Petition — Ohio v. Kovacs

oe “815

IN THE ALEXAN

SUPREME COURT OF THE UNITED shrres =

OCTOBER TERM, 1982

in Re: WILLIAM LEE KOVACS,

Debtor

STATE OF OHIO,

Petitioner-Appellant,

V.

WILLIAM LEE KOVACS, d/b/a, B & W

Enterprises; Hamilton Industrial

Real Estate Company; Resort

Rentals; and Whitco Enterprises,

Respondent-Appellee.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

WILLIAM J. BROWN

Attorney General of Ohio

E. DENNIS MUCHNICKI

Assistant Attorney General

State Office Tower

30 East Broad Street, 17th Floor

Columbus, Ohio 43215

(614) 466-2766

Counsel of Record for Petitioner

STEPHEN J. WILLEY

Assistant Attorney General

Co-Counsel for Petitioners

QUESTIONS PRESENTED FOR REVIEW

1.Whether the provisions of the Bankruptcy

Reform Act of 1978, 11 U.S.C. Section 362(b) (5),

exempt from the automatic stay provision of 11 U.S.C.

Section 362(a) state court proceedings which are

intended to enforce a debtor’s compliance with a

mandatory injunction obtained in an action against the

debtor to vindicate the state’s police power authority to

abate a public health hazard.

2. Whether a state court proceeding to enforce a

mandatory injunction requiring the cleanup of a chemical

waste storage facility and an order appointing a receiver

to perform the cieanup which was necessitated due to the

debtor’s failure to comply with the injunction is a

proceeding to enforce a money judgment or a proceeding

to enforce an injunction within the meaning of 11 U.S.C.

Section 362(b) (5).

3. Whether the State of Ohio is estopped to deny

that the State is not seeking to enforce a money

judgment.

PARTIES TO THE PROCEEDING BELOW

The petition to this Court for a writ of certiorari to

the United States Court of Appeals for the Sixth Circuit

is sought by the State of Ohio on the relation of its

Attorney General, William J. Brown. The State was a

party to a proceeding before the Bankruptcy Court for

the Southern District of Ohio which court issued a

statutory stay against Ohio preventing it from going

forward with a proceeding in a state trial court. The

State was the appellant in the proceeding in He Sixth

Circuit. William Lee Kovacs, d/b/a, B & W Enterprises,

Hamilton Industrial Real Estate Company, Resort

Rentals and Whitco Enterprises, (hereinafter “Kovacs” or

Debtor“) is the debtor in the bankruptcy case, the

moving party for the issuance of the statutory stay which

is at issue in this case, and appellee in the Sixth Circuit

proceeding. Jack Zettler is the receiver appointed in the

state court proceeding which was stayed by the bank-

ruptcy court and was a witness before the bankruptcy

court. E. Hanlin Bavely is the bankruptcy trustee.

Neither Bavely nor Zettler have filed any pleadings in

appeals from the bankruptcy court’s issuance of the stay

although Zettler has orally indicated his concurrence with

the State of Ohio’s position.

iii

TABLE OF CONTENTS

QUESTIONS PRESENTED FOR REVIEW........... i

PARTIES TO THE PROCEEDING BELOW.......... ii

OPINIONS BELOW. .... ..... vii

RisO CTO CO viii

STATUTORY AND CONSTITUTIONAL

PROVISIONS INVOLVED............---45- ix

STATEMENT OF THE CASE............ . 1

REASONS FOR GRANTING THE PETITION........ 5

1. The Decision Below Involves An important

Question Of Federal Law, Whether A

Bankruptcy Court, To Protect Debtors,

May Prevent A State From Exercising Its

Police Power By Pursuing Enforcement Of

An Injunction To Abate A Public Health

1. The Decision Below Creates A Conflict

Between The Circuits Concerning The

Applicability Of The Automatic Statutory

Stay To The Enforcement Of Injunctions

Obtained By States In The Exercise Of

Their Police Power To Protect Public

eee ce e6etesohenenes 15

ill. The Decision Below Represents A Serious

Failure Of The Sixth Circuit, District And

Bankruptcy Courts To Honor A Policy

Choice Made By Congress Which This

Court, In View Of Its Supervisory Power

Over Bankruptcy Courts, Should Not

REED den cdcudadee 606606068 dd ec ese ee 20

r al ee eee 27

I 28

APPENDIX (separately bound)

TABLE OF AUTHORITIES

Page

Cases:

Callaway v. Benton,

„„ eee 7

Colonial Tavern, Inc. v. Byrne,

420 F. Supp. 44 (DO. Mass. 1976).............. 11

Donovan v. TMC Industries, LTD,

20 B. R. 997 (N. D. Ga. 198227777. 10

Fuller v. Aylesworth,

75 F. 694 (6th Cir. 1890) 15, 18, 19

Gladden v. Pargas, Inc. of Waldorf, Md.,

575 F.2d 1091 (4th Cir. 1978p))))) 24

Glenn v. State Farm Mutual insur. Co.,

ee a Ts Ps eee es 24

In re Canarico Quarries, inc.,

466 F. Supp. 1333 (DO. P. R. 1979)............. 10

In re Hillsdale Foundry Company,

2 C.B.C. 542 (Bkrtcy. W. D. Mich. 1974)........ 10

In re Jacobsmeyer,

13 B. R. 298 (Bkrtcy. W. D. Mo. 1981).......... 10

in re Mason,

18 B. R. 817 (Bkrtcy. W. D. Tenn. 7982) 11

in re Theobald Industries, inc.,

16 B.R. 537 (Bkrtcy. D. N. J. 1981) ........... 11

Maggio v. Zeitz,

De eee 20

Minne. Farm Bureau Marketing Corp. v. North

Dakota Agr. Marketing Ass n. Inc., 563

Pe es PED xd on cceseeesecseses 24

Murec v. United States Stee/ Corp.,

195 F. Supp. 137 (N.D. Ohio, 1961)........... 24

National Labor Relations Board v. Evans

Plumbing Co., 639 F.2d 291 (5th Cir. 1981)..... 11

Palmer v. Commonwealth of Massachusetts,

F èůͤ KK a 7

TABLE OF AUTHORITIES / Conta.

