.--•I'...
V
             IMTED STATES ENVIRONMENTAL PROTECTION AGENCY
                            '•ASH1NGTOS.D.C. 20460
                                                           9832-8
                             MAY 23
 MEMORANDUM
 SUBJECT:  R
 FROM:
                          ou» Waste Bankruptcy Guidance
                       May«
 TO:
            ^Acting Assistant^ AHrinit trator for
              Enforcement aTTd Compliance Monitoring
            Regional Counsels,  Regions I-X
      The Agency's recent  experience in CERCLA and  RCRA bankruptcy
 actions has identified the need for updated  and  revised guidance
 on the scope of EPA's  enforcement actions against  bankrupt parties.
 This  memorandum is intended to update the May 24,  1984 guidance
 •CERCLA Enforcement Against Bankrupt Parties* and  the  guidelines
 on bankruptcy contained in the Cost Recovery Handbook  "Procedures
 for Documenting Costs  for CERCLA $107 Actions,*  January 30,  1985.
 The memorandum defines specific criteria for evaluating the
 merits of a potential  bankruptcy referral) elaborates  on  the
 policy regarding settlement with bankrupt partiesj  reviews the
 recent judicial decisions in the areas of the automatic stay,
 abandonment, discharge, and claims of administrative expenses;
'and briefly describes  new enforcement theories which have been
 asserted by the Agency in recent pleadings.

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BANKRUPTCY REFERRALS                                     9832* 8

     EPA has referred  22 hazardous substance cases to the

Department of Justice  for filing in bankruptcy actions.  After

several years of  litigation only two of these cases have resulted

in recovery of funds from the debtor.  The current docket of

bankruptcy cases  has consumed a disproportionate amount of

attorney resources  based on the expected recovery of funds  to

the Agency.

     Additional scrutiny will be used in evaluating future

referrals from the  Regions which include bankruptcy claims.

In all referrals  regarding bankrupt parties, the Regions should

include a justification for filing in the bankruptcy action.

The referral justification should be based on at least one  of   "

the following five  criteria:

          1.  EPA is likely to recover at least $5/000
              by  filing a simple proof of claim as a
              general  unsecured creditor

     Filing a proof of claim is a relatively simple and straight-

forward matter which may be appropriate when the Agency has a

claim as a general  unsecured creditor, for example in cases

where the Agency  has completed a response action before the

bankruptcy is filed.   Where there appears to be sufficient assets

in the debtor's estate !/ for a small distribution to the
I/ Determining the extent of the assets in the estate can be
   based on the schedule of assets set out in the bankruptcy
petition, the extent of assets and claims published followir;
the initial meeting of creditors, the court's bankruptcy
and periodic filings available through the court clerk.

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                               -  3  -
9832.8
 government  on  an  unsecured  claim,  the  trustee,  debtor, or other
 creditors itay  well not  undertake the trouble and expense to
 challenge a dale that  does not otherwise  threaten the estate.
 The  chances of such an  objection are particularly small where
 EPA's  claim.is liquidated and  CERCLA liability  la clear V.  As-
 a general rule, a proof of claim should be filed in cases where
 EPA  does not anticipate that an objection will be raised by the
 creditors or the  estate and where  the  filing of a proof of claim
     »
 will lead to a recovery of at  least $5,000 J/.  In these cases,
 the  Region  should prepare an abbreviated referral package con-
 taining the proof of claim, supporting affidavits and cost
 documentation  and a brief description of the assets in the
 debtor's estate.
          2.   EPA is likely to recover at least $20,000 of
               response  costs through a more complex bankruptcy
               filing
     As a general rule, prospective referrals of complex
 bankruptcy  actions (such as a request for an administrative
 expense priority) that may lead to recovery of less than $20,000
 are discouraged.
2/  Under Stetlon 502(a) of the Bankruptcy Act • claim is deened
~   allowed unless objected to.  Thus, filing a proof of claim,  by
itself, will oftan not Itad to the type of extensive litigation
that has characterited many of tht Agency'a bankruptcy cases so  far,
3/  If coatly obstacles or significant challenges at so»e point
~"   do in fact loon over EPA'a proof of clala. th* Agency can
always withdraw its claim as a matter of right prior to the
filing, of an objection (Bankruptcy Rult 3006).  Evan after the
filing of an objection to tht proof of claim, EPA can withdraw
ita claim, aublect to court approval.  As long as the claim was
filed in good faith, a court will be unlikely to dtny the with-
drawal of a claia where the government indicates that it is not
in its best interests to pursue th* claim.

