Petitioners Brief — O'Neill v. City of New York, 105 S. Ct. 2110 (1985) (No. 84-805)

p a

Nos. oh and 84-805 Office-Supreme Court, U.S, }

LED

ps APR 4 1985

Supreme Court of the United SHthfPy'e2.™™

—S

Ocrosrr TERM, 1984

MIDLANTIC NATIONAL BANK,

Petitioner (No. 84-801),

US.

THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL

PROTECTION,

Respondent,

and

THOMAS J. O’NEILL, TRUSTEE IN BANKRUPTCY OF

QUANTA RESOURCES CORPORATION, Debtor,

Petitioner (No. 84-805),

vs.

THE CITY OF NEW YORK and STATE OF NEW YORK, et al.,

Respondents.

On Writs of Certiorari to the United States Court of Appeals

For the Third Circuit

BRIEF OF PETITIONER, MIDLANTIC NATIONAL BANK

A. DENNIS TERRELL

Counsel of Record for Petitioner,

Midlantic National Bank

131 Madison Avenue

q Morristown, New Jersey 07960-1979

(201) 285-1000

SHANLEY & FISHER, P.C.

Att s for Petitioner

Midlantic National Bank

KENNETH S. KASPER

Of Counsel and

On the Brief

SSS ES TT a ES, EE SES

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

Petitions FoR CertTioraRI F'rtep NovemsBer 14, 1984

CERTIORARI GRANTED AND Cases CONSOLIDATED

Fepruary 19, 1985 >

Questions Presented for Review

1. Whether the Third Circuit Court of Appeals erred

in holding that a bankruptcy trustee’s ability to abandon

_burdensome and valueless property under 11 U.S.C. §554

is conditioned upon compliance with state environmental

regulations?

2. Whether the Third Cireuit Court of Appeals erred

in interpreting 11 U.S.C. $554 and 28 U.S.C. §959(b) so as

to raise a substantial question as to the taking of property

without just compensation in sharp conflict with the deci-

sion of this Court in United States v. Security Industrial

Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) ?

Parties

The parties who appeared before the Third Cireut Court

of Appeals in Case No. 83-5730 are listed below.

The New Jersey Department of Environmental Protec-

tion, Appellant.

Thomas J. O’Neill, Trustee for Quanta Resources Corp-

oration, Appellee.

Midlantie National Bank, Appellee.

James V. Frola and Albert Von Dohlin, Appellees.

The parties who appeared before the Third Cireuit Court

of Appeals in Case No. 83-5142 are listed below.

The City of New York and the State of New York, Ap-

pellants.

Thomas J. O’Neill, Trustee for Quanta Resources Corp-

oration, Appellee.

The State of New Jersey, Amicus Curiae.

The Commonwealth of Pennsylvania, Amicus Curiae.

The Department of Environmental Resources of the Com-

monwealth of Pennsylvania, Amicus Curiae.

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW ............--.-:c0cceeeeeeeeeees i

LS SLE il

a cmemnsiaianenmens V

OPINIONS AND JUDGMENTS BELOW ................-..-c0c--e-e0----- 2

EES SEE 2

CONSTITUTIONAL PROVISIONS AND STATUTES ......--------0----. 3

SPPATMPEBIT OF THB CAGE oneceecceccececcececececceceeesececcsccsceeeves 5

SUMMARY ESE ESS ens 9

ARGUMENT:

Porst I—The interpretation given to 11 U.S.C.

y554(a) by the Court of Appeals raises a sub-

stantial question under the taking clause of the

Fifth Amendment and, therefore, conflicts with

the rule of statutory construction confirmed

in United States v. Security Industrial Bank,

459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235

En an inlinebestetense 11

Point I1—Abandonment of burdensome and

worthless property pursuant to 11 U.S.C. $554

(a) by a trustee serving in a liquidation pro-

ceeding under Chapter 7 of the Bankruptcy

Code is not conditioned upon compliance with

local police power regulations ................2.-..-..---- 16

A. The Court of Appeals seriously miscon-

strued §554(a) of the Bankruptey Code in

holding that a trustee would violate en- -

vironmental protection laws by abandoning

contaminated property »

iv TABLE OF AUTHORITIES

B. The Court of Appeals erred in concluding

that Congress intended that abandonment

be conditioned upon compliance with state

environmental protection laws ..............--..--.-

Point 11{—Conditioning abandonment of burden-

some property upon environmental compliance

frustrates full effectuation of the objectives of

federal bankruptcy legislation and therefore

violates the supremacy clause ............----.--..-0---0-++

Coe cenncicintnierenasetiebiniammacanimaaneminminitaamanaianiiaite

PAGE

19

TABLE OF AUTHORITIES Vv

PAGE

Table of Authorities

Cases Cited

Agins v. City of Tiburon, 447 U.S. 255, 100 S.Ct. 2138,

BB Ea men aE 14

American Tobacco Co. v. Patterson, 456 U.S. 63, 102

S.Ct. 1534, 71 L.Ed.2d 748 (1982) 220. 19

Austrian v. Williams, 216 F.2d 278 (2d Cir. 1954),

cert. denied, 348 U.S. 953, 75 S.Ct. 441, 99 L.Ed.

TP TEED sitithidnienntitciiiapennimccsnninnn .. 24

Brown v. O’Keefe, 300 U.S. 598, 57 S.Ct. 543, 81 L.Ed.

TEER ee Lee ENR ER EE 9,17, 19

City of New York v. Quanta Resources Corp. (In re

Quanta Resources Corp.), 739 F.2d 912 (3d Cir.

IIIT senithicindilnbinatiitineaadisdaanidiatisbiel 2, 11, 12, 16, 18, 20, 21, 23, 27

Consumer Product Safety Comm’n v. GTE Sylvania,

Inc., 447 U.S. 102, 100 S.Ct. 2051, 64 L.Ed.2d 766

CARINE > ‘icitenincissesicnnscternenisiniannsishiinsilteeabapsainsiltecsiassisdscissiahietanaiiies 19

Frola v. O’Neill (In re Quanta Resources Corpora-

tion), Case No. 81-05967, Adversary No. 82-0753

CEUs MINNIE Suisiecsshiniicatinistiniiiaienesiliuidiethesiinalddditaile te tasaaie 6,7

Frola v. O’Neill (In re Quanta Resources Corpora-

tion), Civil Action No. 83-4358 (D.N.J.) .................. 7

Griswald v. Connecticut, 381 U.S. 479, 85 S.Ct. 1678,

Oe ee ee ED hnctiaiieieitciccendcteitessniiasantitietsnetiniinnes 19

Hines vy. Davidowitz, 312 U.S. 52, 61 S.Ct. 399, 85

AREA A ED. sndenniesininincisenbvinnsictnincinabhipindininisiudenl 10, 26

In re Charles George Land Reclamation Trust, 30

BRR. SEB CHUOI. Bi. TG) cnneccccssecccccscsesssmscnciennesecees 18

vi TABLE OF AUTHORITIES

PAGE

In re Chicago Rapid Transit Co., 129 F.2d 1 (7th Cir.

1942), cert. denied, 317 U.S. 6838, 63 S.Ct. 205, 87

ae He > III: seccstcestedsedetatianicartipicsstinnnlianidcasheieimainintinnasn 21, 22

In re Cruseturner, 8 B.R. 581 (Bkrtcy. D.Utah

In re Lewis Jones, Inc., 1 Bkr. Ct. Dee. 277 (Bkrtey.

