ELR Citation: ELR 21269
No(s). s. 87 Civ. 8144 (JES), 88 Civ. 0834 (JES) (S.D.N.Y. Mar 15, 1990)

The court holds that a claim for cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is not dischargeable in bankruptcy by a corporate debtor unless there has been a prepetition release or threatened release of hazardous waste. After a diversified company and 66 affiliated corporations filed bankruptcy petitions, federal and state governments sought declaratory judgments as to the dischargeability of environmental claims against the debtors. The court first holds that absent a prepetition release or threatened release of hazardous waste, any subsequent liability for environmental cleanup or remedial action is not dischargeable in bankruptcy. The court notes that bankruptcy discharges liability only for claims arising before the bankruptcy petition was filed. Unless there has been a prepetition release or threatened release of hazardous waste, which is a constituent element of CERCLA liability justifying governmental action, there is no prepetition event as to which any postpetition contingent injury can properly attach. The court holds that before a contingent claim can be discharged, it must result from prepetition conduct fairly giving rise to that contingent claim. Future environmental obligations may be dischargeable, although a CERCLA cause of action fully arises only after a review has been made, a remedy chosen, and costs incurred. The court holds that injunctive relief that provides that a defendant who fails to comply may be liable for cleanup costs is dischargeable in bankruptcy where there has been a prepetition release or threatened release, but injunctive relief that does not provide for cleanup cost liability is not dischargeable, even if it provides for punitive civil penalties for noncompliance. Thus, where a creditor has the option of converting an injunction into a right to monetary compensation, as the Environmental Protection Agency can do here if it performs the cleanup because of debtor's failure to do so, such an obligation must be regarded as a dischargeable claim. The policies underlying CERCLA, the Resource Conservation and Recovery Act, and state environmental laws are not contravened by allowing a debtor to be discharged from liability in bankruptcy. Nothing in either the Bankruptcy Code or the environmental statutes sets forth a clear congressional expression that claims for contingent cleanup and remedial costs should not be dischargeable. Finally, the court holds that monies spent complying with environmental laws postpetition where there has been a prepetition release or threatened release of hazardous waste are actual and necessary costs and expenses of preserving the estate and thus entitled to an administrative priority. Moreover, civil penalties for postpetition violations are also entitled to be treated as administrative expenses.

Counsel for Plaintiff
Peter Mounsey
Land and Natural Resources Division
U.S. Department of Justice, Washington DC 20530
(202) 514-2000

Norman Spiegel, Nancy Stearns, Ass't Attorneys General
Department of Law, State Capitol, Albany NY 12224
(518) 474-7330

Counsel for Defendants
Lewis B. Kaden, Karen E. Wagner, Joan I. Greco
Davis, Polk & Wardwell
One Chase Manhattan Plaza, New York NY 10005
(212) 530-4000

Michael J. Crames, Herbert S. Edelman, Edmund M. Emrich
Levin & Weintraub & Crames
225 Broadway, New York NY 10007
(212) 962-3300

Lawrence M. Handelsman, Mark A. Speiser, Madelaine Berg, Robert Raskin
Stroock & Stroock & Lavan
7 Hanover Sq., New York NY 10004-2594
(212) 806-5400