Erman v. Lox Equipment Co.

No. C 91-1257 BAC (142 B.R. 905, 35 ERC 1526) (N.D. Cal. July 1, 1992)

The court holds that the postpetition purchasers of a bankruptcy debtor's contaminated property are not barred by the Bankruptcy Code's automatic stay provision from seeking damages under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) from the debtor for the environmental contamination at the site. The contaminated property was purchased from the debtor-in-possession in April 1987, nearly two months after the owner filed its Chapter 11 reorganization petition in bankruptcy. The court holds that because the bankruptcy judge crossed out the "exclusive jurisdiction" language in the petition upon signing the proposed confirmation order, the debtor's motion to dismiss the purchasers' complaint must be denied. The court next observes that because the purchasers' complaint could not have been commenced against the seller prior to its filing for bankruptcy, the applicability of the Bankruptcy Code's automatic stay depends on whether the court finds that the purchasers' CERCLA claim arose prepetition. The court, applying the policy considerations in Juniper Development Group v. Kahn, 73 B.R. 494 (Bankr.D.Mass. 1987), holds that the purchasers' claim against the debtor arose postpetition when the contaminated facility was transferred, and thus, the automatic stay does not apply. A debtor should not be allowed to circumvent CERCLA by virtue of a postpetition transfer of contaminated property, particularly where there are allegations that the debtor had knowledge of the environmental problems that it did not disclose to the purchaser.

Counsel for Plaintiffs
Matthew Righetti, Paul A. Montesanti
The Righetti Law Firm
4900 Hopyard Rd., Ste. 220, Pleasanton CA 94588
(510) 460-0900

Counsel for Defendants
Garrett E. Mulrooney, Gordon J. Apple
Maun & Simon
2300 World TradeCtr., St. Paul MN 55101
(612) 229-2900

CAULFIELD, District Judge

[23 ELR 20171]

CAULFIELD, District Judge.

This matter comes before the court on the motion of Defendant Richmond Tank Car Company ("RTC") to dismiss the second amended complaint for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) or, alternatively, for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). Oral argument was heard on June 19, 1992. After careful consideration of the parties' oral and written arguments and the record as a whole, the court hereby DENIES RTC's motion to dismiss.

BACKGROUND

Plaintiffs are shareholders of Union Rebar, Inc., which was dissolved in 1989. Defendant RTC is a debtor-in-possession under Title 11 of the Bankruptcy Code, having filed its bankruptcy petition in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") on February 20, 1987. RTC is winding down its affairs pursuant to its First Amended Plan of Reorganization, which the Bankruptcy Court confirmed on February 23, 1990.

This case arises out of Union Rebar's purchase in April 1987 of a cryogenic manufacturing and repair facility in Livermore, California (the "Livermore Facility"). The Livermore Facility was purchased from Richmond Lox Equipment ("RLE"), which was then owned by RTC. On October 30, 1987, pursuant to an order of the Bankruptcy Court, RTC sold all of the stock, assets and liabilities of RLE to Minnesota Valley Engineering Company ("MVE"). MVE was sold to Worldwide Cryogenics Holding Corporation, Inc. in June 1989.

Plaintiffs filed this action on April 26, 1991. On March 6, 1992, plaintiffs filed their second amended complaint adding RTC as a defendant. Plaintiffs allege that RTC is liable under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") for the environmental condition of the Livermore Facility and pray for damages in excess of $ 100,000.

SUBJECT MATTER JURISDICTION

RTC argues that as of February 20, 1987, when RTC filed its bankruptcy petition, all of its property became subject to the exclusive jurisdiction of the District Court for the Southern District of Texas pursuant to 28 U.S.C. § 1334(d). That exclusive jurisdiction was referred to the Bankruptcy Court under 28 U.S.C. § 157(a), and, RTC argues, continues until the bankruptcy case is closed.

The court need not determine whether RTC is theoretically correct. Even assuming the Bankruptcy Court would otherwise have exclusive jurisdiction, it has been relinquished in this case. When the Bankruptcy Judge signed the proposed Confirmation Order, she crossed out the "exclusive jurisdiction" language and specifically ordered that jurisdiction was to be concurrent. Accordingly, RTC's motion to dismiss for lack of jurisdiction is hereby DENIED.

AUTOMATIC STAY

Alternatively, RTC moves that the [23 ELR 20172] second amended complaint be dismissed as to RTC for failure to state a claim. RTC argues that this action violates the automatic stay provisions of the Bankruptcy Code and therefore is void as to RTC. See In re Schwartz, 954 F.2d 569 (9th Cir.1992) (violations of the automatic stay are void, not voidable). The court disagrees.

