15 ELR 10168 | Environmental Law Reporter | copyright © 1985 | All rights reserved

Bankruptcy and the Cleanup of Hazardous Waste: Caveat Creditor

Editors' Summary: The huge liabilities associated with cleanup of hazardous waste sites have driven some waste generators and disposers into bankruptcy. When this happens, business creditors find themselves fighting with the government and cleanup-related claimants over the bankrupt's assets.These confrontations have become more common: the Supreme Court has already handed down one ruling in a cleanup-bankruptcy case, Kovacs, and has granted certiorari in two more. The authors give a brief overview of federal hazardous waste and bankruptcy laws and then explore their interaction in four key areas: the discharge of cleanup liability, the priority of a cleanup claim in relation to other creditors, the abandonment of waste sites to avoid liability, and the effect of the automatic bankruptcy stay on hazardous waste litigation. They suggest how many of the unresolved legal issues in these areas could be decided and discuss how the law will affect parties responsible for cleanup and their creditors.

Messrs. Drabkin and Moorman are partners, and Mr. Kirsch is an associate, at Cadwalader, Wickersham & Taft, 1333 New Hampshire Avenue, N.W., Washington, D.C. 20036.

[15 ELR 10168]

Statutes providing for the cleanup of hazardous waste have recently emerged as new sources of both concern and promise for creditors and debtors. Congress designed the Bankruptcy Code¹ to provide for an equitable settling of a debtor's accounts and to provide a "fresh start" for distressed businesses so that they can reorganize their financial affairs.² Congress and the state legislatures have also passed numerous environmental statutes such as the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund or CERCLA)³ to protect the public from harmful substances in the environment. When a business facing environmental cleanup obligations files for bankruptcy, these policies are brought into conflict. Media attention has focused on the growing use of bankruptcy to alleviate the burdens of environmental liability. The public has been left with the image of bankruptcy as an unintended escape route for waste disposers seeking to evade their public responsibilities to clean up the environment.

This image is inaccurate and unjust. Companies shackled by liability for hazardous waste should not necessarily be faulted for using the protections of bankruptcy; these companies generally are reacting as would any business facing a liability it can never pay. Features of both the bankruptcy and the environmental laws actually encourage businesses to seek refuge in bankruptcy. Under the Bankruptcy Code, unlike its predecessor the Bankruptcy Act of 1898,⁴ a debtor seeking to reorganize its business need not be insolvent before filing for bankruptcy.⁵ Upon filing for bankruptcy [15 ELR 10169] under the 1978 Code, most pending lawsuits against the debtor are automatically stayed.⁶ Further, filing for bankruptcy no longer means that control of the business must be transferred to an unrelated court-appointed bankruptcy trustee. The Code anticipates that a debtor reorganizing its business will usually continue to run it.⁷

If the Code makes bankruptcy amore attractive option, environmental laws can make it a virtual necessity. In the usual course of business, the magnitude of a company's debts is a function of the organization's size and operations. Environmental cleanup obligations created by CERCLA, however, may bear no relationship to either of these factors. A small company may be faced with staggering liability for decontaminating a hazardous waste site, even from small releases of certain chemicals. According to the Environmental Protection Agency (EPA), the average expenditure per Superfund site is close to $12 million.⁸ Moreover, under some circumstances a company can be held liable under CERCLA even though its business had nothing to do with the generation or disposal of hazardous waste.⁹ When a company faces environmental liabilities that are either grossly out of proportion to the size of the business or unanticipated given the nature of the business, it has little choice but to seek shelter in bankruptcy.

The Supreme Court has recently decided one case addressing the relationship between bankruptcy and environmental laws, Ohio v. Kovacs,¹⁰ and has agreed to hear argument on two others, both related to the Quanta Resources decisions from the United States Court of Appeals for the Third Circuit.¹¹ The Kovacs decision, although explicitly limited in scope by the Supreme Court, recognized that debtors may discharge claims arising out of environmental obligations in bankruptcy. The Quanta Resources cases, which will decide whether a bankruptcy trustee may abandon property accompanied by environmental liabilities, may have a similar effect. These cases have obvious importance to that segment of the business community exposed to environmental liabilities.

This is only one side of the relationship between bankruptcy and environmental statutes, however. Environmentals laws have widespread and highly significant implications for the entire business community. The new obligations created by environmental statutes create a number of new pitfalls for businesses having no direct involvement in environmental pollution. They create uncertainty where creditors once stood on firm ground and they require new caution in many types of routine business transactions. This article will review both the new uses of bankruptcy to ameliorate environmental obligations and the new pitfalls that environmental statutes present.

I. The Superfund Scheme

A. EPA's Authority Under CERCLA

CERCLA authorizes a variety of mechanisms for the governmental or private party cleanup of sites contaminated with hazardous substances. The statute is worded very broadly to apply to all "owners and operators"¹² of "facilities"¹³ from which hazardous substances are being "released."¹⁴

CERCLA § 104¹⁵ empowers EPA to clean up a hazardous waste site itself. The cleanup is financed initially by the federal Superfund, a $1.6 billion fund established by CERCLA for the purpose of funding hazardous waste cleanups.¹⁶ Congress did not intend CERCLA to be a public works project, however. Following the cleanup, EPA seeks reimbursement from potentially responsible parties (PRPs) under the terms of CERCLA § 107.¹⁷

EPA is not the only party that can undertake CERCLA cleanups. States and private parties may also clean up a site and then seek reimbursement under § 107.¹⁸ In such a [15 ELR 10170] case, the party incurring the "response costs" may recover the expenditures in one of two ways: by making a claim against the Superfund, or by a direct suit against any or all of the parties whom the Act hold liable.

In the event of a claim by a state or private party against the Superfund, EPA can sue the PRPs to recover the cleanup costs, thereby replenishing the Superfund.¹⁹ Thus, PRPs are ultimately liable for all CERCLA cleanups. For this reason, the liability provisions of the Act become the focus of many CERCLA controversies.

As an alternative to an EPA cleanup and cost recovery action, EPA may, under § 106,²⁰ issue an administrative order directing a party to clean up a site when such an order "may be necessary to protect public health and welfare and the environment."²¹ If the party fails to comply with the order, EPA may impose penalties of up to $5,000 per day.²² Moreover, if the party fails to clean up the site and EPA ultimately performs the cleanup itself, the party may be held liable for punitive damages amounting to three times the cost of the cleanup, in addition to the compensatory cleanup costs.²³ EPA has met some problems in issuing § 106 orders, however, and has made sparing use of this provision.²⁴ At the present time, EPA is using the § 106 order principally in a consent form for certain types of negotiated settlements. The courts are currently divided on the constitutionality of the penalty provision of section 106, because it imposes penalties before parties have an opportunity to seek judicial review of EPA's issuance of an order.²⁵

B. Liability of Owners, Operators, Generators & Transporters Under CERCLA

CERCLA imposes liability on past and present owners and operators of facilities releasing hazardous substances into the environment,²⁶ on generators of hazardous wastes,²⁷ and on transporters.²⁸ The liability section of CERCLA, § 107,²⁹ creates broad liability for "a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance."³⁰ A substance is a "hazardous substance" under CERCLA if it is listed as hazardous or toxic under a variety of other environmental statutes or under CERCLA itself.³¹ EPA's possible "response costs" include immediate actions to remove hazardous substances from a facility as well as long-term remedial measures to "prevent or minimize the release of a hazardous substance so that they do not migrate to cause substantial danger to present or future public health or welfare or to the environment."³²

CERCLA is silent on the degree of culpability that gives rise to liability. The courts have uniformly held, however, that CERCLA imposes a strict liability standard.³³ Thus, an absence of "fault" does not preclude liability under the statute. For example, the statute holds liable a current owner or operator of a facility even if the owner or operator did nothing to contribute to the pollution at the site.³⁴

Just as uniformly, the courts have held that all CERCLA defendants are jointly and severally liable for all response costs, unless the injury is divisible.³⁵ The effect of joint and several liability is that EPA is able to sue any one or more of the PRPs, with the selection of the targets based on their predicted ability to pay rather than on their overall role in creating the situation giving rise to the liability. Once adjudged liable, these parties must then attempt to obtain contribution from other parties not subjected tothe lawsuit. If the truly culpable PRPs are judgment-proof, the relatively innocent PRPs may remain solely liable notwithstanding their blamelessness.

Defendants in CERCLA suits do have certain available defenses. They may argue that their conduct does not fall [15 ELR 10171] within the bounds of the particular liability language of § 107, or that liability is precluded by one or more of the affirmative defenses contained in the Act. Defenses based on the liability language, with extremely few exceptions, have not succeeded. The affirmative defenses for acts of God, acts of war, and certain third-party actions,³⁶ also are very limited. The burden of proving them rests on the defendant, and the burden is difficult to meet. Perhaps for this reason the courts have yet to clarify the contours of the affirmative defenses. Moreover, questions of foreseeability, due care, and causation³⁷ will present questions of fact likely to lead to inconsistent and unpredictable decisions. Thus, CERCLA's affirmative defenses provide little solace to a company that happens to fall within the Act's expansive grasp.

C. The States' Role Under CERCLA

States, like the federal government, may undertake Superfund cleanups and then sue the PRPs to recover their costs. In addition, numerous states have their own mini-Superfund statutes.³⁸ These statutes provide state funding for hazardous waste cleanup, and also place ultimate liability on the PRPs. Thus, at any given Superfund site, a company may be forced to deal with EPA's Washington headquarters, an EPA regional office, and a variety of different state officials and agencies. Each entity may have its own view of the appropriate response for the site, enmeshing the PRPs in interagency jurisdictional disputes. The cost of an appropriate legal response to such a governmental barrage is itself more than many small companies are able to bear.

II. The Bankruptcy Code

A. Discharge of Pre-Petition Debts

The main reason businesses file for bankruptcy is the avoidance of overly burdensome pre-petition debts. With certain exceptions,³⁹ a discharge in bankruptcy releases the debtor from all debts arising before the bankruptcy.⁴⁰ The code defines a "debt" as "liability on a claim."⁴¹ A claim is either a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured"⁴² or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured to unsecured."⁴³

The questions that might be expected to arise in the context of an environmental cleanup obligation are whether the obligation is properly characterized as a debt, and, if so, the time at which the obligation arose. The first question has been partially answered by the Kovacs decision. The second question has yet to be addressed squarely by the courts.

B. Priorities of Claims

If an obligation is a debt within the meaning of the Code, and therefore subject to discharge, the party claiming the debt is a creditor who may be entitled to share in the assets of the bankruptcy estate. In most bankruptcies the estate's assets are insufficient to pay all creditors' claims.

Thus, the Code establishes a system of priorities for the payment of the claims from the assets of the bankruptcy estate. Secured creditors, those who have secured interests under state law, are usually first in line.⁴⁴ The secured creditors are entitled to satisfy their claims from the property subject to their liens. In many instances, payment of the secured claims leaves little or nothing in the estate for payment of the remaining unsecured claims.

If any funds remain after payment to the secured creditors, these funds are paid first for administrative expenses, the costs of administering the bankruptcy estate.⁴⁵ Administrative expenses include not only the costs of the bankruptcy proceedings themselves but also "the actual, necessary costs and expenses of preserving the estate"⁴⁶ and the cost of operating the business during the pendency of the bankruptcy proceeding.⁴⁷ Thus, obligations of the estate arising after the filing of the bankruptcy petition are treated as administrative expenses, and take precedence over the unsecured obligations incurred before filing of the petition.

Administrative claimants are followed by various other priority claimants.⁴⁸ After the administrative priority claimants, the estate's assets must be applied to certain unsecured claims of individuals, such as wage claims and customer deposits, and then to taxes.⁴⁹ Non-tax debts to the [15 ELR 10172] government are not included in the list of priorities. Thus, in most cases, if pre-petition environmental cleanup costs are treated as normal unsecured non-tax debts, the debtor's assets will be depleted long before any cleanup costs can be paid.

