Emerging Tensions Between CERCLA and the Bankruptcy Code

Patricia L. Quentel

Patricia L. Quentel practices commercial, bankruptcy, and real estate law as an associate with Buist, Moore, Smythe & McGee, P.A., in Charleston, South Carolina. The author received a J.D., cum laude, from the University of Wisconsin Law School, where she was a managing editor of the Wisconsin Law Review, and a B.A., cum laude, from Lawrence University. She served as a law clerk to the Honorable Donald Russell, U.S. Court of Appeals for the Fourth Circuit, from 1988-89.

[23 ELR 10268]

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund)¹ provides for the allocation of responsibility for and cleanup of damage to the environment caused by hazardous substances.² The policies underlying CERCLA assign responsibility for payment of cleanup costs to those who pollute. In contrast, the policies underlying the Bankruptcy Code³ attempt to provide a reorganized debtor the opportunity for a fresh start after certain claims against it have been discharged. These "competing objectives"⁴ have come into focus as the U.S. Environmental Protection Agency (EPA) has attempted to assert liability for cleanup costs against business entities which have filed for protection under the Bankruptcy Code.⁵

The juxtaposition of the Bankruptcy Code's policy of discharging debts with CERCLA's policy of making the polluters pay for cleanup costs of hazardous substances creates a tension between these two statutory schemes. The stakes in resolving this tension are high, as statistics on CERCLA's cleanup costs and bankruptcy filings illustrate. For example, it is estimated that the average cost of cleaning up a hazardous waste site on CERCLA's national priorities list (NPL)⁶ is over $40 million.⁷ Further, according to the Administrative Office of the United States Courts, more than 970,000 bankruptcy cases were filed during the year ended June 30, 1992. This figure reflects a 10.6 percent increase since 1991 and a 167 percent increase since 1985.⁸

After a brief overview of certain policies and provisions of CERCLA and of the Bankruptcy Code, this Dialogue discusses the recent case law which highlights the interplay between the two statutory schemes. The courts' varying approaches in these recent cases illustrate the legal and public policy disagreements surrounding the dischargeability of CERCLA's claims based on actual or threatened releases of hazardous substances which occur before an entity files for bankruptcy.⁹ This Dialogue concludes that a case-by-case approach by the courts, rather than wholesale revision by Congress, will serve best the policies underlying CERCLA and the Bankruptcy Code.

An Overview of Relevant Portions of CERCLA

CERCLA sets forth a scheme assigning liability for hazardous substance cleanup costs to four classes of potentially responsible parties (PRPs): those who are current owners or operators of a facility contaminated by hazardous substances; those who owned or operated the facility at the time hazardous substances were disposed; transporters of hazardous substances; and generators of hazardous substances.¹⁰

CERCLA allows the federal government as well as private citizens to sue the responsible parties for costs incurred in response to actions taken with respect to releases or threatened releases of hazardous substances.¹¹ Furthermore, CERCLA allows awards of future response costs, as long as some costs already have been expended by the person or governmental entity seeking such relief.¹² In addition to [23 ELR 10269] recovering costs associated with cleanup of hazardous substances, CERCLA allows recovery by natural resource trustees for damages for, injury to, destruction of, or loss of natural resources resulting from the release of hazardous substances.¹³ Under CERCLA's terms, however, a cause of action for damages to natural resources is generally limited to governmental entities.¹⁴

Pursuant to CERCLA § 104, EPA may conduct a removal action or remedial action¹⁵ at a hazardous waste site or it may allow a PRP to undertake such actions on its own.¹⁶ Pursuant to CERCLA § 106(a), EPA is authorized to seek injunctive relief against the PRPs, or it can order the PRPs to abate a danger or threat to the environment.¹⁷ EPA also may order the PRPs to clean up the site.

In the alternative, pursuant to CERCLA § 107(a), EPA may respond to a release or threatened release of a hazardous substance by undertaking a removal action or remedial action with Superfund money, subsequently identifying the PRPs, and bringing cost recovery actions against the PRPs.¹⁸ Under § 107(a), private parties, as well as state and local governments, may bring such cost recovery actions against partiesresponsible for the release or threatened release of hazardous substances.¹⁹

Liability under CERCLA is strict²⁰ and is joint and several unless the allocation of harm can be divided.²¹ In some cases, financial responsibility for cleanup costs has flowed to parent corporations from their subsidiaries, or from parent corporations to successor firms.²² Since liability is joint and [23 ELR 10270] several, EPA may choose to assert claims only against PRPs who are financially viable. A responsible party who is sued by a private citizen or by the federal government may seek contribution from other PRPs for cleanup costs incurred,²³ although EPA cannot assess liability against such PRPs until it has investigated a site and adopted remedial measures pursuant to CERCLA.²⁴ Under CERCLA, however, one PRP's cost recovery action against another will not lie until the PRPs have been found liable under the statute.²⁵ CERCLA authorizes a party to recover from other PRPs certain costs,²⁶ although a private cause of action under CERCLA may not be commenced before cleanup costs are incurred.²⁷ In addition, it is unclear whether PRPs are entitled to assert contingent claims against each other.²⁸

An Overview of Relevant Provisions of the Bankruptcy Code

The Bankruptcy Code²⁹ provides a framework for the resolution of a debtor's prebankruptcy liabilities and affords a debtor a "fresh start" by discharging the debtor³⁰ of liability for actual and contingent claims³¹ arising before the bankruptcy petition was filed (prepetition claims) through a process of liquidation or reorganization of the debtor's assets and allocation of assets among creditors.³²

A fundamental issue in the interplay between environmental and bankruptcy law focuses on whether the environmental liability at issue constitutes a "claim" and, if so, whether the claim arose before, or after, the debtor petitioned for bankruptcy protection.³³ If environmental liabilities are claims, the persons or entities which hold those claims may be creditors of the debtor whose claims will be subject to discharge or payment.³⁴ Claims which arose before the date of the bankruptcy court order confirming a liquidation or reorganization plan generally are discharged by the bankruptcy court.³⁵

A "debt" is defined in the Bankruptcy Code as "liability on a claim."³⁶ A "claim" is defined as either (1) 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,"³⁷ or (2) a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, [23 ELR 10271] disputed, undisputed, secured or unsecured."³⁸ Thus, a claim exists only when "the pre-bankruptcy relationship between the debtor and third party contain[s] all the elements necessary to give rise to a legal obligation under the relevant substantive non-bankruptcy law."³⁹

With respect to a contingent claim dischargeable in bankruptcy, the debtor's legal duty to pay is triggered by the occurrence of a future event, if the future occurrence was within the parties' actual or presumed contemplation at the time the parties' original relationship was established.⁴⁰ It is settled that the debtor's obligation to clean up hazardous substances is a "claim" as defined in Bankruptcy Code § 101(4).⁴¹ The crucial question, however, is whether the claim entitles the claimholder to a right to payment.

The determination of the time at which a claim arises is important with respect to determining whether a party is a creditor⁴² and whether the claim is of a type that may be discharged in bankruptcy.⁴³ The existence of a valid bankruptcy claim depends on whether the claimant possessed a right to payment, and whether that right arose before the bankruptcy.⁴⁴ "If the contamination [by hazardous substances] occurred before the petition is filed, the cleanup obligation is presumptively a general unsecured claim."⁴⁵ With respect to EPA's ability to recover the cost of cleanup, the time at which a claim arose is crucial to whether EPA will be considered a creditor of the debtor and able to recover such cleanup costs, or whether such payment for environmental liabilities will be wiped from the debtor's slate of obligations.

CERCLA Liability and Bankruptcy: Judicial Answers to Vexing Questions

Generally, the confirmation of a bankruptcy plan discharges the debtor of all debts except those which occurred after the bankruptcy.⁴⁶ As one court noted: "[T]he Bankruptcy Code manifests a strong and clearly expressed congressional intent that a debtor be discharged from all claims, both actual and contingent, which arise out of pre-petition conduct. Moreover, the courts have effectuated that congressional intent by … construing the concept of 'claim' very broadly."⁴⁷

Despite the guidance in the Bankruptcy Code and from the courts on the dischargeability of claims, the intersection of bankruptcy law and CERCLA liability presents several vexing questions. For example, under what circumstances should a PRP who has filed for bankruptcy be discharged from liability for the costs of cleanup? If that debtor is made to bear the cost of cleanup, is it likely that other creditors, coming behind the federal government, will be left with little, if anything to repay their claims? If that debtor is discharged, is it equitable for other PRPs, or taxpayers, to bear cleanup costs? If a business declares bankruptcy and later is named as a PRP, how will the discharge be affected?

