United States
            Environmental Protection
            Agency
             Office of
             Solid Waste and
             Emergency Response
  &EPA
 DIRECTIVE NUMBER:   9832.7

 TITLE:  Guidance Regarding CERCLA Enforcement
      Against Bankrupt Parties
                          i
 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
    O C — Review & Comment

REFERENCE (other documents):
SWER       OSWER       OSWER
  DIRECTIVE    DIRECTIVE   Dl

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   &EPA
                      United Slates Envirc—:--•:''rrs:	:-"••


                OSWER Directive Initiation Request
                                                             1. Directive Number
                                                          9832.7
                               2. Originator Information
     e of Contact Person
    John Fleuchaus
                                  8BbM
  3. Title
    Guidance Regarding CERCLA Enforcement Against Bankrupt Parties
  4. Summary of Directive (Include brief 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
Keywords
Bankruptcy,
  6a. Does this Directive Supersede Previous Directive^)?  |_J Yes  |XJ No  What directive {number, title)
  b. Does It Supplement Previous Directives)?  Q Yes  /] No   What Directive (number. title)
7.. Draft Level

  LJ A — Signed by AA/DAA   L2 B — Signed by Office Director  LJ C —
                                           For Review & Comment
                                                               In Development
  This Request Meets OSWER Directives System Format
8.
9.
Signature of Lead Office Directives Coordinator
Name and Title of Approving Official
Date
3-fe- 5 7
Date
OSWER           OSWER           OSWER
        DIRECTIVE        DIRECTIVE       L

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                                           9832,7
          Attachment VIII

Guidance  Regarding CERCLA Enforcement
       Against Bankrupt Parties
              5/24/84

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                                                      9832,7
     I UNITED STATES ENVIRONMENTAL PROTECTION AUENCY
     /            .    WASHINGTON. DC. 20460



                          MAY £4 1984
                                                        O/' .'.r ..-
                                                        O'CSM's- *•.;
                                                     CO"**. ••*••$ MOs ",'*•-
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 ass'ist the
 Regions in developing CERCLA enforcement actions against bankrupt
 parties.   The guidance is intended co 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 law; 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 nay be neces-
 sary and acceptable if required to meet deadlines in bankruptcy
 cases.

     If you or your staff have any further questions regarding
 CERCLA enforcement against bankrupt parties, please contact
 Kirk Sniff at (FTS) 362-3050 or Heidi Hughes.at (FTS) 382-3109.


Attachment

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                                                     9832,7
                       TABLE OF. CONTENTS
                                                      PAGE

I. -INTRODUCTION		.  1 •
     A. Scope and Duracion of the  Problem	  1
     B. When co 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
          fb) Priority Structure	  13
          2. Theories  of  Recovery  Beneficial  to
               Che 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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                         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 co 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
     i
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 or

recovery.  Finally, it is intended to serve as a bankruptcy infor-

mation clearinghouse, listing materials available from OECM-Was re

on bankruptcy and related subjects.

     In che long run, the requirements of the Resource Conservation

and Recovery Ace (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, ouch 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 -                 9832*7
            *  * *  »
IV. PROCEDURES..	   24
     A. Rules of Bankruptcy Procedure	.   24
     B. Filing Proof of Claims	   25
     C. Pleadings	   27
                                                •         ^
     D. Appeals	   27
     £. 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 to 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  againsc
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*set  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  in 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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                                                         9832,7

                                •3-


 copies of the case  dockec  co an EPA attorney.J/ Depending on tne
                 *
 •cage of proceedings,  the  dockec nay include an icenizacion of

 assets.  It  aay  be  pointless co proceed if there are few assecs.

