UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
Received
11-1998
Worcement&CompfJancflOoctef
VOCKBt
OFFICE OF
ENFORCEMENT AND
COMPLIANCE ASSURANCE
SEP 3.0 !997
MEMORANDUM' .
SUBJECT: . Guidance, on EPA JParti^patioh in Bankruptcy Cases
FROM:
Steven A. He
Assistant
or
TO:
Addressees listed below
This memorandum transmits guidance entitled "EPA
Participation in Bankruptcy Cases." This guidance supersedes the
"Guidance Regarding CERCLA Enforcement Against Bankrupt Parties,"
OSWER Directive #9832.7 (May 24, 1984) and the riReyised Hazardous
Waste Bankruptcy Guidance," OSWER Directive #9832.8 (May 23,
1986). .
* f '
This guidance identifies the factors to be considered by EPA
in determining whether to participate in a bankruptcy case,
including whether to pursue-collection of costs or penalties
against debtors who have liability under CERCLA or other
environmental statutes.
i . .
This guidance was prepared with the assistance of EPA's
National Bankruptcy Lead'Region Work Group and the Department of''
Justice. If you have- questions about this guidance, you may
contact Andrea' Madigan of Region IV, chair of the bankruptcy work
group, at (4.04) 562-9518. . ' '
Attachment
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903R97040
Addressees:
Regional Counsel, Regions I-X, EPA
Director, Office of Site Remediation fc Restoration,
Region I, EPA .
Director, Emergency &. Remedial Response Division,
Region II, EPA
Director, Hazardous Waste Management Division,
Regions III & IX, EPA
Director, Waste Management Division, Region IV, EPA
. Director, Superfund Divisions, Regions. V, .VI £ VII, EPA
Assistant Regional Administrator, Office of Ecosystems
Protection and Remediation, Region VIII, EPA
Director, Environmental Cleanup Office, Region X, EPA
cc: Work Group Members
Barry Breen, OSRE
Eric Schaeffer, ORE
Linda Boornazian, OSRE
Sandra Connors, OSRE
Charles Breece, OSRE
Lori Boughton, OSRE
Joel Gross, DOJ " . . . .
Assistant Section Chief's, Environmental Enforcement Section,
DOJ • . •
Alan Tennenbaum, DOJ
Earl Salo, OGC
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EPA PARTICIPATION IN
BANKRUPTCY CASES
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EPA PARTICIPATION IN BANKRUPTCY CASES
• TABLE OF CONTENTS'
I/ Introduction 1
II. , Purpose and. Scope of Guidance. 1
III. When to File a Proof of claim in a Bankruptcy
Case .....'. ; 2
.A. , Potential for Recovery 2
B. Impact on Agency Resources 5
, C. Fairness to Other Liable Parties ...5
D. Other Considerations....'. • '.'....'.. .6.
IV. Abandonment 6
A. Whether There Are Unencumbered Assets . .
in the Bankruptcy Estate that Could ' .
• be Used to Fund Response Action 7
r*
B. Nature of Environmental Threat '. 8
* - • •
• C. Need for Access to Conduct Future .
Cleanup Activities 8
V. • Cleanup Activities Under CERCLA on Property
Included in the Bankruptcy :Estate . . 8
VI.- Impact of the Automatic Stay on
• Administrative and Judicial Proceedings . ; 9
A. Regulatory Compliance and Enforcement Actions ........10
'B. Issuing Cleanup Orders Against Debtors or •
Trustees .' i ......' • 11
C. Information Gathering..;.... 11
• D. issuing General or Special Notice Letters
Under CERCLA 12
E. CERCLA Liens .... . ..:13
VII. Other Bankruptcy Issues .. 13
VIII. use of this . Guidance. . '. 13
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EPA PARTICIPATION IN BANKRUPTCY CASES
I. Introduction.
This guidance .is issued to assist the Regions in evaluating
how to respond when a potentially responsible party or the owner
or operator of a regulated facility files for bankruptcy.1
This guidance supersedes the "Guidance Regarding CERCLA-
Enforcement Against Bankrupt Parties," OSWER Directive #9832.7
(May 24, 1984) and the "Revised Hazardous Waste Bankruptcy
Guidance," OSWER Directive #9832.8 (May 23, 1986).
