Bankruptcy Is Not an Answer: A Rebuttal

Charles Openchowski

Mr. Openchowski is an attorney in the Office of the Chief Counsel, U.S. Army Corps of Engineers. This dialogue presents Mr. Openchowski's personal views, not necessarily those of the Corps of Engineers.

[15 ELR 10314]

In their article, "Bankruptcy and the Cleanup of Hazardous Waste: Caveat Creditor,"¹ Messrs. Drabkin, Moorman and Kirsch discuss a problem of critical concern: the proper balance between requirements contained in environmental statutes and protections afforded by the Federal Bankruptcy Code.² While the article focuses on the applicability of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)³ to situations involving the disposal of toxic wastes, numerous other federal and state environmental statutes governing different forms and sources of pollution are also subject to this balancing process.

The conflict between bankruptcy and environmental law boils down to a decision on who is responsible for cleaning up pollution hazards: debtors, creditors, or the government. If a debtor is permitted to invoke the provisions of the Bankruptcy Code, the list can be narrowed to two possibilities. Choosing between them raises a fundamental issue of fairness to the creditor, who may have had no knowledge of a debtor's unlawful actions. In that respect, the article provides valuable advice by suggesting that closer scrutiny of investments in enterprises that have potential environmental liabilities may be advisable. However, the article is disturbing to the extent that it presents bankruptcy law as an appropriate mechanism for dealing with environmental cleanup decisions. This approach disregards the legislative history of the Bankruptcy Reform Act of 1978,⁴ in that Congress clearly indicated that the Bankruptcy Code was not to be used to evade responsibilities mandated by environmental protection statutes. Unfortunately, the recent Supreme Court decision in Ohio v. Kovacs⁵ lends some support to the article's approach.

For the reasons set forth below, I believe that the United States Supreme Court has interpreted the federal bankruptcy law in a manner that contravenes congressional intent and that alters the statutorily established allocation of responsibilities under environmental laws. In so doing, the Court has provided polluters with an attractive, viable, but inappropriate, business option.

The Bankruptcy Code

Unquestionably, a major objective of the Federal Bankruptcy Code is to prevent business failures and to try to help rehabilitate ailing businesses.⁶ In addition, the Code is intended to provide a fair, orderly settling of creditors' accounts.⁷ Because it is specifically designed to respond on an individual basis to financial and business-related matters, however, the Bankruptcy Code is not well-suited to properly allocate the responsibility for resolving complex environmental issues and regulating pollution problems.

Although the courts normally strive to effectuate the goals of the Bankruptcy Code, there are times when the overall public interest must override these objectives. Congress clearly foresaw the possibility that higher priorities would exist when it enacted and Bankruptcy Reform Act of 1978.⁸ While including an automatic stay provision designed to give debtors a temporary respite from creditors and from the circumstances that led to the bankruptcy in the first place,⁹ Congress also incorporated several exceptions to that provision.

One of the exceptions, contained in § 362(b)(5), provides that filing a bankruptcy petition will not automatically stay "the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental [15 ELR 10315] unit to enforce such governmental unit's police or regulatory power."¹⁰ The accompanying legislative history includes specific examples of governmental enforcement activities that are to be free to proceed, unaffected by the automatic stay provision. Among them are suits enforcing "environmental protection, consumer protection, safety, or similar police or regulatory laws."¹¹

The importance of § 362(b)'s exceptions to the automatic stay provision was addressed in In re Canarico Quarries, Inc.: "Congress has recently recognized [through the Bankruptcy Reform Act of 1978] in an express fashion its intention that public interest regulations are to outweigh that of the Bankruptcy Act and Rules in case of conflict."¹²

The Third Circuit took a comparable position in Penn Terra Ltd. v. Department of Environmental Resources.¹³ In that case, a strip mine operator violating state environmental laws had entered into a settlement agreement with the state to rectify severe erosion problems. When the operator failed to complete the remedial provisions on schedule, the state obtained a court order requiring full compliance with the terms of the agreement. Penn Terra then filed for bankruptcy, and attempted to have the state's compliance order stayed. In interpreting the automatic stay provision, the court of appeals stated:

The police power of the several States embodies the main bulwark of protection by which they carry out their responsibilities to the People; its abrogation is therefore a serious matter. . . . Where important state law or general equitable principles protect some public interest, they should not be overridden by federal legislation unless they are inconsistent with explicit congressional intent such that the supremacy clause mandates their supersession.¹⁴

Section 362(b)(5) on its face sets apart a "money judgment" from other forms of relief. The legislative history makes this differentation even clearer by stating that the exception to the automatic stay provision "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."¹⁵ Perhaps on the assumption that these indications of intent are amply descriptive of traditionally established concepts, Congress did not include specific definitions for "money judgment" and "injunction."

