C. Government Perspectives on Bankruptcy and Environmental Law Interaction

Nancy Firestone

Editors' Summary: Although NEPA requires the preparation of an EIS for every major federal action significantly affecting the environment, federal agencies often decide in particular cases that compliance with NEPA is satisfied by preparation of EAs. The decision not to prepare an EIS is usually based on a finding of no significant impact. When an agency's threshold NEPA decision is challenged in court, what is the appropriate standard of review? The federal courts of appeals answer this question in at least two different ways: some circuits use the "arbitrary and capricious" standard, while others inquire into the "reasonableness" of the agency's decision. Several courts have expressed doubt that there is any genuine distinction between the rival standards, and the Supreme Court has so far declined to settle the issue. The author of this Article surveys the federal case law on this question, exploring the approach of each circuit and taking issue with those who maintain that the difference between the standards is illusory. The vital difference, the author argues, is that courts using the reasonableness standard are more likely to substitute their own judgment for that of the agency, while courts adopting the arbitrary and capricious standard tend not to second-guess an agency's decision. Because he sees an important difference between these two approaches, the author urges the Supreme Court to grant certiorari to resolve the circuit split.

Nancy Firestone is Deputy Section Chief for Environmental Enforcement, Land and Natural Resources Division, U.S. Department of Justice in Washington, DC.

[18 ELR 10358]

There are about 600 environmental cases pending at the U.S. Justice Department, of which fifty-eight involve bankruptcy issues. Thus, nearly ten percent of our case docket forces us to confront the interaction of bankruptcy and environmental law.

In response, we have had to hire bankruptcy experts. We now have a senior attorney who is responsible for ensuring that we take consistent positions in all of those cases.

What is the source of these staffing changes? Clearly, certain individuals and companies have entered bankruptcy in response to environmental problems. On the other hand, most of our more complex bankruptcy matters arise in Chapter 11 reorganizations,¹ usually in cases where companies have entered bankruptcy for primarily nonenvironmental reasons. Many of them are indeed profitable. Among the bankruptcies in which we are currently involved are LTV, Sharon Steel, Texaco, Johns-Manville, and several other major companies.

Let me explain the sorts of cases in which we get involved and why.

In evaluating a case — whether or not it is a bankruptcy case — our first priority is to ensure compliance with the environmental laws. In most bankruptcy cases, then, we focus mainly on companies that are continuing to operate. The fact that they are in bankruptcy may create additional problems, but it does not shield them from compliance with the environmental laws.²

In such cases, just as we do with healthy companies, we recognize that a company with environmental obligations is not necessarily able to come to compliance immediately upon notification from the Justice Department. Thus, just as in other cases, we negotiate in bankruptcy cases to set up schedules to bring companies into compliance.

Our second concern is with contaminated property that is part of a bankrupt estate. Our position in Midlantic³ reflected a concern that trustees not be allowed simply to [18 ELR 10359] abandon property and present the public with an immediate threat. In an effort to balance interests on both sides, we refrained from advocating for a requirement that the entire site be cleaned up. Instead, we proposed as a minimum that the public not be jeopardized by the abandonment.

We have taken similar positions on administrative-priority claims.⁴ If, for example, property is ineligible for abandonment because it would jeopardize the public, or if the site must be cleaned up to protect the public, we are entitled to some sort of a priority. This priority may not extend to the entire cleanup, but it should at least cover those steps necessary to protect the public health and welfare. For example, if a site includes leaking drums, because of the potential for groundwater contamination, we may say that, as a matter of administrative expense, we will remove the drums and take away the immediate threat. We may recognize that a $ 45 million groundwater cleanup is something that cannot be handled by this estate.

A third priority for us concerns past owner-operators, generators or transporters who enter bankruptcy. We approach them as a general creditor to say: "A hazardous waste cleanup must take place, you were a major contributor to that problem, and, as a consequence, you should contribute to the cost." We do not claim any particular priority in such cases. Perhaps we are not entitled to one in any event.

In Superfund⁵ cases, there may be as many as 200 to 4,000 parties, one or two, or more, of whom will enter bankruptcy during the course of the case. Rather than follow each of those companies into bankruptcy, chasing down every dollar, we select them in the same way that we decide whom we will name in a hazardous waste case: Is it a major contributor? What is the strength of our case against this individual or company? What is the likelihood of our success? In bankruptcy, we also ask: Does this estate have anything worth pursuing?

We have been fairly successful in the larger bankruptcy cases, most of which have involved Chapter 11. For example, we recently received $ 5 million from the Charter bankruptcy in Florida⁶ and $ 3 million from one of the Johns-Manville cases.⁷ Our percentage has been fairly significant. In the Charter case, for example, our $ 5 million came from a total estate of $ 11 million.

