A Whole New Ballgame: Judicial Review and Estimation of CERCLA Claims in Bankruptcy

David F. Williams, Laurence S. Kirsch, and Elizabeth T. Van Horn

Editors' Summary: One of the lessons of recent Superfund litigation is that, in general, defendants unhappy with the government's cleanup plans face an uphill battle challenging those plans in court. Congress wrote the 1986 Superfund Amendments to favor a free hand for EPA in cleaning up hazardous waste sites, even if the cleanup bill will later be handed to a private defendant. Generally, this reflects Congress' policy preference for speedy cleanups.

But the rules can be very different under the Bankruptcy Code, where Congress wrote to encourage careful stewardship of limited funds available in bankruptcy. In this Article, the authors, who represented a debtor in a recent bankruptcy proceeding, show how the Bankruptcy Code can lead a court to estimate a company's liability on terms much more favorable than would be available under standard Superfund procedures. And, the authors suggest, the results hint at a need to rethink Superfund's restrictions on judicial review.

Messrs. Williams and Kirsch are partners, and Ms. Van Horn is an associate, in the Washington, D.C., office of the law firm of Cadwalader, Wickersham & Taft. The authors represented National Gypsum Co. in the proceeding discussed in this Article.

[22 ELR 10785]

The rising tide of big-case bankruptcies in the 1990s has produced a number of significant developments involving the intersection of the federal Bankruptcy Code¹ with environmental law — in particular, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).² An increasing number of courts have issued decisions that attempt to reconcile the apparently competing congressional policies underlying these two statutes. The Bankruptcy Code seeks to give debtors a "fresh start" through the discharge of prepetition debts, to treat similarly situated creditors equally, and to ensure the efficient administration and resolution of the bankruptcy case. When, however, a debtor is a potentially responsible party (PRP) at a hazardous waste site, the goals of bankruptcy law may conflict with CERCLA's policy of giving the U.S. Environmental Protection Agency (EPA) almost unlimited discretion to select remedies and to delay any judicial review until the Agency seeks to recover its costs from the PRP.

One of the most important recent developments in this area is the "estimation" of EPA's CERCLA claims in bankruptcy cases. Section 502(c) of the Bankruptcy Code³ requires claims that are "contingent or unliquidated" — i.e., which are not reduced to a fixed dollar amount — to be estimated for purposes of allowance, if resolution of such claims in the normal course of proceedings outside of bankruptcy would "unduly delay" the bankruptcy proceeding. As applied to the CERCLA context, a claim would need to be "estimated" for a Superfund site where the government has not yet implemented a remedy, quantified natural resource damages, or otherwise determined the dollar amount of its costs and damages incurred at a site. This Article discusses the ways in which the rules and results that normally attend CERCLA proceedings change radically when meaningful judicial review becomes available through the estimation of CERCLA claims in bankruptcy. The outcome of the first such estimation, which was recently completed in federal bankruptcy court in Texas, may contain important lessons regarding the availability of judicial review in the more traditional CERCLA case.

Outside of bankruptcy, CERCLA forces a PRP who has legitimate grievances about EPA's approach to site cleanup to play by rules strongly biased in EPA's favor. CERCLA § 113's provisions on the timing, standard, and scope of review foster a tendency toward unquestioning judicial approval of EPA's actions. However prodigal it feels EPA's choice and implementation of a remedy may be, a PRP cannot go to court until after the money has been spent. Once there, it must persuade a court, on the basis of an administrative record compiled by EPA, that the agency's decision was arbitrary and capricious. The burden of proving that EPA's actions were inconsistent with the national contingency plan (NCP) is on the PRP. In addition, the PRP must bear the burden, more metaphysical but nonetheless weighty, of being stigmatized as a "polluter,"⁴ while the court accords EPA "great deference."⁵

In the bankruptcy courts, however, PRPs may find themselves playing a whole new ballgame. A company in Chapter 11 in Texas that is a PRP at a number of hazardous waste sites recently participated in the first-ever bankruptcy proceeding to estimate the government's CERCLA claims.⁶ The debtor (National Gypsum Co.) and the U.S. Department of Justice (DOJ) presented arguments and evidence to the bankruptcy court in a three-day summary trial involving three Superfund sites. At two of the sites, there had been a substantial amount of site investigation, but no completed remedial investigation/feasibility study (RI/FS) or record of decision. At those sites, the debtor was able to propose its own remedies to the court on an equal footing with the government. The bankruptcy court examined the competing [22 ELR 10786] remedies de novo, determined which were more likely to be selected, and estimated the cost of implementing them. The estimate, in accordance with Bankruptcy Code § 502(c), effectively set a cap on the amount of the government's future CERCLA recovery. The court estimated the company's liability at a dollar amount of approximately 10 percent of what the government attempted to prove at trial.

Judicial Review in CERCLA Proceedings Outside Bankruptcy

CERCLA establishes two methods whereby EPA may pursue cleanup of a hazardous waste site. Under § 104 of CERCLA,⁷ EPA can conduct removal (short-term) or remedial (long-term) cleanup actions itself, then initiate a cost recovery action under § 107 of CERCLA to recoup its expenditures.⁸ Alternatively, EPA can compel a PRP to perform the cleanup itself under § 106 of CERCLA,⁹ either through issuing an administrative order or filing a suit for injunctive relief.