II. Purpose and Scope of Guidance. " .
It is not always appropriate for the Agency to file a claim
for cost recovery or penalties'• or to otherwise participate in a
bankruptcy case. The purpose' of this' guidance is to identify the
factors to be considered by EPA in determining whether to
participate in a bankruptcy case, including whether to pursue"
collection of costs or penalties against debtors who have
liability under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) or other environmental .
statutes. This guidance also addresses issues in bankruptcy
cases relating to the abandonment of- contaminated property,
cleanup activities under CERCLA on property included in the
bankruptcy estate, and the- impact .of the automatic stay on
different types of administrative and j.udicial enforcement
activities.
*
This guidance does not address or otherwise change
procedures .relating to the referral of bankruptcy matters to the
Department of Justice.' Requests for filing proofs of.claim or
other participation before a Bankruptcy Court are made by .
referral to the Department.of Justice. Requests should be made
as far in advance of any deadline as possible. •
Issues that arise when a regulated entity or a potentially
responsible party files or has filed for bankruptcy are complex.
In many instances, applicable law is unsettled or may vary
depending upon the judicial court of appeals circuit. This
guidance is based upon the state of the law as it now exists; an
independent case by case analysis should be undertaken with
respect to any bankruptcy issues that arise in future cases. . .
1 For an overview of the Bankruptcy Code -as it relates to
enforcement, cost recovery, and other actions under environmental
statutes, see ."A Bankruptcy Primer for the Regional Attorney"
issued by EPA's National Bankruptcy Lead Region Work Group in
February 1994.. . .
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III. When to File a Proof of Claim in a Bankruptcy Case.
In evaluating whether to proceed .with the filing of a proof
of claim for liability arising under environmental laws and
regulations, the following factors should be considered:2
A. Potential for Recovery.
In deciding whether to file a proof of claim,' the potential
for recovering payment on the claim should be considered. .This
involves an analysis of the amount and priority of EPA's claim in
relation to the assets and liabilities of the bankruptcy estate.
1. Amount and--Priority of EPA's Claim. In analyzing
the potential for recovery, the amount and priority of EPA's
claim should be considered. Under the Bankruptcy Code, claims
are organized into classes and paid in accordance with the
bankruptcy priority scheme.3 Generally, classes of claims that
have a higher priority must be paid in full before any payment is
made to creditors holding claims of a lower priority.* Within
each class of claims, if. there are insufficient funds to pay all
claims in full, payment is .pro rata. '..'•.' *
Environmental claims -are likely to fall into one of the . .
following categories: -.
Secured claims. If EPA perfected a CERCLA lien prior to the
bankruptcy filing against property owned by the debtor, the
2 It is important to distinguish an EPA claim for
reimbursement of response costs or for-penalties from the
Agency's injunctive authority to issue cleanup orders. Only
"debts" which are liabilities on a "claim" may be discharged in
bankruptcy. The obligations imposed by a cleanup order issued to
an owner of contaminated property which orders the respondent to
cease • threatened . or ongoing pollution are not dischargeable
claims .in bankruptcy. See State of Ohio v. Kovacs. 469 U.S.
274,' 284-5 (1985) .-United States v. LTV Corporation (In re
Chateauga'v) . 944 F.2d 997, 1008 (2nd Cir. 1991);.' In re CMC
Heartland Partners. 966 P.2d,1143, 1146-47- (7th Cir. 1992) ; In re
Torwico Electronics. Inc.. 8 P.3d 146, 148 (3rd Cir. 1993); In re
Motel Investments. Inc.. 172 Bankr. 105 (Bankr. M.D. Fla;. 1994).
3 The priority scheme is set forth in 11 U.S.C. §507.
: * Under_Chapter 11, certain priority claims can be paid over
time under a plan of reorganization. See 11 U.S.C §1129.,
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Agency may have a'secured claim.5 EPA may also have a secured
claim if it obtained a judgment against the debtor and perfected
a judgment lien against property of the debtor prior to the
bankruptcy .filing.6 In addition, EPA may have a secured claim to
the extent that such claim is subject to a setoff against a claim.
of a debtor against EPA or another agency of the United
States.? Secured claims will be paid in bankruptcy to the extent
.of the value of the collateral securing" such claim. If the
amount of .the claim exceeds the value of the collateral, the
deficiency will be treated as an unsecured claim.