A lesser priority for us concerns penalty-only claims. In such cases, we are not seeking injunctive relief, and there is no hazardous waste site. Instead, a company is operating — either pre-petition or post-petition — and it has now brought itself into compliance. While it was out of compliance however, it racked up a $ 2-$ 5 million penalty claim. If the company is operating post-petition, we tend to pursue the claim on the grounds that there is no right to operate in violation of the law. Indeed, in nonenvironmental cases, such penalties have been accorded an administrative-priority status.

In a case involving a laundry in Cambridge, Massachusetts, the First Circuit declared penalties stemming from the violation of a local ordinance to be administrative expenses.⁸ The court may not have realized that under the Clean Air Act⁹ and the Clean Water Act,¹⁰ at $ 25,000 a day considerably more may be at stake than the $ 200 or so involved in that case.

If the company is operating pre-petition, we consider factors similar to those involved when we pursue a generator in bankruptcy: What is the strength of the case? What are the chances that we'll get something out of it?

Such cases are not the most compelling to a bankruptcy court. Fellow creditors, for instance, often cannot quite understand why you're there. Thus, the negotiations are difficult.

We do strive to bring some rationality to the cases on which we work. We recognize that in bankruptcy in particular there may be little value to litigating to the death. We may find that the cost of litigating the case, which is an administrative expense, would deplete the entire estate, leaving no one a winner. My attorneys stand to gain some trial experience, but that is not our ultimate goal.

In some cases, then, we try to find ways for all of the creditors to end up with something. In bankruptcy, as a creditor, the government's fight is often not with the debtor but with other creditors. Some of these creditor disputes occur within the government itself. For the first time, the Environmental Enforcement Section has had to sit down with the Tax Division, the Civil Division, the Department of Labor, the Department of Energy and others. We have had to educate them about our administrative-priority concept.

We recently entered into a settlement in a case called "Bofors Nobel."¹¹ In that case, the operator of a hazardous waste facility was in bankruptcy, and the estate included contaminated property that was otherwise valuable. It was an ongoing business that somebody wanted to buy. The company that wanted to purchase the business told us: "I am willing to buy this portion of the company, I am willing to invest $ 23 million in the estate; but I will not do so if the government will claim that I am the new owner-operator of a hazardous waste facility. In exchange for $ 23 million, I'll probably have just bought myself an additional $ 20 million worth of liability."

[18 ELR 10360]

In response, we did agree to allow the company to purchase the contaminated property and the ongoing plant facility without exposing them to suit for any further hazardous waste problems arising from facts known at the time. If the company created its own hazardous waste problems, they would be liable. In exchange, the U.S. Government and the state took $ 15 million of the $ 23 million, and the remainder went to the other creditors.

While this may not be our normal policy, we must consider such solutions in the area of hazardous wastes and bankruptcy. At times, the government must recognize that we are a partner with some of the other creditors, and creative solutions can benefit all of us financially.

DISCUSSION

PARTICIPANT: In the last case you discussed, did you discuss whether the company with which you settled would be protected from cross-claims by other parties you might pursue at that site, or were there no other potentially responsible parties?

FIRESTONE: I don't recall. However, as a general matter, we would enter into an agreement with them under the Superfund amendments that would enable them to claim contribution protection as a matter of law.

PARTICIPANT: In these creative situations you mentioned, to what extent has third-party dispute resolution been employed?

FIRESTONE: Our experience has been straight negotiation. In the Bofors Nobel case, somebody who was not a party to the bankruptcy came in with a proposal. It made no difference to the debtor. The other creditors knew that they could not get any money unless we promised a covenant to the new purchaser, so the attorneys had to sit in a room and negotiate. There was no major conflict. There was some concern about whether the agreement was legal.

PARTICIPANT: This is a question for Richard Krasnow. It concerns the issue of priorities of cleanup mandates during Chapter 11, particularly during the operation of the business. You mentioned that it could always be characterized as a pre-petition type of a claim. Has the argument of unjust enrichment to the estate been advanced? Couldn't one say that in the course of cleaning up a contaminated asset one adds value to it, justifying compensation on a priority basis?

KRASNOW: I have not seen such a claim. I would suggest, though, that this kind of issue should be resolved not by the court, but, rather, through resolutions of the sort Nancy Firestone has described.

PARTICIPANT: An unjust enrichment theory seems to underlie the various state superlien provisions.

