Petition for Writ of Certiorari — O'Neill v. City of New York, 105 S. Ct. 2110 (1985) (No. 84-805)

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Supreme Court of the United

Ocroser Term, 1984

THOMAS J. O’NEILL, TRUSTEE IN BANKRUPTCY OF

QUANTA RESOURCES CORPORATION, Debtor, Pesta

etitioner,

THE CITY OF NEW YORK and STATE OF NEW YORK,

Respondents.

THOMAS Jf. O’NEILL, TRUSTEE IN BANKRUPTCY OF

QUANTA RESOURCES CORPORATION, Debtor, Petiti

elstioner,

Vv.

THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL

PROTECTION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

THOMAS J. O’NEILL

Counsel of Record for Petitioner

60 Park Place

Newark, New Jersey 07102

(201) 643-6300

NOLAN, O’NEILL & MOORE

Attorneys for Petitioner

WILLIAM F. McENROE

CORINNE M. DeSTEFANO

On the Petition

Adams Press Co:p., 1188 Raymond Boulevard, Newark, New Jersey 07102—(201) 623-8611

Quice - cupreme Court. US

FILED

——

Questions Presenied

i. Whether the right of a trustee in Bankruptey pur-

suant to Section 554(a) of the Bankruptcy Code, 11 U.S.C.

Section 554(a), to abandon property of the estate, which

admittedly is burdensome to the estate and of inconse-

quential value to the state, can be restricted by a state

as a result of prepetition conduct of the debtor.

2. Whether the decision of the Court of Appeals is in-

consistent with this Court’s decision in NLRB v_ Bildisco

and Bildisco, 104 S. Ct. 1188 (1984), in relying upon an

exception to the automatic stay contained in Section 362

of the Bankruptey Code, 11 U.S.C. Section 362, as a basis

for judicially inserting an exception to the right of aban-

donment into Section 554(a) of the Bankruptcy Code,

ma U.S.C. Section 554(a).

3. Whether the decision of the Court of Appeals is

inconsistent with this Court’s decision in United States

v. Security Industrial Bank, 459 U.S. 70 (1982), in con-

struing the Bankruptey Code as requiring a trustee in

bankruptcy to expend assets of the estate to effect an

environmental cleanup of facilities operated by the debtor

prior to the filing of the bankruptcy petition, which are of

no value to the estate, thereby raising constitutional ques-

tions arising out of the “takings clause” of the Fifth Amend-

ment.

4 Whether the decision of the Court of Appeals in deny-

ing a trustee in bankruptey the right to abandon property

of the estate pursuant to Section 554(a) of the Bank-

ruptey Code because of purported prepetition violations

of state environmental laws is violative of the Supremacy

Clause of the federal constitution.

5. Whether judicial imposition of conditions upon the

right of a trustee in bankruptcy to abandon property of

the estate pursuant to Section 554(a) of the Bankruptcy

Code 11 U.S.C. Seetion 554(a) will impair hankruptey

policy and frustrate effectuation of the objectives of the

federal Bankruptey Code.

6. Whether “abandonment of property of the estate”

by a trustee in bankruptcy pursuant to Section 554(a)

of the Bankruptey Code, 11 U.S.C. Section 554(a), can

constitute a violation of state or federal environmental

laws and regulations.

7. Whether a state’s claim for reimbursement of ex-

penses for the environmental cleanup of property of the

debtor is entitled to priority or administrative expense

status in a bankruptcy liquidation.

Parties

The appellants in Third Cireuit Case No. 83-5142 (“New

York Case”) were, the City of New York and the State

of New York. Also involved in that case were the State

of Pennsylvania, the Department of Environmental Re-

sourees for the State of Pennsylvania and the State of

New Jersey, as amici curiae. The appellant in Third

Cireuit Case No. 83-5730 (“New Jersey Case”) was the

State of New Jersey, Department of Enviornmental Pro-

tection. Appellees were Thomas J. O'Neill, Trustee, in

both cases, and Midlantic National Bank and James V.

Frola and Albert VonDohlin in the New Jersey case.

(Case No. 83-5730).

TABLE OF CONTENTS

PAGE

SI IID scinsiteclisitienstsssaciesnieciniiinmnitienticdatgutaniannaie i

ge SAIN A Send eR AEP URE SOE Scr tary Eye Tt PT iil

a SP II aii ss ctiinlinicatelinctmdiadtiosoniets Vili

I BI eed ececctecectibiteahiicintinsisede ncicdsehiceahitetattieaaheciag 2

ID eiiiiiritnieeitiiinie i iciininctintcmieiibinisieinienidineiamaiies 3

CONSTITUTIONAL PROVISIONS AND Statutes INVOLVED 3

a a i i 3

) AORN eR Pe at ena RM er Ry oy Pe

RO GONWU ceccsncssesticienmennnenenmemnsnenmineinnitni a 8

AncuMENtT—The decision of the Court of Appeals that

allows yovernmental units, acting under state and

local laws, to restrict the right of a bankruptey

trustee to abanden property pursuant to 11 U.S.C.

Section 554(a) and require the trustee to expend

and distribute the assets of the estate in a manner

other than required under the Bankruptcy Code

should be reviewed by this Court because this is an

issue of profound importance to the administra-

tion of the federal bankruptey laws which has not

been, but should be, settled by the Supreme Court,

and because the Court of Appeals decided a fed-

eral question in a way in conflict with applicable

decisons of the Supreme Court .......0..20...2.ce cece 10

TABLE OF CONTENTS

The decision of the Court of Appeals is con-

trary to this Court’s rule of construction an-

nounced in NLRB y. Bildisco & Bildisco, 104

S.Ct. 1188 (1984), in judicially inserting an

exception into the Bankruptcy Code where

no such exception was intended or included

OF IE ceceninittiteniainininciintiiedlliaceseniiicaitinniivuntios

The construction of Section 554(a) of the

Bankruptey Code advanced by the Court of

Appeals is inconsistent with the decision of

the Supreme Court in United States v. Se-

curity Industrial Bank, 459 U.S. 70 (1982),

and is violative of the “takings clause” of the

Pee. SENET wnctanieeensdcnesiteininnnrniionnn

28 U.S.C. Section 959(b) does not constitute

a bar to abandonment by the Trustee ~..........

Abandonment of property of the estate by a

Trustee in Bankruptey in accordance with

11 U.S.C. Section 554(a) does not violate

Ey Gar BN cenctteieriineieniciseicts

The decision of the Court of Appeals will

frustrate effectuation of the objectives of

federal bankruptey legislation ........................--

1. Courts cannot create categories of

priorities or administrative expenses

not recognized by the Bankruptey Code

There exists no basis for subordination

of administrative, secured, and other

unsecured claims to the claims of New

York and New Jersey .................c-csecceeees

PAGE

vi TABLE OF CONTENTS

3. Under the cireumstances of this case, a

Trustee in Bankruptey has no alterna-

tive but to refuse appointment or, once

having accepted appointment, to resign

F. This court should grant certiorari ..................

I anita tain tines catilcaldliia adit aaiat ala anal nlis aiiaalti

APPENDICIES

Appendix A—Opinion of the United States Court of

Appeals for the Third Cireuit (No, 85-5142) -.....

Appendix B—Opinion of the United States Court of

Appeals for the Third Cireuit (No, 85-5730) -.......

Appendix C—Orders Amending Opinion (No. 83-

DRT ceicsnisesseeecssccecenseenceiessetsiciicanicenaiiaenaiasaminnaiesiininati

Appendix D—Judgment of the United States Court

of Appeals for the Third Cireuit (No, 83-5142) .-...

Appendix E—Judgment of the United States Court

of Appeals for the Third Circuit (No. 85-5780) -...

Appendix F—Order Denying Petition for Rehearing

of the United States Court of Appeals for the Third

RID sacecccsicrtsinssitnsnstsstesicniihainaiiainicbieiinitasiinatiteientineiats

Appendix G—Memorandum Opinion of the United

States District Court for the District of New Jer-

OY <cnussnsntnornsctaeemnnscetentesnsansscteninansenesiameneseetscnneencsnnteneretit

Appendix H—Order of the United States District

Court for the District of New Jersey ...........-...-.--.-++-

|, Sn

PAGE

4la

45a

47a

49a

TABLE OF CONTENTS Vii

PAGE

Appendix I—Order Authorizing Abandoment of

Property of the United States Bankruptey Court

for the District of New Jersey oo... ccccecoeeccsee----. 64a

Appendix J—Order Authorizing Abandonment of

Property of the United States Bankruptey Court

for the District of New Jersey o.o..cceccecccccoccsscsecsseoeeees. 66a

Appendix K—Oral Decision of the United States

Bankruptcy Court for the District of New Jersey 69a

Appendix L—Constitutional Provisions and Relevant

SPUUPTIID svviiinictinicetsinuinaieiinitaateitaniinenieaartia 76a

viii TABLE OF AUTHORITIES

Table of A:thorities

Cases Cited

Alhlswede, In re, 516 F, 2d 784 (9th Civ. 1971)

error

American Lumber Company, In re, 5 B.R. 470 (D.C.

eee

Bowman vy. Towery, 207 Okla. 4, 248 P. 2d 1050 (1952)

Charles George Land Reclamation Trust, In re, 30

B.R. 918, (Bkrptey Ct. D.Ma. 1983)

Good Deal Supermarkets, Inc., In re, 384 F. Supp.

A ee |, | re

Ifarper. In re, 175 F. 412 (N.D. N.Y. 1910)

Kansas City Journal-Post Co., In re, 144 IF. 2d 791

LL S| | nnn

Lewis Jones, In re, 1 B.C.D. 277 (Bkrptey Ct. KE. D.

| a

Mason v. C.LR., 646 F. 2d 1309 (9th Cir. 1980) -.......

Mobil Steel Company, Matter of, 563 F. 2d 692 (5th

Ch, TTT) enceccsensccsnesesncecseenesncscsnnseectuconsssenmsazennisnncsonrencsane

N.LR.B. v. Bildisco & Bildiseo, 104 S. Ct. 1188

LEAL SEE LT ee TON

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

BDGB) oecnncocccereecssrsecsscnsssnsenscensncnsssssnesocssssnsnsnesssesesseesesieseensee

Quanta Resources Corp., Matter of, 739 I, 2d 912

(Bard Ci, 19GK) nnecansnnccoeecnscsnsceeseosesencsosesssenensenavensenesncosn

Quanta Resources Corp., In re, 789 PF, 2d 927 (3rd

he, BE) neccencesccetcsitesnere cnr nreseseciinsncsneinacmaneensenineetenennnints

PAGE

i, 10

Dire —- =.

TABLE OF AUTHORITIES ix

PAGE

State of New York and City of New York v. Thomas

J. O'Neill, ete., (D.N.J. No. 82-3524, January 24,

TD; anissvindteideieicietiiianiatipieiaiiniabianimniasaisensmme niceties 2

State of New York and City of New York v. Thomas

J. O'Neill, ete., (Bkrptey Ct. D.N.J. No. 81-05967,

I I I stilaieschishiachircintvetiiineapstaieiinan ie 2

Tarpley, In re, 4 B.R. 1945 (Bkrptey Ct. Tenn. 1980) 17

United States v. Security Industrial Bank, 459 U.S.

fo i tS a nee, i, 11, 12, 14

Universal Money Order Co., In re, 470 F, Supp. 869

AE Rae ron nL, Sah 19

Watts, In re, 19 F. 2d 526 (E.D. La. 1927) 00. 18

Westgate-California Corp., In re, 642 F. 2d 1174 (9th

I acai 25

Zehner, In re, 193 F. 787 (A.D. La. ED cthtnetintneistinene 18

Statutes Cited

1l ULS.C.:

NE SIE eiainactnsseibhanchesbntlaaltihinitinibalhitatas nih i, 2, 10, 11, 20

aan NII -asstabnsdhclicticsdininciniiiadsiiainepaliiapininiaiininuminaicetio 11

fe here og ag A Te Ee 10

EEE EN SSeS AION Re a 23

RUE TOUITIII Miiieiacastmaieidashsnig lias ST) es 10

x TABLE OF AUTHORITIES

PAGE

11 US.C.:

NI, TE ssssaciitinsciisecteiiitieibiiniellainaiianiihaainebiaat icine eitiedaaliie 23

GID cccniisiecictsiisonescibaiiedteeniaienceineiareniioneeits 23

SE. THR isch tetrsetniestceadeishinshaseetsintciaiietcnadimnnsianenanionniah 24, 25

a, TE snccectvncnevicnssessasessensessenesesnenpneennatitinceinninnannmess 22

RI, TEINO: siisstinnsessuececsesiencectiiaiubiasspenisiasiatistsmneeiidinitaiibaniietis 3,13

es, ID cictetienicntertiitensteisiinintsnitiaiiie i, ii, 10, 11, 13-15

BNI TD cecceincacthiesincceidecnnicenihdatclinbaphitesntilaeiiandioaaaieaahidieninine 12

i: Wile AAD I, eiieeccicsninnieinieninanens +

BI Fe naciscsseevidesnesoaseicieipieddiinisnnlinpsiaimiaiaiiceantbints 3,18

Bee. LIOL, €€ BOG. ....-c-cccccssccssccccesseccessccevccsecssnssesesesceses +

TR, TINIE iiesiscssheenieninsiettodicisinecesiioniceiehalaiansieiieniiendinninenion il

ise; FE cccctssissiisieeinicsiidbiiaihinsdanenniiianiitaapiaiecintinincetanite 26

28 U:S.C.:

I TD. ssnciictinsensscccmnntiisinienimbiiaimmmael 3, 14, 15, 26

Bee: BEG sccccssccnecnssnncnsncnscnensesiitiouiinsiassesumiannsatinninastiins 8

OE AT, 5 eee 22

Other Authorities Cited

7-pt 2 Moore’s Federal Practice (J. Moore & J. Lucas)

Dah TE, FO ccceercctcstnisctcestetnicrecttininreciintincniseciintncanrieepieeieane 14

4 Collier on Bankruptey, Section 554.01 (15th Id.) ... = 16

4 Collier on Bankruptey, Section 554.02(2) (15th

ED ceccenennssnnnccsetwhesiocncstnecttniiciiiacisiiainisiisininibdiaisisatiiaasenisite 17

TABLE OF AUTHORITIES ix

PAGE

Ii.R. Rep. No. 595, 95th Cong. 1st Sess. 343 (1977),

reprinted in (1978) U.S. Code Cong. & Ad. News,

eh ATE NEN MSI ae a aS Amy SO REA 21

124 Cong. Ree. H 11,095 (Sept. 28, sition S 17,412

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NO.

IN THE

Suprene Court of the United States

Ocroser TERM, 1984

THOMAS J. O'NEILL, TRUSTEE IN BANKRUPTCY

OF QUANTA RESOURCES CORPORATION, Debtor,

Petitioner,

THE CITY OF NEW YORK and

STATE OF NEW YORK,

Respondents.

THOMAS J. ONETLL, TRUSTEE IN BANKRUPTCY

OF QUANTA RESOURCES CORPORATION, Debtor,

Petitioner,

Vv.

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

Thomas J. O’Neill, Trustee in Bankruptey of Quanta

Resources Corp., Debtor, petitions for a Writ of Certiorari

to review two judgments of the United States Court of

Appeals for the Third Circuit in the following cases:

In the Matter of: Quanta Resources, Corp., a corp-

oration of the State of Delaware, Debtor, The City

of New York and the State of New York v. Quanta

Resources Corp., Debtor, Thomas J. O'Neill, Trustee

(Case No. 83-5142); and,

In re Quanta Resources Corp., Debtor, The New

Jersey Department of Environmental Protection

(Case No. 83-5730).

A single petition for writ of certiorari covering both cases

is filed pursuant to Rule 19.4 of the Rules of the Supreme

Court of the United States since the two cases involve

identical or closely related questions.

Opinions Below

The opinions of the Court of Appeals for Case No.

83-5142 (App. A, infra, la to 34a)' and Case No. 83-5730

(App. B, infra, 35a to 40a) are reported at 739 I, 2d 913

and 927 respectively. The Memorandum Opinion of the

District Court in State of New York and the City of New

York vy. Thomas -F. O'Neill, Trustee in Bankruptcy of

Quanta Resources Corp. (App. G, infra, 52a to 60a) and

the opinion of the Bankruptey Court (App. IX, infra, 69a

to 75a) in the case State of New York and City of New

York vy. Thomas J. O'Neill are unreported.

1 Reference herein to the opinions and judgments below will be

by citation to the appendix to this Petition for Certiorari filed by

Thomas J. O'Neill, Trustee of Quanta Resources Corp.

ene ye ee ee

Jurisdiction

The judgments of the Court of Appeals in Case No.

83-5154 (App. D, infra, 45a) and in Case No. 83-5730

(App. E, infra, 47a) were entered on July 20, 1984. On

August 16, 1984 the Court of Appeals denied rehearing.

(App. F, infra, 49a). The jurisdiction of this Court is

involked under 28 U.S.C. Section 1254(1).

Constitutional Provisions and Statutes Involved

The constitutional provisions involved are the Supremacy

Clause of Article VI and the “takings clause” of the Fifth

Amendment. The provisions of the Bankruptcy Code in-

volved are Sections 362, 554, and 704, 11 U.S.C. Sections

362, 554 and 704. The case also involves interpretation

of 28 U.S.C. Section 959(b). These provisions are printed

in the Appendix hereto.

Statement of the Case

These two companion cases, arising out of the same

bankruptcy proceeding, present to the Court the question

of construction of Section 554 of the Bankruptcy Code,

Abondonment of Property of the Estate, and the inter-

relationship of this section with other state and federal

laws. The question is presented in the context of the

bankruptey liquidation of a debtor which had engaged in

the business of treatment of waste oils, and the attempt

by the Trustee to abandon r:al and personal property

of the estate which is alleged to have been contamin-

ated through prepetition conduct of the debtor. The

Trustee’s abandonment is opposed by the respective en-

vironmental agencies of New York and New Jersey who

seek to compel the Trustee to clean up the sites.

