Bankruptcy and Environmental Regulation: A Response

Dennis Jay Drebsky and Salvatore A. Santoro

ELR Dialogue is a vehicle for the easy sharing of ideas with our subscribers. ELR invites submission of materials analyzing or commenting on developments in the law, and in particular solicits responses to Articles, Comments, and Dialogue we have published. Submissions should be 500-1,000 words in length, typed double-spaced. We hope you will communicate with us and the diverse, nationwide readership of the Reporter through ELR Dialogue.

The views presented in ELR Dialogue are those of the author, not the Environmental Law Reporter or the Environmental Law Institute.

— The Editors

Mr. Drebsky is a partner and Mr. Santoro an associate in the New York law firm of Skadden, Arps, Slate, Meagher & Flom.

[13 ELR 10262]

In a comment appearing in 13 ELR 10099 (April 1983), Kenneth L. Rosenbaum criticized a recent decision by the United States District Court for the District of New Hampshire, United States v. Johns-Manville Sales Corp.¹ In its decision in Manville, the court held that neither the federal nor state government could continue to prosecute a suit seeking a mandatory injunction requiring Manville to clean up hazardous waste sites where it had disposed of asbestos waste for several years prior to its filing for reorganization pursuant to Chapter 11 of the Bankruptcy Reform Act of 1978 (the Bankruptcy Code or the Code).² The court based its decision on the automatic stay of suits against a debtor contained in § 362 of the Bankruptcy Code. This provision is intended to give the debtor "a breathing spell from his creditors" in order to permit the debtor to attempt to fashion an orderly repayment or reorganization plan or "simply to be relieved of the financial pressures that drove him into bankruptcy."³ In addition, the Code seeks to prevent creditors from making a race to the courthouse to collect the debts owed to them before a fair and equitable plan for the repayment of debts is approved by the bankruptcy court.⁴ The Manville court held that because the effect of the relief sought would require "the expenditure of substantial funds from the assets of Manville" the governmental suit against Manville was subject to the automatic stay and could not proceed.⁵

Mr. Rosenbaum strongly disagrees with the result reached by the Manville court, and argues that a debtor undergoing reorganization in the bankruptcy court should be subject to suit for a mandatory injunction requiring the abatement of an environmental hazard if the government can demonstrate that the hardship to the public outweighs the hardship to the debtor's estate and its creditors. We believe that the Bankruptcy Code permits no balancing whatsoever under the facts in the Manville case. If a change in the Bankruptcy Code should be made granting environmental suits a privileged status this change should be made by the legislature and not by the courts.

The Manville Case

The United States sought relief, pursuant to § 7003 of the Resource Conservation and Recovery Act⁶ (RCRA) and § 106(a) of the Comprehensive Environmental Response, Compensation, and Liability Act⁷ (CERCLA) against Johns-Manville Sales Corp. and the owners of various sites on which Manville allegedly disposed of its asbestos waste.⁸ As to Manville, the complaint sought not only to enjoin it from any further disposal of hazardous waste on the sites owned by the other defendants, but also [13 ELR 10263] to require Manville to prepare and implement a plan to be approved by EPA [Environmetnal Protection Agency] for covering all of the sites at issue with soil and vegetation and to maintain such cover in order to prevent asbestos fibers from becoming airborne, … and to erect fences and post warnings around each of the aforesaid sites …. [and] to post a performance bond for the accomplishment of all necessary remedial actions.⁹

The Automatic Stay

The filing of Manville's Chapter 11 petition triggered the "automatic stay" provisions contained in § 362(a) of the Bankruptcy Code.¹⁰ Section 362(b), however, contains statutory exceptions to the "automatic stay" in § 362(a). Specifically, § 362(b)(4) provides that the stay does not apply to "the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." Significantly, § 362(b)(5) excepts from the stay "the enforcement of a judgment, other than a money judgment, … [that enforces a] governmental unit's police or regulatory power."¹¹

The plaintiffs argued in Manville that the relief sought against Manville fell within the exceptions to the automatic stay because it was "injunctive under federal and state laws which authorize abatement of imminent and substantial endangerment to health caused by the disposal of hazardous asbestos wastes."¹² Manville argued that the exceptions to the automatic stay do not apply because "the actual relief … sought is not an injunction of ongoing waste disposal on its part but is the expenditure of funds to rectify … long-past disposal practices."¹³