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One crucial question is when an environmental claim pursuant to CERCLA § 107⁴⁸ creates liability for "costs incurred" by EPA. Some courts have held that a claim does not arise until after EPA has incurred response costs.⁴⁹ Arguably, under CERCLA § 104, EPA does not have a claim until it has spent funds, and no funds may be spent until the site has been placed on the NPL.⁵⁰ Another case, however, has held that EPA has a claim for prospective cleanup costs even when funds have not yet been expended.⁵¹ Thus, it is unclear whether liability for "contingent" cleanup costs will be dischargeable in bankruptcy.⁵² The question of the time at which CERCLA liability arises in the context of bankruptcy proceedings has been examined by several courts, with differing results.

United States v. Union Scrap Iron & Metal: A Claim Arises When Cleanup Costs Are Incurred

In United States v. Union Scrap Iron & Metal,⁵³ the court held that EPA's claim for response costs incurred in cleanup of hazardous substances will not arise until after those costs have been incurred.⁵⁴ Significantly, the court held that the prepetition release of a hazardous substance prior to the confirmation of a bankruptcy reorganization plan would not give rise to a CERCLA claim which would be discharged by that confirmation when EPA did not know that a party was a PRP.⁵⁵

In Union Scrap, EPA sought recovery from 20 defendants for approximately $1.2 million in response costs incurred at the site of a scrap metal recovery business in Minneapolis operated by Union Scrap Iron & Metal (Union Scrap), which processed used batteries for Defendant Taracorp Industries, Inc. (Taracorp).⁵⁶ After processing, the spent lead plates were transported to Taracorp smelters in St. Louis Park, Minnesota, or Granite City, Illinois, or to Union Scrap's site.⁵⁷

In October 1982, Taracorp filed for Chapter 11 protection under the Bankruptcy Code. In January 1983, Union Scrap filed for bankruptcy; at that time, Taracorp had 7,040 pounds of whole batteries remaining on the Union Scrap site.⁵⁸ Meanwhile, Taracorp's reorganization plan was confirmed in July 1985.⁵⁹ Although EPA participated in negotiations with respect to Taracorp's St. Louis Park and Granite City facilities, it did not file claims with respect to those sites.⁶⁰ Taracorp's reorganization plan preserved from discharge all allowed claims of governmental units arising out of its alleged violations of federal or state environmental statutes in connection with its operations at its facilities. The order confirming the plan discharged all claims of the government which were not filed by the deadline for proofs of claim and were not scheduled or were scheduled as contingent.⁶¹ Significantly, however, neither Taracorp's disclosure statement nor its plan of reorganization mentioned its potential environmental liabilities at the Union Scrap site.⁶²

The government brought suit against Taracorp for recovery of response costs at the Union Scrap site, and Taracorp moved to dismiss, arguing that any CERCLA liability had been discharged in 1985 by the bankruptcy court. Taracorp argued that EPA's suit was a "claim" under the Code; since Taracorp's release or threatened release of hazardous substances at the Union Scrap site occurred before it petitioned for bankruptcy and EPA did not file a prospective claim with the bankruptcy court, any liability for hazardous substance cleanup cost was discharged when the court confirmed Taracorp's reorganization plan.⁶³ According to Taracorp, had EPA filed a proof of claim, the bankruptcy court could have estimated the liability as a "contingent claim."

EPA disagreed, arguing first that the bankruptcy proceedings only involved Taracorp's two facilities and did not involve Taracorp's activities at the Union Scrap site. Since Taracorp's disclosure statement and its plan of reorganization did not mention the potential liabilities at the Union Scrap site, EPA did not know until August 1989 that Taracorp was a PRP at that site.⁶⁴ EPA further argued that under [23 ELR 10273] CERCLA, it did not have a right to assert claims against PRPs until it actually incurred cleanup costs. Under Taracorp's view of contingent claims, CERCLA's goals of immediate response and later reimbursement from PRPs would be undermined if EPA had to anticipate and litigate every possible CERCLA claim each time a conceivable PRP entered bankruptcy.⁶⁵

The court, agreeing with EPA, held that the "mere release" of a hazardous substance was insufficient to create a legal obligation constituting a claim in bankruptcy; a claim could arise only at the time EPA incurred response costs.⁶⁶ Because EPA had not incurred response costs at the time of Taracorp's confirmation, "the EPA could have no claim in the bankruptcy proceedings — there was no legal obligation under CERCLA."⁶⁷ Taracorp's liabilities arose at the time EPA incurred those costs, which was after the bankruptcy court had confirmed Taracorp's plan of reorganization. Therefore, since EPA had incurred no response costs at the time Taracorp's plan was confirmed, it could not assert a claim against the debtor's estate.⁶⁸

Taracorp also argued that EPA's claim was contingent, because EPA could presume knowledge of Taracorp's involvement in the Union Scrap site based on EPA's participation in the negotiations involving Taracorp's Illinois site.⁶⁹ The court disagreed: "That the EPA can imagine hazards at Taracorp's many facilities does not give rise to a presumption of knowledge of the hazards at the [Union Scrap] site, especially when that site was actually operated by Union Scrap, not Taracorp."⁷⁰ The court found that to adopt Taracorp's reasoning "would effectively require pre-enforcement CERCLA litigation by forcing the EPA to investigate and assess its potential CERCLA claims every time a conceivable potentially responsible party filed for bankruptcy."⁷¹ According to the court, a claim arose when EPA incurred cleanup costs, not when EPA could "imagine" or have "presumed knowledge" of the release. The court, construing Taracorp's motion to dismiss as a motion for summary judgment, denied relief to Taracorp.⁷²

In re Jensen: A Claim Arises at the Time Hazardous Substances Are Released

In contrast to the Union Scrap holding, in In re Jensen,⁷³ a bankruptcy appellate panel of the Ninth Circuit held that an environmental claim asserted by the California Department of Health Services (DHS) arose for purposes of bankruptcy "at the time of actual or threatened release of the hazardous waste or based upon the debtor's conduct,"⁷⁴ even if cleanup costs were incurred postpetition. In Jensen, the debtor had filed for protection under Chapter 7. DHS had argued and the bankruptcy court had held that DHS' claim did not arise until DHS incurred cleanup costs, because Bankruptcy Code § 101(4) specifically required a "right to payment" before a claim arose in the bankruptcy context.⁷⁵ Until cleanup costs were incurred, DHS had no right to payment, and no cognizable claim in the bankruptcy context.⁷⁶

In Jensen, the bankruptcy appellate panel reversed, noting that there are three theories as to when a bankruptcy claim arises: (1) with the right to payment; (2) upon the establishment of the relationship between the debtor and the creditor; or (3) based upon the debtor's conduct.⁷⁷ DHS argued under the first theory that its claim did not arise until its right to payment arose.⁷⁸ The bankruptcy court had agreed with DHS: since Bankruptcy Code § 101(4) requires a right to payment before a claim is recognized in bankruptcy, and the right to payment under federal or state law did not arise until cleanup costs are incurred, no claim existed for bankruptcy purposes until those cleanup costs are incurred.⁷⁹

The bankruptcy appellate panel rejected the bankruptcy court's view that the claim arose upon right to payment,⁸⁰ because to hold that the statutory right to payment would trigger recognition of the bankruptcy claim "contravenes the overriding goal of the Bankruptcy Code to provide a 'fresh start' for the debtor."⁸¹ Disagreeing with Union Scrap, the court in Jensen noted that the definition of "claim" in Bankruptcy Code § 101(4) included contingent and matured rights to payment, and that the "fresh start" provided by the Bankruptcy Code would be undermined if the claim arose only at the time of statutory right to payment.⁸²

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DHS also argued under the second theory that the claim arose at the earliest point in the relationship between the debtor and the creditor.⁸³ Since DHS did not become involved in the bankruptcy until after it had been filed, DHS' claimswere postpetition. The bankruptcy appellate panel agreed with this theory so far as it was consistent with the court's adoption of the third theory of liability, wherein the creditor's claim arises based upon the debtor's conduct.⁸⁴

The bankruptcy appellate panel found that the third theory, which held that the bankruptcy claim arises from the debtor's conduct, satisfied the Bankruptcy Code's legislative intent. Relying on In re Johns-Manville Corp.,⁸⁵ and In re A.H. Robins Co.,⁸⁶ both of which held that the "right to payment" arose at the time when the acts giving rise to the alleged liability occurred, the court in Jensen held that the claim arose based on the debtor's prepetition conduct and therefore was discharged in bankruptcy, even though EPA had no knowledge of the debtor's actions or the presence of hazardous substances on the site until after the debtor had filed for bankruptcy. To the Jensen court, no cause of action arose until there was a release or a threatened release of a hazardous substance.⁸⁷ The Jensen court, in so holding, underscored the "important bankruptcy goal of providing a fresh start to the debtor."⁸⁸ Nonetheless, DHS and the bankruptcy court had believed that the public policies supporting environmental cleanup afforded environmental claims a special status. The Jensen court disagreed, relying on Ninth Circuit precedent that "sounded a strong policy against according preference to particular claims" within a specifically enumerated class.⁸⁹ Absent a clear directive from Congress, the court was unwilling to formulate its own priority scheme and afford preferential status to environmental claims.⁹⁰ The court in Jensen held that since claims in bankruptcy arose based on the debtor's conduct, DHS' claim arose prepetition and was discharged by the debtor's bankruptcy.⁹¹