Page

Cases:

Securities and Exchange Commission v. First

Financial Group of Texas, 645 F.2d 429

eee 006060 pete 11, 15, 16, 17, 18

State of Ohio v. Kovacs,

681 F.2d 454 (6th Cir. 1982)....... vii, 19, 20, 23

Tennessee Valley Authority v. Hill,

, eee 26

United States v. Briggs Manufacturing Co.,

460 F.2d 1195 (9th Cir. 19722/ꝶʒ2ʒv 24

United States Fidelity and Guaranty Co. v. Ft.

Misery Highway Dist., 22 F. 2d 369 (9th

D 15, 18, 19

Wilkie v. Brooks,

515 F.2d 741 (6th Cir. 1975), cert. denied,

Ge Es Ce oceé eed svcets sciéNéss 24

Statutes:

Federal:

hE r 3

Ce ee, SS a ob Gd epedbaenseuee 8,12

11 U.S.C. Section 362..... ix, 2-5, 7, 9, 10, 12, 17, 25

4 ED 6 co.cc covestbebewussvaee i

I Ge ck viveaencenteses 3

11 U.S.C. Section 362(b) ()). i, 9, 18, 21

II viii

eee eee eee 13

42 U.S.C. Section 6901, ef s G99 ee ees 13

42 U.S.C. Section GB01, OF et 13

State:

Ohio Revised Code, Chapter 153. 1

Ohio Revised Code, Chapter 376 ù)ù))7 .. 1

Ohio Revised Code, Chapter 6111...............05- 1

TABLE OF AUTHORITIES (Cont’d.)

Page

Miscellaneous:

Black’s Law Dictionary

i +i ten eee esse 18

31 Corpus Juris Secundum,

Estoppel, Section 67 (196). 25

28 American Jurisprudence 2d,

Estoppel and Waiver, Section 35 (19660 25

20 Ohio Jurisprudence 2d,

Estoppel and Waiver, Section 35 (1956) ........ 24

e 8 ok can cacy cbs oben’ 8

House Report No. 95-595,

95th Cong., Ist Sess. (1977) 8, 9, 21, 22, 23

e eee eee 8

n 95-989,

OPINIONS BELOW

The opinion of the Sixth Circuit in State of Ohio v.

Kovacs, is reported at 681 F.2d 454 (6th Cir. 1982) and

is set out for the Court’s convenience in Appendix A.

The decisions of the district court and bankruptcy court

are not reported, but are set forth in Appendices C and D.

JURISDICTION

The judgment of the Court of Appeals was entered

on June 16, 1982. The State of Ohio, however, filed a

timely petition for rehearing and suggestion for en banc

consideration. The motion was denied on August 16,

1982. The jurisdiction of this Court is invoked pursuant

to 28 U.S.C. Section 1254(1).

STATUTORY AND CONSTITUTIONAL

PROVISIONS INVOLVED

This case involves an interpretation of the statutory

stay provisions of the Bankruptcy Reform Act of 1978,

11 U.S.C. Section 362, and the determination of the

extent to which a suit brought by the State of Ohio in

state court in the exercise of the State’s police power is

exempted from the application of the stay. The relevant

provisions of the Bankruptcy Act of 1978 are set forth in

Appendix H.

STATEMENT OF THE CASE

On September 29, 1976, the State of Ohio, on the

relation of its Attorney General, Director of Environ-

mental! Protection, and Department of Natural Resources,

filed suit in the Butler County, Ohio, Court of Common

Pleas, Case No. CV76-09-0834, against, among others, the

Chem-Dyne Corporation and William Lee Kovacs,

individually and as an officer of Chem-Dyne, alleging,

inter alia, that defendants had caused the unlawful

discharge of toxic water pollutants, i.e., the pesticides

Endrin, Dieldrin and Heptachicr into the waters of the

state in violation of Chapter 6111 of the Ohio Revised

Code; that the defendants had caused an air pollution

nuisance in violation of Chapter 3767 of the Ohio Revised

Code; and that the defendants’ illegal water pollution had

caused the death of numerous wild animals, including

fish. The Chem-Dyne Corporation was an industrial and

chemical waste treatment, recycle, storage and disposal

company located at 500 Ford Boulevard in the middle

of the City of Hamilton, Butler County, Ohio. William

Lee Kovacs was one of the two principal corporate

officers of the company and was named as a defendant

both as an officer of the corporation and individually

because the State contended that many of the unlawful

acts were committed at his direction and in his presence.

On July 18, 1979, after more than two (2) years of

negotiation, a Stipulation and Judgment Entry was

entered in the case. (The Stipulation and Judgment

Entry is included as Appendix G.) Kovacs personally

signed the Stipulation and Judgment Entry. in that

Stipulation and Judgment Entry, the State of Ohio

alleged that the defendants had caused water pollution,

nuisance conditions and fish kills in violation of Chapters

6111, 3767 and 1531 of the Ohio Revised Code. Finding

No. 1 of the Stipulation established that defendants were

in the business of hauling, recycling and redistributing

hazardous industrial waste. The Stipulation and Judgment

Entry contained a Finding No. 7 that the defendants had

industrial wastes and other types of wastes stored on

their premises at 500 Ford Boulevard, Hamilton, Ohio, in

the amount of 850,000 gallons in liquid form and 4,000

barrels of solid or semi-solid sludges. in Orders 1 and 2

of the Judgment Entry defendants were enjoined to abate

water pollution and nuisance conditions at 500 Ford

Boulevard. In Order No. 3 the defendants were ordered

to remove all the industrial and other wastes described in

Finding No. 7 from the premises at Ford Boulevard

within 12 months. In Order No. 8, the defendants were

directed to pay $75,000 to the Ohio Department of

Natural Resources as compensation for the alleged fish

Kills.“

On February 1, 1980, in a written opinion, Judge

Robert L. Marrs, Butler County Court of Common Pleas,

granted the State’s motion to have a receivership imposed

over the defendants. (The Court's decision is included as

Appendix F.) in granting the State’s motion the court

specifically found that the defendants had failed to

remove the industrial and hazardous wastes stored in

Hamilton as required by Order No. 3 of the Stipulation

and Judgment Entry. The court specificaily noted that

the defendants had operated in “flagrant disregard of the

Stipulation and Judgment Decree.” (App. F at 41):

*That part of the order imposing a $75,000 money judgment to Ohio

ONR is not at issue in this appeal. The State recognizes this as a money

judgment which is dischargeable in bankruptcy. ONR has therefore filed

its proof of claim and is using the remedies provided in the Bankruptcy Code

to satisfy its money judgment. This appeal deals strictly with the bankruptcy

court's determination concerning the effect of the automatic stay contained

in 11 U.S.C. Section 362 on Ohio's ability to enforce the injunctions

contained in Orders 1, 2, and 3 of the July 18, 1979, Stipulation and

Judgment Entry.