Administrative expense claims. Response costs incurred by
EPA after. the bankruptcy- filing to clean, up property owned or ,
operated by the debtor during the bankruptcy case, or property
at which the debtor's wastes were disposed of or transported to
for disposal during the bankruptcy case, may qualify as
administrative expenses,having priority and-paid befpre general
unsecured claims.8 . . . • •
s Section 107(1) of CERCLA provides that all costs and
damages that are recoverable from a liable party under CERCLA
constitute a lien in favor of the United States against real
property owned by such liable party that was subject to or - •
affected by a removal or remedial action. For information on hbw
to perfect a CERCLA lien, see EPA's "Guidance on Federal
Superfund Liens", OSWER Directive No. 9832.12- (September 22,
1987) and "Supplemental Guidance on Federal Superfund Liens",
OSWER Directive No. 9832.12-la (July 29, 1993).'
6 Once the debtor files for bankruptcy, any act to create,
perfect, or enforce a lien against property of the bankruptcy
estate is prohibited by the automatic stay of Section 362 (a) (4)
of the Bankruptcy Code. Any act to create, perfect, or enforce a
lien against property of the debtor is likewise prohibited to the
extent that such lien secures a claim that arose prior to the
bankruptcy filing. See Section 362 (a) (5) of the 'Bankruptcy Code;.
7 Section 506 of the Bankruptcy .Code.
8 Section 503 (b)'(1) (A) of the Bankruptcy Code defines
.administrative expenses to include the "actual, necessary costs
and expenses of preserving the estate." • Section 507(a) of the
Bankruptcy Code grants first priority to the payment of
administrative expenses. For cases holding that response costs
incurred post-petition to cleanup property of- the estate are
entitled to administrative priority see Pennsylvania v. Conrov.
24 F.3d 568 (3rd. 1994); In re Hemingway Transport. Inc.. 993
F.2d 915 (1st Cir. 1993); In re Chateaucray Corp.. 944 F..2d 997
(2nd Cir. 1991); In re Smith Douglass. Inc.. 856 F.2d 12 (4th
Cir. 1988). • . .
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General unsecured claims. Cleanup costs that are riot
secured and that do not qualify as an administrative expense
constitute a general unsecured claim and are paid only after all
secured and priority claims are paid in full or otherwise
satisfied. . ' . .
Penalties. Penalties assessed under environmental laws for
violations that occurred prior to .the bankruptcy filing are
subordinated in Chapter 7. cases and paid only after all other
general unsecured claims are paid in full. Pre-petition
environmental penalties are subordinated in Chapter 7 cases even
if they have been, reduced to judgment and secured by a perfected
judgment lien.' Pre-petition penalties in many Chapter 11
reorganization cases are treated as non-subordinated general
unsecured claims in recognition of the fact that such claims are
not likely to be subordinated where the debtor is reorganizing.10
Penalties that arise post-petition from, the debtor's continued
operation of its business; may be treated as administrative
expenses and paid as a priority claim.11
Accordingly,, first priority administrative claims, such as a
claim for post-petition penalties or for response costs incurred
post-petition^ are more likely .to be paid than general unsecured •
claims. A claim under CERCIA for reimbursement of all past and
future response costs may constitute the largest general
unsecured claim and would, therefore, receive a high proportion
of the available funds in a pro rata distribution. .Recovery on a
pre-petition penalty claim could be remote in light of the low
priority afforded this type of.claim. ' ' .
2. Assets and Liabilities of the Bankruptcy Estate.
The other factor in evaluating the likelihood of recovery is
the amount, if any, of funds available for distribution in the
bankruptcy case and the priority and amount of- other claims
against the bankruptcy estate. In a no-asset Chapter 7 case,
there are no funds available for-distribution and no possibility
of recovery; there is 'no need to' file a proof of claim in such
cases. • • .
In bankruptcy cases where there are assets, evaluating the
amount of funds that may be recovered for the benefit of
9 See Section 726(a) of the Bankruptcy Code.
10 See Schultz Broadway Inn v. United States. 912 F:.2d 230,
233 (8th Cir. 1992) . ...
11 See In re Hemingway Transport. Inc. . supra; In re
Chateauqav Corp.. supra;' In re N^P. Mining Co.. 963 F. 2d 1449
(llth Cir. 1992) .- ' .
