Petition for Writ of Certiorari — Torwico Electronics, Inc. v. New Jersey Department of Environmental Protection & Energy

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1%

TORWICO ELECTRONICS, INC.,

Petitioner,

STATE OF NEW JERSEY, DEPARTMENT OF

ENVIRONMENTAL PROTECTION AND ENERGY,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

TIMOTHY P. NEUMANN

DAVID E. SHAVER

WOOD, BROEGE, NEUMANN

& FIS “HER

25 Abe V-“orhees Drive

Manas.uar, NJ 08736

(908) 223-%484

Attorneys jor Petitioner

DAVID B. HIRD*

PETER M. GILLON

JAMES D. BARNETTE

ADAM P. STROCHAK

WEIL, GOTSHAL & MANGES

1615 L Street, N.W.

Washington, DC 20036

(202) 682-7000

Attorneys for Petitioner

*Counsel of Record

EEE ae oT

QUESTION PRESENTED

Whether an order by a government enviror#tiental

agency, requiring a corporate chapter 11 debtor « spend

assets of its estate to clean up property not owned er occu-

pied by the debtor, constitutes a dischargeable “claim” within

the meaning of section 101(5) of the Bankruptcy Code, as

interpreted by the Court in Ohio v. Kovacs, 469 U.S. 274

(1985).

(i)

PARTIES TO THE PROCEEDING

The petitioner is Torwico Electronics, Inc., a debtor

under Chapter 11 of the United States Bankruptcy Code. '

The respondent is the New Jersey Department of Environ-

mental Protection and Energy. Although not a party to this

case, George Allen Associates has a direct interest in its

outcome.

' Torwico Electronics, Inc. has no parent corporation or subsidiaries.

(ii)

TABLE OF CONTENTS

partes to the Proceeding ................:.

le ee a we en

NG eS eae a oele

Summary of Argument ...................

Reasons for Granting the Petition .............

The Decision Below Conflicts with this

Court’s Interpretation of the Definition of

“Claim” in Ohio v. Kovacs ...........

A. This Court Repeatedly Has Held

that the Definition of “Claim”

Should be Broadly Construed .......

B. The Decision Below is in Direct

Conflict with the Holding of

The Third Circuit’s Decision Below is in

Conflict with Decisions of Other Circuits

The Third Circuit’s Decision Undermines

the Bankruptcy Code’s Policies of Pro-

viding the Debtor with a Fresh Start and

Assuring Equal Treatment of Creditors ... .

(ili)

TABLE OF CONTENTS—Continued

Page

Ce -< waves wees Ge CUNO eee eee oF 29

EE a4 40k Sc Se es a ee Ee ee la

Opinion of the Third Circuit Below ....... > Se

Judgment of the Third Circuit Below ...... . 14a

Opinion of the District Court Below ....... 16a

Opinion of the Bankruptcy Court Below ...... 22a

NJDEPE Administrative Order............ 6la

(iv)

TABLE OF AUTHORITIES

Page

CONSTITUTIONAL PROVISIONS:

U.o. Com. Ant. 3,98.61.4 .........0-. 14

et a Oe WE. 60s kom oe ee ee 7

STATUTES:

Bankruptcy Code, 11 U.S.C. §§ 101 ef seg.

oe ee Oe ss owe ee ows passim

BE hres EE cs oe tc le bw wees 13

BR oe ft re 11

Re re so os G9 Se ee ee 11

Se ee Pa 6 oo ee ek ew oh 10

Ba UA. § LIGGGEMINA) ... 2. ce. 1]

Comprehensive Environmental Response,

Compensation and Liability Act of 1980

(“CERCLA”), 42 U.S.C. §§ 9601 et seq.

GS WU. BOO fee heen 19-20, 22

SS Wie oi ed ewe eas 19-20

42 U.S.C. § SO07@M1) .. ww cc eee 20

42 U.S.C. § SG0I(GNS) .. ww ce 26

eee ED nk ov wk ees 28

Judicial Code

a ae SD. k's ve oe ee 6

De Wee OU go kw een 8

OO UB. GPIB) ow ce eee wass 2

ee We so 8

ae UA. BT ss eve boxe eee 6

(v)

TABLE OF AUTHORITIES—Continued

Page

New Jersey Environmental Cleanup Responsibility

Act (“ECRA”), N.J. Stat. Ann.

§§ 13:1K-6 et seg. (1991) .......... 3, 16

ee Be. ee eee 7

New Jersey Industrial Site Recovery Act,

1993 N.J. Laws 139 (amending ECRA) .... 3

New Jersey Solid Waste Management Act, N.J. Stat.

J me BS) oe fF eee 6, 16

New Jersey Spill Compensation and

Control Act, N.J. Stat.

Ann. §§ 58-10-23-11 ef seq. .......... 16

IN.3. Semt. AMM. SSEIGSd.1ic 2. wwe eee 5

N.J. Stat. Ann. § 58:10-23.lle ......... 5

N.J. Stat. Ann. § 58:10-23.11f ........ 21

N.J. Stat. Ann. § 58:10-23.11f(a) ........ 5

N.J. Stat. Ann. § 58:10-23.11f(f) ........ 5

N.J. Stat. Ann. § 58:10-23.11f(7) ....... 28

Surface Mining Control and Reclamation Act,

PW as Oe ee Oe OR ois ek oe iene es 18

CASES:

Chateaugay Corp., In re, 944 F.2d 997

SL SED ga S's neue ae eaten as 21-23

Chicago, Milwaukee, St. Paul & Pacific

RR Co., In re, 974 F.2d 775

Ce COED oe vc a ee es eee aa 21

CMC Heartland Partners, In re, 966 F.2d 1143

eel ee, EE wg Geno ee a eee re 9, 19-21

(vi)

TABLE OF AUTHORITIES—Continued

Page

Dant & Russell, Inc., In re, 853 F.2d 700

IS 3 eet ee ee 23-24

Jensen, In re, 995 F.2d 925 (9th Cir. 1993) ... 22

Johnson v. Home State Bank, _ US. __,

bi Bee Fs. | 11

Lone Pine Steering Comm. v. EPA, 777 F.2d

883 (3d Cir. 1985), cert. denied,

476 U.S. 1115 (1986) .............. 28

Midlantic Nat‘l Bank v. New Jersey Dept.

of Environmental Protection, 474 U.S.

RN AD oe re re 22

NLRB vy. Bildisco & Bildisco, 465 U.S.

I alg cee a ts « «ow o'uk 27

Ohio v. Kovacs, 469 U.S. 274 (1985) ..... passim

Ohio v. Kovacs, 717 F.2d 984

fe I Es 16

Pennsylvania Department of Public Welfare

v. Davenport, 495 U.S. 552 (1990) . 11, 12, 17

Russell-Stanley Corp. v. Plant Indus.,

Inc., 595 A.2d 534 (N.J. Super. Ct.

2 ae ee 3

Superior Air Products v. NL Indus., Inc.,

522 A.2d 1025 (N.J. Super. Ct.

App. Div. 1987), appeal dismissed, 598

ee See 16

Torwico Electronics, Inc. v. State of New

Jersey, Department of Environmental

Protection, 8 F.3d 146 (3d Cir. 1993) 1, 14, 21

(vii)

TABLE OF AUTHORITIES—Continued

Page

Torwico Electronics, Inc. v. State of New

Jersey, Department of Environmental

Protection and Energy, 153 B.R. 24

Bee ee oe ey ee 1,8

Torwico Electronics, Inc. v. State of New

Jersey, Department of Environmental

Protection, 131 B.R. 561

a, ee 2,7, 13

United States v. Whiting Pools, Inc.,

Ee 27

United States v. Whizco, Inc., 841 F.2d

Se rs 6s wo we bee es 9, 18-19

REGULATIONS:

N.J. Admin. Code tit. 7, § 26-9.8(1) ........ 14

N.J. Admin. Code tit. 7, § 26-12.1(a) ........ 6

LEGISLATIVE HISTORY:

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

(1977), reprinted in 1978 U.S.C.C.A.N.

NS i bik ak ele ns + oe 12, 24, 26

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

reprinted in 1978 U.S.C.C.A.N. 5787 .... 12

MISCELLANEOUS:

Martin J. Bienenstock, Bankruptcy Reorganization

Re erecta ule a Le Ute aie a ae 4 26

(viii)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

No.

TORWICO ELECTRONICS, INC.,

Petitioner,

STATE OF NEW JERSEY, DEPARTMENT OF

ENVIRONMENTAL PROTECTION AND ENERGY,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioner Torwico Electronics, Inc. respectfully petitions

for a writ of certiorari to review the judgment of the United

States Court of Appeals for the Third Circuit in this case.

OPINIONS BELOW

The opinion of the Court of Appeals, infra pp. 1a-13a,

is reported at 8 F.3d 146 (3d Cir. 1993). The opinion of the

District Court, infra pp. 16a-21a, is reported at 153 B.R. 24

(D.N.J. 1992). The opinion of the Bankruptcy Court, infra

pp. 22a-60a, is reported at 131 B.R. 561 (Bankr. D.N.J

1991).

JURISDICTION

The judgment of the Court of Appeals in this case was

entered by an opinion and judgment filed October 25, 1993.

The jurisdiction of this Court 1s invoked under 28 U.S.C

§ 1254(1).

STATUTE INVOLVED’

11 U.S.C. § 101(5)

“claim” means --

(A) right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed.

undisputed, legal, equitable, secured, or unsecured;

(B) right to an equitable remedy for breach of

performance if such breach gives rise to a right to

payment, whether or not such right to an equitable

remedy is reduced to judgment, liquidated, unliq-

uidated, fixed, contingent, matured, unmatured,

disputed, undisputed, secured, or unsecured.

> This provision previously was codified at 11 U.S.C. § 101(4)

STATEMENT OF THE CASE

Petitioner Torwico Electronics, Inc. (“Torwico”) is a

debtor under title 11, chapter 11 of the United States Code

(“Bankruptcy Code”). Beginning in 1961, Torwico operated

a manufacturing facility on leased premises on New Hamp-

shire Avenue in Lakewood, New Jersey.

In September 1985, Torwico’s lease expired and the

company moved its operations to a property located on

Oberlin Avenue, also in Lakewood, New Jersey. The

company has not had any property interest in the New

Hampshire Avenue property since vacating the premises in

1985. JA 16.° Torwico conducted business at the Oberlin

Avenue property from September 1985 until its assets were

liquidated in accordance with a December 1992 order of the

bankruptcy court.

Torwico’s cessation of manufacturing operations at New

Hampshire Avenue triggered Torwico’s obligation under the

New Jersey Environmental Cleanup Responsibility Act

(“ECRA”)* to notify the state and clean up any hazardous

substance contamination on the property. Torwico complied

with ECRA’s notice requirements by informing the New

’ Citations to “JA” refer to the Joint Appendix filed by the parties

before the Third Circuit below.

* ECRA, enacted by the New Jersey legislature in 1983 and substan-

tially amended in 1993, requires the owner or transferror of certain indus-

trial property to notify the state of a pending property transfer or

cessation of industrial operations and, if necessary, to conduct a state-

supervised cleanup as a precondition to transfer of the property. See N.J.

Stat. Ann. §§ 13:1k-6 ef seg. (1991) (amended by 1993 N.J. Laws 139).

Under ECRA, the tenant and landlord are jointly and severally liable for

cleanup obligations. See Russell-Stanley Corp. v. Plant Indus., Inc., 595

A.2d 534, 545 (N.J. Super. Ct. Ch. Div. 1991) (under ECRA, State may

order landlord to clean up property contaminated by a former tenant).