C. Abandonment of Property

A primary function of the bankruptcy process is the collection and orderly distribution of the estate's assets. This task is thwarted by the retention of property that has little value, or worse, negative value. Thus, the Bankruptcy Code permits the abandonment of property that is "burdensome to the estate or that is of inconsequential value to the estate."⁵⁰ Once abandoned, the property reverts to "any party with a possessory interest."⁵¹ Usually, this party is the debtor.⁵²

For the property being abandoned, abandonment reverses the transfer that takes place upon filing for bankruptcy. Upon filing, the bankruptcy estate assumes all of the debtor's property.⁵³ The "abandonment constitutes a divestiture of all interests in property that were property of the estate."⁵⁴ Title is revested in the debtor, and "lienors are free to proceed against it just as they normally would under applicable state law."⁵⁵ Abandonment "is simply a declaration by the trustee that the bankrupt estate wants nothing further to do with the property."⁵⁶

Bankruptcy Rule 6007 sets forth two procedures for the abandonment of property. The trustee or debtor in possession may choose to abandon property by giving notice to the creditors, who may object to the abandonment within fifteen days.⁵⁷ Alternatively, a party in interest may file a motion with the Bankruptcy Court for an order requiring the trustee or debtor in possession to abandon certain property.⁵⁸ If either an objection is made or a motion is filed, the Rules provide that the Bankruptcy Court will hold a hearing on the abandonment.⁵⁹

One significance of abandoning property encumbered by environmental liabilities is that abandonment may serve to separate the property with its accompanying liability from the financial resources of the estate that might be applied to that liability. The precise effect of abandonment, however, may be far more complex because of the unusual Superfund liability scheme. The contours of the intricate interrelationships between bankruptcy and environmental statutes in this context and others will be discussed in the sections that follow.⁶⁰

D. Automatic Stay

When a debtor files for bankruptcy, most cases pending against him in other courts are automatically frozen while the bankruptcy proceeds.⁶¹ Claims against the bankrupt normally must be pursued in the bankruptcy court. Perhaps the most massive example of this general rule is the staying of approximately 20,000 lawsuits filed against the Manville Corporation by individuals exposed to asbestos.⁶²

The Bankruptcy Code contains several exceptions to this rule, however. Actions "by a governmental unit to enforce such governmental unit's police or regulatory power,"⁶³ and actions for "the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power"⁶⁴ are excepted from automatic stay. The courts have had trouble deciding whether these exceptions pertain to suits brought by governments seeking to force compliance with environmental laws.

III. Recent Developments and Their Implications For the Business Community

A. Dischargeability of Debts: Kovacs

On January 9, 1985, the Supreme Court decided Ohio v. Kovacs,⁶⁵ the Court's first case involving the relationship between bankruptcy and hazardous waste laws. That Kovacs was the first such case to reach the Supreme Court is unfortunate, because the complex set of circumstances surrounding the case exacerbated the Court's already-difficult task and obscured many of the simpler questions facing businesses and legal practitioners every day. Yet, Kovacs did provide valuable guidance that may be gleaned both from what the Court said and from what it refused to say.

Kovacs addressed the important question of whether an obligation to clean up hazardous waste is a dischargeable debt within the meaning of the Bankruptcy Code. If such an obligation is a dischargeable debt, it does not survive the bankruptcy; the party claiming the debt, however, may be entitled to share in the assets of the bankruptcy estate. If the obligation is not a dischargeable debt, the obligation will survive bankruptcy, but the debtor will normally have few assets, if any, with which to comply.

William Lee Kovacs was the primary owner and chief [15 ELR 10173] executive officer of Chem-Dyne Corp., a company that operated a hazardous waste disposal facility in Hamilton, Ohio. In 1976, before the passage of CERCLA, Ohio sued Kovacs, Chem-Dyne, and other businesses also involved in the Hamilton site for violations of state common law. In 1979, Kovacs entered into a stipulation enjoining the defendants from further pollution of the air or waters, requiring the defendants to remove certain waste from the site, and ordering payment of $75,000 to the State for injury to wildlife.⁶⁶ Kovacs signed the stipulation "both in his individual capacity and on behalf of Chem-Dyne."⁶⁷ When Kovacs and the other defendants failed to comply with the stipulation, Ohio obtained from the state court the appointment of a receiver, whose job was to take possession of the assets of Kovacs and the corporate defendants and to implement their obligations under the injunction.

Before the receiver had completed his tasks, Kovacs filed for bankruptcy under chapter 11 for reorganization; the case was later converted to a liquidation under chapter 7.⁶⁸ Ohio sued in bankruptcy court for a declaration that Kovacs' obligations under the stipulation were not dischargeable in bankruptcy. The state argued that the obligation was a statutory rather than contractual breach, and, second, that the breach of the obligation did not give rise to a "right to payment," as contemplated by the Code's definition of "claim."⁶⁹ The bankruptcy court disagreed and ruled that the obligations were dischargeable debts.⁷⁰ The district court and court of appeals⁷¹ affirmed, but Ohio and thirty-two other states petitioned the Supreme Court to hear the case. The governmental parties argued that the Sixth Circuit's ruling "cripples the government's ability to exercise its police powers to protect public health, safety, and the environment"⁷² and "provides offenders with a blueprint for evading laws protecting the environment."⁷³

The Supreme Court affirmed the lower court's ruling allowing discharge, but not without explicitly attempting to limit the scope of its holding. The Court said, "there is little doubt that the State had the right to an equitable remedy under state law and that the right has been reduced to judgment in the form of an injunction ordering the cleanup."⁷⁴ The judgment gives rise to a right to payment because "[t]here is no suggestion by plaintiff that defendant can render performance under the affirmative obligation other than by the payment of money."⁷⁵ In the Kovacs case, while Ohio argued that it had no alternative right to payment from the injunction, it simultaneously engaged in a "steadfast pursuit of payment as an alternative to personal performance."⁷⁶ By pursuing these apparently inconsistent positions, Ohio may have sewn the seeds of its own defeat.

The Court emphasized the importance of the appointment of the state court receiver to its holding. When faced with Kovacs' noncompliance, the state chose not to prosecute Kovacs under the state's laws or to bring contempt proceedings against him. Rather, the state sought the appointment of a receiver. "As wise as this course may have been, it dispossessed Kovacs, removed his authority over the site, and divested him of assets that might have been used by him to clean up the property."⁷⁷ Kovacs was "disabled by the receivership from personally taking charge of and carrying out the removal of wastes from the property."⁷⁸ Given the receivership, Kovacs was not personally capable of cleaning up the site; thus, the state could only be interested in a money judgment against him. "What the receiver wanted from Kovacs after bankruptcy was money to defray cleanup costs."⁷⁹ Therefore, "[o]n the facts before it, and with the receiver in control of the site, we cannot fault the Court of Appeals for concluding that the cleanup order had been converted into an obligation to pay money, an obligation that was discharged in bankruptcy."⁸⁰

The Court took great pains to "emphasize what we have not decided."⁸¹ Discharge will not apply, said the Court, to protect the debtor from prosecution for criminal violations; to terminate an obligation to pay a fine or penalty; to permit a polluter to bring additional toxic wastes onto the premises or to engage in conduct that will contribute to the pollution of the site; or to excuse whoever is in possession of the site from the duty to comply with environmental laws.⁸² The Court also did not "address what the legal consequences would have been had Kovacs taken bankruptcy before a receiver had been appointed and a trustee had been designated with the usual duties of a bankruptcy trustee."⁸³

* Discharge of Claims for Environmental Cleanup Costs. Despite the limitations of the Kovacs decision, the opinion begins to answer many questions faced by environmental debtors and the broader businesses community. First, the Kovacs decision can be viewed as resolving that claims for money under § 107 of CERCLA are dischargeable. The Court treated as a foregone conclusion that an obligation [15 ELR 10174] to pay a sum of money for environmental cleanup measures is a dischargeable debt. Ohio did not even challenge this point.⁸⁴ Therefore, an obligation to pay a money judgment created by § 107 of CERCLA⁸⁵ should be treated as a dischargeable debt as well. Although a plaintiff in a § 107 action against a debtor may share in any available funds as part of the bankruptcy proceeding, the debt will not survive the bankruptcy. Clearly, this result will encourage companies encumbered by large CERCLA debts to file for bankruptcy. Similarly, it will encourage secured creditors of such companies to force their debtor into bankruptcy.

The consequences of discharge will be much broader, however. Because CERCLA liability is joint and several, plaintiffs can pick and choose among the array of possible defendants. Plaintiffs will have to consider that some targets might seek discharge in bankruptcy. If nothing else, the possibility of bankruptcy will strengthen those defendants' positions in settlement negotiations. Kovacs increases incentives to ignore marginal defendants altogether; plaintiffs may sue only those companies known to have "deep pockets," even where smaller companies carry more blame for the hazardous waste release being remedied. The more solvent defendants will then shoulder the burden of seeking contribution from the other potentially responsible parties, to the extent that these companies have resources available. As a practical matter, the joint tortfeasors unfortunate enough to be sued will be forced in many instances to pay the entire liability themselves.

Thus, large companies that generate or transport hazardous waste may be required to exercise additional caution in the selection of hazardous waste sites; they are more likely, for example, to undertake waste disposal work "in house," to avoid being held responsible for the problems created by other companies. Alternatively, potential CERCLA target companies may decide to scrutinize waste disposal facilities based on the financial responsibility not only of the site owner but also of the other waste contributors at the site; they may attempt to send their wastes only to sites where both the site operator and the other waste contributors are secure enough financially that no one large company will be forced to pay for the problems caused by many other insolvent businesses.

The federal and state governments will also be affected by the ability if insolvent defendants to discharge their environmental obligations in bankruptcy. In many instances, governments will be forced to bear the cleanup costs where no solvent party may be found. The answer to this problem for the future lies, however, in the tightening of financial standards applicable to companies handling hazardous waste.⁸⁶ For the inherited problems of the past, the government may in some cases be obligated to undertake cleanups at its own expense.

Insolvency of companies responsible for past hazardous waste problems will also result in additional strains on EPA/state relationships. Where interagency jurisdictional disputes have, in the past, involved mostly questions of control and authority, these disputes may soon involve thornier questions concerning the ultimate payment of funds for hazardous waste cleanups. States may be expected, for example, to make additional claims against the federal Superfund for costs expended in the remediation of hazardous waste releases.

* Discharge of Environmental Cleanup Injunctions. Second, although Kovacs does present a relatively clear picture of the dischargeability of CERCLA § 107 obligations, it leaves a related question subject to confusion: whether an EPA cleanup order under § 106 survives a bankruptcy. The language of Kovacs suggests that the dischargeability of an obligation under an order depends both upon the debtor's ability to comply with the order and upon the enforcement mechanisms selected by the government.

Kovacs itself involved an injunctive order. The Court held that "the cleanup order had been converted into an obligation to pay money"⁸⁷ because of Kovacs' inability to perform the cleanup personally. So too in most § 106 orders, the affected parties are not personally able to effectuate the cleanup; as a practical matter, they can only pay a contractor to perform the work. The court in United States v. Robinson (In re Robinson)⁸⁸ adopted this interpretation of the Kovacs decision. The court acknowledged it could not "find that the defendant has been personally barred from the site or rendered less able by government action to perform the restoration than [it] would otherwise have been."⁸⁹ Nonetheless, the debtor is not "able to perform the obligation through his own labor and without expense to the estate."⁹⁰ Because "compliance with the Court's order costs money,"⁹¹ the court decided to extend Kovacs to the case before it, and held that an obligation to restore marshland was a dischargeable claim.

It is by no means certain that Kovacs countenances such an extension. The Kovacs decision could be read as limited to cases in which the debtor is legally unable to perform the cleanup personally. Under this view, the dischargeability of a § 106 order may depend upon the person in control of the bankruptcy estate: If the debtor is in possession, he is theoretically capable of performing the cleanup himself, and thus, the § 106 obligation might not be dischargeable. If, on the other hand, the court has appointed a bankruptcy trustee, the debtor has been "dispossessed, removed [of] his authority over the site, and divested [of] assets that might have been used by him to clean up the property";⁹² therefore, the order would create a claim within the Kovacs framework. This latter result unfortunately provides creditors little comfort, because it appears that EPA could simply issue a new § 106 order to the trustee or any subsequent owner of the property.⁹³

[15 ELR 10175]

Kovacs suggests, however, that the inquiry is yet more complex: that discharge depends upon the enforcement mechanism selected by the government. For example, the Court's reasoning relies heavily upon Ohio's decision to enforce its order by appointing a receiver for Kovacs' property.⁹⁴ Had Ohio instituted contempt proceedings or criminal prosecutions against Kovacs for his violations of the orders, said the Court, the Bankruptcy Code would offer no protection. Nor would the Code discharge Kovacs' obligations to pay any fines or monetary penalties "imposed . . . prior to bankruptcy."⁹⁵

Although CERCLA does not empower the EPA Administrator to prosecute a party who disobeys § 106 orders, it does empower him to impose a fine up to $5,000 per day.⁹⁶ If the Administrator chooses to impose the fines, they would appear to fall within the scope of the Kovacs exception to dischargeability. On the other hand, if EPA opts to clean up the debtor's site following noncompliance with a § 106 order, the compensatory damages to cover the actual cleanup costs appear to be dischargeable,⁹⁷ while the punitive damages payable for violation of the order⁹⁸ may be nondischargeable as a "fine, penalty, or forfeiture payable to and for the benefit of a governmental unit."⁹⁹

Thus, the Kovacs rubric appears to contemplate that the dischargeability of obligations created by environmental cleanup orders depends in part on the enforcement mechanism selected by the government. If the government chooses to clean up a site and sue for the cost, this cost is subject to discharge. If the government simply imposes fines, these fines will survive the bankruptcy. If the government does not take any enforcement action before bankruptcy, however, the Kovacs structure breaks down. Before enforcement, it is not possible to determine whether a particular claim will be dischargeable.