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                                -*•                     9832,8
              «
     Assuring a  recovery  of  $20,000 or more, the Region should
set out the  extent  of  the assets  in the debtor's estate, the
nuir.ber and extent of other claims, the status of other creditors
(i.e., secured or unsecured), and the theories of recovery which
will be asserted in the bankruptcy litigation.  The Region should
also evaluate the merits of  EPA's claims, including the ability
of the Agency to prove its CERCLA 1107 claims based on available
cost documentation.
          3.  The bankruptcy action has significant deterrence
              value
     Under this justification, the Regions should establish
that the bankrupt party may  be seeking to avoid liability
for Superfund cleanup  through an unlawful declaration of insol-
vency.  The  referral should  Include a discussion of the past
financial practices of the potential defendant and any indication
of misrepresentation or fraudulent transfer of funds.  A bank-
ruptcy case may also be an appropriate candidate for referral  if
the case is made highly visible to-the regulated community and
will serve as a deterrent to other defendants who may contemplate
using the bankruptcy courts  as an obvious shield from potential
Superfund liability to the government £/.  In these cases, the
6/  The ftovernaent has been successful in dismissing bankruptcy
actions where the government was able to ahov under Rule 707(a)
or 305(a) that the dismissal was in the public interest.  In In
re Commercial Oil (No. 85-01951 Bankr. N.D. Ohio) the Bankruptcy
Court under rule 707(a) dismissed the petition in bankruptcy
citing In re Charles George Land Reclamation Trust. 30 B.R. 918
(Bankr. C.D. Mass. 1983) wnicn involved a shea bankruptcy filing
in an attempt to avoid Superfund liability.

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9832.8                          '    •
   Region  should attempt  to estimate the extent  to  which  the costs
   of  litigation may  be recoverable.
   4.   Equitable treatment  of all  responsible  parties
        In tone  circumstances the  Region may wish to refer a case
   against a  bankrupt party in the interest of equity and fair
   treatment  of  all parties.   For  example, it  may be appropriate
   to  pursue  the bankrupt owner or operator of a facility who
   contributed significantly  to the  creation of the hazard,
   particularly  in connection with a  settlement with other viable
   responsible parties.  In most cases,  the Region  should not
   consider a referral  against bankrupt  generators or transporters
   unless  the case meets the  criteria  set out  in justifications^
   1 or  7..
        5.  Favorable  precedent or  tactical litigation considerations
        In  rare  cas»s  there may be an  overriding interest in
   pursuing a bankrupt  party  for the purposes  of obtaining an
   important  and favorable  precedent j>/  or where there are tactical
   litigation issues  relating to other actions in which the Agency  -.
   is  involved &/.
   5/  There may bt  cases where even though the potential recovery
   ~   is  small, there  is good opportunity to develop the law in
   the area of  environmental bankruptcy litigation.  Moreover,
   eases where  the Agency's claim  is snail Bay present the best
   factual situations for developing our legal arguments.  For
   example, courts may  be more willing to grant an administrative
   expense priority  when the size  of EPA's claim is snail and will
   not keep other administrative claims from being paid.
   6/  For example,  filing a proof of claim may be a useful mechanism
      to  insure that the United States receives copies of relevant
   pleadings filed in the bankruptcy and has access to participate
   in whatever  discovery is conducted in the bankruptcy proceeding.

