Office of
Solid Waste and
Emergency Response
SEPA
DIRECTIVE NUMBER:
9832.7
TITLE:
Guidance Regarding CERCLA Enforcement
Against Bankrupt Parties
APPROVAL DATE: May 24, 1984
EFFECTIVE DATE: May 24, 1984
ORIGINATING OFFICE: OECM
Q FINAL
D DRAFT
LEVEL OF DRAFT
DA Signed by AA or DAA
D B Signed by Office Director
DC Review & Comment
REFERENCE (other documents):
S \NER OS WER OS WER
DIRECTIVE DIRECTIVE Dl
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United States Envite-:-:'
Wai.'...-.,,..:... - -.--
OSWER Directive Initiation Request
1. Directive Number
2. Originator Information
Name of Contact Parson
John Fleuchaus
ffittfe
°6'ifcM
^^^K^P^AVd^iu^VkDfir
3. Title
Guidance Regarding CERCLA Enforcement Against Bankrupt Parties
4. Summary of Directive (Include trie! statement of purpose)
To Assist the Regions in Developing CERCLA Enforcement Actions
against'Bankrupt Parties. The guidance is intended to encourage
aggressive enforcement against insolvent parties and insure national
consistency in current and future bankruptcy cases brought by the Agency
5. Keywords
Bankruptcy,
6a. Does this Directive Supersede Previous Directive^)? Jl Yes (Xj No What directive (number, title)
b. Does It Supplement Previous Directive**)?
Yes
No What Directive (number. title)
7,; Draft Level
DA Signed by AA/DAA p3 B Signed by Office Director LJ C
For Review & Comment
LJ In
Development
This Request Meets OSWER Directives System Format
8. Signature of Lead Office Directives Coordinator
9. Name and Title of Approving Official
Data
3-fe-
87
0616
OSWER OSWER OSWER
DIRECTIVE DIRECTIVE i
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9832,7
Attachment VIII
Guidance Regarding CERCLA Enforcement
Against Bankrupt Parties
5/24/84
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9832,7
*
\ UNITED STATES ENVIRONMENTAL PROTECTION AUENCY
/ WASHINGTON. DC. 20460
MAY £4 1984
OP
MEMORANDUM
SUBJECT: Guidance Regarding CERCLA Enforcement^Against
Bankrupt Farcies
FROM: Courtney M. Price
Assistant Administrator for'Enforcement
and Compliance Monitoring
TO: Regional Administrators, l-X
Regional Counsels, I-X
Lee M. Thomas, Assistant-Administrator for
Solid Waste and Emergency Response
The attached guidance has been developed to assist the
Regions in developing CERCLA enforcement actions against bankrupt
parties. The guidance is intended to encourage aggressive
enforcement against insolvent parties and insure national
consistency in current and future bankruptcy cases, brought by
the Agency.
The guidance provides.- 1) an overview and summary of the
Bankruptcy Reform Act and existing bankruptcy case lav; 2) a
discussion of enforcement theories available to the Agency to
pursue insolvent parties under CERCLA; and 3) references to
current bankruptcy pleadings and appeals.filed by the Agency.
Pages 24 and 25 of the attached guidance describe referral
procedures for a proof of claim in bankruptcy. A bankruptcy
referral will ordinarily be processed in the tame way as other
hazardous waste referrals. ' However, expedited.. Headquarters and
DOJ concurrence and abbreviated referral packages may be neces-
sary and acceptable if required to meet deadlines in bankruptcy
eases.
If you or your staff have any further questions regarding
CERCLA enforcement against bankrupt parties, please contact
Kirk Sniff at (FTS) 382-3050 or Heidi Hughes.at (FTS) 382-3109.
Attachment
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9832,7
TABLE OF CONTENTS
PAGE
<
I. -INTRODUCTION 1
A. .Scope and Duration of the Problem 1
B. When to Proceed Against a Bankrupt
Party 2
1. Probability of Recovering the Cost
Litigation. 2
2. Deterrence of Frivolous or Fraudulent
Bankruptcy Filings 3
II. THE BANKRUPTCY CODE: An Overview 4
A. Organization of the Code. 4
B. Voluntary vs. Involuntary Bankruptcy 5
III. CERCLA AND BANKRUPTCY ACTIONS 6
A. Proceedings in District Court or
Bankruptcy Court 6
B. Cost Recovery Under Section 107 of CERCLA 11
1. Distribution of Assets 12
(a) Secured Creditors .. 12
Cb) Priority Structure 13
2. Theories of Recovery Beneficial to
the United States 15
(a) Administrative Costs 15
(b) Recovery Under Section 506(c)
of the Code ... 17
(b) Equitable Liens 18
(d) Restitution ..v 18
C. Other Matters in Bankruptcy and
Insolvency Cases ;.. 19
1. Abandonment of Property 19
2. State -Involvency Laws 23
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9832,7
INFORMATION,REGARDING CERCLA
ENFORCEMENT AGAINST BANKRUPT PARTIES
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983-2,7
I. INTRODUCTION
and Duration of the Problem
The U.S. E.P.A. is charged with the duty of managing and
replenishing the limited Superfund to the greatest extent possible.
While our enforcement activities under the Comprehensive Environ-.
mental Response, Compensation, and Liability Act (CERCLA) will
generally be directed against solvent parties, there have been
and will, continue to be times when a responsible party declares
bankruptcy.
This memorandum sets forth enforcement options for dealing
t
with bankrupt parties. It includes guidance on when to proceed
against bankrupt parties. It also discusses the theories and
procedures for recovering cleanup costs from bankrupt parties
under both federal bankruptcy law and common law theories ot
recovery. Finally, it is intended to serve as a bankruptcy infor-
mation clearinghouse, listing materials available from OECM-Wastr'e
on bankruptcy and related subjects.
In the long run, the requirements of the Resource Conservation
and Recovery Act (RCRA), particularly the closure and financial
requirements, should, insure the orderly closure of storage or
9-
disposal facilities. Nonetheless, this will not always occur.
Thus, while the purpose of this memorandum is to aid the EPA official
enforcing CERCLA, much of it will be relevant to future efforts by
EPA to require bankrupt owner-operators of. storage or disposal
facilities, generators, and transporters to contribute as much as
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- 2 -
IV. PROCEDURES 24
A. Rules of Bankruptcy Procedure.' 24
B. Filing Proof of Claims 25
C. Pleadings 27
D. Appeals 27
E. Federal Bankruptcy Court
Jurisdiction 28
V. THEORIES OF INDIVIDUAL LIABILITY 30
A. Personal Involvement in Acts
and Omissions.. 31
B. Piercing the Corporate Veil ... 33
C. Personal Jurisdiction in Cases Involving
Corporate Officers or Shareholders 35
VI. INDEX OF RESOURCES 36
PLEADINGS 36
Proofs of Claim 36
Other Briefs and Motions 36
ORDERS. 37
RESOURCES 38
RULES 38
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- - -2- 9832.7
possible co the cleanup of the hazardous conditions they have
created.
B. When to Proceed against a Bankrupt Party
. .
In making the determination of when to proceed against
bankrupt parties the Regions should balance the likelihood of
recovering assets from the estate of the insolvent party against
the extent of Agency resources required to prosecute bankrupt
parties. The Regions should also evaluate the effect that pursuing
parties who have filed bankruptcy will have in deterring future
frivolous or fraudulent bankruptcy claims. -
1. Probability of Recovering the Cost Litigation
Two' questions should be answered by the Regions to determine
the efficient use of enforcement resources and the extent to which
the Agency should pursue bankrupt parties in CERCLA actions.
The first question to answer in determining whether to
proceed against a bankrupt party is related to the scope of the
r*se: Are there other solvent parties in the case? If so, CERCLA's
purposes may be served by proceeding against them alone. In general,
actions against bankrupt parties such as generators lacking assets
should not be undertaken when there are other solvent parties.
