12/2011

Cost Recovery Not Allowed From Purchaser's Escrow

On June 21, 2011, the Fifth Circuit Court of Appeals ruled in In re Evans Industries, Inc., that a purchaser of assets from a bankrupt company cannot make a claim against a holdback escrow account for expenses incurred while cleaning up hazardous waste that the bankrupt company left behind. Pursuant to an asset purchase agreement, Grief Industrial Packaging and Services purchased five facilities from Evans Industries, Incorporated. Under the terms of the agreement, Grief placed more than $1.6 million in a holdback escrow account from which it was entitled to make claims for certain expenses. Any disputed claim would be submitted to the bankruptcy court for resolution. After Grief took possession of the facilities, it made a claim against the holdback escrow account for $649,633.75 in expenses that it incurred in removing and disposing of hundreds of barrels of hazardous material left behind by Evans at four facilities. To dispute Grief’s cost recovery claim, the Chapter 11 Trustee filed a complaint on behalf of Evans.

The Court of Appeals considered the proper interpretation of the asset purchase agreement to determine whether Evans breached its warranty that the facilities complied with all relevant environmental regulations, and whether Evans retained responsibility for environmental cleanup costs that accrued prior to the asset purchase agreement. Affirming the rulings by the bankruptcy court and the federal district court, the Court of Appeals concluded that the asset purchase agreement consigned responsibility to Evans, but the agreement did not say that Grief could engage in remediation on its own initiative and turn over the bill to the holdback escrow account. 

For more information about this ruling, please contact Frank Deveau or any member of Taft’s Environmental Practice Group.

The author acknowledges the able assistance and analysis of Jinee Majors, a Taft summer intern. 

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