 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

 amounts  from  the Bankruptcy Court.  The Regions should pursue bankrupcc;

 actions  where the case nay serve as a deterrent to other parties

 who  would otherwise consider escaping liability through a declaration
I/   The nost common form of bankruptcy is liquidation under
~    Chapter 7 of the Bankruptcy Reform Ace or 1978 (11 U.S.C.
S101 cc seq.) (hereinafter ciced 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. «t~al.. Civil No. 81-3.99-D).  TKe
distinccions between a Chapter 7 liquidation and a Chapter 11
reorganization are discussed infra.  Unless otherwise seated the
discussion in this nenorandua 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-

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 lite 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.
             II.   THE BANKRUPTCY CODE:  An Overview
A.   Organization of the Code                          .
         The Bankruptcy Reform Act of 1978 (11 U.-S.C.  $ 101 e_c sec.
(1978)) replaced and liberalized the Act of 1898 (11 U.S.C. $  1 et
s«q. (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: and 11, Reorganization.
                                     4
     Chapters 1, 3, and 5 set forth definitions and procedures
common to all bankruptcies.  The provisions of Chapters 7 and 11
•ec forch the specific procedures for liquidation.* and reorganiza-
tions.  Under a 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 must 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 may
 initiate  a voluntary action,_3/  The debtor does not  have to  be
 insolvent^/ and no formal adjudication of bankruptcy is required
 ir. "rlur.tary cases.  An order for relief is automatically entered
 by the Bankruptcy Court in a voluntary case.
     An involuntary petition under Chapter 7 or 11 may-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.V.. -- «.x»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 the Court to take charge of substantially all
 of the debtor'• property.£/
3/   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 3ankruptcy 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.
*/   11 U.S.C. I303(h)

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                         •      .6-                       9832,7

               III. . CERCLA AMD 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,
           unoacured, 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  premised
on a civil action or a final judgment; it is sufricient 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
a 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. '
                    /
A.   Proceedings in District Court or Bankruptcy Court.
     An important question that oust be resolved  in each case is
whether to initiate proceedings in District Court or Bankruptcy

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                                                       9832,7
                               -7-


 Court.  An ordinary creditor must 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
     •                                     i         *        *

 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 been
                commenced before the commencement of the 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 or
                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 the case ...; .

          (6)   any act to collect, assess,  or recover a claim
                against the debtor that arose before the
                commencement of the case ...; and,

          (70   the setoff of any debt owing to the debtor  ...

     In a number of situations, however, the filing of a petition

does not operate as a stay, including (Section 363(b)):
                                                 9-
          (4) ...  the commencement or continuation'of
              an action ... by a governmental unit to
              enforce such governmental unit's policy or
              regulatory power;

          (5) ...  the enforcement of a judgment other than
              a money judgment, obtained in  an action or
              proceeding by a governmental unit to enforce
              such governmental unit's police or regulatory
              power.

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                                                       9832.7
               ....           .8-


      Tbe  purpose of these exceptions, as articulated in the House

 Report  accompanying the Bankruptcy Coae, is to permit governmental

 authorities  to pursue actions to protect public health and sa£ety6/

 and  to  allow governmental units to sue or continue suit against a

 debtor  to abate violations of environmental protection laws.^/

      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 S107) and actions for injunctive

 relief  (CERCLA S106).£/  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""!. Byrne, 420 F.
Supp. 44  (D. Mass. 1976) and In re Dolly Madison. 504 F.2d. 499
(3d. Cir. 1974) [held; a*bankruptcy court should not interfere with
governmental regulatory programs]; Aaron, Bankruptcy Stays tor
Environmental Regulation: Harvest of Commerical Timber as an
Introduction to a Clash of Policies. 12 Envt'l. Law 1, 5-8 (1961)
I—.'r.^pccy 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 (1961).
See; II U.S.C. §362.Cc)-(g) for the conditions under which the
automatic stay remains in effect and other rules applicable to
obtaining relief from the stay.

£/   A notion 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 «tay is In Re Revere Copper
and Brass. Inc. . 29 B.R. 584 (Bkrtcy.N.W.. 19STHWhen the govern-
ment proceeds in District Court, a tiaely 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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                                                      9832,7
                                 -9-