The second question that oust be answered by the Regions
relates to the value of the case: Are there assets tn the estate
of the bankrupt party? The Assistant United States Attorney in
the District where the Bankrupty Court sits may be able to send
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.... 9.832,7
-3-
copies of the case docket to an EPA attorney.^/ Depending on the
tage of proceedings, the docket say include an itemization of
assets. It may be pointless to proceed if there are few assets.
The position of the other creditors should also be considered.
In general, EPA and the Department of Justice should maximize
its use of attorney resources by pursuing bankrupt responsible
parties when there appear to be assets in the estate, and there
are either few secured creditors with relatively limited claims or
some basis exists for recovering funds from the estate despite the
presence of secured creditors.£/
2. Deterrence of Frivolous or Fraudulent Bankruptcy Filings
On occasion, EPA may elect to pursue a bankrupt responsible
party even when it appears unlikely that we will recover sizeable
anounts from the Bankruptcy Court. The Regions should pursue bankrupt;
actions where the case may serve as a deterrent to other parties
who would otherwise consider escaping liability 'through a declaration
1/ The most common form of bankruptcy is liquidation under
~~ Chapter 7 of the Bankruptcy Reform Act of 1978 (11 U.S.C.
S101 ec seq.) (hereinafter cited as "the Bankruptcy Code").
However, several CERCLA cases have involved responsible parties
in Chapter 11 reorganization (see United States, et al. v. Johns
Manville Sales Corporation, et al.. Civil No. 81-299-D).. Th"e
distinctions between a Chapter 7 liquidation and a Chapter 11
reorganization are discussed infra. Unless otherwise stated the
discussion in this memorandum concerns Chapter 7 liquidation
proceedings.
2/ This evaluation should be documented in the case referral
~" package prepared by the Region. The Department of Justice
has requested that all bankruptcy referrals include a "quick look"
financial assessment of the potential defendant's assets (i.e. a
summary of assets listed in the bankruptcy papers, a Dunn and
Bradstreet report, etc.)
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9832*7
-4-
i ~
of insolvency. For instance, through' the prosecution of bankrupt
parties*the Agency could provide an effective deterrent to under-
financed "fly-by-night" companies who see bankruptcy as a way to
avoid their liabilties to the federal government. Similarly, it
is important that responsible parties are treated equitably. For
example, in a case involving a bankrupt site owner/operator
whose actions contributed significantly to the waste condition,
EPA could pursue the bankrupt site owner to further the enforcement
policy goal of treating responsible parties even-handedly and
equitably.
11. THE BANKRUPTCY.CODE: An Overview
A. Organization of the Code
The Bankruptcy Reform Act of 1978 (11 U.S.C. S 101 e_t sec.
(1978)) replaced and liberalized the Act of 1898 (11 U.S.C. S 1 et ;
seq. (1898)). The new act, commonly called the Bankruptcy-Code,
consists of eight chapters. Those relevant to EPA claims are:
Chapters 1, General Provisions; 3, Case Administration; 5, Creditors.
and Debtor, and the Estate; 7, Liquidation; mnd 11, Reorganization.
4
Chapters 1, 3, And 5 set forth; definitions and procedures
common to all bankruptcies. The provisions of Chapters 7 and 11
set forth the specific procedures for liquidation^ and reorganiza-
tions. Under « Chapter 7 "straight bankruptcy" or "liquidation,"
a debtor is granted a discharge of all debts but must liquidate
all assets. A Chapter 7 bankruptcy is administered by a trustee
appointed by the Bankruptcy Court. Under Chapter 11, there is no
liquidation of assets. Rather the goal of this chapter is to <
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9832,7
-5-
reorganize the obligations of the debtor in order to give the
debtor a "fresh start" in carrying out his business. The debtor
and his creditors oust arrive at a reorganization plan whereby a
hare of the debts is paid to the different classes of creditors
on a schedule. The debtor normally administers the reorganization.
B. Voluntary vs. Involuntary Bankruptcy
Under either Chapter 7 or 11, the debtor himself nay
initiate a voluntary action.3/ The debtor does not have to be
insolvent^/ and no formal adjudication of bankruptcy is required
ir. "rluntary cases. An order for relief is automatically entered
by the Bankruptcy Court in a voluntary case.
An involuntary petition under Chapter 7 or 11 oay.be filed
against most debtors by certain creditors. The debtor may contest
the petition, however, and the issue of whether the debtor is or is
not insolvent will then be adjudicated. The Bankruptcy Court will
only enter an order for relief if the debtor is not generally paying
u^ j-w.. -- »-K»y become due, or if a custodian, within the last 120
days before the filing of the petition, has taken possession of or
has been appointed by Che Court to take charge of substantially all
of the debtor's property,5/
I/ 11 U.S.C. S 109(b).
4/ Insolvency in bankruptcy 'law is a term of art derived from
~~ common law. If a corporation or individual claims insolvency
under the common law of a State (as opposed to filing under the
federal .Bankruptcy Code), he is generally only deemed insolvent if
he is not paying his debts as they become due and if a receiver or
other custodian has been appointed by the Court, to take charge of
his property.
5/ 11 U.S.C. I303(h)
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.6- 9832.7
III. . CERCLA AND BANKRUPTCY ACTIONS
Section 101 of the Bankruptcy Code defines "creditor" as:
(A) [an] entity that has a claim against
the debtor that arose at the time of or before
the order for relief [dismissal decision -of
Bankruptcy Court which follows the approval of
the trustee's Final Report] concerning the
debtor ...
Under section 101 of the 1978 Act, a "claim" is a:
(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
(B) right to an equitable remedy for breach
of performance if such breach gives rise .to
a right to payment, whether or not such
right ... is reduced to judgment, fixed,
contingent, matured, unmatured, disputed,
secured, or unsecured. . *
The statute clearly states that a claim need not be premisea
on a civil action or a final judgment; it is sufzicient if the
claim is based on a simple right to payment as a result of work
completed and cost incurred. Thus, the United States need not
have received a judgment under CERCLA before making a claim againsc
* bankrupt party. It is enough that the United States has a right
to payment or an injunctive claim. The United States' right to
payment can be baaed upon CERCLA Sections 107 and/or 104, or other
authorities. Thus, the United States can proceed to file a claim
in Bankruptcy Court. ' ;
i
A. Proceedings in District Court or Bankruptcy Court.
An important question that must be resolved in each case is
whether to initiate proceedings in District Court or Bankruptcy
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.... 9832,7
-7-
Cuurt. An ordinary creditor muse proceed in Bankruptcy Court
because under the automatic stay provision (Section 362 of the
Bankruptcy Code, 11 U.S.C. $362(a)), the filing of a Chapter 7 or
»
s-
Chapter 11 petition operates as an automatic stay of any proceedings
against the debtor. The stay halts the following:
(1) the commencement or continuation ... of a
judicial, administrative, or other proceeding
against the debtor that was or could have beer.
commenced before the commencement of che case
under this title;
(2) the enforcement, against the debtor or against
property of the estate, of a judgment obtainea
before the commencement of the case ...
(3) any act to obtain possession of property of
the estate or of property from the estate;
(4) any act to create, or enforce any lien
against .property of the estate;
(5) any act to create, perfect, or enforce against
property of the debtor any lien to the extent
that such lien secures a claim that arose
before the commencement of che case ...;
(6) any act to collect, assess, or recover a claim
against the debtor that arose before the
commencement of che case ...; and,
(7') che teeoff of any debt owing co che debtor ...
In a number of situations, however, Che filing of a petition
does not operate as a stay, including (Scccion 363(b)):
f-
(4) ... Che commencement or continuation'of
an action ... by a governmental unit Co
enforce such governmental un.it's policy or
regulatory power;
(5) ... che enforcement of a judgment other Chan
a money judgment, obtained in an action or
proceeding by a governmental unit co enforce
such governmental unit's police or regulatory
power.
