# Petition — Ohio v. Kovacs

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1983
- **Citation:** 459 U.S. 1167

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_1157%3A1. Public record. Not legal advice.