If certain injunctive orders are indeed nondischargeable, a variety of problems arise. The effect of nondischargeability for an individual debtor is clear: after the general bankruptcy discharge, the individual would remain obligated to fulfull the environmental obligation. For a reorganizing corporation continuing to operate, the effect of nondischargeability is also clear: the debt would survive the approval of the reorganization plan and would constitute a continuing liability of the reorganized company. In either case, post-petition creditors of the bankrupt may require security before transacting business with the debtor because of the pre-existing debt. Clearly, the continuance of the debt impedes the debtor's opportunity for a "fresh start."

The effect of nondischargeability for liquidating corporations, however, is far from clear. The Code generally denied discharge to corporations liquidating under chapters 7 or 11.¹⁰⁰ The reason for the lack of discharge is simple: When a corporation liquidates, its operations stop and only the empty corporate name remains. There is no need for a discharge. Some creditors might not be satisfied, however. They may seek to recover their debt by piercing the debtor's corporate veil and making claims directly against the corporate shareholders.

EPA has issued two internal guidance memoranda suggesting that piercing of the corporate veil is permissible when the shareholders controlled or directed the activities of a corporate debtor.¹⁰¹ Moreover, al least two cases hold that the liability provision of CERCLA, § 107, specifically authorizes direct recovery against corporate officers when these officers "by contract, agreement, or otherwise arranged for disposal . . . of hazardous substances."¹⁰² In many instances, these officers would also be corporate shareholders. Absent such a direct connection between the shareholders' conduct and the disposal of hazardous waste, however, a plaintiff seeking to pierce the corporate veil faces a considerable burden. Thus, in most instances, the environmental debts of liquidating corporations will probably die with them.

* When Does a CERCLA Claim Arise? The third set of questions raised by Kovacs pertains to the timing of the debt. A liquidation proceeding discharges only those debts that arise before filing of the bankruptcy petition.¹⁰³ A [15 ELR 10176] reorganization proceeding discharges debts "that arose before the date of . . . confirmation" of the reorganization plan.¹⁰⁴ In either type of bankruptcy, the date that the claim "arose" becomes critical. Under the Code, an obligation is a claim "whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured."¹⁰⁵ Thus, for example, a worker injured before filing of the petition has a pre-petition claim even for benefits payable after filing of the petition,¹⁰⁶ and an asbestos worker injured pre-petition has a claim whether or not he has sued.¹⁰⁷ Similarly, a guarantor or surety of a debtor is a creditor because it holds a contingent claim.¹⁰⁸ As these cases and many others illustrate, the term "claim" is interpreted very broadly.¹⁰⁹ In all of these cases, however, the creditor has done everything necessary to give rise to some obligation by the debtor.

No courts have yet had occasion to decide when a CERCLA obligation "arises" in the bankruptcy context. Indeed, the date at which such a claim arises seems to depend on the type of obligation. For example, assume that hazardous waste was dumped at a site in 1981; that the debtor, a liable party under CERCLA, files for bankruptcy in 1982; and that EPA does nothing to clean up the site or otherwise pursue the debtor until the Agency files a claim in the bankruptcy proceeding for "future cleanup costs." EPA might argue that it is entitled to share in the debtor's estate because a CERCLA claim arose as soon as the site was polluted, or as soon as the pollution was discovered.¹¹⁰ Perhaps these arguments are correct with respect to a § 106 injunctive order, assuming that such an order creates a "claim," because EPA can issue a § 106 order at any time.

The date at which a § 107 claim for cleanup costs arises, by contrast, is considerably less certain.In the example above, EPA cannot credibly assert that it has a "claim" under § 107 because it has not fulfilled one critical element of CERCLA liability: it has not expended any funds at the site. Unless EPA expends recoverable cleanup costs, it has no claim under § 107 because there is no § 107 claim absent the expenditure of costs. In fact, numerous CERCLA cases have held that an action under § 107 is premature unless some response costs have been expended.¹¹¹ This requirement is mandated by the plain language of § 107, which creates liability for response costs "incurred."¹¹² Further, EPA cannot incur response costs under CERCLA until a particular site is listed on EPA's National Priorities List,¹¹³ indicating that no CERCLA claim has arisen until a site has been listed.¹¹⁴

A premature CERCLA claim is unlike a tort that has been committed pre-petition but not yet sued upon, because crucial elements of the liability have yet to take place. Both the expenditure of recoverable funds and listing on the National Priorities List are predicates to liability. Unlike a contingent contract liability where the creditor has already taken all necessary actions to establish its contingent claim, EPA has not done what it needs to do to establish its liability; the contingency is in the creditor's own hands. Thus, EPA should not be considered to have a CERCLA § 107 claim until it has expended funds and listed a site on the National Priorities List.

Contrary to the assertions of EPA and the state governments in Kovacs, treatment of CERCLA cleanup costs as pre-petition claims may often work to the governments' advantage. If indeed a CERCLA § 107 claim does not arise until after EPA acts, any EPA claim in a liquidation proceeding for cleanups begun after filing of the petition would be considered a post-petition debt. Under these circumstances, the debt would not be discharged, but EPA generally would not be able to share in the bankruptcy estate.¹¹⁵ For individual debtors, the governments would retain the right to proceed against the debtor after the bankruptcy, but few individuals have the resources necessary to make any significant contribution to a hazardous waste cleanup. In the case of a liquidating corporation, where discharge is not an issue, the ability to share inthe bankruptcy estate may be the only recourse available to the government.¹¹⁶ Thus, for liquidating corporations, EPA benefits by arguing that it has a pre-petition claim under the Code.

For reorganization proceedings an EPA claim for [15 ELR 10177] cleanups begun after confirmation also would not be discharged,¹¹⁷ nor would EPA be able to share in the distribution of the debtor's pre-petition estate. In this event, however, EPA would be able to pursue the corporation after it reorganizes its debts. The reorganized corporation would remain shackled by an immense liability.

In sum, debtors facing large environmental cleanup liabilities can make a fatal mistake by filing for bankruptcy too soon, before EPA undertakes a Superfund cleanup. Only by ensuring that EPA's claim under CERCLA has "arisen" before filing can the debtor be confident that his debt will be discharged. On the other hand, creditors of a company with a potentially large environmental liability may want to push the debtor into bankruptcy before the government expends some funds at the site, to retain for themselves the remaining assets of the bankrupt.

EPA's interests vary with the circumstances. If an environmental liability will be so overwhelming for a company that it will liquidate if faced with a CERCLA § 107 cost recovery action, EPA is well advised to undertake site cleanup activities soon; by doing so, it may preserve its ability to pay the CERCLA claim from the bankruptcy estate. If the company will be able to reorganize, however, and public health considerations permit, EPA might gain some benefit by waiting; it might preserve the CERCLA action as a post-petition claim. Governmental regulatory agencies will undoubtedly have difficulty in making such judgments.¹¹⁸

EPA and the states have attempted to avoid this decision by claiming that environmental cleanup expenses should be treated as priority or administrative expenses of the bankruptcy estate. Inthis event, a post-petition claim could be recovered from the bankrupt's assets; in fact, it could be paid ahead of the bankrupt's other debts. Thus, the treatment of environmental obligations as priority or administrative claims has significant implications not only for companies facing environmental liabilities but also for the creditors of these companies and the business community as a whole. The hierarchy attached to environmental claims of the bankruptcy estate is the subject of the section that follows.

B. Priorities of Claims

EPA and state environmental agencies have realized that they will rarely recover their hazardous waste cleanup costs from companies that file for bankruptcy because non-tax debts to the government are not priority claims under the Code.¹¹⁹ Whether environmental debts are considered pre-petition or post-petition is of little relevance if the bankrupt has insufficient assets to pay the claim after distribution to priority creditors. In response, EPA and the states have considered two courses of action: First, they have attempted to secure judicially-established priorities for hazardous waste cleanup claims by asserting that such claims fall within some priority provision of the Code. They have sought to secure "administrative" status for environmental debts so that these debts will be paid first amongst the unsecured creditors. Whether courts will fully embrace this theory cannot yet be determined. Moreover, where the debtor has many secured debts, leaving few assets for unsecured creditors, even administrative status is insufficient. Therefore, governmental entities also have asserted that environmental cleanup costs satisfy the pre-requisites for a "superlien" under § 506(c) of the Code, which permits the trustee to recover from secured assets. Governmental entities have also argued, under applicable state law, that they may be entitled to an equitable lien on the property, and that they may recover cleanup costs under this lien.

Second, in light of the judicial uncertainty attendant to EPA's theories, EPA and state governments have pushed for the passage of statutory modifications to the normal bankruptcy priorities. These modifications would give environmental liabilities "superliens" or "superpriority interests" over other types of debts. Each of these responses creates significant pitfalls for companies doing business with concerns facing possible environmental debts.

* Judicially-Established Priorities. EPA has argued in its CERCLA Bankruptcy Guidance Document¹²⁰ that hazardous waste cleanup costs take first priority among the unsecured creditors as "administrative expenses" that are "necessary costs and expenses of preserving the estate."¹²¹ The EPA document admits, however, that "there is little case-law" to support its position.¹²² In fact the document's primary source of support is a 1952 appellate case in which a trustee was required to remove several barges that had been left in Baltimore Harbor,¹²³ because of the court's view that the safety of navigation takes precedence over what was, at that time, a "judge-made rule" allowing trustees to abandon property.¹²⁴ EPA does not fully explain why cleaning up the property should be considered a cost of "preserving" the bankruptcy estate.

Based on this argument and little more, EPA and states have asserted in numerous CERCLA cases that cleanup costs should be given administrative status. For example, in the Quanta Resources bankruptcy, now before the Supreme Court on the ability of Quanta to abandon contaminated property, New York argued that its cleanup [15 ELR 10178] costs should be treated as administrative expenses.¹²⁵ The appeals court refused to reach the issue of administrative status given its holding that abandonment was not permitted,¹²⁶ but Judge Gibbons noted in his dissent that if abandonment were permitted, the "suggestion that the cleanup cost might be classified as a 'preservation expense' of a property is preposterous. Upon abandonment, title to the property revests in the debtor. Fiduciaries are not at liberty to 'preserve' the property in which their cestui have no interest."¹²⁷ The Bankruptcy Code does not allow "the imposition of cleanup costs on other creditors."¹²⁸

On January 3, 1985, EPA won its first direct victory on administrative treatment of hazardous waste cleanup expenses. In In re T.P. Long Chemical, Inc.,¹²⁹ the bankruptcy court granted administrative status to a CERCLA § 107 claim precipitated by a release of a hazardous chemical that occurred over one year following the filing of the bankruptcy petition.¹³⁰ After finding that the trustee could not avoid liability under CERCLA by abandoning the property,¹³¹ the court concluded:

it follows that the cost incurred by the E.P.A. in discharging this liability is an actual necessary cost of preserving the estate entitled to administrative expense priority. . . . The necessity of the expense cannot be questioned since the removal of the wastes was an obligation of the estate under CERCLA. The court recognizes that this decision will deplete the assets of the estate. The success of the E.P.A. in pursuing this administrative claim is achieved at the expense of the creditors of the debtor. The court can sympathize with the creditors but finds that this a risk which the creditors must bear.¹³²

The court rejected, however, EPA's second statutory argument, that the cleanup should be paid as a superlien under § 506(c) of the Code. Under § 506(c), "[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim."¹³³ EPA argued that the cleanup would benefit the interests of the secured creditor, a bank, and that the removal costs should be recoverable from the bank's secured property. The court agreed with EPA on several points: It agreed that EPA could sue as a bankruptcy trustee since the Agency was "stand[ing] in the shoes of the trustee [in performing] a duty imposed upon the trustee to remove the hazardous waste."¹³⁴ It also agreed that the costs expended were "reasonable" and "necessary."¹³⁵

The court denied superlien status, however, because the bank did not receive any benefit as a result of the removal action. Although the bank may have benefitted from the cleanup as would any member of the public, the bank's status as a member of the public "is unrelated to [the bank's] status as a holder of a secured claim. The E.P.A. must prove that its action in regard to [the bank's] collateral benefitted [the bank] insofar as it is a holder of a secured claim."¹³⁶

In an attempt to show that the cleanup benefitted the bank, EPA argued that the cleanup discharged the bank's CERCLA liability. It argued that the bank was liable under CERCLA for the cleanup because it held the property as collateral, or, in the alternative, that this liability would attach if the bank took possession of the property. The court disagreed. By holding the property as collateral, said the court, the bank did not assume any CERCLA liability.¹³⁷ Moreover,

even if [the bank] had repossessed its collateral pursuant to a security agreement it would not be an "owner or operator" as defined under CERCLA. The term owner or operator is defined, in relevant part, in section 101(20)(A) of CERCLA.The last sentence of this section is: "Such term does not include a person, who, without participating in the management of a vessel of facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility.¹³⁸

The court's holding depended, however, upon its finding that "[i]t is undisputed that [the bank] has not participated in the management of the . . . facility."¹³⁹ Therefore, the cleanup costs did not discharge a liability of or confer a benefit upon the bank, the secured creditor, and no superlien should be created.

