ELR Citation: ELR 21466
No(s). s. 90-5024 et al (2d Cir. Sep 6, 1991)

The court holds that unincurred Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) response costs for prepetition releases or threatened releases of hazardous substances are "claims" dischargeable in bankruptcy. A diversified steel, aerospace, and energy corporation filed a Chapter 11 bankruptcy petition and listed 24 pages of "contingent" claims in its schedule of liabilities, for which CERCLA response costs had not been incurred prepetition. The court first holds that the district court properly applied the Bankruptcy Code's definition of "claim" when it held that sums ultimately to be owed to the Environmental Protection Agency (EPA) at such time as the Agency incurs CERCLA response costs amount to claims dischargeable in bankruptcy. Although this case appears to involve a conflict between the Code and CERCLA, which happen to conflict in their application to a specific set of facts, the court observes that it need not be swayed by the arguments advanced by EPA that a narrow reading of the Code will better serve the environmental interests Congress wished to promote in enacting CERCLA. If the Code creates limits on the extent of environmental cleanup efforts, the remedy is for Congress to make exceptions to the Code to achieve other objectives Congress chooses to reach, rather than for courts to restrict the meaning of across-the-board legislation like a bankruptcy law in order to promote objectives evident in more focused statutes. The broad definition Congress gave under the Code to the term "claim" counsels against the narrow reading urged by EPA. Moreover, although the Code's inclusion of "unmatured" and "contingent" claims usually applies to future obligations contemplated by the parties at the time the original relationship was created, the relationship between environmental regulating agencies and those subject to regulation provides sufficient "contemplation" of contingencies to bring most ultimately maturing payment obligations based on prepetition conduct within the definition of "claims." Finally, the court notes that if unincurred CERCLA response costs are not claims, some corporations facing substantial environmental claims will not be able to reorganize at all.

The court further holds that the bankruptcy proceeding does not amount to preenforcement judicial review of CERCLA claims, and EPA is thus not entitled to a declaratory judgment upholding its contention that unincurred response costs are not dischargeable claims. EPA's contention that extensive factual inquiry will have to be undertaken that would effectively force the agency to litigate in the bankruptcy proceedings to liquidate and fix any claims it might conceivably have against the corporation for postconfirmation response costs is not necessarily correct, since contingent claims may be estimated if their liquidation would unduly delay the administration of the case. Nothing prevents the speedy and rough estimation of CERCLA claims for purposes of determining EPA's voice in the Chapter 11 proceedings, with ultimate liquidation of the claims to await the outcome of the normal CERCLA enforcement proceedings in which EPA will be entitled to collect its allowable share of incurred response costs. Moreover, the bankruptcy court is not being called on to review any challenges to removal or remedial actions selected under CERCLA §104 or to review any order issued under CERCLA §106(a). Thus, CERCLA's ban on preenforcement review in §113(c)(2) is inapplicable.

The court next holds that injunctive relief that imposes an obligation entirely as an alternative to a right to payment is dischargeable in bankruptcy, such as where EPA orders a party to remove waste that is not currently causing pollution when EPA could have removed the waste itself and sued to recover its costs. However, where there is no right to payment for cleanup or other remedial costs, claims for injunctive relief are dischargeable. While EPA is entitled to seek payment if it elects to incur cleanup costs itself, it does not have the authority to accept a payment from a responsible party as an alternative to continued pollution. Thus, any order that to any extent ends or ameliorates continued pollution is not an order for breach of an obligation that gives rise to a right of payment and is for that reason not a "claim." But, an order to clean up a site, to the extent that it imposes obligations distinct from any obligation to stop or ameliorate ongoing pollution, is a "claim" if the creditor obtaining the order had the option, which CERCLA confers, to do the cleanup work itself and sue for response costs, thereby converting the injunction into a monetary obligation. In addition, holding that injunctions that seek to remedy ongoing pollution are nondischargeable in bankruptcy is more faithful to Supreme Court decisions holding that the Code does not entitle a debtor to abandon property in violation of an environmental regulation that is reasonably designed to protect the public health or safety from identified hazards.

Finally, the court holds that response costs for postpetition remedial actions qualify as administrative expenses, and are accorded priority in the bankruptcy proceeding. If property on which hazardous substances pose a significant threat to public health cannot be abandoned, it follows that expenses to remove the threat posed by such substances are necessary to preserve the estate. Whether any particular item of cost is entitled to priority requires a particularized determination.

[The district court decision is published at 20 ELR 21269.]

Counsel for Plaintiff-Appellant
Richard W. Mark, Ass't U.S. Attorney
1 St. Andrew's Plaza, New York NY 10007
(212) 791-0008

Vicki L. Plaut, Joel M. Gross
Environment and Natural Resources Division
U.S. Department of Justice, Washington DC 20530
(202) 514-2000

Counsel for Defendants-Appellees
Karen E. Wagner
Davis Polk & Wardwell
1 Chase Manhattan Plaza, New York NY 10005
(212) 530-4000

Herbert S. Edelman
Kaye, Scholer, Fierman, Hays & Handler
425 Park Ave., New York NY 10022
(212) 836-8000

Before: NEWMAN and ALTIMARI, Circuit Judges, and CONBOY, District Judge.^*