Taking advantage of this perceived deficiency, the Sixth Circuit and the Supreme Court have taken what seem to be commonly understood terms and, through a strained interpretation of the Bankruptcy Code, have blurred the distinctions between them. In so doing, they have seriously called into question the federal and state governments' ability to effectively pursue enforcement of environmental laws.

The Caselaw

The first step in this process was Ohio v. Kovacs (Kovacs I).¹⁶ The case involved an industrial and hazardous waste site operator in Ohio who was polluting nearby waters in violation of state law. The state and Kovacs signed a settlement agreement providing for the cleanup of the site. After Kovacs did not live up to the terms of the settlement agreement, the state obtained a state court order appointing a receiver who was to take possession of Kovacs' property and assets, and implement the terms of that agreement. When Kovacs subsequently filed for bankruptcy, the state went back to state court and tried to determine Kovacs' income and assets in order to complete the task assigned to the receiver.

The issue before the court was whether the Bankruptcy Code's automatic stay provision could preclude a state action to enforce its environmental statute. Even though the state had been extraordinarily persistent, the circumstances surrounding the case had left the state with few, if any, other viable alternatives to secure compliance with its environmental statute by a reluctant party.¹⁷ Nonetheless, the Sixth Circuit penalized that persistence by holding that the state on its own initiative had somehow converted a court order that was originally injunctive in nature into a money collection remedy. Having determined that the action had been converted into the "enforcement of a money judgment," the court ruled that the automatic stay provision precluded the state from proceeding further with its efforts to secure compliance by Kovacs of the settlement agreement.¹⁸

The state appealed the Sixth Circuit's decision to the Supreme Court. The Court granted the state's petition for [15 ELR 10316] certiorari, but did not reach the substance of this issue.¹⁹ Instead, it noted that the state had filed a complaint in the bankruptcy court (Kovacs II, discussed below), alleging that Kovacs' legal obligations under the terms of the settlement agreement were not a "claim" for bankruptcy purposes. The Supreme Court vacated the Circuit Court's decision concerning the automatic stay, and remanded the matter to determine if the state's filing rendered the dispute over the stay moot.²⁰

In Kovacs II, the Sixth Circuit continued to blur the distinctions established by Congress in the 1978 Bankruptcy Reform Act. This time, the issue focused on whether Kovacs' obligations under the settlement agreement qualified as a "claim," that could be discharged as a debt under the Code. Based upon the same facts and similar reasoning, the court determined that the injunctive cleanup order had been converted by the state's actions into an obligation to pay money.²¹ The cleanup order thus was made to fit within the definition of a claim as a "right to an equitable remedy for breach of performance if such breach gives rise to a right of payment.²² Putting breach of performance in a contractual sense on an equal footing with violations of statutory requirements, the court reasoned as follows:

The impact of its attempt to realize upon Kovacs' income or property cannot be concealed by legerdemain or linguistic gymnastics. Kovacs cannot personally clean up the waste he wrongfully released into Ohio waters. He cannot perform the affirmative obligations properly imposed upon him by the State court except by paying money or transferring over his own financial resources. The State of Ohio has acknowledged this by its steadfast pursuit of payment as an alternative to personal performance.²³

Thus, the court did not focus on the nature of the remedy involved to determine if it was intended to serve as compensation for previously caused harm, or as equitable relief intended to prevent further or future harm.²⁴ Rather, the Sixth Circuit based its decision on the ability of Kovacs to personally rectify his violation of the law, and on the fact that the receivership arrangement had taken away Kovacs' access to the site and the resources that could accomplish the cleanup effort.²⁵ On appeal, the Supreme Court affirmed this approach. In so doing, the Court diluted the meaning attached to, and the reason for having, the various forms of remedies available to the courts.

The tests based on "ability to personally perform" and "who is in possession" are misguided and flawed. They are misguided in that they serve to vitiate the language in the 1978 Bankruptcy Reform Act's legislative history that provides that enforcement of injunctions pursuant to environmental laws is to be allowed to proceed despite a bankruptcy filing. They are flawed because the reasoning behind these standards leads to a foolproof excuse to avoid environmental responsibilities.

In virtually every instance, the cleanup task will not be something that can be personally or physically accomplished by the violator acting alone, be it an individual or a corporation. Therefore, regardless of whether a violator is in possession of the actual site that has provoked a government enforcement effort,²⁶ money will have to be paid out to another party with specialized cleanup expertise, whether it concerns restoring a wetland or disposing of PCBs. That money will have to come out of the violator's pocket, or from the estate's assets if there has been a bankruptcy filing.