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                                                      9832.8
MULTIPLE CLAIMS
     In several cases, the Regions have referred bankruptcy
cases which address one claia against a debtor, but which do not
mention other, sometimes unrelated, potential claims that may
involve the sane debtor.  For example, referrals for the recovery
of funds spent in an immediate removal may also have potential
claims for CERCLA remedial action or RCRA corrective action.
There can be conflicts in how the Agency would want to proceed
on the various claims.  Accordingly, it is essential that the
full extent of all potential EPA claims against a debtor be
disclosed to the Department of Justice before any formal action
is taken in the bankruptcy.  All litigation reports prepared by
the Regions for bankruptcy cases should summarize all known and
potential claims that EPA may have against the debtor.
SETTLEMENT VITP BANKRUPT PARTIES UNDER CERCLA
     The Agency's settlement policy ]_/ states that it nay be
appropriate for the Regions to enter into negotiations with bank-
rupt PRPs even though an offer nay not represent a substantial
portion of the costs of cleanup.  The policy further states, that
the Regions should avoid becoming involved in bankruptcy proceedings
77  "Interia Hazardous Vase* Settlement Policy" Vol. 50, Mo. 24
~   Federal Register (February 5, 1985) 5034-5044.  See discussion
at ITManagement Guidelines for Negotiation. cUiasin bankruptcy
Id. at 5036.

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                                                         9832,8
 if  there  is  little  likelihood  of  recovery,  and  should  recognize
 the risks  of  negotiating yithout  creditor status.   In  general,
 the Regions  have  been  given  broad authority to  settle  with
 bankrupt  parties.
     When  a -Region  elects  to settle with a  bankrupt party the
 following  five  options  should  be  considered:
           1.  Confession of Judgment
     In United  States v. Metate Asbestos Corp. et al.. No. 83-
 309-GLO-RMB  (Order  of July 12, 1985) the court approved the
 entry of a consent  decree and  civil Judgment against certain of
 the  defendants  in bankruptcy for  $7,085,000.  The order granted
 .iudRifent /jointly  and severally in the District Court proceeding .
 in  settlement of  claims against the bankrupt parties.  In this
 case, due to  the  extremely limited assets of the bankrupt
 individuals,  it is  doubtful  that  the United States will recover
 a substantial portion of the $7 million.  This form of settlement
 (i.e., a confession of liability  and Judgment) is only encouraged
 in a Chapter  11 reorganization action where a specific provision
 for  enforcement of  the Judgment is tec out  in the confined plan
of reorganization.  *V
8/  Unless otherwise provided for in the plan of reorganisation.
~~   the confirmation of the plan discharges the debtor from
all debts arising before the date of confirmation, 11 U.S.C.
I1141(d)(1).  In addition. 11 U.S.C. IS24(a) provides that
a discharge voida Judgments on discharged debts and enjoins
any legal action to collect such debts froa the debtor or the
property of the debtor.

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                              - 8 -            ,         9832,8

          2.  Written agreement with trustee and other creditors
              regarding satisfaction of claic with appropriate
              reservations
     It is also possible for the Agency co enter Into an agree*
Bent with the trustee for the debtor regarding a future payment
of funds upon dissolution of the estate.  For example, in one
case in the Northern District of Florida the Agency is contem-
plating entering into a stipulation with the trustee and the
mortgage holder on the contaminated property.  As a condition of
settlement, EPA will agree to release the debtor from liability
and allow the cleaned up property to be sold or leased.  EPA and
the mortgage holder would splir the proceeds from the sale or
lease of the property thereby recovering a substantial portion
of the Agency's cleanup costs.
     In a second case, in the Eastern District of North Carolina,
the Agency is considering entering into a similar arrangement.
The dpbtor-in-possession has submitted a liquidation plan of
reorganization in which the debtor agrees to retain title to the
contaminated property during the EPA cleanup.  When the cleanup
is completed, the debtor will cell the property.  The proceeds
will go first to eovtr administrative expenses involved in the
•ale and then to EPA for reimbursement of response costs.  EPA
has requested that language be included in the plan vhich pro-
tects the right of EPA to recover against the debtor's insurance
companies.

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                              - 9  -