On October 6, 1981, Quanta Resources Corp. (“Quanta”)

filed a voluntary petition in bankruptey under Chapter

11 of the Bankruptey Code, 11 U.S.C. Section 1101, e¢

seq. On November 12, 1981, on motion of the debtor, the

proceedings were converted to liquidation under Chapter

7, 11 U.S.C. Section 701, et seq. Petitioner, Thomas J.

O'Neill, was appointed Trustee on November 18, 1981.

The debtor corporation operated facilities in Edgewater,

New Jersey and Long Island City, New York. The New

York property was owned by the debtor, while the New

Jersey property was leased from two individuals, James

Frola and Albert VonDohlin, appellees in the New Jersey

Case.

New York

The property is located at 37-80 Review Avenue,

Long Island City, New York. Upon his appointment, the

Trustee obtained an appraisal report which described the

property as follows:

The subject property has been used for many years

as a storage facility for waste oil and is improved

with a wide variety of fuel storage tanks. We have

been advised that many of these tanks now hold

waste oil which is contaminated and effectively,

the tanks have little or no market value. Also lo-

cated on the site are several small concrete block

buildings that were used in connection with this

operation. In the judgment of the appraiser, the age

and condition of these buildings are such that they

have no value and should be removed.

The appraiser estimated the fair market value of the

propertly as $535,000.00, but stated for “forced sale”

purposes he would discount this value by 20% to $428,-

000.00. Mortgages on the property exceeded the “forced

sale” value. These appraisal figures did not, however,

consider any expenditures which would be necessary in

order to dispose of the contaminated oil on the site and

render the property marketable.

A considerable quantity of waste oil, sludge and other

hazardous wastes, including oil contaminated with PCB's,

was stored on the property, and it was estimated that the

cost to dispose of the contaminated waste oil properly

and otherwise clean up the site would be in excess of a

million dollars.? While the single fact that the cost to

dispose of the waste on the site would exceed the total

value of the estate rendered the property valueless, at the

onset of the case the Trustee was required to maintain

24 hour guard service because of the property’s condition,

at a cost in excess of $1,100.00 per week. At the initial

hearing before the Bankruptey Court on the application

for abandonment, the Trustee testified that he person-

ally had borrowed $20,000.00 since the inception of the

Chapter 7 proceedings, and that much of this money had

gone to continue the security. The Trustee simply had

no funds whatsoever to pay for continued security, much

less to undertake any cleanup operations.

On March 18, 1982, upon request of the Trustee, the

Clerk of the Bankruptey Court issued a notice to eredi-

tors of “sale by public auction or abandonment” of the

New York property. The notice advised that if the Trus-

tee did not receive an offer in excess of liens on the prop-

erty, he would abandon the property. No offers were

received at the auction sale on April 5, 1982.

* According to New York's Brief before the Third Circuit, fol-

lowing the Trustee’s abondonment, the City and State undertook

a cleanup operation and expended 2.5 million dollars.

The Trustee subsequently reecived an offer from Green-

point Oil Corp. (“Greenpoint”), to purchase the Long

Island City property, subject to mortgages and certain

other liens for a total price of $5,000.00. This offer was

approved by the Bankruptey Court. Counsel for Green-

point subsequently advised the Trustee, however, that

Greenpoint did not intend to proceed with the purchase

because of hazardous conditions and violations existing

at the property which Greenpoint was not aware of at

the time of the offer. On June 22, 1982, on application

of Greenpoint, the Bankruptey Court voided the approval

of the offer.

Although it was the position of the Trustee that, be-

cause of the prior notice to creditors the property should

then be decmed to have been abandoned as of April 5, 1982,

a new notice of proposed abandonment was mailed to all

creditors on May 25, 1982. In reponse to the second notice

to creditors, the State of New York filed an objection with

the Bankruptey Court on June 4, 1982. On June 7, 1982,

the City of New York also filed an objection.

Oral argument on the objections was conducted before

the Ilonorable D. Joseph DeVito, United States Bank-

ruptey Judge, on June 8, 1982. At that time, the Court

directed the filing of additional briefs. On or about

June 15, 1982 the State et New York filed a Memorandum

in Opposition to Abandonment in which, for the first

time, the State requested that the Court order that any

money spent by the State or City to dispose of waste be

deemed a first lien on the property with priority

over any other mortgages and liens.* No notice of the

application to impose a lien was given to the other len-

holders on the property.

3As of that date, mo money had been expended by the City or

State.

Following additional argument on June 22, 1982, the

Bankrupte i

to undertake a cleanup of the sites Was recognized by Judge

DeVito. He found that:

The City and State are in a better position in every

respect than either the trustee or debtors’ creditors

to do what needs to be done to protect the publie

against the dangers posed by the PCB contaminated

facility .. . for this Court to grant the relief re-

quested by the Attorney General] would de little else

than to put into play an exercise in futility, and

would possibly delay the parties who could be

chargeable with the cleanup of the property or who

have other interests to permit them to move in.

That should go forth as quickly as possible and

I think this determination will work in that diree-

tion.

(App. K, infra, 73a to 74a). The claim to entitlement to a

lien was rejected by the Court as unauthorized under the

Bankruptey Code, An Order incorporating the terms of

the Court’s oral decision Was entered on July 7, 1982, effee-

tive June 22, 1982, nunc pro tune. (App. J, infra, 66a to

68a).

Notices of Appeal to the District Court were filed on

July 16, 1982. Oral argument was conducted before the

Honorable Frederick B. Lacey, United States District

Court Judge, on January 24, 1983. At that time, and ina

Memorandum Opinion, (App. G, infra, 52a to 60a), Judge

Lacey aflirmed the decision of the Bankruptey Court. The

New York appeal was docketed in the Third Cireuit on

February 28, 1983,

New Jersey

In addition to the Long Island facility, Quanta operated

a waste oil facility located at 1 River Road, Edgewater,

New Jersey which consisted of storage and product tanks

and equipment for the processing of oil. In June, 1981,

a sampling of the waste oil at the site by the New Jersey

Department of Environmental Protection (“NJDEP”)

determined that levels of PCB’s were present in the oil

in excess of the levels permitted under the temporary

operating authorization issued in 1978. On July 2, 1981,

Quanta agreed to cease its operations upon NJDEP’s re-

quest. NJDEP further directed that certain remedial

steps be undertaken by Quanta, The filing of the bank-

ruptey petition intervened.

For the Trustee to implement the remedial measures

would have exhausted the entire estate. The Trustee

simply did not and docs not have resources adequate to

maintain and protect the site much less implement re-

medial actions. Under such circumstances, the Trustee

had no alternative but to seek authorization to abandon.

Unlike New York, the debtor did not own the New Jer-

sey real estate, and therefore the application for aban-

donment was limited to the oil in the tanks. An Order

was entered by the Bankruptcy Court on May 20, 1983,

authorizing the abandonment of the property effective

May 17, 1983 nune pro tunc, (App. I, infra, 64a to 65a).

Since the identical issue presented in the New Jersey

ease was already pending before the Court of Appeals,

a notice of appeal by agreement to the Court of Appeals

under 28 U.S.C. Section 1293(b) was filed on behalf of

the New Jersey Department of Environmental Protection

on September 21, 1983.

ll Ee:

The New York case was argued before the Court of

Appeals for the Third Cireuit on October 24, 1983. No

argument was heard in the New Jersey case. Opinions

in both matters were filed July 20, 1984, reversing the

decisions of the Bankruptcy and District Courts. The

Trustee filed a Petition for Rehearing in both matters, and

on August 16, 1984, rehearing was denied, (App. F, infra,

49a to 5la),

The Court of Appeals failed to recognize the realities in

these cases. The administration of the debtors’ estate is

virtually completed. All assets other than those aban-

doned by the Trustee have been liquidated, Distribution

was made to secured creditors at the time the assets se-;

curing their liens were sold, and administrative expenses

ineurred by the trustee, including but not limited to

salaries and use and occupancy claims, have been paid

to the extent funds were available. The Trustee has no

money from which to finance any cleanup of either facility

or to reimburse the government for its cleanup costs.

Moreover, at no time did the trustee ever have sufficient

assets to do so,

ARGUMENT

The decision of the Court of Appeals that allows

governmental units, acting under state and local laws,

to restrict the right of a bankruptcy trustee to abandon

property pursuant to 11 U.S.C. Section 554(a) and

require the trustee to expend and distribute the assets

of the estate in a manner other than required under

the Bankruptcy Code should be reviewed by this Court

because this is an issue of profound importance to the

administration of the federal bankruptcy laws which

has not been, but should be, settled by the Supreme

Court, and because the Court of Appeals decided a

federal question in a way in conflict with applicable

decisions of the Supreme Court.

A. The decision of the Court of Appeals is contrary to this

Court’s rule of construction announced in NLRB v.

Bildisco & Bildisco, 104 S. Ct. 1188 (1984), in judici-

ally inserting an exception into the Bankruptcy Code

where no such exception was intended or included

by Congress.

As one basis for conditioning the trustee’s right to

abandon, the Court of Appeals referred to the automatic

stay provisions of Section 362 of the Bankruptcy Code,

11 U.S.C. Seetion 362, which provide that “the commence-

ment or continuation of an action or proceeding by a

vovernmental unit to enforce such governmental unit’s

police or regulatory power” is not stayed by the filing of

a bankruptey petition. 11 U.S.C, Section 362(b) (4).

In NLRB y. Bildisco & Bildisco, 104 8. Ct. 1188 (1984),

it was argued that collective bargaining agreements were

not ineluded within the general scope of Section 365(a)

of the Bankruptey Code, 11 U.S.C. Section 365(a), relating

to executory contracts. Relying upon the fact that Section

1167 expressly exempted collective bargaining agreements

subject to the Railway Labor Act, but granted no similar

exception to agreements subject to the National Labor

Relations Act, the Supreme Court stated:

Obviously, Congress knew how to draft an exclusion

for collective bargaining agreements when it wanted

to; its failure to do so in this instance indicates

that Congress intended that Section 365(a) apply

to all collective bargaining agreements covered by

the NLRB.

Id. at 1195. Here too it must be assumed that Congress

knew how to draft an exclusion for governmental actions

when it wanted to do so, such as in the ease of exception

to the automatic stay pursuant to 11 U.S.C., Section 362(a).

The failure of Congress to include such an exception in

Section 554(a) indicates Congress’ intent that the trustee’s

right to abandon pursuant to Section 554(a) not be sub-

ject to any exception for action by governmental units.

As stated by District Court Judge Lacey in his opinion

affirming the abandonment of the Long Island City facility,

“reliance on Section 362 actually undercuts appellant's

argument,” (App. G, infra, 60a), there being no compar-—

able exception for governmental actions contained in See-

tion 554(a) of the Code.

B. The construction of Section 554(a) of the Bankruptcy

Code advanced by the Court of Appeals is inconsistent

with the decision of the Supreme Court in United States

v. Security Industrial Bank, 459 U.S. 70 (1982), and

is violative of the “takings clause” of the Fifth Amend-

ment.

As pointed out by Judge Gibbons in his dissenting

opinion in the Third Circuit, this Court in United States

v. Security Industrial Bank, supra, held that:

The Bankruptcy Act should not be construed to

destroy the interest of creditors when a substantial

question arises as to whether the act constitutes

a taking of property without just compensation,

(App. A, infra, 28a). Quoting from Security Industrial

Bank, Judge Gibbons stated that the holding was a corol-

lary of the longstanding doctrine that the Court is obli-

gated:

First (to) ascertain whether a construction of the

statute is fairly possible by which the constitu-

tional question may be avoided .. . similarly, in the

absence of a clear expression of Congress intent

... (a court should) decline to construe the Act

in a manner which could in turn call upon the

Court to resolve difficult and sensitive questions

arising out of the guarantees of the “takings

clause”. (Citations omitted).

(App. A, infra, 28a)

The majority’s construction of Section 554(e) of the

Bankruptcy Code raises a substantial question under the

“takings clause” of the Fifth Amendment, U.S. Const.,

Amend. 5,‘ since the requested cleanup of the properties

4The dissenting-opinion contained the following discussion on

this point:

The “taking” concern has been raised previously:

[T]he public interest cannot demand the erosion of the

bankrupt’s assets to the point of confiscating practically the

entire estate. At some point the extent and degree of taking

runs into the constitutional prohibition in the Fifth Amend-

ment [on] the taking of private property for public use

without just compensation.

(.:ootnote continued on following page)

would completely exhaust the assets of the estate, both

secured and unsecured. A construction of Section 004(a) of

the Code is available, however, which would avoid this

difficult constitutional question. Section 004(a) provides

that:

After 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.

11 U.S.C. Section 554(a). There is no question here but

that the two facilities were burdensome to the estate

and of inconsequential value to the estate.® Having satis-

fied this criteria, the plain language of Section d04(a) per-

mits abandonment in both cases, thereby avoiding the

constitutional question under the “takings clause” of the

Fifth Amendment.

(Footnote continued from preceding page)

In re New York, New Haven and Hartford Railroad Co.,

330 F. Supp. 131 147 (D. Conn 197): see also H.R. Rep.

No. 595, 95th Cong. Ist Sess. 423 (1977), reprinted in

1978 U.S. Code Cong. & Ad. News, 59603, 6379:

Subsection (a) [11] U.S.C. Section 1170(a) permits the

court to authorize the abandonment of a railroad line if the

abondonment is consistent with the public interest and either

in the best interest of the estate or essential to the formu-

lation of a plan... The authority to abandon or not to

abandon lines of railroad is, of course, subject to the fifth

amendment of the Constitution, which may in_ particular

cases require abandonment in order not to erode a secured

creditor’s interest in the debtor’s property even though the

public interest dictates otherwise.

(App. A, infra 29a to 30a).

* The majority held that “this factual finding is no: challenged

on appeal.” (App. A, infra 5a).

Under the holding of United States v. Security Indus-

trial Bank, supra, the Court must read Section 554(a) in

such a manner as to avoid the constitutional question. Ac-

cordingly, Section 554(a) must be read as permitting

abandonment under the facts of this case. This Court

should grant this petition for certiorari in order to insure

conformity with the Security Industrial Bank decision.

C. 28 U.S.C. Section 959(b) does not constitute a bar to

abandonment by the Trustee.

Following a lengthy analysis of the provisions of 28

U.S.C. Section 959(b), the Court of Appeals admitted that

Section 959(b) was “not itself an independent prohibition

of the trustee’s abandoning property in contravention of

state law ...”, and that the seope of the section could be

construed as limited to administration of the debtor’s

business as a going concern (App. A, infra, 17a). The

Court further cited the interpretation of Section 959(b)

found in Moore’s:

But Section 959(b) applies only to the receiver in

his operation of the property in his possession. It

does not require the federal receivership court to

comply with state laws regulating the distribution

of funds in receivership, although Erie R. Co. v.

Tompkins should now require it to do so in cases

involving only unon-federal matters. (emphasis

added)

7-pt 2 Moore’s Federal Practice, 66.04[4] at 1913 (J.

Moore & J. Lucas 2d ed. 1982) (footnotes omitted), Since

Section 959(b) is not an independent bar to abandonment,

can reasonably be construed as limited in scope to an on-

going business, and since the only cited authorities sup-

port this limitation, it is respectfully submitted that 28

U.S.C. Section 959(b) does not prohibit abandonment by

the trustee in this case.

D. Abandonment of property of the estate by a Trustee

in Bankruptcy in accordance with 11 U.S.C. Section

554(a) does not violate state laws or regulations.

The Court of Appeals made a fundamental mistake in

its statement of the issue presented on appeal, The ma-

jority opinion in Case No, 83-5142 states the issue as:

Does 11 U.S.C. Section 554 (1982) permit the aban-

donment of property of the bankrupt estate in con-

travention of state and lecal environmental protec-

tion laws?

(App. A, infra, 3a). Again in Case No, 83-5730, involv-

ing the New Jersey site the court held that:

The trustee does not have the right to abandon

property of the estate where abandonment contra-

evenes state public health and safety laws, as it does

here.

(App. B, infra, 39a). In each ease, the majority made

an assumption, not supported by fact or law, that aban-

donment by the Trustee would violate state law.

The issue should be stated as whether governmental

units, acting under state and local laws, can restrict the

right of a trustee to abandon property pursuant to the

federal Bankruptey Code anc require that the trustee

expend and distribute the assets of the estate in a manner

other than that required under the Bankruptey Code. It

is respectfully submitted that this is a question of vital

importance in the administration of the Bankruptcy Code

which should be settled by this Court.

The history and purpose of abandonment under the

prior Bankruptcy Act and the present Bankruptcy Code

indicate that the right has evolved from a “judge made

rule” to a congressionally recognized power under the

Bankruptcy Reform Act of 1978.° Discussing the back-

ground and legislative history of a trustee’s right to aban-

don property of the estate, Collier states that:

No provision, however, specifically dealt with the

abandonment of burdensome property in liquidation

cases. By analogy to the trustee’s power to reject

executory contracts, cases under prior law permitted

the trustee to abandon property that was either

worthless or overburdened, or for any other rea-

son when it was certain that the property would

not yield any benefit to the general estate. This prac-

tice furthered the paramount purpose of bankruptcy

liquidation: the reduction of the debtor’s property

to money as expeditiously as practicable so as to

secure funds for distribution to general creditors.