The fact that money is involved should not be used as a pretext for altering the nature of an injunctive remedy sought by a government enforcement agency. As recognized in the Penn Terra case, one must accept the fact that "in contemporary times, almost everything costs something," and that "[a]n injunction which does not compel some expenditure or loss of monies may often be an effective nullity."²⁷ Instead, the issue is better resolved by examining how the government initially decides to respond to a violation of environmental laws: by going after a violator's money in order to obtain restitution or reimbursement for cleanup efforts already undertaken; or by seeking to force the responsible party to correct the violation on its own. Both approaches involve an expenditure of money, but they accomplish their objectives using a different set of assumptions. The Sixth Circuit and the Supreme Court have adopted a strained interpretation that negates the express intent of Congress to recognize the fundamental differences of each approach and to allow certain government enforcement of environmental laws to outweigh the protections afforded by the Bankruptcy Code.

[15 ELR 10317]

The Effect of Kovacs

The Kovacs II decision is unfortunate for several reasons. First, contrary to the article's assertion,²⁸ the Supreme Court has provided virtually no guidance for resolving future conflicts between bankruptcy and environmental law. Based on the example set by the state of Ohio, it is now known that the combination of a receivership arrangement and an attempt to levy on wages will allow a violator of environmental laws to seek refuge behind the Bankruptcy Code. However, the Court made it clear that its holding was limited to the specific facts in that case.²⁹

In the end, the Supreme Court gave no indication of how far a governmental agency can go in insisting on compliance with an injunction before that insistence turns into an obligation to pay money and the agency loses its chance to avoid becoming entangled in the bankruptcy proceedings. As a practical matter, federal and state enforcement agencies may be compelled to pursue fines and criminal sanctions in all instances involving violations of environmental laws, or risk not being able to secure adequate enforcement of those laws.³⁰ While such drastic measures are not always appropriate, the Supreme Court appears to have left little else in the way of alternatives.³¹

Second, the Kovacs II ruling has called into question the continued relevancy of the Penn Terra decision. The Supreme Court, in a footnote, seemed to approve of the Third Circuit's decision in that case that the automatic stay provision did not preclude the state's enforcement of its environmental law against a strip mine operator.³² However, when a similar issue had come to its attention earlier in Kovacs I, the Court avoided ruling on the matter. Instead, as noted above, it remanded the case to the Sixth Circuit to determine if that question had been made moot by the filing of Kovacs II. After the Supreme Court's ruling in Kovacs II that the injunction was dischargeable in bankruptcy, the Sixth Circuit held that the issue concerning § 362's applicability in Kovacs I was moot.³³ In effect, by arguing that a government enforcement action taken pursuant to environmental laws is a dischargeable debt, a debtor may be able to avoid the Penn Terra precedent allowing such enforcement action to continue by virtue of § 362(b)'s exception to the automatic stay provision.

One court has already taken the opportunity to follow this example provided by the Kovacs litigation, in order to bypass the ruling in Penn Terra. In United States v. Robinson,³⁴ the defendant/debtor illegally filled in a wetland area in violation of federal statutes.³⁵ The government obtained a district court judgment ordering him to restore the marshlands to their previous condition. The restoration work was never done. When the United States initiated civil contempt proceedings, the violator filed for bankruptcy.

The bankruptcy court began its opinion by addressing the government's contention that the restoration order was not automatically stayed due to the exception contained in § 362(b):

However valid the plaintiff's statement of the law concerning the automatic stay may be, it is not applicable to an adversary complaint alleging non-dischargeability of a debt. There is certainly little correlation between what is and is not within the scope of the automatic stay on the one hand and what is not dischargeable on the other.³⁶

The court went on to find that the debtor on his own could not physically do all that was necessary to comply with the restoration order. Since the restoration effort would necessarily require an expenditure of money, the court decided that the obligation to restore the wetland area was a "claim" for purposes of the Bankruptcy Code. As such, it was dischargeable. Referring to the recent Supreme Court decision, the judge chose to "extent the reasoning contained in Kovacs," finding that "extension will allow greater fidelity to the principles expressed by the Supreme Court as we understand them, than would finding the factual difference to require a legal distinction."³⁷

Third, and finally, the reasoning expressed in the Kovacs and Robinson cases has serious ramification for the system of priorities established by Congress in the Bankruptcy Code. By including § 362(b)'s exceptions to the automatic stay provision, Congress presumably intended to place certain government enforcement actions outside the confines [15 ELR 10318] of the list of priorities contained in the Code.³⁸ In effect, selected remedies used in enforcing laws that protect the environment and the public's health and safety were given highest priority by being elevated above the normal fray of a bankruptcy proceeding, so that they could be promptly and fully accomplished. As a result of Kovacs II, that statutorily designed priority system has been altered by allowing enforcement of environmental statutes to become bogged down in bankruptcy proceedings.³⁹

The Supreme Court's Upcoming Decision in Quanta

In re Quanta Resources, Corp.⁴⁰ presents the Supreme Court with another opportunity to address the conflict between bankruptcy and environmental laws. The decision in Quanta is critical because of its potential for further eroding the system of priorities.