Defendants in this case are engaged in a

business that definitely affects this entire

community and conceivably the water for

this entire area as well as the wild life,

natural resources of the area, and the fish

in the streams. Mr. Kovacs is engaged in

businesses that very definitely have a

wide spread effect on the community life

and its daily operation and is affected

with a public interest which invokes the

equity powers of the Court.

(App. F at 42).

On February 4, 1980, the court entered an order appoint-

ing Jack Zettler as receiver and directing the defendants,

including Kovacs, to turn over their assets to the receiver

for use by the receiver in fulfilling the cleanup obligations

imposed upon the defendant in the July 18, 1979

Stipulation and Judgment Entry. (The Order appointing

Receiver is included as Appendix E.] The order also

contained an injunction imposing upon Kovacs a continu-

ing duty to cooperate with the receiver to complete the

removal of wastes.

On July 17, 1980, Kovacs filed a petition for

reorganization pursuant to Chapter XI of the Bank-

ruptcy Code, 11 U.S.C. Section 101, et sq., and sought

an automatic stay pursuant to 11 U.S.C. Section 362

against the state court receiver, Mr. Zettler. On July

28, 1980, the bankruptcy court dissolved the stay against

the receiver because the state receivership was determined

to be exempt from the stay pursuant to 11 U.S.C.

Section 362(b) (4). Subsequently Kovacs converted to

straight bankruptcy pursuant to Chapter VII.

On September 12, 1980, the State moved the Butler

County Court of Common Pleas to hold a hearing to

determine whether Debtor Kovacs had additional assets

which, pursuant to the court’s order of February 4, 1980,

should be administered by the receiver and used to com-

plete the cleanup. Specifically, the State alleged that

while the cleanup under the receiver’s direction was on-

going, there was a need for additional assets to complete

the removal and lawful disposal of the waste materials

which remained on-site. Since Kovacs had obtained

employment elsewhere after the appointment of the

receiver, the State asked for the hearing before the

common pleas court judge to determine if Kovacs,

pursuant to the injunction establishing his continuing

duty to cooperate with the receiver, should be required

to provide additional financial assistance to complete

the removal of wastes from the site.

On September 19, 1980, Debtor Kovacs filed in the

bankruptcy court a Motion for a Specific Stay seeking a

determination that the statutory stay contained in 11

U.S.C. Section 362 applied against the hearing in the

Butler County Court of Common Pleas requested by

Ohio on September 12. A hearing on the motion was

held before the Bankruptcy Court on September 29,

1980. At the hearing the State presented the expert

testimony of Frank Byros of U.S. EPA and Ken Harsh

of Ohio EPA. Byros testified concerning the various

environmental hazards he encountered at the Ford

Boulevard site: (1) fire hazards from flammable chemi-

cals; (2) odors and irritated throats from the air pollution

caused by vapors from the chemicals on-site; and (3)

ground and surface water pollution caused by the leaking

barrels and open pits of toxic chemicals. He testified that

the site was an imminent hazard and that the problems

would be aggravated by any delay in the cleanup. Harsh

also testified concerning the types of dangerous chemicals

stored on the site and expressed his opinion that any

delay in the cleanup would aggravate the problem. Mr.

Zettler, the receiver, testified concerning the need for

additional funds in the receivership without which the

cleanup would be delayed thereby confirming the fears

of Byros and Harsh. Zettler also explained how those

funds would be used in the cleanup.

A temporary stay was issued on October 1, 1980,

which was to remain in effect until the judge decided the

motion for a stay. On October 31, 1980, the bankruptcy

court entered its decision and order holding 11 U.S.C.

Section 362 applicable and thereby granting Debtor's

motion and making permanent the stay contained in 11

U.S.C. Section 362. (The decision is contained in

Appendix D). Specifically, the bankruptcy court held

that while the State’s mandatory injunction was clearly

injunctive relief, not a money judgment, since there was

no difference in effect upon Kovacs between the expendi-

ture of funds pursuant to a mandatory injunction and a

money judgment, Ohio was “estopped to deny” that it

was not seeking a money judgment. (App. D at 21).

Upon appeal by the State, the decision was affirmed in

the United States District Court for the Southern District

of Ohio (Appendix C) and by the Sixth Circuit. It is

from the Sixth Circuit’s decision that the State of Ohio

brings its petition to this Court for a writ of certiorari to

the Court of Appeals.

REASONS FOR GRANTING THE PETITION

This case presents a question of profound importance

to the federal, state and local governments which are

attempting to protect citizens from the dangers presented

to their health and safety by illegally operated chemical

waste disposal facilities. More specifically, this case

presents a classic confrontation between the rights of

an allegedly impecunious operator of a chemical waste

storage facility, William Lee Kovacs, who seeks the shelter

of the Bankruptcy Reform Act of 1978 to protect him

from his obligation to clean up the environmental night-

mare he created, and the rights of the State of Ohio to

enforce an injunction obtained against Kovacs prior to his

bankruptcy petition which injunction required Kovacs to

abate water pollution and nuisance conditions and to

remove all chemical and industrial wastes from the

premises before they caused serious harm to the public

health and safety. The decisions of the bankruptcy court,

district court and court of appeals below focus solely on

the effect of Ohio’s enforcement efforts on Debtor

Kovacs and demonstrate no concern for the threat to

public health and safety which is presented by the

hazardous materials stored on the Chem-Dyne site.

Contrary to the decision below, the legislative history

of the Bankrupicy Reform Act of 1978 and the decisions

of other federal courts recognize that the rights of a

debtor must be carefully balarced against the public

health and safety and that in the event of a conflict,

public health and safety must prevail. Thus, Ohio seeks

to have this Court reverse the decision of the court of

appeals which gives priority to a debtor’s financial

interest over the health and safety of the public. The

State presents three grounds in support of its petition for

certiorari.

i. The Decision Below Involves An Import-

ant Question Of Federal Law, Whether A

Bankruptcy Court, To Protect Debtors,

May Prevent A State From Exercising

Its Police Power To Pursue Enforcement

Of An Injunction To Abate A Public

Health Hazard.