ET: CUTE . <rcccrcctesivislaienutininianisiiininiaasisbianiaasaliaainenin 21,2

In re Quanta Resources Corporation, 739 F.2d 927

GD Gt ID Sicenttiensbessencicnnissdeeshsinisellniacsiinsicinibannaitalateaaadane 11, 16

In re T.P. Long Chemical, Inc., 45 B.R. 278 (Bkrtcy.

Pe: Ge GENIN | ceteidcinsnsaitinsenscdisesnstedinntincsiiioniindimanensions 12,14

Lorillard v. Pons, 434 U.S. 575, 98 S.Ct. 866, 55 L.1Ed.

BE GD CIGD tetrctitettnsiccmiianiien ecvctnrnaneiiiienintatainints 15

Louisville Joint Stock Land Bank v. Radford, 295

U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935) -....... 9, 13, 14

Mason v. C.I.R., 646 F.2d 1309 (9th Cir. 1980) -.......... 17

Michigan Canners & Freezers Assn. v. Agricultural

Marketing and Bargaining Board, US. —,

104 S.Ct. 2518, 81 L.Ed.2d 399 (1984) 2. 26

Ohio v. Kovacs, —— U.S. ——, 105 8.Ct. 705, 83

a7) RF eee 10, 23, 25

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

TEI cssiovssccinssnittinainiuatietiseiapuitenendannsiptieatnmaniinmiinittsieniddiia 16, 20-22

Pacific Gas and Electric Company v. State Energy

Resources Conservation & Development Commis-

sion, 461 U.S. 190, 130 S.Ct. 1718, 75 L.Ed.2d 752

CIT cicero cersiccsssntnenseesssesnnietnensncnsaiesannintesetasinesnanmmunannssttisa 28

Penn Terra Ltd. v. Department of Environmental Re-

sources, 733 F.2d 267 (3d Cir. 1984) ........-......-.....--- 22-23

TABLE OF AUTHORITIES Vii

PAGE

Perez v. Campbell, 402 U.S. 637, 91 St.Ct. 1704, 29

L.Ed.2d 233 (1971) ............ ieiiiiaianiatitaaiiaitiaiil 10, 26, 28

Reiter v. Sonotone Corp., 442 U.S. 330, 99 S.Ct. 2326,

60 L.Ed.2d 931 (1978) ............................ 19

State of Mo. v. U.S. Bkrtey. Court, Ete., 647 F.2d 768

(Sth Cir. 1981), cert. denied, 454 U.S. 1162, 102

S.Ct. 1035, 71 L.Ed.2d 318 (1982) nee eee 24

United States v. Clark, 454 U.S. 555, 102 S.Ct. 895,

70 L.Ed.2d 768 (1982) ...... 10, 19

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

70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) ....i, 11-13, 15, 29

Village of Euclid v. Ambler Realty Co., 272 U.S. 365,

47 S.Ct. 114, 71 L.Ed. 303 (1926) 2.02... 14

United States Constitution Cited

a ARTE ee ee ae a Le 3, 26

SF crtetncinetcnioinens piaenasiatiiaipaeia 3, 9, 11-13

Statutes Cited

N.J.S.A. 13:1K-6 et seq. (West Supp. 1984) -.......... 27

N.J.S.A. 13:1K-8(b) (West Supp. 1984) 002020... 28

N.J.S.A. 13:1K-9(a) (1) (West Supp. 1984) —.......... 27

N.J.S.A. 13:1K-9(a) (2) (West Supp. 1984) —.......... 27

N.J.S.A. 13:1K-9(b) (1) (West Supp. 1984) —......... 27

N.J.S.A. 13:1K-9(b) (3) (West Supp. 1984) —......... 27

N.J.S.A. 13:1K-12 (West Supp. 1984) 2000. 28

viii TABLE OF AUTHORITIES

a

: PAGE

N.J.S.A. 13:1K-13 (West Supp. 1984) ................---.---. 27

N.J.S.A. 58:10-23.11f(f) (West Supp. 1983) .............. 25

11 U.S.C.:

FT 23

rT an 12

en 12

§ £ se: no sinalansiainidestaniicdeiniivie 13

Te 17

TIA: TEI sesteestinectstinieteniintiniannniarecimmnianmuahicians i, 5, 21

| eno 4, 9-13, 15-17, 19,

20, 23, 25, 26, 29

Bs TIIUD ceceunscstesnstassentiininentniatnicaminicansiapissacimeitinnemansincadiiiin 4, 27

Be, TEI ccisestitscssesceesisncnsintenscinsncniinieianiaiiainciiaisinnimiinciesits 28

28 U.S.C.:

| eer See i, 5, 22-24

) x_n 2

Bee, TEED eccccecesccsenccsemcsintiinimennesectntnstemammenininsaaton 8

a 8

Sec. 405 of the Bankruptcy Reform Act of 1978, Pub.

L. 95-598, Title IV, 92 Stat. 2686 (1978) ............-....-.. 8

Rule Cited

Local Rule 47 of the United States District Court for

the District of New Jersey .....................ce-csseosereceeeeeeceee 8

TABLE OF AUTHORITIES ix

Legislative History Cited

H.R. Rep. No. 95-595, 95th Cong. Ist Sess (1977),

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

UTE sassdsecisiieeesiaeeiteaasbapinpieabitidisigiaiabiiideddih andi nm

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

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

SULT \inveibicsignitienabdeeiiisiitiiaihtca laa iaaalaiataat ee ats 27

Other Authorities Cited

4 L.P. King, Collier on Bankruptey 554.01 (15th

i MI, “chcisbidiideameeneiadiaciasitasieit ea 16, 17

4 L.P. King, Collier on Bankruptey 554.02(2) (15th

a SI icheiidicicdiadabtacicectinin ad testa han 17

7-Pt.2 J. Moore and J. Lucas, Moore’s Federal Prac-

tice §66.04(4) (2d Ed. 1982) eee cccceeeeeee 24

2A N.J. Singer, Sutherland Statutory Construction

§45.11 (Sands 4th Ed. 1984) occ lccccecececceeees 13

Nos. 84-801 and 84-805

IN THE

Supreme Court of the United States

Ocroser TERM, 1984

= >

MIDLANTIC NATIONAL BANK,

Petitioner (No. 84-801),

VS.

THE NEW JERSEY DEPARTMENT OF

ENVIRONMENTAL PROTECTION,

Respondent,

and

THOMAS J. O’NEILL, TRUSTEE IN BANKRUPTCY

OF QUANTA RESOURCES CORPORATION, Debtor,

Petitioner (No. 84-805),

Vs.

THE CITY OF NEW YORK and

STATE OF NEW YORK, e¢ al.,

Respondents.

On Writs of Certiorari to the United States Court of Appeals

For the Third Circuit

—@—

BRIEF OF PETITIONER, MIDLANTIC NATIONAL BANK

Opinions and Judgment Below

The opinion of the Third Circuit Court of Appeals in

the action involving the New Jersey property, Case No.

