ELR Citation: ELR 21051
No(s). 90-7360 (2d Cir. May 2, 1991)

The court rules that a governmental suit for the recovery of costs incurred in responding to completed violations of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) falls under the police power exemption to the automatic stay provisions of the Bankruptcy Code. New York City sued 15 corporate defendants in 1985 to recover the CERCLA response costs expended in removing hazardous substances from several city landfills. In 1987, one corporate defendant filed for reorganization under Chapter 11 of the Bankruptcy Code in California, and New York timely filed a proof of claim in the California bankruptcy proceeding. Subsequently, the corporate defendant moved the bankruptcy court to determine its liability to New York under CERCLA, to which New York moved the New York district court to withdraw to itself those parts of the bankrupt's California case that deal with New York's CERCLA claims. The New York district court then found the automatic stay in bankruptcy inapplicable to New York, granted New York's summary judgment motion as to the corporate defendant's liability, and enjoined the parties from litigating the remaining damage issues in California bankruptcy proceedings.

The court first notes that the New York district court's ruling on liability is not a final order, since it left the corporate defendant's damages and affirmative defenses still to be considered. Thus, the district court's grant of summary judgment is only partial and not appealable at this time. However, the court holds that it has jurisdiction under 28 U.S.C. §1291(a)(1) to review the applicability of the automatic stay provision to the CERCLA action and the propriety of the district court's injunction against further CERCLA litigation in the California bankruptcy proceeding.

The court next holds that New York's suit falls within the exemption to the automatic stay. The legislative history to the automatic stay provision shows that Congress intended to except damage actions for completed violations of environmental laws from the action of the stay. The availability of a reimbursement action encourages a quick governmental response to environmental crises, since the government can be secure in knowing reimbursement will follow. Such quick governmental responses are direct exercises of a government's police power, and actions to collect damages after violations have occurred are consistent with the legislative objective of enforcing police or regulatory powers. The need to continue such deterrent actions, despite the pendency of a bankruptcy action, furthers the purpose of the regulatory exemption to the automatic stay: to avoid frustrating necessary governmental functions by seeking refuge in bankruptcy court. Further, the city acted on behalf of the taxpayers and drew on public funds to respond to the public threat. Such suits, if permitted to progress to judgment notwithstanding bankruptcy, serve to deter the would-be violator and enforce the city's police or regulatory power. The availability of the automatic stay exemption is not determined by whether the city's action fits the definition of a "public" action under CERCLA §107(a)(4)(A), or a "private" action under §107(a)(4)(B), but by what entity is bringing the suit and for what purpose. Although the exemption is only available to governmental units bringing the suit, the Bankruptcy Code does not mandate in what form, under what statute, or in what capacity the governmental unit must sue.

The court next holds that the district court acted within its discretion in enjoining litigation of damages and related issues in the California proceeding both under the "first filed" rule and as a matter of judicial economy. The city's suit was filed before defendant filed for bankruptcy in California, and no special circumstances exist that justify giving priority to the second action. Both suits involve identical parties and present the same issue. Because the New York district court has expended considerable time and effort on this case, judicial economy argues against allowing two courts to expend their energies on the same case. Moreover, litigating the city's CERCLA claim in the California bankruptcy proceeding may require a withdrawal to a California district court if New York's claim should need substantial interpretation of CERCLA, which would further frustrate judicial economy.

[Previous decisions in this litigation are published at 16 ELR 20850, 19 ELR 20332, 20 ELR 21321, and 21 ELR 20248.]

Counsel for Appellant
Joseph A. DiBenedetto, Jeanne Murphy
Winston & Strawn
175 Water St., New York NY 10038
(212) 269-2500

Counsel for Appellee
Christopher A. Amato, Ass't Corporation Counsel
Corporation Counsel for the City of New York
100 Church St., New York NY 10007
(212) 566-4515