Court-Created Receivership Emerging as Remedy For Persistent Noncompliance with Environmental Laws

The stiff monetary sanctions, injunctions, and even prison terms that are authorized to be imposed upon violators of the federal pollution control laws¹ act as a "big stick" with which timely compliance is encouraged by federal and state enforcement authorities. There are circumstances, however, in which these remedies are simply not effective or realistically available. An example of such a case is where the noncompliant facility is publicly owned, such as a municipal electric utility. In this situation, practical and political considerations militate against the (1) levying of monetary sanctions, (2) issuance of injunctions against further operations, or (3) jailing the responsible public officials. In addition, traditional enforcement sanctions are likely to be less than ideally effective in the not uncommon case where the public or private violator is in poor financial health.

In several recent decisions, state and federal courts have adopted the common law remedy of receivership as a mechanism to coerce intransigent violators into compliance with the requirements of pollution control laws. Where injunctive relief has failed to solve the problem and monetary penalties appear inappropriate, these courts have appointed a single administrator with virtually unrestrained power to ride herd on a corporation or municipally owned facility until compliance is achieved. For example, one recent case concerned a municipal sewage treatment plant that for years had been discharging effluents in violation of federal limitations as well as a judicial enforcement order.² The court placed the plant under the direct control of a receiver who was given a mandate and full authority to take all measures deemed necessary to bring the plant into compliance. In another case involving a municipally operated electric generating plant that had fallen far behind a court-approved schedule for phasing the plant out of service, the court placed the facility under the control of a reciver rather than continue to cajole and threaten the existing management.³ Even more far-reaching are the implications of decisions by state courts in Ohio and Indiana that appointed receivers to assume control of privately owned corporations.⁴

Although receiverships have been utilized by courts of equity for centuries, their use has generally been limited to disputes over parcels of property and failed businesses. Only in the relatively recent past have courts made aggressive use of the receivership as a remedial device for public interest purposes, and its application in the environmental arena is quite new. As many courts have recently discovered, the receivership offers unique advantages in terms of its adaptability to complex situations and its unmatched coercive impact. On the other hand, it has certain drawbacks that limit its applicability to cases of compelling need.

Historical Development of the Receivership

The receivership has a long history of use as an equitable [10 ELR 10060] remedy. English courts of equity first used the device to protect and hold disputed property, such as that belonging to incompetents or decedents' estates.⁵ A traditional yet still common function of the receivership is to liquidate, consolidate, and distribute the assets of a dissolving partnership or insolvent corporation. From this narrow beginning a rather remarkable evolution has occurred.

In the mid-nineteenth century, the recurrent problem of bankrupt railroads presented American courts with an opportunity to use the receivership for a new purpose: promotion of the public interest. Recognizing that the disappearance of a rail spur could crush the economies of the towns that had grown around it, the courts directed the recivers not to pay off the claims of creditors but to reorganize the insolvent company's debts so that it could continue to serve the public under different management. The success of the practice led to its adoption in federal legislation.⁶

Another key development occurred in several nineteenth-century cases concerning defaults by municipalities on revenue bonds. Where municipalities refused to levy the taxes necessary to repay buyers of such bonds, federal courts were eventually forced to order United States marshalls to take control of local treasuries and distribute monies to the bondholders.⁷ For the first time the federal judiciary was displacing the functions of local governments to assure compliance with the law.