In re Chateaugay Corp.: Unincurred Costs Are Dischargeable in Bankruptcy

In In re Chateaugay Corp.,⁹² the Second Circuit, affirming the district court,⁹³ held that unincurred CERCLA "response costs," as long as they related to a prepetition release or threatened release of hazardous substances, were properly characterized as prepetition claims, and thus dischargeable in bankruptcy.⁹⁴ In that case, the debtor corporation, LTV, filed a Chapter 11 petition in 1986. LTV's schedule of liabilities contained several contingent claims held by EPA and state environmental enforcement officers. EPA filed a proof of claim for about $32 million, which represented response costs incurred prepetition at 14 sites where LTV had been identified as a PRP.⁹⁵ EPA asserted that further response costs were not anticipated at one of the sites, but that LTV was a potential PRP at sites additional to those listed on its proof of claim, so that EPA might assert additional liability against LTV in the future.⁹⁶ LTV sought declaratory judgments in its bankruptcy proceedings to discharge the CERCLA and state environmental claims upon confirmation of its reorganization plan. The court held that the environmental liabilities were discharged only to the extent the release of hazardous substances occurred prepetition.

As a policy matter, EPA argued in Chateaugay that CERCLA's objectives were better served if reimbursement claims for response costs based on prepetition releases could be asserted at full face amount against the reorganized corporation, rather than considered as claims.⁹⁷ The court viewed the intersection of the Bankruptcy Code and CERCLA as a harmonious interplay between the two statutes. EPA urged the court to adopt a narrow reading of the Bankruptcy Code to further Congress' objectives in enacting CERCLA, but the court concluded that it was bound to construe the Bankruptcy Code "fairly" and to avoid a restrictive reading:

If the Code, fairly construed, creates limits on the extent of environmental cleanup efforts, the remedy is for Congress to make exceptions to the Code to achieve other objectives that Congress chooses to reach, rather than for courts to restrict the meaning of across-the-board legislation like a bankruptcy law in order to promote objectives evident in more focused statutes.⁹⁸

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Thus, the court's reading plainly emphasizes Congress' role in remedying any restrictions the Bankruptcy Code places on environmental cleanup efforts.

In addition, the distinction between contingent and incurred costs was crucial to the Second Circuit's holding in Chateaugay. In its analysis, the court in Chateaugay first referred to the plain language of the Bankruptcy Code and observed the broad definition of "claim." Then, it noted the argument made by some bankruptcy theorists that a "claim" should be found "whenever, in the absence of bankruptcy, a particular claimant has the right to reach the debtor's assets."⁹⁹ Analogizing the matter to claims filed with respect to tortfeasors, the court observed that in the bankruptcy context, where a tort victim had some prepetition contact with the tortfeasor, some courts refused to recognize a "claim" absent a manifestation of injury.¹⁰⁰ In contrast, other courts, reading the definition of "claim" more broadly, ruled that in a products liability context, claims should be allowed even without manifestation of injury.¹⁰¹ The court concluded that at the time EPA incurs CERCLA's response costs, it will have "what can fairly be called a 'right to payment.'"¹⁰² In defining that right, the court stated:

That right is currently unmatured and will not mature until the response costs are incurred. In the context of contract claims, the Code's inclusion of "unmatured" and "contingent" claims is usually said to refer to obligations that will become due upon the happening of a future event that was "within the actual or presumed contemplation of the parties at the time the original relationship between the parties was created."¹⁰³

Turning to the matter at hand, the court, in determining what was within the "presumed contemplation," focused on determining the actual relationship between EPA and the debtor; the district court, on the other hand, had focused on determining whether the debtor's conduct gave rise to a claim by EPA.¹⁰⁴ The Second Circuit examined the relationship between LTV and EPA and held it did not rise to the level of that between a claimant holding an existing yet unmatured contract claim. Nevertheless, the court reasoned that the relationship was closer than that between future tort claimants unaware of their injuries and the tortfeasor.¹⁰⁵ As the court noted: "The relationship between environmental regulating agencies and those subject to regulation provides sufficient 'contemplation' of contingencies to bring most ultimately maturing payment obligations based on pre-petition conduct within the definition of 'claims.'"¹⁰⁶

EPA did not yet know the full extent of costs to be assessed against LTV, nor even the location of the sites. But the court found that the location of the sites, the determination of their coverage under CERCLA, and the incurring of EPA's response costs "are all steps that may fairly be viewed, in the regulatory context, as rendering EPA's claim 'contingent,' rather than as placing it outside the Bankruptcy Code's definition of 'claim.'"¹⁰⁷ The court in Chateaugay, relying in part on the reasoning in Kovacs, noted the possible disadvantage to environmental claimants if a "claim" were interpreted to exclude unincurred CERCLA response costs.¹⁰⁸ The court took a dim view of such an arrangement:

Accepting EPA's argument in this Chapter 11 reorganization case would leave EPA without any possibility of even partial recovery against a dissolving corporation in a Chapter 7 liquidation case. Indeed, while EPA obviously prefers in this case to keep its CERCLA claim outside of bankruptcy so that it may present it, without reduction, against the reorganized company that it anticipates will emerge from bankruptcy, one may well speculate whether if unincurred CERCLA response costs are not claims, some corporations facing substantial environmental claims will be able to reorganize at all.¹⁰⁹

Thus, Chateaugay's holding that unincurred CERCLA response costs, related to a prepetition release or threatened release of hazardous substances, were prepetition claims dischargeable in bankruptcy, represents a judicial summons to Congress to promote environmental cleanup efforts through revisions to the Bankruptcy Code.

In re National Gypsum Co.: EPA May Recover Future Response Costs

In In re National Gypsum Co.,¹¹⁰ the district court held that EPA was entitled to collect a sum certain for future response costs and natural resources damages costs from the debtor National Gypsum; the court held that such sums were not "claims" within the meaning of the Bankruptcy Code and subject to discharge. The debtors, National Gypsum Co. and its parent company, Aancor Holding, Inc. (Debtors) filed a petition for bankruptcy under Chapter 11 in October 1990.¹¹¹ Upon filing for bankruptcy, the Debtors contacted EPA to announce their potential CERCLA liability.

Although the Debtors and the United States identified more than 20 sites at which the Debtors were potentially liable, in May, 1991, the United States filed its proof of claim for Debtors' prepetition conduct at only 7 CERCLA sites (Listed Sites), while expressly reserving its right to assert that the Debtors were liable under CERCLA due to prepetition conduct with respect to at least 13 unlisted sites (Unlisted Sites).¹¹²

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The proof of claim asserted liability against the Debtors for past response costs, future response costs, and natural resources damages.¹¹³ At issue were the following: (1) whether future response costs and future natural resources damages costs at the Listed Sites were "claims" within the meaning of the Bankruptcy Code and subject to discharge; (2) whether the Debtors' environmental liabilities for the Unlisted Sites arising from prepetition conduct were "claims" within the meaning of the Bankruptcy Code and subject to discharge; (3) whether response costs incurred in connection with property presently owned by the Debtors were entitled to administrative expense priority; and (4) whether the Debtors were jointly and severally liable for claims at the Listed Sites.¹¹⁴

The United States argued that future response costs and future natural resources damages costs at the Listed Sites were not subject to discharge and that the Debtors' liabilities at the Unlisted Sites were not dischargeable claims. The United States contended that response costs incurred after bankruptcy at the Debtors' property were entitled to administrative priority, and that the Debtors were jointly and severally liable.¹¹⁵ In response, the Debtors argued that their potential liability for any future response costs or future natural resources damages at the Listed Sites were prepetition claims subject to discharge; that their environmental liabilities for the Unlisted Sites arising from prepetition conduct were claims; that the response costs incurred post-bankruptcy at the Debtor's property were general unsecured claims; and that the proof of claim should be fixed at an amount reflecting the Debtors' equitable share of liability.¹¹⁶

