Respondents Brief — Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection

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Vice Supreme C 7. US

Nos. 84-801 and 84-805 RIL Ss Db

IN THE wn @ | 5

Supreme Court of the United States 6°”

OctosBer TERM, 1984 7

THOMAS J. O'NEILL, TRUSTEE IN BANKRUPTCY OF QUANTA

RESOURCES CORPORATION, Debtor,

Petitioner,

THE CITY OF NEW YORK and STATE OF NEW YORK and THE NEW

JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION,

Respondents.

MIDLANTIC NATIONAL BANK,

Petitioner,

THE NEW JERSEY DEPARTMENT

OF ENVIRONMENTAL PROTECTION,

Respondent.

ON WRITS OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF OF RESPONDENTS STATE OF NEW YORK

AND CITY OF NEW YORK

RoBerT ABRAMS

Attorney General of the State

of New York

Attorney for State of New York

Rospert HERMANN

Solicitor General of the

State of New York

NANCY STEARNS Department of Law

Assistant Attorney General Two World Trade Center

Counsel of Record for the Room 4724

State of New York New York, New York 10047

NorRMAN SPIEGEL (212) 488-3710

CHRISTOPHER KeivH HALL Freperick A.O. SCHWARZ, JR.

Assistant Attorneys Genera. Corporation Counsel of the

Of Counsel City of New York

LEONARD KOERNER Attorney for City of New York

Assistant Corporation Counsel 100 Church Street

Counsel of Record for the New York, New York 10007

City of New York (212) 566-3377

une 7, 1985

Questions Presented

1. Does section 554(a) of the Bankruptcy Code authorize a

trustee in bankruptcy to abandon a toxic waste facility which

constitutes a present hazard to public health, safety and the en-

vironment, in violation of federal, stave and local laws?

2. Would an order of the bankruptcy court limiting the trustee's

authority to abandon the facility under these circumstances con-

stitute an unlawful taking of the secured creditors’ interests

(assuming that this issue is ripe for decision)?

INDEX

Questions Presented ..................000 eee:

Table of Authorities ....................00055.

Statement of the Case ....................055.

SUMMARY OF ARGUMENT..................

ARGUMENT

I. A BANKRUPTCY TRUSTEE MAY NOT

ENDANGER THE HEALTH AND SAFETY

OF MILLIONS OF CITY RESIDENTS BY

ABANDONING A STORAGE FACILITY

LEAKING TOXIC WASTES, IN VIOLA-

TION OF FEDERAL, STATE AND LOCAL

ENVIRONMENTAL STANDARDS.........

A. Federal Environmental and Bankruptcy

Laws Should Be Read in Harmony to

Protect the Public Safety and the

B. The Trustee’s Power to Abandon Under

Section 554(a) Is Limited by

Requirements of Public Safety ..........

i. The Trustee’s Authority to

Abandon Is Subject to Health and

ii. Requiring the Trustee to Manage

the Estate in Compliance with

Federal and State Environmental

Laws Is Consistent with Ohio v.

Page

iii. Section 959(b) Requires the

Trustee to Comply with Public

Safety Requirements When

Managing and Abandoning

a . .. err ean es 19

iv. To Deprive State and Local

Governments of the Ability to

Prevent Threatened Disposals of

Dangerous Hazardous Wastes Is

Inconsistent with Congressional

WE NG aGaucetseticos.. 24

v. The Trustee’s Expenditure of

Funds to Prevent Violations of

Federal and State Environmental

Laws Is a Necessary Cost of

Preserving the Estate ........... 28

C. The Trustee May Not Abandon Property

in Violation of State and Local Health,

Safety and Environmental Requirements. . 30

II. LIMITING THE TRUSTEE’S POWER TO

ABANDON PROPERTY IN VIOLATION

OF FEDERAL AND STATE

ENVIRONMENTAL LAWS IS NOT A

“TAKING” UNDER THE FIFTH

AMENDMENT ......................... 35

A. The Fifth Amendment Takings Issue Is

Not Ripe for Adjudication by this Court . . 35

B. Valid Government Regulations which

Cause Significant Economic Loss Do Not

Violate the “Takings Clause” of the Fifth

Rie a ea 36

C. Neither United States v. Security,

Industrial Bank nor the “Erosion Taking”

Doctrine Permits Abandonment Here .... 39

i ie eee oe 40

TABLE OF AUTHORITIES

Cases: Page

Agins v. City of Tiburon, 447 U.S. 255 (1970) ... 35,37

Alfred L. Snapp & Son, Inc. v. Puerto Rico ex

rel. Baez, 102 S. Ct. 3260 (1982)........----- 13

In re Briarcliff, 15 Bankr. 864 (D.N.J. 1981)..... 19,21,22

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

(D.P.R. 1979) ......-- eee eects 22

In re Charles George Land Reclamation Trust, 30

Bankr. 918 (Bankr. D. Mass. 1983).......---- 21,29,30

Colonial Tavern, Inc. v. Byrne, 420 F.Supp. 44

(D. Mass. 1976).......-.-+202eee errr 22

Commodities Futures Trading Commission v.

Incomco, Inc., 649 F.2d 128 (2d Cir. 1981) ... 18

Commonwealth Edison Co. v. Montana, 453 U.S.

G09 (1981)... 2... cece eee eee eee nett 31,33

Commonwealth v. Peggs Run Coal Co., 55 Pa.

Commw. 312, 423 A.2d 765 (1980)........--. 22

Crowell v. Benson, 285 U.S. 22 (1932) .......... 39

In re D.H. Overmeyer Telecasting Co., Inc., 35

Bankr. 400 (N.D. Ohio 1983) ....---.---+---: 19

In re Dolly Madison Industries, 504 F.2d 499 (3d

Clie. IDFA)... ccc ccc cccctesccececceneceeees 22

Florida Lime ¢ Avocado Growers, Inc. v. Paul,

373 U.S. 132 (1963) .....----- cece eee? 31,33

Georgia v. Pennsylvania R. Co., 324 U.S. 439

(IDEB) oo nce cece cence nccccerccccscnccees: 13

Gillis v. California, 293 U.S. 62 (1934) ....-.--. 21

Goldblatt v. Hempstead, 369 U.S. 590 (1962) .... 36

Cases: Page

In re Grand Spaulding Dodge, Inc., 5 Bankr. 481

Nea te Seal. 8 22

Hadacheck v. Sebastian, 239 U.S. 394 (1915) .... 37

Hanover National Bank v. Moyses, 186 U.S. 181

sath bud Pee ee yt ovis toa be «ese a 38

Hines v. Davidowitz, 312 U.S. 52 (1941) ........ 34

Kaiser Aetna v. United States, 444 U.S. 164

PE GRA EVATGd bee 635-300 KE ic ke bd wis 36

In re Kennise Diversified Corp., 34 Bankr. 237

(Bankr. S.D.N.Y. 1983)... ................. 14,19,22

In re Kish, 41 Bankr. 620 (Bankr. E.D. Mich.

Us gd a dsb hSe wed de occ Maid Sekt és ees 14

Kothe v. R.C. Taylor Trust, 280 U.S. 224 (1930) . 9

In re Lewis Jones, Inc., 1 Bankr. Ct. Dec. 277

(Bankr. E.D. Pa. 1974) ..................... 14,16,

17,33

McGreavey v. Shaw, 90 N.H. 130, 5 A.2d 270

No sac cob uadlan Gateioeuwed r+ cbdek ys os 22

Maryland v. Louisiana, 451 U.S. 725 (1981) ..... 13,30,31

Midlantic National Bank v. New Jersey

Department of Environmental Protection, No.

BETS RRR SE ev) ee a ae 35,38

Mugler v. Kansas, 123 U.S. 623 (1887).......... 37

National Labor Relations Board v. Amax Coal

Co., 453 U.S. 322, 329 Ea ee 15

National Labor Relations Board v. Bildisco, 104

Be GA, Bi ID 5 cc nccncvccvceckesccc, 14,15

In re Nitec Paper Corp., 43 Bankr. 492 (S.D.N.Y.

ROR eo ae Ls aan tele op et 14,22

Cases: Page

Ohio v. Kovacs, 105 S. Ct. 705 | ee. ee 17,18,

19,25

Oitenheimer v. Whitaker, 198 F.2d 289 (4th Cir.

De pancburseavkacassscuspundvensde rae 14,15,

16,29,33

Penn Central Transportation Co. v. New York

City, 438 U.S. 104 (1978) .......---- 6. eee ees 37

Penn Terra, Ltd. v. Department of

Environmental Resources, 733 F.2d 267 (3d

UE Ts dc vin so secaspesievedsscenncecsurs 18

Pennsylvania Coal Co. v. Mahon, 260 U.S. 393

(eso ooo 36

Pepper v. Litton, 308 U.S. 295 (1939) .......-.. 30

People by Abrams v. 11 Cornwell Company, 695

F.2d 34 (2d Cir. 1982)...........---- eee eee 13

In re Quanta Resources Corp., 739 F.2d 912 (3d

Ce, BEG. occ ccc cccccccccesscerceuscess passim

In re Quanta Resources Corp., 739 F.2d 927 (3d

i) SP errrrer retro eT l

Reading v. Brown, 391 U.S. 471 (1968) ........- 30

Regional Railroad Reorganization Act Cases, 419

U.S. 208 (1074)... ccc ccc eres cece ccvcevces 40

Roe v. Wade, 40 U.S. 113 (1973) ..........-.-- 28

Ruckelshaus v. Monsanto, 104 S. Ct. 2862 (1984). 9,36,38

Securities and Exchange Commission v. United

States Realty ¢¢ Improvement Co., 310 U.S.

Ty) errr rrr rer ee eee ee 17

Silkwood v. Kerr-McGee Corp., 104 S. Ct. 615

Se con cnnvsendvevecsescscuneveweserss 33

Southern Pacific Terminal Co. v. Interstate

Commerce Commission, 219 U.S. 498 (1911) .. 28

vii

Cases: Page

State of Missouri v. United States Bankruptcy

Court, 647 F.2d 768 (8th Cir. 1981), cert.

denied, 454 U.S. 1162 (1982) ................ 23

State of New York v. General Electric, 592 F.

Supp. 291 (N.D.N.Y. 1984)..... eee aoe 12

State of New York v. Shore Realty Corp., No.

84-7925 (2d Cir. Apr. 4, i985)............... 13,20

In re 30 Hill Top Street Corp., 42 Bankr. 517

(Bankr. D. Mass. 1984) ..................... 17,20,

22,29,30

In re Thomassen, 15 Bankr. 907 (Bankr. 9th Cir.

HENS Che ah eeua lun alti eas xs 4 3 18

In re T.P. Long Chemical, Inc., 45 Bankr. 278

(Benkr. N.D. Oblo 19GB)... ............000.. 11,17,38

United States v. Reilly Tar & Chemicai Corp.,

546 F.Supp. 1100 (D. Minn. 1982) ........... 12

United States v. Security Industrial Bank, 459

Ie eins dC Ged ce es ua eee 35,37 ,39

United States v. Waste Industries, Inc., 734 F.2d

PI cas x re wera veo Daviwkde ceo 26

In re Vermont Real Estate Investment Trust, 25

Bankr. 804 (Bankr. D. Vt. 1982)............. 29

Village of Euclid v. Ambler Realty Co., 272 U.S.