Two statutory provisions ensure that any judicial review of EPA's actions under these provisions tilts sharply in EPA's favor. Section 113(h) of CERCLA,¹⁰ entitled "Timing of Review," generally divests federal courts of jurisdiction to entertain a PRP's challenge to removal or remedial action selected under § 104, or to administrative orders issued under § 106, until EPA brings a § 107 action to recover its costs or sues to enforce its order.¹¹ In other words, a PRP can raise its challenges to EPA's actions only as defenses in an enforcement or cost recovery suit brought by EPA.¹² By this time, either the work is done or the PRP will have borne the risk of significant statutory penalties.¹³ Furthermore, not only is the PRP in a defensive posture, it also bears the burden of proof.¹⁴ Section 113(j) limits judicial review of EPA's selected response action to the administrative record and requires a PRP challenging EPA's remedy to show that its selection was "arbitrary and capricious."¹⁵ Moreover, the primary remedy available to the PRP is to limit EPA's recovery to response costs or damages that are not inconsistent with the NCP.¹⁶

The Ban on Preenforcement Review

Section 113(h) of CERCLA, which was added by the Superfund Amendments and Reauthorization Act of 1986 (SARA), codified a judicially created ban on preenforcement review of EPA's decisions under CERCLA.¹⁷ In Lone Pine Steering Committee v. EPA,¹⁸ for example, decided in 1985, the Third Circuit had rejected a challenge to EPA's choice of a remedy on the grounds that it was unnecessarily expensive. In other pre-SARA suits, courts denied PRPs the opportunity to challenge EPA's decision to undertake an emergency removal action under § 104,¹⁹ to compel EPA to permit them to conduct the RI/FS,²⁰ and to raise defenses to liability, such as the Act of God defense.²¹ "Congress envisioned a procedure that permits the EPA to move expeditiously in the face of a potential environmental disaster," the Second Circuit explained in Wagner Seed Co. v. Daggett. "To introduce the delay of judicial proceedings at the outset of a cleanup would conflict with the strong congressional policy that directs cleanups to occur prior to a final determination of the part[ie]s' rights and liabilities under CERCLA."²²

Courts have read § 113(h) expansively, applying it to bar actions even after EPA has performed a cleanup.²³ Although review at this point could not possibly delay the cleanup, the Fifth Circuit held in Voluntary Purchasing Groups v. Reilly²⁴ that § 113(h) barred a judicial determination of liability before EPA initiated a cost recovery suit. Thus, within the constraints of the limitations period,²⁵ EPA controls the timing of judicial review.

Challenges to EPA's choice or implementation of a remedy based on nonbankruptcy law external to CERCLA have been no more successful than claims based on CERCLA itself. While the First Circuit recently held unconstitutional CERCLA's lien provision,²⁶ the court distinguished this challenge from a constitutional attack on EPA's administration of the statute. Such an attack, the court ruled, "may well be a 'challenge] [ to removal or remedial action selected [22 ELR 10787] under section 9604 of this title' and may thus fall within section 9613(h)'s bar."²⁷

Nor may a PRP obtain preenforcement review of EPA's conduct on the grounds that it violates a statute other than CERCLA. North Shore Gas Co. v. EPA,²⁸ for instance, involved two overlapping sites. EPA selected a remedy for the first site that required the construction of a boat slip at the second. A PRP at the second site alleged that the construction required preparation of an environmental impact statement under the National Environmental Policy Act²⁹ and a permit under the Resource Conservation and Recovery Act.³⁰ Judge Posner, writing for the Seventh Circuit, held that § 113(h) precluded this challenge until "construction of the new slip is complete."³¹ Indeed, the decision apparently contemplates deferring review until the cost recovery suit for the second site.³²

The harm contemplated in North Shore Gas — an increase in the cost of the plaintiff's activities under CERCLA — was, at least in theory, compensable under the statutory scheme. But even where delaying review could lead to irreparable harm, § 113(h) bars preenforcement review. This was the holding of a case that epitomizes the difficulties facing a PRP seeking judicial review under CERCLA, Boarhead Corp. v. Erickson.³³ There, a hazardous waste site also contained an American Indian burial ground and artifacts. Accordingly, it was eligible to be listed as a historic place under the National Historic Preservation Act of 1966 (NHPA).³⁴ The site owner sought to require EPA to comply with the NHPA prior to conducting an RI/FS for the site. The court acknowledged that deferring judicial review to the postcleanup period is "likely to be inadequate to redress harm that occurred to archaeological and historical resources" on the site.³⁵ Nevertheless, in a statement that sums up both the legal and the attitudinal disadvantages facing PRPs, it ruled:

Although the argument in favor of protecting our Indian heritage does not lack force even when advanced by a polluter, we hold that the district court did not err when it dismissed Boarhead's complaint against Erickson for lack of subject matter jurisdiction.³⁶

Even before the enactment of § 113(h), courts readily precluded preenforcement review because of their perception that Congress intended cleanups to go forward without delay.³⁷ But as one commentator pointed out,

The courts that relied on the need for speed in denying early review of EPA response actions have given little attention, or little weight, to the possible cleanup benefits of preenforcement review. Early review could lead to more PRP-conducted studies, which, even EPA concedes, may be conducted more quickly and less expensively than government RI/FS's.³⁸

Since the enactment of § 113(h), courts have been equally uncritical in advancing a second congressional purpose: the avoidance of piecemeal litigation.³⁹ Only recently have there been manifestations of judicial discomfort at the scope of § 113(h)'s preclusion: Judge Posner's comment in North Shore Gas that "the breadth of section 113(h) is troublesome"⁴⁰ and the First Circuit's decision in Reardon that § 113(h) did not preclude a constitutional challenge to CERCLA itself.

