Amicus Brief for the United States — Ohio v. Kovacs

Office - Supreme Court, U.S.

FILED

No. 82-815 DEC 15 1982

In the Supreme Court of the

OcTOBER TERM, 1982

STATE OF OHIO, PETITIONER

V.

WILLIAM LEE Kovacs

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

AS AMICUS CURIAE

(202) 633-2217

a

TABLE OF CONTENTS

Page

Interest of the United States : 1

ee 2

.... 3 —— 5

Conelusion > ae

TABLE OF AUTHORITIES

Cases:

Canarico Quarries, Inc., In re, 466 F. Supp. 1333. 11

Commonwealth v. Peggs Run Coal, 423 A. 2d 765. 8,11

Kovacs, In re, Bankr. No. B-180-1499 (S. D. Ohio

CS 3

Mitchell v. De Mario Jewelry Co., Inc., 361 U.S.

1———————————————————————

NLRB v. Evans Plumbing Co., 689 F 2d 2911 10, 11

Penn Terra Limited, In re, Bankr. No. 82-845

(W.D. Pa. Nov. 4, 1982o7ʒfõ/ 2

Porter v. Warner Co., 328 U.S. 398 8

United States v. Charles Price, 688 F.2d 204 8,9

United States v. Johns-Manville Sales Corp.,

Bankr. No. 81-299-D (D. N.H. Nov. 15, 1982) 2

United States v. Republic Steel Corp., 362 U.S.

Statutes:

— . . 8

U.S. Fidelity & Guaranty Co. v. Ft. Misery High-

way Dist., 22 F. 2d B69 ùꝶũU¶9292e2e22e 10

Bankruptcy Reform Act, 11 U.S.C. (Supp. V) 101

et seq.:

Chapter 1:

11 U.S.C. 101(4) (A) * 8

GR GG kL— 10

Chapter 3:

11 U.S.C. 362(b) 7 5

11 U.S.C. 362(b) (4) 15 6

.

Statutes—Continued Page

11 U.S.C. 362 (b) (55 5, 6, 7, 8

12090 4

Chapter 5:

11 U.S.C. 528 (a) (7) 7

Chapter 7 3

Chapter 11 8

28 U.S.C. 1471 (e) 6

Miscellaneous:

H.R. Rep. No. 95-595, 95th Cong., 2d Sess. (1978). 6, 7

S. Rep. No. 95-989, 95th Cong., 2d Sess. (1978) 6,7

In the Supreme Court of the United States

OcTOBER TERM, 1982

82-815

STATE OF OHIO, PETITIONER

V.

WILLIAM LEE Kovacs

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES

AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This case presents the substantia! question whether

the automatic stay provisions of the Bankruptcy Re-

form Act, 11 U.S.C. 362, operate to block the effec-

tive implementation of mandatory injunctions ob-

tained in governmental environmental suits against

defendants who later file for bankruptcy. Here, an

industrial waste disposer successfully invoked the

automatic stay to prevent the State of Ohio from en-

forcing a state court order requiring the polluter,

who had failed to comply with an earlier cleanup

order, to release certain of his assets and future in-

(1)

come to a court-appointed receiver who, in turn, was

directed to effect the cleanup. That problem equally

arises when the United States seeks to enforce

cleanup obligations imposed by federal law, includ-

ing the Safe Drinking Water Act (“SDWA”), 42

U.S.C. 300f et seg., the Resource Conservation and

Recovery Act (“RCRA”), 42 U.S.C. 6901 et seq.,

and the Comprehensive Environmental Response

Compensation and Liability Act (“CERCLA”), 42

U.S.C. 9601 et seq.

We have cause for concern that the decision below

may be used to cripple our own environmental en-

forcement efforts. Already, Kovacs himself has in-

voked the Sixth Circuit decision to frustrate a fed-

eral action pending against him. At least one dis-

trict court has refused to vacate a stay against an on-

going federal action in pursuit of an injunction that

would order the defendant-debtor to abate the health

hazard created by its disposal of asbestos wastes.