The conjunction of these two uses of receiverships — to promote the public interest and to overcome resistance to injunctive decrees — first occurred in civil rights cases in the 1960s. To surmount virulent opposition to the mandate of the Supreme Court in Brown v. Board of Education,⁸ federal courts found the power to take extraordinary measures, including placing entire school systems under the direct supervision of a receiver or the court itself.⁹ The success of the device in the civil rights context led to experimentation in other areas. For example, a federal court in the Northwest, confronting massive public and governmental resistance to its attempts to guarantee the fishing rights of treaty Indians, conscripted the assistance of two federal agencies and took direct control over the day-to-day management of the regional fisheries.¹⁰ A widely celebrated decision in 1976 placed the Alabama state prison system under the supervision of the district court, which appointed a panel of "receivers" to assist it in administering the prison system in order to bring it up to minimum standards.¹¹

The growing frequency with which the courts have turned to receiverships to implement equitable decrees demonstrates their increasing confidence in the effectiveness of the remedy. It bears emphasis, however, that under current law receiverships are not establish lightly; they are viewed only as a weapon of last resort.¹² Generally, receiverships will not be established unless an injunctive decree or consent judgment has been entered and shown inadequate to cure the problem.

Among the reasons for the courts' reluctance to employ a receivership is that it can be enormously burdensome to the defendant, who is usually held liable for the typically large fees and expenses of the receiver.¹³ The need for continuing judicial supervision of the progress of the receiver can make severe demands upon the resources of the court as well. In addition, appointment of a receiver to assume the day-to-day management of any ongoing entity, whether a school district or a business, is bound to diminish the efficiency of operations because of the receiver's lack of familiarity with the situation. Where the receiver has been appointed to reverse serious violations of constitutional rights or environmental requirements, some loss of efficiency or competitive position may be of little concern. Nevertheless, this is a defect not shared by civil money penalties or injunctions, which create a strong incentive to eliminate the illegal condition while preserving the powers of the existing management structure.

City of Detroit

In May 1976, the Environmental Protection Agency (EPA) brought suit against the City of Detroit seeking compliance with the discharge limitations set forth in the national pollutant discharge elimination system (NPDES) permit for its sewage treatment plant. Alleging that, in the year and a half since the permit had been issued, the plant's effluents had violated its provisions hundreds of times and that the city had also violated applicable monitoring requirements on several hundred occasions, EPA sought injunctive relief and civil penalties of $10,000 per violation.After months of negotiations, the parties signed a detailed consent agreement binding the city to meet revised discharge limits, secure adequate financing for plant improvements, obtain and train adequate staff, and [10 ELR 10061] undertake other remedial measures. Not long thereafter, however, it became evident that the city was not living up to the agreement¹⁴ and was instead continuing to violate the terms of the NPDES permit.

Upon consideration of EPA's renewed motion for injunctive relief, it was evident to the trial judge that it would be pointless simply to award civil penalties or order that specific discharge limits be met. Compliance with the NPDES permit depended on the repair or acquisition of key plant components, obtaining additional permits from the state, and reorganizing the management of the facility. Instead of ordering the sewage department to comply with these plans, the court appointed the mayor as receiver to implement them.¹⁵ All relevant powers of the sewage department were suspended and transferred to the receiver, and their exercise was expressly made immune from any act of the city council. The full range of the mayor's powers as administrator was extremely broad, and included the paying, collecting, and incurring of debt; hiring assistants, consultants, and other personnel; and investing in and repairing capital equipment.

Town of Greenwich

The controversy in Town of Greenwich v. Connecticut Department of Transportation¹⁶ centered on the Cos Cob Power Plant, which was privately owned but leased to the Department of Transportation as a source of electricity for a commuter railroad. In 1976 EPA determined not only that the emissions from the antiquated plant violated the state implementation plan but that the plant could not be brought into compliance without terminating its operation. Accordingly, EPA ordered the state to follow a specific plan for phasing the plant out of service by September 15, 1978.