          3.  Agreement with trustee regarding pro rata
              distribution of assets
9832,8
     Pending a final accounting, EPA nay agree with the trustee
to a pro-rats payment of our claim In bankruptcy.  In In re
Crystal Chegieal Corpany. No. 81-02901-HB-4 (Bankr. S.D. Texas),
EPA entered into a stipulation with the trustee for a pro rata
payment of cleanup costs after liquidation.  The stipulation was
reached after a four day presentation of •vidence Co the bank-
ruptcy court where EPA was seeking an ionediate payment of funds
for the ongoing cleanup.
          A.  Settlements contained in the reorganization plan
     A Chapter 11 reorganization plan is • type of settlement  •
document.  Reorganization plans can be used to set forth
various settlement-type provisions that are in the Agency's
interest.  For example, In In re Thomas Solvent Co..  NK 8^-00843
(Bankr. W.D. Mich.), the Second Amended Plan of Reorganization,
which was confirmed by the court, included, at the government's
insistance, provisions relating to prtserving claims  against
liability insurers and provisions relating to restrictions on
transfer of contaminated property.  Other appropriate provisions
in such plan* night bt provision* en access to property and
retention of records.  The Agency should in«i*t on thi* type of
provision in cases where a plan cannot be confined without our
concurrence*

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                              - 10 -
                                                       9832,8
         5. Settlement with other creditors.
     In some cases, other creditors will be a party to a settlement
between FPA and the debtor.  For example, in In re Thomas Solvent
Co. .  NK 84-OOBO (Bankr. W.D. Mich.), there it approximately
5350,000 available for distribution to creditors.  The significant
creditors are EPA, the State of Michigan and two residents groups
with health claims.  FPA, the State and the two groups have
filed multi-Billion dollar claims.  We are presently finalizing
a settlerent arrong these creditors and the debtor which will
provide for the distribution of the S350.000.  One primary
benefit of such a settlement is that it avoids the need for time
consuming and expensive litigation in bankruptcy court among
creditors damaged by the sane activities, and will allow us to
devote our full resources to pursuing a cost recovery action
against other responsible parties.
     There are numerous other options for settlement, and
for documentation of settlement, with a bankrupt party,
including those used to resolve non-bankruptcy proceedings
under CEFCLA.  Although Headquarters vill be flexible in   .
reviewing theae settlements, It ia important that the Regions
consult with Headquarters and the Department of Justice before
entering into final negotiation* with a bankrupt party.  An
abbreviated referral of the bankruptcy settlement agreement is
acceptable.

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                              - u  •
                                                      9832,8
 JUDICIAL DEVELOry.ESTS
     Since the May 24, 1964 guidance was issued regarding CERCLA
 enforcement againt bankrupt parties, there has been an increase
 in judicial activity in the area of environmental bankruptcy
 actions, particularly in cases involving hazardous waste sites.
 In addition to several significant District Court and Appellate
 Court decisions, the Supreme Court has issued two significant
 rulings in this area in Ohio v.  Kovaes, 4,05 S. Ct. 705 (1985),
 and Midlantic National Bank v. New Jersey Department of
 Environmental Protection, 54 U.S.L.W. 4138 (U.S.  Jan. 27,  1986)
 ("Quanta Resources').
     1.  Automatic Stays
     Several courts have adopted the Agency's interpretation
 that the automatic stay provision of section 362  of the
 Bankruptcy Code does not apply to actions taken by a govern-
mental unit to prevent environmental harm.  In Pcnn Terra
 Ltd,  v. Department of Environmental Resources, 733 F.2d 267,
 274 (3d Cir. 1984), the court held that actions taken to
 •rectify harmful environmental hazards' were an obvious
exercise of the State's authority under the police power and
 therefore were exempt from the automatic stay.  The Supreme
 Court* in a footnote to the Kovaes decision, suggested that
Penn Terra may be applicable to hazardous waste cleanup actions,
 IDS S.Ct. 70S, 718, n. 11.
     A recent CERCLA decision regarding the Film Recovery
site in Illinois was also favorable to the Agency on the issue
 of the automatic stay, united States v. B.R. MaeKav fc Sons Inc. ,