83-5730, is reported at 739 F.2d 927 and is set forth at

pages 35a to 40a of the appendix to the Petition of Trustee

Thomas J. O’Neill (“the Trustee”). The amended judg-

ment of the Court of Appeals in that case is set forth at

pages 47a to 48a of the appendix to the Petition filed by

the Trustee. The order denying the petition for rehearing

by the Cireuit Court of Appeals is set forth at pages 49a

to 51a of the appendix to the Petition filed by the Trustee.

The order of the United States Bankruptcy Court for the

District of New Jersey authorizing abandonment of the

New Jersey property is set forth at pages 64a to 65a of

the appendix to the Petition filed by the Trustee.

The opinion of the Third Cireuit Court of Appeals in

the companion case of City of New York v. Quanta Re-

sources Corp. (In the Matter of Quanta Resources Corp-

oration, Debtor), is reported at 739 F.2d 912. This opinion

is also set forth at pages la to 43a of the appendix to the

Petition filed by the Trustee. The opinion of the United

States District Court for the District of New Jersey in

the companion case is not reported but is set forth at pages

52a to 60a of the appendix to the Petition filed by the

Trustee. The opinion of the United States Bankruptcy

Court for the District of New Jersey in the companion case

is not reported but is set forth at pages 69a to 75a of the

appendix to the Petition filed by the Trustee.

Jurisdiction

Midlantic National Bank (“Midlantic’’) and the Trustee

have invoked jurisdiction of the Court under 28 U.S.C.

§1254(1). The judgments of the Court of Appeals in Case

No. 83-5154 and in Case No. 83-5730 were entered on July

20, 1984. On August 16, 1984, the Court of Appeals denied

rehearing.

Constitutional Provisions and Statutes

The Supremacy Clause of Article 6 and the Fifth Amend-

ment to the United States Constitution along with three

federal statutes, 11 U.S.C. §554(a), 11 U.S.C. 4704, and

28 U.S.C. $959(b), are central to this matter.

Article VI, Clause 2:

This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

and all Treaties made, or which shall be made, un-

der the Authority of the United States, shall be the

supreme Law of the Land; and the Judges in every

State shall be bound thereby, any Thing in the Con-

stitution of Laws of any State to the Contrary not-

withstanding.

Amendment V:

No person shall be held to answer for a capital,

or otherwise infamous crime, unless on a present-

ment or indictment of a Grand Jury, except in cases

arising in the land or naval forces, or in the Militia,

when in actual service in time of War or public

danger; nor shall any person be subject for the

same offence to be twice put in jeopardy of life or

limb; nor shall be compelled in any criminal case

to be a witness against himself, nor be deprived of

life, liberty, or property, without due process of

law; nor shall private property be taken for public

use, without just compensation.

11 U.S.C. §554(a):

After notice and a hearing the trustee may aban-

don any property of the estate that is burdensome

to the estate or that is of inconsequential value to

the estate.

11 U.S.C. §704:

The trustee shall—

(1) collect and reduce to money the property of

the estate for which such trustee serves, and close

such estate as expeditiously as is compatible with

the best interests of parties in interest;

(2) be aecountable for all property received;

(3) ensure that the debtor shall perform his in-

tention as specified in section 521(2)(B) of this title;

(4) investigate the financial affiairs of the debtor;

(5) if a purpose would be served, examine proofs

of claims and object to the allowance of any claim

that is improper;

(6) if advisable, oppose the discharge of the

debtor ;

(7) unless the court orders otherwise, furnish such

information concerning the estate and the estate’s

administration as is requested by a party in inter-

est;

(8) if the business of the debtor is authorized to

be operated, file with the court and with any govern-

mental unit charged with responsibility for collee-

tion or determination of any tax arising out of such

operation, periodic reports and summaries of the

operation of such business, including a statement

9)

of receipts and disbursements, and such other in-

formation as the court requires; and

(9) make a final report and file a final account

of the administration of the estate with the court.

28 U.S.C. §959(b) :

Except as provided in section 1166 of title 11,

a trustee, receiver or manager appointed in any

cause pending in any court of the United States, in-

cluding a debtor in possession, shall manage and

operate the property in his possession as such trus-

tee, receiver or manager according to the require-

ments 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.

Statement of the Case

These two companion cases, arising out of the same bank-

ruptcy proceeding, present to the Court the question of

the construction of the abandonment provision of the Bank-

ruptey Code, 11 U.S.C. $554, and the interrelationship of

that statutory provision with other state and federal laws.

The question arises in the context of a bankruptcy liqui-

dation involving a debtor which had conducted waste oil

recycling operations in Edgewater, New Jersey, and Long

Island City, New York.’ Abandonment of the two sites by

the Trustee is opposed by the environmental agencies of

1Insofar as Midlantic’s security interest in certain property

of the debtor does not extend to the Long Island City facility,

Midlantic will rely upon the Trustee to set forth the specific facts

concerning abandonment of that facility.

New York and New Jersey who seek to compel the Trustee

to bring the sites into compliance with all environmental

laws.

Quanta Resources Corporation (“Quanta”) was formed

as a Delaware corporation in March 1980.2 In July 1980,

Quanta entered in an agreement to acquire Kdgewater

Terminals, Inc., and its interest in a lease for property

located at 1 River Road, Edgewater, New Jersey (R. Stip.

16). Through this agreement, a Temporary Operating

Authorization (“TOA”) from the New Jersey Department

of Environmental Protection (“NJDEP”) to operate a

waste oil recovery business at the Edgewater site was

assigned to Quanta (R. Stip. 4, 7).

With the TOA in hand, Quanta accepted waste oil and

oil sludge at the Edgewater property in order to process

the oil for resale (R. Stip. 17). On June 3, 1981, Quanta

borrowed $600,000.00 from Midlantie for working capital

and executed a Note and Security Agreement (R. Stip. 79).

Midlantie’s security interest in Quanta’s inventory, ac-

counts receivable and several items of equipment was duly

perfected pursuant to New Jersey law (R. Stip. §9).* By

Order dated April 5, 1982, the United States Bankruptcy

Court for the District of New Jersey determined that Mid-

lantic holds a valid first priority lien in the sum of $643,-

2 Paragraph 5 of the Stipulation of Facts filed on December

20, 1982, in Frola v. O’ Neill (In re Quanta Resources Corporation),

Case No. 81-05967, Adversary No. 82-0753 (Bkrtcy. D.N.J.)

designated as item seven in the Designation of Contents for

Inclusion in Record on Appeal. For ease of reference, subsequent

‘citations will be made according to the following form—R. Stip.

15.

8 Midlantic’s security interest did not extend to any of Quanta’s

Long Island City property.

660.68 in the various item of the debtor’s Edgewater prop-

erty including the waste oil inventory relevant to this ap-

plication (R. Stip. f11).

Late in June 1981, NJDEP sample waste oil stored by

Quanta at the Edgewater site and discovered unlawful con-

centrations of polychlorinated biphenyls (“PCBs”) (R.

Stip. 78). Under the terms of the TOA, PCBs could not

be stored at the faciilty (R. Stip. 78). As a result, on July

2, 1981, Quanta complied with a NJDEP request and ceased

all operations at the Edgewater site (R. Stip. 710).

On October 6, 1981, Quanta filed a voluntary petition

for reorganization under Chapter 11 of the Bankruptcy

Code (R. Stip. 71). The Chapter 11 petition was con-

verted to a Chapter 7 liquidation proceeding on November

18, 1981 and on that same day Thomas J. O’Neill was des-

ignated as the Quanta trustee (R. Stip. 2).