Finally, the court dismissed EPA's claim that it should be granted an equitable lien on the property. EPA argued that it was entitled to an equitable lien because it discharged an obligation of the property on which the lien is sought. The court held that "E.P.A. did not discharge an obligation of [the bank]. It did discharge an obligation of the estate and the court has found that it may recover from the estate."¹⁴⁰

In In re Berg Chemical Co., New York City was more successful in an attempt to achieve a "first lien and [15 ELR 10179] superpriority" over all other debts. The City agreed to use $235,000 in City funds to clean up a hazardous waste site leased from the City by Berg Chemical, in exchange for the first priority in the Berg bankruptcy. In a two-page order, entered by the United States District Court for the Southern District of New York, the court found that "the cleanup will improve the prospects for sale of [the] property," and that the holders of secured claims in the premises were adequately protected. The district court granted "a first lien superior to all existing liens," and "a superpriority . . . having a priority status over any and all expenses and claims to proceeds of the sale, except for professional fees as may be allowed by this Court."¹⁴¹ This order apparently was entered, however, by agreement of the parties, and the extent to which other courts will make similar decisions is unclear.

* Legislative Efforts to Modify Priorities. In the face of considerable uncertainty concerning the ability of government agencies to recover hazardous waste cleanup costs, pressure has mounted for legislative modification to the Code's system of priorities. As Justice O'Connor pointed out in her Kovacs concurrence, the classification of an interest as a lien, perfected security interest, or unsecured claim generally is determined by the substantive law that created the interest.¹⁴² Several states have already enacted legislation modifying the classification of the state's interest in hazardous waste cleanup liability, and the United States Congress has considered similar legislation. The principal issue that must be decided in framing such legislation is the precise property to which a superlien should attach. Specifically, the legislatures must decide whether an environmental superlien can take precedence over liens only on contaminated property, or on uncontaminated property as well.

For example, New Jersey's Spill Compensation and Control Act provides that "[a]ny expenditures made by the administrator pursuant to this act shall constitute a first priority claim and lien paramount to all other claims and liens upon the revenues and all real and personal property of the discharger."¹⁴³ If the environmental liability exceeds the value of the contaminated property, the State can recover from other property of the discharger as well.

The Massachusetts Oil and Hazardous Material Release Prevention and Response Act¹⁴⁴ also contains a lien provision, but the provision is less clear than that in the New Jersey statute. The Massachusetts Act states that any debt under the Act "shall constitute a lien on property owned by persons liable under this chapter. . . . Any lien recorded, registered or filed pursuant to this section shall take priority over any encumbrance theretofore recorded, registered or filed."¹⁴⁵ The Act excepts, however, "real property the greater part of which is devoted to single or multifamily housing."¹⁴⁶ Like the New Jersey Act,¹⁴⁷ the Act makes the lien effective upon recordation.¹⁴⁸ Unlike the New Jersey statute, the lien covers only the real property at which the hazardous waste was released, and the Act makes no reference to the creation of a superpriority over unsecured claims.

The New Hampshire hazardous waste laws also include a provision for a priority lien, but this provision is even less clear than that of Massachusetts. The lien provision provides that the state "shall be entitled to a lien upon business revenues and all real and personal property of any person causing expenditures from the fund for the amount expended from the fund because of that person's acts or omissions. This lien shall take precedence over all other claims."¹⁴⁹ The Act states that the lien takes precedence over all other "claims," not all other liens or encumbrances; therefore, it is not clear whether the lien was intended to be a superlien or simply a "superpriority interest" that would be paid after secured creditors are paid. Unlike the New Jersey or Massachusetts statutes, the New Hampshire Act does not make the lien effective on recordation, making it impossible for purchasers of property to know whether the property is encumbered by an environmental lien.¹⁵⁰

Although no federal superlien or superpriority legislation has been enacted, Congressman Florio (D-N.J.) did introduce such a bill in the last Congress. That bill, H.R. 2767, would have amended CERCLA to provide that any CERCLA claim "shall have priority over all other classes of claims against such debtor, without regard to whether such claims are secured."¹⁵¹ This bill shared many defects with the New Hampshire law: it referred to "claims" and "priorities," but actually seemed to create a superlien. It did not require that the lien be recorded, creating possible notice problems. It appeared to supersede liens in existence before the environmental lien was created, and it apparently applied to all properties of the debtor.

The current Senate CERCLA reauthorization bill, S. 51, also addresses priorities of CERCLA claims and responds to certain defects of the Florio bill. Section 127 of the bill would amend the liability provision of CERCLA to provide that the lien would operate only on the real property at which the removal or remedial actions took place. It would also become effective on recordation, except for individuals with actual notice of the removal. The lien would arise, however, as soon as EPA expends response costs.¹⁵²

[15 ELR 10180]

* Problems With Modifications to Priorities. Modifications to the Code's priority system create serious problems for people who have no direct connection with hazardous waste liability. The creation of a new superlien that taken precedence over prior liens is especially troublesome: such a superlien may be a constitutionally impermissible impairment of existing contracts or a deprivation of property without due process. Superlien provisions at the state level may be preempted by the Bankruptcy Code.¹⁵³

Any modification to the Code's priority system, however, is troublesome. The creation of new superpriority interests may require unsecured creditors to obtain security in order to protect their interests adequately and may shake settled expectations fundamental to everyday business decisions.

If environmental obligations are paid as administrative expenses, people providing goods and services to bankruptcy estates must take extra precautions. Administrative expenses usually do not exhaust the estate's resources. Therefore, in most cases administrative claimants are paid in full. If, on the other hand, the estate does not contain sufficient assets to pay all administrative costs, the administrative claimants must accept a proportional share of the avaiable funds. Thus, if the courts consider enormous environmental cleanup obligations to be administrative expenses, people extending credit to bankruptcy estates may need to devise new means to protect their payments. This prospect is particularly worrisome because environmental cleanup obligations may be hidden liabilities not discoverable in preliminary reviews of bankruptcy estates.

Particular administrative claimants may seek superpriority over other administrative claimants,¹⁵⁴ or perhaps even over secured claimants, through the provisions of the Code, but these efforts seem likely to precipitate a disruptive game of priority leapfrog in which each claimant tries to jump ahead of others by seeking superpriority status. Furthermore, if professionals who would otherwise consider providing services to bankruptcy estates become more reluctant to undertake the task because there may be no funds left to pay them, the economy will suffer as debtors find themselves unable to reorganize their ailing businesses in bankruptcy proceedings.

Finally, if environmental obligations are given priority over other secured debts, creditors will find themselves operating in a new world of "caveat creditor." Creditors, realizing that they may be forced to wait in line behind environmental claims if such claims arise, will need to find new ways to uncover possible environmental liabilities not reflected on the balance sheet, and to protect their interests where these potential liabilities are found.

C. Abandonment of Property

Property containing large quantities of hazardous waste may have such large cleanup liabilities attached that they are "burdensome to the estate, or . . . of inconsequential value to the estate."¹⁵⁵ The Code authorizes the estate to abandon such property. The property is abandoned to "any party with a possessory interest,"¹⁵⁶ in most cases the debtor. Yet, after the bankruptcy the debtor has few if any assets remaining. He is not in a position to clean up the property. Thus, EPA and the states have asserted, abandonment of contaminated property should not be permitted.

For example, in the Quanta Resources bankruptcy, the debtor Quanta owned a waste oil storage and processing facility on Long Island. The facility contained over 500,000 gallons of waste oil and other chemicals, of which at least 70,000 gallons were contaminated with polychlorinated biphenyls (PCBs), a carcinogen. Quanta also owned a facility in Edgewater, New Jersey, also found to contain PCB-contaminated oil. The Quanta trustee filed a notice of his intention to abandon the property, and the New York and New Jersey state environmental agencies objected. The bankruptcy court allowed the abandonment, but the Third Circuit reversed.¹⁵⁷ Both the Quanta trustee and Midlantic National Bank, a Quanta creditor, petitioned the United States Supreme Court to review this decision. On February 19, 1985, the Supreme Court decided to hear the case.¹⁵⁸

The Third Circuit held that "the Trustee does not have the right to abandon property of the estate where abandonment contravenes state public health and safety laws."¹⁵⁹ The court arrived at this conclusion through a protracted analysis of whether "Congress intend[ed] that the trustee's abandonment power be unrestricted by public health and safety regulations."¹⁶⁰ After the court "balance[d] the relative weight of the state and federal policies,"¹⁶¹ it determined that the importance of the state environmental policy outweighed that of the federal Bankruptcy Code.

Underlying this analysis is the notion that the Code's [15 ELR 10181] policy of abandonment somehow conflicts with the policies of the environmental laws. The Quanta opinion, indeed the significance of the issue of abandonment, rests upon two assumptions, each flawed. First, the opinion assumes that allowing abandonment creates an environmental hazard. Second, the opinion assumes that denying a right to abandon would prevent this hazard.

In the Third Circuit's view, "[i]f trustees in bankruptcy are to be permitted to dispose of hazardous wastes under the cloak of the abandonment power, compliance with environmental protection laws will be transformed into governmental cleanup by default."¹⁶² The states' rationale, adopted by the Quanta court on appeal, was that abandonment itself constitutes "disposal" of the hazardous waste because the debtor would not be able to clean up the site absent its assets, which were in the hands of the bankruptcy estate.¹⁶³ As the state of New York argued in its brief in opposition to the grant of a writ of certiorari, the act of abandonment, "which separates hazardous waste from the assets needed to check its destructive potential, was a final disposal of the waste which 'clearly contravened applicable law, and did so not merely technically but with severely deleterious implications of the public safety.'"¹⁶⁴

This assumption, that abandonment "separates hazardous wastes from the assets needed to check its destructive potential,"¹⁶⁵ is the heart of the Quanta Resources fallacy. Perhaps were applicable state law alone operating in the Quanta cases, abandonment would have operated to separate the wastes from the assets and would have created an environmental hazard. The availability of remedies under CERCLA, however, dramatically alters that picture. Neither the Third Circuit (majority or dissent) nor the parties appeared to grasp this vital implication of CERCLA.

In reality, as the bankruptcy court in In re T.P. Long Chemical Co. recognized, abandonment may do nothing to alter the bankrupt estate's cleanup liability for the property sought to be abandoned because CERCLA could be used to hold the estate liable even after abandonment.¹⁶⁶ CERCLA imposes cleanup liability on an "owner or operator" of a facility from which hazardous substances are released. Upon the filing of the bankruptcy petition, the estate becomes the "owner or operator" of the facility.¹⁶⁷ Therefore, the estate is a liable party under CERCLA. As the T. P. Long Chemical court noted, "[m]ere abandonment of the drums is not the ultimate goal sought by the trustee. The ultimate goal is to escape the estate's obligation to the E.P.A. under CERCLA. Abandonment is a means to this end."¹⁶⁸ The T.P. Long Chemical court acknowledged that abandonment need not lead to this end.¹⁶⁹ If this is indeed the case, the importance of the entire abandonment issue to hazardous waste cleanups may have been greatly overstated. Indeed, contaminated property is not the source of the burden to the estate if the burden, the CERCLA liability, continues after the abandonment.¹⁷⁰

Second, the court assumed that denying abandonment would prevent or minimize the environmental hazard. This is incorrect. Ensuring that the estate continues to hold title to the contaminated property does nothing to ensure that resources are available to pay for a cleanup. The availability of the estate's resources is determined not by abandonment, but by whatever priority the courts assign to the cleanup costs. Denying abandonment need not ensure a high priority.¹⁷¹ Priority rather than abandonment is the key issue.