Forcing a trustee to retain and administer prop-

erty that was valueless or unprofitable is contrary to

that purpose. (emphasis added)

4 Collier on Bankruptey, Section 554.01 (15th Ed.) Col-

lier goes on to state that:

Former section 70a of the Act vested title to the

debtor’s property in the trustee. Abandonment then

divested the trustee of this title and revested it in

the debtor. Under Section 541, the Trustee no longer

® As such, decisions under the prior Bankruptcy Act relied upon

by the Court of Appeals are not persuasive authority. See Otten-

heimer v. Whitaker, 198 F. 2d 289 (4th Cir. 1952), affirming 102

F. Supp. 913 (D. Md. 1952), and In re Lewis Jones, 1 B.C.D.

277 (Bk. Ct. E.D. Pa. 1974).

takes title to the debtor’s property, and, upon aban-

donment under Section 554, the trustee is simply

divested of control of the property because it is no

longer part of the estate. Thus, abandonment con-

stitutes a divesture of all interests in the property

that were property of the estate.

4 Collier on Bankruptcy, Section 554.02 (2) (15th Ed.)

When a trustee abandons property, the property stands

as if no bankruptcy had been filed. The property reverts

back to the debtor as of the date of the commencement

of the proceedings. In effect, the debtor is treated as hav-

ing owned it continuously. Mason y. CIR, 646 F, 2d 1309

(9th Cir. 1980). Liens encumbering property abandoned

by the trustee are not affected, and the debtor holds in

the same manner as prior to the filing of the bankruptcy.

In re Tarpley, 4 BR 1945 (Bktey Ct. Tenn. 1980). The

Trustee is deemed to have never had title to or custody

of the property.

Upon abandonment, the trustee here stands as if he

never had an interest in either facility. He has neither

taken any action nor refrained from taking any action

that would subject him to liability under state or local

laws. To suggest that the trustee could be personally

exposed to criminal sanctions solely by virtue of his

appointment by a federal court to serve as a trustee in

bankruptey is proof of how the objectives of the Bank-

ruptey Code will be frustrated by the Court of Appeals’

decision.

It would be a different matter, of course, if the trustee

had actually operated the property in his possession,

which post-petition operation resulted in violations of en-

vironmental laws. Here, however, the trustee did not

operate either facility. To equate the trustee’s sole act

of taking custody of the property between the date of

his appointment and the date of the abandonment to a

disposal of hazardous wastes in violation of federal, state

and local environmental laws quite obviously is a strained

interpretation of the concept of abandonment. There being

no violation of law on the part of the trustee, the trustee

cannot be denied the right to abandon assets of the estate

based upon these laws. For the trustee not to abandon

this property would be violative of his duties enumerated

in 11 U.S.C. Section 704. The trustee’s duty to abandon

unprofitable property is also stressed in Im re Harper,

175 F. 412 (N.D.N.Y. 1910); In re Zehner, 193 F. 787

(A. D. La. 1912); In re Watts, 19 F.2d 526 (E.D. La.

1927); and Bowman vy. Towery, 207 Okla. 4, 248 P. 2d

1030 (1952).

E. The decision of the Court of Appeals will frustrate

effectuation of the objectives of federal bankruptcy

legislation.

How are claims of state and local governmental for en-

vironmental cleanup costs to be treated in liquidation pro-

ceedings under the Bankruptcy Code? It is respectfully

submitted that the decision of the Court of Appeals on this

question is contrary to several provisions of the Bank-

ruptey Code and wil! effectively render bankruptey admini-

stration in the circumstances of this case impossible,

1. Courts cannot create categories of priorities or ad-

ministrative expenses not recognized by the Bank-

ruptcy Cede.

Courts have consistently held that the original and

primary purpose of bankruptcy legislation is the reduction

of the debtors’ property to money as expeditiously as

—

EE ————

practical, and a fair and equitable distribution of the

property of the debtor to and among his creditors. States,

by means of their own laws, cannot devise preferences

among creditors of the debtor which the federal bank-

ruptey law does not recognize. In re Universal Money

Order Co., 470 F. Supp. 869 (S.D. N.Y. 1977) ; In re Good

Deal Supermarkets, Inc., 384 F. Supp. 87 (D. N.J. 1974).

The governmental authorities in these cases are seeking

to compel the trustee to retain and administer property

which is valueless and unprofitable, and to expend assets,

which would otherwise be available for distribution to

creditors, to maintain the property and dispose of the

hazardous wastes located on the sites. In effect, the states

are attempting to obtain a preference of one class of

ereditors over another, contrary to the express provisions

and purposes of the Bankruptey Code. Under such cir-

cumstances, the Supremacy Clause of Article VI of the

Constitution demands that the conflict between the Bank-

ruptey Code and state legislation be reselved in favor of

the Bankruptcy Code. Abandonment must be permitted.

Although the Court of Appeals recognized that “state

law regulating the distribution of assets among creditors

must give way to the all encompassing law of creditors’

rights”, (App. A, infra, 18a) the Court failed to recognize

that, in effect, the denial of the trustee’s right to abandon

will result in a distribution of assets among creditors pur-

suant to state law rather than federal law. This result

clearly is wrong, and frustrates the full effectuation of

the objectives of federal bankruptcy legislation.

For the Court to say that the trustee must finance the

cleanup would require a rearrangement of the priority

of distribution not envisioned by the Bankruptey Code.

Secured and unsecured creditors would be required to pay

for the cleanup of the facilities. The result would be to

transfer the cost to parties who were in no way responsible

for placing the contaminated oil on the sites. If the Court

insists that the cost of cleanup be borne by the innocent,

then it is the innocent public who should carry that burden

not a select innocent few. As noted by Judge Gibbons,

one result is:

Transferring the cost of cleanup to secured and

unsecured creditors of the debtor, in this instance

outside New York, who have no interest whatever

in the Long Island City property, and who, on the

record before us, were in no way responsible for

placing the contaminated oil on that site.

(App. A, infra, 29a).

The question of the right of governmental units to

priority or administrative expense status was addressed

by Congress in connection with the enactment of the ex-

ception to the automatic stay provisions. 11 U.S.C. See-

tion 362. The Congressional House Report Comments on

Section 362 include the following:

Paragraph (4) excepts commencement or continu-

ation of actions and proceedings by governmental

units to enforce police or regulatory powers. Thus,

where a governmental unit is suing a debtor to pre-

vent or stop violation of fraud, environmental pro-

tection, consumer protection, safety, or similar police

or regulatory laws, or attempting to fix damages for

violation of such a law, the action or proceeding is

not stayed under the automatic stay.

Paragraph (5) makes clear that the exception ex-

tends to permit an injunction and enforcement of

an injunction, and to permit the entry of a money

judgment, but does not extend to permit enforce-

ment of a money judgment. Since the assets of the

debtor are in the possession and control of the bank-

ruptecy court and since they constitute a fund out of

which all creditors are entitled to share, enforce-

ment by a governmenial unit of a money judgment

would give it preferential treatment to the detri-

ment of all other creditors.

ILR. Rep. No. 595, 95th Cong, First Sess. 343 (1977),

reprinted, in (1978), U.S. Code Cong. & Ad. News 5963,

6299. The intent to deny priority or preferential treat-

ment is clear.

As pointed out in the decision in In re Charles George

Land Reclamation Trust, 30 BR. 918 (Bkrptey Ct. D. Ma.

1983), Congress had an additional opportunity to con-

sider the question of the priority of federal and state gov-

ernmental claims for cost of cleaning up hazardous sub-

stances. A bill introduced by Rep. Florio on September 25,

1982 (H.R. 1972) would have given priority to such claims.

The bill was defeated. The fact that it was necessary to

introduce such a bill also indicates that such priority is not

accorded to these claims under the present bankruptcy

code.

Upon the failure of a landowner to implement cleanup

measurers, both the New York and the New Jersey Sta-

tutes relied upon by respondents below are similar in

result. If the state undertakes cleanup of the property

and disposes of the hazardous waste, the state then be-

comes entitled to a lien.’ By way of example, the New

7The City of New York filed a Proof of Claim on October 7,

1982, in the sum of “approximately $5,000,000.00”, The City

claimed a lien pursuant to New York City Administrative Code

Section 564.245 upon the Long Island City premises “for all

expenses incurred by the City of New York in securing, removing

and properly disposing the materials unlawfully placed there by

the debtor.”

(Footnote continued on following page)

Jersey Spill Compensation and Control Act, N.J.S.A.

58 :10-23.11, et seq. creates:

A first priority claim and lien paramount to all other

claims and liens upon the revenues and all real and

personal property of the discharger, whether or not

the discharger is insolvent.”

N.J.S.A. 58:10-23.11f. The claim and liens arise upon

any expenditure by the administrator of the New Jersey

Spill Compensation Fund.

In this case, the City and State of New York, upon

abandonment by the Trustee, received exactly what they

claim they are entitled to, a lien on the New York prop-

erty of the debtor. New Jersey, not yet having made any

expenditures, is not entitled to a lien. If and when New

Jersey does expend money, it will be free to pursue its

remedies against the real property in Edgewater, New

Jersey. Since no expenditures were made by any govern-

mental units prior to the filing of the bankruptcy petition,

the asserted liens were not perfected or enforceable on the

date of the filing, and are therefore avoidable by the

Trustee. 11 U.S.C. Section 545.

(Footnote continued from preceding page)

The New York State Department of Environmental Conser-

vation filed a Proof of Claim on July 14, 1982 in an amount “to

be determined”. The claim states that the cost of removal and

disposal of waste oil and other hazardous substances constitutes

its clam. New York State also claimed a first lien on the Long

Island City property.

The proof of Claim of the New Jersey Department of Environ-

mental Protection, filed July 20, 1982, asserts that it is a “claim

for an administrative expense of the estate which should be given

priority over all secured claims of the estate”. New Jersey further

claimed “that all money received by the Trustee from the sale of

oil or equipment at the facility in Edgewater should be applied

toward the proper closure and cleanup of the facility”.

New York and New Jersey further appear to seek a

“super-priority” status for their claims such as that con-

templated by 11 U.S.C. Section 364(¢). Nowhere in the

Bankruptey Code can there be found an express or im-

plied intent to accord such status to any claims other than

those expressly set forth in the Code.

As to whether the claims of New York and New Jersey

could be accorded administrative expense status under

11 U.S.C. Seetion 503(b)(1)(A), Judge Gibbons, in his

dissenting opinion, characterized as “preposterous” the

contention that the cleanup costs for assets which are of

no value to the estate could be classified as ‘“‘necessary

costs and expenses of preserving the estate.” 11 U.S.C.

Section 503(b)(1)(A). While, as noted by the majority,

the categories enumerated in Section 503 are not exclusive,

it is clear thet all categories relate to preservation of the

estate. In no way will a cleanup of the properties benefit

or preserve the estate. The only result can be the ex-

haustion of all assets of the estate, and the denial to all

other creditors of the right to share in the distribution

of the estate.

2. There exists no basis for subordination of admini-

strative, secured, and other unsecured claims to the:

claims of New York and New Jersey.

What the state and local governmental units effectively

seek here is a subordination of all other claims, whether

secured, super-priority, administrative or unsecured, to

their claims. New York seeks reimbursement of the $2.5

million it expended subsequent to the trustee’s abandon-

ment of the Long Island City site. New Jersey, not having

spent any money, seeks to compel the Trustee to under-

take removal of hazardous materials from the Edgewater,

New Jersey site. In any event, the states want these claims

to be paid first. New York in seeking to reach assets of the

debtor located in New Jersey, actually seeks more than

its own statute permits.

Under Section 510 of the Bankruptcy Court, 11 U.S.C.

Section 510, courts have jurisdiction to subordinate, on

equitable grounds, all or any part of an allowed claim or

interest to all or any part of another allowed claim or

interest. The Code provides:

Section 510. Subordination

section, after notice and a hearing, the court may—

(1) under priniciples of equitable subordination,

subordinate for purposes of distribution all or part

of an allowed claim to all or part of another

allowed claim or all or part of an allowed interest

to all or part of another allowed interest; ...

Before the Bankruptcy Court will exercise its power of

equitable subordination, however, three conditions must

be satisfied:

(1) The claimant must have been engaged in some type

of inequitable conduct ;

(2) The misconduct must have resulted in injury to

creditors of the bankrupt or conferred an unfair advant-

age on the claimant, and

(3) Equitable subordination of the claim must not be

inconsistent with the provisions of the Bankruptey Act.

Matter of Mobil Steel Company, 563 F. 2d 692, 700 (5th

Cir, 1977); In re American Lumber Company, 5 B.R. 470

(D.C. Minn, 1980). The fundamental aim of subordination

——— Ne eeeEEeeEEeEeEeEeeer ee eee

is to undo or to offset any inequity in the claim position

of a ereditor that will produce injustice or unfairness to

other creditors in terms of the bankruptey result. In re

Kansas City Journal-Post Co., 144 F. 24 791 (Sth Cir. 1944) ;

In re Westgate-California Corp., 642 F. 2d 1174 (9th Cir,

1981). Generally, the claim will not be subordinated un-

less it is shown that the claimant has acted inequitably in

the course of his relationship with the debtor and that

those activities have harmed the debtor or his other eredi-

tors in some way. In re Ahlswede, 516 F. 2d 784, 788 (9th

Cir. 1971); In re Westgate-California, supra.

Included in the legislative history to Section 510 is the

following:

It is intended that the term “principles of equitable

subordination” follow existing case law and leave

to the courts development of this principle. To

date, under existing law, a claim is generally sub-

ordinated only if holder of such claim is guilty of

inequitable conduct, or the claim itself is of a status

susceptible to subordination, such as a penalty or a

claim for damages arising from the purchase or sale

of a security of the debtor. The fact that such a

claim may be secured is of no consequence to the

issue of subordination. However, it is inconceivable

that the status of a claim as a secured claim could

ever be grounds for justifying equitable subordin-

ation. 124 Cong. Ree. H 11,095 (Sept. 28, 1975);

S 17,412 (Oct. 6, 1978). |

There is no basis for the subordination sought by re-

spondents. There has been no allegation, and there exists

no basis for any allegation, that the Trustee or any other

creditor engaged in any inequitable conduct or misconduct

which harmed the debtor or respondents. There is no basis

in the Bankruptcy Code or case law for subordination of

any claims of New York and New Jersey.

3. Under the circumstances of this case, a Trusice in

Bankruptcy has no alternative but to refuse appoint-

ment or, once having accepied appoiniment, to

resign.

Where is a trustee in bankruptey left under the decision

of the Court of Appeals? Does he remain the owner of the

property forever? Which site must be cleaned first—New

York or New Jersey? Can he be subject to criminal sane-

tions or personal liability for costs of cleanup? Can the

estate never be closed? Can creditors be charged with the

cost of cleanup? These and many other important ques-

tions are left unanswered.

A good example of the frustration of the purposes of

federal hankruptey law which will result is found in the

ease of In re Charles George Land Reclamation Trust,

30 BR. 918 (Bkrtey. D.Ma. 1983). The debtor in that

case owned and operated a waste disposal facility. Prior

to the filing of a bankruptcy petition, the debtor had

entered into a consent judgment with the Commonwealth

of Massachusetts requiring the debtor to undertake certain

actions to bring the facility into compliance with environ-

mental laws and regulations. The required remedial

actions had not been completed as of the filing of the

bankruptcy petition. The Commonwealth of Massachu-

setts argued before the Bankruptey Court that any trustee

would have to immediately rectify the violations of law

or otherwise find himself in violation of 28 U.S.C. See-

tion 959(b). As a result, no private panel member would

agree to serve as trustee. The United States Trustée, as

a default trustee under 11 U.S.C, Section 15701(b), then

brought an emergency motion for dismissal. This motion

was granted. The present uncertain status of the law

in this area, which resulted in the refusal of anyone to

serve as trustee, was the reason.

To allow the decision of the Court of Appeals to stand

would effectively preclude orderly liquidation of any

debtor’s estate where the debtor was under an obligation

at the time of filing bankruptcy proceedings to take any

remedial action under any other federal or state legi-

slation. Nowhere in the Bankruptey Code ean there be

found a legislative intent to deny such debtors the rights

and protections under the Bankruptey Code. Quite to the

contrary, the Code evidences a congressional intent that

claims of governmental units for environmental cleanup

not be accorded priority or administrative expense status,

but rather share with all other creditors in the distribution

of the estate.

F. This court should grant certiorari.

We believe that there are special and important reasons

for this Court to grant review on writ of certiorari. We

have attempted to illustrate as concisely as possible how

extensively the decision of the Court of Appeals will fru-

strate the objectives of bankruptey. The uncertainty in

bankruptey law today due to the absence of a definitive

answer on this issue from the Supreme Court has made

administration of estates of debtors involved in any way

with hazardous materials at the very least difficult and

dangerous for trustees, if not impossible. The complete

reordering of priorities which can result from the decision

of the Court of Appeals should be reviewed and settled

by this Court. This Court should also review the decisions

in light of the apparent inconsistencies with applicable

decisions of the Supreme Court.

CONCLUSION

Based upon the foregoing it is respectf ully submitted

that this Petition for a Writ of Certiorari to the United

States Court of Appeals for the Third Circuit be granted.

Respectfully submitted,

Tuomas J. O’Nemu

Notan, O’Nemu & Moore

Counsel of Record for Petitioner

60 Park Place

Newark, New Jersey 07102

(201) 643-6300

Dated: November 14, 1984

APPENDIX A

Opinion of the United States Court of Appeals for the

Third Circuit (No. 83-5142)

In the Matter of:

QUANTA RESOURCES CORP.,

a corporation of the State of Delaware

Debtor

THE CITY OF NEW YORK and

THE STATE OF NEW YORK

Vv.

QUANTA RESOURCES CORP.,

a corporation of the State of Delaware

State of New York

and City of New York

Appellants

On Appeal from the United States

District Court for the

District of New Jersey

(Civil Action No. 82-3524)

Argued October 24, 1983

Before: GIBBONS, GARTH, and

HIGGINBOTHAM, Circuit Judges

(Opinion Filed July 20, 1984)

Robert Abrams, Esq.