The Trustee proceeded to sell a portion of the waste

oil inventory that was not contaminated with PCBs, gen-

erating a sum of approximately $288,000.00 (R. Stip. {]12).*

*On July 7, 1982, the owners of the Edgewater property,

Frola and Von Dohlin, started an action in the Bankruptcy Court

seeking, inter alia, an order directing the Trustee to turn over

the proceeds of the sale of this oil to the landowners. Frola v.

O’Neill (In re Quanta Resources Corporation), Case No. 81-

05967, Adversary No. 82-0753( Bkrtcy. D.N.J.) NJDEP cross-

claimed seeking the funds for future cleanup of the site. By

order of April 27, 1983, the Bankruptcy Court dismissed the

claim of the landowners and the NJDEP and deferred resolution

of Midlantic’s turnover application as being premature. The NJDEP

appeal to the District Court from this order is now pending although

on “administrative hold” until the abandonment issue is resloved.

Frola v. O’Neill (In re Quanta Resources Corporation), Civil

Action No. 83-4358 (D.N.J.). Pursuant to a consent order, the

Trustee has distributed the proceeds to various parties subject

to further adjudication of NJDEP’s rights.

8

In addition, through notices ‘ssued on October 8, 1982,

October 18, 1982, and April 22, 1983, the Trustee announced

his intention to abandon the PCB laden waste oil inven-

tory in Edgewater (R. Stip. 719; R. October 8, 1982, No-

tice; R. October 18, 1982, Revised Notice; R. April 22, 1983,

Notice). Over NJDEP objections of October 14, 1982, and

April 27, 1983, the Bankruptcy Court authorized abandon-

ment of the Edgewater site by order of May 20, 1983° (R.

May 20, 1983, Order reprinted at Appendix | to the Trus-

tee’s Petition for Certiorari).

Since the abandonment issued raised in the New Jersey

case was already pending before the Court of Appeals for

the Third Cireuit, a notice of appeal by agreement to the

Court of Appeals under 28 U.S.C. §1293(b) was filed by

NJDEP on September 21, 1983 (R. Notice of Appeal).

It is important to note that in the appeal NJDEP did not

challenge the conclusion of the Bankruptey Court that the

Edgewater facility and its contaminated waste oil inven-

tory were of no value and were instead a great burden to

the estate. Instead, NJDEP argued that the Trustee could

not abandon the burdensome property because of a duty

to clean up the environmental contamination arising un-

der police power laws of the State of New Jersey (R. State-

ment of Issue on Appeal).

Over the dissent of Cireuit Judge Gibbons, the Third

Cireuit Court of Appeals reversed the decision of the Bank-

5 The United States Bankruptcy Court for the District of New

-Jersey had jurisdiction over the abandonment application under

§405 of the Bankruptcy Reform Act of 1978, Pub. L. 95-598,

Title IV, 92 Stat. 2686 (1978), reprinted in note preceding, 28

U.S.C.A. §1471 (West Supp. 1983) and Local Rule 47 of the

United States District Court for the District of New Jersey that

was issued on October 1, 1982.

9

ruptey Court holding that the Trustee would violate state

environmental legislation if he were to abandon the con-

taminated oil and that the Trustee must somehow bring

the Edgewater site into compliance with local environ-

mental laws.

Summary of Argument

1. The Court of Appeals violated a canon of statutory

construction in interpreting the abandonment provision of

the Bankruptcy Code, 11 U.S.C. §554(a), so as to raise a

substantial constitutional issue of taking under the Fifth

Amendment to the United States Constitution. United

States v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct.

401, 74 L.Ed.2d 235 (1982). The Fifth Amendment com-

mands that the burden of cleaning up environmental prob-

lems of a valueless asset abandoned by a trustee in bank-

ruptey be borne by the general public and not the credi-

tors of the debtor’s estate. Louisville Joint Stock Land

Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593

(1935).

2. Congress did not intend that abandonment of burden-

some and valueless assets of an estate being liquidated in

bankruptey be conditioned upon a trustee first spending

assets that would otherwise go to creditors so as to bring

the abandoned property into compliance with state environ-

mental laws.

(a) Abandonment of a burdensome asset does not con-

stitute an act or omission triggering liability for a trustee

under environmental laws. Brown v. O’Keefe, 300 U.S. 598,

57 S.Ct. 543, 81 L.Ed. 827 (1937).

(b) Publie policy demands that trustees serving under

federal bankruptcy law not assume personal responsibility

10

for environmental problems arising through prepetition

conduct ef debtors.

(c) The Court of Appeals erred in creating a limitation

upon a trustee’s ability to abandon burdensome estate as-

sets in view cf the clear and conclusive language of 11

U.S.C. §554(a). United States v. Clark, 454 U.S. 555, 102

S.Ct. 895, 70 L.Ed.2d 768 (1982). Ohio v. Kovacs, ——

U.S. ——-, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985).

3. Insofar as they impact upon 11 U.S.C. §554(a) and

a trustee’s ability to abandon burdensome property, state

environmental laws stand as an obstacle to the purposes

and objectives of Congress and fall under the supremacy

clause. Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29

L.Ed.2d 233; Hines v. Davidowitz, 312 U.S. 52, 61 S.Ct. 399,

85 L.Ed. 581 (1941).

11

ARGUMENT

POINT I

The interpretation given to 11 U.S.C. §554(a) by

the Court of Appeals raises a substantial question under

the taking clause of the Fifth Amendment and there-

fore conflicts with the rule of statutory construction

confirmed in United States v. Security Industrial Bank,

459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1962).

As a creditor with a perfected security interest in the

fund created from the sale of a portion of Quanta’s waste

oil inventory, Midlantic has raised its voice on its own

and on behalf of all creditors against the far reaching

interpretation given to 11 U.S.C. §554(a) by the Court

of Appeals. Under the decision below, who must bear the

huge cost of disposing of the PCB contaminated oil?® No

party has ever challenged the fact that the Trustee has

never had sufficient funds to clean up either site. Nonethe-

less, the Court of Appeals reversed the Bankruptcy Court

orders authorizing abandonment directing that the envir-

onmental cleanup costs be evaluated as administrative ex-

penses on remand. City of New York v. Quanta Resources

Corp. (In re Quanta Resources Corp.), 739 F.2d 912, 923

(3d Cir. 1984); In re Quanta Resources Corporation, 739

F.2d 927, 929 (3d Cir. 1984).7 Through this command, the

® Following abandonment of the Long Island City property by

the Trustee, New York City and New York State cleaned up that

site at an expense of approximately $2,500,000.00 (Petition of

Trustee, p. 5, footnote 2). To date NJDEP has not taken any

action to clean up the Edgewater site.

7In his dissent in the New York case, Circuit Judge Gibbons

criticized the majority’s sidestep of the administrative expense

(Footnote continued on following page)

12

Court of Appeals has shifted the burden of environment

compliance from the debtor to the Trustee to the creditors,

possibly including secured creditors such as Midlantic,

“who, on the record before us, were in no way responsible

for placing the contaminated oil on that site”. Jd. at 925

(dissent of Judge Gibbons).