Throughout the development of federal bankruptcy

law there has been a constant tension between the

administration of federal bankruptcy proceedings and the

enforcement of the states’ police power. There has been

a temptation for debtors to attempt to use the shelter of

the bankruptcy courts to avoid fulfilling their responsibil-

ities under regulatory programs enacted pursuant to state

police power. As early as 1939, however, this Court

admonished in, Palmer v. Commonwealth of Massachu-

setts, 308 U.S. 79 (1939), that a bankruptcy proceeding

cannot be used to excuse noncompliance with state

regulatory programs or to displace the policy judgments

of state administrative agencies. Similarly, in Ca//away v.

Benton, 336 U.S. 132, 141 (1949), this Court declared

that:

We do not believe that Congress intended

to leave to individual judges the question

of whether state laws should be accepted

or disregarded.

Indeed, the problem is so serious that it was specific-

ally addressed by Congress in the Bankruptcy Reform

Act of 1978. Congress was concerned that bankruptcy

courts not use their authority to disrupt the enforce-

ment of statutes adopted pursuant to the states’ police

power to protect public health and safety. This concern

was particularly evident in the Congressional committee

reports which discussed the automatic stay provisions

ultimately contained in 11 U.S.C. Section 362:

Under present law, there has been some

overuse of the stay in the areas of govern-

mental regulation. For example, in one

Texas bankruptcy court, the stay was

applied to prevent the State of Maine

from closing down one of the debtor's

plants that was polluting a Maine river in

violation of Maine’s environmental protec-

tion laws. In a Montana case, the stay was

applied to prevent Nevada from obtaining

afi injunction against a principal in a

corporation who was acting in violation of

Nevada’s anti-fraud consumer protection

laws. The bill excepts these kinds of

actions from the automatic stay. The

States will be able to enforce their police

and regulatory powers free from the

automatic stay. The bankruptcy court

has ample additional power to prevent

damage to the bankrupt estate by such

actions on a case-by-case basis. By

exempting these state actions from the

scope of the automatic stay, the court

will be required to examine the state

actions more carefully, and with a view

to protecting the legitimate interests of

the state as well as of the estate, before it

may enjoin actions against the debtor or

the estate. House Report No. 95-595,

95th Cong., Ist Sess. (1977), accompany-

ing H.R. 8200, at p. 155-156 (emphasis

supplied).

Similar language is contained in the Senate Report on

the Senate version of the Bankruptcy Act of 1978, S.

2266. See Senate Report No. 95-989, 95th Cong., 2nd

Sess. (1978), at p. 52. Indeed, both reports emphasize

that state police power enforcement actions are not sub-

ject to the automatic stay, but if it is necessary, they may

be enjoined pursuant to 11 U.S.C. Section 105 where the

court may develop a more flexible form of injunction

which protects the states’ legitimate police power interests

as well as the interest of the parties to the bankruptcy

case. House Report No. 95-595 at p. 342; Senate Report

No. 95-989 at p. 51. Thus, the theme repeated thoughout

the legislative history of the Bankruptcy Reform Act of

1978 is that when dealing with a state police power

enforcement action a bankruptcy court must avoid using

a heavy-handed approach and meticulously balance the

states’ interest in the enforcement of their laws with the

interests of the bankruptcy estate.

This Congressional policy was adopted in the

language of 11 U.S.C. Section 362 which reflects the

Congressional determination that the automatic stay be

defined by statute and not left to case-by-case judicial

determination. Section 362 states in relevant part as

follows:

(a) Except as provided in subsection (b)

of this section, a petition filed under sec-

tion 301, 302 or 303 of this title operates

as a stay, applicable to all entities, of — —

7 * *

(2) the enforcement, against the

debtor or against property of the estate,

of a judgment obtained before the

commencement of the case under this

title;

* * *

(b) The filing of a petition under section

301, 302 or 303 of this title does not

operate as a stay — —

. o

(5) under subsection (a) (2) of this

section of the enforcement of a judg-

ment, other than a money judgment,

obtained in an action or proceeding by

a governmental unit to enforce such

governmental unit’s police power or

regulatory power; (emphasis supplied).

The distinction created in Section 362(b) (5) is explained

in House Report No. 95-595 as follows:

10

Paragraph (5) makes clear that the excep-

tion extends to permit an injunction and

enforcement of an injunction, and to

permit the entry of a money judgment,

but does not permit enforcement of a

money judgment. /d. at 343. (emphasis

supplied.)

The same language appears in Senate Report No. 95-989

at p. 52. Thus, the Congressional committee reports

clearly indicate that the enforcement of an injunction

obtained by a governmental unit in an action to enforce

its police or regulatory powers is exempt from the

automatic stay in Section 362 while an attempt to

enforce a money judgment is subject to the stay.

In light of the thoughtful consideration given to this

matter by Congress and the explicit statutory language

adopted it would seem that the distinction drawn between

injunctions and money judgments for purposes of deter-

mining the applicability of the statutory stay would

settle the matter. Unfortunately this has not been the

case. Instead there has continued to be a splintering of

authority throughout the district courts and courts of

appeals as to when the statutory stay is applicable against

state police power actions. Compare: /n re Hillsdale

Foundry Company, 2 C. B. C. 542 (Bkrtcy. W. D. Mich.

1974) (state action to shut down factory in violation of

pollution laws is subject to bankruptcy stay) with /n re

Canarico Quarries, inc., 466 F. Supp. 1333 (DO. P. R. 1979)

(stay inepplicable to state action to shut down factory in

violation of pollution laws); Compare: /n re Jacobsmeyer,

13 B.R. 298 (Bkrtcy. W.D. Mo. 1981) (stay applicable

against injunction obtained by state in exercise of its

police power which would preclude a viable reorganiza-

tion plan) with Donovan v. TMC Industries, LTD, 20

B.R. 997, 1004 (N.D. Ga. 1982) (stay does not apply

against injunction obtained by federal government in

11

exercise of its police power which would preclude a

viable reorganization plan); Compare: in re Theobald

Industries, inc., 16 B.R. 537, 539 (Bkrtcy. D. N. J. 1981)

(statutory stay applies against National Labor Relations

Board proceeding) with Nationa/ Labor Relations Board

v. Evans Plumbing Co., 639 F.2d 291, 293 (5th Cir.