 judgment that nay be obtained,  the government  should be prepared
 Co argue chac enforcement of che judgment  is a. continuation of the
 governmental unit's enforcement of its  regulatory power.  Thus the
     •                                              m        m
                                                     t
 Bankruptcy Code read in conjunction  with CERCLA and other authorities
 allows Che United States Co seek an  order  from Federal Discrict
 Court requiring Che Bankruptcy  Court to order  che debtor in posses-
- sion or trustee to use assets of che bankrupt  co abate a hazardous
 condition or co reimburse che government for its expenditures.
      In two recent cases, che courts rejected  che government's
 view of the exceptions-.   In United States  v. Johns Manville 9/ ,
 che Discrict Court in New Hampshire  denied EPA's motion to vacate
 an Order issued by che Bankruptcy Court in New York staying all
 proceedings in  an EPA enforcement action against Manville.  The
 opinion characterized che government's  accion  for injunccive  relief.
 as tantamount to an accion for  a money  judgment.  Since Section
 362(b)(5) of che Code prohibits enforcement of a money judgment,  .  ....
 che Courc held  chac che  injunccive relief  coughc by che government
 did noc fall within che  parameters of che  bankruptcy stay exemption.
 The Courc noted chac if  Che govemmenc  had instead sought an
 injunccion co prevent accive, on-going  disposal rather Chan cleanup
 of an  existing  hazard,  such an  accion would noc have been scayed
 by the bankrupccy filing.  In our view, che Discricc Courc
I/   No. 81-229-D  (D.N.H.  decided Nov.  15,  19»2).

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                                                      9832,7
                               -10-

      .^/  The Agency has proceeded with CERCLA response  activities
 at  the Johns Manville sites.
      In  In Re KovacsJ1/  Ohio was stayed from proceeding in
         •^"^^—         ^^             .        t      ...
    •                                        '
 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 Chen-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 brief in
TO/  The government took the position that the Johns Manville
     District Court erred, in a action to disniss?in AM Inter-
national v. United States. Case No. 82-B04922 .(N.D. Hi. Bkrtcy
Ct.; (CERCLA $106 Action;.m
H/  681 F.2d 454 (6th Cir. 1982).
12/  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

                               -li-


 the Kovacs  II  case  seating  chac the case has national implication

 for environmental enforcement under the Clean Water, RCRA, and

 CERCLA and  further  the states that the 6th Circuit decision
                                                  *        v
     •
 "obviously  encourages polluters to abuse the Bankruptcy Code

 and defy  state and  federal  environmental protection." jjj/

 fi.    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

 (or will spend) ]j^J 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.^57

      Therefore, when the United States files a proof of claim

with  the Bankruptcy Court, Department of Justice and EPA attorneys
137  Id.. Memorandum for the United States as amicus curiae
     supporting petitioner (January, 1984).

147  In the ease where the Agency has not spent Superfund money
     at the site but where we intend to conduct a fund-rinanced
response action, the United States can file a proof ot 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
the completion of the abatement actions by EPA.
   i-'   •
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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                               -12-
              * . * *
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 lien _is a right to repayment,
created by agreement, which exists independently of bankruptcy
laws.  As such, it is a charge against assets which must be met
before distribution to unsecured creditors.^/  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 fnount 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.
     195TT

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                                                      9832*7
              -  ••  •            -13-  -'

      In  Chapter  7 proceedings, secured creditors will recover
 before unsecured creditors, including EPA, unless the Bankruptcy
 Court is  persuaded by our arguments Co jump our claims ahead of
 All  others.J_J_/   In Chapter 11 proceedings, the government should
 be prepared  to play an active role in working out the terms 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 the following order under Section
 507(a):
              1.   First, administrative expenses ... and any fees
                   And charges assessed against the estate  ...
177  I507(b) establishes a "Super Priority" which'would require
tKe Agency to have priority over tvery other claim allowable.
Under $507(b) EPA would have Co 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.
187  11 U.S.C. 507(a)

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                                .14-
               "             ^,
               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
'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_f/  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
19/  H.R. 2767  sponsored  by  Rep.  Florio.

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                                                      9832-7
                               -15-


 similar provisions  in their own environmental laws,20/

           2.   Theories of Recovery Beneficial to the United Staces

               (a)   Administrative Coses
     •
      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 Ottenheiaer v. Vhitaker 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, 58
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 tee "Superlien 'Solutions' to Hazardous
Waste: Bankruptcy Conflicts" ABA Environmental Law Newsletter,
winter 83/84.