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creditors and.the amount and priority of other creditors' claims
may not be-possible until late in the bankruptcy case and after .
'the deadline for filing a proof of claim. While the debtor's
bankruptcy schedules list assets and liabilities, they are
sometimes misleading; . Values assigned to assets are'sometimes
speculative.. The equity in property subject to a lien could be
unrecoverable if such property cannot be sold in a timely manner^
Intangible assets such as preference claims and fraudulent
transfer claims are'sometimes unscheduled. Accounts receivable
can be difficult to collect, or subject to bona fide dispute.
Proofs of'claim filed by other creditors may1 be subject to bona
fide dispute. It should be recognized, therefore, that the
likelihood'of recovery is sometimes speculative-and-subject to
change. '.. ' - .
: B. Impact on Agency Jtesources. ...
Once a proof of claim is filed, EPA must be prepared to
substantiate the claim before the bankruptcy court-on a
potentially accelerated schedule. In addition, EPA may have to
respond to discovery requests and develop expert • testimony on the
estimate of future response costs on relatively short notice.
The need to allocate resources for such matters should be
measured against the potential gain in filing a claim. For
example, in a CERCLA case where there are other viable PRPs, or •
where other viable PRPs are already committed to undertake the
cleanup pursuant to an administrative order or consent decree,
the resources needed to pursue a claim in bankruptcy against a
debtor PRP may outweigh any anticipated return. Further, in
CERCLA cases where the Agency has not yet selected a remedy, the
resources needed to establish the likely remedy, and the
estimated cost-of such remedy before the bankruptcy court may
outweigh any anticipated return. .
C. -Fairness to Other Liable Parties.
The decision to forego filing a proof of claim need not 'be
based solely upon EPA's ability to recover .costs from other
liable'parties. The interests of justice or other policy
' considerations may also be considered. For example, private cost
recovery claims for future response costs are treated as
contingent claims for contribution and are disallowed in
bankruptcy pursuant to 11 D.S.C §502 (e) (1). Therefore, other.
PRPs may be foreclosed from recovering any portion of the
debtor's fair share of the cleanup costs. In such a case, the
Region may elect to proceed with the filing of a claim against
the debtor PRP.13 " . .
12 Even if EPA elects not to file a proof of claim, Section
501 of the Bankruptcy Code may permit the debtor, trustee, or a
co-PRP to file a claim on behalf of the Agency. See
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D. Other Considerations. • . -
All the -factors that are taken into account in deciding
whether to take enforcement action in a non-bankruptcy case
should also be considered, such as the culpability of the debtor,
the strength'of the evidence against the debtor, the deterrence
value of such action, the precedential value of such action and.
the interests of justice'and equity.
IV. Abandonment. . ' '
Section 554 of the Bankruptcy Code, 11 U.S.C §554, provides
that upon the request of the trustee or other party in interest,
the..bankruptcy court may allow abandonment of property .of the •
estate when the property is "burdensome" lor ''of inconsequential
value and benefit to the estate". The power to abandon property
is not unlimited .and may not be allowed in contravention of a
state statute or regulation that is reasonably designed to
protect the public health or safety from identified hazards."
If abandonment is allowed, the property is no longer
property of the estate and it is' abandoned to the debtor and any
other.party with an interest in property; in essence, the
property assumes its pre-bankruptcy status. If abandonment of
Hemingway Transport, Inc.. 993 F.2d 915 (1st Cir. 1993).
13 In Midlantic National Bank v. New Jersey Department of
Environmental Protection. 474 U.S. 494 (1986), the Supreme .Court
established that the trustee's abandonment power is limited and
may hot be exercised in contravention of laws designed to protect
the public health or safety. The Court went on to note that this
exception to the trustee's abandonment power is narrow and does
not encompass a speculative or indeterminate future violation of
such laws that may stem from abandonment and that the abandonment
power is not to be fettered by laws or regulation not reasonably
calculated to protect the public health or safety from imminent .