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                               "    "                   9632,8
 £LJLL. JJo. 65-C-6925 (K.D. 111. Jan. 17, 1986).  In  the MeKav
 decision the court held that CERCLA cost recovery actions  fall
 squarely within the governmental enforcement exception  to  the
 automatic stay.  Id. at 7.
      Other'recent decisions Indicate • iplit of authority  on the
 ISSUP of whether the automatic »tay applies  to enforcement actions
 brought pursuant to CERCLA.  In United States v. ILCO.  48  B.R.
 1016 (N.D.  Ala. 19*5),  EPA asserted claims pursuant to  T.CRA
 53008,  CWA  SS301 and 309.  and CERCLA 1106.   The Court's decision
 in the  ILCO case stated clearly that the CERCLA $106  claims were
 exempt  from the automatic  stay because the government's complaint,
 which sought a court order compelling ILCO to remedy  environmental
 harm, constituted an equitable action to prevent future harm,
 rather  than an action to enforce a money judgment.  Recognizing
 that the debtor would have to expend funds In order to  catisfy
.the requested  mandatory relief,  the Court indicated that
 compliance  with environmental laws is of greater importance than
 the rights  of  the creditors.   The ILCO decision cites Penn Terra.
 733 F.2d 277 and Kovaea  In support.   See also.  In the Matter of
 Hildeman Indus.. Inc. (Bankr. N.D. N.J.  Dec.  17, 1984)  (dioxin
 sampling taken pursuant  to an adainlatrative  order falls vithin
 the enforcement of the  police or regulatory  powers of a
 governmental unit).   But see.  In re Thomas Solvent Co.. Bankr.

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                               "                '          9832,8
 L.  Rep.  (CCC)  170,111  (Bankr.  W.D.  Mich.  1984)  (automatic stay
 held  applicable  to Michigan's  attempt  to  enforce a pre-bankruptcy
 cleanup  injunction).
      Enforcement  actions  brought pursuant to the Resource
 Conservation- and  Recovery Act  and its  applicable regulations
 have  also been found to be exempt from the automatic atay in
 most  of  the  recent decisions.  The  Bankruptcy Court in In re
 Wheeling Pittsbure Steel  Corp.. et  al*. v. United States
 Environmental Protection  Agency and Ralph W. Siskind,
 No. K5-793 (PCH)  No. 85-0236 (Bankr. W.D. Penn. Oct.  31,  1985),
 granted  the  United States' notion to dismiss the complaint
 to  enforce the automatic  stay.  In  that decision, the court
 held  that the United States can:  1) proceed to enforce RCRA;
 2)  seek to determine the  existence of  any violations  of RCRA;
 3)  seek to rectify those  violations; and 4) seek the  entry of  a
money judgment on any penalties assessed (but cannot  seek to
 enforce such judgment without  an order from the court).
     Similarly, on appeal to the U.S. District Court  for the
Western District  of Texas from the Bankruptcy Court,  in _In
the Matter cf Commonwealth Oil Refining Co.. Inc..  Offieal
 Committee of Unsecured Creditors and the Indentured Trustee  v.
 United States Fnvironwental Protection Agency.  Ho.  SA 85-CA-20A5
 (W.D. Texas, Nov. 5, 1985). Che court held that an EPA enforce-
ment  action to require a  debtor to comply with RCRA'a Part B
                                  r-
 requirements was  an exerciae of the Agency's regulatory power,

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                              - 14 -
                                                          9832  8
and thus excepted from the automatic stay under 11 U.S.C.        '
S362(b)(4).  The court stated that the expense which the debtor
will incur to car.ply with environmental laws does not convert
into an enforcement of a money judgment which would be auto-
matically stayed, slip op. at 3.  See also, United States v.
ILCO, 48 B.F~. 1016, 1021, 1024 (N.D. Ala. 1985); In re Bayonne
Barrel and Drun Co., Inc., No. 82-04747, slip op. at 1 (D.  N.J.
July 17, 1984).  But see, In re Professional Sales Corp.,  48
B.R. 651 (Bankr. N.D. 111. 1985), rev'd 56 B.R. 753 (N.D.  111.
1985).
     There is also sane authority to suggest that the collection
of a civil administrative fine or penalty is an exercise of the
government's regulatory power, and therefore is exempt from the
automatic stay provisions, United States v. Energy International
Inc., 19 BR 1020, (S.D. Ohio, 1981).
     2.  Abandonment
     In Midlentie National Bank v. New Jersey Dcpt. of
Environmental Protection, ('Quanta Resources") 54 U.S.L.w.  4138
(Jan. 27, 1986), the Supreme Court held that "a trustee nay not
abandon property in contravention of a state statute or regula-
tion that is reasonably .designed to protect the public health or
safety from identified hazards."  The Court qualified this holding
by stating that this exception to the abandonment power would not
apply if the stats statute did not address an •imminent and
identifiable harm" or if the violations alleged were 'speculative
or indeterminate future" events. Id. at n.9.  The Court Isft