Sa ee eaters eee CR. tos cosas oe 37

Constitutional and Statutory Provisions:

as Ws MW cnn ecnnscdsccucevciacecs passim

11 U.S.C. § 362(a) (1982) ..................... 18

11 U.S.C. § 362(b) (4) (1982) .................. passim

11 U.S.C. § 503(b) (1) (A) (1982) .............. 28

11 U.S.C. § S03(c) (1982) ..................... 6

11 U.S.C. § 522(f) (2) (1982) .................. 39

Constitutional and Statutory Provisions: Page

11 U.S.C. § 554(a) (1982) .....---- +e eee ere passim

11 U.S.C. § 721 (1982) ....----- seer errr 20,21

11 U.S.C. § 727 (1982) .....---- sree eer 27

15 U.S.C. § 2601 et seq. (1982) (most recently

amended 1984) ......-----:seecerttrttrttt 10

15 U.S.C. § 2601(b) (1982) .....----- eee eee 10

15 U.S.C. § 2605(e) (1982) .....---- eee ee ree 15

98 U.S.C. § 959(a) (1982) ......--- eee eres 19,21,22

98 U.S.C. § 959(b) (1982) .....---- eee e errr passim

98 U.S.C.A. § 1452 (West Supp. 1985)........-- 25

33 U.S.C. § 409 (1982) (Act of Mar. 3, 1899) .... 16

33 U.S.C. § 1251 et seq. (enacted 1948, most

recently amended 1984)......-------ss+s0005 10

33 U.S.C. § 1251(a) (3) (1982) ...------- ee: 10

33 U.S.C. § 1321(b) (3) (1982) ....------ eee: ll

33 U.S.C. § 1321(f). (g) (1982)...------ +e eee 11

42 U.S.C. § 6901 et seq. (enacted 1976, most

recently amended 1984)......-----+-sss00005 10

42 U.S.C.A. § 6972 (West Supp. 1985)........-- ll

42 U.S.C. § 6973 (1982) ...... J algae re 11,26

Constitutional and Statutory Provisions:

42 U.S.C. § 7401 et seg. (enacted 1955, most

recently amended 1982).....................

42 U.S.C. § 8301(b) (3) (1982) .......... 000000.

42 U.S.C. § 9601 et seq. (enacted 1980, most

recently amended 1984).....................

42 U.S.C. § 9601(9) (1982) ........ 0.0...

42 U.S.C. § 9601(21) (1982) ......... ip pie

42 U.S.C. § 9607(a) (1982) ............. 0.00 ee,

42 U.S.C. § 9607(b) (1982) ............0 2.0

42 U.S.C. § 9607(e) (1) (1982) ...........00000.

N.Y. Envtl. Conserv. Law § 27-0701

ss oEb spree nine sa ceases

N.Y. E.nvtl. Conserv. Law § 27-0914

0 ee eee

N.Y. Envtl. Conserv. Law § 71-2711

N.Y. Envtl. Conserv. Law § 71-2712

ede Chu Whee s bn k a tees

N.Y. Envtl. Conserv. Law § 71-2713

i et on hanks nse keh On 4a e's

Regulations:

SP Gers SF PI CEs fice eiccccuceivcceces

40 C.F.R. § 761.60 et seq. (1984) ..............

Other Authorities:

Blumenthal. Accused Polluter Was Paid to Clean

Up Sites, N.Y. Times, May 7, 1982, B 20 at

RR cry ce ee Ne he eho ee ae oU

Chavez, Toxic Waster Entrepreneur, N.Y. Times,

Dia Gir, Bi, BP 0 OO GM. E nn ones cee evens.

Editorial Commentary and Analysis, Bankr. Serv.

se ee Be eet ee ree

Other Authorities:

L. King, 4A Coilier or Bankruptcy,

(14th ed. 1978) .......0c0eeeeeeee seer eee

L. King, 3 Collier on Bankruptcy,

(15th ed. 1983) ........0.0eeee reeset eres

L. King, 4 Collier on Bankruptcy

(15th ed. 1985) ........eeeeeeeeeeee eer

H.R. Rep. No. 198, Part 1, 98th Cong., 2d Sess.,

reprinted in 1984 U.S. Code Cong. & Ad.

News SB76 ........csceeceeee scence ese ees

H.R. Rep. No. 595, 95th Cong., lst Sess..,

reprinted in 1978 U.S. Code Cong. & Ad.

See OE. concen cece sectwsesecreseressss

H.R. Rep. No. 1016, Part 1, 96th Cong., 2d

Sess., reprinted in 1980 U.S. Code Cong. &

Ad. News G11O .......--sccrecerecersereee®

J. Moore, 7-Pt. 2 Moore’s Federal Practice

(Od od. 1984)... 0. sc cece ec eeeeeeeee ence ees

S. Rep. No. 414, 92d Cong., 2d Sess., reprinted

in 1972 U.S. Code Cong. & Ad. News 3668 ...

S. Rep. No. 698, 94th Cong., 2d Sess., reprinted

in 1976 U.S. Code Cong. & Ad. News 4491...

S. Rep. No. 989, 95th Cong., 2d Sess., reprinted

in 1978 U.S. Code Cong. & Ad. News S787 ...

N. Singer, 2A Sutherland Statutory Construction

(ath ed. 1984) .....-...ecceerec eee ee eee ere es

Webster’s Third New International Dictionary

GIDE cons snes sivecssaesnegesesenseneonss

Page

27,32

15,20

Statement of the Case

This case involves a bankruptcy trustee's negligent post-petition

management of a hazardous waste facility in the heart of the

nation’s largest city. The bankruptcy trustee managing this pro-

perty took virtually no steps during his administration of the estate

to protect the public from leaking chemicals or possible fires; then,

after nearly eight months of neglect, he simply decided to aban-

don the property. New York opposed this effort.

This case also involves the harmonization of important federal

and state policies: on the one hand, to protect the health and

safety of the American public from the toxic effect of dangerous

chemicals by preventing their uncontrolled discharge into the en-

vironment, and on the other, by means of federal bankruptcy

policy, to provide a fair distribution of a debtor’s assets among

creditors. The court below carefully accommodated these policies

in order to protect the public. This Court should reject the peti-

tioner’s attempt to upset that careful balance.

eee eee eS

Quanta Resources Corporation (“Quanta” or the “debtor”) was

in the business of collecting, transporting, processing and stor-

ing waste oils. In re Quanta Resources Corp., 739 F.2d 912, 913

(3d Cir. 1984) (“Quanta”) (App. A, la, 3a )! Quanta owned and

operated facilities in Edgewater, New Jersey and in Long Island

City in New York City. Id. at 913 (App. A, 3a); In re Quanta

Resources Corp., 739 F.2d 927, 928 (3d Cir. 1984) (App. B, 37a).’

| References to pages in the appendices to the Petition for a Writ of Certiorari

are indicated as App. __, References to pages in the joint appendix

in the court below are indicated as J.A. —_.

? Before their sale to Quanta, these facilities were operated by companies

reportedly controlled by Russell W. Mahler, President of the former Hudson

Oil Refining Company, who was convicted of illegal dumping of toxic wastes

into abandoned mines in Pennsylvania and sentenced to serve one year in prison

and pay a $750,000 fine. Chavez, Toxic Waste Entrepreneur, N.Y. Times, May

27, 1982, D 1 at col. 1; Blumenthal, Accused Polluter Was Paid to Clean Up

Sites, N.Y. Times, May 7, 1982, B 20 at col. 1.

The Long Island City toxic waste facility is located at the

_ geographic center of New York City, Quanta, 739 F.2d at 913

(App. A, 3a), and is approximately 450 feet from Newtown Creek,

a tributary of the East River, a navigable waterway. More than

500,000 gallons of waste oil, sludge and hazardous waste were

being stored on the property; more than 70,000 gallons of these

were contaminated with polychlorinated biphenyls (PCB’s), an

extremely hazardous substance. Id. (App. A, 4a); Affidavit of

James Reid (J.A. 17-18).

‘

On October 6, 1981, Quanta filed a voluntary petition for

reorganization under Chapter 11 of the Bankruptcy Code. Id.

(App. A, 3a). After filing its petition for reorganization, Quanta

continued in the operation of its business and in possession of

its property as debtor-in-possession until November 12, 1981. Id.

At that time, Quanta’s reorganization case was converted to a

Chapter 7 liquidation case and Thomas J. O'Neill, the petitioner

(“trustee”), was appointed trustee. Jd.

In June of 1982, after nearly eight months of neglect by the

trustee, the facility was in a dangerous state of disrepair. See Af-

fidavit of Richard Docyk (J.A. 11-13). Some of the storage tanks

had holes in them, and some were leaking. Id. The system needed

by the Fire Department to put out a fire was not in operation,

and some of the equipment necessary to make the system effec-

tive was missing. Had a fire broken out, the burning waste oil

would have generated smoke-laden PCB’s, and possibly dioxin,

threatening the lives of fire fighters and millions of New York

City residents.’ Affidavit of Dan Levy (“Levy Aff.”) (J.A. 19-22).

’ When PCB's are burned, heated to high temperatures, or exposed to sunlight,

they are oxidized. Oxidized PCB’s are much more toxic than the PCB’s

themselves. Oxidation products include the polychlorinated dibenzo-p-dioxins

(commonly called dioxins) and polychlorinated dibenzofurans. Theve are many

isotopes (varieties) of these compounds containing four chlorine atoms which

are common oxidation products of PCB’s. These tetrachlorodibenzo-p-dioxins

(TCDD’s) and tetrachlorodibenzofurans (TCBF’s) include some of the most toxic

compounds known. They are among the most potent carcinogens, teratogens,

and liver toxins. Oral doses on the order of a few micrograms (a millionth of

a gram) can be lethai. Levy Aff. (J.A. 21).

iain iclaiiali diem iaee iaiael

By notice dated May 25, 1982, the trustee proposed to aban-

don the Long Island City toxic waste facility on the grounds that

the property is “burdensome to the estate, or . . . is of inconse-

quential value to the estate” ll U.S.C. § 554(a) (1982). See Quanta,

739 F.2d at 913 (App. A, 4a). Assuredly, the facility was not be-

ing properly operated when the trustee took over possession and

management. Nonetheless, as the City and the State of New York

(hereinafter, when referred to collectively, “New York”) argued,

what the trustee proposed to do by abandonment, after having

neglected the facility, created dangers to the public safety and

the environment which would not have otherwise existed. Im-

plicitly, by requesting approval to abandon, the trustee was re-

questing the court to approve the removal of guards and other

supervisory personnel who had been placed there because of the

dangerous condition of the facility. Previously, the trustee sought

to sell components of the partially inoperable fire suppression

system. (Notice of Proposed Private Sale by the Trustee, dated

May 3, 1982). Additionally, the trustee sought to abandon the

half-million gallons of flammable liquids contaminated with

highly dangerous PCB's.

Permitting the trustee to abandon the Long Island City facility

meant, in the view of New York officals, the further deteriora-

tion of the untended facility and the possibility of vandalism.

This would substantially increase the possibility of fire or leakage

and would seriously endanger the lives and property of New York

residents. In addition to the public health problems that would

be created, abandonment of the Long Island City facility by the

trustee would effectively cc stitute final disposal of the PCB-

contaminated oil and other hazardous wastes on the property

because the debtor had been left without any assets.

New York consequently opposed abandonment of the toxic

waste facility on the grounds that abandonment would endanger

the safety of the public in violation of both federal and state law.

See Objections to Proposed Abandonment, dated June 4, 1982

(J.A. 3). It asked the bankruptcy court instead to order that assets

of the estate be used to bring the facility into compliance with

federal and state public safety and environmental laws.* Jd. (J.A.

7). In the alternative, New York requested that any funds it ex-

pended to clean up the site constitute a first lien, taking priority

over any other mortgages or liens on the property. Id.

On June 22, 1982, United States Bankruptcy Judge D. Joseph

DeVito ruled that the trustee could abandon the Long Island City

facility, stating:

The City and State of New York are the proper par-

ties to safeguard the health and safety of their citizens.

The duty of the Trustee is to serve as representative

of the estate, and the duty of this Court is to protect

the assets of the estate in custodia legis.

The City and State are in a better position in every

respect than either the Trustee or debtor's creditors to

do what needs to be done to protect the public against

the dangers posed by the PCB-contaminated facility.

But it is not the estate or debtor’s creditors who should

finance the requisite clean-up, given the decision of the

Trustee to abandon the property.

Oral Decision (App. K, 73a). Judge DeVito also denied New York’s

motion to designate governmental funds spent on such a cleanup

as constituting a first lien on the property.’ Id. (App. K, 74a).