To the extent that the abandonment issue is worthy of attention, a footnote of the Kovacs opinion foreshadows the likely outcome of Quanta Resources at the Supreme Court. In Kovacs, the Court stated that its opinion did not address "what the legal consequences would have been had Kovacs taken bankruptcy before a receiver had been appointed and a trustee had been designated with the usual duties of a bankruptcy trustee."¹⁷² In a lengthy footnote to this sentence, the Court outlined its understanding of the legal consequences in the event of a usual bankruptcy proceeding. The Court said:

After notice and hearing, a trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate. . . . Had no receiver been appointed prior to Kovacs' bankruptcy, the trustee would have been charged with the duty of collecting Kovacs' nonexempt property and administering it. If the site at issue were Kovacs' property, the trustee would shortly determine whether it was of value to the estate. If the property was worth more than the costs of bringing it into compliance with state law, the trustee would undoubtedly sell it for its net value, and the buyer would clean up the property, in which event whatever obligation Kovacs might have had to clean up the property would have been satisfied. If the property were worth less than the cost of cleanup, the trustee would likely abandon it to its prior owner, who would have to comply with the state environmental law to the extent of its ability.¹⁷³

Thus, the Supreme Court already has stated its view that [15 ELR 10182] trustees of contaminated property can abandon the property. In all likelihood, the Court will find nothing in the Quanta cases that would cause it to shift its position from that articulated in Kovacs. If the Court reverses the Third Circuit, permitting abandonment, bankruptcy estates probably will continue to use abandonment in the hope of cutting short their environmental obligations. If the Court affirms the lower court's decision, estates would have to retain the property.

In either case, however, the critical decision will be the source of the funds used to pay any remaining environmental liability, a question of priorities. This issue, rather than the ability to abandon, will determine whether a debtor's environmental liabilities will be paid at the expense of the debtor's other creditors, or will be borne by other potentially responsible parties or the public as a whole. The Quanta decision will be most useful if the Supreme Court sheds light on the priorities issue as part of its opinion.

D. Stays of Environmental Enforcement Proceedings

Although cases involving discharge, priorities, or abandonment of contaminated property attract considerable attention to the relationship between bankruptcy and hazardous waste cleanup laws, most cases decided by the courts have dealt with stays of court proceedings. These decisions address whether various environmental proceedings are subjected to the Code's automatic stay provision,¹⁷⁴ or fall within the exceptions to the stay as actions "by a governmental unit to enforce such governmental unit's police or regulatory power"¹⁷⁵ or actions "for the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power."¹⁷⁶

The distinction between these two provisions is significant; a governmental agency may seek to obtain an order or money judgment based on the government's police or regulatory powers, but an action to enforce a money judgment against the debtor based on these police powers is impermissible. Thus, although there is an exception to the stay for governmental police or regulatory actions, there is an exception to the exception where the action is to enforce a money judgment. Such actions are stayed.

For example, Illinois v. Electrical Utilities Co.¹⁷⁷ was a suit by Illinois against the debtor under the Toxic Substances Control Act for the dumping of PCBs on the debtor's manufacturing site. The complaint sought an injunction from further disposal, payment of investigative costs, and recovery of the costs of the lawsuit. Electrical Utilities was an action to obtain in the first instance a judgment enforcing the government's police or regulatory powers, as opposed to an action to enforce and order already issued. The Code's legislative history provides that § 362(b)(4) of the Code "extends to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment."¹⁷⁸ Thus, whether or not the requested relief would cost money, the court allowed the action to proceed.¹⁷⁹

Similarly, In re Canarico Quarries, Inc.¹⁸⁰ the court refused to stay an action by the Puerto Rico air pollution control agency attempting to bring the quarry operations into compliance with the federal Clean Air Act and Puerto Rican law. This case involved ongoing pollution from continuing quarry operations. Notwithstanding that compliance would cost money, the court allowed the action to continue.

Cases involving enforcement of an earlier judgment based upon police or regulatory powers require a decision whether the order being enforced is a money judgment. For example, an earlier Sixth Circuit decision in the Kovacs case stayed a suit filed in state court by the state of Ohio to force Kovacs to disclose his income and assets so that his post-bankruptcy income could be applied to completing the job of the receiver. The court held that the automatic stay, and not the exceptions to it, applied because the state "was seeking what in essence amounted to a money judgment against Kovacs."¹⁸¹ Allowing the state court action to proceed "would subvert the purpose of the Bankruptcy Act to rehabilitate debtors and to give them relief from harassing creditors."¹⁸² The "Kovacs I" opinion was ultimately vacated in light of the Supreme Court's holding that Kovacs' obligation had been discharged.¹⁸³ Nonetheless, debtors seeking stays in similar cases could argue that Kovacs I still stands for the general proposition that lawsuits by the government to enforce environmental cleanup orders could be subject to the automatic stay.

In a similar decision, relying on Kovacs I, one district court has held that a suit by the United States against the Manville Corporation, seeking to enforce a CERCLA § 106 cleanup order issued to Manville, must be stayed during the Manville bankruptcy.¹⁸⁴ Even though part of the relief requested included an injunction against additional waste disposal at the sites, the court reasoned, "a fair reading of the remainder of the relief sought demonstrates that if found to be required, its implementation would require the expenditure of substantial funds on the part of Manville."¹⁸⁵ Therefore, to enforce the order would be tantamount to enforcing a money judgment, rendering the exceptions to stay inapplicable.

The Manville court distinguished its case from one in which the relief sought was designed to prevent additional [15 ELR 10183] deposits of waste. In such a case, said the court, the police powers exception would operate and the case would not be stayed. The court left its basis for this distinction unclear. Perhaps the court perceived that a "cease and desist" order would not involve the expenditure of money, while a CERCLA cleanup order would require a financial expenditure. Alternatively, the court may have been suggesting that an environmental order is not a money judgment if it protects the public from future hazardous waste contamination, rather than for the correction of pollution problems created in the past.¹⁸⁶

Either of these explanations is inherently unsatisfactory. The first rationale is unconvincing because compliance with an affirmative injunctive order often requires the expenditure of money, and compliance with many "cease and desist" orders also may require the expenditure of money. Whether the injunction serves to enforce the government's police or regulatory powers, or is equivalent to a money judgment, must hinge on something other than the expenditure of money. The second rationale is deficient because the government surely retains "police or regulatory power" that would enable it to protect the public from ongoing pollution from hazardous waste disposed at some time in the past.¹⁸⁷

Perhaps the real basis for the Manville decision remained unstated by the court. Manville owned neither of the sites it was directed to clean up. Thus, just like Mr. Kovacs, the company was "dispossessed," legally unable to perform the cleanup itself. Therefore, the order to be enforced was tantamount to a money judgment, as in Kovacs, because Manville may have been unable to perform other than by the payment of money.

This interpretation of the Kovacs and Manville decisions helps reconcile them with a case in which environmental actions were not stayed by a bankruptcy. When the state of Pennsylvania sued Penn Terra, Ltd., the bankrupt operator of coal surface mines, to force compliance with state environmental laws, the United States Court of Appeals for the Third Circuit held that the actions were excepted from the automatic stay.¹⁸⁸ Despite the lack of any earlier judgment that Pennsylvania may have sued upon to enforce, Penn Terra argued that this was an action to enforce a money judgment not exempted from stay by section 362(b)(5). The court disagreed. The court acknowledged that compliance would cost money, but

[w]ere we to find that any order which requires the expenditure of money is a "money judgment," then the exception to section 362 for government police action, which should be construed broadly, would instead be narrowed into virtual nonexistence. Yet we cannot ignore the fundamental fact that, in contemporary times, almost everything costs something. An injunction which does not compel some expenditure or loss of monies may often be an effective nullity.¹⁸⁹

The Penn Terra court believed that "the inquiry is more property focused on the nature of the injuries which the challenged remedy is intended to redress — including whether plaintiff seeks compensation for past damages or prevention of future harm"¹⁹⁰ The injunction sought "was, neither in form nor substance, the type of remedy traditionally associated with the conventional money judgment. It was not intended to provide compensation for past injuries. . . . Rather [it] was meant to prevent future harm to, and to restore, the environment."¹⁹¹ Although the court did not make this observation, Penn Terra was also legally capable of performing its injunctive obligations. There were no intervening factors that would have served to disable the company from compliance.¹⁹²

In re Thomas Solvent Co.¹⁹³ appears to be aberrational. In that case, the bankruptcy court held that the bankruptcy stay applied to a state court proceeding seeking to order Thomas Solvent to take certain actions to purify ground-water contaminated by leaking toxic chemicals stored by Thomas. Reasoning that Kovacs I required the stay of any action to enforce an injunction where compliance with the injunction would require the expenditure of funds, the court concluded that the state proceeding should be stayed. The effect of the stay, moreover, was to permit the facility to continue operations, generating additional pollution, for a 90-day period. After that period, the court said, if a liquidation plan were not confirmed or the case converted to a chapter 7 liquidation, the automatic stay would be lifted. The court's action appears questionable in two ways: First, the decision to deny enforcement of a cleanup order, issued pre-petition and based on pre-petition conduct, is not required simply because the enforcement would involve the expenditure of money; the effect of the enforcement, as in Penn Terra, is to clean up an ongoing pollution problem. Second, the court's decision to permit the debtor to continue polluting while its plant operated is yet more difficult to justify.

Finally, in In re Professional Sales Corp.,¹⁹⁴ one bankruptcy court took the unusual step of issuing a preliminary injunction against an action by EPA to revoke a hazardous waste facility's interim status under RCRA. The court said that the site already had been cleaned up under the Superfund program and presented no ongoing environmental hazard. More importantly, the current owner [15 ELR 10184] was not accepting additional waste into the facility. Under these circumstances, the court found no harm in delaying the EPA proceeding. The court's reason for enjoining the proceeding was that revocation would diminish the value of the site, which was then up for sale. Had the owner in this case been operating the site and accepting waste shipments, the result would likely have been different.

The availability of a stay for actions to enforce orders obtained by environmental agencies obviously has a significant effect on parties to such orders. The government may not be able to enforce certain environmental obligations during the pendency of a bankruptcy proceeding. For debtors, a stay provides a possible means of pacing environmental obligations. For example, a debtor might be able to postpone enforcement of a CERCLA $106 order by filing for bankruptcy.

Stays may also affect companies having no expected environmental involvement. When a company declares bankruptcy because of an insurmountable environmental liability, suits by all of the company's creditors will be frozen while the bankruptcy proceeds. Therefore, companies whose only connection with environmental pollution is that they may have sold goods or lent money to other companies with environmental problems may find themselves waiting in line at bankruptcy court because of an environmental liability totally unrelated to the creditor's operations. This frightening prospect suggests the need for new precautions by everyone transacting business with entities facing possible environmental debts.

V. Concluding Observations

Environmental cleanup obligations have created a new world of "caveat creditor" for the business community. Discharge of environmental debts affects not only the debtors but also the other potentially responsible parties at the hazardous waste site, the federal and state governments, and the debtor's post-petition creditors. The priority to which environmental claims are entitled under the Code not only determines whether those claims will be paid, but also affects all creditors of any company with possible environmental liabilities. Priorities also affect the functioning of the bankruptcy system itself to the extent that environmental obligations deprive esttes of the administrative expenses necessary to the bankruptcy process. Abandonment may be attempted as a means of altering those priorities, and the Quanta Resources cases at the Supreme Court may contain guidance about such a use of abandonment. Further, if environmental obligations drive companies into bankruptcy, the automatic stay may affect not only the bankruptcy proceeding but also any other lawsuits pending against the debtor.

Hazardous waste laws have yet more fundamental implications for the business community. Environmental statutes make creditors' jobs more tricky.A hazardous waste facility used as security may prove worthless when new environmental laws prohibit operation of the facility without satisfying new technical standards. Similarly, the value of the land may plummet upon discovery of a release of hazardous waste. Creditors normally bear the risk, however, that the property taken as security may prove less valuable than the creditor originally had envisioned.