The case deals with the disposal of more than 500,000 gallons of waste oil and other chemicals at a site in Long Island City. Highly toxic polychlorinated biphenyls (PCBs) contaminated nearly a fifth of the materials stored at the site. Rather than comply with a state cleanup order, the corporation filed for bankruptcy. The trustee in bankruptcy determined that the contaminated site was of no value to the estate, and sought to abandon it to avoid incurring the substantial cleanup costs.⁴¹ In overturning the lower courts' decisions allowing abandonment, the Third Circuit concluded that the public interest in enforcing the state environmental laws outweighted the trustee's right to abandon the site under the Bankruptcy Code.⁴²

On February 19, 1985, the Supreme Court granted the trustee's petition for certiorari, which argued that the Third Circuit's decision unfairly shifts the cleanup burden from the debtor to the creditors.⁴³ As indicated in the article, a footnote in the Kovacs II opinion provides an indication of how the Court might well decide this case. In discussing abandonment of property in the context of the overall scheme of liquidating an estate, the Court stated "[i]f 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 his or its ability."⁴⁴

The key phrase in this sentence is "to the extent of his or its ability." In the aftermath of a bankruptcy proceeding, there is little likelihood that a debtor would have the resources and ability necessary to carry out a court order requiring compliance with environmental laws. Furthermore, if the Supreme Court does allow abandonment, it will be providing a means for creditors to escape the estate's obligations to comply with environmental laws, as well."⁴⁵

Such an evasion is not always possible under CERCLA, whose expansive liability provisions mayprevent the estate from escaping liability through abandonment.⁴⁶ However, to the extent that other environmental protection statutes do not contain similar language potentially imposing strict liability on estates, a decision by the Supreme Court in Quanta to allow abandonment will serve as an example for creditors to follow in trying to keep the estate free of responsibility for costs associated with environmental compliance.⁴⁷

Although the article asserts that "[d]enying abandonment need not ensure a high priority,"⁴⁸ it is clear that permitting abandonment will ensure that little or nothing is done to clean up the violation of environmental law by those responsible for it. At that point, the public will be forced to pay the bill.⁴⁹

Responding to the Problem

Given the opportunity presented by the court decisions discussed above, it appears certain that the responsibility [15 ELR 10319] for cleaning up environmental hazards will increasingly be shifted to government agencies.⁵⁰ Since the article focuses on the role of CERCLA in this regard, it is important to point out some important limitations of that federal statute.

To begin with, the reauthorization process for the Superfund program this year has underscored several perceived shortcomings of the Environmental Protection Agency's (EPA's) implementation of CERCLA. Much of the criticism has centered on the slow progress and low spending levels achieved since the program's inception.⁵¹ For example, during fiscal years 1982-84, $335 million was obligated for Superfund cleanup efforts, but only $91 million was actually spent.⁵² Congress has reacted by proposing to increase the size of the Superfund and to establish cleanup deadlines for EPA.⁵³ Office of Technology Assessment projections suggest, however, that even with these measures, the Superfund program would take years to clean up the many toxic waste sites in the nation.⁵⁴ The practical effect of relying on the government to clean up a site in many cases is to postpone cleanup indefinitely.

A second major limitation of CERCLA is that the statute addresses only certain forms of toxic contamination of the environment. Numerous other important environmental statutes, both federal and state, focus on pollution problems that do not come under this program and for which there is no government cleanup option. Yet the reasoning in Kovacs has significant ramifications for the effectiveness of enforcement efforts under all environmental laws.