Notices of Appeal to the District Court of New Jersey were

filed on July 16, 1982. Although Judge Lacey affirmed the order

* The trustee's allegation that there were no funds in the estate either to con-

tinue the security service at the Long Island City facility or otherwise to bring

the site into compliance with government regulations, Brief for Petitioner

Thomas J. O’Neill, Trustee (“T. Br.”) at 5, is misleading. The estate in fact had

significant assets which could have been converted into cash. For example, a

portion of the waste oil inventory not contaminated with PCB’s was sold,

generating approximately $288,000.00. Brief of Petitioner, Midlantic National

Bank (“Midlantic Br.”) at 7.

* At the time of the petition to abandon, the Equitable Life Assurance Cor-

poration and Portland Holding Corporation held mortgages on the property.

Subsequently, both Equitable Life and Portland relinquished their mortgage

interests. Quanta, 739 F.2d at 914 n.3 (App. A, 5a n.3). This issue of lien priori-

ty is therefore not before this Court.

of the bankruptcy court, he found that “the question is a close

one” Memorandum Opinion, January 24, 1983, at 5 (App. G,

56a).°

New York filed a notice of appeal on February 17, 1983, and

oral argument took place on October 24, 1983. On July 20, 1984,

the court'of appeals reversed the decisions of the bankruptcy and

district courts. Quanta, 739 F.2d 912 (App. A, 1a). The court of

appeals reasoned:

If trustees in bankruptcy are to be permitted to dispose

of hazardous wastes under the cloak of the abandon-

ment power, compliance with environmental protec-

tion laws will be transformed into governmental

cleanup by default. It cannot be said that the

bankruptcy laws were intended to work such a radical

change in the nature of local public health and safety

regulation — the substitution of government action for

citizen compliance — without indication that Congress

so intended.

Id. at 921-22 (App. A, 22a). The court of appeals, however, made

no specific ruling as to what assets of the estate should be used

for compliance purposes. That issue “can properly be resolved

only by the bankruptcy court, since the issue was not treated in

the proceedings below and so the record on appeal does not in-

clude findings of relevant fact.” Id. at 923 (App. A, 25a).

* Because the Long Island City facility constituted such a grave threat to the

safety and health of the residents of New York City, after the bankruptcy court

authorized abandonment, a cleanup of the tanks and their contents was under-

taken at public expense. That cleanup has now been completed. It did not,

however, include removal of subsoil contamination. Quanta, 739 F.2d at 914

(App. A, 6a).

SUMMARY OF ARGUMENT

Section 554(a) of the Bankruptcy Code does not authorize a

bankruptcy trustee to abandon a toxic waste facility where to

do so imminently and substantially endangers the environment

and public health and safety in violation of federal, state and

local laws.

The court below held that the Bankruptcy Code did not

preempt state and local public health and safety laws, without

addressing whether the proposed abandonment also contraven-

ed federal laws. This Court, however, can avoid reaching this

constitutional question of preemption by harmonizing two federal

policies expressed in recent statutes: to protect the health and

safety of the American public from toxic wastes, and to provide

a fair distribution of debtors’ assets among creditors.

Various provisions of the Bankruptcy Code demonstrate that

Congress intended bankruptcy trustees as a general matter to

comply with federal, state and local public safety laws. Section

554(a) codifies pre-Code law which authorized abandonment on-

ly when it does not endanger public safety. This section must

also be read together with other provisions of the Code and federal

statutes governing trustees. Section 959(b) of the Judicial Code

requires a trustee in any cause to comply with valid state laws.

Section 362(b)(4) of the Bankruptcy Code exempts post-petition

state regulatory enforcement of public safety laws from the

automatic stay of all legal proceedings against the debtor even

when the grounds for enforcement are rooted in pre-petition con-

duct. In addition, under section 503(c) of the Bankruptcy Code,

expenditure of funds to protect the public from the dangers pos-

ed by the toxic waste site is a necessary administrative cost of

preserving the estate.

Nothing in the text, legislative history or policy expressed in

several statutes passed by Congress in the last decade to protect

our environment against hazardous waste products suggests any

intention to allow a trustee in bankruptcy to ignore strict

regulatory requirements by abandoning a burdensome proper-

ty. Consequently, state and local laws paralleling these federal

‘

oO ey He ng Oe ele “~ se

enactments cannot be said to frustrate Congress’ objectives in the

Bankruptcy Code. Section 554(a) therefore does not preempt

otherwise applicable state and local laws for the protection of

public health and safety and the environment.

This Court has consistently rejected challenges to legitimate

government regulations under the takings clause of the fifth

amendmen: even when the practical effect of compliance would

result in complete destruction of the value of the property. The

court below properly concluded that limiting the trustee’s power

to abandon a toxic waste site that was in violation of public safety

laws of general applicability, which were in effect at the time

the loans were made, did not constitute a taking. The creditors

did not have a reasonable, investment-backed expectation that

those who operated this toxic waste storage facility would not

be required to devote some of their resources to complying with

environmental laws.

ARGUMENT

I. A BANKRUPTCY TRUSTEE MAY NOT EN-

DANGER THE HEALTH AND SAFETY OF

MILLIONS OF CITY RESIDENTS BY ABANDONING

A STORAGE FACILITY LEAKING TOXIC WASTES,

IN VIOLATION OF FEDERAL, STATE AND LOCAL

ENVIRONMENTAL STANDARDS.

Federal and state law clearly prohibit what the trustee in

bankruptcy here proposed to do: walk away from a dangerous

toxic waste facility in the midst of a major metropolitan area,

placing large numbers of people in imminent peril of the conse-

quences of leaking PCB's and possible fires. See Point I(A),

1(B)(iii), post. The trustee, however, contends that he is em-

if others are n6ét, because the polluters responsible for the

dangerous condition have taken refuge in bankruptcy.

Chiefly, the trustee relies on section 554(a) of the Bankruptcy

Code, 11 U.S.C. 554(a) (1982), which provides that:

[a]fter notice and a hearing, the trustee may abandon

any property of the estate that is burdensome to the

estate or that is of inconsequential value to the estate.

The trustee argues that under this provision the bankruptcy court’s

inquiry is expressly restricted to whether the property is of in-

consequential value or is burdensome to the estate. If the answer

is yes, the court must approve abandonment. (T. Br. 13-16). Ac-

cording to the trustee’s reading of section 554(a), any violation

of a federal, state or local law designed to protect the public safety

and the environment, as well as any danger to the public which

would occur as a result of abandonment, is of no legal concern

to the bankruptcy court.

The United States Court of Appeals for the Third Circuit flatly

rejected this argument, finding no support for such a drastic con-

struction of the abandonment provision. Instead, the court of

appeals remanded the matter to the bankruptcy court with direc-

tions to fashion a solution consistent with the public interest and

the requirements of federal and state laws concerning public safe-

ty and environmental protection. The State of New York and the

City of New York submit that this decision is the only resolution

of the matter that is fully consistent with and supported by the

various federal and state public safety and environmental laws,

the Bankruptcy Code, principles of statutory construction and

prior judicial decisions.

A. Federal Environmental and Bankruptcy Laws Should

Be Read in Harmony to Protect the Public Safety and

the Environment.

In interpreting the limits on the trustee’s abandonment power,

the court below correctly found that the Bankruptcy Code, taken

as a whole, does not preempt state and local laws concerning

hazardous waste and designed to protect public health and safety,

as we argue more fully below (Point I{B]). This Court, however,

need not reach the constitutional preemption question because,

we argue below, the abandonment of a facility containing hun-

dreds of thousands of gallons of hazardous wastes violates a broad

range of federal environmental protection statutes, as well as

parallel state and local laws.’

The need to accommodate the directives of different federal

laws, of course, does not present supremacy clause questions.

Rather, it presents a question of harmonization. The basic rule

of statutory construction is that:

[Where two statutes are “ ‘capable of co-existence, it

is the duty of the courts, absent a clearly expressed con-

gressional intention to the contrary, to regard each as

effective’ ” Regional Rail Reorganization Act Cases,

419 US., at 133-134, 95 S.Ct. at 353-354, quoting Mor-

ton v. Mancari, 417 USS. 535, 551, 94 S.Ct. 2474, 2483,

41 L.Ed.2d 290 (1974).

Ruckelshaus v. Monsanto, 104 S. Ct. 2862, 2881 (1984).

Here, no evidence has been produced of any congressional in-

tent that the abandonment power of a trustee in bankruptcy

under section 554(a) overrides the requirement of compliance

with federal environmental laws, particularly those comprehen-

sive laws that were passed or substantially amended since the

Bankruptcy Code was enacted in 1978. Moreover, the purposes

of the Bankruptcy Code and the purposes of the federal en-

vironmental protection laws are not mutually exclusive or an-

tagonistic. As is discussed more fully below, Congress intended

these two purposes to be harmonized.

Broadly viewed, the historic purpose of the federal bankrupt-

cy statues is to bring about an equitable distribution of the

bankrupt’s estate among creditors “holding just demands based

upon adequate consideration.” Kothe v. R.C. Taylor Trust, 280

US. 224, 227 (1930). Environmental regulation is a more recent

concern of the federal government. Reflecting a growing anxie-

ty about the grave threat hazardous chemicals pose to the public

’ The State of New York argued in the cuurts below that the trustee’s actions

violated federal as well as state and local laws. See, ¢.g., Brief of Appellants

in the Court of Appeals for the Third Circuit at 5, 7-10, 12, 14, 23. The court

of appeals did not directly address this point.

health and the environment, Congress in the past ten years has

enacted several new statutes and amended existing statutes in

order better to control this toxic threat.’

* During the past decade, Congress has enacted or amended the following en-

vironmental protection laws:

a. Toxic Substances Control Act (TSCA), 15 U.S.C. § 2601 et seq. (enacted

1976, most recently amended 1984). In enacting TSCA, Congress declared that

it was “the policy of the United States that . . . adequate authority should exist

to regulate chemical substances and mixtures which present an unreasonable

risk of injury to health or the environment, and to take action with respect

to chemical substances and mixtures which are imminent hazards. . . ” 15 U.S.C.

§ 2601(b) (1982). As the Senate Report makes clear, Congress intended TSCA

to be “a comprehensive measure ‘o protect the public and the environment from

exposure to hazardous chemicals.” S.Rep. No. 698, 94th Cong., 2d Sess. 3,

reprinted in 1976 U.S. Code Cong. & Ad. News 4491, 4493. The Senate Report

demonstrates that Congress was particularly concerned about the dangers of

PCB's, id. at 3-4, 1976 U.S. Code Cong. & Ad. News at 4493-94, and that Con-

gress considered “controlling toxic chemicals in the environment is one of the

crucial health requirements facing this nation.” Jd. at 4, 1976 U.S. Code Cong.

& Ad. News at 4494.

b. Comprehensive Environmental Response. Compensation and Liability Act

(CERCLA), 42 U.S.C. § 9601 et seq. (enacted 1986, most recently amended 1984).

In passing this “Superfund” legslation known as CERCLA, Congress sought

in part to address the problem of inactive hazardous waste sites which in the

past “have forced state and local governments to bear the costs” of cleanup.

H.R. Rep. No. 1016, Part I, 96th Cong., 2d Sess. 20, reprinted in 1980 U.S. Code

Cong. & Ad. News 6119, 6123.

c. Federal Water Pollution Control Act (Clean Water Act), 33 U.S.C. § 1251

et seq. (enacted 1948, most recently amended 1984). In passing the Clean Water

Act, Congress announced a strong “national policy that discharge of toxic

pollutants in toxic amounts be prohibited.” 33 U.S.C. 125l(a)(3) (1982). The

Senate Committee on Public Works conducted a two-year study of the existing

federal water control program and concluded that “the national effort to abate

and control water pollution has been inadequate in every vital aspect,” S.Rep.