and identifiable harm. Since the Midlantic decision, a number of
courts have addressed the issue of when abandonment, of
contaminated property may.be allowed, 'while no uniform standard
has as ye.t .emerged from these cases, courts generally consider
the nature.of the environmental threat, and the amount of money •
available to the estate to fund any cleanup in determining
whether abandonment should be allowed. See. In re Smith-
Douglass. Inc.. 856 F.2d 12 (4th Cir, 1988); In re Wall Tube & '
Metal Products Co.. 831 F.2d 118 (6th.Cir. 1987); In re PCX. 96
Bankr. 49 (Bankr. E.D.N.C.. 1989) ; 'in ire- Peerless Plating Co.. 70
Bankr. 943- (Bankr. W.D. Mich 1987)-; In re Anthony Terrante &
Sons. 'Inc. . 119 Bankr. 45 (D. N.J. 1990) ; In re Franklin Signal
Corp. . 65 Bankr. 298 (D. Minn. 1986)..
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contaminated property is allowed, the trustee or debtor may
.contend that response costs incurred after the abandonment no
longer have administrative priority status under 11 U.S.C. §507,
because the cleanup was not necessary to "preserve property of
the estate." • •
. Section 554 provides that property of the estate may be
"abandoned only after notice and a hearing. Usually, .creditors
and other parties iii interest are served with a. not ice that
identifies the property sought to be abandoned. However, notice
that a debtor or trustee may seek to abandon unspecified property
at the Section 341 meeting may be' included in the notice for such
meeting.14 in such Instances, EPA may consider requesting the
trustee or debtor to identify, prior to the Section 341 meeting,
all property that may be • abandoned 'so that the Agency can
determine, whether to take any action regarding the proposed
abandonment. . ' .
In.evaluating whether to oppose a motion to abandon
contaminated property filed by a trustee or other party in
interest in a bankruptcy case, the following factors should be
considered: . '
A. Whether There Are Unencumbered Assets in the Bankruptcy
Estate that .Could Be Used to Fund Response Actions.
In a bankruptcy case .with few or no unencumbered assets, it
is unlikely that there would be sufficient funds in the
bankruptcy estate to finance a cleanup of the contaminated
property. In such cases there may be no reason to oppose a
motion for abandonment. In cases where-there are some funds in.
the estate but not enough to pay for all cleanup costs, it may be
appropriate to ask the bankruptcy court to condition the
abandonment upon the trustee undertaking certain tasks such as
maintenance.of site security or performing a discrete portion of
the cleanup necessary to protect public health or the
environment." Even if the estate has limited assets, EPA may
consider negotiating conditions upon, which,.the Agency would not-
14 See In re Southern International Co. . 165 Bankr. 815
(Bankr. E.D.' Va. 1994) . ' '
'1S See, e.g., in re- FCX. Inc. . 96 Bankr. 49 (Bankr.
E.D.N.C. 1989) (as a condition to allowing the debtor to abandon
contaminated property, the court required the debtor to set aside
$250,000 to pay for cleanup of the abandoned property as an
administrative expense); In re Franklin Signal Corp.. 65 Bankr.
"268 .(Bankr. D. Minn 1986) (prior to abandonment, the trustee was
required'to investigate the presence of hazardous substances on
property and inform federal and state .environmental agencies of
the results and any intent, to abandon) .
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oppose the proposed abandonment, such-as EPA's access to the
contaminated property, that the abandonment is without prejudice •
to the priority of EPA's claim against the estate, or that the
abandonment is without prejudice to EPA's right to file a lien
against the contaminated property after the abandonment is
approved. ' .
B. Nature of Environmental Threat".
Consideration should be given to the nature and- extent of
the environmental problems.posed by the site. . In opposing an
abandonment motion,• EPA. should be prepared to present evidence
about the environmental conditions at the site and the threat. • .
that they pose to public health and safety. Consideration should
also be given to whether abandonment would constitute a-release
under applicable state law or whether the site is subject to a
pre-petition state or federal cleanup order." •
** *
C. . Need for Access to Conduct Future Cleanup Activities.
It is important to consider the need of EPA for access to
contaminated property in order to-conduct future cleanup
activities. Without a court order allowing EPA access to
abandoned property, there may -be no one to contact to obtain.
access once the property "is abandoned to a debtor that is nothing
more than a corporate shell. EPA has been able to obtain a court
.order allowing such access as a condition to .the.court's approval
the proposed abandonment.17
V. Cleanup Activities Under CERCLA on Property Included in the .
Bankruptcy Estate. ' .