The Limitations of Post-Hoc Review

In precluding preenforcement review, the courts have readily assumed that the prospect of postimplementation review will keep EPA honest and efficient.⁴¹ Even after a PRP gets to court, however, CERCLA weighs the rules for judicial review heavily in EPA's favor. In addition to the inertia that favors upholding what EPA has already done, a PRP challenging EPA's selection or implementation of a Superfund remedy also must overcome the almost insuperable hurdles posed by § 113(j) and judicial deference to EPA's "specialized knowledge." The burden of proof, moreover, is on the PRP. And, as CERCLA practitioners have repeatedly learned, the dim prospect of success in court leads to settlement choices out of court that give EPA by far the stronger bargaining position. With no threat of any meaningful judicial review, the agency has in some cases staked out positions that are scientifically insupportable and procedurally unfair.

The Lone Pine court, in denying preenforcement review, had argued that PRPs would have an "adequate opportunity" to object to the cost and adequacy of the response actions in a § 107 cost recovery action.⁴² Having acknowledged [22 ELR 10788] the possibility of "bureaucratic excesses," it promised that in such an action the reviewing court "will undoubtedly look carefully at the claims made by the government" and subject the evidence to "careful and exacting study."⁴³ CERCLA's requirement that EPA observe cost effectiveness, the court held, "is a limitation, not a license to squander."⁴⁴

Other decisions, however, had already begun to undermine the Lone Pine court's assumption. The 1985 case United States v. Ward was an early example of the trend toward according the agency "great deference."⁴⁵ While noting that PRPs were entitled to challenge a remedy's cost-effectiveness, the court observed: "This court cannot and will not substitute its layman's judgment for the scientific conclusions made by EPA after years of in-depth study …." Accordingly, the court held, the PRP must show that EPA's action is arbitrary and capricious.⁴⁶

SARA confirmed the court's choice of an arbitrary and capricious standard of review — a standard that makes the prospect of a successful challenge to EPA decisionmaking extremely remote.⁴⁷ The pattern of deference to EPA's "scientific" decisionmaking also continued. In United States v. Northeastern Pharmaceutical & Chemical Co.,⁴⁸ for example, the court, applying the arbitrary and capricious standard, noted: "Because determining the appropriate removal and remedial action involves specialized knowledge and expertise, the choice of a particular cleanup method is a matter within the discretion of the EPA."⁴⁹

The courts have also placed upon the challenging PRP the burden of showing that EPA's incurrence of costs — and thus, its choice of remedies — was inconsistent with the NCP.⁵⁰ This allocation of the burden is based on the language of § 107 of CERCLA, which makes PRPs liable for costs of removal or remedial action incurred by the government "not inconsistent with the national contingency plan."⁵¹ "'[N]ot inconsistent' is not, at least for purposes of statutory construction and syntax, the same as 'consistent,'" the court explained in Northeastern Pharmaceutical. Moreover, it held, "all costs" incurred by EPA that are not inconsistent with the NCP "are conclusively presumed to be reasonable."⁵² The opinion in United States v. American Cyanamid Co.⁵³ sums up this unquestioning deference: "CERCLA imposes no obligation on the United States to minimize its response costs for the benefit of responsible parties who are liable for the costs…. Reasonableness of costs for clean-up is not a defense to recovery." A PRP who seeks disallowance of EPA responses "has the burden of demonstrating that the clean-up, because of some variance from the Plan, resulted in demonstrable excess costs…."⁵⁴

The PRP must carry this burden assisted only by what is in the administrative record compiled by EPA. While the courts have held that PRPs would have an adequate opportunity to contribute to this record, in practice EPA has proven reluctant to include materials in the administrative record that are unfavorable to its position, and a PRP's opportunities to supplement or force revisions to the administrative record are limited.

Review and Estimation of CERCLA Claims in Bankruptcy

In a string of recent cases, the DOJ has attempted, with mixed success, to import into the bankruptcy context § 113(h)'s ban on preenforcement review. The government's successes, however, have come in cases in which a reorganized debtor has emerged from Chapter 11.⁵⁵ In both In re Chateaugay⁵⁶ and In re National Gypsum Co., the government argued in the course of ongoing bankruptcy proceedings [22 ELR 10789] that because of § 113(h), unincurred response costs arising from prepetition releases of hazardous substances are not "claims" dischargeable in bankruptcy. In both cases, the courts rejected this argument.

In re Chateaugay Corp.

The mid-1980s saw some preliminary indications that the Bankruptcy Code might alter the normal course of environmental proceedings in the debtor's favor. In Ohio v. Kovacs,⁵⁷ a case challenging a state's ability to enforce an injunction under its environmental laws against a bankrupt individual, the Supreme Court observed, "[I]t is apparent that Congress desired a broad definition of a 'claim' in bankruptcy." While the Kovacs decision did not involve CERCLA, the Court's comment on the breadth of the Bankruptcy Code suggested that the policies of the Code were to apply even to CERCLA claims.