When that deadline passed without the state having made significant progress toward shutting down the plant, EPA brought an action against the state agency in federal court. That litigation led to a court-approved settlement which extended the final closure deadline until December 1980 and established a new set of incremental deadlines. The state was in violation of the settlement schedule almost immediately. Only seven months after it had been entered, the defendants submitted to the court a proposed revision which would extend the deadline for shutdown by another seven months. Moreover, there was little reason to believe that even the revised schedule could be attained.¹⁷

The prospect of continuing failure to meet the court-ordered deadline posed a risk to the health of the local residents that the district court found unacceptable. Frustrated with the state's intransigence, the court appointed an administrator to assume control of the plant's operations and shut it down by the end of the year. As in City of Detroit, the administrator was charged with expansive discretionary powers, including the borrowing of funds, hiring of consultants, contractors, and counsel, as well as "full power to manage, control, and deal with all items, assets, properties, contracts, and other matters" incident to his responsibilities.¹⁸

Chem-Dyne

For several years in the late 1970s, the Chem-Dyne Corporation operated a chemical reprocessing and disposal facility in downtown Hamilton, Ohio. During this period the company received shipments of millions of gallons of carcinogenic, toxic, flammable, and otherwise hazardous chemicals that it then shipped to landfills, incinerated, dumped directly onto its own property, or stored haphazardly in 55-gallon drums. A long-standing feud between the company and state and local officials erupted into litigation in 1976 when chemicals leaked from the site into nearby waters and caused a large fish kill.¹⁹ The case was settled in 1979 through a stipulation providing, among other things, that the inventory of chemicals stored at the site would be reduced steadily until all had been removed by July 1980.

Ironically, conditions took an immediate turn for the worse. In the following weeks several fires broke out at the site. Neighborhood residents complained increasingly of physical ailments. It developed that instead of reducing the inventory of waste, Chem-Dyne had virtually doubled it in the months following the agreement. In addition, the company defaulted on several payments owed to the state pursuant to the agreement.

In light of this evidence that the company lacked either the intent or capability to restore the site, the state sought and was granted a temporary injunction (1) barring the firm from making or accepting further shipments of chemicals and (2) prohibiting the removal of any assets from the property.²⁰ Further, the court appointed a receiver to assume control of the company.²¹ As in City of Detroit and Town of Greenwich, the receiver's remedial powers were essentially unlimited.

The placing of Chem-Dyne into receivership precipitated an interesting parallel development in Indiana concerning one of the company's subsidiaries, the Seymour Recycling Corporation. Seymour had for years been skirmishing with the state over a stockpile of hazardous waste even larger than Chem-Dyne's. When the Chem-Dyne receiver was appointed, Indiana obtained an injunction in state court preventing Seymour from accepting waste [10 ELR 10062] shipments from its parent.²² When, however, Seymour's counsel withdrew from the case for nonpayment of fees, the state moved to place the firm in receivership, apparently out of concern that the parent intended to strip the subsidiary of everything but its two million gallons of toxic waste. The motion was granted on February 25.²³

Observations

These cases demonstrate that the use of receiverships as a judicial enforcement weapon has shown remarkable growth in the last year. The milestones reached in the civil rights decisions of the preceding few years, in which courts first began using the remedy as a tool for effecting social progress, were perhaps more significant. Nevertheless, the latest cases break important new ground.

First, they represent a breakthrough in the use of receiverships in a remedial setting for purposes other than the protection of constitutional rights. Indeed, none of the cases discussed above was brought to enforce individual rights at all, but rather as a means of enforcing equitable decrees that in turn were issued to enforce environmental laws. Second, they add a new weapon to the arsenal of equitable remedies available to the courts in environmental cases. This extraordinary form of relief, though it may be needed only rarely, is a potent complement to the typical statutory remedies.

These decisions have put courts in all jurisdictions on notice that in appropriate cases they may consider the appointment of a receiver to take control of noncompliant facilities. Yet they afford surprisingly little guidance on the critical question of just what circumstances must exist in order to justify the creation of a receivership. A common denominator in each of the cases discussed above is that the receivership was ordered only after an injunction or consent decree had been issued and flagrantly violated. This reticence to install a receivership has strong policy roots, since an inherent side-effect of this type of relief is the extraordinary demands it imposes on the resources of all parties, particularly the court. There seems to be no reason, however, for a rigid rule requiring as a prerequisite that injunctive relief have been attempted and have failed. Health-threatening situations could conceivably arise in which a court could not accept the risk that an injunction might not prevent a particularly serious or imminent harm from occurring. When it is necessary to take prompt and drastic action, courts should be prepared to turn to receivership without the formality of waiting for an injunction to be disregarded.