Section 362(a)(1) of the Bankruptcy Code provides an automatic stay "applicable to all entities" of the following:

(1) the commencement or continuation . . . of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title. . . .

11 U.S.C. § 362(a)(1).¹ Clearly, this action could not have been commenced against RTC prior to the filing of its bankruptcy petition in February of 1987, because the Livermore Facility was not sold to Union Rebar until two months later in April of 1987. Thus, the applicability of the automatic stay depends on whether the court finds that plaintiffs' CERCLA claim against RTC arose pre-petition.

Several courts have noted that "the policy of giving debtors a 'fresh start' . . . may conflict with the policy of protecting and removing hazardous wastes from the environment." Juniper Development Group v. Kahn (In re Hemingway Transport, Inc.), 73 B.R. 494, 499 (Bankr.D.Mass. 1987). Although the Supreme Court has not ruled on the precise issue of when a CERCLA cause of action arises for bankruptcy purposes, it has indicated that the two objectives should be reconciled, if possible. Id. (citing Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 106 S. Ct. 755, 88 L. Ed. 2d 859 (1986); Ohio v. Kovacs, 469 U.S. 274, 105 S. Ct. 705, 83 L. Ed. 2d 649 (1984)).

In determining when plaintiffs' CERCLA claim arose for bankruptcy purposes, the court finds persuasive the reasoning set forth in Juniper. In that case, the court determined when the CERCLA claim arose for purposes of deciding whether the clean-up costs were administrative expenses under the Bankruptcy Code. The debtor transferred real property to a third party, Juniper, post-petition and the property was later determined to be contaminated. The court held that although the toxic wastes were dumped on the subject property prepetition, the cause of action under CERCLA arose as to Juniper when the property containing the waste was transferred to Juniper.

The policy considerations found to be significant in Juniper are also integral to this decision. As noted in Juniper:

Not only is the Court moved by the concept of fairness emphasized by the Supreme Court and the First Circuit Court of Appeals, it is moved by its awareness that [other courts have]frowned on the notion of a debtor attempting to transfer its liability or potential for liability under state or federal environmental laws.

Juniper at 505. A debtor should not be allowed to circumvent CERCLA by virtue of a post-petition transfer of property, particularly where there are allegations that the debtor had knowledge of the environmental problems which it did not disclose to the purchaser. Accordingly, the court finds that plaintiffs claim against RTC arose post-petition when the Livermore Facility was transferred. Therefore, the automatic stay does not apply.

The Bankruptcy Appellate Panel's decision in In re Jensen, 127 B.R. 27 (Bankr. 9th Cir.1991) does not warrant a different result. The Jensen case held that the California Department of Health Services' claim for clean-up costs arose pre-petition, because the debtor's conduct giving rise to the claim, i.e., the release of hazardous waste, occurred pre-petition. The court so held despite the fact that the clean-up costs themselves were incurred post-petition. Although both Jensen and the case at bar involve the pre-petition release of hazardous waste, Jensen involved a claim by a governmental agency, the California Department of Health Services, whereas this case involves a claim by a post-petition transferee of the contaminated property. Thus, the cases are factually distinguishable.

Moreover, Jensen is not necessarily inconsistent with Juniper. Indeed, the Juniper court noted that although the debtor may have incurred the potential for liability pre-petition, its liability to Juniper under Section 107(a)(2)(B) of CERCLA arose post-petition. Were the court to apply the Jensen analysis that the CERCLA claim arose based upon the debtor's conduct, the relevant conduct in this case would be the post-petition transfer of the Livermore Facility.

CONCLUSION

For the above reasons, the court DENIES RTC's motion to dismiss in its entirety.

IT IS SO ORDERED.

1. Contrary to RTC's assertion, Bankruptcy Code Section 362(a)(3), which stays "any action to obtain possession of property of the estate" does not apply. This action was instituted to liquidate a contingent claim, not to collect on a judgment or otherwise obtain possession of property of the estate. If plaintiffs are successful in obtaining a judgment against RTC, however, section 362(a)(3) may then be applicable. See In re M. Frenville Co., 744 F.2d 332, 338 n. 11 (3rd Cir.1984), cert. denied, 469 U.S. 1160, 105 S. Ct. 911, 83 L. Ed. 2d 925 (1985).