If the government is to take over responsibility for cleanup efforts, Congress must strengthen the current Superfund program under CERCLA by providing more financial resources and ensuring a more active, timely commitment of those resources. This will undoubtedly entail greater contributions to the Superfund program by those producers and operators of hazardous wastes who make CERCLA a necessity. Apart from raising more revenue, this may also have a subsidiary benefit of forcing some marginally profitable polluters out of business.⁵⁵ In the long run, their elimination would reduce the costs to society for environmental cleanup efforts by more accruately reflecting the true cost of pollution, ahead of time.⁵⁶

Furthermore, Congress must firmly resolve the conflict between environmental law and bankruptcy. As discussed in the article,⁵⁷ there have been various "Superlien" proposals introduced in connection with reauthorization of CERCLA. These proposals are limited in their usefulness, however.⁵⁸ In particular, the approaches proposed to date would apply only to cleanup efforts under CERCLA and the Resource Conservation and Recovery Act,⁵⁹ and do not address the numerous other environmental statutes that can be affected by bankruptcy proceedings. In order to best resolve the conflict between bankruptcy and all potentially affected environmental laws in a comprehensive fashion, Congress needs to address this issue directly in the actual provisions of the Bankruptcy Code.

The current situation permitting a bankruptcy filing to interfere with the enforcement, or to supersede the requirements, of state and federal environmental laws will only foster more confusion over the allocation of rights and responsibilities under these two areas of law. The problems associated with hazardous waste disposal and other forms of pollution are too important, and the potential impact on public health and safety is too great, to be decided by default.

Conclusion

Undeniably, some environmental protection measures are expensive. Nonetheless, they have become a necessity because in the past, the free market system has not effectively internalized the cost of pollution into the cost of production. This unsatisfactory treatment of pollution problems ultimately led to the passage of extensive federal and state environmental legislation during the 1960s and 1970s.

From a purely financial point of view, bankruptcy may [15 ELR 10320] in fact represent an attractive option to certain polluters who are unwilling or unable to pay the costs of compliance with environmental statutes. The question is, however, should bankruptcy be permitted to reallocate responsibilities established under environmental statutes? There is no indication that Congress envisioned bankruptcy as an appropriate mechanism for affirmatively achieving correct responses and solutions to the complex nature of environmental issues. In addition, it is clear that the Bankruptcy Code is not designed or adapted to handle these issues.

Nonetheless, the Supreme Court's opinion in Kovacs II has made it possible for some debtors to avoid compliance with environmental laws by asserting that the costs associated with such compliance constitute a dischargeable debt. If the Court allows abandonment in the upcoming Quanta decision, it will make it possible for certain creditors to avoid compliance with environmental laws as well. As these loopholes become better known, one can expect that the responsibility and costs associated with cleaning up environmental hazards increasingly will be shifted to the government.

Those who take advantage of the provisions in the Bankruptcy Code in order to evade their responsibilities under environmental statutes serve to illustrate the saying that using the wrong tools will lead to a bad result. In that sense, they give credence to what the authors of the article decry as an "inaccurate and unjust" image.⁶⁰ They also do a disservice to those who have taken the necessary steps and precautions, and paid the required costs, to run their businesses in compliance with the law. Courts should think long and hard before giving those who improperly utilize bankruptcy protections a "fresh start" to once again operate, pollute, and profit at the public's expense.

1. 15 ELR 10168 (1985) (hereinafter "the article").

2. 11 U.S.C. §§ 101-151326.

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

4. Pub. L. No. 95-598, 92 Stat. 2570 (Nov. 6, 1978).

5. 105 S. Ct. 705, 15 ELR 20121 (1985).

6. H.R. REP. NO. 595, 95th Cong., 1st Sess. 340, reprinted in 1978 U.S. CODE CONG. & AD NEWS 6296; S. REP. NO. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 5840.See also H.R. REP. NO. 687, 89th Cong., 1st Sess. (1965); S. REP. NO. 1158, 89th Cong., 2d Sess. (1966).

7. H.R. REP. NO. 595, 95th Cong., 1st Sess. 341, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 6296; S. REP. NO. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 5840. See also H.R. REP. NO. 595, 95th Cong., 1st Sess. at 174-75, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 6134-35.

8. See Thomas Solvent Co. v. Kelley, 44 Bankr. 83, 88 (Bankr. W.D. Mich. 1984), where the debtor successfully precluded the state of Michigan from enforcing a state court order requiring purification and protection of groundwater to comply with state environmental laws; the case is discussed in the article, 15 ELR at 10183. The court observed that "[a] debtor in possession may not preserve its viability as a business entity, yet avoid its responsibility to society, simply by filing a Chapter 11 petition;" see also Penn Terra Ltd. v. Dept. of Environmental Resources, 733 F.2d 267, 278, 14 ELR 20475, 20480 (3d Cir. 1984), discussed more fully below.

9. H.R. REP. NO. 595, 95th Cong., 1st Sess. 340, reprinted in 1978 U.S. CODE CONG. & AD. NEWS 6296; S. REP. NO. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 U.S. CODE CONG. & AD NEWS 5840.