United States v. Johns-Manville Sales Corp., Bankr.

No. 81-299-D (D.N.H. Nov. 15, 1982)“ Further-

more, even as it bears on local enforcement efforts,

the present decision implicates the national commit-

ment to a safer environment by encouraging offend-

ers to file for bankruptcy and thereby excuse them-

selves from performing orders which require them

to abate the health hazards they have created.

STATEMENT

1. Prior to filing a petition in bankruptcy, the

debtor, William Kovacs, had been engaged in the

business of industrial waste disposal in Ohio. In

1979 the State of Ohio sued Kovacs as an individual

1See also In re Penn Terra Limited, Bankr. No. 82-845

(W.D. Pa. Nov. 4, 1982).

and as the officer of several business entities, includ-

ing the Chem-Dyne Corporation, for alleged viola-

tions of various state environmenta! iaws. At that

time, Kovacs signed a stipulation and judgment entry

in the Butler County Common Pleas Court. That

order prohibited him from causing further pollution,

required him to remove all hazardous wastes from

the premises of the Chem-Dyne Corporation by

July 1980, and directed him to pay $75,000 to the

Ohio Department of Natural Resources. Pet. App. G.

Due to Kovacs’ failure to comply, the state court

appointed a receiver to collect Kovacs’ non-exempt

assets and use them to finance the cost of cleanup

at the Chem-Dyne site.“ Pet. App. E. Subsequently

in July 1980, Kovacs filed a personal petition in

bankruptcy in the United States Bankruptcy Court

for the Southern District of Ohio. In re Kovacs,

Bankr. No. B-1-80-1499 (Oct. 31, 1980) .°

In an effort to ensure the availability of adequate

funds to implement the cleanup order, Ohio sought

a state court hearing on Kovacs’ current employment

status and income. Kovacs thereupon moved the

bankruptcy court to enjoin Ohio from proceeding in

state court. He argued that the State’s goal was to

obtain an order permitting the state-court receiver to

use his post-bankruptcy income to satisfy the unfilled

2 The receiver was authorized “to receive and collect any

and all sums of money due or owing to the defendant busi-

ness entities or defendant Kovacs in any manner, whether

the same are now due or shall hereafter become due and

payable.” Pet. App. E at 9.

His original petition sought reorganization under Chap-

ter 11 of the Bankruptcy Code. In September 1980, the

bankruptcy court converted the action to one for straight

bankruptcy under Chapter 7 of the Code. See Pet. App. D

at 1.

4

obligation to clean up the Chem-Dyne site and that

such an order would violate the automatic stay provi-

sions of 11 U.S.C. 362. The bankruptcy court agreed.

2. The bankruptcy court readily acknowledged

that neither the cleanup order nor the order impos-

ing the receivership gave the State a money judg-

ment with respect to cleaning up the Chem-Dyne

premises.* Nonetheless, the bankruptcy court en-

joined the State from proceeding in state court “to

levy on post-filing wages of the debtor.” Pet. App. D

at 11. It reasoned that “there is no difference in

substance between efforts to collect money from a

debtor by securing a court order, and efforts to en-

force a money judgment against him. We hold,

therefore, that the State is estopped to deny that

it is seeking to enforce a money judgment against

debtor.” Pet. App. D at 6.

The State appealed to the United States District

Court for the Southern District of Ohio, which

affirmed. Pet. App. C. The district court, too, found

that the State sought to collect money “just as

though it were enforcing a money judgment.” Pet.

App. C at 3. Accordingly, the district court held the

automatic stay applicable “because the state’s effort

is clearly to enforce a judgment obtained before the

filing of the bankruptcy petition.” Ibid. Moreover,

the district court rebuked the State for “attempting

to punish Mr. Kovacs for not complying with the

1979 judgment, and, in the process, subverting the

purpose of the Bankruptcy Code.” Id. at 4. The

court admonished the State to seek relief from the

stay in the bankruptcy court under 11 U.S.C.