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                               - 15 -
                                                           9832,8
 op«n tb* question of whether trustees oust coirply with health
 and safety lavs no natter how "onerous"  their  provisions.  However,
 the Court did zive sorre clue when  it described security  fencing,
 drainage and diking repairs, sealing deteriorating  tanks,  and
 removing explosive agents as "relatively minor steps."  ^ld at
 n.3.
      Prior to the Supreme Court's  ruling,  abandonaent decisions
 in the  lower courts were inixed.  Compare.  In re T.P.Long Chemical
 Inc.. No.  581-906 (Bankr.  N.D.  Ohio.  Jan.  31,  1985) (the trustee
 was denied permission  to use abandonment to avoid CERCLA liabil-
 ities)  with,  ratarount  Dyers,  13 B.C.D.  321 (Bankr. D. Vt. 1985)
 (abandonment of contaminated property allowed); In  re Union
 Scrap Trer and  M»tal.  13 P.C.D. 29  (Bankr. D.  Minn., 1985'  (same)).
      3.   fiseharge
     The Supreme  Court  recently addressed  the  Issue of whether a
 bankruptcy discharge relieves  the  debtor from  fulfilling
•environmental  duties that  may  have  arisen  prior to  filing the
 petition In  bankruptcy.   In  Ohio v.  Kovacs. 105 S.  Ct. 705
 (19R5)  the Court  stated  that •  pre-petltlon Injunction for cleanup*
 of  the  Chem  Dyne  hazardous vastt site la • dischargeable debt
 where the  debtor  had been  dispossessed of  the  property and hence
 the State  was-seeking nothing more  than  payment of  money for
 the cleanup.  However,  the Kovaea decision noted that an
 affirmative injunction  not to  bring waste  to a aite (which would
 not Involve an  expenditure of money)  waa not a dischargeable
 debt.   The Agency has  taken  the poaition that  the Kovaes ruling

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                              - 16 -
                                             '   ,           9832,8
should be applied only to those sites where the debtor is no
longer in possession or control of the contaminated property.
An equally narrow interpretation can be made of the decision
in In re Robinson, No. 84-404-BK-J-GP (Bankr.  M.D. Fla.
Feb. 4, 1985), rev'd. (A pre-petition injunction to restore
marshland which the debtor had illegally excavated was also held
to be dischargeable even though the debtor was not dispossessed,
because the restoration project would have required an expenditure
of money and was not an affirmative injunction.  In contrast,
EPA enforcement actions or cleanup compliance  orders could  be
characterized as an affirmative injunction).
     4.  Recovery of Response Costs - Administrative
         Expenses
     The Agency has successfully argued that the EPA's response
costs are necessary to preserve the estate of  the debtor and
should be accorded the priority allowed for administrative
expenses, In re T.P. Long Chemical Inc., No. 581-906 (Bankr.
N.D. Ohio, Jan. 31, 1985).  In the T.P. Long case, the
Court held that the estate was a liable party  under CERCLA
S107 and that the CERCLA liabilities of the estate were
entitled to priority treatment as an administrative expense.
Kovaes 105 S.Ct. at 711-712.
     The Supreme Court** decision in Midlantie Bank nay be  read
to support the holding in T.P. Lono that CEKCLA liabilities
of the estate are administrative expenses.  Although the Court
attempted to reserve the administrative expenses question,  the