10. 11 U.S.C. § 362(b).

11. H.R. REP., supra note 9 at 343, reprinted in 1978 U.S. CODE CONG. & AD. NEWS at 6299; S. REP., supra note 9, at 52, reprinted in 1978 U.S. CODE CONG. & AD. NEWS at 5838. The legislative history states:

Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.

Two other statutory provisions further indicate that Congress did not intend for bankruptcy law to be used to evade compliance with other laws. Under 28 U.S.C. § 959(b), Congress provided that management of an estate must be carried our in accordance with state laws. Furthermore, 11 U.S.C. § 523(7) provides in pertinent part that a discharge under the Bankruptcy Code "does not discharge an individual debtor from any debt . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss."

12. 466 F. Supp. 1333, 1339 (D.P.R. 1979). The court in this case held that it was inappropriate tostay the state's enforcement of its Clean Air Act state implementation plan after Canarico had filed for bankruptcy. The case is discussed in the article, 15 ELR at 10182.

13. 733 F.2d 267, 14 ELR 20475 (3d Cir. 1984). See also In re Quanta Resources Corp. (appeal of the state and city of New York), 739 F.2d 912, 921, 14 ELR 20563, 20568 (3d Cir. 1984), cert. granted sub nom. O'Neill v. City of New York, 105 S. Ct. 1168 (Feb. 19, 1985) (No. 84-805), discussed more fully below, where the Third Circuit set forth a similar standard.

14. 733 F.2d at 273, 14 ELR at 20478.

15. H.R. REP., supra note 9 at 343, reprinted in 1978 U.S. CODE CONG. & AD. NEWS at 6299; S. REP., supra note 6, at 52, reprinted in 1978 U.S. CODE CONG. & AD NEWS at 5838.

16. 681 F.2d 454 (6th Cir. 1982), vacated, 459 U.S. 1167 (1983). The factual background of the case is discussed in the article, 15 ELR at 10173.

17. Significantly, the case involved a toxic waste disposal site that posed a real threat to human health and safety. Thus, it cannot be said that the state was overreacting to an environmental problem with relatively minor impacts (for example, where only aesthetics are at stake) or to a matter of mere public convenience.

18. Thus, under the court's holding, that portion of the settlement agreement under which Kovacs undertook to clean up the site was made equivalent to Kovacs' obligation to pay $75,000 as compensation to the state for injury to wildlife.

19. 459 U.S. 1167 (1983).

20. Id. The Sixth Circuit eventually held that the issues concerning the automatic stay provision were rendered moot by the Supreme Court's ruling in Kovacs II. 755 F.2d 484 (6th Cir. 1985).

21. 717 F.2d 984, 988 14 ELR 20252, 20255 (6th Cir. 1983), aff'd 105 S. Ct. 705, 15 ELR 20121 (1985). In this opinion, as with the decision in Kovacs I, the Sixth Circuit affirmed the rulings of the bankruptcy and district courts.

22. Under 11 U.S.C. § 101(4), a "claim" is defined as:

(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; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

23. 717 F.2d at 988, 14 ELR at 20255 (emphasis added).

24. The Sixth Circuit quite clearly took a different approach in this regard than that taken by the Third Circuit in the Penn Terra decision discussed, and quoted in relevant part, in the article, 15 ELR at 10183. The article's attempt to reconcile these two cases and their respective approaches obscures the fact that the courts chose completely different paths in interpreting the requirements and language of the Bankruptcy Code. Using the "possession of the site" criteria to find common ground, see 15 ELR at 10183, cannot account for such widely divergent reasoning, and is not dispositive of the underlying issues for the reasons discussed further below.

25. It should be remembered that access to the site prior to the receivership arrangement had not moved Kovacs to comply with the settlement agreement.

26. As a practical matter, actual possession of the site is not a determinative factor and should not be used to confuse the real issue. To claim that dispossession prevents a violator from accomplishing responsibilities under environmental laws ignores the fact that these cases arise precisely because a violator still in possession of the site, or responsible for its condition, has refused to comply with those laws. The Kovacs case provides an excellent example of this. In these kinds of situations, it is certainly not realistic to assume that a violator would have a change of heart and decide to comply with requirements of environmental laws, just because access to the site had been taken away by the government.

27. 733 F.2d at 278, 14 ELR at 20480. The full text of this quotation is presented in the article, 15 ELR at 10183.