With respect to whether future response costs and future natural resources damages costs at the Listed Sites were claims within the meaning of the Bankruptcy Code and thus subject to discharge, the United States argued that such costs do not give rise to a bankruptcy claim subject to discharge; only those costs already incurred before reorganization were dischargeable claims, since under the Bankruptcy Code, the time at which a claim arises is determined by reference to substantive nonbankruptcy law, and CERCLA expressly provides that no liability or legal claim arises until costs have been expended or remedial measures taken.¹¹⁷ The Debtors, in turn, argued that future responses and damages costs based on prepetition conduct are prepetition claims subject to discharge under the Bankruptcy Code. While the existence of a claim under the Bankruptcy Code is determined pursuant to substantive nonbankruptcy law, the timing of the claim is crucial: "[C]ourts must look to the earliest possible date upon which a claim may arise, so as to maximize the scope of a discharge."¹¹⁸ Under this theory, three events determined the time at which a CERCLA claim arose under the Bankruptcy Code: (1) prepetition conduct by the Debtors at a site; (2) prepetition release or a threatened release of a hazardous substance at a site; or (3) the United States' initial prepetition incurrence of the first response costs at the site.¹¹⁹

In its analysis, the court relied on Union Scrap to hold that "[a] claim exists only if before filing of the bankruptcy petition, the relationship between the debtor and the creditor contained all the elements necessary to give rise to a legal obligation — 'a right to payment' — under the relevant nonbankruptcy law."¹²⁰ Nonetheless, since the Bankruptcy Code encompassed within the term "claim" all contingent, unliquidated, and unmatured rights to payment, the court noted that "[i]t is immaterial for the purpose of bankruptcy, whether EPA's claims against the Debtors are ripe for adjudication under CERCLA, as long as all the elements that can give rise to liability under CERCLA have occurred pre-petition."¹²¹

The court noted that in Chateaugay, the Second Circuit had "used the bankruptcy concept of contingent claims to bring future CERCLA responses and damages costs within the ambit of present discharge proceedings under the Code" and advocated a "speedy and rough estimation" of CERCLA's claims for purposes of EPA's role in bankruptcy proceedings.¹²² The court in Chateaugay had held that an obligation to pay EPA's response costs is a dischargeable claim whenever it is based on prepetition conduct resulting in a release or threatened release of a hazardous substance. The court refused to recognize as claims those response costs that are based simply on a debtor's prepetition conduct, thereby requiring conduct that resulted in a prepetition release or threatened release of a hazardous substance.¹²³ Thus, the broad scope of the Chateaugay ruling assumes an expansive definition of "claim," so that a prepetition release, unknown to anyone, is nonetheless a contingent claim.¹²⁴ Declining to take such a broad view of a claim, National Gypsum maintained the view that conduct giving rise to a release or threatened release of hazardous substances prepetition should be the relevant inquiry in determining the existence of a claim. The court was unwilling to favor, however, to the extent exhibited in Chateaugay, the Bankruptcy Code's objective of a "fresh start" over CERCLA's objective of environmental cleanup.¹²⁵ To the National Gypsum court, the only meaningful distinction to be drawn regarding CERCLA claims in bankruptcy "is one that distinguishes between costs associated with pre-petition conduct resulting in a release or threat of release that could have been 'fairly' [23 ELR 10277] contemplated by the parties; and those that could not have been 'fairly' contemplated by the parties."¹²⁶

While the Chateaugay court had not articulated a means of distinguishing between those claims that were contemplated by the parties and those that were not, the National Gypsum court set forth several factors to be considered in determining whether such costs were within the parties' fair contemplation. Factors relevant to whether fair contemplation of future costs based on prepetition conduct would include knowledge by the parties of a site in which a PRP may be liable, NPL listing, notification by EPA of PRP liability, commencement of investigation and cleanup activities, and incurrence of response costs.¹²⁷ The court held that all future response and natural resources damages costs based on prepetition conduct fairly contemplated by the parties at the time of a debtors' bankruptcy are claims under the Bankruptcy Code.¹²⁸

With respect to the Debtor's environmental liabilities for the Unlisted Sites, the court held that the United States had sufficient knowledge on which to base contingent liability, but chose not to do so. Accordingly, all liabilities at the Unlisted Sites resulting in a release or threatened release and arising from prepetition conduct fairly within contemplation of the parties, were dischargeable claims.¹²⁹ Since the Bankruptcy Rules provide that any claim not asserted in a proof of claim is barred,¹³⁰ the United States sought permission to amend its proof of claim with respect to the Unlisted Sites. The court granted permission to amend, noting that the novel nature of the legal issues before the court warranted amending the proof of claim.¹³¹ The National Gypsum court, with respect to future response and natural resources damages costs, presented a list of specific prepetition factors, including the parties' knowledge of a site in which a PRP may be liable, NPL listing, notification by EPA of PRP liability, commencement of investigation and cleanup activities, and incurrence of response costs¹³² as conduct that could be fairly contemplated by the parties at the time of a debtors' bankruptcy and give rise to claims under the Bankruptcy Code.¹³³

Conclusion

The juxtaposition of CERCLA and the Bankruptcy Code has resulted in judicial prioritizing of conflicting policies between the two statutes. As relevant case law indicates, whether an environmental liability will be considereda claim in bankruptcy depends, in part, on the facts of each case, and on whether such costs were within the actual or presumed contemplation of, or fairly contemplated by, the parties.

In Union Scrap, the court was unwilling to hold that if EPA could "imagine" or "presume knowledge" of hazards at a facility, it would have a claim in bankruptcy. Thus, a claim arose when EPA actually incurred cleanup costs. In so holding, Union Scrap clearly favored the policies underlying CERCLA over those of the Bankruptcy Code.

In contrast, Jensen focused on the debtor's conduct and held that a claim arose for purposes of bankruptcy at the time of the actual or threatened release of the hazardous substances. Jensen noted that absent a clear mandate from Congress, environmental claims could not take priority over the fundamental fresh start policy underlying the Bankruptcy Code. Thus, the bankruptcy appellate panel in Jensen clearly favored the policy embodied in the Bankruptcy Code over the policy underlying CERCLA.

Echoing Jensen, the court in Chateaugay was unwilling to hold, absent a clear statutory directive, that unincurred CERCLA response costs constituted a claim under the Bankruptcy Code. In contrast to Jensen's focus on the debtor's conduct, Chateaugay examined the actual relationship between EPA and the debtor. Pursuant to Chateaugay, when the relationship between a regulating authority and regulated entities provide sufficient "contemplation" of contingencies, future obligations based on prepetition conduct will constitute a claim. The court concluded that the regulatory relationship between EPA and the debtor mitigated for holding EPA's claim as contingent, and thus dischargeable.

One result of Chateaugay is that all prepetition releases of hazardous substances may be considered claims dischargeable in bankruptcy. Under Chateaugay, it will be impossible for EPA to recover unincurred response costs from an entity which has filed for bankruptcy. Thus, in Chateaugay, the policies underlying CERCLA and the Bankruptcy Code were in sharp conflict, and the resolution of the conflict [23 ELR 10278] benefits only a small group of debtors at the expense of the environment.

In contrast to Chateaugay, the court in National Gypsum examined the relationship between EPA and the debtor and refined Chateaugay's broad-brush analysis for determining whether a sufficient relationship exists between EPA and the debtor to allow claims to be discharged. National Gypsum, with respect to future response and natural resources damages costs, presented a list of specific prepetition factors, including knowledge by the parties of a site at which a PRP may be liable, NPL listing, notification by EPA of PRP liability, commencement of investigation and cleanup activities, and whether response costs had been incurred. This conduct, which could be "fairly contemplated" by the parties at the time of a debtor's bankruptcy, would give rise to claims under the Bankruptcy Code.

These cases involving the dischargeability of CERCLA's cleanup costs in bankruptcy proceedings suggest that Congress, rather than the courts, is the proper forum for resolving the tensions inherent in bankruptcy's fresh start and CERCLA's cleanup goals. On a case-by-case basis, bankruptcy courts will continue to confront the questions of whether liability for cleanup costs will be considered a claim under the Bankruptcy Code, the time at which the claim arose, and whether the debtor will be obligated to pay the claim or whether the claim will be discharged in bankruptcy. As courts struggle with ephemeral notions of knowledge and fair contemplation, it is apparent that some guidance from Congress is needed. Although Congress cannot conceivably resolve the conflicting policies for all cases, with congressional guidance, bankruptcy courts can equitably fulfill their proper role in resolving the conflicting policies inherent in CERCLA and the Bankruptcy Code.

1. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075.