The Second Circuit offered an even stronger hint that bankruptcy might change the rules in a CERCLA proceeding in In re Combustion Equipment Associates, Inc.⁵⁸ In that case, the court pointed out substantial differences in the philosophies of CERCLA and the Bankruptcy Code, including their timing:

in contrast to CERCLA's preference for delaying litigation, a preference that postpones the fixing of liability on specified parties or in specified amounts, the Bankruptcy Code often accelerates litigation by allowing a bankruptcy judge to estimate contingent liabilities, 11 U.S.C. § 502(c), thereby fixing them for the purpose of sharing in the assets of the estate before they would have otherwise matured.

While the court declined on ripeness grounds to consider the plaintiff's declaratory judgment complaint concerning dischargeability of the government's CERCLA claims, the court expressly reserved the question of § 113(h)'s effect in an ongoing bankruptcy proceeding.⁵⁹

Three years later, the Second Circuit addressed this precise issue in In re Chateaugay Corp., decided in connection with the Chapter 11 reorganization of LTV Corporation. The Second Circuit's ruling was the first appellate decision that the government's right to recover response costs under CERCLA is a "claim" dischargeable in bankruptcy. Section 101(4) of the Bankruptcy Code defines a "claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured, or unsecured; …"⁶⁰ Although this definition of "claim" includes contingent or unmatured claims, the government argued that it would be "forced to litigate in the bankruptcy proceedings to liquidate and fix any claims it might conceivably have … for postconfirmation response costs," and that § 113(h) precluded this litigation.⁶¹ The Second Circuit rejected this argument. Because of the bankruptcy courts' authority under § 502(c) of the Bankruptcy Code to estimate contingent and unliquidated claims, the court stated that "CERCLA's prohibition of preenforcement review is simply inapplicable."⁶² Estimation in bankruptcy, the court reasoned, did not call upon the courts to "review any challenges to removal or remedial action" selected under § 104 of CERCLA.⁶³ In the court's view, a "speedy and rough" estimation proceeding would not take the place of "normal CERCLA enforcement proceedings," but rather would establish EPA's position in the bankruptcy.⁶⁴

Although the Chateaugay decision contemplated the estimation of the government's CERCLA claims, no estimation proceeding has taken place in that case. In National Gypsum, the district and bankruptcy courts built on the Chateaugay decision to set the parameters for the first estimation proceeding involving the government's CERCLA claims, overruling the government's renewed protests that § 113(h) precluded such a proceeding.

Section 113(h) Does Not Bar Estimation of CERCLA Claims

Citing Chateaugay's statement that "nothing prevents the speedy and rough estimation of CERCLA claims," the district court granted National Gypsum's motion for an estimation hearing prior to any determination on liability.⁶⁵ Estimation, the court found, served "several purposes."⁶⁶ First, because the government's claims were potentially very large, estimation was essential to permit evaluation of the feasibility of the company's reorganization plan. Moreover, estimation would serve two fundamental Bankruptcy Code policies: the equal treatment of similarly situated creditors, and ensuring that debtors receive a "'fresh start without the threat of lingering claims riding through' the bankruptcy."⁶⁷ To the government's argument that the determination of CERCLA liability should precede estimation, the court responded that CERCLA authority upon which the government relied was "inapposite to the unique circumstances before this Court resulting from the interaction of CERCLA and the Code."⁶⁸ The court concluded, "[T]here is no reason to depart in the instant case involving CERCLA from the well-established bankruptcy practice and policy favoring estimation of unliquidated claims prior to determination of liability."⁶⁹

Three months later, the district court again followed "the landmark case of In re Chateaugay"⁷⁰ in rejecting the government's argument that consideration of its CERCLA claims in bankruptcy for response costs not yet expended or natural resource damages not yet assessed violated § 113(h). "Once a potentially responsible party is in bankruptcy," Chief Judge Sanders stated, "the provisions of CERCLA cannot stand as the sole relevant statutory guide, [22 ELR 10790] and must be reconciled with the provisions of the Code."⁷¹ Like the Second Circuit in Combustion Equipment, Chief Judge Sanders perceived a "tension" between CERCLA and the Bankruptcy Code, but declined to accord one statute "primacy" over the other.⁷² Judge Sanders reconciled § 113(h) with the Bankruptcy Code by confirming that estimation could proceed for bankruptcy purposes (including the allowance of claims) without interfering with subsequent proceedings under CERCLA outside bankruptcy. However, EPA was required to assert its claims in bankruptcy or forever lose them:

The time scheme governing EPA under CERCLA by necessity is altered when it comes in contact with the Code. In order for the EPA to preserve its claims in regard to a PRP in bankruptcy, its duties are triggered by the mere discovery of a site linked to the Debtors, and extends to such activity that would allow a rough and speedy estimation of CERCLA claims under the Code.⁷³

The practical effect of this holding is to circumscribe the reach of § 113(h) in ways that are at odds with EPA's usual interpretation.

Estimation to "Fix" the Government's Claims

In Combustion Equipment, the Second Circuit had stated that bankruptcy estimation "fix[es]" contingent liabilities "for the purpose of sharing in the assets of the estate before they would otherwise have matured."⁷⁴ This ruling accords with the actual language of the Bankruptcy Code § 502(c), which states that estimation of the claim is "for purpose of allowance."⁷⁵ The district court in National Gypsum quoted Combustion Equipment with approval in its November 12, 1991, opinion. And, in discussing the benefits of estimation, the court relied heavily on a leading case for the proposition that estimation places a ceiling, or "cap," on the ultimate value of the creditor's claim, In re Baldwin-United Corp.⁷⁶ Thus, the creditor here, the United States, receives a distribution from the bankruptcy estate in the amount of its estimated claim, and cannot recover anything further from the reorganized debtor after it emerges from the bankruptcy.