362(d). Meanwhile, if Kovacs were violating envi-

*The State apparently conceded that it could not enforce

that part of the 1979 order requiring Kovacs to pay the State

$75,000. Pet. 2n.*

ronmental laws, the State could invoke criminal sanc-

tions, but the “Bankruptcy Code may not be used as

a substitute for such criminal sanctions.” Ibid.

8. The Sixth Circuit affirmed, per curiam. 681

F.2d 454 (1982) (reproduced at Pet. App. A). It

concluded that, while Section 362(b) clearly per-

mitted governmental units to continue to enforce

their police power through mandatory injunctions

despite the filing of a bankruptcy petition, it denied

them the power to collect money in their enforce-

ment efforts. Pet. App. A at 6. Like the two lower

courts, the Sixth Circuit also believed that Ohio had

returned to state court in pursuit of what “in

essence” amounted to a money judgment against

Kovacs, which was “properly” subject to the auto-

matic stay. Ibid. Concerned that the state court

had ordered Kovacs to release all non-exempt assets,

including money payable to himself in the future,

the Sixth Circuit could find “little in substance to

distinguish that order and a money judgment.” Id.

at 6-7. It concluded that Ohio’s attempt to reach

Kovacs’ post-bankruptcy earnings would “subvert”

the purpose of the Bankruptcy Code to rehabilitate

debtors. Id. at 7.

DISCUSSION

The Sixth Circuit’s decision effectively defeated

Ohio’s ability to force Kovacs to comply with a man-

datory injunction designed to protect public safety.

At least in principle, that holding conflicts with deci-

sions of other courts, including the Court of Appeals

for the Fifth Circuit. By propounding an expansive

definition of “money judgment,” the court has unduly

restricted the governmental exemption to the auto-

matic stay. See 11 U.S.C. 362(b)(5). The result

is to encourage polluters to abuse the Bankruptcy

6

Code and defy state and federal environmental pro-

tection laws. Accordingly, we join Ohio in urging

the Court to review this important question.

1. So far as relevant here, governmental litigation

is wholly or partially exempt from the automatic stay

provision of the Bankruptcy Act when the suit im-

plements the government’s police or regulatory power.

For purposes of 11 U.S.C. 362(b)(4), it matters

not what relief is sought: the governmental unit

may commence. or continue any police or regulatory

action. Subsection (b) (5), on the other hand, speci-

fies which judgments the government may not then

seek to execute. In the present case, there is no

doubt that the order was obtained pursuant to an

exercise of Ohio’s police or regulatory powers. The

legislative history is unambiguous that the auto-

matie stay provisions do not apply to halt the com-

mencement and continuation of environmental pro-

tection actions.“ The only question is whether the

state court order sought to be enforced is a “money

judgment” which cannot be executed without leave

from the bankruptcy court.“

5 H.R. Rep. No. 95-595, 95th Cong., 2d Sess. 343 (1978) :

Paragraph (4) excepts commencement or continuation

of actions and proceedings by governmental units to en-

force police or regulatory powers. Thus, where a gov-

ernmental unit is suing a debtor to prevent or stop

violation of fraud, environmental protection, consumer

protection, safety, or similar police or regulatory laws,

or attempting to fix damages for violation of such a law,

the action or proceeding is not stayed under the auto-

matic stay. [Emphasis added.]

See also S. Rep. No. 95-989, 95th Cong., 2d Sess. 52 (1978).

* Once a petition in bankruptcy is filed, the bankruptcy

court acquires exclusive jurisdiction over the debtor’s prop-

erty, wherever it may be located. 28 U.S.C. 1471(e).