Attorney General of the State

of New York

Appendix A

Bery! Kuder

Nancy Stearns

Norman Spiegel, Esq. (Argued)

Assistant Attorneys General

Of Counsel

2 World Trade Center

New York, New York 10047

Frederick A. O. Schwartz, Jr.

Corporation Counsel for the

City of New York

Gary Tarnoff, Esq.

Of Counsel

Assistant Corporation Counsel

100 Church Street

New York, New York 10007

Attorneys for Appellants

William F. McEnroe, Esq. (Argued)

Nolan Bell and Moore

60 Park Place

Newark, New Jersey 07102

Attorneys for Thomas J. O'Neill

Trustee-Appellee

Leroy S. Zimmerman, Esq.

Attorney General of Pennsylvania

1641 Strawberry Square

Harrisburg, Pennsylvania 17120

James D. Morris, Esq.

Howard J. Wein, Esq.

Assistant Counsel

Commonwealth of Pennsylvania

Department of Environmental

Resources

Office of Chief Counsel-Eastern

Region

Suite 1200 - 1315 Walnut Street

Philadelphia, Pennsylvania 19107

Appendiz A

Irwin I. Kimmelman, Esq.

Attorney General of New Jersey

Hughes Justice Complex - CN 112

Trenton, New Jersey 08625

Attorneys for Amici

GARTH, Circuit Judge:

This case presents an issue of major importance

under the Bankruptcy Reform Act of 1978: does 11

U.S.C. § 554 (1982) permit the abandonment of

property of the bankrupt estate in contravention of

state and local environmental protection laws? In

proceedings before the bankruptcy court, the trustee

in bankruptcy here asserted the power to abandon a

waste oil processing and storage facility. He was

opposed by the State and City of New York, who argued

that the trustee’s power was limited by state and local

laws regulating the abandonment of hazardous wastes.

The bankruptcy court granted permission to abandon.

The district court affirmed the bankruptcy court. We

reverse.

Quanta Resources Corp. (Quanta), which owned

and operated a waste oil storage and processing facility

in Long Island City, New York (the geographic center of

New York City), filed a voluntary petition in bankruptcy

under Chapter 11 of the Act on October 6, 1981. The

action was converted to a liquidation proceeding under

Chapter 7 on November 12, 1981. Thomas J. O'Neill

(Trustee), the appellee here, was appointed trustee in

bankruptcy on November 18, 1981.

The Trustee filed a notice of intention to abandon

Appendiz A

the facility under 11 U.S.C. § 554. That section

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.” At the time of the notice there were

on the site fuel storage tanks containing more than

500,000 gallons of waste oil and other chemicals, of

which at least 70,000 gallons were contaminated with

polychlorinated biphenyls (PCB's).

PCB's are extremely hazardous chemicais.'

Reflecting the hazards associated with these

compounds, numerous federal, state, and loca! iaws

govern the storage and disposal of PCB's. E.g., 15

U.S.C. § 2605(e) (1982); 40 C.F.R. §8 761.1-761.80

(1983); N.Y. Envtl. Conserv. Law 88 27-0900 to

27-0923 (McKinney Supp. 1982); N.Y. Admin. Code

Tit. 6. § 366.4(e) (1982); New York, N.Y. Admin. Code

§ C19-50.0. Compliance with these laws would have

required substantial expenditures to guard, repair,

and clean up the facility and to dispose of the waste.’

The Trustee's notice of intention to abandon was

predicated on the assertions that the requisite

expenditures would render the property a burden on

1. PCB's are themselves toxic. See generally Nat'l. Rsch.

Council Comm ’ee on the Assessment of Polychlorinated Biphenyls

in the Environment, Polychlorinated Biphenyls (1979). Their

oxidation products (produced upon burning PCB's) are also toxic.

Among the oxidation products of PCB's are polychlorinated

dibenzo-p-dioxins (the so-called “dioxins”) and polychlorinated

dibenzo forans, which are powerful carcinogens, teratogens, and

liver toxins. Affidavit of Dan Levy, New York State Department of

Law Environmental Scientist, App. 19 - 22.

2. At the time of the hearing, Quanta was evidently in violation

of a consent order requiring it to bring the facility into compliance

with state law. See Transcript of Bankruptcy Proceedings. June 8,

1982, at 25.

Appendix A

the estate, and that the property would be of

inconsequential or no value to the estate.

At the time of proposed abandonment, the site was

subject to two mortgage liens.’ Although there were

objections filed to abandonment, there was no dispute

as to the fact that the requisite expenditures would

rapidly dissipate whatever equity there was in the

property. Thus, the bankruptcy court found that the

property was burdensome and of inconsequential or no

value to the estate.*

The objections to abandonment filed by New York

asserted that abandonment of the property would itself

violate state and local law. This is because

“abandonment” under Section 554 revests title subject

to liens in Quanta,°* which has no other assets, having

lost title to these in favor of the estate upon

commencement of the bankruptcy case. 11 U.S.C.

§541 (1982). Quanta was itself, then, unable to act

3. On March 18, 1982, the Trustee had filed a notice of

intended “saie by public auction as abandonment” of the site. The

notice stated that if the Trustee did not receive an offer in excess of

a lien of the Equitable Life Assurance Society, the property would

be abandoned. Objection to the sale was filed by Portland Holding

Corp. based on an asserted mortgage lien; the bankruptcy court

entered judgment establishing the validity of that lien. An offer to

purchase the property subject to the liens was approved by the

court, but was subsequently withdrawn on the ground that there

were hazardous wastes stored there in violation of law, and that

this had not been made known to the purchaser. See Transcript of

Bankruptcy Court Proceedings, June 8, 1982, at 12. These liens

were later abandoned. See Affidavit of Nancy Stearns, annex;

Affidavit of Carol Moore, Exh. B.

4.‘ This factual finding is not challenged on appeal.

5. Abandonment is to any person with a possessory interest in

the property, including the debtor, See S. Rep. No. 989, 95th

Cong.,. 2d Sess. 93 (1978), reprinted in 1978 U.S. Code Cong. & Ad.

News 5879.

Appendix A

with respect to the site. Thus abandonment would, in

effect, constitute disposal of the hazardous wastes, see

N.Y. Envtl. Conserv. Law § 71-7702 (McKinney Supp.

1982) (“disposal”). In addition, abandonment of the

facility in its then state of disrepair, itself irremediable

by Quanta, would create a continuing violation of state

and local hazardous waste storage laws, see supra.

New York asserted, therefore, that because these

laws are designed to decrease the risk of uncontrolled

toxic chemical discharge, abandonment would create a

substantial danger to the public health and safety.

Thus New York requested that permission to abandon

be denied until all hazardous wastes were removed

from the property and lawfully disposed of. New York

grounded its objection in both “public policy

considerations” reflected in the applicable local laws

and the provisions of 28 U.S.C. § 959(b) (1982), which

requires that a trustee “manage and operate its

property in his possession as such trustee. . .

according to the requirements of the valid laws of the

State in which such property is situated, in the same

manner that the owner or possessor thereof would be

bound to do if in possession thereof.”

After a hearing, the bankruptcy court rejected New

York's objections and issued an order, on July 7, 1982,

permitting abandonment. The court refused to stay the

order pending appeal, and refused to grant New York a

first lien on the property to the extent of any monies

that New York might expend to bring the abandoned

property into compliance with law. In fact, following

the abandonment New York did proceed to clean up the

facility,° with the exception of contaminated subsoil, at

a cost of about $2.5 million (Affidavit of Richard

Mendes).

6. See N.Y. Envtl. Conserv. Law § 27-0916 (McKinney Supp.

1982).

Appendix A

New York appealed to the district court from the

bankruptcy court's order, without raising the question

of New York's right to a first lien. The district court

affirmed on January 24, 1983. New York appealed to

this court. The: Commonwealth of Pennsylvania and

the State of New Jersey submitted briefs as amici

curiae. The questions raised by New York in this

appeal are the propriety vel non of abandonment, and

New York's right to reimbursement for its cleanup

costs as an administrative expense, see 11 U.S.C.

§§ 503(b), 507(a).

II.

Where it is contended, as it is here, that federal law

confers a power that is not limitable by state law, the

supremacy clause, U.S. Const. Art. VI, cl. 2, requires

that we determine whether application of the state law

frustrates the full effectuation of the objectives of

federal bankruptcy legislation. Perez v. Campbell, 402

U.S. 637, 652 (1971). In general, preemption of state

law “is not favored ‘in the absence of persuasive

reasons -- either that the nature of the regulated

subject matter permits no other conclusion, or that

Congress has unmistakably so ordained.’ ”’

Consolidated Edison v. Montana, 453 U.S. 609, 634

(1981) (quoting Florida Lime & Avocado Growers, Inc.

v. Paul, 373 U.S. 132, 142 (1963)); see Penn Terra Ltd.

v. Department of Envtl. Resources, No. 83-5448, slip

op. at 11 (3d Cir. April 30, 1984). See also Stellwagen

v. Clum, 245 U.S. 605, 613 (1918) (state laws are

suspended only to the extent of actual conflict with the

scheme of federal regulation). Thus, analysis must

proceed in two stages: first, an examination of the

primary purposes of each of the laws at issue; second, a

determination whether state law is an obstacle to the

effectuation of federal objectives. Perez, supra, 402

U.S. at 644, 649.

Appendix A

The objectives of federal bankruptcy law can be

broadly stated: to provide for an equitable settling of

creditors’ accounts by usurping from the debtor his

power to control the distribution of his assets.’ See

Kothe v. R.C. Taylor Trust, 280 U.S. 224, 226 (1930).

The purpose of a liquidation proceeding under Chapter

7, as under Chapter VII of the Bankruptcy Code, see S.

Rep. No. 989, 95th Cong. 2d Sess. 6, reprinted in 1978

U.S. Code Cong & Ad. News 5792 (new law essentially

tracks previous law), is to provide a fair distribution of

the debtor's assets among the creditors; to that end, a

trustee for the creditors is appointed by the court or

elected by the creditors. 11 U.S.C. 88 702 (election),

703 (appointment), 704 (duties). The trustee must

collect the debtor’s assets for the estate, reduce the

assets to money, and distribute the property of the

estate. Id. 88 704, 726. The abandonment power

embodied in Section 554 enables the trustee to rid the

estate of burdensome or worthless assets, and so

speeds the administration of the estate, see id. §

704(1), and also protects the estate from diminution.

In such manner, abandonment serves the creditors’

interest in expeditiously obtaining a fair amount on

settlement of their claims.

The primary purpose of the state and local laws

regulating disposal of hazardous wastes is obviously to

protect the public from the toxic effect of dangerous

. While it has been held that the old bankruptcy law advanced

a second purpose, to provide a fresh start for the debtor, e.g.,

Kokoszka v. Belford, 417 U.S. 642, 645-46 (1974) (citing

Berlingham v. Crouse, 228 U.S. 459, 473 (1913)). that purpose can

no longer be said to be advanced in present liquidation law, with

respect to nonindividuals (i.e., corporations and partnerships),

since the 1978 Act eliminated the provision for discharge of debts

of nonindividuals. 11 U.S.C. § 727(a)(1): see S. Rep. No. 989, 95th

Cong. 2d Sess. 98 (1978), reprinted in 1978 U.S. Code Cong. & Ad.

News 5884.

Appendia A

substances by preventing their uncontrolled discharge

into the environment.

On the surface, these two purposes cannot be

reconciled where the trustee legitimately invokes his

power to abandon an asset whose manner of

abandonment the state regulates. The question thus

presents itself: did Congress intend that the trustee's

abandonment power be unrestricted by public health

and safety regulations? Our examination of the

bankruptcy laws and the authorities interpreting these

laws reveals no such congressional intent.

We start with the basic assumption that Congress

did not intend to displace state law. Maryland v.

Louisiana, 451 U.S. 725, 746 (1981); Penn Terra,

supra, slip op. at 11. Where it is argued that Congress

intended to withdraw police power from a state, that

intention must be unmistakable. Penn Terra, supra,

slip op. at 11-12.

There is no legislative history of Section 554.

Although there had been no express recognition of an

abandonment power in the pre-1978 bankruptcy

statute, courts approved the trustee's exercise of such

a power as part of his larger power to dispose of the

assets of the estate. See 4A Collier on Bankruptcy

{70.42 at 502-504 & n. 4 (J. W. Moore 14th ed. 1978)

(citing cases); see also 11 U.S.C. 88 64a(4), 70a(2), 70b

(1976) (repealed 1978) (provisions contemplating

abandonment, respectively, of property against which

taxes are assessed; of rights in pending applications

for patents, copyrights, and trademarks; and of

executory contracts). Section 554 obviously codifies

this judge-made law.

Cases under prior law held that “the trustee in the

exercise of the power to abandon is subject to the

application of general regulations of a police nature.”

10a

Appendix A

4A Collier on Bankruptcy (14th ed.), supra, § 70.42(2)

at 502-04. Ottenheimer v. Whitaker, 198 F.2d 289 (4th

Cir.), affg 102 F. Supp. 913 (D. Md. 1952), held that

the trustee could not abandon four worthless barges in

a harbor, where abandonment would violate federal law

relating to the obstruction of the harbor, even though

the cost of complying with the laws would be much

greater than the value of the barges. The court

acknowledged the general rule that the trustee may

abandon burdensome property, and then held it

inapplicable.

This rule would be applicable here 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 equally true that if the

trustee abandons 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.

In that event, the barges would sink and

become an obstruction to the passage of other

vessels, and it might well be held that the bankrupt

or the trustee had become liable to the punishment

of fine or imprisonment prescribed by the statute

for the person who voluntarily or carelessly allows a

vessel to be sunk in a navigable channel. It seems

obvious to us that a rule which is not provided by

statute but built up by the courts to facilitate the

administration and distribution of the assets of a

bankrupt estate should not be extended so as to

reach such an unreasonable and unjust result.

The judge-made rule must give way when it comes

into conflict with a statute enacted in order to

lla

Appendix A

ensure the safety of navigation; for we are not

dealing with a burden imposed upon the bankrupt

or his property by contract, but a duty and a

burden imposed upon an owner of vessels by an

Act of Congress in the public interest.

198 F.2d at 290.

The concerns underlying this decision are, first,

the comparative strengths of judge-made law relative to

a conflicting statute, and second, the comparative

strengths of policies which avoid burdens to the estate

relative to the policies respecting safety of the public.

With respect to each concern, the court held that the

determinations of the legislature and the policy of

safeguarding the public were paramount.

Another case, which relied in part on Ottenheimer

and which emphasized a combination of these two

concerns, is In re Lewis Jones, Inc., 1 Bankr. Ct. Dec.

277 (Bankr. E.D. Pa. 1974). The court there held that

the trustee could not abandon underground steam

pipes, vents, and manholes, where abandonment

would infringe on the public interest by creating health

and safety hazards. Lewis Jones cited the principle

announced in S.E.C. v. United States Realty &

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 committed to it, grant

or deny relief upon performance of a condition

which will safeguard the public interest.

(citations omitted). The trustees in Lewis Jones

estimated the cost of alleviating the problems to be at

least $82,000 (plus $500 per vent to fill in each of an

unknown number of vents); there were funds of

$328.000 on hand: creditors’ claims amounted to

12a

Appendix A

$4,478,000. The court found that the cost was “not too

high a price to pay in the public interest.” The court

then ordered that permission to abandon be

conditioned on the trustees’ expending funds to fill in

and seal the steam openings.

In a case relying similarly on the court's equitable

powers, but grounding these in the jurisdiction

conferred by statute, the court held that the trustees

(in reorganization) for a railroad could not abandon

service on a branch line even though operating the line

would burden the estate with expenditures. In re

Chicago Rapid Transit Co., 129 F.2d 1 (7th Cir.), cert.

denied, 317 U.S. 683 (1942). In this case the railroad

was a public utility, subject to state regulations that

limited its power to abandon service without consent of

the state authorities. The court first noted that under

the supremacy clause, U. S. Const. Art. 6, cl. 2, the sole

federal jurisdiction im bankruptcy, “when given

expression in legislation by Congress,” supersedes all

inconsistent state laws. Id. at 4. It then observed that

the power to abandon burdensome assets was

incidental to the powers lodged in the bankruptcy

court by the statute, and that “the intent and purport

of all bankruptcy legislation, so far as the power to

protect the estate is concerned, is largely declaratory of

certain recognized equitable principles, namely: the

power of a court of equity to protect property in its

custody.” 129 F.2d at 5. But, the court reasoned, if the

traditional authority of the state .o regulate local

transportation should “be deemed withdrawn by

Congress in bankruptcy legislation, evidence of that

withdrawal in fit language should be found within the

act.” Id., citing Palmer v. Massachusetts, 308 U.S. 79

(1939). It then held that Congress had not withdrawn

the state's authority, and thus the trustees must

comply with the valid state laws. The court

distinguished the bankruptcy court's power to cancel

l3a

Appendix A

burdensome leases, so that the trustees were permitted

to cancel the lease of the line from the interstate

authority, and were ordered to continue operating the

railroad but for the account of the lessor.

By contrast, recently another court held, while

citing Chicago Transit, that the trustee for a bankrupt

hospital could not be prevented from abandoning

medical records even though a state law required

insoivent hospitals to maintain and store them. In re

Adelphi Hospital Corp., Bankr. L. Rep. (CCH) 466,882

at 76,856 (2d Cir. 1978) (per curiam). The Adelphi

court relied on the supremacy clause, and stated

simply:

It is beyond peradventure that federal law

prevails over inconsistent state laws. U.S. Const.

art. VI, cl. 2; Gibbons v. Ogden, 22 U.S. (S Wheat.)

1 (1824). This fundamental principle of American

jurisprudence of course encompasses the

bankruptcy laws. U.S. Const. art I. 88, cl. 4; see,

e.g., International Shoe Co. v. Pinkus, 278 U.S.

261, 263-65 (1929). And under federal law,

abandonment in this case is clearly permissible.