KRASNOW: The Code permits the court to estimate contingent unliquidated claims, so that they may be discharged. It could well turn out that estimate is far less than what the total liability will be. Yet, the creditor whose claim has been estimated will likely be stuck with that lower claim. One could certainly argue that such an outcome constitutes unjust enrichment. Nonetheless, the Code appears to permit it.

FIRESTONE: The question of when a claim does arise — for example, in a hazardous waste site, where materials were dumped over the past fifteen years and the leaking is now occurring — is an issue that appears in the insurance context as well. The different arguments that are made as to when a claim arises depend on the result one desires. There is a case now under way in Philadelphia involving some railroad yards that are contaminated with PCBs. We are claiming, post-bankruptcy, that the prior owners were not discharged of liability.¹² Because the discharge took place before Superfund was enacted, they could not have discharged claims that did not even exist until 1980 when Superfund was passed.

PARTICIPANT: One might also argue that a claim doesn't arise until EPA has spent some money.

FIRESTONE: We've made that argument as well.

PARTICIPANT: I have a question for Douglas Baird and Richard Krasnow. You both drew a distinction between matters involving ongoing operations or ongoing pollution and past problems. With regard to Superfund, that distinction becomes murky. Under Superfund, the EPA can choose when they want to clean up a hazardous waste site. If they perform a cleanup themselves and send in the bill, most would consider it to be a dischargeable debt, and a suit involving that money would be subject to a stay. On the other hand, the EPA can simply issue an order requiring the responsible party to hire — and compensate — a consultant. Is such an injunctive cleanup order a dischargeable debt in light of Kovacs?¹³

BAIRD: The answer is actually quite clear. Your example involves a pre-bankruptcy claim that arose out of pre-bankruptcy misdeeds. If the firm went out of business the day it filed the bankruptcy petition, it would still have that obligation to EPA. EPA would still have a right to get at the assets. The fact that the claim is couched in the form of an order instead of an obligation to pay money shouldn't make any difference. One need only translate the dollar value of the order into dollars to arrive at the amount of the claim. Things only get tricky in cases where the firm wants to continue operating.

We have here a firm that wants to continue in business, but, in order to keep its operating permit, it must clean up all pollution that it made in the past. If it goes out of business, we can assume that its obligation to clean up is just a general claim, since no special lien is involved. What, then, if it wants to stay in business? In my view, it has to pay the price. If staying in business means cleaning up all the past waste, then that's what it must do. It has the choice. Part of the cost of staying in business is paying environmental cleanup costs at 100 cents on the dollar, even though these claims might be only pro-rated in a liquidation.

If I were drafting the environmental laws, I would ensure that the government's right to get at assets of the firm was the same regardless of whether the firm liquidated or stayed in business. The ability of a secured creditor to get collateral does not turn on whether the firm stays in business. Nonetheless, inadequate drafting in the environmental laws does not justify turning to bankruptcy laws to solve the problem.

PARTICIPANT: This question is addressed to Nancy Firestone. We're living in a world of complex corporate structures. Assuming there are no problems with piercing the corporate veil, are there any other problems posed of a parent corporation where the subsidiary corporation that owns a contaminated site either is forced into bankruptcy [18 ELR 10361] through the cost of cleanup or goes into bankruptcy? Do you have any other novel theories through which you might attempt to seek the deep pocket in Chapter 7 cases?

FIRESTONE: If I cannot reach the parent, and the subsidiary is in Chapter 7, I would proceed on basically two grounds: The first ground is piercing; the second is to declare that where the parent is the controlling entity, we will not pierce. Instead, we term the parent to be the operator of a hazardous waste facility.

PARTICIPANT: Nonetheless, the problem of piercing the corporate veil remains.

FIRESTONE: While we have learned much on this issue, you are right. Fortunately, we have had the help of the Antitrust Division. Some of our cases include textbook examples of how to set up multiple corporations and insulate them all from one another.

PARTICIPANT: I have a comment for Professor Baird. You claimed that the rules you were discussing were only procedural bankruptcy rules and that they did not affect the substance of environmental law. I think, however, that the rules set up in bankruptcy do, in fact, have a substantive and somewhat arbitrary effect on the operation of the environmental laws. In your examples of installing a scrubber versus shutting down an operation, or cleaning up a waste site, in both cases there is an obligation to take certain action. In each case, that action costs something, in effect, to the general creditors, and in each case that action is designed to prevent future environmental harm. According to the rules that you described, however, one obligation escapes from the stay and cannot be discharged, and the other is susceptible to the stay and can be discharged. The only basis for that distinction is that one is sort of a requirement as a condition precedent to future operations, and the other happens to be a condition subsequent — i.e., you must clean up your site after you make a mess. This distinction seems somewhat arbitrary. The substantive effect on environmental law is that air pollution is usually controlled by preventing it before it happens, whereas hazardous wastes are typically controlled by cleaning them up afterwards. In effect, air pollution gets a much higher priority than hazardous waste.