The Manville Decision

The court in Manville held that the automatic stay provided by § 362(a) applied and that the action before it did not fall within the exceptions contained in § 362(b). The court concluded that the § 362(b) exceptions did not apply because "the relief sought is directed against Manville alone and will require it to divest substantial of its assets now held in the jurisdiction of a bankruptcy court from the claims of numerous creditors, many of whom allege that they are themselves suffering serious physical debilitation as a result of the inhalation of asbestos fibers."¹⁴ The court noted that, even though the stay was found applicable in this case, neither the plaintiffs nor any other party in interest were prevented from seeking relief from the automatic stay in the bankruptcy court if they could meet the standards of § 362(d) of the Bankruptcy Code.¹⁵

Moreover, the court noted that the plaintiffs could have used available government funds to clean up the hazards existing at the sites,¹⁶ pursuant to §§ 104 and 107 of CERCLA¹⁷ and applicable state statutes.¹⁸ Thereafter reimbursement from Manville could have been sought in the pending bankruptcy proceeding. For reasons unclear to the court, the plaintiffs had not chosen to make use of these remedies.

The Critical Facts in Manville As They Relate to the Bankruptcy Code

According to parties involved in the litigation, the owners of land permitted Manville to dump asbestos wastes on their property in the early 1970s. Manville never owned, operated, nor leased the property. All of the actions by Manville underlying the lawsuit were completed, and the suit was commenced, before Manville filed its Chapter 11 petition in 1982.¹⁹ All claims against Manville, therefore, are pre-petition, unsecured claims.²⁰

Notwithstanding this, according to Mr. Rosenbaum's thesis, Manville should be required immediately to pay in full the cost of cleaning up the dump site unless the balance of hardship tips in favor of the debtor and its creditors. The § 362(b)(5) requirement that money judgments enforcing a governmental unit's regulatory power are not excepted from the stay²¹ would be avoided. Relying on dicta in a case decided under the repealed Bankruptcy Act²² and a recent article by Professor Aaron,²³ Mr. Rosenbaum would give environmental claims judicially decreed preferential treatment under the Bankruptcy Code. In support of this position Mr. Rosenbaum suggests that the "bankruptcy statute and its legislative history are vague enough to support a range of policy interpretations."²⁴

[13 ELR 10264]

Congress, on the other hand, did not view the Bankruptcy Code as a "vague" statute lending itself to broad-based judicial gloss, at least as far as the rights and priorities of creditors are concerned. Indeed, Congress enacted an exhaustive list of unsecured claims that are entitled to priority and delineated an unambiguous scheme of distribution to both secured and unsecured creditors of the debtor's estate. Thus, for example, the Bankruptcy Code provides that all secured creditors must be paid up to the value of the collateral which secures their claims²⁵ before priority claimants are paid in full.²⁶

In § 507(a) of the Bankruptcy Code,²⁷ Congress supplied a detailed list of the "priority" claims which are entitled to be paid before other unsecured creditors. "Environmental" claims are not listed among the allowable priority claims.

The priority scheme contained in § 507 is neither novel nor unresponsive to social and governmental policies. Even when dealing with claims by various levels of government, Congress, ever since enactment of the Bankruptcy Act of 1898, made a choice as to which claims were and were not entitled to priority status. Similarly, in previous years, employees' claims were viewed as deserving special treatment, and potent lobbying efforts were mounted by diverse interest groups seeking special protections for employee claims. In response to those efforts Congress decided that employee wage and benefit claims were entitled to preferential treatment in the scheme of distribution.²⁸ If environmental claims are to be accorded similar special treatment, we believe that Congress must modify § 507 of the Bankruptcy Code after appropriate debate and a full arising of the advantages and consequences of such action. To do otherwise flies in the face of nearly one hundred years of bankruptcy practice and disregards the present scheme of asset conservation and distribution merely because environmental issues are currently the topic of legitimate public concern.²⁹

Moreover, the implications in adopting Mr. Rosenbaum's proposal to allow governmental litigants³⁰ who allege environmental grievances an opportunity to reach the assets of debtors who have sought the protections of the Bankruptcy Code are far reaching indeed. While environmental matters quite rightly have a high degree of public awareness, there are similar social concerns, such as worker safety or product liability issues, for which a good argument could be made that they also should be excepted from the reach of the automatic stay provisions of the Bankruptcy Code, as an exercise of judicial "policy interpretation" using a subjective "balancing of hardships" test. Such piecemeal unravelling of the carefully crafted asset distribution system provided for in the Code could inevitably lead to the very races to the courthouse that § 362 was intended to avoid. In such a circumstance, it is not inconceivable that the rights of the debtor and his creditors will be lost in the shuffle. Obviously the uncertainties and imponderables brought into play by Mr. Rosenbaum's well meaning, but misdirected, proposal would have a serious impact on this country's credit and monetary markets since settled creditor rights in which banks and financial institutions rely in extending credit might be sacrificed by courts in the name of righting a public wrong.