Midlantic respectfully asserts that the Court of Ap-

peals violated a canon of statutory construction in its drive

to advance the important policy of protecting the public

health by regulating disposal of toxic wastes. See, City of

New York v. Quanta Resources Corp., 739 F.2d at 921.

Throughout this litigation, both Midlantic and the Trustee

have argued that a rule conditioning the clear command

of the abandonment provision of the Bankruptcy Code,

11 U.S.C. §554(a), would raise a serious taking issue under

the Fifth Amendment. Yet, the Court of Appeals saw no

taking question arising under the Fifth Amendment in

the destruction of Midlantic’s rights as a secured creditor

in favor of the public welfare. Indeed, the constitutional

argument was dismissed in a footnote. City of New York

v. Quanta Resources Corp., 739 F.2d at 922 (footnote 11).

This casual dismissal of the taking issue completely dis-

regarded the rationale of this Court in United States v.

Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 401, 74

L.Ed.2d 235 (1982).

(Footnote continued from preceding page)

priority issue as irresponsible. City of New York v. Quanta

. Resources Corp., 739 F.2d at 925. Expanding the Third Circuit

Quanta opinions, one Bankruptcy Court has recently held that

environmental claims are administrative expenses under 11 U.S.C.

§503 and are entitled to priority over all unsecured creditors under

11 U.S.C. §507(a)(1). In re T.P. Long Chemical, Inc., 45 B.R.

278, 286-290 (Bkrtcy. N.D. Ohio 1985). \

13

In Security Industrial Bank, a secured creditor chal-

lenged retrospective application of §522(f)(2) of the Bank-

ruptey Code, 11 U.S.C. §522(f)(2), as an unconstitutional

taking of a pre-enactement lien under the Fifth Amend-

ment. On review, this Court first noted that under Louwis-

ville Joint Stock Land Bank vy. Radford, 295 U.S. 555, 55

S.Ct. 854, 79 L.Ed. 1593 (1935) the bankrupter power is

subject to the Fifth Amendment’s prohibit.un against tak-

ing private property without compensation. 459 U.S. at

75, 103 S.Ct. at 410, 74 L.Ed.2d at 240. The Security In-

dustrial Bank Court next reviewed the nature of the

claimed taking and found that the government action would

result in a complete destruction of the property right of

the secured party. 459 U.S. et 75, 103 S.Ct. at 411, 74 L.Ed.

2d 241. To avoid this grave constitutional question, the

Court applied the cardinal principle of statutory construe-

tion that a statute should be construed so as to avoid a

constitutional question if an alternative interpretation is

fairly possible. Security Industrial Bank, 459 U.S. at 78,

103 S.Ct. at 412, 74 L.Ed.2d at 243. Stated alternatively:

As a corollary of the presumption favoring con-

stitutionality, the fact that one among alternative

constructions would involve serious constitutional

difficulties is reason to reject that interpretation

in favor of another.

2A N.J. Singer, Sutherland Statutory Construction, §45.11

(Sands 4th Ed. 1984).

As in Security National Bank, the interpretation given

to 11 U.S.C. §554(a) by the Court of Appeals creates a

very serious question of an unconstitutional taking of pri-

vate property under the Fifth Amendment. Indeed, in

footnote eleven of the Long Island City abandonment opin-

ion, the Third Cireuit concluded that it would be consti-

tutionally reasonable to require that proceeds normally

14

targeted for satisfaction of a secured creditor’s lien be

instead spent by the Trustee to comply with toxic waste

disposal. 739 F.2d at 922.° The end result would be total

destruction of Midlantic’s lien since, even including the

money that would be otherwise paid to Midlantic, the Trus-

tee only has a small fraction of the funds necessary to

compensate the New York regulatory agencies for cleanup

of the Long Island City site.

In dismissing the taking issue, the Court of Appeals

categorized enforcement of New York and New Jersey

environmental laws as a permissible regulatory activity

and not an unconstitutional taking. 739 F.2d at 922 (foot-

note 11). Midlantie respectfully disagrees. Starting with

Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 47

S.Ct. 114, 71 L.Ed. 303 (1926) (zoning ordinance limiting

use of property valid as exercise of police power) through

Agins v. City of Tiburon, 447 U.S. 255, 100 S.Ct. 2138,

65 L.Ed.2d 106 (1980) (zoning ordinance placing land in

residential planned development and open space zone),

this Court has repeatedly recognized that reasonable regu-

latory actions do not constitute unlawful takings. How-

ever, reasonableness has its limits and at some point in

time regulation crosses the line to become confiscation.

As noted by Justice Brandeis in the Louisville Joint Stock

Land Bank v. Radford opinion:

[T]he Fifth Amendment commands that, however

great the Nation’s need, private property shall not

be thus taken even for a wholly public use without

8 This conclusion conflicts with the recent decisions of the

* Bankruptcy Court for the Northern District of Ohio In Jn re T-.P.

Long Chemical, Inc., 45 B.R. 278 (Bkrtcy. N.D. Ohio 1985).

Nonetheless, absent reversal by this Court, the New Jersey Bank-

ruptcy Court will probably be persuaded by the reasoning of the

Third Circuit on remand.

15

just compensation. If the public interest requires,

and permits, the taking of property of individual

mortgages in order to relieve the necessities of

individual mortgagors, resort must be had to pro-

ceedings by eminent uomain; so that, through tax-

ation, the burden of the relief afforded in the public

interest may be borne by the public.

295 U.S. at 602.

Since implementation of the Third Cireuit decisions in

the two Quanta cases will undoubtedly lead to total de-

struction of Midlantic’s property interest, reliance upon

the cases upholding limited regulatory activities stands

completely off the mark. The result is not regulation but

destruction. Moreover, the effect falls upon an innocent

third party and not a primary actor somehow responsible

for the necessity of the regulatory action. On these facts

the Court of Appeals erred in finding that its construction

of 11 U.S.C. §554(a) did not raise a substantial question

under the taking clause of the Fifth Amendment.

Once such a question was raised, the holding of this

Court in United States v. Security Industrial Bank, 479

U.S. 70, 103 S.Ct. 407, 74 L.Ed. 2d (1982) required that

the Court of Appeals ascertain whether another construc-

tion of 11 U.S.C. §554(a) would avoid the constitutional

question. 459 U.S. at 78, 103 S.Ct. at 412, 74 L.Ed. 2d

at 243; see also, Lorillard v. Pons, 434 U.S. 575, 577, 98

S.Ct. 866, 868 55 L.Ed.2d 40 (1978). A construction that

would not condition abandonment upon environmental

compliance would certainly avoid the taking issue. More-

over, as demonstrated through Point II of this Brief,

any alternative construction would flatly contradict the

intention of Congress in enacting $554(a).

16

POINT II

Abandonment of burdensome and worthless property

pursuant to 1] U.S.C. §554(a) by a trustee serving in

a liquidation proceeding under Chapter 7 of the Bank-

ruptcy Code is not conditioned upon compliance with

local police power regulations.

A. The Court of Appeals seriously misconstrued §554(a)

of the Bankruptcy Code in holding that a trustee would

violate environmental protection laws by abandoning

contaminated property.