No. 414, 92d Cong., 2d Sess. 7, reprinted in 1972 U.S. Code Cong. & Ad. News

3668, 3674, and proposed a major change in the enforcement mechanism to

increase the federal role. /d., 1972 U.S. Code Cong. & Ad. News at 3675.

d. Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 6901 et seq.

(enacted 1976, most recently amended 1984).

e. Clean Air Act, 42 U.S.C. § 7401 et seq. (enacted 1955, most recently amend-

ed 1982).

at eg neh Soul ae Rae al demand, RR

The Long Island City toxic waste site is a facility governed

by the Comprehensive Environmental Response, Compensation

and Liability Act of 1980, 42 US.C. 8 9601(9)(1982). Under

CERCLA, any person who disposes of isazardous waste at such

a facility is liable for cleanup costs and damages. 42 U.S.C. §

9607(a) (1982). The debtor's estate and the trustee in his represen-

tative copacity are such “persons” under CERCLA. 42 U.S.C §

9601 (2i)(1982). See also In re T.P Long Chemical, Inc., 45 Bankr.

278 (Bankr. N.D. Ohio 1985). The trustee cannot shift the liability

of the estate to a third party. 42 U.S.C. § 9607(e)(1) (1982).

Abandonment of PCB-contaminated waste oil would also

violate the Toxic Substances Control Act (TSCA) and regulations

which explicitly prescribe the proper disposal of PCB's.’ Pursuant

to regulations, PCB-contaminated materials, depending on their

concentration levels, must either be disposed of in special land-

fills or destroyed in approved incinerators. 40 C.F.R. § 761.60

et seq. (1984). The Environmental Protection Administration

(“EPA”) promulgated these comprehensive regulations after deter-

mining that “the mar.ufacture, processing, and distribution in

commerce of PCB’s . . . presents an unreasonable risk of injury

to health within the United States... . based upon the well-

documented human health and environmental hazard of PCB

exposure.” 40 C.F.R. § 761.20 (1984). Abandoning such highly

toxic substances in the heart of New York City is clearly prohibited

under TSCA.

In addition, abandonment of the Long Island City facility

violated the imminent hazard provisions of the Resource Con-

servation and Recovery Act (RCRA) in effect at the time of the

bankruptcy court’s order, 42 US.C. § 6973 (1982), as well as those

added in the 1984 amendments to the Act. 42 U.S.C.A. § 6972

(West Supp. 1985). Finally, the trustee’s actions implicated the

Clean Water Act’s prohibition against discharges of hazardous

substances into navigable waters. 33 US.C. § 1321(b)(3) (19%2).

* Because of the particular dangers posed to the public health and the environ-

ment by PCB's, they are the only class of chemicals which Congress has

specifically addressed in a statute, rather than leaving them for regulation by

EPA under its general authority to regulate toxic substances. See 15 U.S.C.

§2605(e) (1982).

Under the Clean Water Act, the trustee cannot shift liability te

a third party not responsible for the discharge. 33 U.S.C. §

1321(f),(g) (1982).

None of these comprehensive federal enactments expressly ex-

empts from its requirements a trustee in bankruptcy seeking to

abandon burdensome property. Legislative history fails to disclose

any such congressional intention. Logic, too, suggests that the

poisoning of our environment would not be considered benign

or acceptable to Congress because it was done in order to preserve

the assets of creditors. Congress was surely aware that requiring

facilities which stored deadly substances to be maintained and

monitored might diminish or even eliminate the creditor's security.

It nonetheless gave higher priority to avoiding the costs and per-

manent consequences to the environment and public health and

safety which would result from the dumping of indefinitely life-

endangering substances.

Congress has not held the view, shared by the bankruptcy court

below and the trustee, that cities and states should bear the finan-

cial responsibility for disposal and cleanup of hazardous chemicals

generated by private parties. At the time of CERCLA'’s passage,

Congress was aware that “EPA estimated that as many as 30,000

to 50,000 inactive and uncontrolled hazardous waste sites existed

in the United States, and estimated that cleanup of the 1200 to

2000 most dangerous sites alone would cost between $13.1 and

$22 billion. H.R. Rep. No. 1016, 96th Cong., 2d Sess. 18, 20 (1980),

reprinted in 1980 U.S. Code Cong. & Ad. News 6120, 6123.” State

of New York v. General Electric, 592 F. Supp. 291, 302 n.21

(N.D.N.Y. 1984). Because Congress believed existing hazardous

waste sites should not be cleaned up by public funds alone, it

decreed that generators and transporters of hazardous chemicals,

as well as owners and operators of property in which hazardous

kemicals were stored or disposed of, were liable for cleanup costs,

irrespective of the “Superfund” created by CERCLA. State of

New York v. General Electric, 592 F Supp. at 302; United States

v. Reilly Tar & Chemical Corp., 546 F.Supp 1100, 1112 (D. Minn.

1982).

Similarly, in broadening the citizens suit provision in RCRA in

the 1984 arnendments to that Act, Congress expressly recognized

that the government cannot be expected to be responsible to clean

up all hazardous waste sites. In the report accompanying the

amendments, the House Energy and Commerce Committee

stated:

The Committee believes this expansion of the citizens

suit provision will complement, rather than conflict

with, the Administrator's efforts to eliminate threats

as to the public health and the environment, particular-

ly where the Government is unable to take action

because of inadequate resources.

H.R. Rep. No. 198, Part I, 98th Cong., 2d Sess. 53 , reprinted

in 1984 U.S. Code Cong. & Ad. News 5576, 5612 (emphasis sup-

plied). Surely, therefore, Congress did not intend government to

step in and finance remediation of additional hazardous waste

sites created by newly bankrupt companies when responsible par-

ties were on the scene.

New York has been vigorous in enforcing these federal statutes.”

Indeed, the Court of Appeals for the Second Circuit has recent-

ly affirmed the State’s authority to obtain injunctive relief under

state law and “response costs” under CERCLA for cleaning up

a hazardous waste storage facility. State of New York v. Shore

Realty Corp., No. 84-7925, slip op. at 3065 (2d Cir. Apr. 4, 1985).

New York was here seeking to remedy similar violations of both

federal and state law. See n.7, ante.

B. The Trustees Power to Abandon Under Section 554(a)

Is Limited by Requirements of Public Safety.

The trustee points to the seemingly unqualified language of

section 554(a) as authorizing him to abandon the Quanta facility

its parens patriae power. It has frequently done so because it has “a quasi-

sovereign interest in the health and well-being — both physical and economic — of

its residents in general.” Alfred L. Snapp & Son, Inc. v. Puerto Rico ex rel. Baez,

102 S. Ct. 3260, 3269 (1982); People by Abrams v. L] Cornwell Company, 695

F.2d 34, 38 (2d Cir. 1982). In addition, the environmental laws create benefits

and alleviate hardships which the “state will obviously wish to have accrue to

its residents.” Snapp, 102 S. Ct. at 3269; 11 Cornwell, 695 F.2d at 39. See also

Maryland v. Louisiana, 451 U.S. 725 (1981); Georgia v. Pennsylvania R. Co.,

324 U.S. 439 (1945).

without regard to the requirements of recently enacted en-

vironmental safeguards. Whenever the policies of the Bankruptcy

Code come into possible conflict with other federal policies, this

Court has made clear the judiciary’s function is to harmonize

them. See, e.g., National Labor Relations Board v. Bildisco, 104

S. Ct. 1188, 1197 (1984); see also In re Nitec Paper Corp., 43 Bankr.

492, 499 (S.D.N.Y. 1984); In re Kish, 41 Bankr. 620, 626 n.6

(Bankr. E.D. Mich. 1984); In re Kennise Diversified Corp., 34

Bankr. 237, 245 (Bankr. S.D.N.Y. 1983). A trustee’s abandonment

power has never been so broadly construed as to sanction over-

riding of laws enacted for public health and safety, as a review

of the case law leading to enactment of 11 U.S.C. § 554(a) (1982)

indicates.

The provisions of the Code, read together, demonstrate a con-

gressional intent that trustees in bankruptcy are to comply with

laws designed to protect public health, safety and the environ-

ment. For example, section 554(a) is properly seen as having

codified the “public endangerment” exception judicially developed

prior to its enactment. Furthermore, the trustee's authority to

abandon is subject to his duty to manage and operate the pro-

perty in accordance with state law. 28 U.S.C. § 959(b) (1982).

Likewise, there is an exception in ll U.S.C. § 362(b)(4) (1982)

to the automatic stay of all proceedings against the bankrupt for

governmental enforcement actions. All evidence a clear congres-

sional intention that bankruptcy concerns be accomodated with

other important societal interests.

i. The Trustee's Authority to Abandon Is Subject to Health

and Safety Laws.

Cases decided prior to the 1978 enactment of section 554(a)

plainly recognize that a trustee's ability to abandon property has

historically been subject to the requirements of public health and

safety. Absent some indication of a contrary intent — and the

legislative history of section 554(a) is silent on this — the proper

conclusion to be drawn is that section 554(a) codifies the rule

established in such cases as Ottenheimer v. Whitaker, 198 F.2d

289 (4th Cir. 1952), and In re Lewis Jones, Inc., 1 Bankr. Ct.

Dec. 277 (Bankr. E.D.Pa. 1974), that a trustee may not abandon

property where doing so would endanger public health and safe-

ty" L. King, 4 Collier on Bankruptcy $554.01 at 554-5 (15th ed.

1985) (“This section [554(a)] makes few substantive changes in

prior law, but seeks to clarify certain ambiguities and to codify

cases resulting from legislative silence on the matter.”); accord,

Editorial Commentary and Analysis, Bankr. Serv. L. Ed. § 23:111

(1979). The judge-made law which section 554 codifies

demonstrates quite plainly that although a trustee's power to

abandon burdensome or worthless property was recognized by

the courts long before the codification at 11 U.S.C. § 554(a) in

1978, “the exercise of the power to abandon is subject to the ap-

plication of general regulations of a police nature.’ L. King, 4A

Collier on Bankruptcy {70.42(2) at 502-04 (14th ed. 1978).

In Ottenheimer v. Whitaker, the trustee in bankruptcy peti-

tioned the court for leave to abandon, as burdensome to the estate,

" Because the legislative history is silent, it is appropriate to consult these deci-

sions in the interpretation of the codification in section 554(a). N. Singer, 2A

Sutherland Statutory Construction § 48.03 at 291 (4th ed. 1984). See alse Na-

tional Labor Relations Board v. Amax Coal Co., 453 U.S. 322, 329 (1980).

® The trustee argues that because Congress did not write into the section 554(a)

abandonment power a “public endangerment” rule, it therefore intended to

reject the judge-made rule, citing National Labor Relations Board v. Bildisco,

104 S. Ct. 1188 (1984) (T. Br. 15-16). The short answer is that there was no need

to reiterate such a rule because, as we demonstrate below, 28 U.S.C. § 959(b)

and ll U.S.C. § 362(b)(4) limit the trustee's authority to abandon under sec-

tion 554(a) and, in combination, mandate a “public endangerment” rule.

Nonetheless, the Court's statement in that case that “Congress knew how to

draft an exclusion . . . when it wanted to,” 104 S. Ct. at 1195, here undermines

the trustee's position. When Congress directed bankruptcy trustees in section

959(b) to manage and operate the property in accordance with state law, it

provided an exemption for railroad reorganizations but none that would apply

to the present case. When Congress decided not to stay automatically govern-

mental enforcement proceedings once a petition is filed, it did not specify an

exception for proposed abandonment by a trustee. 11 U.S.C. § 362(b)(4). When

Congress wrote the numerous environmental laws discussed above, it could have

excepted trustees in bankruptcy, either in general or only when they propose

to abandon property, but did not do so, even though it did enumerate other

exceptions to the coverage of those laws. See, e.g., 42 U.S.C. § 9607(b) (1982)

(defenses to CERCLA).

certain floating barges. The abandonment was opposed by the

Harbor Engineer of Baltimore and the United States Army Corps

of Engineers on the ground that the proposed abandonment

would violate 33 U.S.C. § 409 (1982) (Act of Mar. 3, 1899), which

made it unlawful to sink vessels in navigable channels. Testimony

had shown that the barges were in dilapidated condition and,

if abandoned, would sink at anchorage. The court not only denied

the trustee permission to abandon the barges but directed him

to remove them from the anchorage and mandated that the cost

of removal be borne by the bankrupt estate as a cost of administra-

tion. The court of appeals declared that the well-settled rule that

a trustee can refuse to accept property of an onerous or un-

profitable nature would have applied were it not for the unusual

consequences that would follow:

There can be no doubt that the property not only has

no value, but also that the care and disposition of it

will involve the expenditure of a substantial sum of

money. But it is equaily true that if the trustee aban-

dons the barges and at the same time holds on to the

valuable assets of the estate, the title to the barges will

revert to the bankrupt and he will be left without

means to care for or dispose of them in the manner

prescribed by the statute.