Jersey Department of Environmental Protection (since

renamed the Department of Environmental Protection and

Energy, “NJDEPE”) that hazardous wastes were removed

from the site regularly by Torwico’s solvent supplier. JA

221. On April 22, 1985, however, an NJDEPE inspector

visited the New Harmpshire Avenue property and observed

stained soils. The NJDEPE sequired Torwico to conduct

sampling and the results indicated the presence of contamina-

tion in soils. JA 222. The NJDEPE required Torwico to

sample groundwater beneath the New Hampshire Avenue

property and Torwico retained an environmental consultant

to conduct a groundwater investigation. JA 224.

In April 1988, Torwico entered into an agreement with

its former landlord, George Allen Associates (“George

Allen”), to share the cost of further environmental assess-

ment and remediation in accordance with their obligations to

the State under ECRA. JA 37. To expedite the cleanup,

George Allen took charge of the actual cleanup work,

assumed responsibility for obtaining all necessary approvals

from the NJDEPE, and paid the cleanup costs. Torwico

agreed to reimburse George Allen for fifty percent of the

cleanup costs. JA 203. The cleanup proceeded under

NJDEPE supervision. In March 1989, workers discovered

additional contamination emanating from a septic system

containing hazardous substances. JA 203.

For unrelated business reasons, Torwico filed a petition

for reorganization under chapter 11 of the Bankruptcy Code

in the United States Bankruptcy Court for the District of

New Jersey on August 4, 1989. Torwico listed the Attorney

General of New Jersey, the NJDEPE and George Allen as

unsecured creditors holding disputed claims regarding

Torwico’s liability for the cleanup of environmental contami-

nation at the New Hampshire Avenue property. JA 24. On

October 4, 1989, the bankruptcy court issued an order

scheduling the first meeting of creditors, notifying creditors

of the automatic stay and establishing January 2, 1990 as the

bar date for creditors to file proofs of claim. On the same

day, the bankruptcy court served copies of that order, by

mail, on the Attorney General of New Jersey and the

NJDEPE. JA 254. The State, however, never filed a proof

of claim with the bankruptcy court.

On November 13, 1989, eight months after discovery of

the septic system and almost two months before the bar date

for claims, an NJDEPE investigator issued two notices of

violation to the company regarding the New Hampshire

Avenue septic system. JA 203-204.° The first alleged that

Torwico had violated provisions of the New Jersey Spill

Compensation and Control Act (“Spill Act”), N.J. Stat. Ann.

§§ 53:10-23.11c, 53:10-23.1le, by discharging hazardous

substances and by failing to report those discharges to the

State.° The second alleged that Torwico had disposed of

hazardous wastes into the septic system without first obtain-

ing a permit to operate a hazardous waste facility, in viola-

tion of regulations promulgated pursuant to the New Jersey

* The NJDEPE also issued a third notice of violation, alleging that

Torwico had failed to obtain a new hazardous waste generator identifica-

tion number from the U.S. Environmental Protection Agency when it

moved from New Hampshire Avenue to Oberlin Avenue in 1985.

Torwico subsequently obtained the proper identification number for its

Oberlin Avenue plant and has never asserted that the Bankruptcy Code in

any way affected its obligation to comply with regulatory requirements

applicable to its continuing operations at the Oberlin Avenue property.

* The Spill Act prohibits the discharge of hazardous substances. In the

event of a discharge, the Spill Act gives the NJDEPE authority to: (1)

order the discharger to clean up or (2) conduct the cleanup itself, using

money from a designated fund, and then recover those costs from the

discharger. See N.J. Stat. Ann. § 58:10-23.11f(a), (f).

Solid Waste Management Act (“SWMA”). See N.J. Admin.

Code tit. 7, § 26-12.1(a). Subsequently, the NJDEPE issued

an administrative order to Torwico requiring Torwico to

clean up the septic system and assessing a civil penalty of

$22,500.00 for violation of the SWMA.’ In August 1990,

the NJDEPE issued another notice of violation to Torwico

and George Allen, alleging that both had failed to comply

with provisions of ECRA. JA 366-67.

Torwico filed an adversary proceeding in the bankruptcy

court® seeking a declaration that its alleged liability to the

State constituted an unsecured “claim” within the meaning of

section 101(5) of the Bankruptcy Code because Torwico

could comply only by paying an environmental contractor to

perform the necessary cleanup.” The State’s answer to the

complaint asserted that Torwico’s obligations to clean up its

former property under ECRA, the SWMA, and the Spill Act

constituted “ongoing regulatory obligations” which could not

be discharged as “claims” in bankruptcy.

On cross-motions for summary judgment, the bankruptcy

court held for Torwico that the NJDEPE’s cleanup order was

’ The NJDEPE order is reproduced at pp. 61a-67a, infra.

* Federal subject matter jurisdiction over the proceeding existed

pursuant to 28 U.S.C. § 1334(a). Jurisdiction of the bankruptcy court

existed pursuant to 28 U.S.C. § 157(b).

* See 11 U.S.C. § 101(5). At the time Torwico filed the complaint in

this proceeding the definition of “claim” was codified at section 101(4)

of the Bankruptcy Code, 11 U.S.C. § 101(4). The recodification did not

change the language of the section. For purposes of clarity and consis-

tency, the section is identified throughout this Petition as 101(5), even

when reference is made to cases decided prior to the recodification.

an unsecured “claim.”'” The bankruptcy court held that,

under this Court’s decision in Ohio v. Kovacs, 469 U.S. 274

(1985), “where a debtor in bankruptcy cannot clean up

environmental contamination himself or itself without paying

money, the obligation to clean up pursuant to an injunction

is a debt which is dischargeable in bankruptcy.” 131 B.R.

at 570 (infra p. 39a). Because Torwico could comply with

the NJDEPE’s administrative order only by spending money,

the bankruptcy court concluded that Torwico’s liability to the

State was a “claim” under section 101(5) of the Bankruptcy

Code. The bankruptcy court also held that the State had

forfeited its right to participate in any distribution of funds

under Torwico’s plan of reorganization by failing to file a

proof of claim before the bar date. 131 B.R. at 573 (infra

pp. 47a-49a). The bankruptcy court further held that provi-

sions of ECRA which purport to dictate the treatment of

cleanup obligations in bankruptcy are void under the Suprem-

acy Clause, U.S. Const. Art. VI, § 2."!

Infra pp. 3la-47a. The bankruptcy court subsequently signed an

order entering judgment for Torwico on September 20, 1991.

' 131 B.R. at 573-78 (infra pp. 49a-5S6a). The ECRA provision in

question provided:

No obligations imposed by this act shall constitute

a lien or claim which may be limited or discharged

in a bankruptcy proceeding. All obligations im-

posed by this act shall constitute continuing regula-

tory obligations imposed by the state.

N.J. Stat. Ann. § 13:1k-12 (1991). The constitutionality of this provision

was not considered by either the district court or the Third Circuit below.

Paragraph 15 of the NJDEPE’s administrative order contained similar

language. See infra p. 66a.

The State appealed the bankruptcy court's judgment to

the district court, which reversed.'* The district court distin-

guished Kovacs on the grounds that in Kovacs the State of

Ohio had admitted in oral argument that the only perfor-

mance sought from the debtor was the payment of money.

Concluding that the NJDEPE in this case had no alternative

payment remedy, the district court held that Torwico’s

cleanup obligation was not a dischargeable claim under the

Bankruptcy Code. 153 B.R. at 26 (infra pp. 19a-20a).

Torwico appealed the district court’s decision to the

United States Court of Appeals for the Third Circuit, which

affirmed.'’ The Third Circuit concluded that New Jersey

was not seeking money from Torwico and had no right to

payment under the statutory authority asserted in the adminis-

trative orders. Torwico’s cleanup obligations were ongoing,

the court concluded, because they “run with the waste” and

apply regardless of where the waste may be located. The

court thus ruled that New Jersey’s right to enforce its order

was not a “claim” under the Bankruptcy Code and therefore

was a non-dischargeable obligation of the debtor.

SUMMARY OF ARGUMENT

The Third Circuit’s decision conflicts with the decision

of this Court in Ohio v. Kovacs, 469 U.S. 274 (1985). In

Kovacs, this Court ruled that the Bankruptcy Code defines

the term “claim” broadly to include the obligation of a

debtor to spend money to comply with a government injunc-

The district court had jurisdiction over the appeal pursuant to 28

U.S.C. § 158(a).

'> The Court of Appeals had jurisdiction over the appeal pursuant to 28

U.S.C. § 1291.

tion requiring an environmental cleanup. This Court

acknowledged in Kovacs that a debtor who continues to own

OF possess property must operate its property in compliance

with environmental laws. However, the Court ruled that

where a debtor’s legal rights to own or occupy the property

have been cut off—in that case by the appointment of a

receiver—the obligation to spend money to pay for a cleanup

is a “claim” subject to discharge in bankruptcy.

In this case, Torwico never owned the contaminated

property and its right of occupancy ended with the expiration

of its lease, almost four years prior to the commencement of

the bankruptcy case. Thus, like the debtor in Kovacs,

Torwico has no continuing right of ownership or possession

over the property subject to the cleanup order. Under the

reasoning in Kovacs, the State’s right to compel Torwico to

pay for a cleanup is a “claim” under the Bankruptcy Code.

The Third Circuit’s decision not only conflicts with

Kovacs, but also with the decisions of other Circuit Courts

of Appeals. See United States v. Whizco, Inc., 841 F.2d 147

(6th Cir. 1988); In re CMC Heartland Partners, 966 F.2d

1143 (7th Cir. 1992). In Whizco, the Sixth Circuit applied

Kovacs in ruling that a government order compelling the

debtor, a former coal mine operator, to spend money to

reclaim a mine was a dischargeable claim under the Bank-

ruptcy Code. Similarly, the Seventh Circuit, in CMC Heart-

land, applied the logic of Kovacs to distinguish between the

case where a debtor’s environmental liabilities are based on

its actions as a former site operator, and are thus discharge-

able claims, and the case where the environmental liabilities

are based on the debtor’s current status as a property owner

or operator, and thus may not be dischargeable. In contrast,

the Third Circuit below held that the debtor’s cleanup

obligation survives bankruptcy regardless of whether the

debtor continues to own or occupy the property involved.

Nc TTCCTC emt EE - —— ————————————— a

The decision below is unsupported by the language of

section 101(5) and subverts the fundamental policies underly-

ing the Bankruptcy Code: (1) providing equal treatment to

all similarly-situated creditors, and (2) affording debtors a

fresh start when they emerge from bankruptcy. Ruling that

cleanup obligations are not “claims,” as the Third Circuit

did, requires that the State’s interest takes precedence over

the claims of other legitimate creditors. As the drafters of

the Bankruptcy Code recognized, such disguised priorities

prejudice other creditors and undermine a debtor’s opportuni-

ty for a fresh start. In particular, corporate debtors facing

liabilities of unknown magnitude which pass through the

bankruptcy to the reorganized entity may be denied the

financing and new investment necessary to reorganize. Cut

off from lenders and investors and unable to resolve their

liabilities in the bankruptcy, otherwise salvageable enterprises

are more likely to liquidate, resulting in the loss of jobs and

economic resources.

A writ of certiorari should be issued in this case to

ensure that this Court’s ruling in Kovacs is properly fol-

lowed, to avoid inconsistencies among the Circuit Courts of

Appeals, and to give effect to the important policy choices

which Congress incorporated into the Bankruptcy Code.