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                              -  17  -
                                                           9832,8
implication of the Court's holding  that trustees must comply
with health and safety laws  is that such compliance is an
•actual, necessary cost and  expense of preserving the estate."
11 U.S.C. S503(b)(l)(A).  See also. In the Matter of Thomas
Solvent Co.. No. NK-84-00843 (Bankr. N.D. Mich, Jan. 2, 1986)
(court order requiring construction of a fence on contaminated
property owned by the debtor stated that cost of construction is
an administrative expense pursuant to S503(b) of the Bankruptcy
Code): In re Geuder Paesehe  t Frey Co., (Bankr. E.D. Wise.)
(cleanup costs are administrative expenses); In re Laurinberq
Oil Co. . Inc., No. B-84-00011 (M.D. N.C. Sept. 14, 1984)
(expenses incurred to abate violations of state water pollution
laws are administrative expenses); but see, Southern Railway
Co. v. Johnson Bronze Co., 758 F.2d 137 (3d Cir. 1985) (in the
absence of fraud, purchaser  of property from the debtor does  not
have claims against the bankrupt's estate for the costs of
cleaning up the site); In re Charles A. Stevens, 53 BR 783
(Bankr. D.C.  Maine, Oct.  9, 1985) (costs for investigation of
waste oil contamination were found not to be an administrative
expense and constitute only • genera,!, unsecured claim against
the debtor's estate)) and In re Wall Tube and Metal Products
Co., No. 3-84-00278 (Bankr. E.D. Tenn. Jan. 17, 1986), appeal
pending (environmental response costs incurred by the State of
Tennessee did not constitute administrative expenses.).
     An important First Circuit decision which may have applica-
bility in the recovery of CCRCLA penalties tram bankrupt parties

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                                                  -        9832,8
is the case In re Charlesbark Laundry, Inc., 755 F.2d 200
(1st. Cir. 1985), which held that a State fine assessed for
violation of a preliminary injunction is properly an adminis-
trative expense.
     Governments have also been successful in recovering cleanup
costs through property liens.  In In re Berg Chemical Co.,  Inc.,
Case No. 82-8-12052 (Bankr. S.D. N.Y. July 9, 1984), the City
was granted a superpriority lien against the property to clean
up chemical wastes.  But see, In re Charles A. Stevens 53  BR 783
(Bankr. D.C. Maine Oct. 9, 1985) (the State's pre-bankruptcy
investigation costs did not give rise to a lien against the
property).
     5. Federal Lien
     The proposed CCRCLA ^authorization legislation establishes
a federal lien on property belonging to persons otherwise  liable
for costs and damages under CCRCLA.  (Amendments to CERCLA $107).
The Senate bill provides that the lien is not valid against the
purchaser, holder of security interest, or judgment creditor
until notice of lien is filed in the State where the property is
located.  The House bill provides that the Agency's lien would
be subject to the rights of purchasers, judgment lien creditors,
or holders of security interests under State law until notice of
lien is filed.  The Rouse version slso establishes s maritime
lien applicable to vessels.

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                              -  19 -
                                                        9832.8
EMFORCEMFNT THEORIES
    •There have been several new enforcement theories developed
by the EPA Regional Offices, the Departaent of Justice and the
Office of Enforcement and Compliance Monitoring in the area
of environmental enforcement against bankrupt partita.  Two of
these legal theories nay be particularly useful in the cases
involving insolvent hazardous waste handlers.
     1. Withdrawal of Reference te District Court
     In deciding whether a bankruptcy court is the appropriate
forum there are two issues which are relevant: whether the
proceeding is a core proceeding under Section 157(b)  and,  if
so, whether Section 157(d) applies.
     The bankruptcy courts have the authority to render final
decisions on all core proceedings listed under the bankruptcy
code.  However, both core and non-core proceedings, such as
factual  determinations of liability for environmental damages,
nay be referred to the federal district court.  Pursuant to
11 U.S.C. S157(d) the district court ia required to withdraw
a natter fron bankruptcy court when ita resolution will involve
consideration of the bankruptcy cod* and ether federal atatutes
regulating organisations or activities affecting inttratate
coraarca.
     In United States v. ILCO. Inc..  48 Bankr. Rap. 1016 (N.D.
Ala.. 1985). th« diatrict court h«ld that Section 157(d) applied
to. and required withdrawal fron the bankruptcy court of,  clains
aaaerted by EPA und«r CERC1A and othtr «nvlronatntal atatutes.