2J./  Ottenheiaer 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 Stat. 2549 (codified at 11 U.S.C.).  See also. In re Lewis
Jones. Inc. 1 Bankr. Ct. Dec. 277 (Bk. Ct. £.0. 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 from 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-Bade rule
     •                                              *        «
[•lloving abandonment] must give way vhen it  comes  into conflict
with a statute enacted in order to ensure the safety ot navigation;
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."22/
     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.
221  Id. at 290.
2^1  In Re T.P. Long Chemical Co.. Inc.. Case No. 581-906 (N.D.
     Ohio, Bkrtcy. Eastern District, April 5, 1984).

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                               .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 .*.. ...........
 • ••. •••«» ow  • ••*«•• w** W •
          (b) Recovery Under Section 5Q6.(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 clain."
 (11  U.S.C.  § 506(c)).  In a situation involving real property
 securing a  loan made by a bank or savings and loan, cleanup costs
 that preserved the property would presumably 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
247  See Robinson v. Dickey. 36 F. 2d 147 (lienholders did not
     object to water being pumped out of aines for .safety reasons
and were liable for expenditures).  First Western Savings & Loan
Association v, Anderson. 252 F. 2d 544; Miners Savings Bank of
Pittston. Pa. v. Joyce. 97 F.2d 973.

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                                -18-
           (c)  Equitable  Liens
               It  has  also been suggested 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 lav 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  nay. also require the trustee to have re-
 quested  cleanup of the property, or at least agreed to'..it.25/
           (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  26/t the Coast Guara unloaded a barge loaaea
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
25/  For a discussion of State Law on "Mechanics Lien Statutes  as
     •n Enforcement Tool in CERCLA Cost Recovery Actions."   See oeso
from R. Schaefer  to A.J. Barnes and C.M.  Price dated January 11,  19&-*.
267  Vyandotte Transportation Co.>v. United  States. 389  U.S. 191
     (1967).

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                                                        9832.7
                                -19-

 for acting  expeditiously co 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) 27/. the court stated that restitution was available under
 S7003  of RCRA because the bankruptcy action was an action  in equity.
 United States v. Reserve Mining £87 also lends support to  a  claia
 oasea  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. any bankruptcy case, Che trustee may choose to  petition
 Che Court to allow abandonment of some or all of the assets  of the
estate on the grounds chac care of Che assets by the crustee would
be excessively burdensome Co the estate. 29/  The rationale  for
277  United States v. Northeastern Pharmaceutical and Chemical Co.,
     Inc.. et al."(NEPACCO) (September 30. 1983, W. Disc. Missouri
S.W. Div.).
28/  United States v. Reserve Mining. 408 F. Supp. 1212, (D. Minn.
     1976).
2£/  11 U.S.C. 5 554.

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                                                      9832.7
                                -20-

penniccing 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.3£/
     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 all-ow' 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 net, 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 the property will revert to a  viable party
whom EPA may pursue for contribution to the clean up.
     The position of the United States is supported by the reasoning
                                                 %
of the Ottenheimer v. Vhleaker case, 3V and by In Re Lewis Jones,
307  In re Ira Haupt & Co., 398 F.2d 607 (2d Cir. 1968).
31/  Supra, note 13.

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                                                     X U ~J C. • I
                                -21-
 Inc.  32/   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-
 heimer position and held that the bankruptcy trustee could not
 simply abandon the property.  Instead, the trustee was required cc
 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." 33/
     The law on abandonment under the Code is unsettled.  In the
 recent bankruptcy case, In Re Quanta Resources,34/ 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 to abandon a hazardous waste site on grounds that the
32/  Id.
33/  In Re Lewis Jones, supra at 280.
34/  In Re Quanta Resources Corp..         F. Supp. __
     No* 82-3524 (D.N.J. Jan 24, 1983) Appeal Pending
No. 83-5142 (3d Cir.).

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                                                        9832.7
              - -               -22-

propercy 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, the Court noted, abandonment was allowable under judge-cade
rule.  Section 554 of the Bankruptcy Code, however, provided  specif(
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.36/
     The Court was similarly unpersuaded by Mew York's argument
that S959(b) of the United States Judicial Code, (28 U.S.C.  Section
35/  Hazardous Waste Litigation Reporter, (July 6, 1982) at 2,646
367  Id. at 3,671 and 3,672.