Notwithstanding Judge Sanders' rulings, however, the government continued to argue that estimation should serve only to establish the government's "voice" in the bankruptcy proceeding and would not "fix" its claim for the purpose of sharing in the assets of the estate. An estimation proceeding with this limited purpose would not afford a debtor genuine relief from the provisions of CERCLA § 113. While it could have offered its own view of the remedies to be selected, and had those remedies evaluated de novo, this evaluation would not have affected the world outside the bankruptcy.

Judge Felsenthal of the bankruptcy court, however, when asked to rule on the purpose and effect of the estimation proceeding, held that the estimate would fix the claim for purposes of sharing in the assets of the estate. This ruling gave the outcome of the estimation proceeding an effect external to the bankruptcy. While EPA could go forward with its remedy selection process, it could not recover from the debtor an amount beyond the amount set aside as a result of the estimation proceeding.

The three-day hearing that the bankruptcy court held to establish this amount was the mirror image of a CERCLA cost recovery proceeding, with the PRP's major disadvantages reversed. The government had the burden of establishing its claim, without the favorable presumptions that attach in proceedings governed by CERCLA § 113(j). More importantly, where EPA had not yet selected a remedy, the bankruptcy court evaluated the proposed remedies prospectively, eliminating the disadvantages inherent in any attempt to undo a "done deal."

Preselection Review

At the sites for which EPA has not yet selected a remedy, there is no question of "review" of EPA's decisionmaking. Therefore, there is no "arbitrary and capricious" standard of review, no deference to a "scientific" decision of an expert agency, and no limitation to the administrative record.⁷⁷

While an estimation proceeding can be conducted largely free of CERCLA's usual limitations on judicial review, addressing CERCLA's substantive requirements is of critical importance. The purpose of an estimation proceeding is to produce a reasonable estimate of the actual, likely value of the unmatured claim, using the substantive legal rules governing the ultimate value of the claim outside of bankruptcy.⁷⁸ The goal, therefore, was to predict EPA's most likely, lawful choice.

To achieve this goal in the National Gypsum case, both the government and National Gypsum put forward remedies which they argued were consistent with the NCP and likely to resemble the remedies EPA would select. Unlike the PRP in a CERCLA cost recovery proceeding, who must prove that a remedy selected by EPA is arbitrary and capricious and inconsistent with the NCP, National Gypsum put forward remedies it attempted to prove were reasonable and consistent with the NCP. National Gypsum, using expert witnesses very familiar with EPA-approved site investigations and remedies, designed its case to replicate as closely as possible the decisionmaking process EPA would follow under the NCP. Indeed, in the view of the bankruptcy court, National Gypsum followed the NCP more closely than the government.⁷⁹ Accordingly, in evaluating the remedies proposed for one of the sites, the bankruptcy court accorded National Gypsum's evidence "greater weight"⁸⁰ and estimated [22 ELR 10791] a remedy closely akin to that proposed by National Gypsum's expert. Out of $8.3 million sought by EPA, the court awarded approximately $2.3 million. The court also awarded less than $300,000 of the more than $2 million in natural resource damages sought by the U.S. Department of the Interior. Thus, given the chance to prove itself on an equal footing with the government, a PRP can equal or even better the government in complying with the standards imposed by CERCLA and the NCP.

With respect to the second of the two preselection sites in the National Gypsum case, the Salford Quarry in Pennsylvania, the estimation process called upon the bankruptcy court to apply CERCLA's standards on liability to determine whether the government had any CERCLA claim at all. The court determined that CERCLA liability standards were not satisfied and, even if they were, that the value of that claim would be zero. The decision largely turned on two issues: the government's failure to prove that there had been any release of hazardous substances, and the removal of the site from EPA's national priorities list (NPL). As to the first issue, the bankruptcy court determined that the government had not shown any release of a hazardous substance at the site, stating: "the United States has not established National Gypsum liability under CERCLA."⁸¹ Even if there were liability, the court valued response costs at zero because of the removal of the Salford Quarry from the NPL. National Gypsum had appealed the NPL listing of the Salford Quarry to the United States Court of Appeals for the District of Columbia Circuit. That court vacated the listing on June 19, 1992, five days before Judge Felsenthal estimated the value of the claim.⁸² Sites not on the NPL may not be subjected to remedial action.⁸³ Accordingly, the court estimated the value of the government's claim, which the government argued could be as high as $50 million, at zero.⁸⁴

Postselection Review

At the third site, EPA already had selected a remedy. Accordingly, the bankruptcy court "reviewed" this choice on the administrative record, using the arbitrary and capricious standard of review as required by § 113(j). Estimation here, therefore, more closely resembled the CERCLA norm, with only the timing of review altered. Estimation after EPA has selected a remedy requires the bankruptcy court to consider a PRP's "challenge" to EPA's choice before EPA has brought a cost recovery suit.