In the two decisions below, the Court of Appeals held

that the Trustee could not abandon burdensome property

because abandonment would contravene state and local

environmental laws. City of New York v. Quanta Re-

sources Corp., 739 F.2d at 913; In re Quanta Resources

Corporation, 735 F.2d at 928-929. Midlantic asserts that

one reason why these holdings are wrong is that the Court

of Appeals misconstrued the basic issue on appeal. The

true issue being whether abandonment may be condi-

tioned upon compliance with state and local environmental

laws instead of whether the Trustee would actually violate

such laws upon abandonment. A brief review of the

history of a trustee’s abandonment power shows why the

phrasing of this issue is so important.

Prior to 1978, the law of bankruptcy was governed by

the Bankruptcy Act of 1898. The Bankruptey Act did not

contain a specific statutory provision governing abandon-

ment of property in the liquidation context. See, Otten-

- heimer v. Whitaker, 198 F.2d 289, 290 (4th Cir. 1952),

affirming, 102 F. Supp. 103 (D.Md. 1952) and 4 L.P. King,

Collier on Bankruptcy, 9554.01 (15th Ed. 1985). Instead,

case law permitted a trustee to abandon valueless property

so as to further the paramount purpose of liquidation—

17

the reduction of the debtor’s property to money for ex-

peditious distribution to general creditors. 4 L.P. hing,

Collier on Bankruptcy, 7554.01 (15th Ed. 1985). The com-

mon law rule has now been replaced by a specific statutory

provision governing abandonment—l1l1 U.S.C. $554(a).

In addition, title to property of the debtor’s estate was

treated differently under the prior Bankruptcy Act.

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 (11 U.S.C. $541),

the Trustee no longer takes title to the debtor’s prop-

erty, and, upon abandonment under Section 554, the

trustee is simply divested of control of the property

because it is no longer part of the estate. Thus,

abandonment constitutes a divesture of all interests

in the property that were property of the estate.

4 L.P. King, Collier on Bankruptcy, 9554.02(2) (15th Ed.

1985). However, even under the prior act, title to property

abandoned by a trustee revested in the debtor as of the

date of commencement of the bankruptcy proceeding.

Brown v. O’Keefe, 300 U.S. 598, 602, 57 S.Ct. 543, 81 L.Ed.

827 (1937). This “legal fiction” continues under applica-

taion of §554(a). Mason v. C./.R., 646 F.2d 1309, 1310

(9th Cir. 1980); In re Cruseturner, 8 B.R. 581, 591-592

(Bkrtcy. D.Utah 1981). The analysis of Bankruptcy Judge

Mabey in the Cruseturner opinion is particularly relevant.

Thus, when the trustee abandons property, the

property stands as if no bankruptcy had been filed

and the debtor enjoys the same claim to it and in-

terest in it as he held previous to the filing of

bankruptcy ... Although case law characterization

of the revesting of property in the debtor has been

18

referred to as “legal fiction” . . . application in this

context is appropriate in light of both the legisla-

tive history and the plain meaning of the applicable

statutory provisions.

In re Cruseturner, 8 B.R. at 591-592.

By operation of the “legal fiction” as to title of aban-

donment property, the Quanta Trustee would stand as if

he never had any interest in the polluted inventories. He

would therefore be immune from prosecution for violation

of environmental laws, subject to liability only if he under-

took some prohibited act such as pouring the waste oil

down a sanitary sewer.

Sound poiicy considerations support continuation of the

“legal fiction” surrounding abandonment in a bankruptcy

liquidation proceeding in today’s world. Midlantic asks,

who would choose to serve as a trustee in bankruptcy if

personal liability would attach to such a trustee for en-

vironmental problems arising because of prepetition con-

duct of the debtor? Indeed, in its opinion concerning the

Long Island City abandonment, the Court of Appeals in-

dicated that by abandoning the contaminated waste oil

the Trustee may be guilty of a felony under New York

law. City of New York v. Quanta Resources Corp., 739

F.2d at 921. Clearly, no person would accept such a peril-

ous responsibility and the bankruptcy system would grind

to a halt in any case where potential environmental issues

could arise.

This exact problem surface in Jn re Charles George

Land Reclamation Trust, 30 B.R. 918 (Bkrtey. Ma. 1983).

* In that case, no person was willing to accept the risk of

personal liability arising under state and federal environ-

mental laws by serving as a Chapter 7 trustee for an

estate with grave environmental problems. Jd. at 924. As

19

a result, the Bankruptcy Court dismissed the Chapter 7

proceeding citing as reaso.is the lack of resources, expertise

and a qualified trustee. Jd. This abdication of responsi-

bility is the end product of an irrational interpretation

of 11 U.S.C. $554(a). This Court should address this very

important issue with a clear and direct statement limit-

ing liability of a trustee under the doctrine of Brown v.

O’Keefe, 300 U.S. 598, 602, 57 S.Ct. 543, 81 L.Ed. 827

(1937).

B. The Court of Appeals erred in concluding that Con-

gress intended that abandonment be conditioned upon

compliance with state environmental protection laws.

The starting point in statutory interpretation is the

language of the statute—in this case 11 U.S.C. $554(a).

Reiter v. Sonotone Corp., 442 U.S. 330, 337, 99 SCt. 2326,

2330, 60 L.Ed.2d 931 (1978). If the statutory language

is clear, it is ordinarily conclusive. United States v. Clark,

454 U.S. 555, 561, 102 S.Ct. 895, 809, 70 L.Ed.2d 768

(1982). It is not a function of the United States Supreme

Court or any other court to sit as a super-legislature and

create statutory distinctions where none was intended.

American Tobacco Co. v. Patterson, 456 U.S. 63, 72, 102

S.Ct. 1534, 1539, 71 L.Ed.2d 748 (1982) (footnote 6), citing,

Griswald v. Connecticut, 381 U.S. 479, 482, 85 S.Ct. 1678,

1680, 14 L.Ed.2d 510 (1965). Absent a clearly expressed

legislative intention to the contrary, the statutory language

must be regarded as conclusive by a reviewing court.

Consumer Product Safety Comm’n v. GTE Sylvania, Inc.,

447 U.S. 102, 108, 100 S.Ct. 2051, 2055, 64 L.Ed.2d 766

(1980).

In construing 11 U.S.C. §554(a), the Court of Appeals

found clear language which on its face did not condition

abandonment upon compliance with state environmental

20

legislation. It then noted that there is no specific legisla-

tive history of §554(a). City of New York v. Quanta Re-

sources Corp., 739 F.2d at 916. Nonetheless, the Court of

Appeals searched long and hard to find what it determined

to be a legislative intent to condition abandonment upon

compliance with local environmental Jaws. Midlantie re-

spectfully asserts that the Court of Appeals erred by look-

ing beyond the express language of {554(a) to create a

statutory distinction that was not intended by Congress.

The Third Circuit first examined several cases decided

prior to enactment of the statutory abandonment provision

which held that a trustee’s ability to abandon burdensome

property is subject to police power regulations. The first

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

1952), aff’g, 102 F.Supp. 193 (D.Md. 1952). In Otten-

heimer, the Court of Appeals held that trustee could not

abandon a number of dilapidated barges in Baltimore har-

bor when abandonment would violate a federal statute

prohibiting the sinking of vessels in a navigable channel.

Id. at 290. The absence of a statutory provision governing

abandonment weighed heavily in the balancing analysis

undertaken by the Fourth Circuit.

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 in conflict with a statute enacted to ensure

the safety of navigation...