Also noteworthy is that the Chem-Dyne case appears to be the first environmental case in which a private company has been forced into receivership as a compliance technique. This points up a possibly important distinction between the use of the receivership in the public versus the private context. Public facilities would seem to be more amenable to receivership than private concerns for several reasons. One is that the courts are likely to be reluctant to impose monetary penalties on publicly owned facilities because such levies are eventually passed on to nonculpable taxpayers. This problem is compounded by considerations of federalism where a federal court assesses penalties against state or municipal governments. Injunctive relief will often be an even less attractive alternative. Facilities that provide essential governmental services cannot be closed summarily without large social costs,²⁴ and pollution-control facilities, such as sewage treatment plants, should probably not be shut down for any reason. In addition, public officials may well be less responsive to threatened money judgments than their private sector counterparts, whose success is measured more directly in economic terms. Finally, where a receivership is established, the chances for its succeeding smoothly seem greater in the case of a public entity. A receiver taking control of a private company can expect a certain amount of resentment, if not hostility, to the forced transfer of management powers. On the other hand, if the entity entering receivership is public, the goals and functions of the receiver should parallel those of previous management: to bring the facility or facilities into compliance with applicable environmental standards. A more harmonious relationship could plausibly be expected. Therefore, in the case of private concerns, courts should be doubly certain of the futility of alternative remedies before instituting a receivership.

Conclusion

Government-owned pollution sources have long presented unique and extremely difficult problems to agencies and courts seeking to enforce pollution laws.²⁵ The courts have recently discovered, however, that by forcing such facilities into receivership they can overcome many of the difficulties which in the past have all but tied the hands of the judiciary. Though it is a drastic remedy, receivership has promise as a means of correcting situations once thought intractable. In addition, there are indications that the receivership can be an effective enforcement mechanism where private polluters are involved as well. In these cases the remedy may have harsh side effects and relatively infrequent application, but on occasion it may be the only way of preventing serious environmental harm.

1. See, e.g., the Federal Water Pollution Control Act § 309(b), 33 U.S.C. § 1319(b) (injunctive relief), § 309(c)(1), 33 U.S.C. § 1319(c)(1) (criminal penalties of up to $50,000 per day or two years imprisonment), and § 309(d), 33 U.S.C. § 1319(d) (civil penalties of up to $10,000 per day), ELR STAT. & REG. 42131; Clean Air Act § 113, 42 U.S.C. § 7413 (providing for injunctive relief, money penalties of up to $50,000 per day, and imprisonment of up to one year), ELR STAT. & REG. 42220.

2. United States v. City of Detroit, 476 F. Supp. 512 (E.D. Mich. 1979).

3. Town of Greenwich v. Connecticut Dep't of Transp., __ F. Supp. __, 10 ELR 20178 (D. Conn. Jan. 21, 1980).

4. State v. Chem-Dyne Corporation, No. CV-76-09-0834, (Ohio C.P. Feb. 1, 1980); Environmental Management Board v. Seymour Recycling Corp., No. 78 C 53 (Ind. Cir. Ct. Feb. 25, 1980).

5. See 1 R. CLARK, TREATISE ON THE LAW AND PRACTICE OF RECEIVERS § 11(a) at 13 (3d ed. Anderson 1959); see generally Glenn, The Basis of the Federal Receivership, 25 COLUM. L. REV. 434 (1925).

6. See Corporate Reorganizations Act of 1934, 11 U.S.C. § 207; Railroad Reorganizations Act of 1935, 11 U.S.C. § 205.

7. See Amy v. Watertown, 130 U.S. 320 (1889); Supervisors v. Rogers, 74 U.S. (7 Wall.) 175 (1869).

8. 349 U.S. 294 (1955).