1981) (statutory stay does not apply against NLRB

proceedings); Compare: in re Mason, 18 B.R. 817

(Bkrtcy. W.D. Tenn. 1982) (statutory stay applies to

prevent state from revoking debtors’ liquor license) with

Colonial Tavern, inc. v. Byrne, 420 F. Supp. 44 (D.

Mass. 1976) (stay not applicable to prevent revocation of

liquor license); Compare: the Sixth Circuit's decision

in this case imposing *he stay against an injunction and

order appointing a receiver in a state police power

enforcement action with Securities and Exchange Com-

mission v. First Financial Group of Texas, 645 F.2d

429, 436-439 (5th Cir. 1981), in which the Fifth Circuit

held that the stay does not apply against an injunction

and order appointing a receiver in a federal police power

enforcement action. As a comparison of these cases

reveals, the manner in which the language of the statu-

tory stay has been interpreted has led to increased

uncertainty rather than clarity in implementing the

policy which Congress intended. While some of the cases

suggest that the key to reconciling the divergent holdings

is whether a state's interest in a case is a pecuniary one or

one that directly involves public safety considerations,

Donovan, supra, at 1001, a clear, definitive statement

from this Court would be extremely valuable. As such,

the time is ripe for this Court to confront this issue

which Congress found important enough to specifically

address in the Bankruptcy Reform Act's legislative

history.

The case at bar presents an appropriate vehicle for

this Court to delineate the extent to which state police

power enforcement activities are subject to the Bank-

12

ruptcy Reform Act's statutory stay. At the hearing

before the bankruptcy court the State of Ohio presented

two expert witnesses, one from U.S. EPA and one from

Ohio EPA, who testified concerning the serious extent

of the environmental peril presented by the Chem-Dyne

site: fire hazards, leaking drums and tanks of toxic

chemical wastes which could cause grave water pollution

problems, and chemical vapors which burned and irritated

the throats of persons who breathe them. Those experts

also added that the situation would grow worse the

longer the materials remained on-site. In addition, the

state court receiver, Jack Zettler, testified that there was

no source of immediate funds other than Kovacs to

perform many of the abatement projects which required

immediate attention. By contrast, Kovacs offered no

evidence before the bankruptcy court. Despite the fact

that Ohio presented extensive evidence of an immediate

threat to public health and safety, and despite the fact that

Ohio produced evidence to demonstrate the need to

invoke the February 4, 1980 injunction issued to Kovacs

to cooperate with the receiver to accomplish the cleanup

ordered by the injunction contained in the July 18, 1979

Stipulation and Judgment Entry, all the courts below

focused solely on the impact upon Kovacs’ financial

future and held that the statutory stay automatically

applied. Thus, this case presents this Court with a situa-

tion where the State has made a clear showing of the

immediate need to enforce injunctions against Kovacs to

abate an imminent public health hazard. Yet the court

of appeals held that due to the adverse impact upon

Debtor Kovacs’ pecuniary interests, the statutory stay

automatically applies to prevent Ohio’s enforcement

efforts from going forward.* A sharp factual context

concerning the proper interpretation of the automatic

Statutory stay provision could not, therefore, be more

clearly placed before the Court.

it is important to understand that all three courts below based their

decision upon the automatic, rigid invocation of the statutory stay pursuant

to 11 U.S.C. Section 362 and that none of the courts addressed the develop-

ment of a more flexible remedy pursuant to 11 U.S.C. Section 105.

13

In addition to the specific facts of this case, the

general subject matter of environmental regulation

presents a significant context for the Court to address

the relationshio between the debtor protection concerns

of bankruptcy and the state police power concern with

protecting public health and welfare. Within the area of

environmental law there are numerous ways in which the

goals of environmental protection and debtor protection

collide. There are two, however, which are critically

affected by the Sixth Circuit’s decision below, hazardous

waste disposal and strip mine reclamation. in both of

these areas there has been a repeated pattern of fly-by-

night companies which operate iliegally, make a quick

buck and then leave beh! an unabated environmental

nightmare, either huge amounts of toxic and chemical

wastes which threaten public health or land ravished until

it looks like a moonscape. The correction of either

situation requires large sums of money. Thus, Congress

and the states have been very active in creating new

regulatory programs to deal with those situations. See

Surface Mining Control and Reclamation Act of 1977, 30

U.S.C. Section 1201, et seg.; Resource Conservation and

Recovery Act, 42 U.S.C. Section 6901, et seq.; Compre-

hensive Environmental Response, Compensation and

Liability Act of 1980, 42 U.S.C. Section 9601, ef seq.

The decision below, however, if left untouched, allows

violators to defy regulatory efforts. The Sixth Circuit's

decision allows unscrupulous operators to create an

environmental disaster and then cloak themselves with

the protection of the bankruptcy court to prevent states

from requiring them to abate the hazards which they

created. Furthermore, the pattern of such conduct seems

to be on the increase as regulatory programs are strength-

ened.”

*incteed in Ohio alone there are several other situations where parties

responsible for chemical waste sites or strip mine areas have sought the pro-

tection of bankruptcy courts against Ohio’s entorcement efforts.

14

Thus, while Congress considered the relationship

between bankruptcy and state police power enforcement

activities to be serious enough to warrant Congress to

specifically address the matter in the Bankruptcy Reform

Act, Congress’ efforts have not successfully clarified the

matter and there exists a serious divergence of authority

within the lower federal courts as to the proper manner

in which the automatic stay should be applied to state

police power activities. The instant case presents a clear

and direct vehicle for addressing this important issue.

Therefore, certiorari should be granted.

15

ii. The Decision Below Creates A Conflict

Between The Circuits Concerning The

Appiicability Of The Automatic Statutory

Stay To The Enforcement Of Injunctions

Obtained By States In The Exercise Of

Their Police Power To Protect Public

Health And Safety.