Id. at 290. As a result, it stands clear that the analysis

of the Ottenheimer Court would have markedly differed

if 11 U.S.C. §554(a) had been in effect at the time of that

trustee’s application for abandonment.

21

The second case relied upon by the Third Circuit in

Quanta was In re Lewis Jones, Inc., 1 Bkr.Ct. Dee. 277

(Bkrtey. E.D.Pa. 1974). In that case, a trustee of a pub-

lie utility was barred from abandoning underground steam-

pipes and vents when abandonment would expose the pub-

lie to risk of accident and injury. The Lewis Jones Court

heavily relied upon the Ottenheimer case in reaching this

decision and, in fact, did not cite to any other case in

support of the principle that the power to abandon is

subject to police power regulations. Therefore, it must

also be conceded that the analysis of the Lewis Jones

Court would also dramatically change if §554 had been

enacted prior to the time of that decision.

Moreover, Lewis Jones is also distinguishable because

of the particular equitable considerations present in that

ease. In Lewis Jones, it was estimated that the trustee

could adequately protect the public safety by sealing the

underground pipes at a cost of approximately $64,000.

In re I-wis Jones, 1 Bkr. Ct. Dee. at 278-279. Insofar

as the bankruptcy estate contained over $325,000, the

Lewis Jones Court determined that an expenditure of

$64,000 would not be unreasonable. Jd. at 280. In contrast,

the Quanta estate does not contain sufficient funds for

cleanup of either the Edgewater or Long Island City fa-

cilities. There would be no “cushion” for creditors if the

Trustee had to clean up the property prior to abandon-

ment. As a result, the Court of Appeals erred in relying

upon the particular equitable considerations so important

to the decision of the Lewis Jones Court.

The Third Cireuit also looked to In re Chicago Rapid

Transit Co., 129 F.2d 1 (7th Cir. 1942), cert. denied, 317

U.S. 683, 63 S.Ct. 205, 87 L.Ed. 547 (1942), for guid-

ance on the legislative intent issue. There, the Seventh

Cireuit determined that trustees for a railroad in reorgani-

tion could not abandon services on a branch line absent

22

approval of local regulatory authorities. Jd. at 5. Two

factors distinguish Chicago Rapid Transit from the case

at bar. First, the debtor was in reorganization rather than

in liquidation. Second, the abandonment directly related

to operation and management of the debtor’s business as

opposed to the situation in Quanta where the Trustee was

attempting to fulfill his statutory directive to wrap up the

estate.”

As noted by Judge Gibbons in his dissenting opinion

below, not one of the above-referred decisions is persua-

sive under the Bankruptcy Reform Act of 1978. Focusing

upon Ottenheimer and Lewis Jones, Judge Gibbons com-

mented that:

Neither of these opinions, however, is persuasive

under the 1978 Bankruptey Reform Act. Both sub-

stitute slogans about equity for an analysis of the

purpose of bankruptcy proceedings. Both, more-

over, were decided prior to the enactment of the

Bankruptey Reform Act of 1978, and its codification

in 11 U.S.C. §554 (1982) of the express authority

for trustees to decline to undertake responsibility

for property w-.ich 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 pur-

pose, as it has in other areas. Compare 11 U.S.C.

§362(a) (1982) (exception to automatic stay); Penn

Terra Ltd. v. Department of Environmental Re-

10The requirement that a trustee manage and operate property

in a reorganization proceeding in accordance with the state law has

since been codified at 28 U.S.C. §959(b).

23

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

junction to enforce compliance with state laws is

not a money judgment, and is therefore not subject

to §362 stay) with 11 U.S.C. $554 (1982). hus

Ottenheimer and Lewis Jones are not helpful.

City of New York v. Quanta Resources Corp., 739 F.2d

at 923-924. Thus, the Quanta majority’s reliance upon these

older cases stands misplaced in view of the changes to

the bankruptcy laws that were enacted in 1978.

The comparison drawn by Judge Gibbson in his dis-

sent between $554(a) and other statutory provisions fur-

ther demonstrates that Congress did not intend for aban-

donment to be conditioned upon environmental compliance.

The regulatory exception to the automatic stay provision

of 11 U.S.C. §362 was noted by this Court in Ohio v.

Kovacs, —— U.S. ——, 105 S.Ct. 705, 711, 83 L.Ed. 2d

649 (1985). In $362 of the Bankruptcy Code, Congress

created a specific exception to the general rule that com-

mencement or continuation of actions against a debtor in

bankruptcy are automatically stayed. If Congress intended

that a similar exception apply to abandonment under

§554(a), specific language would have also been incor-

porated.

That conclusion is buttressed by reference to 28 U.S.C.

§959(b) which requires a trustee or receiver appointed

by any United States Court to manage and operate prop-

erty in his possession in accordance with state law. Yet,

as noted in a prominent treatise, this duty does not extend

to a trustee who is liquidating estate assets as opposed

to carrying on the business of a debtor.

But 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,

24

and does not require the federal receivership court

to comply with state laws regulating the distribu-

tion of funds in the receivership...

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

$66.04(4) at 1913 (2d Ed. 1982); see also, Austrian v.

Williams, 216 F.2d 278, 285 (2d Cir. 1954), cert. denied,

348 U.S. 953, 75 S.Ct. 441, 99 L.Ed. 745 (1954) (holding

that the mere collection and liquidation of assets did not

constitute the carrying on of a debtor’s business).

Additional support is found in the decision of the Eighth

Cireuit Court of Appeals in State of Mo. v. U.S. Bkrtcy.

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

454 U.S. 1162, 102 S.Ct. 1035, 71 L.Ed. 2d 318 (1982). In

that case, the State of Missouri contended that a Chapter

11 trustee planned to operate a grain warehouse without

a state license in violation of 28 U.S.C. $959(b). Writing

for the Cireuit Court, Judge Bright recognized that, in

operations, the trustee must act consistent with the dic-

tates of §959(b). Jd at 778. However, Judge Bright went

on to note that:

We add that any authorized action by the trustee to

liquidate or sell the grain appears to fall within

the power of the bankruptcy court to liquidate

the debtors’ assets under the Bankruptcy Act. We

doubt, therefore, that a trustee must obtain a state

license solely for liquidation.

Id., note 18. Similarly, NJDEP cannot here demand that

the Quanta Trustee bring the Edgewater facility into full

* environmental compliance when the Trustee’s role is

limited to the liquidation of estate assets.

Based upon a review of every authority relied upon by

the Court of Appeals, one must conclude that Congress

25

did not intend that the Trustee’s power to abandon worth-

less property under $554(a) be limited by environmental

regulations. As noted by this Court in footnote 12 of the

Kovacs opinion:

Had no receiver been appointed prior to Kovacs’

bankruptcy, the trustee would have been charged

with the duty of collecting Kovacs’ nonexempt

property and administering it. If the site at issue

were Kovacs’ property, the trustee would shortly

determine whether it was of value to the estate.

If the property was worth more than the costs

of bringing it into compliance with state law, the

trustee would undoubtedly sell it for its net value,

and the buyer would clean up the property, in which

event whatever obligation Kovacs might have had

to clean up the property would have been satisfied.

If the property were worth less than the cost of

cleanup, the trustee would likely abandon it to its

prior owner, who would have to comply with the

state environmental law to the extent of his or

its ability.

Ohio v. Kovacs, 105 8.Ct. at 711.