9. See Morgan v. Kerrigan, 409 F. Supp. 1141 (D. Mass. 1975), aff'd sub nom. Morgan v. McDonough, 540 F.2d 527 (1st Cir. 1976); Turner v. Goolsby, 255 F. Supp. 724 (S.D. Ga. 1965).

10. United States v. Washington, 384 F. Supp. 312 (W.D. Wash. 1974), aff'd 520 F.2d 676, 5 ELR 20552 (9th Cir. 1975). See Comment, Federal-State Friction Building Over Indian Fishing Rights in Washington, 8 ELR 10028 (1978).

11. James v. Wallace, 406 F. Supp. 318 (M.D. Ala. 1976). In addition, courts have found it necessary on many occasions to appoint special masters to assist in the formulations of equitable decrees. Special masters differ from receivers in that the powers of the former are strictly advisory. See, e.g., Keyes v. School Dist. No. 1, 380 F. Supp. 673, 684 (D. Colo. 1974) (school desegregation planning); Hamilton v. Schiro, 351 F. Supp. 549 (E.D. La. 1972) (institutional health care reform); Karpal v. Jepson, 271 F. Supp. 74 (D. Conn. 1967) (electoral reapportionment).

12. See Haase v. Chapman, 308 F. Supp. 399 (D. Mo. 1969); Tcherepnin v. Granz, 277 F. Supp. 472 (D. Ill. 1966).

13. In Amos v. Board of School Directors of the City of Milwaukee, 408 F. Supp. 765 (E.D. Wis. 1976), the monthly cost of a special master and a small staff was approximately $7,000. The general rule is that such costs are to be borne by defendants. Id. at 824; Hart v. Community School Board of Brooklyn, N.Y., 383 F. Supp. 699, 767 (E.D.N.Y. 1974).

14. For example, the city had failed to fill some 35 key personnel vacancies, including those of head plant operator and assistant head plant operator.

15. United States v. City of Detroit, 476 F. Supp. 512 (E.D. Mich. 1979).

16. __ F. Supp. __, 10 ELR 20178 (D. Conn. Jan. 21, 1980).

17. See 10 ELR at 20180-81.

18. Not long after the appointment of the administrator in City of Detroit, a federal court in New York approached a similar situation in a different fashion. To spur the City of New York to speed completion of two long-delayed sewage treatment plants, the court in United States v. City of New York, No. 77 Civ. 776 (RLC) (S.D.N.Y. Dec. 6, 1979), appointed a special master to oversee the work. Under an agreement negotiated by the parties, the special master was not given the sweeping decision-making authority of the receiver in City of Detroit. However, the agreement provides for a series of incremental deadlines, or "milestones" that, if not met, trigger the assessment of liquidated damages against the city.

19. State v. Chem-Dyne Corp., No. CV76-09-0834 (Ohio C.P. Butler Cty. 1976).

20. State v. Chem-Dyne Corp., No. CV76-09-0834 (Ohio C.P. Butler Cty. Jan. 25, 1980).

21. State v. Chem-Dyne Corp., No. CV76-09-0834 (Ohio C.P. Butler Cty. Feb. 1, 1980).

22. Environmental Management Bd. v. Seymour Recycling Corp., No. 78 C 53 (Ind. Cir. Ct. Feb. 8, 1980).

23. Environmental Management Bd. v. Seymour Recycling Corp., No. 78 C 53 (Ind. Cir. Ct. Feb. 25, 1980).

24. Cf. Union Electric Co. v. Environmental Protection Agency, 426 U.S. 246, 269, 6 ELR 20570, 20576 (1976) (Powell, J., dissenting).

25. ENVIRONMENTAL LAW INSTITUTE, ENFORCEMENT OF FEDERAL AND STATE WATER POLLUTION CONTROLS 305-28 (Report to the National Comm'n on Water Quality, Contract No. WQ5ACA43, 1976).