Environmental statutes such as CERCLA erect even greater obstacles: On occasion, they turn a security into a liability. Creditors who foreclose on a property must ensure that they will not, by foreclosing, be assuming for themselves the weight of CERCLA liability for the cleanup.¹⁹⁵ Before foreclosing, for example, a bank should do more than verify that property is worth more than the cost of the foreclosure; the bank also must verify that it will not be assuming a CERCLA liability that exceeds the value of the security and creates a serious drain on the institution's resources.

Environmental obligations counsel a greater degree of caution in many types of routine business transactions.¹⁹⁶ Lessors of real estate, for example, must be careful that their tenants do not create hazardous waste releases that would trigger liability for the landlord.¹⁹⁷ Similarly, companies acquiring other companies must exercise care that they are not purchasing an overwhelming CERCLA liability. General creditors will have to take steps to ensure that the property of a company to which the firm would like to extend credit is not encumbered by any environmental "superpriorities." If creditors are not able to assure themselves adequately, the result may be restrictions on the availability of credit.

Thus, the relationship between environmental statutes and bankruptcy has far-ranging implications for a wide spectrum of the business community. The Kovacs decision only begins to answer the new questions posed by this new relationship, and, perhaps the upcoming Quanta Resources decision will help develop the contours of that relationship. Creditors and debtors alike must be aware of these implications and should consider them in planning their business activities.

1. The Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549, has been codified at 11 U.S.C. §§ 101-151326, and is commonly referred to as the Bankruptcy Code. In 1984, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, amending the code effective July 10, 1984.

2. Kokoszka v. Belford, 417 U.S. 642, 645-46 (1977) (the dual purposes of the code are "to convert the estate of the bankrupt into cash and distribute it among creditors and then to give the bankrupt a fresh start with such exemptions and rights as the statute left untouched") (quoting Burlingham v. Crouse, 228 U.S. 459, 473 (1913)); Local Loan Co. v. Hunt, 292 U.S. 234 (1934) ("One of the primary purposes of the Bankruptcy Act is to 'relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.' Williams v. U.S. Fidelity & Guaranty Co., 236 U.S. 549, 554, 555 . . . . This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.").

3. 42 U.S.C. §§ 9601-9657, ELR STAT. 41941.

4. Bankruptcy Act of 1898, 30 Stat. 544, as amended by Bankruptcy Act Amendments of 1938, Pub. L. No. 75-696, 52 Stat. 840 (repealed 1978).

5. Compare 11 U.S.C. §§ 109, 521 with Bankruptcy Act Amendments of 1938, Pub. L. No. 75-696, §§ 130, 323, 52 Stat. 886, 907 (repealed 1978).

6. 11 U.S.C. § 362. Under prior law, stays were available but not automatic. See, e.g., Kennedy, Automatic Stays Under the New Bankruptcy Law, 12 U. MICH. J.L. REF. 3 (1978). The current stay provisions contain certain exceptions, see 11 U.S.C. § 362, but bankruptcy judges may, in their discretion, stay lawsuits subject to the exceptions. See 11 U.S.C. § 105.

7. 11 U.S.C. §§ 1104 (trustee only appointed for cause or in the interest of the creditors), 1107 (rights, powers and duties of debtor in possession).

8. 49 Fed. Reg. 40320, 40325 (1984) (average remedial investigation/feasibility study costs $800,000 per site, average remedial action costs $7.2 million per site, and the costs of operating and maintenance over a 30-year period have a net present value of $4.1 million; these figures do not include initial remedial measures, taken at 10 percent of the sites, at an average cost of $80,000).

9. See, e.g., New York v. Shore Realty Corp., 15 ELR 20358 (2d Cir. Apr. 4, 1985) (current owner of site liable for pollution caused by prior owner); United States v. Argent Corp., 14 ELR 20616 (D.N.M. May 4, 1984) (owner of land leased to silver recovery business held liable).

10. Ohio v. Kovacs, 105 S. Ct. 705, 15 ELR 20121 (Jan. 9, 1985).

11. In re Quanta Resources Corp. (appeal of the New Jersey Department of Environmental Protection), 739 F.2d 927, 14 ELR 20572 (3d Cir. 1984), cert. granted sub nom. Midlantic National Bank v. New Jersey Department of Environmental Protection, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-801); In re Quanta Resources Corp. (appeal of the state and city of New York), 739 F.2d 912, 14 ELR 20563 (3d Cir. 1984), cert. granted sub nom. O'Neill v. City of New York, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-805).

12. An "owner or operator" of an onshore facility includes "any person owning or operating such facility, and . . . in the case of any abandoned facility, any person who owned, operated, or otherwise controlled activities at such facility immediately prior to abandonment." CERCLA § 101(20)(A), 42 U.S.C. § 101(20)(A), ELR STAT. 41943.The term does not, however "include a person, who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility." Id.

13. A "facility" is "(A) any building structure, installation, equipment, pipe or pipeline . . ., well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located." CERCLA § 101(9), 42 U.S.C. § 101(9), ELR STAT. 41943.

14. A "release" is "any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment," with certain limited exceptions. CERCLA § 101(22), 42 U.S.C. § 101(22), ELR STAT. 41943.

15. 42 U.S.C. § 9604, ELR STAT. 41945.

16. CERCLA § 221, 42 U.S.C. § 9631, ELR STAT. 41953. The formal name of the Superfund is the Hazardous Substance Response Trust Fund.

17. 42 U.S.C. § 9607, ELR STAT. 41947.

18. CERCLA §§ 107(a)(B) and 111(a)(2), 42 U.S.C. §§ 9607(a)(B) and 9611(a)(2), ELR STAT. 41947, 41950, suggest that any actions by private parties — anyone other than the United States or state governments — must be ancillary to government actions or at least consistent with the national contingency plan, the federal blueprint for CERCLA implementation. See, e.g., Wickland Oil Terminals v. ASARCO, Inc., 590 F. Supp. 72, 77, 14 ELR 20494, 20496 (N.D. Cal. 1984); Cadillac Fairview/California, Inc. v. Dow Chemical Co., 14 ELR 20716, 20717 (C.D. Cal. Aug. 29, 1984); Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049, 15 ELR 20370 (D. Ariz. 1984); Bulk Distribution Centers v. Monsanto Co., 589 F. Supp. 1437, 1446, 15 ELR 20151, 20156 (S.D. Fla. 1984).

19. See CERCLA § 112(c), 42 U.S.C. § 9612(c), ELR STAT. 41951.

20. 42 U.S.C. § 9606, ELR STAT. 41947.

21. CERCLA § 106(a), 42 U.S.C. § 9606(a), ELR STAT. 41947.

22. CERCLA § 106(b), 42 U.S.C. § 9606(b), ELR STAT. 41947.

23. CERCLA § 107(c)(3), 42 U.S.C. § 9607(c)(3), ELR STAT. 41948.

24. The courts have held that only EPA, not private parties, may take advantage of the injunctive provisions of § 106. See, e.g., New York v. Shore Realty Corp., 15 ELR 20358 (2d Cir. Apr. 4, 1985).

25. Compare Aminoil, Inc v. EPA, 599 F. Supp. 69, 14 ELR 20801 (C.D. Cal. 1984) (§ 106 may not constitutionally impose penalties accruing before judicial review of EPA's actions) with United States v. Reilly Tar & Chemical Corp., 15 ELR 20348 (D. Minn. Apr. 5, 1985) (penalty provision of § 106 is constitutional).

26. CERCLA § 107(a)(1) & (2), 42 U.S.C. § 9607(a)(1) & (2), ELR STAT. 41947.

27. CERCLA § 107(a)(3), 42 U.S.C. § 9607(a)(3), ELR STAT. 41947.

28. CERCLA § 107(a)(4), 42 U.S.C. § 9607(a)(4), ELR STAT. 41947.

29. 42 U.S.C. § 9607, ELR STAT. 41947.

30. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. 41947.

31. CERCLA § 101(14), 42 U.S.C. § 9601(14), ELR STAT. 41943. These other statutes include the Clean Water Act (§§ 307(a) & 311(b)(2)(A), 33 U.S.C. §§ 1317(a) & 1321(b)(2)(A), ELR STAT. 42129 & 42133), the Clean Air Act (§ 112, 42 U.S.C. § 7412, ELR STAT. 42215), Toxic Substances Control Act (§ 7, 15 U.S.C. 2607, ELR STAT. 41343), and the Resource Conservation and Recovery Act (§ 3001, 42 U.S.C. § 6921, ELR STAT. 42011).

32. CERCLA § 101(25), (23), (24), 42 U.S.C. § 9601(25), (23), (24), ELR STAT. 41944, 41943, 41944 (definitions of "response," "remove," and "remedy").

33. See, e.g., New York v. Shore Realty Corp., 15 ELR 20358 (2d Cir. Apr. 4, 1985); Bulk Distribution Centers v. Monsanto Co., 589 F. Supp. 1437, 1442-43, 15 ELR 20151, 20154 (S.D. Fla. 1984); United States v. South Carolina Recycling & Disposal, 14 ELR 20272, 20274 (D.S.C. Feb. 23, 1984); United States v. Northeastern Pharmaceutical & Chemical Co., 579 F. Supp. 823, 843-44, 14 ELR 20212, 20220-21 (W.D. Mo. 1984); United States v. Conservation Chemical Co., 589 F. Supp. 59, 62, 14 ELR 20207, 20208 (W.D. Mo. 1984). See generally Comment, CERCLA Litigation Update: The Emerging Law of Generator Liability, 14 ELR 10224, 10227-29 (1984).

34. See, e.g., New York v. Shore Realty Corp., 15 ELR 20358 (2d Cir. Apr. 4, 1985) (current owner of site liable for pollution caused by prior owner); United States v. Argent Corp., 14 ELR 20616 (D.N.M. May 4, 1984) (owner of land leased to silver recovery business held liable).

35. See, e.g., United States v. Stringfellow, 14 ELR 20385, 20385-87 (C.D. Cal. Apr. 5, 1984); Bulk Distribution Centers v. Monsanto Co., 589 F. Supp. 1437, 1442-43, 15 ELR 20151, 20154 (S.D. Fla. 1984); United States v. South Carolina Recycling & Disposal, 14 ELR 20272, 20275 (D.S.C. Feb. 23, 1984); United States v. Northeastern Pharmaceutical & Chemical Co., 579 F. Supp. 823, 844-45, 14 ELR 20212, 20221 (W.D. Mo. 1984); United States v. Conservation Chemical Co., 589 F. Supp. 59, 63, 14 ELR 20207, 20209 (W.D. Mo. 1984); United States v. A & F Materials Co., 578 F. Supp. 1249, 1255-57, 14 ELR 20105, 20106-08 (S.D. Ill. 1984); United States v. Wade, 577 F. Supp. 1326, 1337-38, 14 ELR 20096, 20099-100 (E.D. Pa. 1983); United States v. Chem-Dyne Corp., 572 F. Supp. 802, 13 ELR 20986 (S.D. Ohio 1983). See generally Comment, CERCLA Litigation Update: The Emerging Law of Generator Liability, 14 ELR 10224, 10230-32 (1984).

36. The "third party defense" provides that the defendant may avoid liability by proving that the release of a hazardous substance was caused "solely" by "an act or omission of a third party other than an employee or agent of the defendant, or than one whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly, with the defendant." CERCLA § 107(b), 42 U.S.C. § 9607(b), ELR STAT. 41947.

37. The courts have stated that EPA need not prove that a particular party's waste actually was released at the site, because the difficulty in "fingerprinting" specific wastes makes such a burden infeasible. EPA need only prove that a party's waste was deposited at the site and that some waste was released. See United States v. South Carolina Recycling & Disposal, 14 ELR 20272, 20274 (D.S.C. Feb. 23, 1984); United States v. Wade, 577 F. Supp. 1326, 1332, 14 ELR 20096, 20097-98 (E.D. Pa. 1983). See generally Comment, CERCLA Litigation Update: The Emerging Law of Generator Liability, 14 ELR 10224, 10228-29 (1984).

38. For a compilation of such statutes, see ELR, STATE SUPERFUND STATUTES 1984.

39. See 11 U.S.C. § 523 (listing exceptions to discharge).

40. Id. §§ 727 (liquidation), 1141 (confirmation of reorganization plan discharges debts), 1328(b) (discharge of debts of individuals).

41. Id. § 101(14).

42. Id. § 101(4)(A).

43. Id. § 101(4)(B).

44. See id. § 506.

45. Id. § 507(a). Administrative expenses can be paid from secured property where necessary for "preserving, or disposing of, such property to the extent of any benefit to the holder of [the secured] claim." Id. § 506(c). See In re T.P. Long Chemical, 45 Bankr. 278, 287 (Bankr. N.D. Ohio 1985).