REASONS FOR GRANTING THE PETITION

I. THE DECISION BELOW CONFLICTS WITH THIS

COURT’S INTERPRETATION OF THE DEFINI-

TION OF “CLAIM” IN OHIO V. KOVACS

A. This Court Repeatedly Has Held that the Defini-

tion of “Claim” Should Be Broadly Construed

The Bankruptcy Code provides for the discharge of

debts, subject to specified exceptions. See 11 U.S.C. §§ 727

(chapter 7 discharge), 1141(d)(1)(A) (chapter 11 discharge),

523 (exceptions to discharge). Discharge of debts is the

primary benefit which debtors receive under the Bankruptcy

Code. The discharge gives effect to Congress’ policy

decision that debtors are entitled to a fresh start, free of all

prior debts, on the theory that a financially-rehabilitated

corporation is of greater social value than a liquidated one.

The Bankruptcy Code is therefore designed to ensure that all

of a debtor’s liabilities can be addressed in the bankruptcy

case.

The term “debt” is defined as “liability on a claim.” 11

U.S.C. § 101(12). A “claim,” in turn, is broadly defined as

any “right to payment, whether or not such right is. ..contin-

gent,...disputed,...equitable,...or unsecured” or a “right to

an equitable remedy for breach of performance if such

breach gives rise to a right to payment.”'*

Starting with Ohio v. Kovacs, 469 U.S. 274 (1985), this

Court has concluded that the terms “claim” and “right to

payment” should be construed broadly to permit the most

comprehensive discharge of the debtor’s obligations. 469

U.S. at 279 (“Congress desired a broad definition of

‘claim.’”); Pennsylvania Department of Public Welfare v.

Davenport, 495 U.S. 552, 558 (1990) (holding that a State’s

right to enforce a criminal restitution order constituted a

“claim,” and reasoning that both the term “claim” itself and

the phrase “right to payment” were to be read expansively

reflecting “Congress’ broad rather than restrictive view of

the class of obligations that qualify as a ‘claim’ giving rise to

a ‘debt’”); Johnson v. Home State Bank, U.S. __, 111

“ 11 U.S.C. § 101(5). The full text of section 101(5) is reproduced at

p. 2, supra. This provision was formerly codified at § 101(4).

S. Ct. 2150, 2154 (1991) (“Congress intended . . . to adopt

the broadest available definition of ‘claim.’”).

In Davenport, the Court noted the language in the House

Report accompanying the 1978 amendments to the Bankrupt-

cy Code which described the term “claim” as having the

“broadest possible” definition, and which noted that the Code

“contemplates that all legal obligations of the debtor... .

will be able to be dealt with in the bankruptcy case.” 495

U.S. at 558 (quoting H.R. Rep. No. 595, 95th Cong., Ist

Sess. 309 (1977), reprinted in 1978 U.S.C.C.A.N. 5963,

6266) (emphasis added); accord S. Rep. No. 989, 95th

Cong., 2d Sess. 22 (1978), reprinted in 1978 U.S.C.C.A.N.

5787, 5808.

The Third Circuit below erred by failing to give effect

to the broad definition of “claim” in the Bankruptcy Code,

as interpreted by this Court in Kovacs, Davenport and

Johnson.

B. The Decision Below is in Direct Conflict with the

Holding of Kovacs.

The Third Circuit’s decision is inconsistent with the

holding of this Court in Kovacs. In Kovacs, the Court ruled

that the term “claim” included injunctions which require a

debtor to spend money for environmental cleanup of property

that he no longer operated or possessed.

Kovacs was the chief executive officer and stockholder

of a company which owned and operated the Chem-Dyne

hazardous waste disposal site in violation of state laws. Ohio

obtained an injunction requiring Kovacs to remove existing

waste from the site and forbidding Kovacs from bringing

additional waste on the property, but Kovacs did not comply.

In response, the State obtained the appointment of a receiver

who took possession of all of Kovacs’ assets, including the

Chem-Dyne site. Kovacs then filed a petition under chapter

7 of the Bankruptcy Code and sought to discharge his obliga-

tion to perform a cleanup under the terms of the injunction.

The State filed a complaint seeking a declaration that

Kovacs’ obligation to remove waste from the property was

not a “claim” and thus not dischargeable. 469 U.S. at 276-

This Court ruled that Kovacs’ obligation to comply with

the injunction to remove wastes was a “claim” under section

101(5)(B) of the Bankruptcy Code. The Court reasoned that,

because Kovacs had no authority over the site and the only

way he could comply was to pay to defray the costs of

cleanup, the equitable remedy of an injunction had been

converted to a right to payment and was thus a “claim”

dischargeable in Kovacs’ bankruptcy. 469 U.S. at 282-83.

The Court tempered its decision by cautioning that

anyone in possession of the site may be subject to cleanup

obligations under state law, including Kovacs himself, if he

came into possession after the receivership was liquidated.

469 U.S. at 285. Nonetheless, the Court concluded that,

where the debtor does not own or possess the affected

property, an injunction to perform an environmental cleanup

which can only be satisfied by the payment of money is a

“claim” that is dischargeable under the Bankruptcy Code."

‘> The Court’s opinion in Kovacs was unanimous, but Justice O’Connor

wrote separately to explain that the ruling would not leave the state

without amy recourse against the debtor’s assets. As Justice O’Connor

noted, how the state’s interest in the debtor’s property is classified in

bankruptcy (i.e. as a lien, a perfected security interest or a mere

unsecured claim) is generally left to state law. See Kovacs, 469 U.S. at

285-86 (O’Connor, J., concurring). What the State may not do, as the

bankruptcy court in this case decided below, is dictate whether or not the

State’s interest is a “claim” in the first place. See 131 B.R. at 576-77

(continued...)

Like the debtor in Kovacs, Torwico can comply with the

cleanup orders from the State only by paying a contractor to

clean up the site.'° As a corporation, Torwico cannot

perform any cleanup action except by paying contractors or

employees to do the work. Moreover, even prior to the sale

of all its physical assets, Torwico did not have the expertise

necessary to conduct an environmental cleanup. Since its

liquidation, Torwico has had no employees and no assets

except for cash. The only way Torwico could comply, both

at the time New Jersey issued its cleanup orders and now, is

to pay money to someone qualified to perform the clean-

up.!’

The Third Circuit attempted to justify its decision not to

follow Kovacs, contending that it was enjoining “continued

pollution” because the hazardous substances already in the

soil at the New Hampshire Avenue property could continue

to migrate. 8 F.3d at 151 (infra pp. 10a-1la). This distinc-

tion is untenable. In Kovacs, this Court faced exactly the

'S (.. continued)

(infra p. 59a) That decision was made by Congress when it enacted

section 101(5) under its constitutional authority to establish “uniform

Laws on the subject of Bankruptcies,” U.S. Const. Art. I, § 8, cl. 4, and

the Supremacy Clause bars any state law to the contrary.

‘© In support of its motion for summary judgment, Torwico filed an

affidavit from its president, Robert Savino, stating that Torwico did not

have the expertise in environmental sciences necessary to prepare a

closure plan, and that if Torwico were compelled to prepare such a plan,

it would have to retain an environmental consulting firm to do so. JA

117-19.

'’ New Jersey's own rules specify that an independent, registered

professional engineer must certify that a cleanup has been completed

according to sitate-approved standards. N.J. Admin. Code tit. 7, § 26-

9.8(1).

same factual situation, noting that at the Ohio property “the

ground . . . remains permeated with toxic materials that must

be removed if further pollution of the public waters is to be

avoided.” 469 U.S. at 278. Nonetheless, this Court

concluded that because the State was seeking to compel the

debtor to pay for a cleanup, the State was enforcing a “right

to payment” which constituted a “claim.”

Moreover, like the debtor in Kovacs, Torwico does not

own or possess the property in question. In Kovacs, the

Court noted that the appointment of a receiver was significant

because “it dispossessed Kovacs, [and] removed his authority

over the site.” 469 U.S. at 283. In this case, Torwico was

already dispossessed of the property by virtue of the expira-

tion of its lease almost four years before the bankruptcy

filing. Thus, the ruling in Kovacs controls this case and the

Court should grant certiorari to correct the Third Circuit's

error.

The Court of Appeals below also attempted to distin-

guish Kovacs on the basis that New Jersey was not seeking

the payment of money, but the performance of work. A

close reading of Kovacs, however, shows that the State of

Ohio also argued that it was seeking the performance of

some action and not the payment of money. See 469 U.S. at

282-83. This Court looked behind the formalism of Ohio's

position to determine the substance of the State’s demand:

The impact of [the State’s}] attempt to

realize upon Kovacs’ income or property

cannot be concealed by legerdemain or

linguistic gymnastics. Kovacs cannot

personally clean up the waste... . He

cannot perform the affirmative obligations

properly imposed on him by the State

court except by paying money or transfer-

ring his own financial resources.

469 U.S. at 282 (quoting the Sixth Circuit’s decision below,

Ohio v. Kovacs, 717 F.2d 984, 988 (6th Cir. 1983)).

Similarly, Torwico can only comply with New Jersey’s

cleanup orders by paying an environmental professional to

prepare and implement a cleanup plan for the site. New

Jersey's purpose in enforcing its orders was made clear early

in this litigation: “[{T]he government’s access to private

funds for cleanup purposes must be assured whenever

possible, including when private funds are available from an

estate in bankruptcy.” JA 180 (NJDEPE brief in the

bankruptcy court). Thus, what the State is seeking here is

not an action by the debtor, but the use of the debtor’s funds

to pay for the cleanup.

The State argued that its right to equitable relief cannot

be reduced to a “right to payment” because it has proceeded

under two statutes, the Environmental Cleanup Responsibility

Act (“ECRA”), N.J. Stat. Ann. §§ 13:1K-6 et seg. (1991),

and the Solid Waste Management Act, N.J. Stat. Ann. §§

13:1E-1 et seg., which the state contends only allow for

enforcement through injunctions and do not create a right to

sue to recoup cleanup costs. However, the State has the

authority to perform the cleanup itself and sue Torwico (and

the property owner) to recover the cleanup costs under

another statute, the Spill Compensation and Control Act

(“Spill Act”), N.J. Stat. Ann. §§ 58:10-23.11 et seg. , which

the State invoked in its original notice of violation."* If the

'® See p. 5, supra. New Jersey courts have concluded that ECRA and

the Spill Act apply in pari materia. See Superior Air Products v. NL

Indus., Inc., 522 A.2d 1025, 1035 (N.J. Super. Ct. App. Div. 1987),

appeal aismissed, 598 A.2d 872 (N.J. 1991).

State chooses to proceed under ECRA, Torwico would pay

the cleanup contractor directly, but if the State decides to

take action under the Spill Act, the State would pay the

cleanup contractor in the first instance and then attempt to

recoup the money from Torwico.'? Accordingly, New

Jersey clearly has a “right to payment” in this case.

In determining whether the State of Ohio’s right to

enforce an injunction was a claim in Kovacs, this Court

looked not at the statutory source of these rights, but at the

impact of the enforcement of these rights on the debtor. If

the only way to comply with the injunction is to pay money,

then the cleanup order has been “converted into an obligation

to pay money.” 469 U.S. at 283.

Finally, this Court held that an enforceable obligation

may be a “right to payment” even where the creditor may

not sue directly to obtain the money. Davenport, 495 U.S.

at 559-60. In Davenport, the State of Pennsylvania argued

that a criminal restitution order did not constitute a right to

payment, and therefore was not a “claim” under the Bank-

ruptcy Code, because neither the State nor the victim could

sue to enforce payment. This Court ruled that because the

restitution obligation could be enforced through other means,

such as the revocation of probation or incarceration, it thus

was a right to payment for bankruptcy purposes. /d. The

Court concluded that “[t]he plain meaning of ‘a right to

payment’ is nothing more nor less than an enforceable

obligation, regardless of the objectives the State seeks to

serve in imposing the obligation.” Jd. at 559.

‘9 In one of its early briefs, the State acknowledged that “[i]f the State

had directed Torwico to clean up, and Torwico had not complied and the

State performed the cleanup itself, the cost recovery action could be seen

as the ‘mere collection of a monetary judgment.’” JA 172.