28. See 15 ELR at 10172-73.

29. As the article points out, the Supreme Court further qualified its ruling by stating that "[i]t is well to emphasize what we have not decided." 105 S. Ct. at 711, 15 ELR at 20123. That warning, together with the text that follows, hardly constitutes guidance in the sense of providing positive direction for future choices. Rather, it characterizes a narrow, reluctant approach which avoids addressing anything more than is absolutely necessary to dispose of the particular case before the Court. It also may indicate that the Court was uncomfortable with the effect of its decision.

30. This option was specifically recognized by the Supreme Court in Kovacs II: "had a fine or monetary penalty for violation of state law been imposed on Kovacs prior to bankruptcy, § 523(a)(7) forecloses any suggestion that his obligation to pay the fine or penalty would be discharged in bankruptcy;" 105 S. Ct. at 711, 15 ELR at 20123.

31. Thus, even in instances where a violation is relatively minor in its impact on the environment or of small risk to health and safety, and where the violator at least initially appears to be willing and able to correct the situation, a government agency might have to "play it safe" by seeking sanctions that are out of proportion to the violation in order to protect against a change in the violator's attitude or circumstances.

32. 105 S. Ct. at 711, n.11, 15 ELR at 20123.

33. 755 F.2d 484 (6th Cir.1985). Since Kovacs I had been vacated by the Supreme Court, its authoritative value was eliminated. To the extent that the court in United States v. Johns-Manville Sales Corp., 13 ELR 20310 (D.N.H. Nov. 15, 1982) (CERCLA action to compel cleanup of site contaminated by asbestos, discussed in the article, 15 ELR at 10182-83) relied on Kovacs I and other cases that no longer constitute good authority based on subsequent interpretation by higher courts, it is also of limited precedential or authoritative value. See generally Rosenbaum, Bankruptcy and Environmental Regulation: An Emerging Conflict, 13 ELR 10099 (1983).

34. 46 Bankr. 136 (Bankr. M.D. Fla. 1985).

35. The filling was done in violation of § 10 of the 1899 Rivers and Harbors Act, 33 U.S.C. § 403, ELR STAT. 41142, and § 404 of the Federal Water Pollution Control Act, 33 U.S.C. § 1344, ELR STAT. 42142.

36. 46 Bankr. at 138. It should be noted that the court applied the reasoning of Kovacs II, a case involving violations of state environmental law, to a situation involving violations of federal law. Similarly, the article discusses the applicability of Kovacs II to CERCLA remedies under §§ 106 and 107 of that federal law. However, the Supreme Court might well have come to a different conclusion in Kovacs II if the Bankruptcy Code had been in conflict with a federal environmental statute. Certainly, the existence of such conflicting federal legislation would have necessitated a different balancing of the statutes' respective interest and objectives than that found in cases balancing the Code against state environmental laws.

37. 46 Bankr. at 139. In a one-page, unreported opinion, District Court Judge Susan Black overturned the decision of the bankruptcy court on August 16, 1985.

38. 11 U.S.C. § 507 (1982). See also 11 U.S.C. § 503 and § 726 (1982). This conclusion is also supported by the legislative history of the 1978 Bankruptcy Reform Act cited in note 11, supra.

39. See Southern Railway v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985), where the court stated that "the Supreme Court [in Kovacs II] held that Ohio's injunction directing the cleanup of a hazardous waste site was no more than a general unsecured claim." If an injuncton is treated as a general unsecured claim, there is little chance that the estate will end up having the resources necessary to undertake compliance with environmental laws, especially after administrative costs have been paid and other creditors' claims have been satisfied. Therefore, the government must either let the violation continue to exist (assuming there's no significant risk to human health) or step in and take care of the situation at the public's expense. In the latter case, the responsibility for cleaning up pollution hazards has effectively been transferred from the debtor to the government.

40. 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); In re Quanta Resources Corp. (appeal of the New Jersey Dept. 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). The factual background of these cases is discussed in the article, 15 ELR at 10180.

41. 11 U.S.C. § 554(a) allows a trustee to abandon "any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate."

42. 739 F.2d at 921, 14 ELR at 20568.

43. 105 S. Ct. 1168 (1985).

44. 105 S. Ct. at 711, n.12, 15 ELR at 20123 (1985).

45. The desire to escape their obligations is understandable (especially for creditors who are not aware of the debtor's illegal actions), since environmental cleanup costs can be expensive enough to deplete the estate before any creditors' claims are satisfied. Nonetheless, such obligations would likely encourage creditors to take a more active role in ensuring compliance with legal requirements by those who are indebted to them. Imposing a direct financial stake in ensuring such compliance would undoubtedly cause immediate monetary impacts and dislocations in the marketplace while creditors readjust to this new vulnerability. At the same time, however, it will provide a much better incentive for preventing and/or quickly curing pollution problems than letting it be known that the government stands ready to take over. Furthermore, that incentive will lead to a more effective, prospective approach for treating environmental consequences of a potential or existing violation, in contrast to a reliance on after-the-fact repair by the government.

