ELR Citation: ELR 20783
No(s). 3-91-1653-H (N.D. Tex. Feb 26, 1992)

The court holds that bankruptcy debtors' future response and natural resource damage costs under the Comprehensive Environmental Response. Compensation, and Liability Act (CERCLA), which are based on prepetition conduct that is fairly contemplated by the parties at the time the debtor files in bankruptcy, are claims subject to discharge under the Bankruptcy Code. After debtors voluntarily filed for reorganization under the Bankruptcy Code, the United States filed a proof of claim in the bankruptcy court on behalf of the U.S. Environmental Protection Agency (EPA) and the Department of the Interior listing seven sites nationwide where debtors allegedly generated or disposed of hazardous substances. In addition, the United States reserved its right to assert liability against debtors under CERCLA with respect to at least 13 other unlisted sites based on pre-petition conduct. In response to debtors' objection to the government's proof of claim, and motion to estimate and classify the government's claim, the United States filed and was granted a motion for withdrawal of reference of all matters pertaining to the government's proof of claim and all of debtors' responses to that claim.

The court first holds that it is immaterial for the purpose of bankruptcy whether EPA's claims against the debtors are ripe for adjudication under CERCLA, as long as all the elements that can give rise to liability under CERCLA have occurred prepetition. While non-bankruptcy substantive law, such as CERCLA, gives rise to the existence of a claim under the Bankruptcy Code, it is not dispositive of the time at which a claim arises under the Code. Moreover, case law has held that a speedy and rough estimation of the claims for the purposes of bankruptcy is not meant to interfere with the normal CERCLA enforcement proceedings, but serves solely to determine the status to be accorded potential CERCLA claims in bankruptcy in order to facilitate administration of the case.

The court holds that all future response and natural resource damage costs based on prepetition conduct that can be fairly contemplated by the parties at the time of debtors' bankruptcy are claims under the Code. Factors relevant to whether fair contemplation of future costs based on prepetition conduct occurred at a particular site include knowledge by the parties of a site in which a potentially responsible party (PRP) may be liable, listing of the site on the national priorities list (NPL), notification by EPA of PRP liability, commencement of investigation and cleanup activities, and incurrence of response costs. The court notes that at least one, and at times all, of these factors have occurred in the seven sites listed by EPA for future response and natural resource damage costs.

The court next rules that it has jurisdiction to hear debtors' claim for declaratory judgment on the dischargeability of the government's claims for costs at the unlisted sites. Although specific statutory waiver of sovereign immunity is necessary to maintain a lawsuit against the United States, §106(c) of the Code contains such a waiver. Moreover, CERCLA §113(h) does not serve as a jurisdictional bar to declaratory relief in the context of bankruptcy when the United States has engaged in enforcement action by filing a proof of claim. However, although a declaratory judgment interferes with normal CERCLA enforcement proceedings by precluding future assertion of liability by the United States against the debtors for the unlisted sites, once the United States files a proof of claim, the exceptions to the jurisdictional bar of CERCLA §113(h) are activated. The court notes that reading the Code and CERCLA together, the government's filing of a proof of claim is an action that falls under the enumerated exceptions to §113(h). Any other reading would allow the United States, by not filing a proof of claim, to preserve its claims for all sites for post-bankruptcy proceedings to the detriment of all other creditors whose claims are discharged, and of the debtors to the extent post-bankruptcy environmental claims impact their ability to effectively reorganize. However, the court holds that although the debtors' environmental liabilities for the unlisted sites arising from pre-petition conduct are claims subject to discharge within the meaning of the Code, the novel nature of the legal issues presented constitutes the unique or extraordinary circumstances required to excuse a creditor's failure to file by the bar date. Thus, extension of the bar date for filing claims for the unlisted sites with the bankruptcy court is warranted.

The court next holds that all response costs incurred post-petition as a result of conduct occurring pre-petition in regard to property presently owned by debtors are entitled to administrative priority, subject to a determination that such costs were necessitated by conditions that posed an imminent and identifiable harm to the environment and public health. Whether a particular expense is an "actual and necessary cost" under §503(b) of the Code is a question of fact to be determined after notice and hearing.

Finally, the court holds that subject to a finding of divisibility, debtors' liability at the listed sites will be estimated on the basis of joint and several liability. In order to avoid joint and several liability, the debtors must establish that the environmental injury is in fact capable of divisibility, and that a reasonable basis exists for such apportionment. The court refers the case back to the bankruptcy court.

Counsel for United States
Carolyn Dibona
Solicitor's Office
U.S. Department of the Interior
Washington, DC 20240
(202) 343-3051

Counsel for Debtors
Boe Martin
Johnson & Gibbs
900 Jackson St., Ste. 100, Dallas TX 75202
(214) 977-9000