2. For a discussion of the impact of the Bankruptcy Code on certain other federal environmental statutes, namely the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901-6992k, ELR STAT. RCRA 1-77; the Toxic Substances Control Act, 15 U.S.C. §§ 2601-2671, ELR STAT. TSCA 001-056; theClean Air Act, 42 U.S.C. §§ 7401-7671q, ELR STAT. CAA 1-186; and the Clean Water Act, 33 U.S.C. §§ 1251-1387, ELR STAT. FWPCA 001-071; as well as the impact of the Bankruptcy Code on state environmental laws, see generally Arlene Elgart Mirsky et al., The Interface Between Bankruptcy and Environmental Laws, BUS. LAW., Feb. 1991, at 623-91.

3. 11 U.S.C. §§ 700, 1100.

4. In re Chateaugay Corp., 944 F.2d 997, 1002, 21 ELR 21466, 21468 (2d Cir. 1991). For a comprehensive overview of the juxtaposition of CERCLA and the Bankruptcy Code, see generally Murray Drabkin et al., Bankruptcy and the Cleanup of Hazardous Waste: Caveat Creditor, 15 ELR 10168 (June 1985).

5. At least one commentator has implied that the cost of complying with environmental laws has directly caused some businesses to seek protection in bankruptcy. See Mirsky et al., supra note 2, at 626.

6. 40 C.F.R. pt. 300 app. B (1992).

7. Mirsky et al., supra note 2, at 674.

8. ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS, STATISTICAL TABLES FOR THE TWELVE MONTH PERIOD ENDED SEPTEMBER 30, 1992, at 90 (1992); ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS, 1991 ANNUAL REPORT OF THE DIRECTOR 105 (1992). See also David F. Bantleon and Kathy L. Kresch, A Bankruptcy Law for the '90s, BUS. L. TODAY, Jan.-Feb. 1993, at 25.

9. The judicial treatment of claims for postpetition releases of hazardous substances is beyond the scope of this Dialogue. Generally speaking, such costs incurred in postpetition cleanup probably will be considered costs of preserving the estate and thus would be classified as administrative expenses. See 11 U.S.C. § 503(b)(1)(A) (defining "administrative expenses" in pertinent part as "the actual, necessary costs and expenses of preserving the estate[.]"); see also In re Wall Tube & Metal Products Co., 831 F.2d 118, 123-24, 18 ELR 20013, 20015-16 (6th Cir. 1987) (response costs held to be actual and necessary administrative expenses recoverable by state environmental authority).

10. CERCLA § 107(a)(1)-(4), 42 U.S.C. § 9607(a)(1)-(4), ELR STAT. CERCLA 024-025.

11. To state a private cause of action under CERCLA, a party must prove (1) that a defendant is within one of the four categories of persons liable for costs of cleanup under § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024; (2) that there has been a release or threatened release of a hazardous substance from a facility under § 107(a)(4), 42 U.S.C. § 9607(a)(4), ELR STAT. CERCLA 024-025; (3) that such release or threatened release has caused plaintiff to incur response costs under § 107(a)(4), 42 U.S.C. § 9607(a)(4), ELR STAT. CERCLA 024-025; and (4) as provided under § 107(a)(4)(B), 42 U.S.C. § 9607(a)(4)(B), ELR STAT. CERCLA 024-025, that the response costs were necessary and consistent with the CERCLA national contingency plan, set forth at 40 C.F.R. pt. 300 (1992).

12. See, e.g., Southland Corp. v. Ashland Oil, Inc., 696 F. Supp. 994, 999, 19 ELR 20733, 20735 (D.N.J. 1988) ("To be granted a declaratory judgment on the issue of liability, [plaintiff] must establish four factors to satisfy the requirements of section 107(a): (1) that the [plant] is a 'facility'; (2) that [defendant] is a 'covered party' as defined by the Act; (3) that the 'release' or 'threatened release' of a hazardous substance from the plant has occurred; and (4) that, as a result, [plaintiff] has incurred response costs.") (citation omitted).

13. CERCLA § 107(a)(4)(C), 42 U.S.C. § 9607(a)(4)(C), ELR STAT. CERCLA 025. "The term 'natural resources' means land, fish, wildlife, biota, air, water, ground water, drinking water supplies, and other such resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States … any foreign government, [and] any Indian tribe…." CERCLA § 101(16), 42 U.S.C. § 9601(16), ELR STAT. CERCLA 008.

14. Lewis M. Barr, CERCLA Made Simple: An Analysis of the Cases Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, BUS. LAW., May 1990, at 923, 947.

15. See CERCLA § 101(25), 42 U.S.C. § 9601(25), ELR STAT. CERCLA 009 (removal action is an initial, short-term action taken to minimize pollution damage); see also CERCLA § 101(24), 42 U.S.C. § 9601(24), ELR STAT. CERCLA 009 (remedial action is a long-range action, consistent with a permanent remedy, to reduce or prevent the release of hazardous substances so they do not cause substantial danger to the health or welfare or to the environment).

16. 42 U.S.C. § 9604(a)(1), ELR STAT. CERCLA 012-13. This section provides in pertinent part:

Whenever (A) any hazardous substance is released or there is a substantial threat of such a release into the environment, or (B) there is a release or substantial threat of release into the environment of any pollutant or contaminant which may present an imminent and substantial danger to the public health or welfare, the President is authorized to act, consistent with the national contingency plan, to remove or arrange for the removal of, and provide for remedial action relating to such hazardous substance, pollutant, or contaminant at any time….

The President's authority has been delegated to EPA. See Exec. Order No. 12580, 52 Fed. Reg. 2923 (Jan. 29, 1987), reprinted in ELR ADMIN. MATERIALS 45031.

17. CERCLA § 106(a), 42 U.S.C. § 9606(a), ELR STAT. CERCLA 024. This provision allows the President to require the Attorney General to

secure such relief as may be necessary to abate such danger or threat [of a hazardous substance release from a facility], and the district court of the United States in the district in which the threat occurs shall have jurisdiction to grant such relief as the public interest and the equities of the case may require…. The President may also … take other action under this section including, but not limited to, issuing such orders as may be necessary to protect public health and welfare and the environment.

Id. Only EPA may seek injunctive relief; there is no private right of action for such relief under § 106. See, e.g., Cadillac Fairview/Cal. Inc. v. Dow Chem. Co., 840 F.2d 691, 696-97, 18 ELR 20470, 20473 (9th Cir. 1988).

18. EPA may bring suit to recover response costs only after it has incurred those costs. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024-025. Accordingly, EPA has argued that its claim against a debtor cannot arise until cleanup costs are incurred, regardless of the time of the release. See, e.g., In re Allegheny Int'l, 126 B.R. 919, 925 (Bankr. W.D. Pa. 1991); United States v. Union Scrap Iron & Metal, 123 B.R. 831 (Bankr. D. Minn. 1990).

19. See, e.g., Dedham Water Co. v. Cumberland Farms Dairy, Inc., 805 F.2d 1074, 1078, 17 ELR 20223, 20225 (1st Cir. 1986). It is well-settled that CERCLA § 107(a) provides a private cause of action. See Allegheny, 126 B.R. at 923 n.3 (Bankr. W.D. Pa. 1991), citing Artesian Water Co. v. Gov't of New Castle County, 851 F.2d 643, 651, 18 ELR 21012, 21016 (3d Cir. 1988); 3550 Stevens Creek Assoc. v. Barclays Bank of California, 915 F.2d 1355, 1358, 21 ELR 20011, 20012-13 (9th Cir. 1990).

20. Although CERCLA, as originally enacted, did not specifically provide for strict liability, it tied its liability scheme to the liability standard set forth in the Clean Water Act (CWA), which had been interpreted by courts to impose strict liability. CERCLA § 101(32), 42 U.S.C. § 9601(32), ELR STAT. CERCLA 009; see also United States v. Hollywood Marine, Inc., 625 F.2d 524, 524, 10 ELR 20718, 20718 (5th Cir. 1980). Courts have consistently interpreted CERCLA as imposing a standard of strict liability. See, e.g., New York v. Shore Realty Corp., 759 F.2d 1032, 1042, 15 ELR 20358, 20362 (2d Cir. 1985) (Congress intended that responsible parties be held strictly liable even though an explicit provision for strict liability was not included in CERCLA's compromise; liability under CERCLA shall be construed to be the strict standard of liability under § 311 of the CWA, 33 U.S.C. § 1321, ELR STAT. FWPCA 042); United States v. Price, 577 F. Supp. 1103, 1114, 13 ELR 20843, 20847 (D.N.J. 1983) ("[T]he strict liability standard fits most closely with the legislative aims of CERCLA which include goals such as cost-spreading and assurance that responsible parties bear their cost of the cleanup." (citations omitted)).