7

Neither the Bankruptcy Code nor its legislative

history specifically defines the term “money judg-

ment.” Congress did, however, explain that subsec-

tion (b) (5) excluded money judgments from the gov-

ernmental exemption in order to prevent the govern-

ment from receiving preferential treatment at the

expense of the other creditors.’ Obviously, when the

government’s interest in executing a judgment is

strictly pecuniary, then its interest is identical to

that of other creditors. The government’s interest

would be predominantly pecuniary, for example,

when it seeks to collect a penalty or fine imposed

upon the debtor for a statutory violation. In that

case, there is no justification for granting the gov-

ernment preferential treatment.“ By the same token,

when the thrust of the government’s action is not

to collect money from the debtor but rather to pro-

tect the public health and safety, then the govern-

ment does not stand in the shoes of an ordinary

creditor. In applying the exemption to a given judg-

ment, the court must initially scrutinize the govern-

mental interest. The mere fact that the judgment

7 H.R. Rep. No. 95-595, supra, at 343:

Paragraph (5) makes clear that the exception extends

to permit an injunction and enforcement of an injunc-

tion, and to permit the entry of a money judgment, but

does not extend to permit enforcement of a money judg-

ment. Since the assets of the debtor are in the posses-

sion and control of the bankruptcy court, and since they

constitute a fund out of which all creditors are entitled

to share, enforcement by a governmental unit of a money

judgment would give it preferential treatment to the

detriment of all other creditors.

See also S. Rep. No. 95-989, supra, at 52.

A governmental penalty or fine may, however, survive the

bankruptcy discharge under 11 U.S.C. 523(a) (7).

entails the expenditure of money does not auto-

matically remove it from the (b) (5) exemption.’

2. Many injunctions entail the expenditure of

money for their performance. See United States v.

Charles Price, 688 F.2d 204, 213 (3d Cir. 1982).

A defendant may be ordered to fund a study to deter-

mine the extent of the threat posed by its waste dis-

posal practices, e.g., Price; to remove leaking drums

of toxic wastes that threaten groundwater contami-

nation, e.g., Kovacs; to remove industrial wastes pre-

viously deposited in navigable waters, e.g., United

States v. Republic Steel Corp., 362 U.S. 482, 490-493

(1960); to operate its plant in compliance with en-

vironmental regulations, e.g., Commonwealth v. Peggs

Run Coal, 423 A.2d 765 (Commw. Ct. Pa. 1980). In

each case, when the government seeks to enforce the

order, its foremost aim is to protect the public health,

not to enhance the public fisc.

In the Price case, the Third Circuit faulted the

district court for adopting an unduly restrictive view

»The Code defines “claim” as the “right to payment,

whether * * * liquidated [or] unliquidated, * * legal [or]

equitable * * *.” 11 U.S.C. 101(4) (A). The fact that this

definition is broad does not mean that money judgments

necessarily include the “equitabie” right to payment. Even if

it did, the relief Ohio sought did not constitute a “money

judgment” excluded from the Section (b) (5) exemption; for,

Ohio’s claim was not to be paid but to require that Kovacs

spend whatever amount was necessary to remove the hazard-

ous wastes.

10 See Mitchell v. DeMario Jewelry, Inc., 361 U.S. 288, 290-

291 (°960) (when the public interest is involved, a court may

fash: any necessary, equitable relief, including the payment

of money); Porter v. Warner Co., 828 U.S. 395 (1946) (ex-

ercising its equitable jurisdiction, this Court ordered defend-

ants to repay illegally collected rents under the Emergency

Price Control Act).

of its equitable remedial powers in the context of en-

vironmental protection. 688 F.2d at 211. The federal

government had requested funds to conduct a diag-

nostic study of the threat posed by a hazardous

waste landfill. The district court denied the request,

believing it an attempt to transform a claim for dam-

ages into an equitable action. The Third Circuit dis-

agreed (id. at 212):

Damages are awarded as a form of substitu-

tional redress. They are intended to compensate

a party for an injury suffered or other loss. A

request for funds for a diagnostic study of the

public health threat posed by the continuing con-

tamination and its abatement is not, in any

sense, a traditional form of damages. The fund-

ing of a diagnostic study in the present case,

though it would require monetary payments,

would be preventive rather than compensatory.

