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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0143%3A02

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1985

## Text

Supreme Court of the United

Ocroser Term, 1984

THOMAS J. O’NEILL, TRUSTEE IN BANKRUPTCY OF
QUANTA RESOURCES CORPORATION, Debtor, Pesta
etitioner,

v.

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.
A

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

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

Quice - cupreme Court. US

FILED

——

Pe

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.

il

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).

iv

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

A

C,

_
I.

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

bo

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

10

11

14

15

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

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

Petitioner,
v.
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

2

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.

4

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,-

5

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,

8

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,

10

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

11

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:

12

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)

13

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).

14

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-

15

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.

16

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).

17

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

18

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 ————

19

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

20

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

21

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”.

23

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

24

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

(c) Notwithstanding subsection (a) and (b) of this
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

7

——— Ne eeeEEeeEEeEeEeEeeer ee eee

25

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.

26

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.

27

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.

28

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

2a
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

3a

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.

I

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

4a

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.

5a

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.

6a

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).

Ta

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.

8a

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.

9a

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.

A.

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.

B.

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

a

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

a

Se eee

2la

Appendix A

police powers be suspended to the extent they interfere
with the liquidation of the estate.

C.

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”

3a

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.

1.

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 follow

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0143%3A02. Public record. Not legal advice.