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9832.7
-8-
The purpose of these exceptions, as articulated in the House
Report accompanying the Bankruptcy Code, is Co permit governmental
authorities to pursue actions to protect public health and safety^/
and to allow governmental units to sue or continue suit against a
debtor to abate violations of environmental protection lavs.?/
The exception in Section 361(b)(4), as interpreted by the
government, is broad. It matters not what is sought: The government
may commence or continue any police or regulatory action. This
includes actions for money (CERCLA $107) and actions for injunctive
relief (CERCLA §106). £/ At the stage of seeking to execute any
6/ H.R. Rep. No. 95-595 95th Cong., 2d sess. 343 (1978); 95.
Cong. Rec. H 11092 (Sept. 28, 1978)
y H.R. Rep. No. 95-595. at 343. See also; In re Bay Bridge
~" Inn..Inc. v. New York State Liquor Authority. 94 F.2d 555
(2d Cir. 1938); In re Colonial Tavern v. Charles L. Byrne, 420 F.
Supp. 44 (D. Mass. 1976} and In re Dolly Madison. 504 F.2d. 499
(3d. Cir. 1974) [held; ar bankruptcy court should not interfere with
governmental regulatory programs]; Aaron, Bankruptcy Stays tor
Environmental Regulation; Harvest of Cocmerical Timber as an
Introduction to a Clash of Policies. 12 Envfl. Law 1. 5-8 (19fel)
I-..*.£Uf.tcy Law - When is a Governmental Unit's Action to Enforce
its Policy or Regulatory Power Exempt from the Automatic Stay
Provisions of Section 362?. 9 Fla. Univ. L. Rev. 369. 380 (1981).
See: ii U.S.C. i362(c)-(g) for the conditions under which the
automatic stay remains in effect and other rules applicable to
obtaining relief from the stay.
8_/ A motion to overcome the stay should generally be filed in
~~ Bankruptcy Court before proceeding in District Court. (See
Pleadings section, infra.) A recent opinion in which a Bankruptcy
Judge discussed -- and rejected -- holding a citizens' group in
contempt for failing to overcome -.the stay is In Re Revere Copper
and Brass. Inc. . 29 B.R. 584 (Bkrtcy.N.W., 19F3TWhen the govern-
ment proceeds in District Court, a timely proof of claim should
also be filed in Bankruptcy Court (see page 24 infra) When a
Regional attorney wishes to pursue in District Court a cost recovery
judgment againt a bankrupt party, it is particularly important that
this strategy be discussed with appropriate EPA H/Q and DOJ attorneys
before referral of a case. '
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-9-
judgment chat nay be obtained, the government should be prepared
to argue that enforcement of the judgment is a continuation of the
governmental unit's enforcement of its regulatory power. Thus the
i
Bankruptcy Code read in conjunction vith CERCLA and other authorities
allows the United States to seek an order from Federal District
Court requiring the Bankruptcy Court co order the debtor in posses-
8ion or trustee to use assets of the bankrupt to abate a hazardous
condition or to reimburse the government for its expenditures.
In two recent cases, the courts rejected the government's
view of the exceptions-. In United States v. Johns Manville £/ ,
the District Court in New Hampshire denied EPA's motion to vacate
an Order issued by the Bankruptcy Court in New York staying all
proceedings in an EPA enforcement action against .Manville. The
opinion characterized the government's action for injunctive relief
as tantamount to an action for a money judgment. Since Section
362(b)(5) of the Code prohibits enforcement of a money judgment,
the Court held that the injunctive relief sought by the government
did not fall within the parameters of Che bankruptcy stay exemption.
The Court noted that if the government had instead sought an
injunction to prevent active, on-going disposal rather than cleanup
of an existing hazard, such an action would not have been stayed
by the bankruptcy filing. In our view, the District Court
9/ No. 81-229-D (D.N.H. decided Nov. 15, 19*2),
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9832.7
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erred._]_£/ The Agency has proceeded with CERCLA response activities
at the Johns Manville sites.
In In Re Kovacs. ^/ Ohio was stayed from proceeding in
< "
State Court in its efforts to enforce an injunction requiring
Kovacs to clean up a hazardous waste site. Kovacs, a corporate
officer and operator of the Chem-Dyne site, had declared bankruptcy.
The Sixth Circuit, affirming the District Court and Bankruptcy
Court decisions, held that Ohio, in proceeding to enforce the
injunction in State .Court was actually seeking a money judgment.
*
The Supreme Court granted the State of Ohio's petition for a
writ of certiorari on January 24, 1983. The Supreme Court vacated
the judgment and remanded the case to the Sixth Circuit to consider
the issue of mootness. The Supreme Court has accepted certiorari
for a second time in the Kovacs II case.J_2/ The issue presented
in Kovacs II is whether a bankrupt defendants nay rely on the
discharge provisions of the Bankruptcy code to void an injunction
which requires him to cleanup a hazardous waste facility*. In
January 1984, the United States filed an amicus curiae b'rief in
107 The government took the position that the Johns Manville
District Court «rred, in a notion to dismiss^in AM Inter-
national v. United States. Case No. 82-B04922 .(N.D. Hi. Bkrtcy
Ct.) (CERCLA SI06 Action;..
H/ 681 F.2d 454 (6th Cir. 1982).
I2./ State of Ohio v. Kovacs (Kovacs II), 717 F.2d 984 (6th Cir. ,
1983) (cert, granted, Sp. Ct. No. 83-1020).-
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9832,7
-ii-
the Kovacs II case stating that the case has national implication
for environmental enforcement under the Clean Water, RCRA. and
CERCLA and further the states that the 6th Circuit decision
"obviously encourages polluters to abuse the Bankruptcy Code
and defy state and federal environmental protection." 1_3/
B. Cost Recovery under Section 107 of CERCLA
The United States should be prepared at -the time of filing
of a proof of claim in Bankruptcy Court to prove that its claim
should be allowed by the court. That is, if the agency has spent
tor wiii spend) ^/ money at a site under the provisions of CERCLA
104, and wishes to recoup such expenditures under CERCLA Section
107, the United States will have to demonstrate to the,Bankruptcy
Court that the estate is in fact liable for such expenses under
Section. 107 ,]*J
Therefore, when the United States files a proof of claim
\
with the Bankruptcy Court, Department of Justice and EPA attorneys
13/ Id., Memorandum for the United States as amicus curiae
supporting petitioner (January, 1984).
14/ In the ease where the Agency has not spent Superfund money
at the cite but where we intend to conduct a fund-iinanced
response action, the United States can file a proof or claim for
an ''open account." The proof of claim would indicate that the
claim is founded on an open account which will become due upon
Che completion of the abatement actions by EPA.
\ m
157 A usual commercial claim of a creditor is established by the
existence of a receipt or invoice indicating that the debtor
received goods or services which he contracted to receive. When
EPA has performed work on a site, however, there has been no agree-
ment to perform such work between EPA and the bankrupt party.
Therefore, we must be prepared to prove Section 107 liability in
order to prove our claim.
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should be prepared to prove all elements of a Section 107 cost
recovery action. The case must be referred to the Department
of Justice in the normal way, although there may be situations
when.a referral by telephone may be necessary. See Procedures.
infra.
1. Distribution of Assets
(a) Secured Creditors
The claims of secured creditors are satisfied
fully before assets are distributed to any unsecured creditors,
including creditors claiming administrative expenses. The
justification for this treatment of secured creditors is statutory
(11 U.S.C. SS507, 726). A valid lienJ.fi a right to repayment,
created by agreement, which exists independently of bankruptcy
laws. As iuch, it is a charge against assets which must be met
before distribution to unsecured creditors.JJj/ For example, a
bank that has made a loan to the owner of a facility that is
secured by a lien on the heavy equipment will receive "off the
"top" the amount representing the value of the heavy equipment or
the equipment itself before distribution of assets to unsecured
creditors In order of their priority under Section 507 of the
Code.