21. Some courts have recognized that liability may not be joint and several if the harm can be divisible among the PRPs. Thus, if a PRP can prove that its harm is divisible, it will only bear that share of cleanup cost proportionate to the harm. See, e.g., County Line Inv. Co. v. Tinney, 933 F.2d 1508, 1515 & n.11, 21 ELR 21299, 21303 & n.11 (10th Cir. 1991); Rhode Island v. Picillo, 883 F.2d 176, 178 (1st Cir. 1989), cert. denied, 493 U.S. 1071 (1990); United States v. Monsanto Co., 858 F.2d 160, 171, 19 ELR 20085, 20089 (4th Cir. 1988), cert. denied, 90 U.S. 1106 (1989).

22. See, e.g., United States v. Carolina Transformer Co., 978 F.2d 832, 837-38, 23 ELR 20365, 20367 (4th Cir. 1992) (using the continuity of enterprise theory of determining successor liability, the court held that an acquiring company which retained assets, employees, production processes, and customers of another company is liable under CERCLA as a successor corporation); United States v. Mexico Feed & Seed Co., 980 F.2d 478, 488, 23 ELR 20461, 20464 (8th Cir. 1992) (imposition of successor liability under the "substantial continuation" test is justified by a showing that either in substance or in form, the successor is a responsible party); Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 92, 18 ELR 21026, 21029 (3d Cir. 1988), cert. denied, 488 U.S. 1029 (1989) (Congress intended to impose successor liability on corporations which either have merged with or have consolidated with a PRP); United States v. Kayser-Roth Corp., 724 F. Supp. 15, 20 ELR 20349 (D.R.I. 1989) (court pierced corporate veil and imposed liability as an owner and operator on parent which "exerted practical total influence and control" over its subsidiary), aff'd, 910 F.2d 24, 27-28 & n.11, 20 ELR 21462, 21463-64 & n.11 (1st Cir. 1990) (the court affirmed the district court's finding that the parent was an operator, holding that its control was more than sufficient to be liable as an operator under CERCLA, and did not reach the question whether the parent was liable as an owner). In certain instances, landlords have been held liable for their tenants' releases of hazardous substances. See, e.g, United States v. Monsanto Co., 858 F.2d 160, 169, 19 ELR 20085, 20088, (4th Cir. 1988), cert. denied, 490 U.S. 1106 (1989).

23. CERCLA § 113(f)(1), 42 U.S.C. § 9613(f)(1), ELR STAT. CERCLA 038, added by the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, permits any person to seek contribution from any other person who is liable or potentially liable under CERCLA ("In resolving contribution claims, the court may allocate response costs among liable parties using such equitable factors as the court determines are appropriate."). In addition, a person may have a state law cause of action for contribution. Several courts have held that a PRP may bring an action for contribution even though it is not a defendant in a state or federal cleanup action. See, e.g., Amoco Oil Co. v. Borden, Inc., 889 F.2d 664, 673, 20 ELR 20281, 20285-86 (5th Cir. 1989); Versatile Metals Inc. v. Union Corp., 693 F. Supp. 1563, 1571, 19 ELR 20472, 20475 (E.D. Pa. 1988).

24. See CERCLA § 113(h), 42 U.S.C. § 9613(h), ELR STAT. CERCLA 040. The issue of preenforcement judicial review is beyond the scope of this Dialogue.

25. See, e.g., Rockwell Int'l Corp. v. IU Int'l Corp., 702 F. Supp. 1384, 1389, 19 ELR 20908, 20910 (E.D. Ill. 1988) ("To receive any actual compensation through an action for contribution, the party must have been found liable as a defendant in an earlier or pending action."). Thus, a PRP will not have a cause of action against another PRP until the PRP is adjudged liable under CERCLA. A cause of action for contribution, however, must be distinguished from a claim against the debtor/PRP. See Mirsky et al., supra note 2, at 651-53.

26. CERCLA permits a private party to recover "necessary costs or response incurred by any … person consistent with the national contingency plan." CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024.

27. See, e.g., In re Allegheny Int'l, 126 B.R. 919, 925 (Bankr. W.D. Pa. 1991) (a private party's cause of action to recover response costs incurred pursuant to CERCLA § 107(a) does not accrue until response costs are incurred); Bulk Distrib. Ctrs. v. Monsanto Co., 589 F. Supp. 1437, 1450-52, 15 ELR 20151, 20158-59 (S.D. Fla. 1984).

28. See, e.g., In re The Charter Co., 862 F.2d 1500, 19 ELR 20504 (11th Cir. 1989) (contingent claims disallowed as against Chapter 11 debtors); but see In re M. Frenville, 774 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160 (1985) (under applicable state law, a claim for contribution is a postpetition claim, even if events giving rise to the claim occurred prepetition).

29. 11 U.S.C. §§ 101-1330 (1988 & Supp. I 1989).

30. Under Chapter 7, liquidation of an individual debtor's estate discharges the debtor from all prepetition debts. See 11 U.S.C. § 727. Under Chapter 11, confirmation of a plan discharges the debtor from all prepetition debts, 11 U.S.C. § 1141(d).

31. The Bankruptcy Code requires estimation of all contingent or unliquidated claims which "unduly delay the administration of the case." 11 U.S.C. § 502(c)(1). Bankruptcy Code § 502(e)(1)(B) provides in pertinent part:

[T]he court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution….

A contingent claim may be disallowed if it is (1) for reimbursement or contribution, (2) by a party liable with the debtor, and (3) contingent when disallowed. See In re Bicoastal Corp., 141 B.R. 231, 234 (Bankr. M.D. Fla. 1992).

32. Pursuant to Chapter 7 of the Bankruptcy Code, a debtor may petitionthe Bankruptcy Court for liquidation; the court will appoint a trustee to take control of the debtor's assets for liquidation and subsequent division among creditors. See 11 U.S.C. §§ 701-766 (1988). Pursuant to Chapter 11 of the Bankruptcy Code, a debtor may petition the court for reorganization; under this Chapter, the debtor generally will retain control over the business entity, unless a trustee is appointed. See 11 U.S.C. §§ 1101-1174 (1988).

33. It is clear that

[t]o the extent that a debtor continues to own or operate sites containing hazardous wastes, which post-petition create a danger of release or threatened release of those wastes, that post-petition ownership can be a proper basis for enforcement action notwithstanding any previous discharge in bankruptcy…. This is especially true since the debtor, post-petition, cannot abandon a site as to which there is a release or threatened release of hazardous waste.

In re Chateaugay Corp., 112 B.R. 513, 525, 20 ELR 21269, 21273 (Bankr. S.D.N.Y. 1990), aff'd, 944 F.2d 997, 21 ELR 21466 (2d Cir. 1991), citing Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 506-07, 16 ELR 20278, 202781 (1986). Thus, if the debtor or a trustee is continuing to operate the debtor's business under Chapter 7 or Chapter 11 authority, 28 U.S.C. § 959(b) mandates compliance with all such laws relating to that operation. Mirsky et al., supra note 2, at 646-47.

34. Mirsky et al., supra note 2, at 650.

35. Under Chapter 7, the debtor's nonexempt assets are liquidated and the proceeds are used to pay creditor's claims. See 11 U.S.C. §§ 704, 726. Under Chapter 11, a debtor will remain in possession of its assets and use those assets to produce income to be distributed under a plan to the creditor. 11 U.S.C. § 1141(d)(1)(A). In either case, to the extent that there are not sufficient assets to pay the claims, the debts are discharged.

36. 11 U.S.C. § 101(12).

37. 11 U.S.C. § 101(5)(A).

38. 11 U.S.C. § 101(5)(B). The legislative history indicates that Congress intended that this definition be read expansively. As the House history states: "The bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case." H.R. REP. No. 595, 95th Cong., 1st Sess. 309, reprinted in 1978 U.S.C.C.A.N. 5963, 6266; see also S. REP. No. 989, 95th Cong., 2d Sess. 21-22, reprinted in 1978 U.S.C.C.A.N. 5787, 5807-08.

39. United States v. Union Scrap Iron & Metal Co., 123 B.R. 831, 835 (Bankr. D. Minn. 1990), citing In re UNR Indus., Inc., 29 B.R. 741, 745-46 n.4 (Bankr. N.D. Ill. 1983).

40. United States v. Union Scrap Iron & Metal Co., 123 B.R. 831, 836 (Bankr. D. Minn. 1990), quoting In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff'd mem., 646 F.2d 193 (5th Cir. 1981).

41. In re Heldor Indus., Inc., 131 B.R. 578, 586 (Bankr. D.N.J. 1991), citing Ohio v. Kovacs, 469 U.S. 274, 15 ELR 20121 (1985); see also Mirsky et al., supra note 2, at 650 ("Liabilities under the environmental laws have generally been found to constitute claims.") (footnote omitted).