When EPA is conducting a cleanup of property that is pwned
by a debtor in bankruptcy, there are issues'that merit special
attention. In cases where.a trustee has been appointed* it is ,
the trustee rather than the debtor who has the authority to grant
access.18 It is not necessary for the trustee to obtain approval
16 See Pennsylvania v. Conrov. 24 F.3d 568 (3rd Cir. 1994)
and In jre Motel Investments. Inc.. 172 Bankr. 105 (Bankr. M.D.
Fla. .1994) .
17 See In re Mowbrav Engineering Co. . 67 .Bankr. 34 (Bankr.
M.D. Ala. 1986). . •
16 .A trustee is appointed in every Chapter 7 case.
11 U.S.C. §701. In Chapter 11, the debtor usually retains
possession and control of its assets as a debtor in possession.
11 U.S.C §1107. A trustee may be appointed in a Chapter 11 case1
only if a party in interest establishes, cause, such as fraud or
-gross mismanagement, or that such appointment would be in the
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of the bankruptcy court before granting access to EPA. However,
sometimes .trustees are unfamiliar with CERCLA and EPA's access
authority and may be initially hesitant to grant access. The
regional counsel bankruptcy contact should contact the trustee,
provide appropriate information about Superfund- and EPA'.s access
authority, and seek to establish a good working relationship with
the trustee. If the trustee continues to deny access, EPA
regional counsel should consult with DOJ to obtain access through
an order or a warrant as appropriate.
' EPA should keep the trustee informed about cleanup
activities. If there is personal property at the site that is
contaminated and must be disposed of or destroyed in'the course
of the cleanup, or is in the way and must be removed, EPA should
so advise the trustee. If there are unresolved conflicts between
EPA's obligation to take appropriate action to protect human
health and the environment and the trustee's obligation to
protect and preserve assets of the bankruptcy estate, regional
counsel should be consulted, and regional counsel may- want to
consult .DOJ. Potentially valuable property, such as equipment,
or tanks.or drums of saleable chemicals, should not be removed
without such consultation so that any potential claim by the
trustee or creditors that such removal violates- the bankruptcy
automatic stay, 11 U.S.C. §362 (a) (3), can be evaluated.
~* *
VI. Impact of the Automatic Stay on Administrative and Judicial
Proceedings.
Section 362(a) of the Bankruptcy Code, .11 U.S.C. §362(b)_,
provides for a broad stay of litigation, lien enforcement and
certain other actions which would affect or interfere with the
bankruptcy process. This stay arises automatically upon the
filing of the bankruptcy petition and applies in;all bankruptcy
cases. The automatic stay is a fundamental part of the
bankruptcy process intended to protect the status quo during the
pendency of the bankruptcy case. .
There are certain exceptions to the automatic stay which are
set forth in Section 362 (b) . Actions by a governmental unit to
. enforce its police' or regulatory powers and- the enforcement of
non-monetary judgments obtained by a governmental unit to enforce
its police or regulatory powers are excepted and, therefore, are
not automatically stayed at the commencement of a bankruptcy.
case. However, .attempts to enfor.ce monetary judgments, perfect
liens, or to obtain possession or control over property of the
estate do not fall within this exception and are subject to the
automatic stay. See 11 U.S.C. §362 (b) (4), (5)'.
best interest of creditors. 11 U.S.C. §1104.
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It is- important to understand what types of enforcement
activities are prohibited by the automatic stay. It is equally
important to understand-what types of enforcement activities are
not stayed".
A. Regulatory Compliance and Enforcement Actions.
While a company may continue to operate its business during
a Chapter 11 reorganization proceeding, the Bankruptcy Code does
not excuse such a company from its obligation to comply with
environmental laws and regulations.19' Environmental enforcement
actions seeking injunctive relief against companies in bankruptcy
are generally excepted from the automatic stay pursuant to the
"police power" exemption of 11 U.S.C. §362{b)(4), (5) .20
Administrative or judicial proceedings to fix the amount of a
penalty or establish the-amount of cost recovery owed are also.
exempt from the automatic stay." Note, however, that'once a
''•" 28 U.S.C. §959(b) provides ". . . a trustee, receiver or
manager appointed in any cause pending in any court of .the United.