16/ 3 Collier on Bankruptcy. Para 507.02 507-12.6 (15th Ed.
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In Chapter 7 proceedings, secured creditors vill recover
before unsecured creditors, including EPA, unless Che Bankruptcy
Court is persuaded by our arguments to Jump our claims ahead of
all others.]2J *n Chapter 11 proceedings, the government should
be prepared to play an active role in working out the terns of a
reorganization plan with the various classes of creditors which
provides for eventual repayment of our cleanup expenditures.
The classes of creditors that have secured interests will have
the greatest leverage in negotiation of a plan.
(b) Priority Structure
Section 507 of the Code sets up the priority
structure for satisfaction of unsecured claims.JJ*/ Payments to
the unsecured creditors are generally made on a pro rata basis.
Ten, fifteen or twenty cents to the dollar is common, depending
on the assets remaining in the estate. The following expenses
\
and claims have priority in che following order under Section
507(a>: :
1. First, administrative expenses ... and any fees
and charges assessed against the estate ...
17/ I507(b) establishes a "Super Priority" which'would require
tKe Agency to have priority over every other claim allowable.
Under S507(b) EPA would have to prove (1) that EPA has a claim
(for administrative expenses) and (2) that this claim is protected
by a lien on the debtor's property (mechanics lien or prejudgmenc
lien) and (3) that the stay has prevented use of the property
(clean up). See Motion for Allowance of Administrative Expenses,
In Re TriangleThemicals Inc.. Case No. 80-00993-HS-7.
LB/ 11 U.S.C. 507(a)
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" ' " * *>*
2 <. Second, unsecured claims allowed under
' Section 502(f) of this title, [regarding
certain claims arising in involuntary cases]
3. Third, allowed unsecured claims .for wages,
salaries, or commissions, including vacation,
severance and sick leave pay.
4. Fourth, allowed unsecured claims for contributions
to employee benefit plans.
5. Fifth, allowed unsecured claims of individuals,
to the extent of $900.*..
6. Sixth, allowed [certain] unsecured [tax or
penalty fee] claims of governmental units ...
Claims by the United States are classified as sixth priority
claims'or general unsecured creditors. Because government claims
are so low in the priority line, attorneys for the government should
'be prepared to argue that our claims should be given greater
preference, based on one of the theories described below.
Congress is currently considering a bill ]$J intended to
give claimants undet R~CRA or Superfund a priority in bankruptcy
proceedings superior to all other creditors, whether their claims
are secured or unsecured. Four states have already enacted
*
1..9/ H.R. 2767 tponsored by Rep. Florio.
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9832-7
-15-
sioilar provisions in their own environmental lavs.Q/
2 . Theories of Recovery Beneficial to the United Scaces
(a) Administrative Costs
The proof of claims filed so far by the United States have
asserted that cleanup expenditures should be considered adminis-
trative expenses of preserving the estate of the bankrupt, thus
deserving to be satisfied as top priority claims. While there
is little caselaw on point, one case provides support for this
theory. In Ottenheimer v. Whitaker 21 / ( the Court upheld the
decision of the Bankruptcy Court which required the trustee to
expend sums of money as administrative costs in order to remove a
hazardous nuisance. The condition was created when the bankrupt
party abandoned several barges in Baltimore Harbor. The Court
207 Massachusetts oil. and Hazardous Materials Release Prevention
and Response Act, Mass. Gen. Laws. Ch. 21E; New Hampshire
Solid and Hazardous Waste Management Act, N.H. Rev. Stat. Ann.
Ch. 147-B: 10; New Jersey Spill Compensation and Control Act, 53
N.J. Stat. Ann. $10-23.11f (1981). Colorado has also enacted
superlien legislation. For a dismissal of these statutes and the
pending federal legislation »ee "Superlien 'Solutions' to Hazardous
Waste: Bankruptcy Conflicts" ABA Environmental Law Newsletter,
winter 83/84.
2jy Ottenheimer v. Whitaker. 198 F. 2d 289 (3rd Cir. 1952) was
decided under the Bankruptcy Act of 1898, 30.Stat. 544, which
hat been replaced by the current Bankruptcy Reform Act of 1978,
92 Stac. 2549 (codified at 11 U.S.C.). See also. In re Lewis
Jones. Inc. 1 Bankr. Ct. Dec. 277 (Bk. Ct. E.D. Pa. 1974; for
the proposition that the bankruptcy court is under a duty to
protect the public interest and may order a Trustee to take
action to protect such interest. Various memoranda supporting
filed proofs of claim contain further caselaw and arguments.
These are available trom OECM-Waste.
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9832.7
' ' ' -16-
reasoned that obstruction of the Harbor would conflict with the
purposes of the Rivers and Harbor Act.
In its opinion the court stated, "The judge-made rule
[allowing abandonment] must give way when it cooes into conflict
with a statute enacted in order to ensure the safety ot navigation;
i
for we are not dealing with a burden imposed upon the bankrupt or
his property by contract, but a duty and a burden imposea upon an
owner of vessels by an Act of Congress in the public interest."227
The United States has argued, by analogy, that expenditures
made by EPA in the public interest under the authority of CERCLA
should be reimbursed as administrative expenses. This public
interest argument should stress the importance of recovering
money to replenish the fund to clean up additional sites. There-
fore, in a CERCLA case, as in Ottenheimer, an Act of Congress
enacted for the public health and welfare should take priority
over the usual bankruptcy distribution order.
In a recent ruling from the bench in a case entitled In re
T.P. Long, in the U.S. Bankruptcy Court for the Northern District
of Ohio, held that the trustee is liable to EPA for cleanup
costs at a hazardous waste site.£37 While the Judge did not
specifically state that the Government's cleanup expenses were
"administrative expenses" for bankruptcy purposes, the written
order is expected to elaborate on the ruling from the bench.
227 Id. at 290.
237 In Re T.P. Long Chemical Co.. Inc.. Case No. 581-906 (N.D,
Ohio, Bkrtcy. Eastern District, April 5, 1984).
-------
.17. 9832.7
* * . ' '
The United States is- expeced to file briefs on the question of
priority for reimbursement as between the secured interest holder
. _ j .u . ..... ___ - r
«... -.. O i..»>-«tU»
t
(b) Recovery Under Section 506(c) of the 'Code
This subsection states: "The trustee may recover
from property securing an allowed secured claim the reasonable,
necessary costs and expenses of preserving, or disposing of, such
property to the extent of any benefit to the holder of such clairz."
(11 U.S.C. $ 506(c)). .In a situation involving real property
securing a loan made by a bank or savings and loan, cleanup coses
that preserved the property would presunably benefit the lender
and would be .recoverable. This would allow the Agency to object
to any liquidation of the real property.
The language of Section 506(c) states, however, that the
trustee rather than the;government can recover. The government
could deal with this by specifically requesting the trustee's
ratification of EPA cleanup plans or obtaining from the trustee an
agreement to seek reimbursement under 506(b).2V
24/ See Robinson v. Dickey. 36 F. 2d 147 (lienholders did not
object to water being pumped out of nines for .safety reasons
and were liable for expenditures). First Western Savings & Loan
Association v, Anderson. 252 F. 2d 544; Miners Savings BanCToT
Pittston. Pa. v. Joyce. 97 F.2d 973.
-------
-is- . $832*7.
