Column: How a bankruptcy filing shielded a big coal company from California’s climate-change lawsuits

Peabody Energy, the nation’s largest private-sector coal company, joined several of its fellow coal producers in bankruptcy in 2016. Its main goal was to wriggle out from under more than $10 billion in debt it had incurred to expand, even as demand was sharply falling.

But its bankruptcy filing has provided a collateral benefit: Peabody has been ruled immune from a lawsuit brought by three California jurisdictions blaming it and dozens of other fossil fuel companies for a sea level rise related to climate change.

The ruling came last month from U.S. Bankruptcy Judge Barry S. Schermer of St. Louis, who presided over Peabody’s bankruptcy. On Monday, the California plaintiffs — the counties of Marin and San Mateo and the city of Imperial Beach — filed a notice that they’ll appeal Schermer’s ruling to federal court.

“We believe the court properly barred these claims, and we will of course defend against the appeal,” says Beth Sutton, a Peabody spokeswoman. “We believe the best path to lower emissions isn’t through litigation or overt regulation.”

The lead lawyer for the plaintiffs, Vic Sher of San Francisco, says he’s confident Schermer is wrong. “We believe the cases were appropriately filed and brought in California, and look forward to having that resolved on appeal,” he told me.

But he may have a tough task bringing Peabody back into the lawsuits, bankruptcy experts say. That’s because most of the damage the cases lay at Peabody’s feet stems from activities prior to its bankruptcy filing. As a result, Schermer ruled, the company’s liability for those activities was extinguished by the bankruptcy.

“Does bankruptcy shield them from torts committed in the past? The answer is yes,” says Lynn LoPucki, a bankruptcy expert at UCLA law school.

Nor is it unusual for a business to use bankruptcy court as a shield against historic misdeeds. In perhaps the most notable case, Johns Manville filed for bankruptcy in 1982 as it faced a torrent of lawsuits from people who claimed they experienced lung disease from inhaling asbestos the company manufactured. As part of its bankruptcy reorganization, the company established a $2.5-billion trust to compensate victims, and emerged from bankruptcy in 1988.

A closer case involves the 2009 bankruptcy of General Motors, a fast-track process that was completed in only 40 days. In May, the Supreme Court refused to block lawsuits over a faulty ignition switch in GM cars that led to sudden stalls and at least 124 deaths, even though the casualties stemmed from pre-bankruptcy actions. The court upheld a lower court ruling that although the faulty cars were manufactured prior to 2009, GM had concealed the defect and taken insufficient steps to inform people they might have a claim to bring to bankruptcy court.

The California lawsuits state that Chevron, Exxon Mobil and other oil, gas and coal companies should be held responsible for the consequences of climate change, including a rise in the sea level threatening coastal communities. The defendants have known of these consequences for decades, the lawsuits assert, but “engaged in a coordinated, multi-front effort to conceal and deny their own knowledge … discredit the growing body of publicly available scientific evidence, and persistently create doubt” among the public. The plaintiffs are asking for money damages and the cost of “equitable relief to abate the nuisances” created by the plaintiffs.

The lawsuits got something of a boost earlier this month when a California appeals court upheld a finding that three paint companies should pay to abate the hazards of lead paint in homes built before 1951. The court accepted the argument of the 10 California cities and counties that brought the lawsuit that the companies had created a public nuisance through their marketing of lead paint for indoor use. The climate change lawsuits rest in part on the same public nuisance theory. (The lawsuits originally were filed in state court but moved to federal court at the defendants’ request.)

The bankruptcy judge, however, drew a wall around Peabody’s liability. Marin’s lawsuit, he observed, wasn’t filed until July 17, four months after he approved Peabody’s reorganization and released the company from bankruptcy. The reorganization plan was drafted in cooperation with the federal Environmental Protection Agency, he noted, and in any case, the California plaintiffs “chose not to participate in [Peabody’s] bankruptcy,” therefore “any … claim they may have had was discharged” — that is, nullified. He rejected the plaintiffs’ arguments that some of the relief they’re seeking from Peabody and the other defendants isn’t monetary and falls within their “police or regulatory powers,” which shouldn’t be protected by bankruptcy.

“It’s basically true that the bankruptcy court has very wide latitude” in absolving debtors of the consequences of prior acts to get them out of bankruptcy,” acknowledges Sean Hecht, an environmental law expert at UCLA. Peabody might have had a harder time shielding itself from the California lawsuit if it had been filed before the bankruptcy case closed. “The whole point of bankruptcy is to give the debtor a fresh start,” he says. “In a way, it’s fortunate for Peabody that the lawsuit was filed after its bankruptcy.”

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UPDATES:

2:54 p.m.: This post has been updated with a comment from Peabody.