.--•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. ------- 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. ------- - 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. ------- -*• 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. ------- 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. ------- 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. ------- 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. ------- - 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. ------- - 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* ------- - 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. ------- - 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. , ------- " " 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. ------- " ' 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, ------- - 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 ------- - 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 ------- - 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 ------- - 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 ------- - 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. ------- - 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. ------- • *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 ------- - 21 - 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 ------- - 22 - 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. ------- - 23 - 9832,6 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 ------- |