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                                -23-

 959(b))  prohibited abandonment.  Section 959(b) provides that the
 trustee  shall  "manage and operate" property in his possession
 •«.ww«.Jit46  '"^ 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 lavs that affect bankrupt
 parties  as long as the substance of those lavs does not overlap
 vith the Ftderal  Bankruptcy Reform Act's jurisdiction.  The United
 States Constitution gives Congress the pover to establish uniform
 lavs on bankruptcy 3.7/ but does not prevent states from passing
valid lavs on  insolvency.  To the extent there is no conflict
between a state's insolvency lav and the federal .bankruptcy law,
 the state lav  remains in operation.38_/ .
     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 minimum, however., it gives the
                                                  f-
government a right of priority over all unsecured creditors to
37/  U.S. CONST art I, S8 cl 4.
38y  In re Wisconsin Builders Supply Co.. 2\39 F.2d 649  (7th Cir.
     1956;, Cert, denied 353 U.S. 9^5 (1958).

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                                            -24-
                                                                  9832.7
            payment out of the property  in  the  hands of the debtor's assignees
            or other representatives  under  the  conditions specified in the
            •tatute.39/
                                  .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
•j            Code.
            39/   Braawell 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.
            407   Under Public Law 95-598 S248, 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

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                                                                  9.832,7
                                              -25-

                         in  August'1979 as  'guidelines' that could be .adopted
                        .as  local  rules.  The  interin 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
 I                        rules  in  addition  to, or in lieu of, these interim
,1                        rules.  Second, if a  point of procedure'is not .covered
 I                        by  the applicable  local rules, consult the Bankruptcy
 *                        Rules  in  effect under the Bankruptcy Act of 1889 ."'Ul 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 fora  which states the name of 'the claimant; the anour.t
              of the debt  or claim; the grouno of liability; the date the da in:
              became due or will become due under an open account  thecrryy see
              footnote 10  supra; and, the nature of the claim (secured or general.
            .  unsecured).^/                                   .
                  The filing of proofs of claims or interests |s  explained  in
              Section 501 of the Bankruptcy Code.^3/  in a liquidation case under
              Chapter 7, a claim ordinarily oust be filed within six months after
              the first  date set :for the first meeting of creditors.^/  Claims  base
             41/  Bankruptcy Monograph dated Novemoer 22, 1982, prepared oy the
                  Office" of the Assistant Attorney General, Civil Division, tor
             use of U.S. Attorneys, at pp. 6,7.
             427  See. Bankruptcy Rules, Proof of Claim official forms.  Proof
                  oT""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.
             447  3 Collier on Bankruptcy Para. -501.02[2]  (15th ed.  1979).


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                                         •    .         9832.7
                               -26-
on administrative expenses can be filed any time before  the  Court
has granted the debtor a discharge, of debts.  It is more difficult:
to 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 tor
determining when that acceptance will take 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."f|_5/  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 in the
filing of a proof of claim in Bankruptcy Court.^£/  As stated
above, special procedures may be available in emergency situations
in which the government would otherwise miss filing^deadlines.
Headquarters and DOJ should be contacted.
45/  11 U.S.C. § 506(a).See also (b)-(j)  [Procedure after objection]
46/  See, fn 1, page 3 supra for referral documentation that the
     department of Justice has requested regarding the.r financial
status of responsible parties.

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                                             -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 Che 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. S 160
             487  28 U.S.C. S 1334
             ^""
I

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                                -28-                    9832.7

E.   Federal Bankruptcy Court Jurisdiction
     The jurisdiction of Bankruptcy Courts has been  in  a confused
state since the Supreme Court's decision in Northern Pipeline
Construction Co. v. Marathon Pice Line Co. *9/  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."5£/  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) nay no longer be litigated in Bankruptcy Court absent
the consent of the litigants.5J/
497  	U.S._	,  102 S. Ct. 2858 (1982).
50/  28 U.S.C. U71(b)(c).
51/  Cook, New Bankruptcy Quandary Could Be Easily Solved.
     Legal Times, Sept. 6. 1982 at 10 Col. 1."