As indicated above, there has been a great deal of

conflict among the lower federal courts concerning the

manner in which the Bankruptcy Code’s automatic statu-

tory stay is to be applied in actions to enforce state

police power authority. The Sixth Circuit’s decision in

this case is a classic example of this lack of uniformity

because the decision below directly conflicts with the

decision of the Fifth Circuit in Securities and Exchange

Commission v. First Financial Group of Texas, 645

F.2d 429 (5th Cir. 1981). In addition, the interpretation

of the phrase “money judgment” contained in the

decision below directly conflicts with what had previously

been a uniform definition of that phrase within the

federal courts. See United States Fidelity and Guaranty

Co. v. Ft. Misery Highway Dist., 22 F.2d 369, 372-373

(9th Cir. 1927); Fuller v. Aylesworth, 75 F. 694, 701

(6th Cir. 1896). Each of these conflicts will be examined

below.

in SEC v. First Financial Group of Texas, supra, the

Fifth Circuit was faced with a civil enforcement action

brought by the SEC against First Financial for various

securities violations. The SEC sought and obtained

injunctive relief. Meanwhile, a petition for involuntary

bankruptcy had been filed against First Financial. Five

days after the filing of the bankruptcy petition, the

district court in the SEC’s enforcement action granted

the SEC’s motion to appoint a receiver to implement the

injunction and assure that there would be no additional

16

unlawful fraudulent transactions. The receiver was

directed to take exclusive control of the corporation’s

assets. /d. at 436-437. First Financial challenged the

district court’s appointment of the receiver on the

grounds that the automatic statutory stay prevented the

district court from going forward in the enforcement

action to appoint the receiver to implement the previously

issued injunction. The Fifth Circuit rejected the claim

and stated:

A continuing civil enforcement proceeding

brought by a governmental unit and the

enforcement of injunctive relief obtained

therein are exempted from the automatic

stay provisions of Section 362(a). /d. at

437 (emphasis original).

The court noted that the use of receiverships was a well-

established mechanism for implementing injunctive relief

and that the receivership at issue would assure complete

enforcement of the federal securities’ iaws.” Id. at 438.

The Fifth Circuit then concluded that the legislative

history clearly indicated that Congress did not intend for

the automatic stay to apply in such a situation. /d. ai

439.

The factual pattern in First Financial is virtually

identical to the case at bar. Im both cases a governmental

unit pursuant to its police power had obtained injunctive

relief to abate violations of law. In both First Financial

and in the instant case a receiver was appointed to imple-

ment the injunction. in both cases the receiver was

granted exclusive possession of the debtors’ assets. Yet

in First Financial the Fifth Circuit recognized that the

automatic stay did not prevent the implementation of the

injunctive relief while the Sixth Circuit below held that

the automatic stay prevented Ohio from implementing

the injunction.

17

The conflict between the two decisions is made

more blatant when they are considered in light of the

fact that the receivership in First Financial presented a

greater imposition to the bankruptcy estate than in the

case at bar. In First Financial the receiver maintained

exclusive possession of the bankruptcy estate. /d. at 439.

By contrast, in a separate proceeding in the case at bar

the receiver had turned over the assets of the estate to the

bankruptcy trustee, and the action of Ohio below was

directed not at the bankruptcy estate but at Kovacs’

post-petition income which was easonable in light of the

assumption made by al! the courts below that Kovacs’

obligation to perform the injunctions was non-discharge-

able.* Furthermore, while the SEC’s enforcement effort

in First Financial was intended to protect the financial

investments of the public, a true pecuniary interest,

Ohio’s efforts have been aimed at safely removing toxic

chemical wastes from the middle of a city thereby abat

ing what an expert from U.S. EPA described as an

“imminent hazard.” Yet the Fifth Circuit held that

Congress afforded the SEC the room to protect the

pecuniary interests of the investing public while the Sixth

Circuit interpreted Section 362 as precluding Ohio from

protecting the lives of the citizens of Hamilton. Such

contradictory application of the statutory stay to a

matter of such grave concern to public health and safety

mandates this Court's attention.

in a recent development the district court, citing the Sixth Circuit“

decision which is at issue here as “law of the case affirmed the bankruptcy

court's determination that Kovacs’ duty to perform the injunction was

dischargeable. See State of Ohio, ex rel. Brown v. Kovacs, Case No. C-1-82-

526 (S.D. Ohio, September 17, 1982). Thus, a decision of the Sixth Circuit

made on the assumption of nondischargeability has been cited as law of the

case requiring a determination of dischargeability. While this makes no

logical sense, it is an example of the “double speak which Ohio has con-

stantly faced in its efforts to vindicate its right to protect the health and

safety cf the citizens of Hamilton, Ohio.

18

Unfortunately, the conflict between First Financial

and the case at bar is not the only inconsistency between

the holding in this case and previous federal appellate

decisions. As previously mentioned, for purposes of

determining the applicability of the automatic stay,

Congress distinguished, in Section 362(b) (5), between

injunctions and money judgments with the stay only

being applicable to the latter. The term “money judg-

ment” is a specific term of art. Indeed, as elementary a

legal authority as Black’s Law Dictionary (4th Ed. 1968)

defines the term “money judgment“ as follows:

One which adjudges the payment of a sum

of money, as distinguished from one

directing an act to be done or property

to be restored or transferred. /d. at p. 980.

The authority cited by B/ack’s are decisions of the Sixth

and Ninth Circuits in Fuller v. Aylesworth, supra, and

United States Fidelity and Guaranty Co. v. Ft. Misery

Highway Dist., supra. \n both cases the courts of appeals

concluded that a money judgment was an order to pay

a sum certain rather than an order to perform an act

which, of course, is an injunction. Thus, in reliance upon

the uniform holding within the federal courts concerning

the definition of money judgment, Congress was able to

create an ostensibly clear distinction between money

judgments and injunctions. The decision below obliterates

this distinction.

The Sixth Circuit’s decision adopts the reasoning of

the bankruptcy and district courts which recognized that

Ohio was enforcing an injunction, not a money judgment.

The three courts below, however, reasoned that since

Ohio sought to compel Kovacs to spend money to

accomplish the acts mandated by the injunction, the

injunction was “in essence” a money judgment. 681

19

F.2d at 456. Effectively, this destroys the distinction

which had previously been uniformly accepted within the

federal courts between an order to pay a sum certain and

an order to perform an act. Even more importantly, the

Sixth Circuit’s decision conflicts with a group of uniform

federal decisions upon which Congress itself relied to

create a meaningful distinction between situations in

which the automatic stay is and is not applicable. Thus,

the court of appeals’ decision below rejecting the distinc-

tion between money judgments and injunctions previously

recognized in Fuller, supra, and Ft. Misery, supra, creates

further confusion in an already confused area and negates

Congress’ efforts to clarify the matter. Therefore, the

situation requires this Court's attention.