198 F.2d at 290 (emphasis added).

The Bankruptcy Court for the Eastern District of Pennsylvania

reached a similar result in In re Lewis Jones, Inc., 1 Bankr. Ct.

Dec. 277 (Bankr. E.D. Pa. 1974). In that case, the trustees of three

bankrupt utility companies sought instructions from the court

concerning certain underground manholes, vents and steam pipes

which could become hazardous to public health and safety if

abandoned in their existing condition. These structures could be

made safe by repaving, filling and sealing but only at a very

substantial cost. In Lewis Jones, unlike in Ottenheimer o: the

present case, no federal or state statute would have been violated

had the trustee not spent the money to remove the potential

hazard. Nevertheless, despite the cost involved for the estate, the

court ordered the trustees to remedy the potentially hazardous

condition, finding that “even absent the violation of a state or

federal act, the public interest must be protected by the Bankrupt-

cy Court.” Lewis Jones, 1 Bankr. Ct. Dec. at 280. The Lewis Jones

court relied, as did the court below, upon the principle announced

in Securities and Exchange Commission v. United States Realty

i> Improvement Co., 310 U.S. 434, 455 (1940):

A bankruptcy court is a court of equity and is guided

by equitable doctrines and principles except as they are

inconsistent with the Act. A court of equity may in its

discretion in the exercise of the jurisdiction commit-

ted to it grant or deny relief upon performance of a

condition which will safeguard the public interest.

(citations omitted).

There is no indication that in codifying the abandonment

power, Congress intended to eliminate the judicially evolved

“public endangerment” exception. Indeed, it was recently reaf-

firmed in In re T.P. Long Chemical Co., 45 Bankr. 278 (Bankr.

N.D. Ohio 1985). Adopting the same reasoning as the court below,

the bankruptcy court held that section 554(a) did not authorize

a trustee to abandon barrels of hazardous materials. The court

stated that “the congressional policy underlying CERCLA is that

those who generate, use, or transport hazardous materials should

be required to pay the cost of damages caused by the hazardous

materials” and that “the estate cannot avoid the liability impos-

ed by CERCLA.” 45 Bankr. at 286. Similarly, in In re 30 Hill

Top Street Corp., 42 Bankr. 517, 519-520 (Bankr. D. Mass. 1984),

the court denied the trustee's motion to abandon a nursing home

in a Chapter 7 case where the proposed abandonment would

return the property to the debtor, who was in no position to cor-

rect the deficiencies in health care services which threatened the

health and safety of the patients.

ii. Requiring the Trustee to Manage the Estate in Com-

pliance with Federal and State Environmental Laws Is

Consistent with Ohio v. Kovacs.

In Ohio v. Kovacs, 105 S.Ct. 705 (1985), this Court held that

the obligation of an individual debtor to comply with a state

court injunction, which was issued prior to the filing of a

bankruptcy petition and required him to clean up a toxic waste

dump, had been converted into an obligation to pay money

dischargeable .n bankruptcy when the individual debtor had been

relieved of his property by a receiver prior to the bankruptcy.

Kovacs was therefore unable to satisfy the obligation to clean up

the site other than by a payment of money, even before the

bankruptcy petition was filed. 105 S. Ct. at 710-711. Here, by

contrast, the state is seeking to enforce the post-petition obliga-

tion of the trustee in charge of the site not to take steps which

violate federal and state environmental laws designed to protect

the public. (The trustee concedes that “[t]he states are free to

direct future conduct of debtors and debtors-in-possession. . . .”

(T. Br. 35).).

This Court, in reaching the decision in Kovacs, was careful

to limit its holding to the narrow issue presented. It declared that

it did not question that anyone in possession of the site, including

a trustee in bankruptcy, must comply with the state’s environmen-

tal laws. 105 S. Ct. at 711-12. Likewise, the Court further stated

in Kovacs that it was not holding that “the injunction against

bringing further toxic wastes on the premises or against any con-

duct that will contribute to the pollution of the site or the State’s

waters is dischargeable in bankruptcy,” 105 S.Ct. at 711 (emphasis

supplied), and, citing Penn Terra, Ltd. v. Department of En-

vironmental Resources, 733 F.2d 267 (3d Cir. 1984), noted that

the automatic stay provision of section 362(a) “does not apply

to suits to enforce the regulatory statutes of the State.” Kovacs,

105 S.Ct. at 711 n.11.® Thus, Kovacs did not relieve the trustee,

° This conclusion is consistent with other lower court decisions refusing to stay

regulatory injunctions and license revocations regulating future conduct of the

debtor, even when the grounds for such enforcement arose before bankruptcy.

See, e.g., In re Thomassen, 15 Bankr. 907 (Bankr. 9th Cir. 1981) (permitting

administrative proceedings which could have resulted in revocation of debtor

physician's license on the basis of pre-bankruptcy professional negligence); Com-

modities Futures Trading Commission v. Incomco, Inc., 649 F.2d 128 (2d Cir.

1981) (permitting regulatory enforcement proceeding seeki.ig to enjoin activities

in the commodities market on the basis of pre-bankruptcy violations); In re D.H.

(Footnote Continued)

as the person in possession of the hazardous waste dump for nearly

eight months, of an obligation to manage the site without risk-

ing harm to the public and not to endanger the public further

by abandoning it in violation of federal or state law."

iii. Section 959(b) Requires the Trustee to Comply with

Public Health and Safety Requirements When Manag-

ing and Abandoning Property.

Section 959(b) of the Jucicial Code requires the trustee to

“manage and operate the property” according to state law. The

trustee argues that because of section 554(a) he could jettison

any obligation to obey state laws by abandoning the property.

New York contends, to the contrary, that in view of the history

of judicially established limitations on the trustee's power to aban-

don, section 554(a)’s conferral of that power is to be read in pari

materia with the basic obligation of the trustee under federal

law to manage and operate the property consistently with state

law requirements. 28 U.S.C. § 959(b).*

(Footnote Continued)

Overmeyer Telecasting Co., Inc., 35 Bankr. 400 (N.D. Ohio 1983) (permitting

FCC proceedings to suspend debtor's broadcasting license); In re Kennise Diver-

sified Corp., 34 Bankr. 237, 243 (Bankr. S.D.N.Y. 1983) (permitting housing

authority to correct serious housing code violations endangering tenants although

debtor landlord’s conduct was rooted in pre-petition period).

“ This Court never addressed in Kovacs whether the trustee could simply aban-

don a currently dangerous toxic dump to an insolvent debtor without making

provisions to protect the public. In dicta, this Court merely noted that section

554(a) authorizes abandonment of valueless property, but it did not have occa-

sion to determine the scope of the public endangerment exception codified in

that section. 105 S.Ct. at 711 n.12. There was no finding in Kovacs that the

toxic dump at the time of bankruptcy posed the imminent danger presented here.

S In re Kennise Diversified Corp., 34 Bankr. 237, 243 (Bankr. S.D.N.Y. 1983),

provides support for this analysis. In that case, the court declared that “Bankrupt-

cy Code § 362(b)(4) and 28 U.S.C. § 959 form a smooth continuum and make

it apparent that Kennise as debtor in possession must operate its building ac-

cording to the dictates of non-bankruptcy law that would apply if there were

no Chapter LI case.” See also In re Briarcliff, 15 Bankr. 864, 868 (D.N.J. 1981)

(holding that the exemption from the automatic stay provision in section

362(b)(4) must be read together with section 959).

There is no question that the abandonment of half a million

gallons of flammable liquids, much of it contaminated with

dangerous PCB’s, in the middle of New York City violates New

York law. In fact, it is a felony. N.Y. Envtl. Conserv. Law (“ECL’)

71-2713 (McKinney 1984). See also ECL §§27-0701, 0914; 71-2711.

2712 (McKinney 1984); State of New York v. Shore Realty Corp.,

slip op. at 3099 (public nuisance). In effect, the trustee

acknowledges that by virtue of section 959(b) he would be bound

by New York’s environmental laws if Quanta were in reorganiza-

tion (T. Br. 23), but he maintains that section 959(b) applies on-

ly in a reorganization, not in a liquidation." There is no support

for this narrow reading in the text of section 959(b), its legislative

history, judicial interpretation or logic.

First, on its face section 959(b) applies to a trustee “appointed

in any cause pending in any court of the United States.” 28 U.S.C.

§959(b) (1982) (emphasis supplied). The only exception is “as pro-

vided in section 1166,” id., which governs railroad reorganiza-

tion proceedings and is inapplicable here; under well-settled prin-

ciples of statutory construction, “[t]he enumeration of exclusions

from the operation of a statute indicates that the statute should

apply to all cases not specifically excluded.” N. Singer, 2A

Sutherland Statutory Construction §47.23 at 194 (4th ed. 1984).

No distinction is made in the language of the statute between

managing a reorganization and managing an orderly liquida-

tion. In fact, Congress clearly envisioned the trustee managing

and operating a business under Chapter 7 because ll U.S.C. §

721 (1982) authorizes such activity by the trustee.

There is, likewise, nothing in the legislative history indicating

that section 959(b) applies only in a reorganization. Courts other

than the court below have held section 959(b) applicable to

trustees managing property in liquidations. For example, in Jn

re 30 Hill Top Street Cor. the court held that a trustee operating

* The court of appeals determined that even if section 959(b) does not by itself

require compliance with state and local law governing hazardous waste facilities,

as New York believes it does, section 959(b) assuredly does provide more evidence

that Congress did not intend the Bankruptcy Code to preempt state and local

police power governing safety and health. 739 F.2d at 919 (App. A, 17a).

a nursing home in a Chapter 7 case pursuant to the trustee's sec-

tion 721 power to operate a business during liquidation was

obligated under section 959 to comply with -tate law. Similarly,

the court in In re Charles George Land Reclamation Trust, 30

Bankr. 918 (Bankr. D. Mass. 1983), held that a trustee in a Chapter

7 liquidation case must manage a hazardous waste site in com-

pliance with state law and protect the public from leaking toxic

wastes. Sze also In re Briarcliff, 15 Bankr. 864, 868 (D.N.J. 1981)

(dictum that trustees in any case are obligated under section 959

as officers of the court “to comply with applicable State and local

law while they carry on their activities”).

Likewise, there is not the slightest support in policy or logic

for the anomalous interpretation advanced by the trustee. Adop-

tion of the trustee’s reasoning would lead to the peculiar result

that a trustee is required to comply with state environmental laws

while administering the estate under a Chapter ll reorganiza-

tion case, but is free from such restrictions if the estate is con-

verted to a Chapter 7 case. This would provide an obvious in-

centive for unscrupulous debtors and creditors to seek to con-

vert reorganization cases to Chapter 7 cases. Encouraging such

hazardous enterprises to go into liquidation in order to avoid com-

pliance with environmental laws is precisely the opposite of what

Congress intended.

Moreover, the logic of the cases discussed below, applying sec-

tion 959(b) to require trustees in reorganization cases to comply

with state laws regardless of financial consequences, is equally

compelling in a Chapter 7 liquidation case where no hope re-

mains of salvaging a business. In each of these cases, where the

actions of the debtor in possession, trustee or receiver would or

could have caused injury to the public or the environment, the

court held that the police and regulatory powers of the state took

precedence, even where such regulations might affect the

rehabilitation of the debtor and result in significant reduction

of its assets.