(c) Equitable Liens
It has also been suggesced by the Civil Division of
the Department of Justice that, depending on the facts of the
situation, the United States could argue that expenditures of
funds for cleanup create an equitable lien on the property. Such
a lien would create an implied contract for reimbursement of EPA
as a secured creditor. State law on equitable liens should be
researched if this theory is attempted. It may be of limited
use since State law may only allow for imposition- of an equitable
lien in situations involving a fraudulent conveyance of real
property. State law may also require the trustee to have re-
quested cleanup of the property, or at least agreed to.. it.2_5/ .
- (d) Restitution
Equitable restitution of the United States has been
approved by the court in cases in which the United States acted to
alleviate a potential health hazard.. In Vyandotte Transportation
Co. v. United States 2671 the Coast Cuara unloaded a barge loaded
with liquid chlorine gas that the defendant had refused to unload
promptly. The Supreme Court required reimbursement of costs
incurred by the United States. The Court noted that denial .of
reimbursement would have financially penalized the United States
257 For a discussion of State Law on "Mechanics Lien Statutes as
«n Enforcement Tool in CERCLA Cost Recovery Actions." See meao
from R. Schaefer to A.J. Barnes and C.M. Price dated January 11, 19o-
;
267 VJyandotte Transportation Co.. v. United States. 389 U.S. 191
(1967).
-------
9832.7
-19-
for acting expeditiously to protect public health and safety,
while unjustly enriching the defendant.
The Vyandotte case has been invoked in proof of claims filed
by the United States as a basis for recovery of CERCLA costs that
Che government has incurred. In a recent order issued in United
States v. Northeastern Pharmaceutical and Chemical Co., Inc., et al.
(NEPACCO) 1Z/, Che court stated that restitution was available under
§7003 of RCRA because the bankruptcy action was an action in equity.
United States v. Reserve Mining 28/ also lends support to a claim
Daseo on restitution. In that case, the Court held that when the
United States is seeking reimbursement for alleviating a potential
public health hazard caused by one who is in violation-of a federal
statute, reimbursement may be granted under the Court's equitable
powers.
C. Other Matters In Bankruptcy and Insolvency Cases
, *
1. Abandonment of Property .
*i. «ny bankruptcy case, the trustee may choose to petition
the Court to allow abandonment of some or all of the assets of the
estate on the grounds that care of the assets by the trustee would
be excessively burdensome to the estate. 29/ The rationale for
277 United States v. Northeastern Pharmaceutical and Chemical Co.,
Inc.. et al.~(NEPACCO) (September 30. 1983. W. Dist. Missouri
S.W. Div.).
287 United States v. Reserve Mining. 408 F. Supp. 1212, (D. Minn.
1976).
19/ 11 U.S.C. 5 554.
-------
9832.7
* " -20- " .
\ . ' - .
permitting abandonment was articulated in In re Ira Haupt & Co . :
. .-. [T]he courts have always recognized that
a Trustee is under no duty to retain the Title
to a piece of property or a cause of action
that is so heavily encumbered, or so costly,
in preserving or securing, that it does not
promise any benefit to the funds available
for distribution.
The United States will oppose abandonment in certain circum-
stances because the procedure may allow the estate to avoid
liability for on-going environmental obligations and may allow' the
trustee to rid the estate of an asset in which the United States
may ultimately have an interest, (based on equitable lien, resti-
tution or administrative expenses). For example, if contaminated.
property is abandoned by the trustee, the property reverts back to
the secured creditor and the Agency may have no claim against the
nonbankrupt party after clean up. Accordingly, the United States
should normally take the position that abandonment is only permis-
sible when public health and safety obligations (statutory or
-Vrrvise) are met, and when a third party will not recover a
windfall from EPA's clean up actions. Abandonment may be preferred
prior to clean up 'if Che property will revert to a viable party
whoa EPA may pursue for contribution to the clean up.
The position of the United States is supported by the reasoning
Of the Ottenheimer v. Whitaker case, 317 and by In Re Lewis Jones .
307 In re Ira Haupt & Co., 398 F.2d 607 (2d Cir. 1968).
3W Supra. note 13.
-------
f
-21-
Inc. 327 in the Ottenheiaer case, the Court refused to allow the
trustee to. abandon assets that created a hazardous condition.
Rather, the Court required the trustee to use assets of the estate
to remove from Baltimore Harbor several barges belonging to the
debtor that night have otherwise obstructed the Harbor.
In In Re Lewis Jones, Inc^ . the Court reiterated the Otten-
heiaer position and held that the bankruptcy trustee could not
simply abandon the property. Instead, the trustee was required tc
repair various steam pipes and manhole covers to protect public
health and safety. The Court in Ottenheiaer had held that abandon-
ment of the debtor's barges by the trustee would conflict with the
Rivers and Harbors Act. The Court in In Re Lewis Jones went a
step further, stating that "even absent the violation of a state
or federal act, the public interest must be protected by the Bank-
ruptcy Court." 337 :
The law on abandonment under the Code is unsettled. In the
recent bankruptcy case, In Re Quanta Resources.^4/ the New Jersey
District Court affirmed the Bankruptcy Court's ruling allowing
abandonment of a hazardous waste site over the objection of the
City of New York and the State of New York. The Court allowed the
company co abandon a hazardous waste site on grounds that the
327 -Id.
33_7 In Re Lewis Jones, supra at 280.
347 In Re Quanta Resources Corp., F. Supp.
No. 82-3524 (D.N.J. Jan 24, 1983) Appeal Pending
No. 83-5142 (3d Cir.).
-------
9832.7
' -22-
property was burdensome to the estate. At the site, there were
500,000 gallons of waste oil, sludge and hazardous waste.stored in
52 tanks and about 70,000 gallons of waste oil contaminated by
PCBs.'3_5_/ While Quanta had previously signed a consent order
with the N.Y. Department of Environmental Conservation to clean up
the site, the Bankruptcy Court's favorable ruling on abandonment
effectively nullified the order.
.New York City and State had asserted that the holdings in
Ottenheimer and Lewis Jones required that the Court deny the
trustee's petition to abandon and allocate assets in the estate to
be used for site cleanup rather than distribution to creditors.
The Court rejected this argument, pointing out that the two cases
were decided before passage of the 1978 Bankruptcy Act. Before the
Act, che Court noted, abandonment was allowable under judge-cade
rule. Section 554 of the Bankruptcy Code, however, provided specific
statutory authority for the abandonment, of burdensome property. ,
This authority, the Court stated, was not conditioned by Congress
upon a finding that abandonment does not harm the public interest .367
The Court was similarly unpersuaded by New York's argument
that S959(b) of the United States Judicial Code, (28 U.S.C. Section
.357 Hazardous Waste Litigation Reporter, (July 6, 1982) at 2,646
36/ Id. at 3,671 and 3,672. .
-------
- ' -23- " .
959(b)) prohibited abandonment. Section 959(b) provides that the
trustee shall "manage and operate" property in his possession
www*U*i.6 ;o valid laws. The Court found that this provision did
not apply to the trustee in a Chapter 7 context, but only to
receivers and trustees involved in business operations rather than
in distribution of an estate.
2. State Insolvency Lavs
States can enact insolvency 'laws that affect bankrupt
parties as long as the substance of those laws does not overlap
with the Ftderal Bankruptcy Reform Act's jurisdiction. The United
t
States Constitution gives Congress the power to establish uniform
laws on bankruptcy 22/ but does not prevent states from passing
valid laws on insolvency. To the extent there is no conflict
between a state's insolvency law and the federal .bankruptcy law,
the state law remains in operation.3£/ .
The United States may benefit from being a creditor in state
insolvency proceedings in appropriate situations. Under 31 U.S.C.
S191 (1979), debts to the United States are given top priority in
state insolvency proceedings. The top priority for government
debts does not create a lien on the debtor's property in favor of
the federal government. At a minimus, however., it gives the
government a right of priority over all unsecured creditors to
3T./ U.S. CONST art 1, S8 cl 4.