BAIRD: The difference isn't arbitrary, in the sense that in one case the act has been committed and in the other case the act has not been committed. People haven't died yet, but in the first case the deed has been done, the gun has been shot. In the second case the trigger hasn't been pulled.

PARTICIPANT: But, in either case, if one does not take the action — i.e., if one does not install the scrubber or clean up the site, people may die in the future.

BAIRD: That point goes to prove that the environmental laws are good laws, and they're designed to keep bad things from happening. The situation you pose may be arbitrary, but not as a result of bankruptcy law. Without bankruptcy law, you would still have exactly the same situation. If a firm shuts down, and $ 100,000 remains, the issue is who gets the money. If the pollution is in the ground, one might not be able to get money for a cleanup because someone else has a better claim to the money. On the other hand, by virtue of the nature of the operating-permit system, one might be able to prevent air pollution. There may be an imbalance, and perhaps the laws should be structured differently. But it is not a result determined in any sense by bankruptcy law.

1. 11 U.S. § 1101 et seq.

2. See 28 U.S.C. § 959(h)(requiring trustees and debtors in possession to comply with state laws), Ohio v. Kovacs, 496 U.S. 274 (1985) (Court does not question that anyone in possession of a hazardous waste site must comply with environmental laws).

3. Midlantic Nat'l Bank v. New Jersey Dept. of Envtl. Protection, 106 S. Ct. 755 (1986), 16 ELR 20278.

4. The cases on this issue have reached varying conclusions. Decisions granting priority include: In re T.P. Long Chemical, Inc., 45 B.R. 278 (Bankr. N.D. Ohio 1985); In re Stevens, 68 B.R. 774 (D. Me. 1987), rev'g 53 B.R. 783 (Bankr. D. Me. 1985); In re Distrigas Corp., 66 B.R. 382 (Bankr. D. Mass. 1986); In re Mowbray Engineering Co., Inc., 67 B.R. 34 (Bankr. M.D. Ala. 1986); In re Peerless Plating Co., 70 B.R. 943 (Bankr. W.D. Mich. 1987); In re Laurinburg Oil Co., Inc., 49 B.R. 652 (Bankr. M.D.N.C. 1984); In re Juniper Development, Hazardous Waste Lit. Rptr. p. 11,199 (Bankr. D. Mass. May 8, 1987); In re Vermont Real Estate Inv. Trust, 25 B.R. 804 (Bankr. D. Vt. 1982). Decisions denying priority include: In re Wall Tube and Metal Products Co., 56 B.R. 918 (Bankr. E.D. Tenn. 1986, aff'd, 17 Envtl. L. Rep. 20284 (E.D. Tenn. 1986), appeal pending (6th Cir.); Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137 (3d Cir. 1985); In re Security Gas & Oil, Inc., 70 B.R. 786 (Bankr. N.D. Cal. 1987); In re Pierce Coal and Const., Inc., 65 B.R. 521 (Bankr. N.D.W. Va. 1986).

5. Superfund is the popular name for the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601-9657, ELR Stat. 41941.

6. In re The Charter Co. et al., No. 84-00289-BK-J-GP (M.D. Fla.), discussed at Hazardous Waste Lit. Rep. 10,017.

7. In re Johns-Manville Corp. et al., Case Nos. 82 B 11656 through 11676 and Adv. Proc. Nos. 85-6828A and 85-6558A, Stipulation and Order Resolving Certain Environmental-Related Claims of the United States and Boston and Maine Corp. (S.D.N.Y. December 4, 1986).

8. In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985).

9. 42 U.S.C. §§ 7401-7642, ELR STAT. 42201.

10. 33 U.S.C. §§ 1251 et seq.

11. See In re Bofors Nobel, Inc., No. 85-02671, Order Authorizing and confirming Sale of Assets and Approving Environmental Agreement and Other Agreements (W.D. Mich. Feb. 26, 1987) and Agreement and Covenant Not To Sue, among U.S. EPA, Michigan, Bofors Nobel, Inc., Environmental Systems Corp. of Michigan, and LOMAC, Inc., dated March 25, 1987, discussed at Hazardous Waste Lit. Rep. 10,017.

12. In re Penn Central Transportation Co., No. 70-347, Petition of the United States for Leave to File Complaint Against Penn Central Corp. (E.D. Pa. May 29, 1986).

13. Ohio v. Kovacs, 469 U.S. 274, 105 S. Ct. 705 (1985), 15 ELR 20121.