The Supreme Court May Clarify Manville Issues

The Supreme Court may soon give an indication of the extent to which the Bankruptcy Code permits a balancing between creditor rights and larger social concerns.The Court, in NLRB v. Bildisco and Bildisco (In re Bildisco),³¹ recently granted certiorari to a case that directly pits the worker protection provisions of the National Labor Relations Act against the asset conservation and reorganization provisions of the Bankruptcy Code. The basic question to be decided by the Supreme Court is whether public policy as reflected in the National Labor Relations Act means that bankruptcy courts may only allow debtors to reject collective bargaining agreements if special circumstances are shown, such as the debtor's inability to rehabilitate himself without rejecting a labor agreement.³²

The Court of Appeals for the Third Circuit in Bildisco noted that "[t]he rejection of a collective bargaining agreement under the new Bankruptcy Code … implicates a significant confrontation of labor and bankruptcy policies …. This case places the statutory policies underlying Chapter 11 in tension with our national labor policy, as expressed in the National Labor Relations Act."³³ In its decision, the court refused to give collective bargaining agreements, an essential element of the underlying policies of the National Labor Relations Act, any unique treatment under the Bankruptcy Code, and instead reasoned that, while the court must weigh worker rights, its primary focus in deciding the ability of a business to reject a labor contract was the "determination that rejection of the labor contract will assist [the debtor] to achieve a satisfactory reorganization."³⁴ The economic effect on the enterprise seeking to be reorganized was deemed of paramount importance. To the extent that the court was farming its decision on a balancing test it was this narrow, economic issue that provided the fulcrum.³⁵

[13 ELR 10265]

The Bildisco court's reasoning is particularly appropriate to the Manville situation, which, according to Mr. Rosenbaum, highlighted a conflict between the "vague" bankruptcy statute and its legislative history and the "clear concern of Congress over the last 15 years with cleaning up the environment."³⁶ The Third Circuit in viewing the apparent clash of policy objectives between the labor and bankruptcy statutes held that:

In enacting § 365, Congress provided no indication that collective bargaining agreements were to be immune from rejection and thus unique among executory contracts. Indeed, the few inferences of congressional intent that may be gleaned from the Code and its legislative history are to the contrary …. Significantly, Congress did provide detailed provisions for acceptance of executory contracts such as shopping center leases, § 365(b)(3), and regarding transactions in commodites futures contracts, §§ 765, 766. Moreover, one particular species of collective bargaining agreement was singled out:

Notwithstanding section 365 of this title, neither the court nor the trustee may change the wages or working conditions of employees of the debtor established by a collective bargaining agreement that is subject to the Railway Labor Act (45 U.S.C. 151 et seq.) except in accordance with section 6 of such Act (45 U.S.C. 156).

11 U.S.C. § 1167. The sheer complexity of the Bankruptcy Reform Act might preclude our use of § 1167 as definitive proof that every other collective bargaining agreement may be rejected, but the section permits an inference that, with this one exception, Congress did not intend to distinguish collective bargaining agreements from executory contracts in general.³⁷

The environmental laws under which the government in Manville brought its action do not enjoy a more favored or more long-standing status than our national labor laws.

If the Supreme Court affirms the Third Circuit's holding in Bildisco, most of Mr. Rosenbaum's thesis about balancing the hardships will be on shaky ground. On the other hand, environmental claims in bankruptcy cases may have a chance to assume a favored position in the reorganization process, as Mr. Rosenbaum proposes, if the Supreme Court holds that special circumstances and a balancing of competing legislative policies and objectives is essential before a collective bargaining agreement may be rejected. At least then arguments could be made that the Supreme Court has recognized that, in appropriate circumstances, Bankruptcy Code provisions should yield in the face of other congressionally stated policy objectives.

In short, we are at a crossroads. The Supreme Court in the next term should soon make a major pronouncement indicating whether the Bankruptcy Code, otherwise absolute on its face, must bend, if not give way altogether, when it comes in conflict with laws that reflect other national concerns. Until then, authority holding that environmental claims are entitled to special treatment, that presently is not expressly provided for in the Bankruptcy Code, is lacking.

1. 13 ELR 20310 (D.N.H. Nov. 15, 1982).