42. The Code defines "creditor" as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor" or an "entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i)" of the Bankruptcy Code. 11 U.S.C. § 101(10)(A) & (B).

43. See Mirsky et al., supra note 2, at 651.

44. In re AlleghenyInt'l, Inc., 126 B.R. 919, 925 (Bankr. W.D. Pa. 1991), citing In re Remington Rand Corp., 835 F.2d 825, 830 (3d Cir. 1988); In re M. Frenville Co., 744 F.2d 332, 336 (3d Cir. 1984), cert. denied, 469 U.S. 1160 (1985).

45. In re Heldor Indus., Inc., 131 B.R. 578 (Bankr. D.N.J. 1991), citing Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137 (3d Cir. 1985). If such an obligation is the subject of a state regulatory statute, but can be satisfied only by the payment or spending of money, the obligation is a "money judgment" within the meaning of Bankruptcy Code § 362(b)(5); the expenditure of funds to satisfy such an obligation is thus subject to the automatic stay provision of Bankruptcy Code § 362(a). Heldor, 131 B.R. at 586-87; see also In re Torwico Elec., Inc., 131 B.R. 561, 571 (Bankr. D.N.J. 1991).

Briefly stated, the Bankruptcy Code sets forth the priorities for claims and interests. First, under Bankruptcy Code § 506, are secured claims, which are secured by liens on a debtor's assets so that the creditor has a right to look to the particular asset for payment before other creditors can reach that asset. Second, under Bankruptcy Code § 503(b), are administrative expenses, which are the actual and necessary costs and expenses of preserving the debtor's estate. Third, under Bankruptcy Code § 504(a)(2)-(8), are priority claims, which include tax claims. Fourth, under Bankruptcy Code § 101(5), are unsecured claims, which include any other legal obligations which require the debtor to pay money. Finally, under Bankruptcy Code § 101(16) are equity interests. Both Chapters 7 and 11 of the Bankruptcy Code provide that all distributions of money or other property must adhere to the statutorily mandated list of priorities. See 11 U.S.C. §§ 1129 and 726.

46. See, e.g., Ohio v. Kovacs, 469 U.S. 274, 278, 15 ELR 20121, 20122 (1985) (under Chapter 11, a debtor is discharged as to all debts except those set forth in 11 U.S.C. § 523(a)). In Kovacs, the Supreme Court defined the basis under which an injunction will be considered a money judgment. In that case, the state of Ohio had obtained an injunction ordering an individual to clean up hazardous substances and when he refused, a receiver was appointed to the property; when the individual sought Chapter 7 protection, the state brought a declaratory action to ensure that the debtor's obligation under the injunction would not be discharged. The Court found that the debtor no longer had the ability to comply with the injunction and that the state of Ohio conceded it could not obtain injunctive relief; the Court thus held that the claim for injunctive relief was the equivalent of a monetary payment, and therefore a "debt" or a "liability on a claim" and thus dischargeable in bankruptcy. 469 U.S. at 276-77, 282-83, 15 ELR at 20121-22, 20123. Pursuant to Kovacs, "[I]f a cleanup order entered under code 362(b)(5) requires that the debtor spend money, a determination must be made as to whether the cleanup order is a 'money judgment' under the Kovacs definition." In re Torwico Elec., 131 B.R. 561, 571 (Bankr. D.N.J. 1991) (footnote omitted). Courts have construed Kovacs to hold that "where a creditor has the option of converting an injunction into a right to monetary compensation … such an obligation must be regarded as a dischargeable claim." In re Chateaugay Corp., 112 B.R. 513, 523, 20 ELR 21269, 21273 (Bankr. S.D.N.Y. 1990), aff'd, 944 F.2d 997, 21 ELR 21466 (2d Cir. 1991). It has been suggested that Kovacs can be read to hold that all claims for money damages under CERCLA § 107 are dischargeable. Drabkin, supra note 4, at 10173.

47. In re Chateaugay Corp., 112 B.R. 513, 524, 20 ELR 21269, 21273 (Bankr. S.D.N.Y. 1990), aff'd, 944 F.2d 997, 21 ELR 21466 (2d Cir. 1991).

48. 42 U.S.C. § 9607, ELR STAT. CERCLA 024.

49. See In re Allegheny Int'l, 126 B.R. 919 (Bankr. W.D. Pa. 1991); United States v. Union Scrap Iron & Metal, 123 B.R. 831 (Bankr. D. Minn. 1990). The court in Allegheny was bound by the Third Circuit's decision in In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160 (1985), which had held that under state law, if the event giving rise to the claim occurred prepetition, but the claim for contribution was asserted postpetition, the cause of action arose at the time the claim was brought, so that the claim was a postpetition claim.

50. 40 C.F.R. pt. 300 app. B (1992).

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

52. One commentator has noted a "special danger" for those who hold contingent environmental claims for contribution or reimbursement:

Under Code Section 502(e), claims for contribution or reimbursement of an entity that is liable with the debtor may be disallowed to the extent that such claim is contingent as of the time of allowance or disallowance of such claim. This provision may affect claims like those of other PRPs which are jointly and severally liable with the debtor under CERCLA.

Mirsky et al., supra note 2, at 652-53.

53. 123 B.R. 831 (Bankr. D. Minn. 1990).

54. Interestingly, the court does not cite CERCLA § 107 as a basis for the decision. The court framed the question as "[s]hould a party's liabilities for environmental damage be discharged in bankruptcy when the harm was done pre-petition, but it was not known at the time to the EPA that the party was potentially responsible, and when CERCLA liability could not be incurred until after bankruptcy reorganization was complete?" Id. at 835.

55. Id. at 838.

56. Id. at 832.

57. Id. at 833.

58. In September 1983, the site was placed on the NPL. In March 1985, EPA conducted a site assessment and by January 1986, it had finished stabilization work. In October 1987, the state of Minnesota used Superfund money to conduct a remedial investigation/feasibility study at the site, and in April 1988, EPA conducted its removal action. In March 1990, EPA issued its record of decision and concluded that no further action was necessary at the site. Id.

59. Id.

60. Id. at 834.

61. Id. at 833-34.

62. Id. at 834.

63. Id.

64. Id. In this case, the debtor had not disclosed its potential CERCLA liability during the bankruptcy proceedings, and the EPA did not know of Taracorp's potential liability. Under slightly different facts, a state environmental agency had notice that it was a creditor in the bankruptcy proceedings, but did not have notice of the environmental claim allegedly discharged, and it had notice that the debtor was a PRP, but not in time to take any action with regard to the debtor before the completion of bankruptcy proceedings and discharge. Sylvester Bros. Dev. Co. v. Burlington N. R.R., 133 B.R. 648, 653, 22 ELR 20596, 20598 (Bankr. D. Minn. 1991). The court in Sylvester held such distinctions meritless, stating: "When the debtor has not disclosed its potential [state and federal environmental] liabilities in long-since closed bankruptcy proceedings, and the governmental agency has not had actual knowledge of the potential claim in sufficient time to file a claim in those proceedings, the potential [state and federal] liability is not discharged." 133 B.R. at 653, 22 ELR at 20598.

65. 123 B.R. at 834.

66. Id. at 835-36.

67. Id. at 836.

68. Id. at 836.

69. It is unclear whether Taracorp argued that EPA had actual knowledge of its involvement at the Union Scrap site. The opinion first indicates that Taracorp argued that EPA had "actual or presumed" knowledge of its involvement at the Union Scrap site, but later in the same paragraph the court states: "It is important to note that Taracorp does not suggest that the EPA had actual knowledge of its role in the [Union Scrap] site." 123 B.R. at 836. The court left open the question of whether a more complete disclosure, listing the Union Scrap site, would have entitled Taracorp to dismissal of EPA's claims against it. Id.

70. Id.

71. Id. at 837.

72. Id. at 839.

73. 127 B.R. 27 (9th Cir. BAP 1991).

74. Id. at 29-30.

75. Id. at 30.

76. Id.

77. Id.

78. Id.

79. Id.

80. The court noted that this was the holding of In re M. Frenville, 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160 (1985). The Jensen court noted that Frenville had been "roundly criticized" by other courts and declined to follow its reasoning. 127 B.R. at 30. The Jensen court also noted without discussion that the court in Union Scrap had reached this same conclusion without citation to Frenville. Id.

81. 127 B.R. at 31.

82. The court appeared particularly concerned with the accrual of the claim in the context of a Chapter 7 bankruptcy, and feared manipulation would result:

The creditor, aware of a debtor's precarious financial situation, will delay expenditures in anticipation of the debtor's bankruptcy, thereby preventing discharge of the creditor's claims. Additionally, debtors having attentive creditors will be denied the benefit of bankruptcy's fresh start, although enjoyed by other debtors similarly situated but whose creditors are less well-informed. Such untenable results cannot be endorsed.