Like Davenport, this case involves a state’s powers to

force a debtor to make a payment to a third party—in this

case, a Cleanup contractor. Here, the State may enforce its

cleanup order by imposing penalties for non-compliance or

seeking to have Torwico held in contempt. Thus, under the

reasoning in Davenport and Kovacs, the State is enforcing a

“right to payment,” which is a “claim” under section 101(5)

of the Bankruptcy Code.

Il. THE THIRD CIRCUIT’S DECISION BELOW IS IN

CONFLICT WITH DECISIONS OF OTHER CIR-

CUITS

In holding that an environmental cleanup injunction is

not a claim where the debtor did not own or possess the

property to be cleaned up, the Third Circuit’s decision is in

direct conflict with decisions of the Sixth and Seventh Cir-

cuits, and is significantly inconsistent with decisions of the

Second and Ninth Circuits. Unless this petition is granted,

the obligation to comply with an environmental cleanup order

may be a dischargeable claim if a debtor files its bankruptcy

petition in Cleveland, but not if the debtor files in Pittsburgh.

The Court should issue a writ of certiorari to resolve this

inconsistency.

Although the facts of this case are clearly analogous to

the facts before the Sixth Circuit in United States v. Whizco,

Inc., 841 F.2d 147 (6th Cir. 1988), the two courts reached

diametrically opposite conclusions. In Whizco, the federal

government had issued an order under the Surface Mining

Control and Reclamation Act (*“SMCRA”), 30 U.S.C. §§

201 et seq., to the debtor, an individual who formerly

operated an abandoned mine, requiring restoration of that

mine. The federal government argued that the obligation to

comply with the order was not a claim because the govern-

ment was seeking compliance with an injunction, not a

payment, and that SMCRA did not give the government the

legal right to payment. Relying on Kovacs, the Sixth Circuit

concluded that the obligation to comply was a “claim”

because compliance would require the debtor to pay money:

It is clear . . . that the defendant does not

have the physical capacity to reclaim the

mine site himself, and that he would have

to hire others to perform the work for

him. This would require the expenditure

of money. ... To the extent, therefore,

that the injunction would have purpose or

value it would require the payment of

money. Thus, when we look at the sub-

stance of what the plaintiff seeks, rather

than the form of relief sought, we see that

the plaintiff is really seeking a payment.

Whizco, 841 F.2d at 150. The Sixth Circuit held that the

obligation to comply with the injunction was discharged,

except to the extent that the debtor could do so without

spending money. /d. at 151. Here, Torwico, as a corporate

debtor, may only comply by spending money.

Although the Third Circuit below stated that its decision

follows the Seventh Circuit’s decision in Jn re CMC Heart-

land Partners, 966 F.2d 1143 (7th Cir. 1992), a careful

reading of that case reveals that the Third Circuit’s holding

actually conflicts with the Seventh Circuit’s view. In CMC

Heartland, a railroad, which had owned and operated a

hazardous waste site named Wheeler Pit, filed for bankruptcy

under the Bankruptcy Act of 1898. A reorganized successor

emerged from bankruptcy still owning the site. When the

U.S. Environmental Protection Agency issued an administra-

tive order under sections 106 and 107 of the Comprehensive

Environmental Response, Compensation and Liability Act of

1980 (“CERCLA”), 42 U.S.C. §§ 9606, 9607, the reorga-

nized entity, CMC, sought a declaration that the obligation

to comply with the injunction was a discharged claim.

The Seventh Circuit ruled that CMC’s liability under

CERCLA as the operator of Wheeler Pit prior to the date of

reorganization constituted a claim which had been discharg-

ed, reasoning that “[t]o the extent that §§ 106 and 107

require a person to pay money today because of acts before

or during the reorganization proceedings, CERCLA creates

a ‘claim’ in bankruptcy.” 966 F.2d at 1146. The Seventh

Circuit explained that this result was consistent with the

purposes of the bankruptcy law:

Reading “claim” broadly ensures that

those injured by the debtor’s hazardous

wastes share in the available assets, just as

those run down by its trains are entitled to

distributions as creditors. Because the

United States neglected to file a claim

under CERCLA in the reorganization,

CMC’s liability as the operator or manag-

er of Wheeler Pit before the bar date in

1985 is extinguished.

Id.

However, the Seventh Circuit held that the government

could still enforce its injunction against CMC because CMC

continued to-own Wheeler Pit after emerging from bank-

ruptcy and was the current owner of the site. The court

reasoned that because section 107(a)(1) of CERCLA, 42

U.S.C. § 9607(a)(1), imposes liability on the current owner

of a hazardous waste site—even if that current owner did not

participate in the disposal of hazardous waste—CMC could

still be compelled to implement a cleanup. CMC Heartland,

966 F.2d at 1147. The Seventh Circuit described this

responsibility as “a statutory obligation attached to current

ownership of the land [which] survives bankruptcy.” Jd.

(emphasis added). Thus, CMC could be compelled to

comply with a cleanup order because it owns Wheeler Pit

today, not because it was responsible for disposing of waste

in the past.

In this case, Torwico is not the current owner or

operator of the property which the State has ordered cleaned

up. Nonetheless, the Third Circuit concluded that just as

liability in CMC Heartland “ran with the land,” liability in

Torwico’s case, “ran with the waste,” because Torwico

allegedly was liable under New Jersey law.as the person who

generated the waste and arranged for its disposal.*? This

analysis ignored the Seventh Circuit’s careful effort to

distinguish between liability based on a debtor’s pre-bank-

ruptcy acts, which constitute dischargeable claims, and

liability based on the ownership of land which may attach to

any current landowner, including a debtor who has emerged

from bankruptcy. Under the reasoning of CMC Heartland,

Torwico’s obligations as an operator of the site and a

generator of waste should be dischargeable claims; Torwico

has no liability as a current owner.”!

°° 8 F.3d at 151 (infra pp. 11a-12a). Significantly, the law to which the

Third Circuit referred is the Spill Act, which the state did not invoke as

authority for its administrative order but which does provide the State

with the right to recover cleanup costs. See N.J. Stat. Ann. § 58:10-

23.11f.

*! Indeed, in another case arising out of the same bankruptcy, /n re

Chicago, Milwaukee, St. Paul & Pacific RR Co., 974 F.2d 775 (7th Cir.

1992), the Seventh Circuit ruled that the State of Washington’s CERCLA

claim against CMC was discharged with respect to a property which

(continued...)

The Third Circuit also misapplied the Second Circuit’s

decision in Jn re Chateaugay Corp., 944 F.2d 997 (2d Cir.

1991). The Chateaugay case involved the question whether

the LTV Corporation could discharge its obligations to

comply with injunctive orders which EPA may issue or

secure from a court under section 106 of CERCLA, 42

U.S.C. § 9606, with respect to sites which the debtor would

continue to own or operate after emerging from bankruptcy.

In Chateaugay, the Second Circuit ruled that an injunction

“to ameliorate ongoing pollution” was not a “claim” and

would not be dischargeable. 944 F.2d at 1008. But it is

clear that the Second Circuit’s ruling was limited to situations

in which the debtor continues to own the affected property:

It is difficult to understand how any in-

junction directing a property owner to

remedy ongoing pollution could be a

dischargeable “claim,” if, as Kovacs in-

structs, the owner “may not maintain a

nuisance, pollute the waters of the State,

or refuse to remove the source of such

conditions. ””

*1 (.. continued)

CMC had sold prior to emerging from bankruptcy. Other circuits have

likewise held that CERCLA claims relating to property not part of the

bankruptcy estate are dischargeable. See In re Chateaugay Corp., 994

F.2d 997, 1005 (2d Cir. 1991) (contingent claims for reimbursement of

CERCLA cleanup costs dischargeable); Jn re Jensen, 995 F.2d 925, 930-

31 (9th Cir. 1993) (liability for cost of removing hazardous substances

from debtor’s former property held to be a dischargeable “claim”).

* The Chateaugay court also concluded that its ruling was consistent

with Midlantic Nat’l Bank v. New Jersey Dept. of Environmental

(continued...)

Chateaugay, 944 F.2d at 1009 (emphasis added) (quoting

Kovacs, 469 U.S. at 285). Thus, the result in Chateaugay,

if not the reasoning, is consistent with CMC Heartland:

debtors who emerge from bankruptcy may be subject to

environmental cleanup injunctions at properties which they

continue to own. But neither case establishes that a debtor,

such as Torwico, may be compelled to use estate assets to

clean up property which it never owned and which it vacated

almost four years before filing for bankruptcy protection.

Finally, the Third Circuit’s decision is inconsistent with

the Ninth Circuit’s decision in Jn re Dant & Russell; Inc.,

853 F.2d 700 (9th Cir. 1988). Although Dant & Russell did

not involve an attempt by a government agency to enforce an

environmental cleanup injunction, the Ninth Circuit clearly

ruled that the obligation imposed by a landlord on a former

tenant to clean up leased property should be treated like any

other claim in the tenant’s bankruptcy. In Dant & Russell,

a landlord sued its debtor-tenant, demanding the full! cost of

cleaning up property contaminated by the debtor during the

course of an expired lease. The Ninth Circuit relied on

Kovacs for the conclusion that where a creditor was seeking

to require the debtor to perform or pay for the cleanup of

property that was not part of the debtor’s estate, such an

obligation was a general unsecured claim under the Bankrupt-

2 (.. continued)

Protection, 474 U.S. 494, 507 (1986), in which this Court ruled that a

bankruptcy trustee “may not abandon property in contravention of a state

Statute or regulation that is reasonably designed to protect the public

health and safety from identified hazards.” If a debtor who does not

continue to Own OF possess property may be compelled to use the assets

of the estate to clean up that property, then this Court would have no

reason to decide, as it did in Midlantic, whether environmental laws limit

the bankruptcy power to abandon the property.

cy Code. Dant & Russell, 853 F.2d at 708-09. The Ninth

Circuit reasoned that to treat such obligations differently

would be to create a new bankruptcy priority not provided

for by Congress:

Although [the landlord] asserts that public

policy considerations entitle its claims for

cleanup costs to administrative expense

priority, we acknowledge that Congress

alone fixes priorities. . . . Courts are not

free to formulate their own rules of super

or sub-priorities within a specifically enu-

merated class.

Id. at 709 (citation omitted).

The Third Circuit’s decision has created just such a new

priority by requiring a former tenant to exhaust the assets of

its estate to complete the cleanup of property which it never

owned and does not operate before it may pay its other

creditors. This is squarely in conflict with the decision of

the Ninth Circuit in Dant & Russell, where the Court of

Appeals recognized that such a result violates the priority

scheme established by Congress in the Bankruptcy Code.

Ill. THE THIRD CIRCUIT’S DECISION UNDERMINES

THE BANKRUPTCY CODE’S POLICIES OF

PROVIDING THE DEBTOR WITH A FRESH

START AND ASSURING EQUAL TREATMENT OF

CREDIFORS.

The drafters of the Bankruptcy Code enacted by Con-

gress in 1978 were guided by twin beacons: “the two strong

bankruptcy policies of a fresh start for the debtor and the

equality of treatment of all creditors.” H.R. Rep. No. 595,

95th Cong., Ist Sess. 285 (1977), reprinted in 1978 U.S.C.-

C.A.N. 5963, 6242. The Third Circuit’s decision in this

case not only ignores these two fundamental bankruptcy

policies, but undermines each of them.