See In re Chicago Rapid Transit Co., 129 F.2d 1,

4-5 (7th Cir.), cert. denied, 317 U.S. 683 (1942).

The paramount purpose of bankruptcy

liquidation and administration is the reduction of

a bankrupt's property to money as expeditiously as

practicable, so as to secure funds for distribution

to general creditors. Hence the trustee in

examining the various assets with regard to their

potential value when converted into money for

distribution to creditors is from the outset faced

with the managerial duty to concentrate on

property of possible benefit to the estate and to

eliminate property that will be either valueless or

unprofitable in its administration. . . The trustee

l4a

Appendix A

- May abandon any property which is either

worthless, or overburdened, or for any other

reason certain not to yield any benefit to the

general estate. 4A Collier on Bankruptcy 4 70.42,

at 502 (14th ed. 1976) (footnotes omitted).

Id. at 76,857 (footnotes omitted). The court's bare

citation of Chicago Transit, which had reached an

opposite conclusion, is not very helpful. But the

passage it cites emphasizes that the state regulation at

issue was a part of public utility regulation of a service

operated for public convenience and necessity. Thus

Adelphi may be read as distinguishing state

regulations on the basis of their relative importance to

the public of their intrusiveness in the regulation of

the industry.

Ottenheimer and Chicago Transit have similar

rationales, but Ottenheimer’s stress in the judge-made

character of the power to abandon is lacking in

Chicago Transit. The two are consistent, however, in

their reluctance to override state statutes in the

absence of explicit Congressional direction:

Ottenheimer's stress on the judge-made character of

the power to abandon is comparable to Chicago

Transit's emphasis on the lack of explicit intent to

override state utility regulations. A common concern

may thus be four: i in all four noted cases: that where

important state law or general equitable principles

protect some public interest, they should not be

overridden by federal legislation unless they are

inconsistent with explicit congressional intent such

that the supremacy clause mandates their

supersession by the abandonment power.

Thus, whether the trustee's power to abandon is

limited depends in part on whether there is express

federal law that either grants superseding power or

15a

Appendix A

subjugates the abandonment power to state law even if

that law would otherwise be inconsistent. Section 554

itself refers only to the trustee's affirmative power to

abandon. Considered in the light of other provisions

that both limit the supersession of state laws and

specifically incorporate equitable principles into a

bankruptcy court's jurisdiction, it is clear that Section

554 does not of itself preempt state police power

regulations.

That Congress did not intend the bankruptcy

scheme generally to abrogate the enforcement of state

police power regulations is evidenced by, first, the

express exception to the automatic stay otherwise

imposed on all actions against the debtor, 11 U.S.C.

§ 362(a), for “the commencement or continuation of an

action or proceeding by a governmental unit to enforce

such governmental unit’s police or regulatory power.”

Id. § 362(b)(4). The exception applies “where a

governmental unit is suing a debtor to prevent or stop

violation of . . . environmental protection . . . laws, or

attempting to fix damages for violation of such a law.”

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

1978 U.S. Code Cong. & Ad. News 5838. See Penn

Terra, supra, slip op. at 15-25 (injunction to enforce

compliance with state environmental protection laws is

not money judgment, is not subject to § 362 stay);

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

Cmwith. 312, 923 A. 2d 765 (1980) (same); cf. In re

Canarico Quarries, Inc., 466 F. Supp. 1333, 1339-40

(D.P.R. 1979) (case under old law using new

§ 362(b)(4) as persuasive authority to hold not stayed a

proceeding to enforce compliance with Federal Clean

Air Act, 42 U.S.C. § 7401-7642 (1976)). See also In re

Kovacs, 681 F.2d 454, 456 (6th Cir. 1982) (discussed

in Penn Terra, supra, slip op. at 22 n.11), vacated and

remanded on other grounds, 103 S. Ct. 810 (1983), on

remand sub nom. Ohio v. Kovacs, 717 F.2d 985 (6th

l6a

Appendix A

Cir. 1983), cert. granted, No. 83-1020, 52 U.S.L.W.

3650 (U.S. March 5, 1984).

A second indication that the bankruptcy schenie is

not intended to abrogate relevant state laws is found in

28 U.S.C. 8 959(b) (1982):

(b) Except as provided in section 1166. a

trustee, receiver or manager appointed in any

cause pending in any court of the United States.

including a debtor in possession, shall manage

and operate the property in his possession as such

trustee, receiver or manager according to the

requirements of the valid laws of the State in

which such property is situated, in the same

manner that the owner or possessor thereof would

be bound to do if in possession thereof.

The trustee in this case argues that Section 959(b) is

inapplicable outside a chapter 11 proceeding (Br. at

12), where the trustee is managing the debtor's

business, see 11 U.S.C. § 1108 (1982). Even in a

chapter 7 proceeding, however, the trustee may be

authorized to operate a business. Id. § 721. Thus there

is no reason to suppose Section 959(b) inapplicable in

chapter 7.

Implicit in Section 959(b) is the notion that the

goals of the federal bankruptcy laws, including

rehabilitation of the debtor, do not authorize

transgression of state laws setting requirements for

the operation of the business even if the continued

operation of the business would be thwarted by

applying state laws. See Gillis v. California, 293 U.S.

62 (1934); In re Dolly Madison Indus., 504 F.2d 499

(3d Cir. 1974); In re Canarico Quarries, Inc., 466 F.

Supp. 1333 (D.P.R. 1979). New York argues that this

principle extends to the liquidation process,

contending that the goal of the federal bankruptcy law

here -- distribution of the assets to creditors -- does not

AO ODA IA Ete LAs cainaehy wii

——s e

eet

17a

Appendix A

authorize transgression of state laws setting

requirements for disposal of assets.

Our examination of Section 959(b) leads us to

conclude that although it is not itself an independent

prohibition of the trustee’s abandoning property in

contravention of state law, it is a clear indication that

in general the congressional scheme was not intended

to subjugate state and local regulatory laws. As a

matter of simple statutory construction, the

applicability of Section 959(b) would seem open to

question. The provision speaks in terms of

“manage|ment]” and operatjion] of the “property.” It

would not strain the language to construe

“management of the property” to include

abandonment of a facility. Nor would it be a gross

misreading to construe “manage and operate”

narrowly, to mean only the administration of the

business as a going concern. Again, we have found no

‘egislative history.

Section 959(b) refers to the railroad reorganization

provisions of the Bankruptcy Act; these permit the

court to authorize abandonment of a line if it is

consistent with the public interest. 11 U.S.C.

§ 1170(a). But since railroad reorganization is treated

as sui generis within the Act, see 11 U.S.C. § 1161,

this reference is of little relevance to the inquiry except

as it indicates that state laws are not applicable to

abandonment of a railroad line (although the extent of

their applicability in determining the public interest is

not indicated).

The trustee cites two authorities for support of a

narrow construction of the provision. One is a footnote

in Missouri v. United States Bankruptcy Court, 647

F.2d 768, 778 n. 18 (8th Cir. 1981), in which the court

stated, in dictum and without analysis, its “doubt”

that a Chapter XI trustee for a grain elevator would be

prohibited from selling grain in the exercise of his

18a

Appendix A

power to liquidate assets even though state law

required a license to sell grain. By contrast the trustee

would, by Section 959(b), be required to obtain a state

license to operate the grain warehouses. Id. at 778.

This case would seem to be authority for a distinction

between operation of a business and liquidation of its

assets. There was, however, no showing that failure to

comply with the state law in question wouid in any way

affect the public health, safety, or welfare, in contrast

to the case here. Would the 8th Circuit have so readily

dismissed the issue if the trustee had been selling

spoiled grain, in contravention of state law? Hs terse

statement is devoid of analysis and is therefore of little

help to the trustee's cause here.

The trustee also relies, as did the court below, on a

statement in a treatise:

But 8 959(b) applies only to the receiver in his

operation of the property in his possession. It does

not require the federal receivership court to comply

with state laws regulating the 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.

7-pt 2 Moore's Federal Practice, { 66.04/4] at 1913 (J.

Moore & J. Lucas 2d ed. 1982) (footnotes omitted).

This paragraph is authority for a basic distinction

between distribution of funds in liquidation and

operation of a business. Again, though, its reach is

limited. Clearly viate law regulating the distribution of

assets among creditors must give way to the

all-encompassing federal law of creditors’ rights.

American Surety Co. v. Sampsell, 327 U.S. 269, 272

(1946). It does not follow that state police power

regulations must also give way.

Chicago Transit, supra, 129 F.2d at 6, noted that

prohibiting abandonment in that case while

19a

Appendix A

permitting the trustee to cancel the lease would not

violate the predecessor to Section 959(b), 28 U.S.C.

§ 124 (1940), which required that federal receivers

operate trust property in accordance with the laws of

the state as the owner would be bound to do. There

would be no violation because the trustee was ordered

to comply with state law to the extent it required

service to be continued; but the state’s authority could

not be extended to the protection of existing contracts,

rather these could be abrogated by the court in its

exercise of equitable powers.

Chicago Transit, however, is not precisely on point

here: the state law required operation of the business,

whereas New York law here only limits abandonment

(disposal) of the facilities and does not speak to

operation of the business. Thus the Chicago Transit

case does not answer the inquiry whether Section

959(b) applies outside of the operation of a business (or

maintenance of its assets in anticipation of such). But

it would be an overly literal reading that would dismiss

wholly the import of the provision on the ground that

“abandonment” of property is distinguishable from

“management” of property. The interests at stake are

not so different; in each case the creditors have an

interest in preserving the debtor's estate so as to

maximize their proportionate recovery; indeed, when

the debtor's business is managed on a chapter 11

proceeding, there is another interest to be considered,

the debtor's interest in rehabilitating the business as a

going concern. Thus, since courts have been willing to

find Section 959(b) applicable even if these two

interests are thwarted, a fortiori it is not inapplicable

just because one interest is adversely affected.

Thus, at the very least, the existence of Section

959(b) indicates that Congress has not “unmistakably

ordained” that state law is superseded by the trustee's

powers to administer the property of the estate.

20a

Appendix A

The third, and final, consideration that informs

our decision is the provision in the bankruptcy act for

the application of equitable principles to determine the

efficacy of requested relief. In addition to the powers

given to the court in 11 U.S.C. § 105 to “issue any

order, process, or judgment that is necessary or

appropriate to carry out the provisions” of the Act, 28

U.S.C. § 1481 establishes the jurisdiction of the court

to include all the powers of a court of equity.* Under the

old bankruptcy statute, under which bankruptcy

courts had been given “such jurisdiction at law and

equity as will enable them to exercise original

jurisdiction,” 11 U.S.C. § 2 (1976) (repealed) it was

held that bankruptcy courts are courts of equity and

may apply equitable doctrines and principles insofar as

they are consistent with the statute. SEC v. United

States Realty Co., supra, 310 U.S. at 455; Pepper v.

Litton, 308 U.S. 295, 304-05 (1939).

This same proposition has been held applicable to

the 1978 Act: “[Bjankruptcy courts are courts of equity,

but at the same time, authorized to prevent courses of

conduct otherwise fraudulent, abusive or unfair.” In re

Multiponics, Inc., 622 F.2d 709, 721 (5th Cir. 1980)

(citations omitted, but citing Pepper v. Litton, supra).

Thus, since there is no unmistakable evidence of

congressional intent to abrogate the enforcement of

state environmental protection laws -- rather, there is

evidence of an intent to accommodate such laws -- and

since equitable principles must be applied, federal law

is supreme only if those principles demand that state

8. Section 1481 did not technically become effective until April

1, 1984, but transition provisions of the Bankruptcy Reform Act

vest courts with the same authority they would have as of that date.

See Pub. L. No. 598, 95th Cong.. 2d sess. 8 405(b) (1978);

Universal Minerals, Inc. v. C. A. Hughes & Co., 669 F.2d 98, 100

n.2 (3d Cir. 1981).

ssctiauiimmanemmeteiaaonsiet

Se eee

2la

Appendix A

police powers be suspended to the extent they interfere

with the liquidation of the estate.

The cases discussed supra that stand for the

proposition that equitable principles are applicabie in

determining whether a trustee may abandon property

in contravention of state law require that a court

balance the relative weight of the state and federal

policies. In this case, the state and local regulations

advance a very important policy: to protect the public

health by regulating disposal of toxic wastes.

Abandonment by the trustee clearly contravened

applicable law, and did so not merely technically, but

with severely deleterious implications for the public

safety. The great weight thus attaching to the state's

interest makes this case more akin to those of

Ottenheimer v. Whitaker, supra, and In re Lewis

Jones, supra, than it is to In re Adelphi Hospital. The

weight of state law is reflected also in the fact that (as

in Ottenheimer) violation of the disposal regulations

may constitute a felony. See N.Y. Envtl. Conserv. Law

§ 71.2721 (McKinney Supp. 1982).

To be weighed against this manifestly important

public policy is the policy advanced by abandonment,

to preserve as much of the estate as possible for

distribution to creditors. This policy must be viewed in

light of the indications of a concurrent federal

legislative policy to limit intrusion into state police

power regulations, including environmental protection

laws, delineated supra. Here, it is undisputed that

compliance with hazardous waste disposal laws

required substantial expenditures, thus depleting the

assets of the estate available for distribution to

creditors.

22a

Appendix A

But the extent (unproven in these proceedings)’ of

the expenditures necessary to dispose of the waste

properly is not in itself sufficient to outweigh the

public interest at stake here. It is only recently that the

public has learned of the magnitude of the dangers

associated with toxic waste disposal; at the same time,

the last few years have witnessed a rising tide of

bankruptcies. Lurking in the shadows of these

phenomena is the spectre of the changing fortunes of

the nuclear power industry, with the concomitant

potentiality for unusable facilities. If trustees in

bankruptcy are to be permitted to dispose of hazardous

wastes under the cloak of the abandonment power,

compliance with environmental protection 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 governmental action for citizen compliance --

without an indication that Congress so intended. '°® The

9. The issue of the exact amount of the depletion was never

brought before the bankruptcy court. or the district court. The

Trustee alleged that the property itself had a fair market value of

$535,000, and a forced sale value of $428,000. both at the time

subject to mortgages in excess of $450,000. Tr. of June 8, 1982

Bankruptcy Hearing at 2. But this does not relate the expense to

the size of the debtor's estate. The Trustee did note that at the time

he was unable to liquidate some major assets (such as oi:). Id. at

11-12.

10. Indeed, Congress has elsewhere indicated an intent that

governmental units be reimbursed, by those responsible for

storage, transport, and disposal of hazardous wastes, for

government's costs of emergency cleanup of inactive hazardous

waste sites by creating a federal cause of action for reimbursement.

Comprehensive Environmental Response, Compensation and

Liability Act of 1980, 42 U.S.C. § 9607 (Supp. V 1981) (“superfund”

Appendix A

supremacy clause does not require the suspension of

the operation of New York's hazardous waste disposal

laws. ''

lil.

New York requests that it be reimbursed, out of the

assets of the estate, for its cleanup costs as an

legislation); one objective of imposing liability was “to induce such

[liable] persons voluntarily to pursue appropriate environmental

response actions with respect to inactive hazardous waste sites.”

H. Rep. No. 1016, Pt. I, 96th Cong. 2d Sess. 17 (1980), reprinted in

1980 U.S. Code Cong. & Ad. News 6120 (emphasis added).

11. As support for its basic position that the abandonment

power is not limited by state law, and not as a separate or discrete

issue or independent bar to the enforcement of state law, the

Trustee contends that prohibiting abandonment may effect an

unconstitutional taking under the Fifth Amendment. The Trustee

argues that use of the estate's assets to comply with state aw may

deplete the estate to such an extent that the secured creditors will

receive less in satisfaction of their claims than they otherwise

would have.

The rights of a secured creditor in the debtor's assets are

“property” subject to a “taking.” See United States v. Security

Indus. Bank, 103 S. Ct. 407, 411 (1982). But we are not persuaded

by the Trustee's argument that an unconstitutional taking could

result from forbidding abandonment here. First, the state's

enforcement of its environmental protection laws cannot be

characterized as a taking; rather it is a permissible exercise of the

state's regulatory power to promote the public good, under a long

line of cases dealing with just that distinction. E.g., Agins v. City of

Tiburon, 447 U.S. 255 (1980) (municipal zoning ordinances

restricting type and density of buildings held not a taking); Penn

Central Transp. Co. v. City of New York, 438 U.S. 104 (1978)

(landmark preservation ordinance); Goldblatt v. Hempstead, 369

U.S. 590 (1962) (town ordinance prohibiting use of land for

mining); Miller v. Schoene, 275 U.S. 272 (1928) (statute requiring

landowner to destroy diseased cedar trees); Village of Euclid v.

Ambler Realty Co., 272 U.S. 365 (industrial zoning regulation);

Hadecheck v. Sebastian, 239 U.S. 394 (1915) (municipal

ordinance prohibiting brickmaking); Mugler v. Kansas, 123 U.S.

623 (1887) (state statute declaring places of manufacture of liquor

248.

Appendix A

“administration expense,” see 11 U.S.C. 88 503(b) &

507(a).

Section 503(b) lists several categories of allowable

administrative expenses. The categories are not

exclusive: administrative expenses “including” those

listed are allowed, and “including” is not exclusive, 11

U.S.C. § 102(3). The only relevant category of those

listed would seem to be Section 503(b)(1)(A), “actual,

necessary costs of preserving the estate.” Preservation

to be nuisances); Troy v. Renna, 727 F.2d 287 (3d Cir. 1984) (state

statute creating statuiory tenancies for senior citizens and disabled

persons). See generally Michelman, Property, Utility, and

Fairness: Comments on the Ethical Foundations of “Just

Compensation” Law, 80 Harv. L. Rev. 1165, 1183-84 (1967)

(factors relevant to classifying an action as regulation or taking).