As in the preselection case, the bankruptcy court is bound by the legal principles that govern the claim outside bankruptcy. Accordingly, Judge Felsenthal applied the arbitrary and capricious standard of review in evaluating the government's claim. And, like nonbankruptcy courts, Judge Felsenthal noted that "with scientific evidence under CERCLA, the reviewing court must be deferential."⁸⁵ Because the record "does not reveal a clear error of judgment or a glaring omission or mistake," the court held, "[a] reviewing court would not likely hold that the EPA's [remedy] was arbitrary or capricious."⁸⁶

Despite this finding, the bankruptcy court did not estimate the government's claim unconditionally at the full amount established by EPA's Record of Decision. Rather, noting that EPA's choice of a remedy was contingent upon the outcome of a treatability study, the court conditioned payment of the full amount on EPA's performance of this study before the date of distribution under any reorganization plan.⁸⁷ Moreover, the court specifically permitted National Gypsum to request judicial review of the study prior to the date of distribution. It is ironic, in light of the rationale for precluding preenforcement review, that the court's refusal to permit § 113(h) to bar estimation actually could help speed a cleanup.

Conclusion

CERCLA protects EPA's decisions about remedies and their costs from scrutiny. Few PRPs facing the roadblocks posed by CERCLA's judicial review provisions are likely even to make it to court; a PRP may well decide it is better off capitulating early. The policies of the Bankruptcy Code offer a glimpse into an alternative world, in which decisions about remedies are examined prospectively by a neutral decisionmaker. The result of the only such examination yet conducted — an outcome vastly different from that proposed by the government at the outset — raises serious questions about the wisdom of CERCLA's severe limitations on judicial review. Are the actions of an agency so shielded from scrutiny really likely to be cost-effective? Are its decisions really so specialized that a judge cannot cope with them? Has delaying review really speeded cleanup? The evidence of the first CERCLA estimation proceeding suggests that the answer to all of these questions is "no." The bankruptcy court reduced the government's estimate of the value of its claims from $69 million to a maximum of $11 million. In a three-day proceeding, the court attained a firm grip on the many complex issues before it. And the decision not only did not delay cleanup, but may have even hastened it.

A PRP should not have to file for bankruptcy to obtain effective judicial review of EPA's decisions under CERCLA. Even allowing for an inflationary litigation strategy, the vast disparity between the government's claimed costs and the amount estimated by a neutral court warrants at least a greater degree of skepticism than that permitted by a standard of unquestioning deference that conclusively presumes that all the costs incurred by EPA are reasonable.

1. 11 U.S.C. §§ 1-1330 (1988).

2. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 007-075.

3. 11 U.S.C. § 502(c).

4. See Boarhead Corp. v. Erickson, 923 F.2d 1011, 1013, 21 ELR 20517, 20518 (3d Cir. 1991).

5. E.g., United States v. Ward, 618 F. Supp. 884, 900, 16 ELR 20127, 20134 (D.N.C. 1985).

6. In re National Gypsum Co., BK-390-37213-SAF-11 (Bankr. N.D. Tex. Nov. 12, 1991).

7. 42 U.S.C. § 9604, ELR STAT. CERCLA 012.

8. 42 U.S.C. § 9607, ELR STAT. CERCLA 024.

9. 42 U.S.C. § 9606, ELR STAT. CERCLA 024.

10. 42 U.S.C. § 9613(h), ELR STAT. CERCLA 040.

11. As a "shorthand," § 113(h) is said to bar "preenforcement review." Reardon v. United States, 947 F.2d 1509, 1512, 22 ELR 20292, 20294 (1st Cir. 1991). Section 113(h) provides for certain exceptions to this bar, but the exceptions are limited.

12. See Cabot Corp v. EPA, 677 F. Supp. 823, 828 18 ELR 20835, 20837 (E.D. Pa. 1988) (PRP's contentions that EPA has failed to take steps to limit its costs are appropriately raised only as defenses against excessive cost recovery under § 107).

13. See CERCLA § 106(b)(1), 42 U.S.C. § 9606(b)(1), ELR STAT. CERCLA 024 (authorizing $25,000 per day fines for failure to comply with administrative orders); CERCLA § 107(c)(3), 42 U.S.C. § 9607(c)(3), ELR STAT. CERCLA 025 (authorizing treble damage recovery in addition to response costs for failure to comply with administrative orders).

14. United States v. Northeastern Pharmaceutical & Chemical Co., 810 F.2d 726, 17 ELR 20603 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987).

15. 42 U.S.C. § 9613(j), ELR STAT. CERCLA 040.

16. Id.

17. The pre-SARA cases barring preenforcement review are collected and discussed in Barnett M. Lawrence, Preenforcement Review Under CERCLA: Potentially Responsible Parties Seek an Early Day in Court, 16 ELR 10093 (Apr. 1986).

18. 777 F.2d 882, 16 ELR 20009 (3d Cir. 1985), cert. denied, 476 U.S. 1115 (1986).

19. J.V. Peters & Co. v. Administrator, 767 F.2d 263, 15 ELR 20646 (6th Cir. 1985).

20. Wheaton Industries v. EPA, 781 F.2d 354, 16 ELR 20260 (3d Cir. 1986).

21. Wagner Seed Co. v. Daggett, 800 F.2d 310, 16 ELR 21001 (2d Cir. 1986).

22. Id. at 315, 16 ELR at 21002.

23. The scope of § 113(h)'s ban on preenforcement review is discussed in detail in Alfred R. Light & M. David McGee, Preenforcement, Preimplementation, and Postcompletion Preclusion of Judicial Review Under CERCLA, 22 ELR 10397 (June 1992).