In Gillis v. California, 293 U.S. 62 (1934), this Court rejected

the receiver’s request to be relieved of compliance with a Califor-

nia licensing law, even though without such relief the

reorganization would fail. In In re Dolly Madison Industries, 504

F.2d 49. (3d Cir. 1974), the court upheld the revocation of a cer-

tificate to do business by the State of Virginia for failure of a

business in reorganization to pay a registration fee and file an-

nual reports. In In re Nitec Paper Corp., 43 Bankr. 492 (S.D.N.Y.

1984), the court held that under section 959, “[a] reorganization

must be formulated within the bounds of existing state and federal

law.” Id. at 499 (footnote omitted). The courts in Jn re Briarcliff

and In re Kennise Diversified Corp. reached similar results. The

court in In re Canarico Quarries, Inc., 466 F.Supp. 1333 (D.P.R.

1979), required a corporation in Chapter XI to comply with the

requirements of the Puerto Rican Environmental Quality Board,

by ceasing emissions in violation of the Federal Clean Air Act,

even if such compliance required the closing of the business,

thereby defeating the purposes of the attempted arrangement.

See also Colonial Tavern, Inc. v. Byrne, 420 F.Supp. 44 (ID. Mass.

}976) (suspension of liquor license upheld for repeated v lations

of midnight closing hour regulations); In re Grand Spaulding

Dodge, Inc., 5 Bankr. 481 (N.D. Ill. 1981) (suspension of

automobile dealer:hip license due to fraud upheld, citing in part

28 U.S.C. § 959(b)); Commonwealth v. Peggs Run Coal Co., 55

Pa. Commw. 312, 423 A.2d 765 (1980) (permitting the state to

close a coal production facility which was violating local en-

vironmental! laws).”

'’ This analysis of section 959(b) is consistent with the interpretation given

by some courts to the narrower limitation in section 959(a) providing that

trustees “may be sued . . . with respect to any of their acts or transactions

in carrying on business connected with such property.” 28 U.S.C.

§959(a)(1982). These courts have permitted suits against trustees under sec-

tion 959(a) for tortious acts committed by trustees during liquidation or

reorganization which have harmed members of the public, while carefully

distinguishing such suits, which do not affect the title, possession, control,

liquidation or distribution of the assets, from those which directly interfere

with administration of the estate. See, e.g., In re 30 Hill Top Street Corp.

(trustee in Chapter 7 liquidation operating nursing home obligated under sec-

tion 959(a) to comply with state public safety laws); McGreavey v. Straw,

90 N.H. 130, 138, 5 A.2d 270, 276 (1939).

The sole authority cited by the trustee before this Court (T.

Br. 22-23)" in support of his contention that section 959(b) does

not govern the activities of trustees in liquidation cases is a state-

ment in J. Moore, 7-Pt. 2 Moore’s Federal Practice, 466.04(4) at

1913 ‘2d ed. 1984), concerning whether state laws regulating

distribution of funds in receivership must be followed:

§959(b) applies only to the receiver in the operation

of property in his possession. It does not apply to the

distribution of the estate, and does not require the

federal receivership court to comply with state laws

regulating distribution of funds in receivership,

although Erie R. Co v. Tompkins should now require

it to do so in cases involving only non-federal matters.

(footnotes omitted).

Clearly, the treatise does not address whether state health and

safety or other police regulations must be followed in a liquida-

tion case. Rather, it is discussing whether state or federal laws

would govern when the only question concerns the distribution

of assets. As the last clause of the quoted language indicates, Prof.

Moore's treatise is not authority for the proposition that the trustee

need not comply with state environmental laws in a liquidation

case.

Given that section 959(b) “is a clear indication that in general

the congressional scheme was not intended to subjugate state and

local regulatory laws,” Quanta, 739 F.2d at 919 (App. A, 17a),

there is simply no justification to limit artificially the broad term

* The trustee has properly abandoned his reliance on dicta in a footnote in

State of Missouri v. United States Bankruptcy Court, 647 F.2d 768, 778 n.18

(8th Cir. 1981), cert. denied, 454 U.S. 1162 (1982). In that case, the court in-

dicated a “doubt” that the trustee would have to obtain a state license to sell

grain if the company were liquidating rather than reorganizing. The court cites

no authority for this proposition. Moreover, as the court below indicated, Quan-

ta, 739 F.2d at 920 (App. A, 18a), had the trustee proposed to enhance the estate

by selling contaminated grain in violation of state law, regardless of threats to

health and safety, it is unlikely the Eighth Circuit would have entertained doubts.

“management” in section 959(b) to exclude the trustee’s proposed

abandonment of burdensome property. Abandonment of burden-

some property is plainly an act undertaken by the trustee to

“manage and operate the property” of the estate.” Under sec-

tion 959(b), it must therefore be done in conformity with state

law. This obvious reading permits the trustee's authority to aban-

don property under 11 U.S.C. § 554(a) to be readily harmonized

with the strictures of both federal and state environmental laws.

It also makes evident sense. There is no reason to believe that

Congress wished to allow terminally ill businesses, unlike those

on the critical list, to expire in derogation of state law. Finally,

this construction of section 959(b) is compelling because it ob- .

viates the need for a constitutional determination as to whether

section 554(a) preempts state and local environmental laws.

iv. To Deprive State and Local Governments of the Ability

to Prevent Threatened Disposals of Dangerous Hazardous

Waste Is Inconsistent with Congressional Intent.

State and local governments must always have, under their

police powers, the ability to forestall imminent peril to their

general populace by doing what New York here sought to do:

obtain a remedial court order addressed to a demonstrable threat

in the near term to public health, safety and the environment.

To hold otherwise is, we fear, to imperil the public, despite the

plain intent of Congress to lessen the perils posed by toxic waste

facilities. It also is to extend an open invitation to the unscrupulous

to use the bankruptcy courts to avoid the stringent requirements

of recently enacted environmental laws.

* Webster's Third New International Dictionary (1976) defines management

as “the act or art of managing . . . the conducting or supervising of something

. . . directing, controlling, and supervising any industrial or business project

or activity with responsibility for results . . . judicious use of means to accomplish

anend.. . skillful... treatment... .”

* Although the court of appeals indicated it believed this construction of sec-

tion 959(b) “would seem open to question,” it stated further that “i]t would

not strain the language to construe ‘management of the property’ to include

abandonment of a facility.” Quanta, 739 F.2d at 919 (App. A, 17a).

This obvious concern must have been what prompted this

Court in Ohio v. Kovacs to caution what it was not declaring:

that the filing of a petition in bankruptcy excuses a pre-existing

duty not to dispose of toxic wastes improperly, or relieves the

trustee of the need to comply with environmental laws. 105 S.Ct.

at 7ll. In the present proceeding, this Court ought not render

local authorities impotent to protect health and safety against

a palpably awesome menace, such as was posed by the Quanta

site, absent the clearest indication that Congress intended such

an extensive evisceration of traditional local regulatory authori-

ty. Plainly, no such indication has been provided.

Rather, as the court of appeals found, 739 F.2d at 918 (App.

A, 15a), the contrary intent appears from Congress’ enactment

of an exception to the automatic stay provision of the Bankrupt-

cy Code for “the commencement or continuation of an action

or proceeding by a governmental unit to enforce such govern-

mental unit’s police or regulatory power.” 11 U.S.C. § 362(b)(4);

see also 28 U.S.C.A. § 1452 (West Supp. 1985) (limiting removal

of actions by governmental units to enforce police or regulatory

authority). The Senate's Report on this provision expressly con-

templated its application to suits concerning environmental pro-

tection laws. S. Rep. No. 989, 95th Cong., 2d Sess. 52, reprinted

in 1978 U.S. Code Cong. & Ad. News 5787, 5838. This excep-

tion to the general rule staying legal proceedings against the deb-

tor is persuasive evidence that Congress did not envision state

and local governments being powerless to use their “police or

regulatory power” to protect public safety, health and the en-

vironment when those are threatened by such proposed actions

of a trustee as abandonment of a toxic waste facility.

The trustee argues, however, that in abandoning Quanta’s

storage facility containing hazardous, flammable liquids he has

taken no affirmative act, but has merely divested the estate of

title to the property so that it is revested in the debtor corpora-

tion. (T. Br. 24). In short, he argues, abandonment is not veally

disposal. The trustee's argument is factually and legally incorrect.

First, as shown above, by removing guards and supervisory per-

sonnel, shutting down the fire suppression system and leaving

hazardous wastes leaking from an unattended facility, the trustee

created a new, highly dangerous situation which cannot be at-

tributed to the acts of the debtor. The trustee's analysis of the

import of his activities in abandoning this property may apply

to inmocuous, static property posing no public risk; it is, however,

woefully deficient where federal, state and local laws recognize

that the proper maintenance and handling of such property is

perpetually a matter of grave public concern. To abandon or fail

to maintain a dangerous waste facility is to create a hazard to

the community, for hazardous waste which is separated from the

equipment, supervision and resources necessary to control its

destructive potential is radically different from hazardous waste

which is stored, supervised and disposed of properly.

If the property of the estate included not a toxic waste facility

but rather a zoo full of sick animals which, because of their diseas-

ed condition, could not be sold, the trustee would surely not be

empowered to sell the cages, fire the caretakers and abandon those

dangerous animals, separating them from the personnel, equip-

ment and other resources necessary to control them. By the same

token, a trustee surely would not be permitted to strip a nuclear

power plant of its salable items of equipment, dismis. the per-

sonnel and abandon the uncontrolled reactor, with the excuse

that it was the debtor who had started the chain reaction many

years earlier. It is the very act of removing the assets necessary

to control the hazardous waste that creates the danger to the

community.

The trustee's argument is legally flawed as well. The United

States Court of Appeals for the Fourth Circuit rejected such an

active-passive distinction in interpreting disposal of hazardous

wastes pursuant to RCRA, 42 U.S.C. § 6973 (1982). In United

States v. Waste Industries, Inc., 734 F.2d 159, 164 (4th Cir. 1984),

the court stated:

[A] strained reading of that term [“disposal” limiting

its section 7003 meaning to active conduct would so

frustrate the remedial purpose of the Act as to make

it meaningless. Section 7003, unlike the provisions of

the Act’s subtitle C, does not regulate conduct but

regulates and mitigates endangerments. The Ad-

ministrator’s intervention authorized by section 7003

is triggered by evidence that the “disposal of ... hazar-

dous waste may present an imminent and substantial

endangerment.” (emphasis supplied by court).

The trustee's argument that the only consequence of his ac-

tion is that the hazardous waste reverts to the debtor sidesteps

the critical fact that he has removed all assets from the debtor.

The Third Circuit properly recognized that an act which separates

hazardous waste from the assets necessary to check its destruc-

tive potential constituted final disposal of the hazardous waste

which “clearly contravened applicable law, and did so not merely

technically, but with severely deleterious implications for the

public safety.” Quanta, 739 F.2d at 921 (App. A, 2la). To say,

as the trustee does, that the debtor corporation is now responsi-

ble for the hazardous waste is to engage in dangerous fiction

because the debtor has been reduced to a paper entity without

assets.”

Finally, the trustee makes a fundamental error in characterizing

New York as a creditor seeking to obtain a priority status not

otherwise provided for in the Bankruptcy Code. In June of 1981,

when the City and State of New York appeared in bankruptcy

court to oppose the trustee's effort to abandon the Long Island

City facility, they did so not as creditors, for in fact nothing was

owed financially by the debtor to New York. Rather, the City

and State appeared in order to inform the court that abandon-

ment of hazardous wastes, the act for which the trustee sought

court approval, would create a grave danger to the health and

safety of the public and violate federal. state and local en-

vironmental laws. It was only as a result of the bankruptcy court's

Indeed, a further distinction between Kovacs and this case is that debts of

individual debtors such as Kovacs are dischargeable in bankruptcy, Ll U.S.C.