First, by classifying environmental orders arising from

prepetition events as anything other than general unsecured

claims, the Third Circuit’s decision will result in unequal

treatment of similarly situated creditors by elevating the

interests of state and federal environmental agencies over the

rights of all other unsecured creditors. The funds a debtor

is forced to expend to comply with an environmental

agency's order—for example, to remediate a landfill to which

the debtor shipped waste years prior to the bankruptcy—will

be unavailable to pay the claims of lenders, suppliers,

contractors, workers, retirees, tort victims, and other

legitimate claimants. This result was never intended by Con-

gress. To the contrary, Congress has expressly stated its

intent to eliminate such disguised priorities and put all

creditors with prepetition claims within the same class on an

equal footing:

[Non-bankruptcy] laws that grant priorities

do so at the expense of other creditors and

to the detriment of the orderly liquidation

and distribution of a bankrupt estate.

Thus, the bill, in the interest of a coherent

bankruptcy policy, eliminates special

priorities found in other laws and brings

all priorities into the bankruptcy code

itself.

[E]xceptions to discharge not found in the

bankruptcy code itself are subject to the

same criticism that special priorities are:

they are not enacted with balancing of the

myriad competing interests in the bank-

ruptcy arena, and frequently are contrary

to the two strong bankruptcy policies of a

fresh start for the debtor and the equality

of treatment of all creditors.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 285 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6242. Accordingly,

reversal of the Third Circuit’s decision is necessary to

maintain the policy of equality among creditors.

Second, by allowing environmental cleanup orders

relating to pre-bankruptcy conduct at property outside the

debtor’s estate to escape bankruptcy treatment, the Third

Circuit’s decision will thwart debtors’ efforts to obtain a

fresh start and will impede their attempts to reorganize their

affairs. In many cases, debtors will be burdened by non-dis-

chargeable liabilities for environmental cleanups, the costs of

which may be impossible to ascertain and which may take

years to complete. Moreover, the difficulty of projecting the

size or timing of such expenditures may make it impossible

for a debtor to formulate an effective business plan—the sine

qua non of a plan of reorganization.

In particular, the decision will frustrate the efforts of

corporate debtors to reorganize by denying them access to

the financing necessary both to operate during the chapter 11

case, and to emerge from bankruptcy. See Martin J.

Bienenstock, Bankruptcy Reorganization 93 (1987). Lenders

and investors will put their money into a reorganizing

business if old obligations can be discharged and if the

company shows a potential for future profits. But they will

not put new money into a company that is subject to continu-

ing cleanup obligations at property the debtor does not own

Or use in its business, such as a landfill to which the debtor

sent waste years ago. See CERCLA § 107(a)(3), 42 U.S.C.

§ 9607(a)(3) (imposing strict, joint and several liability on

persons who “arranged for disposal...of hazardous substanc-

es”).

Third, because the Third Circuit’s decision has the effect

of impeding debtors’ efforts to reorganize, otherwise salvage-

able companies will be compelled to liquidate, costing

workers their jobs and leaving other creditors unsatisfied.

A corporate liquidation generally reduces the assets available

to pay all creditors because the liquidation value of a

company is generally less than its going concern value.

Liquidations forced by prepetition events are thus antithetical

to Chapter 11 of the Bankruptcy Code, which rests on the

premise that a rehabilitated company is more socially useful

than a liquidated one. As this Court recognized in United

States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983):

By permitting reorganization, Congress

anticipated that the business would con-

tinue to provide jobs, to satisfy creditors’

claims, and to produce a return for its

owners. . .. Congress presumed that the

assets of the debtor would be more valu-

able if used in a rehabilitated business than

if “sold for scrap.”

See also NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528

(1984) (reorganization prevents a debtor from having to

liquidate “with an attendant loss of jobs and possible misuse

of economic resources. ”)

Finally, as a general matter, the goal of environmental

protection will not be prejudiced if this Court decides to

overturn the Third Circuit’s decision below. Reversal will

require the government in most cases to file a claim and

receive pro rata payment from the debtor as provided for

under a plan of reorganization. In addition, in most cases

where the debtor does not own the affected property, the

federal or state government may pursue other responsible

parties, not in bankruptcy, to implement the cleanup. In this

case, for example, Torwico’s landlord is jointly and severally

liable with Torwico; to the extent that Torwico cannot be

compelled to complete the cleanup, the State may pursue the

landlord. Further, at most hazardous waste sites, a substan-

tial number of other responsible parties may be compelled to

perform or pay for the cleanup. In fact, it is not unusual to

identify more than a hundred responsible parties at a single

“Superfund” site. See, e.g., Lone Pine Steering Comm. v.

EPA, 777 F.2d 882, 883 (3d Cir. 1985) (142 companies

alleged to be responsible for cleanup costs at a landfill), cert.

denied, 476 U.S. 1115 (1986). To the extent the governme-

nt’s claims remain unsatisfied, the government may resort to

public funds to complete the cleanup. That is a significant

reason why the United States Treasury collects substantial,

broad-based taxes designated for the CERCLA Hazardous

Substance Superfund. See CERCLA § 111, 42 U.S.C. §

9611. New Jersey has a similar tax-based fund. See N.J.

Stat. Ann. § 58:10-23.11f(7).

What the Third Circuit has done below is precisely what

this Court refused to do in Kovacs: establish a new bank-

ruptcy priority for environmental cleanup obligations which

would take precedence over all other prepetition unsecured

obligations. This decision not only jeopardizes a debtor’s

ability to obtain a fresh start, but permits the federal and

State governments to consume all of a debtor’s unencumbered

assets to clean up property that is not part of the debtor’s

estate, while legitimate private claimants go unpaid. This

decision should be reversed.

CONCLUSION

For the foregoing reasons, the Petition for a Writ of

Certiorari should be granted.

Respectfully submitted,

DAVID B. HIRD*

PETER M. GILLON

JAMES D. BARNETTE

ADAM P. STROCHAK

WEIL, GOTSHAL & MANGES

1615 L Street, N.W.

Washington, DC 20036

(202) 682-7000

TIMOTHY P. NEUMANN

DAVID E. SHAVER

WooD, BROEGE, NEUMANN &

FISCHER

25 Abe Voorhees Drive

Manasquan, NJ 08736

(908) 223-8484

Attorneys for Petitioner

*Counsel of Record

January 24, 1994

1 NS aya AP: Soret ai'egs Ge Eanes oo

APPENDIX

IN THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 93-5021

IN RE TORWICO ELECTRONICS, INC..

Debtor,

TORWICO ELECTRONICS, INC..

Appellant

Vv.

STATE OF NEW JERSEY,

DEPARTMENT OF ENVIRONMENTAL PROTECTION.

Appellee

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civil Action No. 92-01828)

Argued August 3, 1993

Before:

STAPLETON, HUTCHINSON AND ROTH, Circuit Judges

(Opinion Filed October 25, 1993)

OPINION OF THE COURT

STAPLETON, Circuit Judge:

This case involves an attempt by the State of New Jersey

to force Torwico Electronics, a debtor in chapter 11 bank-

ruptcy, to comply with its obligations under state and federal

environmental laws. Torwico asserts that these obligations

are “claims,” within the meaning of 11 U.S.C. § 101(5), and

that, because the state failed to timely file a proof of claim,

it is no longer responsible for them. e state claims that

what is involved here are regulatory obligations, not bank-

ruptcy claims. The bankruptcy court decided the issue in

Torwico’s favor, but was reversed by the district court. We

conclude that the district court adopted the correct approach

to this issue and will affirm.

Torwico Electronics conducted a manufacturing business

from a location in Ocean County, New Jersey until Septem-

ber 1985 when it moved to a new location. The Ocean

County site (“the property”) was owned by George Allen

Associates and was leased to Torwico during the time

Torwico did business at that address.

On August 4, 1989, Torwico filed for chapter 11

bankruptcy and listed the New Jersey Department of Envi-

ronmental Protection and Energy (NJDEPE) on its schedules

as a creditor with a disputed and unliquidated claim. On

October 4, 1989, the bankruptcy court sent notice to all

creditors, including NJDEPE, of Torwico’s Chapter 11

bankruptcy and informed them that the last day to file a

proof of claim was January 2, 1990. The following month,

on November 13, 1989, NJDEPE performed an on-site

inspection of the property and found a hidden illegal seepage

pit containing hazardous wastes--wastes which were allegedly

migrating into local waters. NJDEPE also found that

Torwico was operating at its new site without the identifica-

tion number required by EPA. NJDEPE immediately issued

three notices of violation to Torwico, one concerning the

failure to obtain a new identification number at the new place

of business, and the others concerning the hazardous wastes

found at the property. Torwico claims no knowledge of the

seepage pit and the wastes found there.

The January 2, 1990 deadline for filing a proof of claim

passed without any filing by NJDEPE. While Torwico did

obtain an ID number for its new place of business, it did

nothing about the seepage pit at the property. On April 9,

1990, NJDEPE issued an Administrative Order and Notice

of Civil Administrative Penalty Assessment to Torwico

relating to the violation noted in November 1989. The Order

required Torwico to submit a written closure plan for the

seepage pit and assessed a $22,500 penalty for failure to take

action following the November notice. The Order also

stated: “No obligations imposed [by this order] . . . are

intended to constitute a debt, damage claim, penalty or other

civil action which should be limited or discharged in a

bankruptcy proceeding. All obligations are imposed pursuant

to the police powers of the State of New Jersey, intended to

protect the public health, safety, welfare, and environment.”

Torwico and NJDEPE filed cross-motions for summary

judgment before the bankruptcy court, with Torwico seeking

to avoid its obligations to the state by claiming that they were

claims barred by the absence of a filing prior to the bar date.

The court agreed with Torwico and released the company

from its obligations because NJDEPE had failed to timely

iii

file a proof of claim. On appeal, the district court reversed.

Torwico then filed this appeal.’

II.

Because debts are dischargeable in Chapter 11, critical

to the resolution of this case is whether Torwico’s obligations

constitute a “debt” under the bankruptcy code. A “debt” is

defined as a “liability on a claim.” 11 U.S.C. § 101(12)

(1988). A “claim,” in turn, is defined in part as a:

(A) right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed,

undisputed, legal, equitable, secured, or unsecured;

(B) right to an equitable remedy for breach of perfor-

mance if such breach gives rise to a right to payment,

whether or not such right to an equitable remedy is

reduced to judgment, fixed, contingent, matured,

unmatured, disputed, undisputed, secured or unsecured.

' A final order reversing the decision of the bankruptcy court was issued

by the district court on December 14, 1992. We therefore have jurisdic-

tion under 28 U.S.C. § 1291. The district court properly exercised

jurisdiction over this case pursuant to 28 U.S.C. § 158(a), and the

bankruptcy court had jurisdiction over this chapter 11 bankruptcy

pursuant to 28 U.S.C. § 157.

Because the issues raised here are questions of law, and because the

district court’s decision was made in a summary judgment context, our

review is plenary.

11 U.S.C. § 101(5) (1988). Torwico contends that this broad

definition clearly encompasses its obligations to the state

under the administrative order and the state statute pursuant

to which it was issued. NJDEPE, on the other hand,

contends that it has no “right to payment”; rather, it has only

the right to enforce laws requiring Torwico to clean up the

hazardous wastes it is responsible for under state law.

Both sides agree that a proper interpretation of the

Supreme Court decision in Ohio v. Kovacs, 469 U.S. 274,

83 L. Ed. 2d 649, 105 S. Ct. 705 (1985) is instrumental in

resolving this case. In Kovacs, the state of Ohio obtained an

injunction against Kovacs requiring him, inter alia, to clean

up hazardous wastes on his property. When Kovacs failed to

comply, the state obtained a court order appointing a receiver

for the property. The receiver was directed to take posses-

sion of the property, as well as other assets, and complete

the cleanup. After the receiver was appointed, but before he

completed the cleanup, Kovacs filed for personal bankruptcy.