Id.

83. Id.

84. Id. at 31-32.

85. 57 B.R. 680 (Bankr. S.D.N.Y. 1986).

86. 63 B.R. 986 (Bankr. E.D. Va. 1986).

87. 127 B.R. at 33.

88. Id. at 33.

89. In In re Dant & Russell, Inc., 853 F.2d 700, 18 ELR 21312 (9th Cir. 1988), the court declined to hold that under CERCLA, private claims against the debtor could be accorded administrative expense priority. The Jensen court quoted approvingly from that case: "Although [the creditor] asserts that public policy considerations entitle its claims for cleanup costs to administrative expense priority, we acknowledge that Congress alone fixes priorities…. Courts are not free to formulate their own rules of super or sub-priorities within a specifically enumerated class." Jensen, 127 B.R. at 33, quoting Dant & Russell, 853 F.2d at 709, 18 ELR at 21317 (citation omitted).

90. 127 B.R. at 33.

91. Id.

92. 944 F.2d 997, 21 ELR 21466 (2d Cir. 1991).

93. In re Chateaugay Corp., 112 B.R. 513, 20 ELR 21269 (Bankr. S.D.N.Y. 1990). In that case, the district court held that unless a prepetition release or threatened release of hazardous waste has occurred, which is a constituent element of CERCLA liability justifying governmental action, no prepetition event exists as to which any postpetition contingent injury can properly attach. Thus, "in the absence of a pre-petition release or threatened release of hazardous waste, any subsequent liability for environmental cleanup or remedial action is not dischargeable in bankruptcy." Id. at 521, 20 ELR at 21271 (footnote omitted).

94. 944 F.2d at 999, 21 ELR at 21466 (citing In re Chateaugay Corp., 112 B.R. at 513, 20 ELR at 21269).

95. Id., 21 ELR at 21467.

96. Id., 21 ELR at 21467.

97. 944 F.2d at 1002, 21 ELR at 21468. The court noted:

A determination that the CERCLA response costs ultimately to be incurred are not now claims might impair the prospects of achieving a viable reorganization, with the result that the debtor, instead of reorganizing, liquidates under chapter 7 or dissolves under state law, and the assets of the corporation are either unavailable for environmental cleanup costs because such costs are not yet "claims" entitled to pro rata payment, or available only to the limited extent that such costs are considered unaccrued claims for which reserves must be established under state law.

Id., citing THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 51 (1986).

98. 944 F.2d at 1002, 21 ELR at 21468.

99. 944 F.2d at 1003, 21 ELR at 21468, citing THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 34-35 (1986).

100. 944 F.2d at 1004, 21 ELR at 21469 (citations omitted).

101. Id. (citations omitted).

102. Id.

103. Id., citing In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff'd mem., 646 F.2d 193 (5th Cir. 1981).

104. 112 B.R. at 519-21, 20 ELR at 21271-72. Although the district court examined briefly whether the EPA's claim was analogous to a claim stemming from a contractual relationship or the relationship between a tortfeasor and an injured party, 112 B.R. at 520, 20 ELR at 21271, the district court affixed EPA's ability to assert a claim on whether the debtor was responsible for a prepetition release or threatened release of hazardous substances. 112 B.R. at 521, 20 ELR at 21272.

105. 944 F.2d at 1005, 21 ELR at 21469.

106. Id.

107. Id. The court in Chateaugay noted that its holding was in line with the bankruptcy appellate panel's decision in Jensen, 127 B.R. 27, 33 (9th Cir. BAP 1991).

108. 944 F.2d at 1005, 21 ELR at 21470, citing Ohio v. Kovacs, 469 U.S. 274, 285-86, 15 ELR 20121, 20124 (1985) (O'Connor, J., concurring).

109. 944 F.2d at 1005, 21 ELR at 21470.

110. 139 B.R. 397, 22 ELR 20783 (Bankr. N.D. Tex. 1992).

111. Id. at 399, 22 ELR at 20784.

112. Id. at 401, 22 ELR at 20785. With respect to these sites, the United States claimed that the Debtors had arranged prepetition for the disposal of hazardous substances; a release or threat of release of a hazardous substance occurred prepetition; and EPA first incurred response costs prepetition for each of these sites. 139 B.R. at 403, 22 ELR at 20785. In addition, through CERCLA, EPA suspected Debtors' involvement in other sites, but claimed a "lack of full information and its prosecutorial discretion" as reasons for not listing the 13 or more other sites in its proof of claim. Id., 22 ELR at 20786.

113. Id. at 401-02, 22 ELR at 20785.

114. Id. at 400-01, 22 ELR at 20784.

115. Id. at 401, 22 ELR at 20785.

116. Id. Also at issue was a threshold jurisdictional question whether the court had jurisdiction to address the Debtors' liability at the Unlisted Sites. The United States claimed the court lacked jurisdiction while the Debtors argued that the court had subject matter jurisdiction. Id.

117. Id. at 403-04, 22 ELR at 20786.

118. Id. at 404, 22 ELR at 20786.

119. Id.

120. Id. at 405, 22 ELR at 20786, citing United States v. Union Scrap Iron & Metal, 123 B.R. 831, 835 (Bankr. D. Minn. 1990); In re UNR Indus., Inc., 29 B.R. 741, 745-46 n.4 (Bankr. N.D. Ill. 1983).

121. Id. at 405, 22 ELR at 20787 (citing 11 U.S.C. § 101(4)).

122. Id. at 405-06, 22 ELR at 20787, quoting In re Chateaugay Corp., 944 F.2d 997, 1005, 1006, 21 ELR 21466, 21469, 21470 (2d Cir. 1991).

123. Id. at 406, 22 ELR at 20787, citing Chateaugay, 944 F.2d at 1000, 1005, 21 ELR at 21467, 21469.

124. 944 F.2d at 1005, 21 ELR at 21469.

125. 139 B.R. at 407, 22 ELR at 20787 (footnotes omitted).

126. Id. at 407-08, 22 ELR at 20788 (footnotes omitted). The National Gypsum court focused on fairness, finding such a standard expressly within the contemplation of the Code and its requirement of adequate notice pursuant to 11 U.S.C. §§ 521, 523, and Rule 2002 of the Rules and Forms of Practice and Procedure in Bankruptcy, and also adopted the use of the word "fairness" as that term was used by the Second Circuit in Chateaugay. 139 B.R. at 407 n.26 & n.22, 22 ELR at 20787-88 n.26 & n.22.

127. Id. at 408, 22 ELR at 20788. Subsequently, a claimant who had actual knowledge of a hazardous waste site's condition, and had the ability to inspect the site but did not, was held to have "fairly contemplated" the claims so that prepetition releases were prepetition claims dischargeable in bankruptcy. NCL Corp. v. Lone Star Bldg. Ctrs., 144 B.R. 170, 177 (Bankr. S.D. Fla. 1992).

128. Id. at 409, 22 ELR at 20783.

129. The court further noted that "[t]he necessity of the dischargeability is not determinative of when a CERCLA claim arises for bankruptcy purposes. Furthermore, this Court has previously held that the CERCLA claims are potentially so large as to interfere with Debtors' reorganization if not estimated." 139 B.R. at 412 & n.37, 22 ELR at 20789 & n.37.

130. FED. R. BANKR. P. 3003(c)(2).

131. 139 B.R. at 412, 22 ELR at 20790. The court also addressed two other issues. First, the court, relying on Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 16 ELR 20278 (1986), held that postpetition response costs incurred as a result of the Debtors' prepetition conduct were entitled to administrative expense priority, so long as such costs "were necessitated by conditions that posed an imminent and identifiable harm to the environment and public health." 139 B.R. at 413, 22 ELR at 20790. Second, the Debtors argued that in the bankruptcy context, their liability should be fixed at a sum reflecting their equitable share of liability; joint and several liability would undermine the equitable policies underpinning bankruptcy to the detriment of the Debtors and the creditors. 139 B.R. at 414, 22 ELR at 20790. The court disagreed, noting that the judicially imposed joint and several liability had been congressionally endorsed through the enactment of the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, which expressly provided for de minimis settlements as well as for the right to contribution among responsible parties. 139 B.R. at 414-15, 22 ELR at 20790; see also 42 U.S.C. § 9622(g), CERCLA § 122(g), ELR STAT. CERCLA 058 (de minimis settlements); 42 U.S.C. § 9613(f), CERCLA § 113(f), ELR STAT. CERCLA 039 (contribution).

132. 139 B.R. at 408, 22 ELR at 20788 (footnote omitted).

133. Id. at 409, 22 ELR at 20788.