§ 727 (1982), whereas those of a corporate debtor such as Quanta are not. Id.

Congress eliminated dischargeability of corporations because it assumed that

corporations would be empty shells and it wanted to “avoid trafficking in cor-

porate shells.” H.R.Rep. No. 595, 95th Cong,, Ist Sess. 384, 1978 U.S. Code Cong,

& Ad. News 5787, 6340.

erroneous determination to permit abandonment that New York

was compelled to expend monies in an effort to safeguard the

public. That initial determination is what the court below pro-

perly rejected.” New York’s right to recover those monies is not

at issue in this proceeding, as the court of appeals found. Quan-

ta, 739 F.2d at 923 (App. A, 25a).

v. The Trustee's Expenditure of Funds to Prevent Viola-

tions of Federal and State Environmental Laws Is a

Necessary Cost of Preserving the Estate.

To hold that the trustee cannot abandon the property in viola-

tion of federal and state environmental laws is concededly to re-

quire the trustee to continue to expend funds to assure compliance

with those laws. That, the court of appeals noted, is what Con-

gress intended generally, i.e., to prevent government from assum-

ing all the costs of toxic waste dumping. 739 F.2d at 922 n.10

(App. A, 22a n.10). The issue now before this Court, however,

is not whether in a distribution of assets the secured creditors’

claims can be subordinated to government’s claims for expen-

ditures for a complete cleanup. It is whether the trustee can be

compelled to expend estate funds to maintain the property until

government or the trustee or both have taken necessary steps to

assure that the property can be disposed of in compliance with

federal and state environmental, health and safety laws.

The specific authorization for this action by the trustee, we

submit, is the provision of 11 U.S.C. § 503(b)(1)(A) (1982) allow-

ing the trustee to pay the “actual, necessary costs of preserving

* The issue of the trustee's obligation to clean up the site is not, as he contends

(T. Br. 7), moot. First, as the court below found, the cleanup was only partial

and the subsoil at the hazardous waste site remains contaminated. Quanta, 739

F.2d at 914 (App. A, 6a). Second, even if the cleanup had been completed, the

trustee's approach would preclude appellate review of this question of critical

public concern whenever the court declined to stay an order of abandonment

pending appeal. Under long-settled principles, cases such as this which are

“capable of repetition, yet evading review,” Roe v. Wade, 410 U.S. 113, 125 (1973)

(quoting Southern Pacific Terminal Co. v. Interstate Commerce Commission,

219 U.S. 498, 515 (1911)), are not moot.

the estate.” It does no violence to the language of the Bankrupt-

cy Code to find that maintaining guard service, retaining fire-

fighting equipment and patching leaky tanks are necessary costs

of preserving the estate until such time as the property can be

abandoned or otherwise disposed of lawfully. Ottenheimer v.

Whitaker, 198 F.2d at 290.

Surely, as a matter of economic preference, secured creditors

would wish that the costs of compliance with environmental laws

be borne not by their debtor but by the public generally, whether

or not the debtor is in bankruptcy. Congress, however, has ex-

pressed a different intent. Insuring that private parties with com-

merical interests at stake do not literally dump their problems

on the general public provides the rationale for treating costs of

at least maintaining the status quo as necessary administrative

expenses. In re T.P. Long Chemical, Inc., 45 Bankr. at 286-87;

In re Vermont Real Estate Investment Trust, 25 Bankr. 804

(Bankr. D. Vt. 1982); see L. King, 3 Collier on Bankruptcy,

4503.04 at 503-515 (15th ed. 1983).”

Concededly, there may come a point at which requiring the

trustee over a lengthy period to exhaust all available assets of the

estate to prevent or remedy violations of the law can no longer

be characterized as benefiting the dwindling estate. See In re T.P.

Long Chemical, Inc., 45 Bankr. at 287-90. That, however, is

not the situation posed by New York to the bankruptcy court.

Here, and in general, New York was concerned with a short-term

necessity: preventing an abandonment that threatened public

safety, by having the court direct that the trustee expend whatever

funds were necessary to maintain the status quo until appropriate

corrective measures could be undertaken. That, we have argued,

® Although the bankruptcy court reached a different conclusion in Jn re Charles

George Land Reclamation Trust, 30 Bankr. 918, 922 n.6 (Bankr. D. Mass. 1983),

it ignored the contrary decisions in Ottenheimer and Vermont Real Estate In-

vestment Trust. The only support cited for its unprecedented decision was the

failure of Congress to take any action on a bill introduced before the decisions

in Vermont Real Estate Investment Trust and T. P. Long Chemical which would

expressly ratify the Ottenheimer interpretation of the Code. Legislative history

such as this, however, is entitled to little weight. In any event, the proposed

armendment became unnecessary in light of subsequent decisions.

is compelled by section 959(b) and case law delimiting the trustee's

power to abandon dangerous property. Requiring the trustee to

continue to undertake such administrative expenses was well

within the general equitable powers of a bankruptcy court. See,

generally, Pepper v. Litton, 308 U.S. 295 (1939); see also Reading

Co. v. Brown, 391 U.S. 471 (1968) (Harlan, J.) (holding, in view

of general purposes of administrative expense provision and the

Bankruptcy Act as a whole, as well as principles of equity, that

tort claims against a receiver under Chapter XI prior to bankrupt-

cy were entitled to status of administrative expenses). At such

time as the purposes of the Bankruptcy Code would no longer

be served by indefinitely maintaining such a state of affairs, the

bankruptcv court could, as an alternative to permitting aban-

donment, dismiss the Chapter 7 proceedings, as in the case of

In re Charles George Land Reclamation Trust relied upon by

the trustee (T. Br. 18-19),* so that a receiver might be appointed

by the state courts. See In re 30 Hill Top Street Corp., 42 Bankr.

at 522.

C. The Trustee May Not Abandon Property in Violation

of State and Local Health, Safety and Environmental

Requirements.

We have argued above that this case does not present for deci-

sion the issue of whether the abandonment provisions of the

Bankruptcy Code preempt state and local environmental laws.

However, to the extent New York here was enforcing its own laws

as well as parallel federal laws, application of New York’s laws

was not preempted by section 554(a).

Consideration of whether a state provision violates the

supremacy clause “starts with the basic assumption that Con-

gress does not intend to displace state law.” Maryland v. Loui-

siana, 451 U.S. 725, 746 (1981).

Here, there is no question of express preemption. Indeed, Con-

gress, we have argued, expressly mandated in 28 U.S.C. § 959(b)

* The court there noted that dismissal “would allow the EPA and the [state

environmental agency] to assert their full panoply of powers under the Federal

and State Superfund statutes.” 30 Bankr. at 925.

that there be no preemption of state laws when it directed the

trustee to manage and operate the estate consistently with such

laws. By simply construing section 959(b) of the Judicial Code

and section 362(b)(4) of the Bankruptcy Code as governing sec-

tion 554(a) of the Bankruptcy Code, we have contended, the

Court obviates the need to reach any preemption issue.

The only question remaining is whether requiring the trustee

to take elementary steps to protect the public from harm, which

are required by state and local laws governing hazardous wastes,

would frustrate the purpose of the Bankruptcy Code. See

Maryland v. Louisiana, 451 U.S. at 746-47 and cases there cited.

In New York’s view, it clearly would not.

In Commonwealth Edison Co. v. Montana, 453 U.S. 609,

633-36 (1981), this Court rejected an effort to suppress a state

severance tax because it purportedly frustrated national energy

policies established in the Powerplant and Industrial Fuel Use

Act of 1978, 42 U.S.C. § 8301(b)(3) (1982). Citing the preemption

standards enunciated in Florida Lime & Avocado Growers, Inc.

v. Paul, 373 U.S. 132, 142 (1963) (“[p]re-emption of state law by

federal statute or regulation is not favored ‘in the absence of per-

suasive reasons — either that the nature of the regulated subject

matter permits no other conclusion, or that the Congress has un-

mistakably so ordained”), this Court rejected the suggestion that

“general statements demonstrate a congressional intent to preempt

all state legislation that may have an adverse impact. . . ” 453

USS. at 634, 633. By looking at the energy legislation as a whole,

the Commonwealth Edison Court found clear indication that

the statute contemplated the continued existence of state severance

taxes.

‘Similarly, the Bankruptcy Reform Act of 1978, when viewed

as a whole, indicates a clear congressional desire that the state's

public health and safety regulations should continue to exist har-

moniously with the requirements of the bankruptcy laws. It is

difficult to imagine why Congress would direct a trustee to

“manage and operate” the estate in compliance with state laws,

28 U.S.C. § 959(b), but yet intend, without so stating, to displace

those same laws under section 554(a) if abandonment were con-

templated. Likewise, the court of appeals cited the decision not

to stay government enforcement proceedings automatically upon

the filing of a bankruptcy petition as additional evidence of Con-

gress’ intent not to displace state laws. Quanta, 739 F.2d at 918

(App. A, 15a). ll U.S.C. 362(b)(4) authorizes New York to con-

tinue proceedings brought under its “police or regulatory power”

notwithstanding the filing of a petition in bankruptcy.”

Moreover, by its enactment of TSCA, CERCLA and the Clean

Water Act, Congress expressed in no uncertain terms a national

policy requiring careful, proper disposal of hazardous wastes.

Nowhere did it preempt state and local laws directed toward the

same end. There is, therefore, every reason to conclude that Con-

gress did not intend to suppress the vital public interest contain-

ed in these state and local laws controlling the disposal of hazar-

dous waste when, in the Bankruptcy Reform Act, it provided for

the orderly liquidation of a debtor’s estate and its expeditious

distribution to creditors. Certainly, had such an exception been

intended, it could have been written into the Bankruptcy Code’s

provision on abandonment, section 554(a), or into section 959(b)

of the Judicial Code.

* In enacting the Bankruptcy Reform Act of 1978, Congress was concerned that

bankruptcy courts not use their authority to disrupt the enforcement of statutes

adopted pursuant to the states’ police power to protect public health and safe-

ty and the environment. The House Report makes it clear that the interests

of the state in protecting its citizens and its environment are to be carefully

balanced against the competing interests of creditors by the Bankruptcy Court:

Under present law, there has been overuse of the stay in the area

of governmental regulation. For example, in one Texas bankrupt-

cy 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 protection laws. . . .

The bill excepts these kinds of actions from the automatic stay. . . .

The court will [ aow] 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 . . .

H.R. Rep. No. 595, 95th Cong., Ist Sess. 174-75, reprinted in 1978 U.S. Code

Cong. & Ad. News 5787, 6135 (footnote omitted).

In Silkwood v. Kerr-McGee Corp., 104 S.Ct. 615 (1984), this

Court, in support of its holding that federal law does not preempt

state standards for damages due to radiation injuries, observed

that there was no indication that Congress ever seriously con-

sidered precluding the use of state remedies. This silence was “par-

ticularly significant” since it “is difficult to believe that Congress

would, without comment, remove all means of judicial recourse

for those injured by illegal conduct.” 104 S.Ct. at 623. Similarly,

given the silence that accompanied the enactment of section

554(a), it is difficult to believe that Congress intended, without

comment, to work so drastic a change of previously developed

judicial doctrine and recently enacted statutes as to permit a

trustee to disregard public health, safety and environmental laws.

Applying the reasoning of such cases as Commonwealth Edison

Co. v. Montana and Silkwood v. Kerr-McGee, the court below

properly refused to infer “such a radical change in the nature

of local public health and safety regulations — the substitution

of governmental action for citizen compliance without an indica-

tion that Congress so intended.” Quanta, 739 F.2d at 921-22 (App.

A, 22a).