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                                .29-


      In reaction  co  Congress*  failure co enact legislation that

 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.££/  xhe 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
           judgment 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.)J  A district judge then reviews
           the  recommendation and  enters a judgment. [Section (c)(.5)j
           Where circumstances  require, an order or judgment
           entered by a-bankruptcy judge will be confirmed by a Dis-
           trict judge  even if no  objection is filed.537

      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

 	  	  	psrinent with options for seeking relief in the Bank-

 ruptcy  Court.  For example, the United States can move the District
                         •^
 Court co "withdraw the reference  Co che bankruptcy judge."£^/  If
52/  See: Memorandum from William E. Foley (Dir. 'Admin Officer
     of U.S. Courts) co Judges, Clerks U.S. Courc System Regarding
.Continued Operation of Che Bankruptcy Courc System after Dec. 24,
1982 in the Absence of Congressional Action.

537  Id.                                                  .

54/ * 11471(d) grants Bankruptcy Judges the authority to refuse-
     jurisdiction.

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                       \


                                                        9832.7
                                •30-


such a notion were granted, the District Court could  retain  the

entire matter, refer part of it back to the bankruptcy  judge or

refer the entire matter back to the bankruptcy judge.   The govern-

ment should also make a simultaneous motion to overcome the  stay.

If, however, an action in Bankruptcy Court has already  been  initiatec

the government may file a motion to stay the bankruptcy matter  in

order to proceed in District Court.55/


                V.  THEORIES OF INDIVIDUAL 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 bankrupY.IrT'such a case,  the United States may  choose  to

ignore the estate in bankruptcy and pursue the responsible individ-

uals -- as individuals -- directly, or the United States could

pursue-both the assets of the bankrupt corporation and  the appro-

priate individuals.567
557  These procedural recommendations were made informally in
     conversations with staff members of the U.S. Administrative
Courts.  Perhaps reflecting the current confusion in the bankruptcy
court system, one staff attorney stated that CERCLA actions appeared
Co present unusual subject natter that a District .Court would wish
to hear itself in light of Northern Pipeline; the other staff
attorney discouraged EPA from attempting to be heard by District
Court, stating that business was proceeding as usual in bankruptcy
courts.

567  For a general discussion of individual liability, see Guidance
     Memo "Liability of Corporate Shareholders and Successor Corpo- ,
rations for Abandoned Sites Under the Comprehensive Environmental
Response Compensation, and Liability Act (CERCLA)" from Courtney y.
Price to Regional Counsels due to be issued June 1984.

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                                -31-                     9832,7

 A.    Personal  Involvement  in Aces 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 for the torts
 of the corporation and of other directors, officers or agents if
 he failed to exercise reasonable care.377
      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.££/ .
     The United States plans to make use of this theory of liability
                                    fe
 in pursuing, in certain cases, the assets of individuals involved
 with  coroorations that have declared bankruptcy;  The fact patterns
 of these particular cases seem well-suited to the law.  They involve
 •icuations in which hazardous waste treatment or disposal operations
577  See:  19 C.J.S. Corporations SS845, 850 (194D).  Accord;
     ITS, v. Hess. 41 F. Supp. 197, (S.D. N.Y. 1983).  See also:
Miller v. Muscarelle. 1970 A. 2d (N.J. Super.. 1961); Donsco Inc.
v. Casper Corp.. 587 F. 2d. 609 (3d Cir. 1978); Patyaan v. Howey.
340 Ho. 11, 100 S.W. 2d. 851. 856 (19b3).  Singleton v. Armor
Velvet Corp.. 4 P. 2d 223 (cal. App).  See also Brief in U.S. v.
Mahier CM.D.  Pa.) drafted by Michael Steinberg, Attorney, Environ-
oental Defense Section, DOJ. (April 1, 1983) for a discussion or
personal liability.
58_7  Martin v. Wood. 400 F. 2d 31U (3d. Cir. 1968).

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                                                         9832-7
               -  ••              -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 notion 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. Hovey,
          100 S.W. 2d 851, 856 (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.1 19 Am. Jur. 2d $ 1382  at 77.59/
     In addition to theories of individual tort  liability,  CERCLA
explicitly allows individuals to be held liable  for cleaning  up
                            *.           .                I
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 Che time of
disposal of any hazardous substance owned or operated any facility,
persons who arranged for disposal and persons who accepted for
transport hazardous substances.££/  The Act defines "person"
as, inter alia, "an individual."£]/  One purpose of the corporate
59/  U.S. v. North Eastern Pharmaceutical & Chemical Co.. Inc.
     et al.. (NEPACCO) No. 80-5066-CV-SW (Western Dist. Mo. 19di).
A later NEPACCO decision based a determination of liability on $107
of CERCLA.  (see discussion infra)
607  CERCLA S107(a)(l)(2), .(3)(4)
6V  CERCLA S 101(21).