The decision below starkly portrays what is happen-

ing with the federal courts’ conflicting interpretations of

what was intended by Congress to be a clear declaration

that state police power enforcement actions for injunc-

tive relief are not subject to the automatic statutory stay.

Due to the conflicts created by the oblique reasoning

of the court below, the confusion in this area will continue

to grow if the Sixth Circuit's decision is allowed to stand.

Thus, this Court should accept Ohio’s petition and grant

the writ which the State seeks.

lll. The Decision Below Represents A Serious

Failure Of The Sixth Circuit, District

And Bankruptcy Courts To Honor A

Policy Choice Made By Congress Which

This Court, In View Of Its Supervisory

Power Over Bankruptcy Courts, Should

Not Ignore.

In Maggio v. Zeitz, 333 U.S. 56, 59 (1948), this

Court was faced with a decision of a bankruptcy court

ordering the imprisonment of a debtor for an act which

the lower court admitted it knew was impossible for the

debtor to perform. This Court noted that the internal

contradiction in the order imprisoning a person for the

failure to perform an act which was admittedly impossible

to perform justified the exercise of the Court’s super-

visory authority over bankruptcy courts. /d at 59. A

similar internal contradiction in the decisions below in

the case at bar justifies the exercise in this case of the

Court’s supervisory authority over bankruptcy courts.

The Court of Appeals stated below that:

We concur with the bankruptcy court’s

conclusion that Section 362 indicates a

clear intent to permit governmental units

to continue to enforce their police power

through mandatory injunctions despite

the filing of a bankruptcy petition but to

deny those units the power to collect

money in their enforcement efforts. /d.

at 456.

After acknowledging the right of states to enforce manda-

tory injunctions, however, the court then held that the

State cannot compel Kovacs to spend money to perform

the acts required by the mandatory injunction issued by

21

the common pleas court, in effect negating the very

activity which the Sixth Circuit acknowledged that

Congress intended. This internal contradiction requires

this Court to address the lower courts’ refusal to honor

Congress’ policy choice concerning the applicability of

the statutory stay.

As all the courts below acknowledge, in Section

362(b) (5), Congress intended to distinguish between

money judgments and injunctions for purposes of deter-

mining the applicability of the automatic statutory stay,

with injunctions being exempt from the automatic

statutory stay. In House Report No. 95-595, supra, at

p. 174, Congress expressed its dissatisfaction with the

manner in which the automatic stay was being

administered under the old statute and the Rules of

Bankruptcy Procedure. Specifically, the House

Committee expressed displeasure with the harm which

could accrue to the public as a result of operation of an

automatic stay against police power enforcement actions.

Thus, the conditions for the operation of the automatic

stay were to be expressly defined by statute.

Elsewhere in both the House and Senate reports

Congress expressed its intent that actions which are

exempt from the automatic stay should be handled in

adversary complaints for injunctive relief subject to the

traditional equitable principles which apply to requests

for injunctive relief. Specifically, both reports declare

as follows:

The court has ample other power to

stay actions not covered by the automatic

stay. Section 195, of proposed title 11,

derived from Bankruptcy Act Section 2a

(15), grants the power to issue orders

necessary or appropriate to carry out the

provisions of title 11. The bankruptcy

courts are brought within the scope of

the All Writs Statute, 28 U.S.C. 1651

(1970), and are given the powers of a

court of law, equity, and admiralty

(H.R. 8200, Section 243(a), proposed

28 U.S.C. 1481). Stays or injunctions

issued under these other sections will not

be automatic upon the commencement of

the case, but will be granted or issued

under the usual rules for the issuance of

injunctions. By excepting an act or action

from the automatic stay, the bill simply

requires that the trustee move the court

into action, rather than requiring the

stayed party to request relief from the

stay. There are some actions, enumerated

in the exceptions, that generally should

not be stayed automatically upon the

commencement of the case, for reasons

of either policy or practicality. Thus,

the court will have to determine on a

case-by-case basis whether a particular

action which may be harming the estate

should be stayed. House Report No. 95-

595, p. 342; Senate Report No. 95-989,

p. 51.

Indeed, the House report explicitly stated that

police power actions are not subject to the automatic

stay and should be enjoined only on a case-by-case basis

and upon such terms as will still protect the state’s

legitimate police power interests:

The States will be able to enforce their

police and regulatory powers free from

the automatic stay. The bankruptcy court

has ample additional power to prevent

damage to the bankrupt estate by such

actions on a case-by-case basis. By

exempting these State actions from the

scope of the automatic stay, the court will

be required to examine the State actions

more carefully, and with a view to

protecting the legitimate interests of the

State as well as of the estate, before it

may enjoin actions against the debtor or

the estate. House Rep. No. 95-595, at

p. 156.

In contrast to this clear directive to carefully protect

legitimate state police power interests, the courts below

mechanically issued a stay against Ohio despite the fact

that, as the courts themselves admit, the judgment Ohio

wishes to enforce is not a money judgment to which the

stay applies. The lower courts’ heavy-handed extension

of the stay to enjoin the Ohio receivership proceeding is

thus contrary to the express language of the statute and

the explicitly stated intent of Congress to balance the

public interest in public health and safety against the

interests of the bankruptcy estate, a balancing test

which none of the courts below performed. The total

failure of any of the three courts below to give any

consideration to the interests of Ohio is very distressing,

and is particularly irresponsible in light of the peril posed

to the citizens of Hamilton by the toxic chemical wastes

on the Chem-Dyne site.

Congress clearly stated that the automatic stay was

to be defined by statute and could not be arbitrarily

expanded without considering the public interest at stake

in Ohio’s action. Yet the courts below justified their rigid

failure to implement the will of Congress by invoking

estoppel and claiming that Ohio was “estopped to deny“

that it was enforcing a money judgment. 681 F.2d at

456. The error in this contrived device for thwarting the

will of Congress is clear.

24

It has repeatedly been held that when determining

whether estoppel applies, a federal court must look to

state law of estoppel. Wi/kie v. Brooks, 515 F.2d 741,

748 (6th Cir. 1975), cert. denied, 423 U.S. 996 (1975).