By focusing upon the important policy of protecting

the public health by regulating the disposal of toxic

wastes, the Court of Appeals forged an exception to the

abandonment statute that is not supported at law. The

decisions represent an impermissible intrusion into the

legislative arena and should be reversed.

Moreover, existing law contains adequate measures to

protect the public safety." Under N.J.S.A. 58:10-23.11f(f)

11[In addition, in this case, abandonment would in all likeli-

hood vest title to the oil in Quanta’s landlords, Frola and Von

Dohlin, who would remediate the contamination so as to render

their land once again valuable.

26

(West Supp. 1983), NJDEP could have cleaned up the

Edgewater site and claimed a “first priority claim and

lien paramount to all other claims and liens” on the Quanta

property. Since NJDEP failed to take any action to

clean up the Edgewater property and thus trigger a

priority claim to Quanta assets, this Court should not

endorse the decision of the Third Cireuit to condition

abandonment of the contaminated oil upon compliance

at the expense of secured creditors such as Midlantic.

POINT III

Conditioning abandonment of burdensome property

upon environmental compliance frustrates full effectu-

ation of the objectives of federal bankruptcy legisla-

tion and therefore violates the supremacy clause.

The Court of Appeals’ construction of 11 U.S.C. §554(a)

also raises a serious question of Constitutional law arising

under the supremacy clause, U.S. Const. Art. VI, el. 2.

Specifically, that question is whether state environmental

laws upon which abandonment of burdensome assets in

a liquidation proceeding would be conditioned are invalid

insofar as they “stand as an obstacle to the accomplish-

ment and execution of the full purposes and objectives

of Congress.” See, Michigan Canners & Freezers Assn. v.

Agricultural Marketing and Bargaining Board, —— U.S.

, 104 S.Ct. 2518, 2523, 81 L.Ed.2d 399, 406 (1984);

Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed.

581 (1941). As in Perez v. Campbell, 402 U.S. 637, 91 S.Ct.

1704, 29 L.Ed.2d 233 (1971), the supremacy clause analysis

focuses upon the objectives of federal bankruptcy legisla-

tion.

In page after page of involved analysis, the Court of

Appeals in Quanta wrestled with the supremacy clause

27

issue. City of New York v. Quanta Resources Corp., 739

F.2d 915-922. Applying the two-step test set forth in Perez

v. Campbell, 402 U.S. at 644, 91 S.Ct. at 1708-1711, 29 L.Ed.

2d at 239, the Third Circuit first examined the purposes

of the laws at issue and then determined whether the state

environmental laws frustrated the objectives of the Bank-

ruptey Code. City of New York v. Quanta Resources

Corp., 739 F.2d at 915. Midlantic respectfully asserts that

the Court of Appeals erred in concluding that the state

laws do not frustrate the principal duty of a trustee under

11 U.S.C. §704 to cotlect and reduce to money the prop-

erty of the estate and to close the estate in an expeditious

manner.”

Midlantic would offer one specific example to properly

focus the attention of the Court on the supremacy issue.

In 1983, the New Jersey Legislature enacted the Environ-

mental Cleanup Responsibility Act (“ECRA”), N.J.S.A.

13:1K-6 et seq. (West Supp. 1984). Through ECRA, an

owner or operator of certain industrial establishments is

required to notify NJDEP in advance of a decision to

stop, sell or transfer operations. N.J.S.A. 13:1K-9(a) (1)

and (b(1) (West Supp. 1984). ECRA also requires prep-

aration of cleanup plans to correct environmental prob-

lems along with submission of surety bonds to guarantee

cleanup. N.J.S.A. 13:1K-9(a)(2) and (b)(3) (West Supp.

1984). Failure to comply with any provision of ECRA

triggers (1) voiding of the transfer, (2) strict liability for

cleanup costs and (3) substantial civil penalties. N.J.S.A.

13:1K-13 (West Supp. 1984).

12 See, S. Rep. No. 95-989, 95th Cong., 2d Sess. 93 (1978),

reprinted in (1978) U.S. Code Cong. & Ad. News 5787, 5879

and H.R. Rep. No. 95-595, 95th Cong., Ist Sess. 379 (1977),

reprinted in, (1978) U.S. Code Cong. & Ad. News 5963, 6335.

28

Under the decisions below, the Quanta Trustee must not

abandon the Edgewater, New Jersey property but must

instead bring the site into environmental compliance. Al-

though N.J.S.A. 13:1K-8(b) (West Supp. 1984) excepts

the imitiation of bankruptcy proceedings from ECRA re-

sponsibilities, it will undoubtedly be. argued that subse-

quent action by the Trustee must conform to ECRA stand-

ards. Thus, the Trustee must post bonds, draft cleanup

plans and look not to the Bankrutpey Court but instead to

NJDEP for ratification of decisions central to estate ad-

ministration. NJDEP would thereby usurp the power

of the Bankruptcy Court in violation of the supremacy

clause.

Morever, Section 8 of ECRA, N.J.S.A. 13:1K-12 (West

Supp. 1984), provides that “(n)o obligations imposed by

this act shall constitute a lien or claim which may be

limited or discharged in a bankruptcy proceeding.” Thus,

under the decision below, NJDEP would assert that not-

withstanding the specific discharge provision of federal

bankruptcy law, 11 U.S.C. §727, the Trustee and the

Quanta estate would remain obligated for ECRA cleanup

responsibility as a condition to any transfer of estate

assets. This requirement directly conflicts with the dis-

charge provisions of federal bankruptcy law and is invalid

under the supremacy clause.

State environmental laws such as ECRA serve the

laudible purpose of protecting the public health through

regulation of toxic waste disposal. However, such laws

may not frustrate the operation of federal law simply

because the state legislature in passing the laws had some

purpose in mind other than one of frustration. Pacific

Gas and Electric Company v. State Energy Resources

Conservation & Development Commission, 461 U.S. 190,

216, 103 S.Ct. 1713, 75 L.Ed.2d 752, 773 (1983) (footnote

28); Perez v. Campbell, 402 U.S. at 651, 29 L.Ed.2d at

29

244-245. The supremacy clause commands that conflicting

state laws must fall when they stand as an obstacle to the

objectives of federal law.

CONCLUSION

Midlantic National Bank has demonstrated that the

decisions of the Third Circuit Court of Appeals below

conflict with the rule of statutory construction outlined in

United States v. Security National Bank, 459 U.S. 70, 103

S.Ct. 407, 74 L.Ed.2d 235 (1982). Midlantie has further

demonstrated that the Court of Appeals erred in con-

cluding that Congress intended that abandonment under

11 U.S.C. §554(a) be conditioned upon compliance with

state environmental laws. Finally, Midlantic has shown

that the Court of Appeals erred in concluding that the

claims of the state regulatory agencies in these actions

are not barred by the supremacy clause of the United

States Constitution.

Wherefore, Midlantie National Bank respectfully re-

quests that the decisions of the Court of Appeals be re-.

versed with instruction to affirm the lower court orders

approving the abandonment of the burdensome assets of.

the estate.

Respectfully submitted,

A. Dennis TERRELL

Counsel of Record for Petitioner, Midlantic

National Bank

Suanitey & Fisuer, P.C.

Attorneys for Petitioner,

Midlantic National Bank

Kennetu S. Kasper

Of Counsel and

On the Brief

April 4, 1985