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                                                       9832,7
                                -33-
 struccure  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 che commission of torts.
 B.    Piercing the Corporate Veil
      By piercing the corporate veil, the United States may be
 able  to 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 che corporation pay dividends?
A) Is the corporation solvent?  5) Have the dominant shareholders
siphoned corporate funds?  6) Does the situation present  an element
of "fundamental unfairness"?££/  courts have refused to pierce the
veil absent a showing of fundamental unfairness.£37  However,
62/  United States v. pisani. 646 F.2d. 83. 88 (3d. Cir. 1981)
637  DcVltt Trucking Brokers v. W. Ray Fleming Fruit Company.
     540 F. 2d 681, 667 (4th Cir. 1976).

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                                -34-
9832.7
 fraud need not be sh'own if federal law governs a case.^/   The
 general rule applied by federal courts co cases involving  federal
 •tatutes  is that the individuals nay be held liable in che interest
 of public convenience, fairness and equity.  The specific  statutory
 directives of CERCLA support a federal law.  In addition,  the
 language of CERCLA establishes liability for individuals who ovnec,
 operated or otherwise controlled activities at hazardous waste
 sites..**/
     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 firming
 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 vane 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.42i,
     424 (D. Mass. 1977). The government will want.to argue that
federal law applies to piercing che veil.  U.S. v. Kimbell Foods.
440 U.S. 715 (1979), holds that application of State law should
not frustrate the objectives of federal statutes. ' In the Pisani
case, supra, at 87, the Third Circuit stated, "We believe it is
undesirable to let the rights of the 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 Uniced States proceeds to initiate action against
 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
 Pharmaceutical & Chemical Co.. Inc.. e't al. (NEPACCO)**/,  defendants
 alleged  that, as Connecticut residents, they were not subject to
                                                                  r
 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
 ..... 	,.„, iiowever, 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.
     Order No. 5066-CV-SW, (June 11, 1981, V. 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-Waste 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.
     8~3TS0198, COMPLAINT FOR DECLARATORY JUDGMENT AND APPLICATION
     FOR ORDER FOR 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. -80-00993-H.C ',
     plus APPLICATION FOR ORDER FOR REIMBURSEMENT etc        -ffidavit.
     (Southern Dist., TX)

     In re Crystal Chemical Company, Case No                  "'is
     UNITE'D 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
     order granting motion

     In re Crystal Cnemi,
     OBJECTION TO PROPOSED
     DISCHARGE OF LIEN and accompa*..               .. *~      £ motion
     (Southern Dist., TX)                      '           -^

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                                                       9832,7

                                -37-


     State of Ohio. Petitioner v. William Lee Kovacs.  ON  PETITION
     FOR A WRIT OF CERT10RARI TO THE UNITED STATES  COURT  OF APPEALS
     FOR THE SIXTH CIRCUIT. Brief for the United States as Amicus
     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 EPA's EXPENSES.  Filed  Aug. 22,  1983.

     In the Matter of Quanta Resources Corp.. Debtor.  State
     of New York and City of New York. Appellants,  v.  Thomas
     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 II). 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
     ,-wwi.wi. to vacate the  automatic stay. (Nov. 15,  1982;
     U.S. District Ct., N.H)

     State of Ohio v. William Lee Koyact. No.  81-3320. Decision
     affirmed 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.. et al.. No.  80-5Q6b-CV-SW.  Decision
     denying defendants' notion to dismiss for lack  of personal
     jurisdiction. (June 11, 19bl; Western District  of Missouri,
     S. Western Division)

     Universal Metal Stamping. Inc. v. Pennco  Machinery. Inc..
     Bankruptcy No. 81-01262K.  Bankruptcy Court-heId 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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                                                     983.2.7
                               '-38-
RESOURCES
     Bankruptcy Monograph conveyed to U.S.  Attorneys Offices
12.W
 22,
     November 22, 1962.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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