Accord: Gladden v. Pargas, Inc. of Waldorf, Md., 575

F.2d 1091 (4th Cir. 1978); Minne. Farm Bureau Market-

ing Corp. v. North Dakota Agr. Marketing Ass n., Inc.,

563 F.2d 906 (8th Cir. 1977); United States v. Briggs

Manufacturing Co., 460 F.2d 1195 (9th Cir. 1972);

Glenn v. State Farm Mutual Insur. Co., 341 F.2d 5

(2d Cir. 1965). Ohio law requires six essential elements

to justify the invocation of estoppel:

(1) conduct which amounts to a false

representation or concealment of material

facts, or, at least, which is calculated to

convey the impression that the facts are

otherwise than and inconsistent with

those which the party subsequently

attempts to assert; (2) intention, or at

least expectations, that such conduct

shall be acted upon by the other party;

and (3) knowledge, actual or constructive,

of the real facts. As related to the party

claiming the estoppel, the essentials

generally are: (1) lack of knowledge and

of the means of knowledge of the truth

as to the facts in question; (2) reliance

upon the conduct of the party estopped;

and (3) action based thereon of such a

character as to change his pusition pre-

judicially. 20 Ohio Jurispruderce 2d,

Estoppel and Waiver, Section 35 (1956),

p. 499. Accord: Murec v. United States

Steel Corp., 195 F. Supp. 137 (N. D. Ohio,

1961).

The elements which are required to justify the imposition

of estoppel under Ohio law are virtually identical to those

which are required in the vast majority of jurisdictions

throughout the country. See 28 American Jurisprudence

2d, Estoppel and Waiver, Section 35 (1966), p. 640-642;

31 Corpus Juris Secundum, Estoppe/, Section 67 (1964),

p. 402-403.

Thus, since the six critical elements of estoppel! are

nearly universally recognized, the following question

must be asked: Where in the record is there even a

scintilla of evidence establishing any of the necessary

elements of estoppel? The silence of all three decisions

below on this question is deafening. None of the

opinions addresses any of the elements of estoppel or

cites any evidence supporting each elernent. What false

representation did Ohio make? What act of the State

did Kovacs rely upon to his detriment? Where is any

evidence that the State intended to mislead Mr. Kovacs?

Where is there any evidence that Mr. Kovacs had less

knowledge than the State about any fact upon which

he relied to his detriment? The answer to these questions

is that such evidence exists nowhere in the record. in-

deed, Debtor Kovacs presented no evidence at all in the

hearing before the bankruptcy court. Instead, he rested

upon his alleged right to a stay under the language of

Section 362.

Thus, the nature of the unique estoppel doctrine

developed by the courts below in the case at bar becomes

clear. They do not use the term “estoppel” in a lawful

manner referring to willful misrepresentation and

detrimental reliance. Rather, the essence of their use of

the term “estoppel” is as follows: Ohio, you are tech-

nically correct. The statutory stay does not apply to

you. But we do not like the result of applying the statute

in the manner adopted by Congress. Therefore, we will

‘estop’ you from exercising your rights under the

bankruptcy law as Congress enacted it.” This is not

estoppel in a lawful and legal sense. It is a refusal of

courts to honor the policy declared by Congress because

in a specific case the courts disagree with the outcome

mandated by the policy Congress adopted. it is also

reversible error,

In conclusion, Congress clearly indicated that the

enforcement of injunctions obtained by units of govern-

ment in the exercise of their police power are not subject

to the automatic statutory stay of the Bankruptcy Re-

form Act of 1978. Congress stated that a bankruptcy

court may only interfere with such enforcement efforts

after a very careful, meticulous balancing of the public

interest and the interests of the bankruptcy estate and

then only by crafting an injunctive remedy which care-

fully protects public health and safety. The Sixth

Circuit’s decision below, however, authorizes a heavy-

handed, insensitive, blanket stay against the enforcement

of the injunction which Ohio obtained against Kovacs

requiring him to remove the toxic chemicals which

threatened the health and safety of the citizens of

Hamilton. The Sixth Circuit's attempt to justify this

defiance of Congressional policy is based upon an unlaw-

ful use of the doctrine of estoppel. This attempt by a

court to impose its policy judgment rather than that of

Congress requires this Court to exercise its supervisory

authority over bankruptcy courts. As Chief Justice

Burger recently stated:

Un our constitutional system the com-

mitment to the separation of powers is

too fundamental for us to preempt

Congressional action by judicially decree-

ing what accords with “common sense

and public weal.” Our constitution vests

such responsibilities in the political

branches. Tennessee Valley Authority v.

Hill, 437 U.S. 153, 195 (1978).

CONCLUSION

The case at bar presents a situation which exemplifies

a matter of vital concern to state governments across the

country involving the conflict between the ability of

States to protect public health and safety and the rights

of persons seeking the shelter of bankruptcy. In addition,

this case also presents a direct conflict between decisions

of the Fifth and Sixth Circuits concerning the extent to

which governmental attempts to enforce injunctions are

exempt from the automatic statutory stay created by the

Bankruptcy Reform Act of 1978. Furthermore, the

refusal of the court below to honor Congress’ policy

choice concerning the exemption of injunction actions

from the scope of the statutory stay calls for the exercise

of this Court’s supervisory authority. Therefore, the

State of Ohio respectfully submits that this Court should

grant a writ of certiorari to review the decision and

judgment of the United States Court of Appeals for the

Sixth Circuit.

Respectfully submitted,

WILLIAM J. BROWN

Attorney General of Ohio

E. DENNIS MUCHNICKI

Assistant Attorney Genera/

State Office Tower

30 East Broad Street, 17th Floor

Columbus, Ohio 43215

(614) 466-2766

Counsel of Record for

Petitioner

CERTIFICATE OF SERVICE

| certify that three copies of this petition for writ of

certiorari were mailed pursuant to Supreme Court Rule

28.3 by ue States mail, first-class postage prepaid,

mis Z day of November, 1982 to John A.

Garretson, 118 S. Second Street, Hamilton, Ohio 45011;

to William H. Eder, 900 Tri-State Building, Cincinnati,

Ohio 45202; to E. Hanlin Bavely, 604 Tri-State Building,

Cincinnati, Ohio 45202.

C. DENNIS MUCHNICKi

Assistant Attorney General

Counsel of Record for Petitioner