States, including a. debtor in possession, shall 'manage and.
operate the property in his possession as such trustee, receiver
or manager according to the requirements of the valid laws' of the
State in which such property is situated, in the same manner that
the owner or possessor thereof would be bound to do if in
possession thereof. " See State of Ohio v Koyacs. 469 US 274, 285
(1985) ("we do not question that anyone in possession of the site
. . . must comply with the environmental laws and regulations of
the State of Ohio-. Plainly, that-person or firm-may not maintain
a nuisance, pollute the waters of the State, or refuse to remove
the source of such conditions."); Midlantic National Bank v. New
Jersey Department of Environmental Protection. 474 U.S. 494
.(1986) ("Congress did not intend for the Bankruptcy. Code to
preempt-all state laws that otherwise constrain the exercise of a
trustee's powers..") '.
20 See In re Commonwealth Oil Refining Co.. 805 F.2d 1175
(5th Cir, 1986) (RCRA §3008 (a) compliance order issued by EPA not
stayed by virtue of 11 U.S.C. §362 (a)- even though compliance with
order, would require debtor to spend money) ; United States v.
Jones & Laughlin Steel Corp.. '804 F.2d 348 (6th Cir. 1986)
(proceeding to modify consent decree relating to debtor's
violations of Clean Water Act and Clean Air Act not stayed by
bankruptcy filing) . See also In re Torwico Electronics. Inc..
F.3d 146-(3rd Cir. 1993), cert..denied, 114 S. Ct. 1576 (1994).
21 Board of Governors of the Federal Reserve System v.
Corp. Financial. Inc.. 502 U.S.. 32 (1991); In re Commerce Oil
Co.. 847 F.2d 291 (6th Cir. 1988); United States v. Nicolet.
Inc.. 857 F.2d 202 (3rd Cir. 1988); City of New York v. Exxon
Corp.. 932 F. 2d 1020 (2d Cir. 1991).
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penalty is assessed or a judgment is .obtained,, the automatic stay
prohibits .collection activities other than through the bankruptcy
process.
Accordingly, enforcement actions seeking injunctive relief
and/or the assessment of a penalty against operating facilities.
for non-compliance with applicable environmental laws and
regulations should not ordinarily be delayed or postponed due to
the filing of a bankruptcy petition involving the facility's
owner or operator.?? However, debtors may contend that an action
for injunctive relief that will inevitably cost money is .an
attempt to enforce a money judgment that is not excepted from the
automatic stay. . Therefore, it is important to consult with legal
counsel on this issue before proceeding.
B. Issuing Cleanup Orders Against Debtors or Trustees.
The automatic stay prohibits most debt collection
activities. .EPA's injunctive authority to issue orders for the
cleanup of. contaminated property23 is distinguished from the
Agency's claim as a creditor for reimbursement of response costs
and is not prohibited by,the automatic stay.24 However, the •
debtor or trustee may contend that compliance with a cleanup -
order will cost money and, therefore, is an attempt to enforce a
money judgment that is riot excepted from the automatic stay. In.
addition, the enforcement of such orders may involve litigation
before the bankruptcy court-on an accelerated time schedule.
Accordingly, regional counsel should be consulted before such
orders are issued, and the regional attorney may want to confer
with DOJ. • ' .
C. information Gathering. • ' •
There .are numerous statutory authorities under which EPA
may seek information from a. variety of parties, including Section
104 (e) of CERCLA, 42 U.S.C. §9604(e), Section 3007 of RCRA, 42 •
22 In cases where the Agency is seeking to assess a
penalty, it has the option of 'either commencing the
administrative or judicial proceeding that would be appropriate
absent the bankruptcy, or filing a proof of claim with the
bankruptcy court in the amount the Agency believes is appropriate-
under the applicable environmental statute or .penalty policy. .
23 EPA has the authority to issue orders requiring cleanup.
activities under several environmental statutes including CERCLA
§§ 104 and 106, RCRA §§ 3008, 3013, and 7003, and CWA §311. The
bankruptcy analysis set forth above would generally apply to'
orders issued under any of these authorities. .
24 See footnotes 2, 15.
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U.S.C. §6927, Section 308 of the Clean Water Act, 33 U.S.C.
§1318, and Section 114- of the Clean Air Act, 42 U.S.C. §7414.