24. Voluntary Purchasing Groups, Inc. v. Reilly, 889 F.2d 1380, 20 ELR 20267 (5th Cir. 1989).

25. Section 113(g)(2) requires an action to recover the costs of a removal action to be brought within three years after completion of the removal action, and an action to recover the costs of a remedial action to be brought within six years of the initiation of physical on-site construction of the remedial action. 42 U.S.C. § 9613(g)(2), ELR STAT. CERCLA 039.

26. Reardon, 947 F.2d at 1509, 22 ELR at 20292 (1st Cir. 1991).

27. Id. at 1515, 22 ELR at 20296. See also Barmet Aluminum Corp. v. Reilly, 927 F.2d 289, 21 ELR 20850 (6th Cir. 1991) (§ 113(h) precludes preenforcement constitutional challenges to CERCLA).

28. 930 F.2d 1239, 21 ELR 21038 (7th Cir. 1991).

29. 42 U.S.C. §§ 4321-4370c, ELR STAT. NEPA 001-014.

30. 42 U.S.C. §§ 6901-6992, ELR STAT. RCRA 001-050.

31. North Shore Gas, 930 F.2d at 1244, 21 ELR at 21039.

32. See id. at 1245, 21 ELR at 21039-40.

33. 923 F.2d at 1011, 21 ELR at 20517.

34. 16 U.S.C. §§ 470-470mm (1988).

35. Boarhead, 923 F.2d at 1022, 21 ELR at 20524.

36. 923 F.2d at 1013, 21 ELR at 20518.

37. See Voluntary Purchasing Groups, 889 F.2d at 1387, 20 ELR at 20270 ("courts have consistently held that where judicial review will delay remedial and removal cleanup activities, they are barred from reviewing response actions prior to an attempt by EPA to enforce its orders or allegations of liability"). Compare Abbott Laboratories v. Gardner, 387 U.S. 136, 154 (1967) (preenforcement review of FDA regulations "is calculated to speed enforcement").

38. Lawrence, supra note 17, at 10097. Most commentators did not take a critical view of the ban on preenforcement review. A 200-page Note in the Harvard Law Review concerning toxic waste litigation, for example, devoted a single paragraph to the issue, apparently agreeing with the courts that "potentially responsible parties are adequately protected by the opportunity under § 107 to raise all of their claims as defenses in the EPA's subsequent cost recovery action." Note, Developments in the Law — Toxic Waste Litigation, 99 HARV. L. REV. 1458, 1488-89 (1986) [hereinafter Taxic Waste Litigation].

39. See Voluntary Purchasing Groups, 889 F.2d at 1390, 20 ELR at 20272. See also Light & McGee, supra note 23, at 10403.

40. 930 F.2d at 1245, 21 ELR at 21040.

41. See, e.g., Cabot Corp. v. EPA, 677 F. Supp. 823, 828-29, 18 ELR 20835, 20838 (E.D. Pa. 1988) ("Due process rights of PRPs are protected by PRPs' eventual opportunity to contest unnecessary costs that EPA attempts to recover from them. The expectation that it will have to defend against such claims by PRPs gives EPA an incentive to conduct cleanups in accordance with CERCLA and the NCP."). See also supra note 38, at 1489 ("the potentially responsible party is also accorded practical protection by the fact that the EPA has no incentive to undertake unjustified cleanup measures, because it may ultimately recover from potentially responsible parties only those costs 'not inconsistent' with the NCP").

42. Lone Pine Steering Committee v. EPA, 777 F.2d at 887, 16 ELR at 20011-12.

43. Id.

44. 777 F.2d at 887, 16 ELR at 20012.

45. 618 F. Supp. 884, 900, 16 ELR 20127, 20134 (D.N.C. 1985).

46. Id.

47. Section 113(j)(2), ELR STAT. CERCLA 040, as amended by SARA, provides:

In considering objections raised in any judicial action under this chapter, the court shall uphold the President's decision in selecting a response action unless the objecting party can demonstrate, on the administrative record, that the decision was arbitrary and capricious or otherwise not in accordance with law.

48. 810 F.2d 726, 748, 17 ELR 20603, 20614 (8th Cir. 1986).

49. Id. Accord, United States v. Northernaire Plating Co., 685 F. Supp. 1410, 1415, 18 ELR 21338, 21340 (W.D. Mich. 1988) ('The deference with which courts review such decisions recognizes that 'determining the appropriate removal and remedial action involves specialized knowledge and expertise' … , consideration of 'numerous scientific factors,' and 'balancing cost with feasibility and adequacy of remedy.'").

50. Northeastern Pharmaceutical, 810 F.2d at 748, 17 ELR at 20614.

51. 42 U.S.C. § 9607, ELR STAT. CERCLA 024.

52. 810 F.2d at 748, 17 ELR at 20613-14.

53. 786 F. Supp. 152, 161, 22 ELR 20976, 20979 (D.R.I. 1992) (citations omitted). See also United States v. Fairchild Industries, Inc., 766 F. Supp. 405, 411-13 (D. Md. 1991); United States v. Kramer, 757 F. Supp. 397, 420-21, 21 ELR 20879, 20897 (D.N.J. 1991); United States v. Marisol, 725 F. Supp. 833, 841 (N.D. Pa. 1989).