^£/ In re Wisconsin Builders Suooiv Co., 2<39 F.2d 649 (7th Cir.
1956), Cert, denied 353 U.S. 965 (1958).
-------
- - - .24- 9832.7.
payment out of Che property in the hands of the debtor's assignees
or other representatives under the conditions specified in the
statute.^l/
IV. PROCEDURES
A. Rules of Bankruptcy Procedure
The Supreme Court, advised by the Judicial Conference of the
United States, has the authority to promulgate rules governing
cases under the new Bankruptcy Code.^_£/ The Advisory Committee on
Bankruptcy Rules was duly appointed by Chief Justice Burger to
draft rules. The Committee was nearing completion of work on the
Proposed Rules when the decision in Northern Pipeline Construction
Co. v. Marathon Pipeline Co. cast doubt on the Code and ..the Proposed
Rules. Thus, no new rules have yet been promulgated.
The existing rules were summed up in a Bankruptcy Monograph
drafted by the Office of the Attorney General:
"Until ... rules of practice and procedure are
approved, at least two different sets of rules
oust be consulted. First, there are the "Suggested
Interim Bankruptcy Rules" prepared by the Advisory
Committee on Bankruptcy Rules of the Judicial
Conference of the United States which were published
39/ Bramwell v. United States Fidelity & Co.. 269 U.S. 483
(1926). The United States could"also argue that satisfaction
of CERCLA-based claims precedes consensual liens, such as mortgages.
The question appears to be open. Collier, at any rate, expresses
the view that whether consensual liens come ahead of the Government's
S191 priority has not been finally and authoritatively determined.
Vol. 6A Collier, §913(2] p. 246.
40/ Under Public Law 95-598 $248, Congress conferred this power
on the Supreme Court, amending the grant of rule-making power
set forth in 28 U.S.C. 52075 to include the new Title 11 Bankruptcy
Code.
-------
9.832,7
- - -25-
in August'1979 as 'guidelines' that could be .adopted
.as local rules. The interim rules have been adopted
in many districts, albeit with occasional variations....
Local district court rules apply' in some jurisdictions.
Some bankruptcy courts have adopted numerous local
rules in addition to, or in lieu of, these interim
rules. Second, if a point o.f procedure "is not covered
by the applicable local rules, consult the Bankruptcy
Rules in effect under the Bankruptcy Act of 1889. "^ i
Government attorneys involved in bankruptcy cases will find
rules and all forms (such as proof of claim forms) in Collier on
/
Bankruptcy (15th ed. 1981).
B. Filing Proofs of Claim
To have standing as a creditor, the United States must file' a
proof of claim form which states the name of 'the claimant; the anour.t
of the debt or claim; the grouno of liability; the date the c la its
became due or will become due under an open account theory*" see
footnote 10 supra; and, the nature .of the claim (secured or general,
unsecured).^/
The filing of proofs of claims or interests j.s explained in
Section 501 of the Bankruptcy Code.f^/ In a liquidation case under
Chapter 7, a claim ordinarily oust be filed within six months after
the first date set for the first neeting of creditors.^/ Claims bas
41/ Bankruptcy Monograph dated Novemoer 22, 1982, prepared oy the
Office" of the Assistant Attorney General, Civil Division, for
use of U.S. Attorneys, at pp. 6,7.
42/ See. Bankruptcy Rules, Proof of Claim official forms. Proof
of claims filed so far have included brief affidavits from
the On-Scene Coordinator stating amounts spent and describing the
nature of the work done as well as copies of bills submitted to
EPA by contractors.
43/ 11 U.S.C. 1 , 501.
44/ 3 Collier on Bankruptcy Para. -501.02(2] (15th ed. 1979).
-------
' - 9.832,7
-26-
on administrative expenses can be filed any time before the Court
has granted the debtor a discharge.of debts. It is more difficult
Co determine when to file a proof of claim in a Chapter 11 reorgan-
ization because while the filing is required prior to the Court's
acceptance of the reorganization plan, there is no mechanise for
determining when that acceptance will cake place. A proof of
claim should be filed immediately, with telephone concurrence by
/ .
EPA HQ (OECM and OWPE) and DOJ, if there is any reason to believe
that a reorganization may be about to be concluded. . .
Section 502 of the Code governs the allowance of claims or.
interests; a claim is deemed allowed "unless a party in interest
... objects."^/ In most cases, the proof of claim should be
included in the litigation referral package sent~'to OECM which
will then be sent to the Department of Justice- and signed by the
Assistant Attorney General for Land and Natural Resources or his
delegate. The Department of Justice must, be involved i.n the
filing of a proof of claim in Bankruptcy Court.f^j/ As. stated
above, special procedures nay be available in emergency situations
in which che government would otherwise miss filing^deadlines.
Headquarters and DOJ should be contacted.
457 11 U.S.C. § 506(a).See also (b)-(j) [Procedure after objection]
467 See, fn 1 , page 3 supra for referral documentation that the
TJepartment of Justice has requested regarding che.r financial
status of responsible parties.
-------
-27- 9832,7
C. Pleadings
See the attached Index of Resources for a listing of proofs of
claim and other pleadings that EPA has filed, so far.
One problem area involves the issue of whether.or not the
United States should file a notion to overcome the stay in Bankruptcy
Court before proceeding to seek injunctive relief in District Cour;.
Arguably, the statute is clear on its face and no special motion
is necessary for continued exercise of our regulatory powers.
Nonetheless, Bankruptcy Courts have held attorneys in contempt
for failing to.overcome the stay. It is recommended, therefore,
that a motion to overcome the stay be filed with Bankruptcy Court
when the government seeks .injunctive relief from a .bankrupt party
in District Court. -
D. Appeals .
Bankruptcy appeals are heard by appellate panels of three
bankruptcy judges appointed to the circuit counsel, on election of
the circuit.^/ If this procedure is not available, appeals are
to the District Courts.^£/ EPA and the Land and Natural Resources
Division of DOJ will involve the Appellate Staff of the Land and
Natural Resources Division in appeals from decisions of a Bankruptcy
Court and in filing of amicus briefs on bankruptcy issues related
to hazardous waste site cleanup. ".
28 U.S.C. § 160
48/ 28 U.S.C. S 1334
~"~" \
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2S 9832.7
Zo~
E. Federal Bankruptcy Court Jurisdiction
The jurisdiction of Bankruptcy, Courts has been in a confused
fate since the Supreme Court's decision in Northern Pipeline
Construction Co. v. Marathon Pipe Line Co. 4?/. The Court held
unconstitutional the grant of power in the Bankruptcy Reform Act
(28 U.S.C. 1471(b)(c)) that gave Bankruptcy Courts jurisdiction
over all "civil proceedings arising under title 11 [of the U.S.
Code, Bankruptcy] or arising in or related to cases under title
11."^P/.. This broad jurisdictional grant to the Bankruptcy Courts
was deemed unconstitutional because bankruptcy judges do not have
the" protection conferred by Article III of the U.S. Constitution
(i.e. lifetime tenure subject to removal only by impeachment and
irreducible compensation). It is unclear what effect the decision
in Northern Pipeline will have on the type of cases that can be
brought in Bankruptcy Court until Congress legislates a solution.
At the least, however, it is clear that the traditional state
common-law actions (commonly called "Marathon claims" by bankruptcy
practitioners) may no longer be litigated in Bankruptcy Court absent
che consent of che litigants.5V
A9/ U.S. _, 102 S. Ct. 2858 (1982).
50/ 28 U.S.C. 1471(b)(c).
51/ Cook, New Bankruptcy Quandary Could Be Easily Solved.
Legal Times, Sept. 6, 1982 at 10 Col. 1.