The state, seeking to obtain some of Kovacs’ post-bankruptcy

income for use in paying for the cleanup, argued that

Kovacs’s obligation to clean up the property under the state’s

environmental laws was not a “debt” (or, in other words,

that the state had no “claim”) and was not dischargeable.

The Supreme Court disagreed.

After looking at the definition of “claim” and the

legislative history, the Court concluded that the state had a

“right to payment” and thus possessed a “claim.” It noted

that Kovacs no longer had possession of the site nor control

over the cleanup; all the state sought from Kovacs was

money to fund the cleanup. In essence, the Court found that

Kovacs’s obligation had been reduced to a monetary claim.

In reaching its decision, the Court noted a number of issues

it was not deciding:

We do not address what the legal consequences

would have been had Kovacs taken bankruptcy

before a receiver had been appointed and a trustee

had been designated with the usual duties of a

bankruptcy trustee. . . . We do not hold that the

injunction against bringing further toxic wastes on

the premises or against any conduct that will con-

tribute to the pollution of the site or the State’s

waters is dischargeable in bankruptcy; we here

address . . . only the affirmative duty to clean up

the site and the duty to pay money to that end. . .

. We do not question that anyone in possession of

the site . . . must comply with the environmental

laws of the State of Ohio. Plainly, that person or

firm may not maintain a nuisance, pollute the

waters of the State or refuse to remove the source

of such conditions.

Id. at 284-85.

Torwico contends that Kovacs applies here: Torwico’s

“affirmative duty to clean up the site and the duty to pay

money to that end” is a claim. In addition, Torwico is no

longer in possession of the site and thus, the Court’s admoni-

tion that parties in possession “must comply with the

environmental laws of the State” and cannot “refuse to

remove” hazardous wastes does not apply to it. NJDEPE

contends that Kovacs is inapplicable here because it does not

seek a monetary judgment, but rather seeks to remedy

ongoing pollution by forcing Torwico to clean up the site.

Considerable insight into the issue presented here may

be gleaned from two recent appellate cases that have dealt

with similar questions. In Jn re CMC Heartland Partners,

966 F.2d 1143 (7th Cir. 1992), the debtor owned a hazard-

ous waste site and went through bankruptcy under the

Bankruptcy Act of 1898. Subsequently, EPA issued an order

pursuant to CERCLA § 106, 42 U.S.C. § 9606, to the

debtor, who still owned the site, requiring removal and

remediation activity. The Seventh Circuit Court of Appeals

held that the order, which was based on ownership of the

land, survived reorganization. The court noted that “[t]o the

extent [the relevant federal statutory sections] require a

person to pay money today because of acts before or during

the reorganization proceedings, CERCLA creates a ‘claim’

in bankruptcy.” Jd. at 1146. However, by authorizing

cleanup orders to current owners, CERCLA § 106 creates a

claim “running with the land,” and a “statutory obligation

attached to current ownership of the land survives bankrupt-

cy.” Jd. at 1147. Thus, the court found in favor of EPA,

but warned that EPA must show under § 106 that the

releases were “threatened or ongoing”; otherwise, one might

conclude that EPA merely “repackaged a forfeited claim for

damages.” Jd.

In In re Chateaugay, 944 F.2d 997 (2d Cir. 1991), the

court faced the issue of what constituted a claim in the

context of the bankruptcy of LTV, an entity that owned and

operated literally dozens of hazardous waste sites. The

Second Circuit held that the EPA’s costs of responding to a

release of hazardous waste, even if not yet incurred at the

time of bankruptcy, involved claims; thus, EPA was forced

to file a proof of claim with respect to these costs and stand

in line with the other creditors. As to injunctions requiring

the debtor to clean up a waste site, the court made the

following distinction:

EPA is entitled to seek payment if it elects to incur

cleanup costs itself, but it has no authority to accept

’ ee

a payment from a responsible party as an alternative

to continued pollution. Thus, a cleanup order that

accomplishes the dual objectives of removing

accumulated wastes and stopping or ameliorating

ongoing pollution emanating from such wastes is

not a dischargeable claim. It is true that, if in lieu

of such an order, EPA had undertaken the removal

itself and sued for the response costs, its action

would have both removed the accumulated waste

and prevented continued pollution. But it is only the

first attribute of the order that can be said to reme-

dy a breach that gives rise to a right to payment.

Since there is no option to accept payment in lieu of

continued pollution, any order that to any extent

ends or ameliorates continued pollution is not an

order for breach of an obligation that gives rise to

a right of payment and is for that reason not a

‘claim.’ But an order to clean up a site, to the

extent that it imposes obligations distinct from any

obligation to stop or ameliorate ongoing pollution,

is a ‘claim’ if the creditor obtaining the order had

the option, which CERCLA confers, to do the

cleanup work itself and sue for response costs,

thereby converting the injunction into a monetary

obligation.

Id. at 1008.’

? The parties here also devote considerable attention to our decision in

Penn Terra Lid. v. Dept. of Environmental Resources, 733 F.2d 267 (3d

Cir. 1984). In this pre-Kovacs case, the court examined whether attempts

by the state to enforce a pre-bankruptcy injunction requiring Penn Terra

to undertake certain cleanup actions was barred by the automatic stay

provisions of § 362. The court concluded that because the injunction was

(continued...)

se ee

We find CMC and Chateaugay to be both persuasive and

consistent.’ Applying the precepts outlined in those cases to

the situation here present leads us to conclude that Torwico’s

obligations under the administrative order do not constitute

a Claim.

As Kovacs noted, a debtor cannot maintain an ongoing

nuisance in direct violation of state environmental laws. The

State can exercise its regulatory powers and force compliance

with its laws, even if the debtor must expend money to

comply. Under Kovacs, what the state cannot do is force the

debtor to pay money to the state; at that point, the state is no

longer acting in its role as regulator, it is acting as a credi-

tor.‘

Here it is clear that the state demanded not that Torwico

pay money over to the state, but rather that it take action to

(...continued)

an exercise of state regulatory power and was not an action for a “money

judgment,” the state could enforce the injunction. Because this case

involved the automatic stay provision of the Bankruptcy Code and the

court expressly declined to discuss whether the injunction constituted a

“claim” or “debt,” see id. at 277 n.11, this case is of only marginal

relevance in deciding the issue currently before us.

> We note that neither NJDEPE nor Torwico appears to challenge the

correctness of CMC or Chateaugay but rather, they dispute the proper

application of those decisions to the current situation.

“Were we to adopt the bankruptcy court’s position that any order

requiring the debtor to expend money creates a dischargeable claim, it is

unlikely that the state could effectively enforce its laws: virtually all

enforcement actions impose some cost on the violator.

10a

ameliorate ongoing hazard.° This is not the end of the

inquiry, however. As noted in Kovacs, even if an injunction

does not facially require payment of money, it still may

present a “claim.” 469 U.S. at 274. Chateaugay and CMC

also both suggest that, at least in some Circumstances, an

injunction that requires a cleanup may still be considered a

“claim.” CMC held that the CERCLA § 106 order there

involved must be in response to an ongoing and continuing

threat, and not merely the repackaging of a forfeited claim

for damages. 966 F.2d at 1146-47. Chateaugay states that

where an order imposes “obligations distinct from any

obligation to stop or ameliorate ongoing pollution,” the order

presents a claim if the government could have done the work

itself and then sought reimbursement; under such circum-

stances there is a “breach of an obligation that gives rise to

a right of payment.” 944 F.2d at 1008.

The state here found that the seepage pit was a continu-

ing problem that was leaking hazardous material into the

surrounding environment. Thus, the state is not asserting a

“repackaged claim for damages”; rather, there is an ongoing

and continuing threat and, in the words of Chateaugay, an

obligation on the part of the debtor “to ameliorat[e] ongoing

pollution emanating from {accumulated] wastes.” Chate-

augay, 944 F.2d at 1008. The state has no “right to pay-

ment” here. What it has is a right to force the debtor to

comply with applicable environmental laws by remedying an

existing hazard.

> The Order requires Torwico to submit “a written closure plan . . . for

closure of the seepage pit.” App. at 210. An affidavit from an employee

of NJDEPE discusses in detail the findings of contamination and the fact

that wastes are migrating into the surrounding environment. See App. at

219-31 (“It is safe to assume, at the concentrations detected at the

property boundary, that the contamination has migrated offsite.”).

lla

The single fact which Torwico relies on most heavily is

that it is no longer in possession of the site, and has not been

in possession for several years. Thus, Torwico argues that

it is not maintaining a nuisance or participating in an ongoing

release of hazardous substances into the environment. It

notes that a prime factor in Kovacs was that the debtor was

no longer in possession of the property and that a receiver

was in possession and was conducting the cleanup. Similarly,

unlike the debtor in Chateaugay, Torwico is not, in its view,

“continuing to pollute” here. Finally, Torwico notes that

CMC found a “statutory obligation running with the land”:

Torwico no longer owns or occupies the land here.

We do not find Torwico’s suggested distinction persua-

sive. Unlike the debtor in Kovacs, Torwico can (and in the

State’s view, must) conduct the cleanup: it has access to the

site and the state has not, apparently, performed any cleanup

on its own. Under New Jersey law, Torwico is a generator

of hazardous waste and as such has an ongoing responsibility

for the wastes it disposes. Even though Torwico no longer

possesses the property, it is still, allegedly, Torwico’s wastes

that are presenting a continuing environmental hazard.

Under New Jersey law, Torwico is accordingly still responsi-

ble for the nuisance and cannot avoid compliance with the

environmental laws. Kovacs, CMC, and Chateaugay all

Suggest that Torwico must remedy the situation: the obliga-

tions under the Order are not a “claim. ”°®

* The parties dispute whether if the state has an “alternate payment

remedy” the order becomes a “claim.” Here, it is undisputed that the

order was issued under statutory sections which do not allow the state to

perform the cleanup and then sue for reimbursement of its costs. That

authority may exist under other potentially relevant statutes for the state

to perform the cleanup and seek reimbursement for its costs is irrelevant--

(continued...)

12a

Unlike Kovacs, the state in this case neither seeks money

nor has a right to payment under the statutory authority

asserted or the Order imposed; the state seeks compliance

with its laws through a cleanup of a current hazardous

situation. In the words of Chateaugay, “there is no option

to accept payment in lieu of continued pollution,” and there

is an order intended to “ameliorate continued pollution”;

thus, the Order “is not an order for breach of an obligation

that gives rise to a right of payment and is for that reason not

a ‘claim.’” 944 F.2d at 1008. Under the circumstances here

present, Torwico’s obligations do not run with the land as

did the debtor’s in CMC; however, they run with the waste.

To the extent that Torwico’s waste poses a continuing

hazard, Torwico is responsible for remedying the problem

regardless of where the waste might be.’ As in CMC, the

release here is “threatened and ongoing”; as in CMC, this is

* (...continued)

-much as it was irrelevant in CMC and Chateaugay. The Chateaugay

court noted that “to the extent that [an order] imposes obligations distinct

from any obligation to stop or ameliorate ongoing pollution, [it] is a

‘claim’ if the creditor obtaining the order had the option . . . to do the

cleanup work itself and sue for response costs.” Chateaugay, 944 F.2d

at 1008. Here, Torwico’s obligation was an obligation to ameliorate

ongoing pollution; it had no option to pay for the right to allow its wastes

to continue to seep into the environment. That the state may have had

alternative means at its disposal to end the ongoing threat does not

convert its statutory authority into a “right to payment.”

’ CMC held that a “statutory obligation attached to current ownership

of the land survives bankruptcy.” 966 F.2d at 1147. Similarly, a

Statutory obligation attached to hazardous waste (i.¢. to make sure it does”

no damage) also survives bankruptcy.

13a

not a “repackaging [of] a forfeited claim for damages” (966

F.2d at 1147) for past conduct, but rather an attempt to

prevent additional future damage.