54. American Cyanamid, 786 F. Supp at 161, 22 ELR at 20979 (quoting O'Neil v. Picillo, 682 F. Supp 706, 729 (D.R.I. 1988), aff'd, 883 F.2d 176 (1st Cir. 1989), cert. denied, 493 U.S. 1071 (1990)). The court in American Cyanamid rejected a challenge to response costs as being not cost effective and therefore inconsistent with the NCP. The court explained, "Cost effectiveness is a criteria for the EPA only when choosing a permanent remedy for a site among competing alternatives…. Once EPA validly chooses a permanent remedy for a site, cost-effectiveness is no longer a viable challenge to the implementation of that remedy." Id. at 162, 22 ELR at 20979-20980.

55. Two appellate courts have decided that § 113(h) weighs against preenforcement resolution of issues concerning the intersection of bankruptcy and CERCLA after the bankruptcy proceeding has concluded. In In re Combustion Equipment Associates, Inc., 838 F.2d 35, 18 ELR 20494 (2d Cir. 1988), § 113(h) was a factor in the Second Circuit's decision that a reorganized company's declaratory judgment action concerning the discharge of CERCLA claims was not ripe. In Matter of CMC Heartland Partners, No. 92-2060 (7th Cir. July 2, 1992), the Seventh Circuit held that § 113(h) deferred until the government's cost recovery suit consideration of whether EPA's cleanup order for a site owned by the reorganized company violated the injunction issued at the end of the reorganization barring all actions against the debtor or its successors by reason of obligations existing during the bankruptcy.

The government has not met with unmixed success in the postbankruptcy context, however. In Manville Corp. v. United States, No. 91 Civ. 6683 (S.D.N.Y. Apr. 3, 1992), the court distinguished Combustion Equipment as being based on "narrowly-drawn ripeness grounds" (slip op. at 18) and permitted a declaratory judgment action concerning the discharge of the government's CERCLA claims to go forward. Section 113(h), the court held, "must yield to allow review in situations not within its reach." Id. A determination of dischargeability under the Bankruptcy Code is such a situation: 'The Complaint seeks a declaration of the scope of Manville's chapter 11 reorganization, a proceeding specifically contemplated by the Bankruptcy Code and the Declaratory Judgment Act … and does not fall within the terms of section 113(h)." Slip op. at 20.

56. 944 F.2d 997, 21 ELR 21466 (2d Cir. 1991).

57. 469 U.S. 274, 279, 15 ELR 20121, 20122 (1985).

58. 838 F.2d 35, 37, 18 ELR 20494, 20495.

59. 838 F.2d at 40, 18 ELR at 20496.

60. 11 U.S.C. § 101(4) (1988).

61. Chateaugay, 944 F.2d at 1006, 21 ELR at 21470.

62. Id.

63. Id.

64. Id.

65. In re National Gypsum Co., CA No. 3-91-1653-H (N.D. Tex. Nov. 12, 1991), slip op. at 7.

66. Id. at 6.

67. Id. at 6-7 (citing Matter of Brints Cotton Marketing, Inc., 737 F.2d 1338, 1342 (5th Cir. 1984); In re Baldwin-United Corp., 55 B.R. 885, 898 (Bankr. S.D. Ohio 1985)).

68. Id. at 8.

69. Id. at 9.

70. In re National Gypsum Co., 139 B.R. 397, 405, 22 ELR 20783, 20787 (N.D. Tex. 1992).

71. 139 B.R. at 404, 22 ELR at 20786.

72. Id.

73. 139 B.R. at 409, 22 ELR at 20788.

74. 838 F.2d at 37, 18 ELR at 20495.

75. 11 U.S.C. § 502(c) (1988).

76. 55 B.R. 885 (Bankr. S.D. Ohio 1985).

77. As discussed below, EPA had selected a remedy at a third site, Operable Unit 2 of the Asbestos Dump Sites in Morris County, New Jersey. The bankruptcy court reviewed this decision on the basis of the administrative record, employing the arbitrary and capricious standard of review.

78. Matter of Brints Cotton Marketing, Inc., 737 F.2d 1338, 1341 (5th Cir. 1984).

79. In re National Gypsum, BK-390-37213-SAF-11, Transcript of Proceedings (June 24, 1992) at 10 [hereinafter Transcript of Proceedings].

80. Id. As discussed below, the court did not evaluate the remedies proposed for the second of the two preselection sites, because it found that the government had not established National Gypsum's liability under CERCLA.

81. Transcript of Proceedings, supra note 79, at 21.

82. National Gypsum Co. v. EPA, No. 90-1574 (D.C. Cir. June 19, 1992).

83. See 40 C.F.R. § 300.425(b)(1) (1991).

84. The government had also claimed that it was entitled to an administrative expense priority for all response costs at the site incurred after filing of the bankruptcy petition. Under the district court's ruling, the government would be entitled to such a priority only if it could make a factual showing that it had incurred the costs to remedy an "imminent and identifiable harm" to the public health and safety. In re National Gypsum Co., 139 B.R. at 413, 22 ELR at 20790. The bankruptcy court ruled that to meet this standard there must be "concrete action in the bankruptcy case administration to abate or remove imminent and identifiable threat." Transcript of Proceedings, supra note 79, at 22. It found that the government had taken no such action. The continuation of pre-petition "monitoring and studying" "would be included in the government's pre-petition general unsecured claim and would not be administrative expenses." Id. at 23.

85. Transcript of Proceedings, supra note 79, at 5.

86. Id. at 8.

87. Id. at 8-9. Under the court's ruling, if the study is not completed by the distribution date, or if it does not support use of the remedy selected by EPA, the distribution to the government would be based on an estimated claim for the amount of EPA's less costly secondchoice remedy.