46. See In re T.P. Long Chemical Co., 45 Bankr. 278, 284-85, 15 ELR 20635, 20638 (Bankr. N.D. Ohio 1985). In this case, the EPA was seeking to recover costs for removing hazardous chemicals under CERCLA. The cleanup occurred after the company had filed for bankruptcy while the chemicals were under the custody of the estate. The case is discussed in the article, 15 ELR at 10181.

47. Furthermore, even if a state statute has language similar to that in CERCLA restricting transfer of liability, it is not at all clear that such language would be permitted to outweigh the provision in the federal Bankruptcy Code allowing abandonment.

48. 15 ELR at 10181.

49. This outcome was foreseen by the Third Circuit in the Quanta decision; see 739 F.2d at 921, 14 ELR at 20569. In light of the Supreme Court's reluctance to comprehensively deal with the issues presented by the Kovacs cases, it is not likely that the upcoming opinion in Quanta will directly address the matter of priorities in a complete, overall fashion. It would be especially suprising, given the fact that the Third Circuit specifically declined to rule on this matter; see 739 F.2d at 923, 14 ELR at 20569. Still, the Court's handling of the abandonment issue could have major consequences on the Code's system of priorities.

50. Another alternative would be to let traditional market forces resolve environmental problems by treating pollution as a "resource." Under this approach, the law of supply and demand would dictate the time-table and extent of the cleanup effort, based upon the worth of the site. Using free market principles, and common sense, it is clear that a site which precipitated or contributed to a bankruptcy filing would not be terribly marketable. Thus, if the original owner did not feel that cleanup was economically justified or attractive, it is unlikely that anyone else would either.

51. See Washington Post, Apr. 26, 1985, at A2; Washington Post, Aug. 8, 1985, at A23. Of approximately 21,500 chemical dump sites that have been reported to EPA, approximately 15,000 have been reviewed. About 5000 sites have received on-site inspections, and 851 have been placed on the National Priorities List. Six hundred sites have been the subject of cleanup efforts of some kind, and permanent cleanup efforts have begun at 132 sites. Washington Post, Sept. 11, 1985, at D1.

52. See Washington Post, Aug. 15, 1985, at A19. In addition, there is some discrepancy over the number of sites needing attention under CERCLA. EPA currently estimates that approximately 2,000 sites across the country will require a cleanup effort in order to alleviate dangerous conditions, while the General Accounting Office places its estimate at 4,000 and Congress' Office of Technology Assessment estimates the number to be about 10,000. See Washington Post, Aug. 11, 1985, at L6; Washington Post, Sept. 11, 1985, at D1.

See also Washington Post, Aug. 21, 1985, at A17, reporting an EPA move to loosen the insurance requirements imposed on operators of toxic waste sites. This move also highlights a growing problem. Because of unforeseen liabilities incurred by "good faith" businesses and irresponsible practices by others, insurance coverage for hazardous waste disposal sites is becoming extremely expensive, when it can be obtained. One possible solution to this situation would be for the federal government to offer protection similar to that afforded the nuclear energy industry under the Price-Anderson Act. The danger with such an approach is that it might eliminate the incentives for industry to correct deficiencies in the proper management and operation of hazardous waste disposal.

53. See, e.g., H.R. 2560, 99th Cong., 1st Sess., introduced by Rep. Florio (D-N.J.), 131 CONG. REC. H3468 (daily ed. May 21, 1985), described in ELR's In the Congress, 15 ELR 10219-20 (July 1985).

54. See OFFICE OF TECHNOLOGY ASSESSMENT, SUPERFUND STRATEGY (1985).

55. Included in this category are those who cannot properly dispose of their pollutants in accordance with the law, but who continue improper disposal methods which save money and permit them to survive.

56. The savings would occur by evaluating a pollutant and factoring in its consequences at the origination stage, as opposed to having the government react to a critical problem once it has developed into an emergency requiring an immediate, costly response.

57. 15 ELR at 10179.

58. For a thorough discussion of the limitations and vulnerabilities of one of these proposals, see Lockett, Environmental Liability Enforcement and the Bankruptcy Act of 1978: A Study of H.R. 2767, The "Superlien" Provision, 19 REAL PROP. PROB. & TRUST J. 859 (1984).

59. 42 U.S.C. §§ 6901-6987, ELR STAT. 42001.

60. 15 ELR at 10168.