46. 11 U.S.C. § 503(b)(1)(A).

47. Id.

48. These priority claims include wages, salaries and commissions earned within 90 days before filing of the bankruptcy petition (up to $2000 for each person) and contributions to employee benefit plans. Id. § 507(a).

49. Id.

50. Id. § 554.

51. Ohio v. Kovacs, 105 S. Ct. 705, 711, n.12, 15 ELR 20121, 20123, n.12 (1985), H.R. REP. NO. 595, 95th Cong., 1st Sess. 377 (1977); S. REP. NO. 989, 95th Cong., 2d Sess. 92 (1978). As the congressional reports note, certain property is automatically deemed to have been abandoned to the debtor.

52. See, e.g., Mason v. Commissioner, 646 F.2d 1309, 1310 (9th Cir. 1980); In re Tarpley, 4 Bankr. 145. 146-47 (Bankr. M.D. Tenn. 1980); Brown v. O'Keefe, 300 U.S. 598, 602 (1937).

53. 11 U.S.C. § 541. The prior Bankruptcy Act vested title to the debtor's property in the trustee. See Bankruptcy Act Amendments of 1938, Pub. L. No. 75-696, § 70a, 52 Stat. at 879 (repealed 1978). The Bankruptcy Code employs a less radical transfer; the trustee assumes control of the property as part of the bankruptcy estate, which holds the title. 11 U.S.C. § 541; see In re T.P. Long Chemical, 45 Bankr. 278, 283 (Bankr. N.D. Ohio 1985).

54. COLLIER ON BANKRUPTCY P554.02[2] at 554-56 (L. King 15th ed. 1985).

55. In re Tarpley, 4 Bankr. at 147 (Quoting In re Palumbo, 271 F. Supp. 640, 643 (W.D. Va. 1967)).

56. Id.

57. FED. R. BANKR. P. 6007(a).

58. FED. R. BANKR. P. 6007(b).

59. FED. R. BANKR. P. 6007(c).

60. Abandonment is discussed infra in the text accompanying notes 155-73.

61. 11 U.S.C. § 362.

62. See Johns-Manville Corp. v. Asbestos Litigation Group (In re Johns-Manville Corp.), 26 Bankr. 420 (Bankr. S.D.N.Y. 1983).

63. 11 U.S.C. § 362(b)(4).

64. Id. § 362(b)(5).

65. 105 S. Ct. 705, 15 ELR 20121 (1985).

66. Id. at 707, 15 ELR at 20121.

67. Id.

68. Id. at 707 & n.1, 15 ELR at 20121 & n.1.

69. Id. at 708, 15 ELR at 20122. The Code defines a "debt" as "liability on a claim," 11 U.S.C. § 101(11), and a "claim," as either a "right of payment" or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment," id. § 101(4).

70. In re Kovacs, 29 Bankr. 816 (Bankr. S.D. Ohio 1982).

71. In re Kovacs, 717 F.2d 984, 14 ELR 20253 (6th Cir. 1983).

72. Brief for the United States as Amicus Curiae Supporting Petitioner at 22, Ohio. v. Kovacs, 105 S. Ct. 705, 15 ELR 20121 (1985).

73. Motion for Leave to File Brief and Brief of the Council of State Governments, the United States Conference of Mayors, the National Association of Counties, the National League of Cities, and the International City Management Association as Amici Curiae in Support of the State of Ohio at iv, Ohio v. Kovacs, 105 S. Ct. 705, 15 ELR 20121 (1985).

74. 105 S. Ct. at 708, 15 ELR at 20122.

75. Id. at 709, 15 ELR at 20122 (quoting In re Kovacs, 29 Bankr. at 816).

76. 105 S. Ct. at 710, 15 ELR at 20123 (quoting In re Kovacs, 717 F.2d at 988, 14 ELR at 20255).

77. 105 S. Ct. at 710, 15 ELR at 20123.

78. Id.

79. Id.

80. Id. at 711, 15 ELR at 20123 (footnotes omitted).

81. Id.

82. Id. at 711-12, 15 ELR at 20123-24.

83. Id. at 711, 15 ELR at 20123. The Court did, however, include a lengthy footnote detailing its expected course of events had Kovacs filed for bankruptcy before appointment of the receiver. Id. n.12.

84. "Kovacs' obligation to pay $75,000 to the State is a debt dischargeable in bankruptcy, which the State freely concedes. . . ." Id. at 708, 15 ELR at 20122; see Brief of Petitioner at 5-6 ("The State recognizes [the part of the state court order imposing a $75,000 judgment] is a money judgment which is dischargeable in bankruptcy.")

85. 42 U.S.C. § 9607, ELR STAT. 41947.

86. Both the Resource Conservation and Recovery Act, § 3004(a)(6) & (t), 42 U.S.C. § 6924(a)(6) & (t), ELR STAT. 42013-15, and CERCLA, § 108, 42 U.S.C. § 9608, ELR STAT. 41949, empower EPA to establish financial responsibility requirements for hazardous waste facilities.

87. 105 S. Ct. at 711, 15 ELR at 20123.

88. 46 Bankr. 136 (Bankr. M.D. Fla. 1985).

89. Id. at 139.

90. Id.

91. Id.

92. 105 S. Ct. at 710, 15 ELR at 20123.

93. Such an order would have the effect of obligating the estate to perform, but the nature and extent of this obligation are unclear. Certainly the estate would not have to perform fully if it did not have sufficient assets to do so. The priority to be accorded such an obligation vis-a-vis other creditors, however, remains uncertain. If a § 106 order would somehow obligate the estate to devote all of its assets first to cleanup costs, the use of such orders would significantly undermine the Code's system of priorities. This issue is discussed in the following section of this article.

94. The Court appears to rely upon this fact both in deciding that the cleanup order created a claim and in deciding that the claim is dischargeable. To the extent that Kovacs employs a dichotomy based upon the enforcement mechanism actually selected by the government in deciding whether an obligation is a claim, the opinion may be misguided. The status of the obligation created by an injunctive order as a claim should not depend upon actions taking place after the obligation arose. A claim is "a right to an equitable remedy for breach of performance if such breach gives rise to a right of payment." 11 U.S.C. § 101(4). Whether an obligation "gives rise" to a right of payment would more properly depend on the state's ability to reduce its claim to a right of payment. If the government could somehow reduce its right under a cleanup injunction to a right of payment, then the claim would "give rise" to a right of payment, regardless of the actual enforcement mechanism selected.

95. 105 S. Ct. at 711, 15 ELR at 20123. The debt would not be discharged because of 11 U.S.C. § 523(a)(7), which provides for an exception to discharge for a "fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, [if the sum] is not compensation for actual pecuniary loss, other than a tax penalty."

96. 42 U.S.C. § 9606(b), ELR STAT. 41947.

97. 11 U.S.C. § 523(a)(7) (fines dischargeable if "compensation for actual pecuniary loss").

98. See CERCLA § 107(c)(3), 42 U.S.C. § 9607(c)(3), ELR STAT. 41948.

99. 11 U.S.C. § 523(a)(7). CERCLA directs that § 107(c)(3) punitive damages are to be deposited into the federal Superfund, though such monies are not earmarked for a particular site.

100. 11 U.S.C. §§ 727(a)(1) (no discharge for non-individual debtors in liquidation proceedings), 1141(d)(3)(A) (no discharge if liquidation plan filed in reorganization proceeding).

101. See Memorandum from Courtney M. Price, Ass't Adm'r for Enforcement and Compliance Monitoring, EPA, to Ass't Adm'r for Solid Waste and Emergency Response, EPA, Liability of Corporate Shareholders and Successor Corporations for Abandoned Sites Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (June 13, 1984); Memorandum from Courtney M. Price, Ass't Adm'r for Enforcement and Compliance Monitoring, EPA, to Lee M. Thomas, Ass't Adm'r for Solid Waste and Emergency Response, EPA, Guidance Regarding CERCLA Enforcement Against Bankrupt Parties (May 24, 1984) [hereinafter cited as Bankrupt Parties Memo]. See also Burack & Brown, EPA's Policy on Corporate Successor Liability Under Superfund, 8 CHEM. & RAD. WASTE LIT. REP. 649 (1985).

102. See United States v. Northeastern Pharmaceutical & Chemical Co., 579 F. Supp. 823, 847-49, 14 ELR 20212, 20220 (W.D. Mo. 1984); United States v. Mottolo, 14 ELR 20497, 20499 (D.N.H. Mar. 27, 1984).

103. 11 U.S.C. § 727(b).

104. Id. § 1129(a).

105. Id. § 101(4).

106. In re U.S. Truck Co., 42 Bankr. 790 (Bankr. E.D. Mich. 1984).

107. In re UNR Industries, 725 F.2d 1111, 1119 (7th Cir. 1984).

108. In re Candor Diamond Corp., 44 Bankr. 195 (Bankr. S.D.N.Y. 1984).

109. See also Mullen v. United States, 696 F.2d 470 (6th Cir. 1983); In re Stirling Homex Corp., 579 F.2d 206 (2d Cir. 1978), cert. denied, 439 U.S. 1074 (1979).

110. In making such arguments, EPA would be well advised to consider the CERCLA statute of limitations.See, e.g., § 112(d), 42 U.S.C. § 9612(d), ELR STAT. 14952 ("no claim may be presented, nor may an action be commenced for damages under this subchapter, unless that claim is presented or action commenced within three years from the date of the discovery of the loss or December 11, 1980, whichever is later").

111. See, e.g., Pinole Point Properties v. Bethlehem Steel Corp., 596 F. Supp. 283, 15 ELR 20173 (N.D. Cal. 1984); Bulk Distribution Centers v. Monsanto Co., 589 F. Supp. 1437, 1450-52, 15 ELR 20151, 20158 (S.D. Fla. 1984); United States v. Price, 577 F. Supp. 1103, 1110, 13 ELR 20843, 20845 (D.N.J. 1983); Cadillac Fairview/California, Inc. v. Dow Chemical Co., 14 ELR 20376, 20381 (C.D. Cal. Mar. 5, 1984).

112. 42 U.S.C. § 9607(a)(A) & (B), ELR STAT. 41947 (emphasis added).

113. See New York V. Shore Realty Corp., 15 ELR 20358 20365 (2d Cir. Apr. 4, 1985) ("Congress intended that . . . federally funded remedial efforts be focussed solely on those sites on the NPL. . . ."); 40 C.F.R. § 300.68(a), ELR REG. 47437.

114. CERCLA § 107(a)(B) imposes additional prerequisites to private party suits. Specifically, a private party cannot sue absent some governmental action at the site. See, e.g., Mardan Corp. v. C.G.C. Music, Ltd., 600 F. Supp. 1049, 1054, 15 ELR 20370, 20372 (D. Ariz. 1984) ("virtually every reported decision or order addressing the issue has found some degree of government involvement or supervision to be a prerequisite to a private party cause of action under § 107(a) of CERCLA"); Artesian Water Co. v. Government of New Castle County, 605 F. Supp. 1348, 1357-61 (D. Del. 1985); Wickland Oil Terminals v. ASARCO, Inc., 590 F. Supp. 72, 77-78, 14 ELR 20494, 20496 (N.D. Cal. 1984); Cadillac Fairview/California, Inc. v. Dow Chemical Co., 14 ELR 20716, 20717 (C.D. Cal. Aug. 29, 1984) ("To have a private cause of action there must be some governmental action preceding the private suit."); Bulk Distribution Centers v. Monsanto Co., 589 F. Supp. 1437, 1446, 15 ELR 20151, 20155-56 (S.D. Fla. 1984).

115. EPA could argue that its claim be considered an "administrative expense" of the bankruptcy estate, in which case the claim would receive top priority after payment of the secured claims. This argument will be discussed in the following section of this article.

116. See Ohio v. Kovacs, 105 S. Ct. at 712, 15 ELR at 20124 (O'Connor, J., concurring).

117. 11 U.S.C. § 1129(a). An EPA claim for a cleanup begun during the confirmation process would be discharged, id., and would be treated as an administrative expense. See Reading Co. v. Brown, 391 U.S. 471, 482-83 (1968).

118. The time at which a CERCLA claim arises is important in a slightly different context as well. Because CERCLA liability is joint and several, a private party liable to EPA may wish to seek contribution from other parties who are also allegedly liable. For example, if EPA is seeking cost reimbursement from a solvent party who wishes to seek contribution from a company on the brink of bankruptcy, the party considering bankruptcy should consider when the solvent party's claim against it would arise. Alternatively, EPA may be pursuing a financially weak party who may seek contribution from a stronger concern. The parties involved should consider whether certain of these claims could be considered pre-petition, and thus dischargeable, while others would be considered post-petition and non-dischargeable.