-------
.29-
In reaction to Congress' failure to enacc legislation thac
would rectify the constitutional infirmity of the Code, the Adminis-
trative office of the United States Courts, Washington, D.C., form-
ulated model rules to be used as interim measures b-y the United
States Circuit Courts.5£/ jhe cover explanation circulated with
the rules summarized the main points as follows:
Under the model rule, all bankruptcy matters are
initially referred to a bankruptcy judge. [Section b(l)
of the Rule]. In proceedings not involving a final
judgtaent on a Marathon claim, the bankruptcy judge may
enter orders and judgments that become effective immed-
iately, subject to district court review if requested by
a party. [Section (c)(2).J With respect to final judg-
ments in Marathon claims, the bankruptcy judge prepares
recommended findings and conclusions and a proposed judg-
ment. [Section (c)(3.)] A district judge then reviews
the recommendation and enters a judgment. [Section (cK5)j
Where circumstances require, an order or judgment
entered by a-bankruptcy judge will be confirmed by a ais-
trict judge even if no objection is filed.53/
Because the United States claims are based.on federal rather-
than state law, the provisions are not directly relevant to our
claims. Nonetheless, the Rules do appear to .allow the government
. --_ .. ---jrinent with options for »eeking relief in the Bank-
ruptcy Court. For example, the United States can move the District
w
Court to "withdraw the reference to the bankruptcy judge."£^/ If
52/ See; Memorandum from William E. Foley (Dir. Udmin Officer
of U.S. Courts) to Judges, Clerks U.S. Court System Regarding
.Continued Operation of the Bankruptcy Court System after Dec. 24,
1982 in the Absence of Congressional Action.
53/ Id. .
5&/ ' §1471 (d) grants Bankruptcy Judges the authority to refuse-
jurisdiction.
-------
« 9832.7
such a notion were granted, the; :D/|;4. t r i c t Court could retain the
> ;:'₯% V,..
entire matter, refer part of it back to the bankruptcy judge or
refer Che entire matter back to tne bankruptcy judge. The govern-
Sfi'
oent should also make a simultaneous motion co overcome the stay.
If, however, an action in Bankruptcy Court has already been initiacec,
che government may file a motion to stay the bankruptcy matter in
order to proceed in District Court.557
::|:;-
V. THEORIES OF DIVIDUAL LIABILITY
The government anticipates situations in which individuals
responsible for the creation of hazardous waste site conditions are
financially solvent even though the corporate owners and operators
are bankrupt.In"such a case, the United States may choose to
ignore the estate in bankruptcy and pursue the responsible individ-
uals -- as individuals -- directly, or che United States could
pursue -both the assets of che bankrupt corporation and the appro-
priate individuals. 5j»/ ,;>
-------
-31- 983.2-7
A. Personal Involvement in Acts and Omissions
The scope of personal liability of corporate officers is broad.
A corporate officer, director, or agent is liable for torts he
commits regardless of whether he acted on his own b'ehalf or to
benefit the corporation, regardless of whether he personally bene-
fited from the commission of the tort and regardless or whether
the corporation is also liable. He is also liable tor the torts
of the corporation and of other directors, officers or agents if
he failed to exercise reasonable care.57/
The liability of corporate officers is generally lisitec to.
situations in which the corporate defendant has knowledge or
responsibility for tortious acts being committed within his area
o'f responsibility. A general duty of supervision may be an insuf-
ficient basis for liability.587
The United States plans to make use of this theory of liability
in pursuing, in certain cases, the assets of individuals involved
with corporations that have declared bankruptcy. The fact patterns
of these particular cases seem well-suited to the law. They involve
situations in which hazardous waste treatment or disposal operations
57/ See: 19 C.J.S. Corporations §5845, 850 (1940). Accord:
TT75. v. Hess. 41 F. Supp. 197, (S.D. N.Y. 19S3). See also:
Miller v. Muscarelle. 1970 A. 2d (N.J. Super., 1961); Donsco Inc.
v. Casper Corp.. 587 F. 2d. 609 (3d Cir. 1978); Pa tyro an v. Howey.
340 Mo. 11, 100 S.W. 2d. 851, 856 (19b3). Sinaleton v. Armor"
Velvet Corp.. 4 P. 2d 223 (cal. App). See also Brief in U.S. v.
Mahler (H.D. Pa.) drafted by Michael Steinberg, Attorney, Environ-
mental Defense Section, OOJ. (April 1, 1983) for a discussion or
personal liability^
58_/ Martin v. Wood. 400 F. 2d 310 (3d. Cir. 1968).
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98-32-7
- -32-
vere directed by employees of corporations that later declared
corporate bankruptcy and abandoned the facilities, leaving public
nuisance conditions essentially of their own creation.
In fact, EPA and the Department of Justice have already used
this legal theory successfully. In one RCRA Section 7003 case, the
United States argued that this Section imposes personal liability
on corporate officers. The Court denied defendant's motion to
dismiss, stating:
"In,Missouri, a corporate officer who participates
in the commission of a tort may be held personally
liable for any resulting damage. Patyman v. Howey,
100 S.W. 2d 851, «56 (Mo. 1936). 'A contrary rule
would enable a director or officer of a corporation
to perpetrate flagrant injuries and escape liability
behind the shield of his representative character,
even though the corporation might be insolvent or
irresponsible.' 19 Aa. Jur. 2d S 1382 at 77.££/
In addition to theories of individual tort liability, CERCLA
explicitly allows individuals to be held liable for cleaning up
hazardous waste sites. Section 107 of CERCLA clearly permits impo-
sition of strict liability upon broad classes of persons including
an individual owner or operator, any person who at the time of
disposal of any hazardous substance owned or operated any facility,
persons who arranged for disposal and persons vho accepted for
transport hazardous substances.££/ The Act defines "person"
""" ' 9-
as, inter alia, "an individual."6J/ One purpose of che corporate
597 U.S. v. North Eastern Pharmaceutical & Chemical Co.. Inc.
et al.. (NEPACCO) No. 8U-5066-CV-SW. (Western Dist. Mo. 19di).
A later NEPACCO decision based a determination of liability on SI 07
of CERCLA. (see discussion infra)
607 CERCLA S107(a)(l)(2), (3)(4)
6V CERCLA S 101(21).
-------
9832,7
-33-
structure is to insulate shareholders from liability. There is,
however, no insulation from liability -- no corporate veil to
*
pierce -- when officers or agents of a corporation commit tortious
Acts or participate personally in the commission of torts.
B. Piercing the Corporate Veil
By piercing the corporate veil, the United States may- be
able Co establish the individual liability of shareholders for
torts committed by the corporation. The case law tends to uphold
protection of the corporate form. Courts will, however, make
exceptions to this rule when shareholders have commingled individual
and corporate affairs so that the corporation appears to be no
more than the "alter ego" of the individual shareholder.
Federal courts have relied on the.tollowing factual tests in
determining when to pierce the corporate veil: 1) Is the corporation
undercapitalized for its purposes? 2) Does the corporation observe
corporate formalities? 3) Does the corporation pay dividends?
A) Is the corporation solvent? 5) Have the dominant shareholders
siphoned corporate funds? 6) Does che situation present an element
of "fundamental unfairness"?££/ Courts have refused to pierce the
veil absent a showing of fundamental unfairness.£3/ However,
627 United States v. Plsani. 646 F.2d. 83, 88 (3d. Cir. 1981).
637 DeWitt Trucking Brokers v. W. Ray Fleming Fruit Company.
540 F. 2d 681, 667 (4th Cir. 1976).
-------
-34-
9832.7
fraud need not be sh'own if federal lav governs a case.^/ The
general rule applied by federal courts co cases involving federal
statutes is that the individuals nay be held liable, in the interest
of public convenience, fairness and equity. The sp'ecific statutory
directives of CERCLA support a federal law. In addition, the
language of CERCLA establishes liability for individuals who owned,
operated or otherwise controlled activities at hazardous waste
Fact situations faced by the United States involving -hazardous
waste disposal or treatment operations should prove appropriate.
for piercing the veil. In many cases, the United States is finding
that CERCLA problems have been created by corporations that have
been mismanaged and undercapitalized for the purpose of handling
hazardous waste. Moreover, in some cases, the same individual
shareholder/directors have dissolved and reformed essentially the
same hazardous waste operations several times, an indication that
the corporate form is being used as a shield and "alter ego" for
individuals.