The automatic.stay in bankruptcy does not apply to or otherwise
prohibit EPA from issuing information request letters under these
authorities. Nonetheless, it is. important to recognize that
financial information regarding the debtor is included in
documents filed with the clerk of the bankruptcy court. The
bankruptcy schedules and statement of-affairs, .which every debtor
is required to.file under penalty of perjury, list the debtor's
assets and liabilities and include additional information about .
the debtor and its business operations. These documents are
publicly available and can be obtained from the. bankruptcy court.
.It is also important to recognize that the Bankruptcy Code .
and Bankruptcy Rules provide.additional methods of obtaining
information about a debtor. Section 343 of" the-Bankruptcy. Code
requires the debtor to attend the first meeting of creditors and
to submit to examination under oath at such meeting. In
addition, under Bankruptcy Rule 2004, the bankruptcy court may
allow the examination of any'entity relating to the-acts, conduct
or property or to the liabilities or financial condition of the
debtor, or to any matter that may affect the administration of
the bankruptcy estate. . ' •
In Chapter 7 cases, the trustee should be able to provide .
access to the debtor's operating records.' However, the Chapter 7
trustee will probably not have extensive knowledge regarding the
debtor'is waste management practices.
D. Issuing General or Special Notice Letters Under CERCLA^
To the extent that a notice letter simply advises a party
that EPA bel-ieves that it may have liability for cleanup of a
site and offers the debtor or trustee an opportunity to engage in
settlement discussions, it would not violate the automatic stay
to send such a. letter to a debtor or trustee in bankruptcy.
However, a demand .for payment, which is often Included in a
notice letter, may be alleged to be an act to collect payment, .of
a pre-petition debt; and, therefore, may be prohibited by the
automatic stay. Accordingly, it is preferable to eliminate the
demand for payment in any notice letter .sent to a debtor or . .
bankruptcy trustee.
It is important to recognize that any settlement must be
approved, by the bankruptcy court after notice and hearing. This
factor must be taken into account in establishing settlement
deadlines. It is unlikely that a bankruptcy settlement will
coincide with special notice procedures of CERCLA § 122.
Accordingly, the impact of the bankruptcy should be considered
.before issuing a notice -letter to a debtor or.trustee to
determine whether a notice letter is appropriate or otherwise
worthwhile. -. '
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E. CERCIA Liens. ;
Anyvact to create, perfect, or enforce a lien against
property of the debtor may violate the automatic stay.25.
Accordingly, EPA should not attempt to perfect its lien under
.Section'107(1) of CERCLA where the owner of the,subject property
is in bankruptcy.
Violations of the automatic stay may be punishable by.a
contempt judgment.25 Accordingly, the regional counsel
bankruptcy contact should be consulted on any matters that may
raise automatic stay issues, ,and the regional attorney may want
to confer with DOJ. ' .
VII. Other Bankruptcy Issues.. ; . .
While this guidance is focused primarily toward more
commonly recurring bankruptcy matters-, it is important to
recognize that there are other issues that may arise requiring
EPA to become involved in a bankruptcy proceeding. Such actions
may include but are not limited to: (1) objecting to a plan of
reorganization that purports to discharge or impair future
environmental claims with respect to property owned by the
reorganized debtor; (2) objecting to a proposal to sell property
of the debtor free and clear of EPA's legal rights against the .
purchaser of such property; (3) objecting to an improper attempt
to impair or release EPA's rights against a non-debtor; (4)
objecting to improper exemptions claimed by an individual debtor;
(5) responding to fraudulent conveyances or preferences actions;
(ۥ) seeking the appointment of a trustee or an examiner to take
over and/or investigate the affairs of a Chapter 11 debtor; (7)
objecting to discharge based upon a debtor's willful and
malicious conduct, fraud, or failure to provide.appropriate
notice to EPA; (8) filing of an involuntary bankruptcy petition
by the United States; and (9) the filing of and/or voting on a
plan of reorganization. ' . .
In those instances where EPA wishes to take legal action
against a party that went through a bankruptcy, the Agency should
consider whether such action was discharged, barred, or otherwise
impacted by such prior bankruptcy. .
VIII. Use of this Guidance. .
This guidance is not a rule and does not create any legal
obligations. The extent to which EPA applies this guidance will
depend, upon the facts of each -case.
25 See Section 362 (a) (5) of the Bankruptcy Code;
26 28 U.S-C. §1481.
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