The study is intended to be the first step in the

remedial process of abating an existing but

growing toxic hazard which, if left unchecked,

will result in even graver future injury, i.e., the

contamination of Atlantic City’s water supply.”

Similarly, in the present case, the state court’s

orders were preventive, not compensatory. Initially,

the court ordered Kovacs himself to clean up the

dumpsite. Only subsequently, upon the State’s show-

ing that Kovacs had not complied, did the court order

Kovacs to release certain assets and future earnings

to the court-appointed receiver. Although this latter

order directed the payment of money by Kovacs to

the receiver, the receivership was established for the

1 For other reasons, the Third Circuit was unable to find

that the district court had abused its discretion in denying

the preliminary injunction. 688 F.2d at 214.

10

limited purpose of implementing the cleanup order.

Accordingly, this second order, directed to cleanup

of the dumpsite, must be distinguished from a tradi-

tional money judgment.”

Remedial orders obtained under the endangerment

provisions may require the expenditure of money

either directly or indirectly. Nevertheless, such re-

medial orders are not designed to penalize defendants.

Nor is their objective to compensate the government

for harm or expenses incurred. They aim solely for

public protection and effective enforcement of the

environmental laws. As such, the government’s

efforts to enforce compliance should be exempt from

the operation of the automatic stay provisions.

3. The decision below is at odds with the approach

followed by the Fifth Circuit when it upheld an

NLRB order that a bankrupt company reinstate

two employees whom it had discriminatorily dis-

charged. NLRB v. Evans Plumbing Co., 639 F.2d

291 (5th Cir. 1981) (per curiam). Unconcerned by

the fact that a reinstatement order was tantamount

to an order to commence paying wages, the court

ruled that: “The crucial issue is whether the NLRB

is a governmental unit and whether this action is

one to enforce police or regulatory powers.” 639

F.2d at 293."

12A money judgment is one which adjudges the payment

of a sum of money, as distinguished from one directing an

act to be done or property to be transferred or restored. 2

Bouv. Law Dict. p. 2240.“ U.S. Fidelity & Guaranty Co. v.

Ft. Misery Highway Dist., 22 F.2d 369, 372 (9th Cir. 1927).

The court declined to express an opinion as to whether

ee 4 —

the bankruptcy covrt had the power to issue a discretionary

stay under 11 U.S.C. 105(a), notwithstanding the exemption

11

Similarly, in a case closely analogous to Kovacs on

its facts, the Commonwealth Court of Pennsylvania

found the governmental action exempt from the stay.

Commonwealth v. Peggs Run Coal Co., 423 A.2d

765 (Commw. Ct. Pa. 1980). There, the Pennsylvania

Department of Environmental Resources sued the

owner of a coal mine and cleaning plant for alleged

violations of various state environmental statutes.

The complaint requested both a mandatory injunction

ordering compliance with the laws and the posting

of bonds to assure compliance with the injunction.

The coal company, having filed a petition in bank-

ruptey, invoked the automatic stay provisions of the

Bankruptcy Code to block the agency’s action. After

analyzing the legislative history (quoted at notes 5, 7,

supra), the Pennsylvania court concluded that the

agency was not attempting to enforce a money judg-

ment. The court therefore held the proceeding

exempt from the automatic stay.“ 423 A.2d at 767.

Plainly enough, the Sixth Circuit followed a dif-

ferent path. It focused its attention exclusively on

the ordered release of Kovacs’ post-bankruptcy earn-

ings to the receiver, ignoring the fact that the re-

ceivership was limited to cleaning up the dumpsite

to protect public safety. In this, we submit, the court

below fell into error.

4. The importance of the question is obvious. Au-

tomatic application of the stay to enforcement of

orders like that involved here elevates the Bank-

of the NLRB’s action from the automatic stay. 639 F. ad at

293 & n.3.

„See also, In re Canarico Quarries, Inc., 466 F. Supp.

1333 (D. P.R. 1979) (vacating bankruptcy court order that

stayed enforcement of Clean Air Act regulations against

debtor’s quarry operations) .

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

DECEMBER 1982

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