64/ United States v. Normandy House Nursing Home. 428 F.Supp.421,
424 (D. Mass. 1977). The government will want.to argue that
federal' law applies co piercing the veil. U.S. v. Kimbell Foods.
440 U.S. 715 (1979), holds that «pplication""oI~St*te law should
not frustrate the objectives of federal statutes. * In the Pisam
ease, supra, at 87. the Third Circuit stated, "We believe it is
undesirable to let the rights of Che United States change whenever
State courts issue new decisions on piercing the corporate veil."
65/ See, pages 7-9, Guidance Memo "Liability of Corporate Officers".,
.fn 49 supra.
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9832,7
-35-
C. Personal Jurisdiction in Cases Involving Corporate
Officers or Shareholders
If the United States proceeds to initiate action agains't
individual corporate officers or shareholders, the -government should
anticipate that defendants may raise the defense of improper juris-
diction or service of process if they reside outside the state
where the CERCLA site is. For example, in U.S. v. North Eastern
%. *m^^mmM «^«^^^«i^"^^^^^-^^^^^-
Pharmaceutical & Chemical Co.. Inc.. e't 'al. (NEPACCO)££/, defendants
alleged that, as Connecticut residents, they vere not subject to
t
extraterritorial service of process under Missouri rules of civil
procedure. They argued that since their acts in directing the
disposal of hazardous waste in Missouri occurred not as their
individual acts but as the corporate acts of NEPACCO, they could
not be subject to extraterritorial service of process as defined in
the Missouri rules.
* . .
The Court rejected this argument as overly technical and
affirmed that: it had valid personal jurisdiction over the defendants
,*, iiuwever, points to the need for attorneys to research
state law regarding personal jurisdiction and service* of process.
Referrals to the Department of Justice should include anticipated
defenses related to personal Jurisdiction. -
667 Order No. 5066-CV-SW, (June 11, 1981, W. Di'st. Missouri,
~"~ SW Div.)
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-36- 9832-7
'VI. INDEX OF RESOURCES
These materials can be sent to EPA Regional attorneys on
request. Because OECM-Vaste does not have the resource capability
to reproduce and send numerous copies, mailings will be limited to
one copy per region of each document listed.
, . - \
PLEADINGS
Proofs of Claim
In the Matter of Aidex Corp.. Case No. 79-0-111, APPLICATION
: FOR PAYMENT OF FUNDS HELD IN TRUST BY THE CLERK OF THE COURT
FOR CLEAN UP OF HAZARDOUS WASTE SITE CONDITION.
U.S. v. Jack L. Neal and Geraldine Faye Neal (Globe), Case No.
SinJom, COMPLAINT FOR DECLARATORY JUDGMENT AflD APPLICATION
FOR ORDER TOR REIMBURSEMENT OF COSTS INCURRED BY THE U.S.
IN RESPONSE TO A HAZARDOUS SITE CONDITION.
In re Liquid Disposal Inc.. Case No 82-01846, APPLICATION FOR
ORDER FOR REIMBURSEMENT OF COSTS INCURRED BY THE UNITED STATES
TO CLEAN UP A HAZARDOUS SITE CONDITION and accompanying
affidavit and invoices. (Eastern Dist., MI)
In re Triangle Chemicals. Inc.. Case No. «0-00993-H-C ',
plus APPLICATION FOR ORDER FOR REIMBURSEMENT etc 'ffidavit,
(Southern Dist., TX)
In re Crystal Chemical Company. Case No 'MS
UNITED STATES MEMORANDUM IN SUPPORT "
(Southern Dist., TX)
Other Briefs and Motions
In the Matter of Aidex Corr
VACATE AUTOMATIC STAY, an'
OF MOTION TO VACATE AUTr
order granting notion,
In re Crystal Chem?... -4,
OBJECTION TO PROPOSED GKA.. . JSED
DISCHARGE OF LIEN and accompa,., .. a. iL-ioti.on.
(Southern Dist., TX) ' ^
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9.832.7
- - -37-
State of Ohio. Petitioner v. William Lee Kovacs. ON PETITION
FOR A WRIT OF CERTIORARl TO THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT, Brief for the United States as Aaicus
Curiae. (Brief supporting appeal of Ohio to the Supreme Court).
In re Triangle Chemicals. Inc.. Case No. 80-00993 HS-7 MOTION
FOR ALLOWANCE OF ADMINISTRATIVE EXPENSES AND PROPOSED ORDER
REQUIRING TRUSTEE TO PAY EPA18 EXPENSES. Filed Aug. 22, 1983.
In the Matter of Quanta Resources Corp.. Debtor. State
of New York and City of New York. Appellants, v. Thornls
J. O'Neill, as Trustee, Appellee. (QUANTA hereafter) Appeal
from the District Court for the District of New Jersey,
Brief of Appellants. (U.S. Court of Appeals for the Third
Circuit, No. 83-5142).
QUANTA, Brief of the Commonwealth of Pennsylvania and
State of New Jersey, Amici Curiae. (U.S. Court of Appeals
for the Third Circuit, No. 83-5142).
In Re A.M. International, Inc.. Case No. 82-B-04922, Defendant's
(United.States') Reply Memorandum in Support of Defendant's
Motion to Dismiss.
State of Ohio'"v. Kovacs (Kovacs 11), 717 F.2d 984 (6th Cir.,
1983)
ORDERS
United States of America, et al. v. Johns Manville Sales
Corporation, et al.. Civil No. 81-299-D.Order of the
District Court denying-United States and New Hampshire
U..WWA.JII to vacate the automatic stay. (Nov. 15, 1982;
U.S. District Ct., N.H)
State of Ohio v. William Lee Kovacs. No. 81-3320. Decision
affined District Court and Bankruptcy Court decisions that
Kovacs was entitled to protection of automatic stay. (June 16,
1982, U.S. Court of Appeals, Sixth Circuit)
United States ot America v. North Eastern Pharmaceutical
and Chemical Co.. Inc.. ec al.. No. »0-5Q6b-CV-SW.Decision
denying defendants' notion to oismiss for lack of personal
jurisdiction. (June 11, 19ttl; Western District of Missouri,
S. Western Division)
Universal Metal Stamping. Inc. v. Pennco Machinery. Inc..
Bankruptcy No. 81-01262K.Bankruptcy Court'held that automatic
stay does not stay a separate suit against the bankrupt's
"sister" corporation. (December 7, 1981; Eastern District,
Pennsylvania)
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9832.7
-38-
RESOURCES
Bankruptcy Monograph conveyed to U.S. Attorneys Offices
November 22, 1982.Summary of bankruptcy law and procedure.
EPA Guidance Manual: Pursuing RCRA Subpart H Interests
ICF. (February, 1983) : '. "
Brief in U.S. v. Mahler (M.D. Pa.) drafted by Michael Steinberg,
Attorney, Environmental Defense Section, DOJ (April 1, 1983).
Discusses personal liability of corporate officers.
RULES
Memorandum from William E. Foley, Director of the Administrative
Office of the United States Courts on CONTINUED OPERATION OF
THE BANKRUPTCY COURT SYSTEM AFTER DECEMBER 24, 1982, IN THE
ABSENCE OF. CONGRESSIONAL ACTION (the "Emergency Rules" or '
"Interim Rules"), (December 3, 1982).
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