2. Pub. L. No. 95-598, 11 U.S.C. § 101 et seq. All Bankruptcy Code section cites following are to 11 U.S.C.

3. H.R. REP. NO. 595, 95th Cong., 1st Sess. 340-42 (1977); S. REP. NO. 989, 95th Cong., 2nd Sess. 49-51 (1978).

4. Id.

5. 13 ELR at 20311.

6. 42 U.S.C. § 6973, ELR STAT. 41922.

7. 42 U.S.C. § 9606(a), ELR STAT. 41947.

8. The State of New Hampshire intervened in the suit seeking similar relief under the provisions of its Solid Waste Management Act, N.H. REV. STAT. ANN. § 147:45 et seq., and Hazardous Waste Management Act, N.H. REV. STAT. ANN. § 147-A (Supp. 1981).

9. 13 ELR at 20311 (footnote omitted). The government sought much more limited relief from the site owners. 13 ELR at 20311 n.11.

10. Section 362(a) prohibits in part, "the commencement or continuation … of a judicial, administrative, or other proceeding against the debtor that was … commenced" before the filing of the petition. In addition, the bankruptcy court in which the petition was filed issued a broad order restraining all parties from commencing or continuing litigation against Manville.

11. The "police or regulatory power" exception to 11 U.S.C. § 362 has been held to refer to enforcement efforts "affecting health, welfare, morals, and safety, but not regulatory laws that directly conflict with the control of the res or property by the bankruptcy court." (Emphasis added.) Missouri v. United States Bankruptcy Court, 647 F.2d 768, 776 (8th Cir. 1981), cert. denied, __ U.S. __, 102 S. Ct. 1035 (1982).

12. 13 ELR at 20310.

13. Id. at 20311.

14. Id. at 20312.

15. Bankruptcy Code § 362(d) permits the bankruptcy court to terminate, annul, modify or condition the automatic stay. It is unlikely that the governmental actions against Manville would have received relief from the automatic stay because of the necessity of demonstrating that the requested relief would not affect property "necessary for an effective reorganization."

16. 13 ELR at 20312.

17. 42 U.S.C. §§ 9604, 9607, ELR STAT. 41945, 41947.

18. See supra note 8.

19. The suit was filed in June 1981 and there was no allegation that Manville continued to dump asbestos at the sites. Had Manville continued to dump its asbestos waste on the New Hampshire sites and had the state or federal government sought an injunction requiring Manville "to cease and desist from ongoing [disposal operation]," the court indicated that it would allow that suit to continue. 13 ELR at 20312. Thus, even under the present provisions of the Bankruptcy Code the Manville court believed that it had the ability to deal with continuing environmental dangers as opposed to requiring debtors to undertake remedial efforts outside of the reorganization process.

20. Bankruptcy Code §§ 101(4) and 502(b). These provisions and other provisions of the Bankruptcy Code provide a detailed framework of priorities between and among creditor claims.

21. See supra text at note 11.

22. In re Canarcio Quarries, Inc., 466 F. Supp. 1333 (D.P.R. 1979).

23. Bankruptcy Stays of Environmental Regulations: Harvest of Commercial Timber As an Introduction to a Clash of Policies, 12 ENVTL. L. 1 (1981).

24. 13 ELR at 10103.

25. Bankruptcy Code §§ 506 and 726.

26. Bankruptcy Code § 507(a).

27. Id.

28. Bankruptcy Code § 507(a)(3).

29. This is not to minimize the severe impact that environmental problems may have on the public at large. However, it is the function of Congress to decide that, as a matter of national policy, environmental violations should be immediately redressed without regard to the pendency of reorganization proceedings and provide for such relief in the Bankruptcy Code.

30. Mr. Rosenbaum apparently would not extend his thesis to permit private litigants who have suffered environmental injury to bring suit against the debtor. Indeed, the effect of allowing the government to diminish the assets of the debtor's estate to carry out a cleanup would be to make it less likely that those most personally affected by environmental wrong-doing would be able to receive full compensation. See United States v. Johns-Manville Sales Corp., 13 ELR at 20312.

31. 682 F.2d 72 (3d Cir. 1982), cert. granted, ___ U.S. __, 103 S. Ct. 784 (1983).

32. Under the Bankruptcy Code a debtor is given the right to reject executory contracts, such as unexpired labor agreements, leases, and contracts for the future delivery of goods and services. 11 U.S.C. § 365.

33. 682 F.2d at 76-78.

34. Id. at 81.

35. For a similar but somewhat broader decision on the standards for rejection, see In re Brada Miller Freight System, Inc., 702 F.2d 890, 900 (11th Cir. 1983).

36. 13 ELR at 10103.

37. 682 F.2d at 78.