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                               •  *o  •                     9832.8
The court  found  that  CERCLA  and  the other environmental statutes
relied on were "tlearly.. .rooted In the commerce clause and
are the type of  laws  Congress  had in nind when it enacted the
mandatory withdrawal  provision."  U. at 1021.  The court in ILCO
clearly sta'ted that withdrawal was only appropriate if the resolu-
tion of the claim required substantial and material consideration
of CERCLA; not that the CERCLA issues were "merely incidental"
for resolution of the matter.  See also, briefs filed by the
government in In re Johns Manville Corp., No. 85-6828CA) (S.D.
N.Y. Dec. 30, 1985) .
     Seeking withdrawal froa the bankruptcy court to Che
district court will allow the Agency a more favorable forum
which is experienced  in hearing complex issues of fact,  and
will allow the Agency to obtain a judgment enforceable in the
bankruptcy court.
     2.  Discharge of Debts
     All pre-petition debts are automatically dismissed  when
the debtor is granted a discharge in bankruptcy, 11 U.S.C.
I727(b), 11 U.S.C. 1502. 11 U.S.C. 11141(d)(1)(A).  The  definition
of a pre-petition debt .includes any action where a claim or
where a potential claim existed before the debtor filed  for
bankruptcy (i.e. where a creditor could have iued or could  have
filed a proof of claim).  Discharges ara available In Individual
bankruptcies (1727(b)) and in  Chapter 11 reorganisations
(l1U1(d)(l)(A)\  They are not available In corporate or

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9832,8
partnership  Chapter  7 proceedings, or  tn Chapter 11 liquidations
(!11&1(d)(3).  This  raises three questions for the Agency:
1) what type of bankruptcy proceeding  is involved?  2) when did
the debt  arise?  and 3) is the debt subject to discharge?
     First, .if the Agency did not incur response costs at a site
prior  to  the bankruptcy filing, the Agency nay wish to argue
that the  debt (or potential debt) did not arise until after
commencement of the bankruptcy action.  The Agency Bay then
preserve  its right to pursue an action against the party after
discharge.  However, a discharge in a Chapter 11  proceeding nay
be read broadly to include all claims that arose pre-confirmation,
C11£1(d).  The issue of the proper treatment of post-petition,
pre-confirmation claims is currently being litigated by the
Agency in the action against Johns Manville at the Iron Horse
Park site in North Billerica, Massachusetts, In re Johns Manville
No. *5-6828(A)  (S.D. N.Y. Dec. 30, 1985).
     It may be advantageous in a Chapter 7 liquidation case for
the Agency to argue that the CERCLA cost-recovery claim "arose" -
pre-petition, when the environmental ham first occurred or was
discovered, even chough response coats were noc incurred until
after the petition.  This la due to the fact that the debtor
does not  survive the bankruptcy and therefore recovery during
liquidation of the estate> as a prt-petition creditor, is EPA*a
only chance for recovery.
     Second, if the debtor ia an individual, or corporation or
partnership under Chapter 11 Rtorganitation. the Agency »ay wish
to take the position that even if the dtbt is a pre-petition

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9832,6
debt, EPA's  clain  is  noc  subject to discharge because it falls
under one of the stated exceptions to discharge act out in 11
U.S.C.  S523(a).  The  exceptions that would be applicable are
those which  apply  to  fines or penalties payable to and for the
benefit of a governmental unit. 11 U.S.C. I523(a)(7), or for
willful or malicious  injury to property, 11 U.S.C. S523(a)(6).
In cases of  misrepresentation by the debtor, the discharge can
also be blocked by:   proof that the debtor oade fraudulent
staterents regarding  its  financial condition; failure by the
debtor  to produce  books and records; or failure by the debtor
to explain losses,  11 U.S.C. $523(a).
CONCLUSION
     Future  CERCLA bankruptcy referrals will be carefully
reviewed by  Headquarters to determine if the action nerits
referral to  the Department of Justice under the five criteria
set out in this guidance.  Settlement with bankrupt responsible
parties is encouraged and, consistent with the Agency's  current
settlement policy, the Region it given greater flexibility and
authority to  settle claims against bankrupt parties.  Recent
judicial decisions and enforcement theories developed by EPA and
the Department of Justice vill strengthen the Agency's legal
position in  those  eases where the Agency has decided to pursue
en enforcement action against a bankrupt party.

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IMPLEHENTATTON
     This guidance updates the procedures contained in the
existing bankruptcy and cost recovery  policies.  All future
hazardous waste bankruptcy referrels and settlements should
follow this guidance.  If you have  any questions concerning
these procedures please contact Heidi  Hughes of my office
(FTS 382-2P*5).
cc:  F. Henry Habicht II
     David T. Buente
     Gene A. Lucero

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