Second, the Trustee contends that this case presents the

possibility of an “erosion taking,” citing to the Regional

Reorganization Act Cases, 419 U.S. 102 (1974), and In re New

York, N.H. & H .R.R., 330 F. Supp. 131, 147 (D. Corn. 1971), rev'd

on other grounds, 457 F.2d 683 (2d Cir. 1972) (lack of subject

matter jurisdiction); see also New Haven Inclusion Cases, 399

U.S. 392 (1970). The doctrine in those cases, even if deemed to be

applicable here (and we have serious doubts that it would be

applicable, because of the sui generis nature of the subject matter,

railroad reorganization) would require a balancing of the losses to

the estate against the public interest. Whether an erosion taking

will result would depend under this theory on whether forcing

expenditure of assets by preventing abandonment will cause

“losses unreasonable even in light of the public interest.” Regional

Railroad Reorganization Act Cases, supra, 419 U.S. at 124 (taking

by accrual of post-bankruptcy claims with priority over those of

claimants). We cannot say that the public interest would be

outweighed by losses here. Our prior analysis applies with equal

force here in determining whether it is constitutionally

“unreasonable” to require that the estate's assets be expended to

comply with toxic waste disposal law as a condition of

abandonment. Cf. City of Paterson v. Fargo Realty. Inc., 174 N.J.

Super. 178, 415 A.2d 1210 (1980) (not unconstitutional to require

owner to reimburse city for expenses incurred in razing structure

that was public nuisance).

ee ee et

25a

Appendiz A

includes the costs of custodial care or insurance, see 3

Collier on Bankruptcy (L. King 15th ed. 1983), supra, 4

503.04 at 503-16, and necessary repairs, id. We need

not, however, reach the issue of the priority, if any, of

New York's claim. That is an issue that 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 include findings of relevant

fact.

IV.

The order of the district court dated January 25,

1983, which affirmed the order of abandonment will be

reversed, and the case remanded for proceedings

consistent with this opinion.

Each party will bear its own costs.

GIBBONS, Circuit Judge, dissenting:

The majority opinion poses as the issue in this

case whether Il U.S.C. § 554 (1982) “permitis] the

abandonment of property of the bankrupt estate in

contravention of state and local environmental

protection laws?” Maj. op., typescript at 3. In focusing

on this single issue, however, the majority fails to

consider additional points of extreme relevance to this

case.

State and local environmental protection laws

simply do not address federal bankruptcy law interests,

including whether and under what circumstances the

trustee of a debtor's estate must take possession of all

property in the estate. After all, trustees are creatures

of federal law. They are appointed not for the benefit of

the world at large, but solely for the purpose of

liquidating property for the benefit of creditors, a

federal interest. See li U.S.C. § 704 (1982). Some state

environmental protection laws, like those of New York,

attempt to impose expenses on the debtor's estate that

26a

Appendix A

would leave no equity to be liquidated. In this case, for

example, it is undisputed that New York law would

leave the debtor's estate with no actual or potential

equity in the Long Island City property. By forcing the

trustee to take possession of property in which there is

no equity, the court serves no interest that the

bankruptcy laws address. By not confronting that

reality, the majority opinion fails to resolve critical

issues in this case: how can the trustee reach into the

creditors’ pockets for the cost of the cleanup, and if he

can, which creditor's pocket?

The proper analysis must begin with the relevant

statute and the question of the trustee's right to

abandon the property. Section 554 of title Il states

clearly:

(a) After notice and a hearing, the trustee may

abandon any property of the estate that is burden

some to the estate or that is of inconsequential

value to the estate.

ll U.S.C. § 554(a) (1982). There is no legislative history

suggesting that we may alter or amend that language.

The intent is clear. The recerd here establishes that the

property is burdensome and of inconsequential value

to the estate. A finding by the bankruptcy court to that

effect has not been challenged on appeal. Thus, under

federal law, the trustee may abandon the property.

This point is challenged, however, by the State and

City of New York, who argue that such abandonment

cannot be permitted when it would violate the public

interest and federal, state and local environmental

laws. Appellants cite for support a Fourth Circuit and a

bankruptcy court case for the proposition that

abandonment may be denied when such abandonment

would threaten public health and safety and/or violate

federal law. The cases presented by appellants are

Ottenheimer v. Whitaker, 198 F.2d 289 (4th Cir.), affg

: he see ee

27a

Appendix A

102 F. Supp. 913 (D. Md. 1952), and In re Lewis Jones, |

B.C.D. 277 (Bk. Ct. E.D. Pa. 1974).

Neither of these opinions, however, is persuasive

under the 1978 Bankruptcy Reform Act. Both

substitute slogans about equity for an analysis of the

purpose of bankruptcy proceedings. Both, moreover,

were decided prior to the enactment of the Bankruptcy

Reform Act of 1978, and its codification in ll U.S.C.

§ 554 (1982) of the express authority for trustees to

decline to undertake responsibility for property which

cannot benefit the estate. Thus there was no statutory

provision permitting trustees to abandon burdensome

property at the time of those decisions. Such an

express statutory provision now exists. Moreover,

Congress did not see fit to provide an exception to this

statutory power, whether for the public interest or any

other purpose, as it has in other areas. Compare ll

U.S.C. 8 362(a) (1982) (exception to automatic stay);

Penn Terra Ltd. v. Department of Environmental

Resources, 733 F.2d 267, 274-79 (3d Cir. 1984)

(injunction to enforce compliance with state laws is not

a money judgment, and is therefore not subject to

§ 362 stay) with il U.S.C. 8554 (1982). Thus

Ottenheimer and Lewis Jones aré not helpful.’

1. Both cases acknowledge that the rules regarding

abandonment in their case were judge-made:

It seems obvious to us that a rule which is not provided

by statute but built up by the courts to facilitate the

administration and distribution of the assets of a

bankrupt estate should not be extended so as to reach

such an unreasonable and unjust result. The

judge-made must give way when it comes into conflict

with a statute enacted to ensure the safety of navigation

Ottenhcimer, 198 F.2d at 290: see Lewis 1 B.C.D. at 279; see also

Missouri v. United States Bankruptcy Court, 647 F.2d 768, 778

n.l8 (8th Cir. 1981) (doubtful tht trustee could be prevented from

28a

Appendix A

The majority opinion is also inconsistent with the

Supreme Court's recent decision in United States v.

Security Industrial Bank. 103 S. Ct. 407 (1982). There

the Supreme Court held that the Bankruptcy Act

should not be construed to destroy the interests of

creditors when a substantial question arises as to

whether the Act constitutes a taking of property

without just compensation. The holding in Security

Industrial Bank is simply a corollary of the

longstanding doctrine that we are obliged “first [to]

ascertain whether a construction of the statute is fairly

possibie by which the constitutional question: may be

avoided.” United States v. Security Industrial Bank,

103 S. Ct. at 412 (quoting Lorillard v. Pons, 434 U.S.

575, 577 (1978) and Crowell v. Benson, 285 U.S. 22. 62

(1932)). Similarly, “in the absence of a clear expression

of Congress’ intent . . . [a court should] decline to

construe the Act in a manner that could in turn call

upon the Court to resolve difficult and sensitive

questions arising out of the guarantees of the’ takings

clause.” Security Industrial Bank, 103 S.Ct. at 414

(quoting NLRB v. Catholic Bishop of Chicago, 440 U.S.

490, 507 (1979)).

The Supreme Court has indicated that creditors

cannot be forced to operate a business, no matter how

vital to the public interest, at a loss. See Railroad

Commission of Texas v. Eastern Texas Railroad

Company, 264 U.S. 79, 85-86 (1924); Brooks-Scanlon

Co. v. Railroad Commission of Louisiana, 251 U.S.

396, 399 (1920); see also Regional Railroad

selling grain to liquidate assets even though state law requires

license to do so); In re Adelphi Hospital Corp., Bank. L. Rep. (CCH) €

66,882, at 76,856 (2d Cir. 1978) (bankrupt hospital's trustee can

abandon medical records even though state law requires their

maintenance); see generally In re Chicago Rapid Transit Co., 129

F.2d 1, 5 (7th Cir.), cert. denied, 317 U.S. 683 (1942) (pre-statute

case stating withdrawal of state power should be stated in Act).

te ee eee

29a

Appendix A

Reorganization Act Cases, 419 U.S. 102, 122 (1974);

Bullock v. Railroad Commission of Florida, 254 U.S.

505, 520-21 (1921). In the Regional Railroad

Reorganization Act Cases, the Supreme Court did not

“balance” the interest of creditors against that of the

public. See 419 U.S. at 122-36. The Court upheld the

Regional Railroad Reorganization Act only because

there was an available remedy in the Tucker Act, 28

U.S.C. § 1491 (1982), for the operational losses which

that Act imposed. 419 U.S. at 136. New York does not

suggest that its law provides an equivalent remedy.

The name of its game is transferring the cost of

cleanup to secured and unsecured creditors of the

debtor, in this instance outside New York, who have no

interest whatever in the Long Island City property, and

who, on the record before us, were in ne way

responsible for placing the contaminated oil on that

site.

Thus, the majority's construction of the Act raises

a substantial question under the taking clause of the

fifth amendment.’ The holding of Security Industrial

2. The “taking” concern has been raised previously:

[Tihe public interest cannot demand the erosion of the

bankrupt's assets to the point of confiscating practically

the entire estate. At some point the extent and degree of

taking runs into the constitutional prohibition in the

Fifth Amendment [on] the taking of private property for

public use without just compensation.

In re New York, New Haven and Hartford Railroad Co., 330 F. Supp.

131. 147 (D. Conn. 1971); see also H.R. Rep. No. 595, 95th Cong.. Ist

Sess. 423 (1977), reprinted in 1978 U.S. Code Cong. & Ad. News,

5963, 6379:

Subsection (a) [ll U.S.C. 8 I170(a)} permits the court to

authorize the abandonment of a railroad line if the

abandonment is consistent with the public interest and

either in the best interest of the estate or essential to the

formulation of a plan .. . The authority to abandon or

30a

Appendix A

Bank compels a construction of section 554 that

avoids this difficult constitutional issue. Such a

construction is available, for the plain language of that

section permits abandonment in this case: moveover,

there is no legislative history to that section providing

any exceptions to the statute or expressing any intent

contrary to abandonment by a trustee of property

found to be burdensome or of inconsequential value. A

fair reading of section 554 permits abandonment in

this case and thus avoids the constitutional question

presented by the taking clause. |

The majority opinion deals with the. taking

problem in a footnote. Maj. op., typescript at 26 n.ll.

That footnote, however, puts the rabbit in the hat by

concluding perfunctorily that the New York statutes at

issue constitute a “regulation” rather than a “taking”

of property.* That is not the analysis of Security

Industrial Bank. The Supreme Court requires that we

address whether a substantial question under the

taking clause arises; the Regional Railroad

Reorganization Act Cases raise such a question. We

are therefore required to construe the Bankruptcy Act

- accordingly.

not to abandon lines of railroad is, of course. subject to

the fifth amendment of the Constitution. which may in

particular cases require abandonment in order not to

erode a secured creditor's interest in the debtor's

property even though the public interest dictates

otherwise.

3. In its taking analysis, the majority opinion characterizes the

environmental protection laws as an example of “the state's

regulatory power to promote the public good” (citing cases). Maj.

Op.,. typescript at n. ll. The cases cited, however, do not address the

question of imposing an obligation on third parties. Thus the

police power cases are irrelevant to the issue of an obligation on the

part of innocent creditors to undertake compliance with the police

power statutes.

3la

Appendix A

The majority opinion sidesteps a key issue by”

stating that “we need not. . . reach the issue of the

priority, if any, of New York's claims.” Maj. op.,

typescript at 28.‘ Yet, the record is unequivocal. The

debtor's estate has no equity whatever in the Long

Island waste oil storage facility. Thus the necessary

implication of the majority's holding is that property

situated elsewhere must be expended for the purpose

of complying with the New York toxic waste laws.

Whether that expenditure is justified because New

York law imposes a lien or charge on property situated

elsewhere or because New York law requires that the

expenditures be treated as costs of administration

under ll U.S.C. 88 503(b), 507(a) (1982), the outcome is

the same, for the majority's opinion cannot conceal the

patent reality that the cost of cleaning the Long Island

City site must come from someone's pocket.

Remanding without addressing the question of whose

pocket is irresponsible.

The majority's reliance on 28 U.S.C. § 959(b) (i982)

is off the mark. If the trustee, or any other court officer,

undertook to operate the Long Island facility, that

officer would be required to operate it in compliance

with local police power regulations by virtue of section

959(b). But section 959(b) cannot be construed as

imposing an obligation to operate any business or

property. In proceedings for reorganization or

liquidation a trustee will undertake to operate a

business or property only when such operation can

inure to the benefit of some part, having an interest in

the estate. Were section 959(b) to be construed

otherwise it would violate the fifth amendment

4. The majority opinion appears to refer to an affidavit stating

that some parties with priority liens relinquished them in favor ofa

first lien sought by the State and City. See Affidavit of Nancy

Stearns, December 22, 1982.

32a

Appendiz A

prohibition against taking without just compensation.

Regional Railroad Reorganization Act Cases, 419 U.S.

102, 118, 125 (1974); see United States uv. Security

Industrial Bank, 103 S.Ct. 407, 411 (1982) (secured

creditor's rights in debtor's assets are “property”

subject to “taking”).°

The majority's argument is not advanced by its

observation that “(t]he supremacy clause does not

require the suspension of New York's hazardous waste

disposal laws.” Maj. op., typescript at 26. Those laws

are not suspended by the district court's disposition.

They have operated so as to eliminate any interest that

the debtor's estate might have had in the Long Island

City plant. They may result in criminal prosecution of

the persons actually responsibile for placing the toxic

substances on the site. See, e.g., N.Y. Envtl. Conserv.

Law § 71.2721 (McKinney Supp. 1982). Moreover, those

laws do not by their terms give fair notice to secured

and unsecured creditors of the debtor that they would

become liable for the cost of cleanup merely by

extending credit to a corporation which unknown to

*S. There is further evidence of doubt as to whether section

959(b) applies to Chapter VII proceedings. Professor Moore stated:

[Section] 959(b) applies only to the Receiver in his

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 the distribution of funds in the receivership

7 J. Moore & J. Lucas, Moore's Federal Practice 8 66.04(4), at 1913

(2d ed. 1982). Moreover, although a trustee may be authorized to

operate a ousiness under section 72!, such operation may occur

only “for a limited period” and only “if such operation is in the best

interest of the estate and consistent with the orderly liquidation of

the estate.” ll U.S.C. 8 721 (1982) (emphasis suplied). Such

authorization here clearly would not be in the best interests of the

estate.

33a

Appendix A

them should in the future violate the law. Nor do they

give notice to a trustee in bankruptcy that he would,

merely by virtue of his appointment, become

responsibile for undoing the effects of a debtor's prior

unlawful activities.

Without definitely resolving the question, the

majority suggests that ll U.S.C. § 503(b)(I)(A) (1982),

dealing with allowable costs of administration, and ll

U.S.C. § 102(3) (1982), dealing with an expansive rule of

construction, may authorize the imposition of cleanup

costs on other creditors. Maj. op., typescript at 27-28.

The suggestion that the cleanup cost might be

classified as a “preservation expense” of a property is

preposterous. Upon abandonment, title to the property

revests in the bankrupt. Fiduciaries are not at liberty

to “preserve” the property in which their cestui have no

interest. The reference to the court's “equitable”

powers, Maj. op., typescript at 22-24, assumes that the

court has “equitable” power to compel the operation of

a business at a loss in the public interest. As discussed

earlier, the taking clause of the fifth amendment,

applicable to the states by virtue of the fourteenth,

prevents the exercise of any such “equitable” power.

Before the trustee may incur expenses of

administration to which section 102(b) may apply,

there must be an identifiable source of authority for

making such expenditures. None exists.

Finally, the majority remands to the district court

with no guidance about the critical issues in this case.

That court has already determined that New York law

does not and, in light of the supremacy clause, cannot

compel a trustee in bankruptcy to undertake

possession or operation of a business from which the

estate can derive no benefit. On remand the court will

still be at a loss to determine how, consistent with the

taking clause. the trustee can reach into the creditors’

pockets for the cost of cleanup, and if he can, which

34a

Appendix A

creditors’ pockets. The majority remands with no more

than a hope that the court can get money somewhere.

Since the record is clear that the debtor's estate

does not have any actual or potential equity in the Long

Island City property, and New York has not pointed to

any other specific property on which it has a valid lien

for the cost of cleanup of that site, the district court did

not err in authorizing abandonment. Certainly that

order was not an abuse of discretion. Nowhere does the

majority disclose what alternative course might have

been pursued. | would affirm now, as we surely will

have to affirm later, when the district court points to

the obvious fact that there must be a source of funds

before expenditures can be made.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

Sor the Third Circuit

EEE

35a

APPENDIX B

Opinion of the United States Court of Appeals for the

Third Circuit (No. 83-5730)

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 83-5730

IN RE: QUANTA

RESOURCES CORPORATION

Debtor

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION

Appellant

On Appeal from the United States

Bankruptcy Court for the

District of New Jersey

(Bankruptcy No. 8:-05967)

Submitted Under Third Circuit Rule 12(6)

June 19, 1984

Before: GIBBONS, GARTH and

HIGGINBOTHAM, Circuit Judges

(Opinion Filed July 20, 1984)

Irwin I. Kimmelman

Attorney General of New Jersey

James J. Ciancia

Assistant Attorney General

Richard F. Engel

Deputy Attorney General

Ross A. Lewin, Esq.

36a

Appendix B

R.J. Hughes Justice Complex

CN 112

Trenton, New Jersey 08625

Attorneys for Appellant

William F. McEnroe, Esq.

Corinne M. DeStefano, Esq.