The trustee contends nonetheless that the supremacy clause

requires the suspension of the states’ public health and hazar-

dous waste laws as to him because operation of these state laws

frustrates the purpose of the Bankruptcy Code. (T. Br. 17.) The

preceding discussion, however, demonstrates that federal laws

themselves seek to assure that valid governmental regulations are

obeyed during the orderly liquidation of assets and their distribu-

tion to creditors. Congress, therefore, has determined that

bankruptcy policy is not by its nature antagonistic to or irrecon-

cilable with public health and safety laws, nor is there an “im-

possibility of dual compliance,” Florida Lime ¢ Avocado Growers

v. Paul, 373 U.S. at 143. Certainly the courts have not viewed

these statutory schemes as mutually exclusive. Cases such as Ot-

tenheimer v. Whitaker and Lewis Jones, taken together with the

directives of 28 U.S.C. § 959(b) and ll U.S.C. § 362(b)(4), make

clear that the trustee’: power under the bankruptcy laws and the

public health and safety concerns expressed in state law not on-

ly can be reconciled but, in Congress’ view, must be reconciled.

Thus, it cannot be said that state and local environmental law

“stands as an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress,” Hines v. Davidowitz,

312 U.S. 52, 67 (1941), where Congress itself has required what

New York also demands: the safe, proper disposal of hazardous

substances.

Il. LIMITING THE TRUSTEE’S POWER TO ABAN-

DON PROPERTY IN VIOLATION OF FEDERAL

AND STATE ENVIRONMENTAL LAWS IS NOT A

“TAKING” UNDER THE FIFTH AMENDMENT.

The court below correctly determined, based on a long line

of decisions by this Court, that state enforcement of environmen-

tal laws, even when it causes financial expenditure or economic

loss, is not a “taking” under the fifth amendment. Quanta, 739

F.2d at 922 n.ll (App. A, 23a n.11). Nevertheless, the trustee claims

that limiting his power to abandon pursuant to section 554(a)

is inconsistent with this Court’s decision in United States v. Securi-

ty Industrial Bank, 459 U.S. 70 (1982), and violates the takings

clause of the fifth amendment. (T. Br. 20-22).”* As demonstrated

below, these contentions lack merit for at least three reasons. First,

the issue is not ripe. Second, as this Court has long recognized,

a state’s enforcement of its environmental laws is not a “taking”

even if it results in total destruction of the value of the property.

Third, neither Security Industrial Bank nor any of the limited

exceptions to this long-settled rule is applicable here.

A. The Fifth Amendment Takings Issue Is Not Ripe for

Adjudication by this Court.

The court below did not reach the question of what, if any,

estate funds should now be devoted to reimbursing New York for

the Quanta cleanup, but rather remanded that question to the

bankruptcy court to make appropriate findings of fact. Quanta,

739 F.2d at 923 (App. A, 25a). The bankruptcy court has made

no findings of fact as to what assets are available, to what extent

claims are secured or unsecured, what types of secured claims

exist, how the secured claims were created and what were the

secured creditors’ reasonable expectations. It is, therefore,

premature for this Court to examine that question at this stage

of the proveedings since “there is as yet no concrete contioversy

regarding the application” of the court of appeals decision. Agins

v. City of Tiburon, 447 U.S. 255, 260 (1979).

* The petitioner in the companion case, Midlantic National Bank v. New Jersey

Department of Environmental Protection, No. 84-801, advances the same argu-

ment. (Midlantic Br. 11-16).

This conclusion is particularly compelling in the present con-

text because this Court has often observed that no “set formula”

has been developed “for determining when justice and fairness

require that economic injuries caused by public action must be

deemed a compensable taking,” and therefore “the inquiry into

whether a taking has occurred is essentially an ‘ad hoc, factual’

inquiry.” Ruckelshaus v. Monsanto Co., 104 S. Ct. at 2874, citing

Kaiser Aetna v. United States, 444 U.S. 164, 175 (1979).

B. Valid Government Regulations which Cause Signifi-

cant Economic Loss Do Not Violate the “Takings Clause”

of the Fifth Amendment.

This Court has consistently rejected challenges to legitimate

government regulations under the takings clause, even where com-

pliance would result in the complete destruction of the value of

the company’s property. Moreover, this Court has done so in cases

that by no stretch of the imagination involve the potentially

catastrophic consequences to public health and safety involved

here.

In Ruckelshaus v. Monsanto, the manufacturer of pesticides

argued that federal reguiations that could result in the public

disclosure of trade secrets, thus completely destroying the value

of the company’s property, violated the takings clause of the fifth

amendment This Court rejected Monsanto’s argument and

declared that the burdens of government regulation were par-

ticularly justified in the sale and use of pesticides, which had

long been the subject of public concern and governmental regula-

tion. The economic burdens that accompany government regula-

tion are the price we pay for “the advantage of living and doing

business in a civilized community.” 104 S. Ct. at 2875 (quoting

Pennsylvania Coal Cu. v. Mahon, 260 U.S. 393, 422 (1922)

(Brandeis, J., dissenting)).

Similarly, in Goldblatt v. Hempstead, 369 U.S. 590 (1962), this

Court upheld a local safety ordinance which prohibited a sand

and gravel company from excavating below the water table, a

level it had previously reached. This Court did so even though

compliance with the ordinance would result in a complete pro-

hibition of the beneficial use to which the property had been

devoted for the preceding thirty-five years and meant the total

destruction of the business enterprise. In rejecting the company’s

“takings clause” argument, this Court quoted Mugler v. Kansas,

123 U.S. 623, 669 (1887), as authority for the proposition that

(t]he power which the States have of prohibiting such

use by individuals of their property as will be pre-

judicial to the health, the morals, or the safety of the

public, is not — and, consistently with the existence

and safety of organized society, cannot be — burden-

ed with the condition that the State must compensate

such individual owners for pecuniary losses they may

sustain, by reason of their not being permitted, by a

noxious use of their property, to inflict injury upon the

community.

Goldblatt, 369 U.S. at 593.”

The trustee’s suggestion that requiring the estate to comply

with federal and state public health and environmental laws

would violate the takings clause with respect to the creditors’ pro-

perty interest in the estate does not withstand scrutiny. Contrary

to the trustee's contention, compliance with the federal and state

regulations which are at issue here does not necessarily extinguish

any property right held by the creditors. Under the ruling of the

court below, unsecured creditors (who of course have no protected

interest in the estate) can still look to the general assets remain-

ing in an estate and secured creditors can still look to specific

property that secures their claim. Therefore, this case is unlike

United States v. Security Industrial Bank, where the very lienhold

interest would have been retroactively extinguished.

* This Court has routinely rejected similar challenges to generally applicable

state regulation which caused expenditure of funds or severe economic loss. See,

e.g., Agins v. City of Tiburon (municipal zoning ordinances restricting the type

and density of buildings held not a taking); Penn Central Transportation Co.

v. New York City, 438 U.S. 104 (1978) (landmark preservation ordinance); Village

of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926) (industrial zoning regula-

tion); Hadacheck v. Sebastian, 239 U.S. 394 (1915) (municipal ordinance pro-

hibiting brickmaking).

The creditors’ real concern in this matter is not with the issue

of compliance with legitimate government regulations per se, or

with the actual extinguishing of a property right; rather, they

are concerned, in practical terms, that after compliance with the

law there will be significantly less value in the general assets of

the estate and less value in the secured property, possibly none

at all, to satisfy their claims.* Creditors, however, advance funds

with the hope of a profitable return but with full knowledge that

the business enterprise they are underwriting may fail for any

one of a number of reasons, including the cost of their debtor’s

compliance with public health and environmental regulations.

See also In re T.P. Long Chemical Inc., 45 Bankr. at 287

(“Creditors must generally bear the risks of any enterprise”). That

is the risk that every creditor voluntarily undertakes in extending

credit, i.e., that its debtor may need to expend some of its resources

to obey laws governing its business. Any creditor of a business

such as Quanta’s assuredly had a “reasonabie investment-backed

expectation,” Ruckelshaus v. Monsanto Co., 104 S. Ct. at 2875,

that Quanta might need to spend money to comply with generally

applicable environmental laws in effect at the time of the bor-

rowing which plainly regulated the very essence of Quanta’s

business.

What the court below held, in effect, was that the creditors’

security interests simply do not require the public to underwrite

the risks those creditors knew of and must have assumed. In other

words, government is not obligated to expend public funds to

* It is well established that unsecured creditors may only look to the unen-

cumbered assets of the estate, if there are any, to satisfy their claims. See Hanover

National Bank v. Moyses, 186 U.S. 181 (1902). Without the benefit of factual

findings it is more difficult to address the issue of secured creditors. The status

of Midlantic National Bank, the petitioner in the companion case, Midlantic

National Bank v. New Jersey, No. 84-801, is illustrative. Although Midlantic

asserts the status of a secured creditor, its secured interest does not reside in

any definable piece of property but rather consists of the debtor’s “inventory,”

i.e., salable waste oil to the extent that any exists and in “accounts receivable”

to the extent that such accounts may exist. See Midlantic Br. 6-7. Compliance

with government regulations does not destroy Midlantic’s rights as a secured

creditor. It only diminishes the value of that property.

meet the regulatory obligations of private parties (here, the estate

and the trustee in his representative capacity) in order to cushion

the creditors’ foreseable risk on their investments. That, in general

terms, parallels the very conclusion Congress reached in enac-

ting numerous environmental laws during the past decade.

C. Neither United States v. Security Industrial Bank nor

the “Erosion Taking” Doctrine Permits Abandonment

Here.

As demonstrated above, state enforcement of federal and state

environmental laws, even when it causes the complete destruc-

tion of the value of the property, is not a “taking” under the fifth

amendment. Neither United States v. Security Industrial Bank

nor the “erosion taking” doctrine alters this conclusion.

In Security Industrial Bank, this Court considered a challenge

under the takings clause to the retrospective application of sec-

tion 522(f)(2) of the Bankruptcy Code to invalidate liens acquired

before the effective date of the Bankruptcy Reform Act of 1978.

It held that when there is “substantial doubt whether the retroac-

tive destruction of the appellees’ liens in this case comports with

the Fifth Amendment.” 459 U.S. at 78, it would consider as a

matter of statutory construction whether section 522(f)(2) must

necessarily be applied in that manner. Id. It considered the

statutory question first under the basic principle set forth in

Crowell v. Benson, 285 U.S. 22, 62 (1932), that “this Court will

first ascertain whether a construction of the statute is fairly possi-

ble by which the constitutional question may be avoided.”

Here, however, the trustee has failed to demonstrate “substan-

tial doubt” that enforcement of federal and state environmental

laws raises a taking question. The only cases cited by the trustee

or the dissent in the court below in support of their contention

that limiting the power of the trustee to manage or abandon the

property where it would harm the public interest are the “ero-

sion taking” cases. (T. Br. 21 n.5); Quanta, 739 F.2d at 924-26

(Gibbons, J., dissenting) (App. A, 28a-32a). As the court below

recognized, however, this doctrine is limited to railroad

reorganization cases and requires a balancing of losses to the estate

against the public interest. Quanta, 739 F.2d at 922 n.11 (App.

A, 23a n.11). The trustee has failed to show that any potential

losses to the estate necessitated by protecting the public from leak-

ing chemicals and possible fires would cause “losses unreasonable

even in light of the public ir. erest.” Regional Railroad Reorganiza-

tion Act Cases, 419 U.S. 102, 124 (1974).

CONCLUSION

For all the foregoing reasons, this Court should affirm the order

of the Court of Appeals for the Third Circuit.

Dated: June 7, 1985

New York, New York

Respectfully submitted,

ROBERT ABRAMS

Attorney General of the

State of New York

FREDERICK A.O. SCHWARZ, JR.

Corporation Counsel of

the City of New York

Rosert HERMANN

Solicitor General of the

State of New York

Nancy STEARNS

Assistant Attorney General

Counsel of Record for the State of New York

NorRMAN SPIEGEL

CHRISTOPHER KEITH HALL

Assistant Attorneys General

of Counsel

LEONARD KOERNER

Assistant Corporation Counsel

Counsel of Record for the City of New York

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.