IV.

In conclusion, we hold that the state’s attempt in this

case to force a party to clean up a waste site which poses an

ongoing hazard is not a “claim” as defined by the Bankrupt-

cy Code. This is not a situation where the state is attempting

to get money from the debtor but rather, it is an exercise of

the state’s inherent regulatory and police powers. We. will

therefore affirm the district court.

l4a

IN THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 93-5021

IN RE TORWICO ELECTRONICS, INC.,

Debtor,

TORWICO ELECTRONICS, INC.,

Appellant

Vv.

STATE OF NEW JERSEY,

DEPARTMENT OF ENVIRONMENTAL PROTECTION,

Appellee

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civil Action No. 92-01828)

STAPLETON, HUTCHINSON AND ROTH, Circuit Judges

JUDGMENT

This cause came to be heard on the record from the

United States District Court for the District of New Jersey

and was argued by counsel on August 3, 1993.

On consideration whereof, if is now here ordered and

adjudged by this Court that the judgment of the said District

Court entered December 14, 1992, be, and the same is

lSa

hereby affirmed. Costs taxed against appellant. All of the

above in accordance with the opinion of this Court.

ATTEST:

[s] P. Dougias Sisk

Clerk

16a

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

No. 92-1828 (AET)

TORWICO ELECTRONICS, INC.,

Plaintiff/Appellee

STATE OF NEW JERSEY,

DEPARTMENT OF ENVIRONMENTAL

PROTECTION AND ENERGY,

Defendant/Appellant

On Appeal From the United States Bankruptcy

Court For the District of New Jersey

Decided December 8, 1992

Before: Anne E. Thompson, District Judge

MEMORANDUM AND ORDER

ANNE E. THOMPSON, District Judge.

This matter is before the Court on an appeal by the State

of New Jersey, Department of Environmental Protection and

Energy (“DEPE”) from the Bankruptcy Court’s judgment,

filed September 20, 1991, in favor of Torwico Electronics,

Inc. (“Torwico”), a manufacturer of electronic transformers.

DEPE is appealing a final judgment of the Bankruptcy Court,

and this Court has jurisdiction pursuant to 28 U.S.C.A.

17a

§ 158(a) (West 1992). The Bankruptcy Court’s legal

conclusions are subject to plenary review, and its factual

findings are examined under a clearly erroneous standard.

See Fed. R. B.R. P. 8013; J.P. Fyfe, Inc. v. Bradco Supply

Corp., 891 F.2d 66, 69 (3d Cir. 1989) (citations omitted).

Background

The parties’ dispute arises from an illegal seepage pit

located on property that Torwico had leased from George

Allen Associates (“GAA”). Torwico relocated after the lease

ended in September 1985; however, it subsequently entered

into an agreement with GAA to share certain costs related to

New Jersey’s Environmental Cleanup Responsibility Act

(“ECRA”). See N.J. Stat. Ann. §§ 13:1K-6 to -14 (West

1991). On August 4, 1989, Torwico filed its Chapter 11

bankruptcy petition. In October 1989, the Bankruptcy Court

issued an order declaring that January 2, 1990 was the last

day on which a party could file a proof of claim or interest.

DEPE, however, asserts that it did not receive notice of

Torwico’s bankruptcy filing.

In November 1989, DEPE inspected Torwico’s former

site and discovered the seepage pit containing hazardous

wastes. The contamination, moreover, had migrated from

the pit into off-site ground waters. Torwico denies that it

used or even knew of the seepage pit during its operations on

the former site. In late March 1990, Torwico filed an

adversary proceeding seeking to preclude DEPE from

imposing any liability or enforcing any obligation for

environmental cleanup. Torwico reasoned that such a liabili-

ty or obligation would constitute a claim under Chapter 11 of

the Bankruptcy Code, and that DEPE was barred from

pursuing any claims because of its failure to file a timely

proof of claim. In response, DEPE argued that its efforts to

en ee NT ee ee

18a

ensure that Torwico complies with environmental laws

constitute an exercise of the state’s police power and would

not be dischargeable in bankruptcy.

In early April 1990, DEPE issued an Administrative

Order and Notice of Civil Administrative Penalty Assessment

to Torwico which required inter alia that Torwico develop a

closure plan for the seepage pit. In August 1990, DEPE

issued a Notice of Violation of ECRA to Torwico and GAA.

In November 1990, Torwico filed a motion with the Bank-

ruptcy Court for summary judgment and injunctive relief,

and DEPE cross-moved for summary judgment. Following

oral argument on January 14, 1991, and supplemental

briefing and reargument on April 1, 1991, the Bankruptcy

Court issued its opinion and order. See In re Torwico

Elecs., Inc., 131 B.R. 561 (Bankr. D.N.J. 1991).

The Bankruptcy Court held that the Torwico’s cleanup

obligation was an unsecured claim. Jd. at 572; see also 11

U.S.C.A. § 101(5) (West Supp. 1992). It reasoned that

“where a debtor in bankruptcy cannot clean up environmental

contamination . . . without paying money, the obligation to

clean up pursuant to an injunction is a debt which is dis-

chargeable in bankruptcy.” 131 B.R. at 569. Following this

conclusion, the Bankruptcy Court held that the DEPE’s claim

was time-barred and that the sections of ECRA which

“purport to dictate the treatment of cleanup obligations in

bankruptcy” are void under the Supremacy Clause. /d. at

573, 576; see also N.J. Stat. Ann. § 13:1K-12 (West 1991)

(“No obligations imposed by this act shall constitute a lien or

claim which may be limited or discharged in a bankruptcy

proceeding.”).

19a

Discussion

In Ohio v. Kovacs, 469 U.S. 274, 83 L. Ed. 2d 649,

105 S. Ct. 705 (1985), the Supreme Court affirmed the Sixth

Circuit’s conclusion that the debtor’s “cleanup duty had been

reduced to a monetary obligation,” and constituted a claim

under the Bankruptcy Code. Jd. at 282, 105 S. Ct. at 709.

In Kovacs, however, the state’s attorney conceded in oral

argument that the only performance sought from the debtor

was the payment of money. See id. at 283. Thus, Kovacs

does not mandate that all prepetition cleanup obligations are

equivalent to monetary obligations. In Midlantic National

Bank v. New Jersey Department of Environmental Protection,

474 U.S. 494, 106 S. Ct. 755 (1986), 88 L. Ed. 2d 859, the

Supreme Court held that a bankruptcy trustee cannot abandon

property in contravention of state environmental statutes and

regulations. Jd. at 507. Although Midlantic specifically

addressed the issue of a bankruptcy trustee’s abandonment

power, it clarified that: “Congress did not intend for the

Bankruptcy Code to pre-empt all state laws.” Jd. at 505, 106

S. Ct. at 761.

In Penn Terra Ltd. v. Department of Environmental |

Resources, 733 F.2d 267 (3d Cir. 1984), the Third Circuit

interpreted sections 362(b)(4) & (5) of the Bankruptcy

Code,’ and addressed the issue of whether the actions of the

Pennsylvania Department of Environmental Resources

(“DER”) were an attempt to enforce a money judgment. /d.

' Section 362(b)(4) provides that no bankruptcy stay applies to the

“commencement or continuation of an action or proceeding by a

governmental unit to enforce such governmental unit’s police or

regulatory power.” 11 U.S.C.A. 362(b)(4) (West 1979). Section

362(b)(5) provides that the stay applies to money judgments even if in

furtherance of the state’s regulatory power. See id. § 362(b)(5).

20a

at 272. The Penn Terra court concluded that “the suit

brought by DER to compel Penn Terra to remedy environ-

mental hazards was properly brought as an equitable action

to prevent future harm, and did not constitute an action to

enforce a money judgment.” See id. at 278. Although the

bankruptcy stay provisions contain a specific exception for

the exercise of police or regulatory power, and the provisions

defining bankruptcy claims do not, Penn Terra recognizes

that requiring a debtor “to rectify harmful environmental

hazards” entails the exercise of state regulatory powers. /d.

at 274.

In In re Chateaugay Corp., 944 F.2d 997 (2d Cir.

1991), the Second Circuit recognized the difficulty in

classifying a debtor’s obligation to clean up a toxic waste site

that continues to leach hazardous substances into nearby

water supplies. See id. at 1007. This obligation contains two

elements: (1) to stop the on-going pollution, and (2) to

cleanup the toxic substances which may have been deposited

before the debtor filed for bankruptcy. The Chateaugay

court concluded that: “[A] cleanup order that accomplishes

the dual objectives of removing accumulated wastes and

stopping or ameliorating on-going pollution emanating from

such wastes is not a dischargeable claim.” /d. at 1008.

In this case, the DEPE has no alternative payment

remedy under ECRA and is attempting to remedy both past

and ongoing pollution. In light of the foregoing case law,

the Court concludes that Torwico’s cleanup obligation under

ECRA is not a dischargeable unsecured claim. The Court,

therefore, need not reach the issue of whether the DEPE’s

purported claim would be time-barred. Similarly, since this

conclusion eliminates the alleged conflict between ECRA and

the Bankruptcy Code, the Supremacy Clause issue does not

arise. See Perez v. Campbell, 402 U.S. 637, 644, 91S. Ct.

1704, 1708, 29 L. Ed. 2d 233 (1971).

2la

For all these reasons, it is on this 8th day of December

1992:

ORDERED that the Department of Environmental

Protection and Energy’s appeal of the Bankruptcy Court’s

decision granting Torwico Electronics, Inc. an injunction

prohibiting the State from enforcing certain environmental

laws be and hereby is granted, and it is further:

ORDERED that the Bankruptcy Court’s ruling that

Torwico Electronics, Inc.’s cleanup obligation is an unse-

cured claim be and hereby is reversed, and that the remain-

der of the Bankruptcy Court’s decision be and hereby is

vacated.

22a

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF NEW JERSEY

IN RE TORWICO ELECTRONICS, INC.,

Debtor,

TORWICO ELECTRONICS, INC.,

Plaintiff,

Vv.

STATE OF NEW JERSEY,

DEPARTMENT OF ENVIRONMENTAL PROTECTION,

Defendant.

Bankruptcy No. 87-06071

Adv. No. 90-3116 TS

Sept. 6, 1991

As Amended Sept. 27, 1991

MEMORANDUM OPINION

STEPHEN A. STRIPP, Bankruptcy Judge

This is an opinion on a motion and cross-motion for

summary judgment in this adversary proceeding. The Debtor

applies for a declaratory judgment that any obligation which

it may have to the State of New Jersey under environmental

laws to clean up contamination at the Debtor’s former place

of business is an unsecured claim under title 11, United

States Code (the Bankruptcy Code), and that the State is now

23a

barred from collecting because of failure to file a proof of

claim within the time required by the Bankruptcy Rules. The

Debtor also applies for an injunction permanently restraining

defendant State of New Jersey, Department of Environmental

Protection (“the DEP”) from seeking to enforce such claims

in any judicial or administrative proceeding. The DEP

applies for a declaratory judgment that the Debtor’s obliga-

tions to the State are not claims, and in the alternative, that

any such claims are not time-barred. This court has jurisdic-

tion under 28 U.S.C. §§ 1334(a) and 151. This is a core

proceeding under 28 U.S.C. § 157(b)(2)(A), (B) and (O).

This shall constitute the court’s findings of fact and conclu-

sions of law.

FINDINGS OF FACT

The material facts are undisputed. The Debtor is in the

business of manufacturing electronic transformers. Its

present place of business is 410 Oberlin Avenue, Lakewood,

New Jersey. However, until September, 1985 the Debtor’s

place of business was located at the corner of New Jersey

Route 70 and New Hampshire Avenue in Lakewood (“the

property”). The Debtor never owned this property, but, in

fact, leased the property from the present owner, George

Allen Associates (“GAA”). The Debtor’s lease terminated

and it moved from the property as of September 3, 1985.