119. See 11 U.S.C. § 507.

120. Bankrupt Parties Memo, supra note 101.

121. See id. at 15-17; 11 U.S.C. §§ 503(a)(1) (definition of administrative expenses), 507(a)(1) (administrative expenses given first priority).

122. Bankrupt Parties Memo, supra note 101, at 15.

123. Ottenheimer v. Whitaker, 198 F.2d 289 (3d Cir. 1952).

124. Id. at 290. The Ottenheimer case was decided under the 1898 Bankruptcy Act that did not explicitly provide for a general right to abandon worthless property. The issue of abandonment will be discussed later in this article.

125. In re Quanta Resources Corp. (appeal of the state and city of New York), 739 F.2d 912, 922-23, 14 ELR 20563, 20569 (3d Cir. 1984), cert. granted, 53 U.S.L.W. 3597 (U.S. Feb. 19, 1985) (No. 84-805).

126. 739 F.2d at 922-23, 14 ELR at 20563. As will be discussed below, the court held that abandonment of the property should not be permitted.

127. Id. at 926, 14 ELR at 20571.

128. Id.

129. 45 Bankr. 278 (Bankr. N.D. Ohio 1985).

130. The debtor filed on May 29, 1981; the release of the substance, sulfur monochloride, occurred in August 1982. Id. at 280-81. Interestingly, the tank from which the substance was released was not the property of the estate, and EPA did not claim costs attributable to the spill of the substance from the tank. EPA claimed administrative status for the cost of removing several drums of hazardous materials found at the site in the process of cleaning up the spill. Id. at 281. It is unclear when these drums were disposed at the site, but no response costs were expended until after the filing.

131. Id. at 284-86.

132. Id. at 286. As will be discussed below in the context of abandonment, this statement actually begs the question. It need not follow that cleanup costs for property that the trustee cannot abandon must be considered administrative expenses; this is the issue to be decided. See also Department of the Interior v. Elliott, 761 F.2d 168 (4th Cir. May 6, 1985) (post-petition penalties under Surface Mining Control and Reclamation Act for post-petition conduct by debtor held to be administrative expenses under old Bankruptcy Act because "once the bankruptcy petition has been filed, the creditors can prevent the accrual of penalties. They, therefore, cannot by their inaction allow the debtor to incur penalties while operating the business, . . . and yet object to the allowance of post-petition penalty claims").

133. 11 U.S.C. § 506(c).

134. 45 Bankr. at 287.

135. Id.

136. Id. at 288.

137. Id.

138. Id. at 288-89 (footnote omitted).

139. Id. at 289.

140. Id.

141. In re Berg Chemical Co., No. 82-B 12052 (HB) (Bankr. S.D.N.Y. July 9, 1984) (emergency order approved and recommended by Bankruptcy Judge Howard Buschman and signed by District Court Judge Abraham Sofaer).

142. 105 S. Ct. at 712, 15 ELR at 20124. But see In re Kennedy & Cohen, Inc., 612 F.2d 963 (5th Cir.), cert. denied, 449 U.S. 833 (1980); Lusk Corp. v. Arizona State Tax Commission, 462 F.2d 187 (9th Cir. 1972) (state statute having effect of modifying bankruptcy priorities held preempted).

143. N.J. REV. STAT. § 58:10-23.11f(f) (emphasis added).

144. MASS. GEN. LAWS ch. 21E, §§ 1-13.

145. Id. § 13.

146. Id.

147. N.J. REV. STAT. § 58:10-23.11f(f).

148. MASS. GEN. LAWS ch. 21E, § 13.

149. N.H. REV. STAT. § 147-B:10.

150. For a more detailed discussion of these three state statutes, see Schwenke & Lockett, Superlien "Solutions" to Hazardous Waste: Bankruptcy Conflicts, ENVTL. L. (Newsletter of the Amer. Bar Ass'n Standing Comm. on Envtl. L.), Winter 1983/84.

151. H.R. 2767, 98th Cong., 1st Sess. (1983).

152. The provision reads as follows:

(m)(1) All costs and damages for which a person is liable to the United States under subsection (a) of this section shall constitute a lien in favor of the United States upon all real property and rights to such property belonging to such person that are subject to or affected by a removal or remedial action.

(2) The lien imposed by this subsection shall arise at the time costs are first incurred by the United States with respect to a response action under this Act. . . .

(3) The lien imposed by this subsection shall not be valid as against any purchaser, holder of a security interest, or judgment lien creditor until notice of the lien has been filed in the appropriate office within the State . . . in which the real property subject to the lien is physically located. . . . This paragraph does not apply with respect to any person who has or reasonably should have actual notice or knowledge that the United States has incurred costs giving rise to a lien under paragraph (1) of this subsection.

S. 51, 99th Cong., 1st Sess. § 127 (1985) (as reported out of the Senate Committee on Environment and Public Works).

153. Cf. In re Kennedy & Cohen, Inc., 612 F.2d 963 (5th Cir.), cert. denied, 449 U.S. 833 (1980); Lusk Corp. v. Arizona State Tax Commission, 462 F.2d 187 (9th Cir. 1972) (state statute having effect of modifying bankruptcy priorities held preempted).

154. For example, in In re Berg Chemical Co., No. 82-B 12052 (HB) (Bankr. S.D.N.Y. July 9, 1984), the court's order granted a first lien and superpriority to New York City that would take precedence over all other claims, "except for professional fees as may be allowed by this Court."

155. 11 U.S.C. § 554.

156. Ohio v. Kovacs, 105 S. Ct. at 711, n.12, 15 ELR at 20123, n.12; H.R. REP. NO. 595, 95th Cong., 1st Sess. 377 (1977); S. REP. NO. 989, 95th Cong., 2d Sess. 92 (1978).

157. In re Quanta Resources Corp. (appeal of the New Jersey Department of Environmental Protection), 739 F.2d 927, 14 ELR 20572 (3d Cir. 1984), cert. granted sub nom. Midlantic National Bank v. New Jersey Department of Environmental Protection, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-801); In re Quanta Resources Corp. (appeal of the state and city of New York), 739 F.2d 912, 14 ELR 20563 (3d Cir. 1984), cert. granted sub nom. O'Neill v. City of New York, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-805).

158. Midlantic National Bank v. New Jersey Department of Environmental Protection, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-801); O'Neill v. City of New York, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-805).

159. 739 F.2d at 928-29, 14 ELR at 20573.

160. Id. at 915, 14 ELR at 20565.

161. Id. at 921, 14 ELR at 20568.

162. Id. at 921, 14 ELR at 20569.

163. Id. at 914, 14 ELR at 20564.

164. Respondent's Brief in Opposition to Petition for Writ of Certiorari at 3 (quoting Quanta Resources, 739 F.2d at 921, 14 ELR at 20568), O'Neill v. City of New York, 105 S. Ct. 1168 (U.S. cert. granted Feb. 19, 1985).

165. Id.

166. 45 Bankr. at 284-85.

167. Id. at 282-83.

168. Id. at 284.

169. But see In re Tarpley, 4 Bankr. 145, 146 (M.D. Tenn. 1980) ("Once abandoned, title to such property revests in the bankrupt as of the date of commencement of the bankruptcy proceedings."). If this is indeed the case, it is possible to argue that the estate never was the owner of the abandoned property, and thus, is not liable under CERCLA. It cannot be denied, however, that the estate was the operator of the property for a period of time, even if it is considered never to have held title.

170. In certain limited circumstances, abandonment may work to the estate's advantage by separating a debt from the assets required to pay it. If a trustee can abandon property before EPA either takes cleanup action or issues a § 106 order, perhaps EPA would not be able to pursue the estate after abandonment. CERCLA authorizes recovery against prior owners and operators, but only those who owned or operated the site at the time of the disposal. CERCLA § 107(a)(2), 42 U.S.C. § 9607(a)(2), ELR STAT. 41947. Thus, if no claim accrues before the abandonment and the trustee does not allow disposal to continue at the site, EPA may not be able to recover from the estate under CERCLA.

171. But see T. P. Long, 45 Bankr. at 286 ("Since the estate cannot avoid the liability imposed by CERCLA, it follows that the costs incurred by the E.P.A. in discharging this liability is an actual and necessary cost of preserving the estate entitled to administrative expense priority."). This aspect of the T.P. Long decision begs the question before it.

172. 105 S. Ct. at 711, 15 ELR at 20123.

173. Id. n.12.

174. 11 U.S.C. § 362.

175. Id. § 362(b)(4).

176. Id. § 362(b)(5).

177. 41 Bankr. 874 (N.D. Ill. 1984).

178. H.R. REP. No. 595, 95th Cong., 2d Sess. 343, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 5787, 6299. See also In re Kish, 41 Bankr. 620, 621 (Bankr. E.D. Mich. 1984) (lawsuit to obtain entry of judgment based on governmental unit's police and regulatory powers excepted from stay under § 362(b)(4)).

179. In In re Charles George Land Reclamation Trust, 30 Bankr. 918 (Bankr. D. Mass. 1983), the court took the highly unusual course of dismissing a chapter 7 case filed by the owner and operator of a waste disposal facility, because the ongoing environmental nuisance posed by the facility made the use of a bankruptcy trustee unsuitable for rectifying the problems at the site.

180. 466 F. Supp. 1333 (D.P.R. 1979).

181. 681 F.2d 454, 456 (6th Cir. 1982), vacated and remanded for consideration of mootness, 459 U.S. 1167 (1983), dismissed as moot, 755 F.2d 484 (6th Cir. 1985).

182. 681 F.2d at 456.

183. In re Kovacs, 755 F.2d 484 (6th Cir. 1985).

184. United States v. Johns-Manville Sales Corp., 13 ELR 20310 (D.N.H. Nov. 15, 1982).

185. Id. at 20311.

186. The court may have confused § 362(b)(4) and (5). It seems that this action fit into the former provision because the governments had no prior injunction to enforce, and the court spoke of 362(b)(4); yet, the standard applied by the court appears to be that of 362(b)(5).

187. "[W]here a government unit is suing a debtor to prevent or stop violation of . . . environmental protection . . . or similar police or regulatory laws, or attempting to fix damages for violation of such law, the action or proceeding is not stayed." H.R. REP. NO. 595, 95th Cong., 2d Sess. 343, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 5963. 6299.

188. Penn Terra Ltd. v. Department of Environmental Resources, 733 F.2d 267, 14 ELR 20475 (3d Cir. 1984).

189. 733 F.2d at 277-78, 14 ELR at 20480. The court in United States v. ILCO, Inc., No. CX85-H-823-S, slip op. at 15-16 (N.D. Ala. May 10, 1985), agreed with Penn Terra in holding that an action to force ILCO to abate the release of hazardous substances was exempt from the automatic stay. The court focused on the timing of the injury, rather than on the timing of the conduct, in concluding that the action fell within the police powers exception to the stay. The fact that compliance with the injunction sought would require the expenditure of money did not render the action one to enforce a money judgment subject to the stay.

190. Id. at 278, 14 ELR at 20481.

191. Id.

192. See also Commonwealth Department of Environmental Resources v. Peggs Run Coal Co., 423 A.2d 765 (Pa. Commw. 1980) (action to enforce state consent order based on ongoing violations of state law held subject to exception to bankruptcy stay).

193. 44 Bankr. 83 (Bankr. W.D. Mich. 1984).

194. BANKR. L. REP. (CCH) P 70518 (Bankr. N.D. Ill. Apr. 26, 1985).

195. See T.P. Long Chemical Co., 45 Bankr. at 288-89 (Because bank did not participate in the management of hazardous waste facility, it could not be held liable as an owner or operator of the facility even if it repossessed the facility). See also United States v. Maryland Bank & Trust Co., No. N84-4026, ELR PEND LIT. 65847 (D. Md. filed Oct. 31, 1984) (lawsuit against bank that foreclosed on property found to contain hazardous waste).

196. See, e.g., Bleicher & Stonelake, Caveat Emptor: The Impact of Superfund and Related Laws on Real Estate Transactions, 14 ELR 10017 (1984).

197. See United States v. Argent Corp., 14 ELR 20616 (D.N.M. May 4, 1984) (lessor liable under CERCLA for releases of hazardous waste caused by lessee).

15 ELR 10168 | Environmental Law Reporter | copyright © 1985 | All rights reserved