Nolan, O'Neill & Moore

60 Park Place

Newark, New Jersey 07102

Attorneys for Appellee

Thomas J. O'Neill, Trustee

A. Dennis Terrell, Esq.

Kenneth S. Kasper, Esq.

Shanley & Fisher, P.C.

95 Madison Avenue

Morristown, New Jersey 07960

Attorneys for Appellee

Midlantic National Bank

Richard B. Honig, Esq.

Klinger, Honig & Klinger, P.C.

P.O. Box 477

25 East Salem Street

Hackensack, New Jersey 07602

Attorneys for Appellees

James V. Frola and

Albert Von Dohlin

OPINION OF THE COURT

were

GARTH, Circuit Judge.

This appeal presents us with the identical issue

presented by the companion case of In re Quanta

37a

Appendix B

Resources Corp. (City of New York and State of New

York v. Quanta Resources Corp.), No. 83-5142.

Because we have decided to reverse the district court's

order in the companion case, in which New York was

the appellant, we will also reverse the bankruptcy

court's order in this case.

Quanta Resources Corp. (Quanta) leased and

operated a facility on a site in Edgewater, New Jersey,

at which Quanta processed and resold waste oil and oil

sludge. Quanta operated the site under “temporary

operating authorities” (TOA’s) issued by the New

Jersey Department of Environmental Protection

(NJDEP). These TOA’s prohibited Quanta from

accepting PCB-contaminated oil.

On June 23, 1981, NJDEP found PCB-

contaminated oil at the site. On July 2, 1981, Quanta

agreed to cease operating at the Edgewater location.

On October 6, 1981, while NJDEP and Quanta were

negotiating as to Quanta’s obligation to clean up the

contaminated oil, Quanta filed a petition in

bankruptcy under chapter 11 of the Bankruptcy Code,

an action which was later (on November 12, 1981)

converted to a chapter 7 liquidation. On October 7,

1981, NJDEP issued an administrative order requiring

Quanta to cease operations, close the facility within

one year, and clean up all hazardous materials.

On April 23, 1983, the Trustee for Quanta gave

notice of proposed abandonment of the facility under

11 U.S.C. 8 554 of the Bankruptcy Code, including the

waste oil contained in tanks. The Trustee excepted

from this notice that part of the oil which was free of

significant contamination from PCB's and was the

subject of a pending sale agreement.

NJDEP opposed the abandonment, arguing that

the abandonment would violate New Jersey law

Appendiz B

because oil contaminated with PCB's must be stored

and disposed of in compliance with state regulations.

According to the state, abandonment would

contravene these requirements and pose a threat to

public health and safety because the oil was stored in

leaking and insecure tanks, creating a danger of

spillage into the Hudson River. NJDEP argued that the

estate had sufficient funds to protect the public from

the hazards.

After a hearing, by order dated May 20, 1983, the

Bankruptcy Court authorized the requested

abandonment of the oil, the order stating that its entry

was to “be deemed to constitute the abandonment of

the . . . property by the Trustee effective May 17, 1983,

nunc pro tunc.” In re Quanta Resources Corp., No.

81-05967 (Bankr. D.N.J. May 20, 1983). The sale of the

remaining oil was completed in June 1983, and the

Trustee vacated the premises on July 1, 1983.

The parties consented to NJDEP’s taking a direct

appeal to this court under 11 U.S.C. § 405(c)(1)(B). We

therefore have appellate jurisdiction. See 28 U.S.C.

§ 1293(b) & note preceding id. § 1471 (appellate

.jurisdiction to consider such appeals).

Il.

The instant case does not present us with a

significantly different factual situation from that

presented to us in In re Quarta Resources Corp., No.

83-5142. In this case, abandonment of the property

and the toxic oils will effect a disposal of toxic waste in

a manner that contravenes New Jersey environmental

protection law.' There is no principled distinction

1. NJDEP argues that federal environmental law is also violated

by the abandonment. Since NJDEP has not persuaded us that it

has the power to enforce federal law in this situation, there is no

issue before us as to a conflict between the abandonment power

under 8 554 of the Bankruptcy Code and federal environmental

protection law.

39a

Appendiz B

between the issues presented in this case and those

presented in the companion Quanta case in which

New York is the appellant. Thus the analysis and

reasoning of No. 83-5142 apply equally to the case at

bar. We hold that the Trustee does not have the right to

abandon property of the estate where aban-

donment contravenes state public health and safety

laws, as it does here.

Because NJDEP -- unlike the City and State of New

York in the companion case at 83-5142 -- has not

argued that it shouid be reimbursed for any expenses

incurred in cleaning up or restoring the property

(indeed NJDEP has not asserted that it incurred any

such expenses),” we have no cause to address that

issue. This point serves to emphasize the scope of our

central holding in these two cases -- that enforcement

of state public health and safety laws is not superseded

by the power of abandonment contained in section 554

of the Bankruptcy Code. The issue is not who should

pay to clean up the estate’s property; it is whether the

Trustee's interest in preserving the estate should

prevail over the public's interest in containing the

hazards produced by toxic wastes in the possession of

the estate. As in the companion case where the State

and City of New York are appealing, we are convinced

that the equities must be balanced in favor of the

public interest.

lil.

The bankruptcy court's order authorizing

abandonment of the estate's property at the Edgewater

site will be reversed and the case remanded to the

2. NJDEP did claim an interest in the property prior to

abandonment. as did Midlantic National Bank, an appellee here.

However. the nature of that interest has not been disclosed to us

and it is not a factor for consideration on this appeal.

40a

Appendiz B

bankruptcy court for further appropriate proceedings

in light of both Quanta opinions.

GIBBONS, Circuit Judge, dissenting:

The same issue is before us as was presented in the

companion case In re Quanta Resources Corp. (City of

New York and State of New York v. Quanta Resources

Corp.), No. 83-5142. I would affirm the bankruptcy

court's order in this case for the same reasons stated in

my dissent in the companion case.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

Sor the Third Circutt

Se ee © an, sa

4la

APPENDIX C

Orders Amending Opinion (No. 83-5730)

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

IN RE: QUANTA RESOURCES CORPORATION

Debtor

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION

Appellant

Before: GIBBONS, GARTH and

HIGGINBOTHAM. Circuit Judges

ORDER AMENDING OPINION

IT IS ORDERED that the opinion in the

above-captioned matter, filed July 19, 1983, is hereby

amended as follows:

Add, immediately after the last sentence of the

opinion, the following new paragraph:

Each party will bear its own costs.

BY THE COURT,

Leonard I. Garth

Circuit Judge

DATED: July 25, 1984

42a

Appendix C

A True Copy:

Teste:

Clerk of the Untted States Court of Appeals

for the Third Circutt

(A.O. U.S. Courts. G.M.C. Printing, Phila., Pa. 215-568-4264)

43a

Appendiz C

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

IN RE: QUANTA

RESOURCES CORPORATION

Debtor

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION

Appellant

On Appeal from the United States

Bankruptcy Court for the

District of New Jersey

(Bankruptcy No. 81-05967)

Submitted Under Third Circuit Rule 12(6)

June 19, 1984

Before: GIBBONS, GARTH and

HIGGINBOTHAM, Circuit Judges

(Opinion Filed July 20, 1984)

It is ORDERED

That so much of the designation of attorneys for

the appellant that appears on the cover of the above

entitled opinion be amended to read as follows:

44a

Appendiz C

Irwin I. Kimmelman

Attorney General of New Jersey

James J. Ciancia

Assistant Attorney General

Richard F. Engel

Deputy Attorney General

Ross A. Lewin, Esq.

Deputy Attorney General

By the Court

-—_—_—/s/Leonard I Garth

United States Circuit Judge

Dated: August 17, 1984

A True Copy:

Teste:

Clerk of the United States Court of Appeals

Sor the Third Circuit

(A.O. U.S. Courts. G.M.C. Printing, Phila.. Pa. 215-568-4264)

45a

APPENDIX D

Judgment of the United States Court of Appeals for the

Third Circuit (No. 83-5142)

UNITED STATES COURT OF APPEALS

For THE Turrp Circuit

No. 83-5142

In tHe MATTER OF

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

Debtor

CITY OF NEW YORK and

THE STATE OF NEW YORK

vs.

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

State of New York and City of New York,

Appellants

(D. C. Civil No. 82-3524)

46a

Appendix D

ON APPEAL FROM THE UNITED STATES

BANKRUPTCY COURT FOR THE DISTRICT

OF NEW JERSEY, Newark

Present: GIBBONS, GARTIL and HTGGINBOTHAM,

Circuit Judges.

JUDGMENT

This cause came on to be heard on the record from the

United States Bankruptey Court for the District of New

Jersey, Newark and was argued by counsel October 24,

1983.

On consideration whereof, it is now here ordered and

adjudged by this Court that the judgment of the said

District Court, entered January 25, 1983, be, and the

same is hereby reversed and the cause remanded for

further proceedings consistent with the opinion of this

Court. Each party to bear its own costs.

ATTEST:

Sautty Mrvos

Clerk

July 20, 1984

Certified as a true copy and issued in lieu

of a formal mandate on August 28, 1984.

Test:

M. Exizaneru Frercuson

Chief Deputy Clerk, United States Court of Appeals

for the Third Cireuit.

47a

APPENDIX E

Judgment of the United States Court of Appeals for the

Third Circuit (No. 83-5730)

UNITED STATES COURT OF APPEALS

For tHe Txuirp Circuit

No. 83-5730

—

In Re:

Quanta Resources Corporation,

Debtor

The New Jersey Department of Environmental Proection,

Appellant

(Bankruptey No. 81-05967)

ON APPEAL FROM THE UNITED STATES

BANKRUPTCY COURT FOR THE DISTRICT

OF NEW JERSEY, Newark

Present: GIBBONS, GARTH and HIGGINBOTHAM,

Circuit Judges.

48a

Appendix E

AMENDED JUDGMENT

This cause came on to be heard on the record from

the United States Bankruptcy Court for the District of

New Jersey and was submitted under Third Circuit Rule

12(6) on June 19, 1984.

On consideration whereof, it is now here ordered and

adjudged by this Court that the order of the said District

Court filed May 20, 1983 be, and the same is hereby

reversed and the cause remanded to the said Bankruptey

Court for further appropriate proceedings in light of this

Court’s opinions in this appeal and in In re Quanta Re-

sources Corp. (City of New York and State of New York

v. Quanta Resources Corp.), No. 83-5142 (3rd Cir. July

20, 1984). Each party will bear its own costs.

ATTEST:

SALLY Mrvos

Clerk

July 25, 1984

Certified as a true copy and issued in lieu

of a formal mandate on August 28, 1984,

Test:

M. Evizanetru Frercvson

Chief Deputy Clerk, United States Court of Appeals

for the Third Circuit.

49a,

APPENDIX F

Order Denying Petition for Rehearing of the United States

Court of Appeals for the Third Crceuit

UNITED STATES COURT OF APPEALS

For THE TuHirp Circuit

No. 83-5142

—>—

In tHE MATTER OF

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

Debtor

THE CITY OF NEW YORK and

THE STATE OF NEW YORKS

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

State of New York

and City of New York

Appellants

50a

Appendix F

No. 83-5730

—>—

In Re:

QUANTA RESOURCES CORPORATION

Debtor

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION

Appeclant

SUR PETITION FOR REHEARING

PRESENT: ALDISERT, Chief Judge, SEITZ, ADAMS,

GIBBONS, HUNTER, WEIS, GARTH, HIGGINBO-

THAM, SLOVITER and BECKER, Circuit Judges

The joint petition for rehearing filed by debtor, Quanta

Resources Corporation, and appellee, Thomas J. O’Neill,

in the above-entitled case having been submitted to the

judges who participated in the decision of this court, and

to all the other available circuit judges of the cireuit in

regular active service, and no judge who concurred in

the decision having asked for rehearing, and a majority

of the circuit judges of the circuit in regular active ser-

vice not having voted for rehearing by the court in bane,

the petition for rehearing is denied.

eS ee ee ee ee en ere

Sla

Appendix F

Judge Gibbons would grant the petition for rehearing

for the reasons set forth in his dissenting opinions.

By the Court

Leonarp I. GARTH

Cireuit Judge

DATED: August 16, 1984

52a

APPENDIX G

Memorandum Opinion of the United States District Court

for the District of New Jersey

UNITED STATES DISTRICT COURT

For tue Disrricr or New J ERSEY

(B. 81-5967)

Civil No, 82-3524

—$-

In tHe Martrer or

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

Debtor.

THE STATE OF NEW YORK and the

CITY OF NEW YORK,

Appellants,

THOMAS J. O'NEILL, Trustee in Bankruptey of

Quanta Resources Corp., Debtor,

Appellee.

January 24, 1983

ne nll

o3a

Appendix G

BEFORE:

The Honorable FREDERICK B. LACY, U.S.DJ.

MEMORANDUM OPINION

The Court: This matter is before the court on an appeal

from the decision of the Bankruptcy Court which per-

mitted che trustee to abandon property over objections

by the City and State of New York.

Quanta Resources (“Quanta”) filed a Voluntary Peti-

tion in Bankruptey pursuant to Chapter XI of the Bank-

ruptey Code. These proceedings were converted to a

Chapter VII liquidation, and a trustee was appointed.

The Trustee proposed sale or abandonment of property

held by Quanta in Long Island City, New York. Notice

was given by the Clerk of the Bankruptey Court. In

response to objections by purported lienholders, a judg-

ment was entered establishing the validity of a lien in the

amount of $344,464. No one appeared at the public

auction. An offer to purchase the property which was

approved by the court was subsequently withdrawn with

court approval when the purchaser discovered that hazar-

dous wastes were located at the site.

A seeond notice was given when the Trustee declared

his intention to abandon the property as burdeisoime to

the bankrupt estate. In response to this notice, the State

and City of New York objecte? They urged that the

trustee not be permitted to abandon the property, and

that whatever assets existed in the estate should be used

to remove the toxie waste from the property. They con-

o4a

Appendix G

tended abandonment of the property would violate federal,

state and local laws concerning disposal of hazardous

waste.

Over these objections, the court ruled that abandonment

Was permissible under section 554 of the Bankruptey

Code, 11 U.S.C. See. 554. The court ruled that the assets

in the estate would be distributed to creditors and not

be used for purposes of removing the toxie waste. The

State and City have since that time expended $2.5 million

to remove the toxic waste. They appeal from the Order

of the Bankruptey Court permitting abandonment and seek

to have the $2.5 million to remove the toxie waste. They

appeal from the Order of the Bankruptey Court per-

mitting abandonment and seek to have the $2.5 million

cost of the cleanup borne by the bankrupt estate.

Section 554(a) of the Bankruptey Code provides:

See, 554. Abandonment of property of the estate.

(a) After notice and a hearing, the trustee may

abandon any property of the estate that is burden-

some to the estate or that is of inconsequential

value to the estate.

The parties cannot dispute that the property is burden-

some to the estate. Irrespective of the cleanup costs,

the liens on the property exceeded the estimated force

sale value of the property. Thus, the Trustee was other-

wise justified, and by law was required, to seek to abondon

the property.

The precise question here is whether abandonment must

be denied under 11 U.S.C. See. 554 where the abandon-

ment would violate public interest and/or federal, state

and local laws. Cases cited by appellants have recog-

Appendix G

nized that abondonment could be denied where the effect

of abandonment would be to threaten the public health

and safety and/or to violate federal law. See, e.g., Otten-

heimer v. Whitaker, 198 F.2d 289 (4th Cir. 1952); In

Re Lewis Jones, Inc., 1 B.C.D. 277 (BK. Ct. E.D. Pa.

1974).

In Ottenheimer, the court refused to permit the Trustee

to abandon barges because the inevitable sinking of the

abandon barges would violate federal law forbidding the

obstruction of navigable waterways. The court ordered

that the assets of the bankrupt estate be used to remove

the barges from the waterway before distribution of as-

sets to creditors. In Lewis Jones, the court refused to

permit abondonment of underground utility lines because

the untended lines would pose a hazard to health and

safety. The court ordered that assets of the estate be

used to seal the lines and cement manhole covers before

distribution to creditors.

Both Ottenheimer and Lewis Jones were decided before

enactment of the Bankruptcy Reform Act of 1978. There-

fore, there was no express statutory provision providing

for the abandonment of burdensome property. The Lewis

Jones court relied, in part, upon section 77(c)(6) of the

former Bankruptcy Act, concerning reorganization of rail-

roads, which allowed abandonment only where the public

interest would not be harmed thereby. Lewis Jones,

supra, 1 B.C.D. at 280. The Ottenheimer court expressed

concern that permitting abandonment would subject the

trustee or bankrupt to criminal penalties for having ob-

structed the waterways. Ottenheimer, supra, 198 F.2d

at 290. As one commentator las remarked:

If one of the purposes of the Bankruptey Act is

the rehabilitation of the debtor . . . it seems in-

d6a

Appendix G

consistent to expose him to a criminal proceeding.

It may well be that the Trustee himself would be

liable for the obstruction of the channel if. the

barges sink ... or that he would at least be

subject to the penalty for aiding and abetting a

violation of the statute by turning the barges over

to the bankrupt knowing that they cannot be cared

for properly. It would indeed be anamolous for one

court to order its officer to do what another could

punish as a misdemeanor.

Note, 66 Harv. L, Rev. 921, 922 (1953).

Although the question is a close one, this court con-

cludes the ruling of the Bankruptey Court must be affirmed.

First, both Ottenheimer and Lewis Jones acknowledged

that the rules concerning abandonment were judge-made

rules which should yield to federal statutes and the gen-

eral public interest. See, Ottenheimer, supra, 198 F.2d

at 290; Lewis Jones, supra, 1 B.C.D. at 280. As the court

wrote in Ottenheimer:

It seems obvious to us that a rule which is not

provided by statute but built up by court decisions

to facilitate the administration and distribution

of assets of a bankrupt estate should not be ex-

tended so as to reach such an unreasonable and

unjust result. The judge-made rule must give way

when it comes into conflict with a statute enacted to

ensure the safety of navigation.

Id. at 290.

By contrast, section 554 of the Bankruptey Code, 11

U.S.C. See. 554, constitutes an express statutory pro-

vision for the abandonment of burdensome property.

d7a

Appendix G

Nowhere is the power to abandon conditioned upon a

finding that abondonment does not harm the public in-

terest or violate any statutes. If Congress had intended

to place this limitation on the power to abandon, it could

have easily done so. Furthermore, as the Lewis Jones

court recognized :

The Supreme Court, in the case of Securities and

Exchange Commission vs. United States Realty

and Improvement Company, 310 U.S. 434, said that

“a bankruptcy court is a court of equity and is

guided by equitable doctrines and principles, except

as they are inconsistent with the Act... .”

Lewis Jones, supra, 1 B.C.D, at 280 (emphasis added).

Here, for the Bankruptcy Court to have granted the

equitable relief requested and to have compelled that the

assets of the bankrupt estate be used to remove the toxic

waste would have been inconsistent with section 554 of

the Act.

The Bankruptcy Court here ruled:

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 the

debtor’s creditors who should finance the requisite

cleanup, given the decision of the Trustee to aban-

don the property.

Transcript of June 22, 1982 Proceedings at 6. The City

and the State have failed to demonstrate why the Bank-

ruptey Court was wrong in deciding that the creditors

should not have to pay for the cleanup. The creditors are

o8a

Appendix G

not more responsible for the toxic conditions than the

general public. And herein lies another problem with

compelling that the assets of the estate be used to fin-

ance the cleanup.

As noted by the appellants and the Lewis Jones court,

abondonment of railroad lines pursuant to the former

Act was subject to the requirement that abandonment not

violate the public interest. See 11 U.S.C. See, 1170(a).

However, the legislative history to section 1170 includes

the following:

Subsection (a) permits the court to authorize the

abondonment of a railroad line if the abondonment

is consistent with the public interest and either in

the best interest of the estate or essential to the

formulation of a plan ... The authority to aban-

don lines of railroad is, of course, subject to the

Fifth Amendment to the Constitution, which may

in particular cases require abandonment in order

not to erode a secured creditor’s interest in the

debtor’s property even though the public interest

dictates otherwise.

House Rep. No. 85-595, 95th Cong., Ist Sess. at 423 (1977).

This concern was also voiced in In Re New York, New

Haven and Hartford Railroad Co., 330 F, Supp. 131,

147 (D. Conn. 1971) where the court wrote:

The public interest cannot demand the erosion of the

bankrupt’s assets to the point of confiscating practi-

cally the entire asset. At some point, the extent

and degree of taking runs into the constitutional

prohibition to the Fifth Amendment, the taking

of private property for a public use without just

compensation.

09a

Appendix G

Here, there is a serious question whether requiring that

the estate’s assets be used to pay for the cleanup—which

would leave nothing for secured creditors—would consti-

tute a taking without just compensation.

Finally, as noted by the Bankruptey Court, Transcript,

supra, at 7, to have refused to permit abandonment would

have been “an exercise in futility.” Abandonment of the

property causes title to vest in the bankrupt who, con-

eededly, does not have sufficient assets to pay for the

cleanup. Refusing to permit abandonment would cause the

title to remain in the Trustee. But the State and City

do not dispute that the Trustee did not, does not, and

never will have sufficient assets to finance the cleanup.

The Bankruptcy Court expressly weighed this factor in

its consideration of the public interest. Id. The court

correctly concluded that the public interest would be best

served by an expeditious cleanup and that permitting

abandonment would result in a quicker cleanup than re-

quiring the Trustee to retain title.

Appellant argued that section 959(b) of the United

States Judicial Code, 28 U.S.C. See. 959(b), proseribes

abandonment. Section 959(b) provides that the Trustee

shall “manage and operate” property in his possession

according to valid laws However, appellants are unable

to cite a case which applied this requirement in a Chapter

VII context. According to Professor Moore:

See, 959(b) applies to the Receiver in his operation

of property in his possession. It does not apply

to the distribution of the estate, and does not re-

quire the Federal Receivership Court to comply with

state laws regulating distribution of funds in the

receivership.

60a

Appendix G

2 Moore’s Federal Practice Sec. 66.04(4). For instance,

in State of Mo. v. U.S. Bankruptey Court, 647 F.2d 768,

778 (Sth Cir, 1971), the court remarked that a Trustee

would not be required to obtain a state license necessary

to operate grain warehousing if the Trustee wished to

sell grain pursuant to a liquidation of the estate. I find

that section 959(b) does not apply to abandonment in a

Chapter VII proceeding.

Similarly, the attempted analogy to exception from the

automatic stay provisions in cases involving enforcement

of state police powers, 11 U.S.C. See. 362, is unpersuasive.

This is because section 554 does not provide a similar

exception to abandonment where the state is seeking to

enforce police powers. Furthermore, section 362(a) ex-

pressly provides that the exception shall not apply where

the governmental unit is pursuing a claim against the

property of the debtor. Therefore, reliance of section 362

actually undercuts appellant’s argument, inasmuch as the

City and State are pursuing a claim against the debtor’s

property.

The decision of the Bankruptcy Court is affirmed,

6la

APPENDIX H

Order of the United States District Court for the

District of New Jersey

(Filed—January 25, 1983)

UNITED STATES DISTRICT COURT

For rHe District or New JERSEY

(B. 81-5967)

Civil No, 82-3524

In THE MATTER OF

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

Debtor.

THE STATE OF NEW YORK and the

CITY OF NEW YORK,

Appellants,

THOMAS J. O'NEILL, Trustee in Bankruptey of

Quanta Resources Corp., Debtor,

Appellee.

62a

Appendix H

This matter having come before the court on an appeal

from a decision of the Bankruptcy Court, and a hearing

having been held and submissions from the parties having

been considered;

IT IS on this 25 day of January, 1983, ORDERED

that the decision of the Bankruptey Court is affirmed, in

accordance with a Memorandum Opinion filed with the

clerk of the court this date.

Freperick B. Lacey

United States District Judge

63a

Appendix H

Docket Entry

CAMDEN - NEWARK - TRENTON

08101 - 07102 - 08605

NEWARK, N. J.

CIVIL NO. 82-3524

—— >-—

In THE MATTER OF

Quanta Resources Corp.,

debtor

The State of New York, et al

vs.

Thomas J. O’Neill

—_—~<>—

There was entered on the docket on 1-26-83 order af-

firming decision of Bankruptcy court.

ALLYN Z. LITE

CLERK

64a

APPENDIX I

Order Authorizing Abandonment of Property of the United

States Bankruptcy Court for the District of New Jersey

(Filed—May 20, 1983)

NOLAN, O’NEILL & MOORE

60 Park Place

Newark, New J ersey 07102

(201) 643-6300

Attorneys for Thomas J. O’N eill, Trustee

UNITED STATES BANKRUPTCY COURT

For tue Disrricr or New JERSEY

Case No. 81-05967

———

In Re:

QUANTA RESOURCES CORPORATION,

a corporation of the State of Delaware,

Debtor.

ORDER AUTHORIZING ABANDONMENT

OF PROPERTY

This matter having been opened to the Court by Nolan,

O’Neill & Moore, attorneys for Thomas J. O’Neilll, Trustee

in Bankruptcy of Quanta Resources Corp., debtor, upon a

~ ee

65a

Appendia I

Notice to Creditors of Proposed Abandonment dated April

23, 1983, and notice having been given to the debtor, its

creditors, and other parties in interest of the Trustee’s

proposed abandonment of the property and of the oppor-

tunity to object and request a hearing on such proposed

abandonment, and an objection having been filed by the

State of New Jersey, Department of Environmental Pro-

tection, and the matter coming on to be heard before the

Court on May 17, 1983, William F. McEnroe, Esq. of

Nolan, O’Neill & Moore, appearing on behalf of the Trus-

tee, Richard F. Engel, Deputy Attorney General, appear-

ing on behalf of the Department of Environmental Protec-

tion, and Richard B. Honig, Esq. of Klinger, Honig, Red-

ish & Klinger, appearing on behalf of the landlords, Frola

and VonDohlin, and the Court having heard and considered

argument of counsel and for good cause shown;

Ir 1s on this 20th day of May, 1983;

Orperep that Thomas J. O’Neill, Trustee, be and he is

hereby auhtorized to abandon the contents of the tanks

located on the premises located at 1 River Road, Kdge-

water, New Jersey, consisting of mixed industrial and

automotive oil, sludge and water, together with any other

personal property of the debtor corporation located on

said premises and also including any leasehold interest

of the Trustee in the premises but reserving to the Trus-

tee possession of that oil which is the subject matter of a

sale to Valley Forge Engineering Inc. which oil shall

remain in the possession of the Trustee pending completion

of the sale, and it is

FurrHer Orperep that entry of this Order shall be

deemed to constitute the abandonment of the aforesaid

property by the Trustee effective May 17, 1988, nune pro

tune.

D. Joseru DrVito

United States Bankruptcy Judge

66a

APPENDIX J

Order Authorizing Abandonment of Property of the United

States Bankruptcy Court for the District of New Jersey

(Filed—July 7, 1982)

NOLAN, BELL & MOORE

60 Park Place

Newark, New J ersey 07102

Attorneys for Thomas J. O’Neill, Trustee

(201) 643-6300

UNITED STATES BANKRUPTCY COURT

For tHe Disrricr or New Jersey

Case No. 81-05967

—>__

In tHe Marrer or

QUANTA RESOURCES CORP., a corporation of the

State of Delaware,

Debtor.

ORDER AUTHORIZING ABANDONMENT

OF PROPERTY

This matter having been opened to the Court by Nolan,

Bell & Moore, attorneys for Thomas J. O’Neill, Trustee

in Bankruptey of Quanta Resources Corp., Debtor, upon

67a

Appendix J

a Notice to Creditors of sale or abandonment of property

dated March 18, 1982, and a Notice of Proposed Abandon-

ment dated May 25, 1982, both notices relating to the real

and personal property of the debtor corporation located

at 37-80 Review Avenue, Long Island City, New York, and

notice having been given to the debtor, its creditors and

other parties in interest of the Trus*’»es’ proposed aban-

donment of the property and o* the opportunity to ob-

ject and request a hearing on such proposed abandonment,

and objections having been filed by the State of New York

and by the City of New York, and the matter coming on to

be heard before the Court on June 8, 1982, and June 22,

1982, William F. MeMuroe, Esq. of Nolan, Bell & Moore

appearing on behalf of the Trustee, Norman Spiegel,

Esq. and Nancy Stearns, Esq., assistant attorneys generals

appearing on behalf of the State of New York, and Gary

R. Tarnoff, Esq., assistant corporation counsel, appear-

ing on behalf of the City of New York, ard the Court

having announced its decision in an oral opinion on June

22, 1982, the terms of which are incorporated herein, and

for good cause shown;

Ir 1s on this 7th day of July, 1982

Orverep that Thomas J. ONeill, Trustee, be and he is

hereby authorized to abandon the real and personal prop-

erty of the debtor corporation located at 37-80 Review

Avenue, Long Island City, New York, and, it is;

Furruer Orperep that entry of this Order shall be

deemed to constitute the abandonment of said property

by the Trustee, effective June 22, 1982, nunc pro tune,

and it is;

Furtruer Orverep that the application by the State of

New York to declare a first lien on the subject property

68a

Appendix J

in favor of the State of New York for any moneys ex-

pended by the State or City of New York to bring the

facility into compliance with New York law and legally dis-

pose of the wastes be and the same is hereby denied.

D. Josep DeVito

United States Bankruptcy Judge

69a

APPENDIX K

Oral Decision of the United States Bankruptcy Court for

the District of New Jersey

UNITED STATES BANKRUPTCY COURT

For THE District or New JERSEY

Case No. 81-05967

—

In THE MATTER OF

QUANTA RESOURCES,

Debtor.

TRANSCRIPT OF PROCEEDINGS

BEFORE:

THE HONORABLE D. JOSEPH DE VITO, United

States Bankruptey Court Judge, in Courtroom 6, Federal

Courthouse and Post Office Building, Newark, New Jersey,

on June 22, 1982, at 2:00 P.M.

1. Ajourned hearing objection to abandonment

of Long Island City property by State of New

York.

2. Adjourned hearing by trustee on objection to

private sale to total recovery.

70a

Appendix K

APPEARANCES:

Messrs. Nolan, Bell & Moore

By: William McEnroe, Esq.

Attorney for Tim O’Neill, Esq., Trustee

Frederick A. O. Schwarz, Jr., Esq.

By: Gary R. Tarnoff, Esq.

Corporation Counsel of the City of New York

Nancy Stearns, Esq.

Norman Spiegel, Esq.

New York Department of Law

Essex-Union Reporting Service

161 Eagle Rock Avenue

Roseland, New Jersey 07068

(201) 228-3118

The Court: I have heard enough gentlemen. The Trustee

in this matter has filed a Notice of Intention to abandon

real and personal property located at 37-80 Review Avenue,

Long Island City, New York, which property has been

used for many years as a waste oil processing and storage

facility improved with fuel storage tanks containing at

present in excess of 500,000 gallons of waste oil and other

chemicals- of which at least 70,000 gallons of waste oil

are contaminated with PCB’s. It is undisputed that such

equity as may exist in subject property over and above

the amount of two mortgage liens would be rapidly dis-

sipated by the costs of necessary and substantial repair

and clean-up operations on the facility It appears to the

Court, that there is little question if any that the subject

———

Se he ee =

71a

Appendix K

property is burdensome to the estate and of inconsequential

or no value to the «-tate.

The State of New York by its Attorney General, Robert

Abrams, joined by the City of New York by its corpora-

tion counsel, F. Schwarz, objects to the proposed abandon-

ment. The attorney general points out that to abandon

such a facility would be an open invitation to vandals and

arsonists. The destruction that they may cause together

with the progressive physical deterioration of the facility

makes it only a matter of time, the attorney general con-

tends, before the toxie pollutants are discharged into the

environment of New York City, threatening public health

and safety. The attorney general cites 28 U.S.C. 959 (b),

which provides “Except as provided in Section 1166 of

Title 11, a Trustee, Receiver or manager appointed in any

cause pending in any Court of the United States, inelud-

ing a debtor in possession, shall manage and operate the

property in his possession as such Trustee, Receiver or

Manager according to the requirements of the valid laws

of the State in which such property is situated, in the

same manner that the owner or possessor thereof would

be bound to do if in possession thereof.

The attorney general requests that the Trustee not be

permitted to abandon the Long Island City facility un-

less and until the Trustee removes all hazardous wastes

from the facility and disposes of those wastes in accord-

ance with New York State and Local Law.

Bankruptey Code 554 (a), made applicable to liquida-

tion cases under Chapter 7 by Bankruptey Code 103 (a),

permits the Trustee, after notice and a hearing, to aban-

don any property of the estate that is of inconsequential

value or burdensome to the estate.

72a

Appendix K

Upon review of both the fair market and forced liqui-

dation valuation of the facility, the attendant costs asso-

ciated with its upkeep including twenty-four guard service

for the property at a cost exceeding $1,100 per week paid

by the Trustee, and the apparently gargantuan task of re-

pair and clean-up, requiring a substantial expenditure,

none of which data is materially controverted by the ob-

jecting parties, the Court agrees that, by any standard,

the subject facility is of inconsequential value and burden-

some to the estate.

This case or proceeding was originally filed as a Chap-

ter 11 on October 6, 1981, was converted to a case under

Chapter 7 on November 12th, 1981, and on November the

18th, 1981, Thomas O’Neill was appointed Trustee and

continues to hold that office.

The violations of State and Local law complained of

by the attorney general are not the doing of the Trus-

tee, and the costs of repair of the physical premises and

cure of the unquestioned hazardous waste conditions can-

not be charged to the bankrupt estate.

It is the duty as well as the right of a Trustee or

debtor in possession to seek the Court’s approval to aban-

don property of inconsequential value or burdensome to

the estate just as it is the right and duty of the Trustee

or debtor in possession to seek the Court’s approval for

rejection of an executory contract when such contract is

burdensome to the estate. And I refer to in re: Investor’s

Development 7 B.R. 772, at page 774 and 6 Bankruptey

Court decision, 1415 (Bankruptey District of New Jersey

1980).

Section 959 of the Judicial Code is not controlling here.

‘The costs of clean-up, maintenance and repair required

73a

Appendix K

to cure the hazardous waste conditions apparently endemic

in the property have been factored into the Trustee’s cal-

culations whether or not to abandon the property and

the Trustee has elected through the power vested in him

by Section 554 of the Code to abandon in order both to

conserve the assets of and insure the orderly administra-

tion and liquidation of the bankrupt estate.

For this Court to grant the relief sought by the attor-

ney general, the right of the Trustee to abandon prop-

erty of the estate pursuant to Section 554 would be ren-

dered a nullity, as the estate would be made to suffer

the resultant costs of managing and operating the prop-

erty notwithstanding the decision of the Trustee to aban-

don same.

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.

Abandonment constitutes a divestiture on the part of

the Trustee of all interests in property that were prop-

erty of the estate. I refer to Collier on Bankruptey See-

tion 554.02 at 554-8. (15th Edition, 1982), causing posses-

sion to revest in the debtor or other party with a posses-

sory interest in the abandoned property.

74a

Appendiz K

The Court will, accordingly approve the decision of

the Trustee to abandon the property. The request of the

attorney general for a first lien on the property so as to

prevent an alleged unjust enrichment by the first and

second mortgagees, is rejected as unauthorized by the

Code.

In reaching the decision, the Court has been very cogni-

zant, mindful and concerned for the public interest in this

situation. But I think for this Court to grant the relief

requested by the attorney general, would do little else than

to put into

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