The Debtor has not had possession of or control over the

property since then.

At some point after the Debtor moved from the proper-

ty, the Debtor and GAA entered into an agreement to share

24a

certain ECRA related costs.’ The Debtor and GAA took

certain steps to clean up contamination on the property.? A

dispute then arose over a waste solvent seepage pit which

GAA discovered during its cleanup. This pit was an illegal

facility.’ Torwico denies that it ever used the seepage pit

and that it was even aware of its existence.‘ Remediation of

soil contamination was completed to the DEP’s satisfaction.

However, there is extensive ground water contamination

which apparently originated from the seepage pit and which

has migrated off the property. The DEP believes that the

ground water contamination poses a potential threat to public

health.

' Certification of Robert Savino, President of the Debtor, dated

November 20, 1990, 4 3.

? Affidavit of Michael J. McCann, DEP Case Manager, filed March 8,

1991.

> Id., para. 29.

* Savino Certification, supra. Although it is not part of the record in

this adversary proceeding, it is part of the record in the Debtor’s

bankruptcy case that in October, 1986 GAA filed suit against the Debtor

in the Superior Court of New Jersey for damages arising from alleged

breach of lease provisions requiring the Debtor to comply with ECRA.

The Debtor filed an answer denying liability, a counterclaim, and a

third-party complaint. The third-party defendant, in turn, filed fourth-pa-

rty complaints. The DEP is not a party to that case. After the Debtor

filed its bankruptcy petition it removed the state court case to this court.

However, this court later remanded the case to the state court. This court

has not been informed that there has been any adjudication yet in that

case of the question of liability as between the Debtor and GAA for

environmental cleanup costs. Since GAA is not a party to this adversary

proceeding, the judgment to be entered herein is presumptively not

binding upon it.

25a

On August 4, 1989, the Debtor filed a petition for

reorganization under chapter 11 of the Bankruptcy Code. It

remains a debtor in possession. It scheduled the DEP and

the Attorney General of New Jersey on Schedule A-3, which

is for unsecured creditors, as holding disputed claims against

the Debtor.* On October 4, 1989 the court issued an Order

for Meeting of Creditors, Combined with Notice Thereof and

of Automatic Stay, which is a standard order issued in every

bankruptcy case. The order issued in the Debtor’s case

Stated in pertinent part as follows:

ANY CREDITOR OR EQUITY SECURITY

HOLDER WHOSE CLAIM OR INTEREST IS

NOT SCHEDULED OR SCHEDULED AS DIS-

PUTED, CONTINGENT OR UNLIQUIDATED

SHALL FILE A PROOF OF CLAIM OR INTER-

EST ON OR BEFORE JANUARY 2, 1990 OR

UNLESS OTHERWISE MODIFIED BY THE

COURT.

This order was mailed by the court to each scheduled

creditor. It stated whether each creditor’s claim was sched-

uled as disputed, and each creditor was thereby informed as

to whether it was necessary to file a proof of claim. Such

filing is necessary to preserve the creditor’s right to receive

payment in the case; if a proof of claim is timely filed, a

hearing is eventually scheduled to adjudicate the debtor’s

objection to such claim. Copies of the order in question

were served by mail upon the Attorney General of the State

of New Jersey and upon the DEP on October 4, 1989. The

orders were mailed to the correct addresses, and were not

* Bankruptcy Rule 1007(b)(1) requires a debtor to file schedules of its

assets and liabilities on certain official forms.

26a

returned as undelivered. The Attorney General and the DEP,

however, deny that they were served with the order, stating

that neither of them has any record of it.

The summons and complaint commencing this adversary

proceeding were served upon the DEP on or about April 2,

1990. On April 9, 1990 the DEP issued an Administrative

Order and Notice of Civil Administrative Penalty Assessment

to the Debtor (“the Administrative Order”).° In substance,

it determines that the Debtor disposed of hazardous wastes in

the seepage pit in violation of the Solid Waste Management

Act, N.J.S.A. 13:1E-1 et seq. and regulations thereunder.

The Administrative Order directs the Debtor to submit a

written plan to the DEP for closure of the seepage pit within

fifteen days. It also assesses a civil administrative penalty of

$22,500 against the Debtor, and states that payment is due

when the Order becomes final. It also states that the Order

is binding upon any bankruptcy trustee, and that

No obligations imposed by this Administrative

Order and Notice of Civil Administrative Penalty

Assessment (with the exception of (the $22,500

penalty]) are intended to constitute a debt, damage,

claim, penalty or other civil action, which should be

limited or discharged in a bankruptcy proceeding.

All obligations are imposed pursuant to the police

powers of the State of New Jersey, intended to

protect the public health, safety, welfare, and

environment.

® See Exhibit D to Savino Certification, supra.

27a

Il.

STANDARDS GOVERNING SUMMARY

JUDGMENT

These motions are governed procedurally by Bankruptcy

Rule 7056, which incorporates by reference Rule 56 of the

Federal Rules of Civil Procedure, dealing with summary

judgment. Summary judgment is appropriate where there is

no genuine issue as to any material fact and the moving party

is entitled to judgment as a matter of law. F.R.Civ.P. 56(c).

In Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548

(1986), 91 L. Ed. 2d 265, the Supreme Court stated that:

Summary judgment procedure is properly regarded

not as a disfavored procedural shortcut but rather as

an integral part of the Federal Rules as a whole,

which are designed “to secure the just, speedy and

inexpensive determination of every action.” Fed.R-

.Civ.P. 1.

A party opposing a motion for summary judgment must

. . . dO more than simply show that there is some

metaphysical doubt as to the material facts. . . . In

the language of the Rule, the non-moving party

must come forward with ’specific facts showing that

there is a genuine issue for trial.’

Matsushita Elec. Industrial Co., Ltd. v. Zenith Radio Corp. ,

475 U.S. 574, 586-87, 106 S. Ct. 1348 (1986), 89 L. Ed. 2d

538.

As the cross-motions for summary judgment reflect, the

Parties agree that there are no genuine issues of material

facts, i.e. facts which are essential to the determination of

this action. The material facts are as stated in Section I

above, and the disputes are as to issues of law.

28a

Il.

BEFORE FUNDS ARE EXPENDED BY A BANKRUPTCY

ESTATE FOR ANY REASON, A DETERMINATION

MUST BE MADE THAT THE EXPENDITURE IS AU-

THORIZED UNDER THE CLASSIFICATION AND

DISTRIBUTION PROVISIONS OF THE BANKRUPTCY

CODE.

To place the issues which follow in their proper context,

it is first necessary to briefly consider certain fundamental

aspects of bankruptcy law.

The filing of a bankruptcy petition creates an estate

which consists of substantially all legal and equitable interests

of the debtor in property as of the commencement of the

case. Code § 541. The Bankruptcy Code includes a system

of provisions for classification of claims against the debtor’s

property, determination of priorities, and conditions to

payment. Although there is a great variety of obligations

under nonbankruptcy law requiring payment of money, the

Bankruptcy Code provides that all such obligations must be

classified within a small handful of categories. This system

of classification is an integral part of bankruptcy law,

because in the vast majority of bankruptcy cases, there are

insufficient assets to satisfy all claims against the debtor in

full. Because this creates competition for a debtor’s assets,

the Bankruptcy Code also includes a system of priorities.

There are only five basic categories of claims in the

Bankruptcy Code against a debtor’s assets. In order of

priority, those categories are as follows:

1. Secured claims. These are claims secured by liens on

a debtor’s assets. A lien is essentially a right to resort to a

particular asset for payment before any other creditor can

resort to it. Under Bankruptcy Code § 506, a claim is

secured to the extent of the value of the collateral, and

29a

unsecured to the extent of any deficiency. Security interests,

which essentially consist of contractual liens on real or

personal property, are the most common form of lien. A

security interest is property which is protected by the

Takings Clause of the Fifth Amendment to the United States

Constitution, which provides that no private property shall be

taken for public use without just compensation. United States

v. Security Industrial Bank, 459 U.S. 70, 103 S. Ct. 407

(1982), 74 L. Ed. 2d 235, Secured claims therefore have the

highest level of priority in bankruptcy cases. Code § 361

and other sections are designed to prevent involuntary

reduction in value of secured claims, which would violate the

Takings Clause.

2. Administrative expenses. These are the actual,

necessary costs and expenses of preserving the bankruptcy

estate, and related expenses. Code § 503(b). After secured

claims, administrative expenses have the second highest level

of priority. Code § 507(a) 1). That essentially reflects the

practical reality that if bankruptcy estates are to be adminis-

tered, those who render such services require assurance that

they will meet a better fate than other creditors of the debtor

(although it often happens that administrative expenses also

are not paid in full.)

3. Priority claims. Administrative expenses are a type

of “priority” claim. Code § 507(a)(1). The term “priority

claim”, however, is generally used in this State as a term of

art to refer to all of the types of claims defined in Code

§ 507(a)(2) through (8) which, for policy reasons, Congress

has determined shall receive preferred treatment in distribu-

tions of a debtor’s property. Tax claims generally fall under

Code § 507(a)(7) (although they may also be secured claims

under applicable nonbankruptcy law, or administrative

expenses if they arise postpetition). Claims based upon

30a

commitments to the Federal Deposit Insurance Corporation,

Resolution Trust Corporation and related entities to maintain

the capital of an insured depository institution fall under

Code § 507(a)(8). These are the only types of obligations of

a debtor to governmental units which are given priority by

the Bankruptcy Code.

4. Unsecured claims. These are all other legal obliga-

tions of the debtor requiring payment of money. Code

§ 101(5). The Bankruptcy Code generally defers to nonban-

kruptcy law to determine the creation of legal obligations

which give rise to claims. Jn re Meyertech, 831 F.2d 410,

417 (3d Cir. 1987). Code § 502(b), however, does limit

certain types of claims.

5. Equity interests. These are essentially the ownership

interests, primarily those reflected in capital stock in the case

of a corporate debtor. Code § 101(16).

Code § 1129 in chapter 11 cases and Code § 726 in

chapter 7 cases require that all distributions of money or

other property from a bankruptcy estate must follow this

order of priority (except to the extent that a particular class

consents to different treatment under a chapter 11 plan).

Two fundamental conclusions follow from the Bankrupt-

cy Code provisions dealing with classification of obligations

and distribution of property of the estate. First, every type

of obligation requiring payment of money from a bankruptcy

estate falls within one of the foregoing five categories; the

Bankruptcy Code recognizes no other categories (except for

co-ownership interests of third parties). Second, where there

is a dispute about whether money should be paid from a

bankruptcy estate to satisfy a legal obligation, the first phase

of the analysis must be to determine the category to which the

obligation belongs. With this background, we can proceed

3la

to determine the nature of the debtor’s obligation to clean up

its former property under the Bankruptcy Code, and the

treatment to which it is entitled in this case.

IV.

THE DEBTOR’S CLEANUP OBLIGATION TO THE

STATE IS AN UNSECURED CLAIM.

The DEP issued its Administrative Order under the Solid

Waste Management Act, N.J.S.A. 13:1E-1 ef seq. (“the

Solid Waste Act”), and regulations thereunder. Moreover,

the DEP also alleges that the Debtor violated three other

New Jersey environmental laws by the wrongful discharge of

hazardous substances on the property: the Environmental

Cleanup Responsibility Act, N.J.S.A. 13:1K-6 et seq.

(“ECRA”); the New Jersey Spill Compensation and Control

Act, N.J.S.A. 58:10-23.11 ef seq. (“the Spill Act”); and the

New Jersey Water Pollution Control Act, N.J.S.A. 58: 10A-1

et seq. (“the Water Pollution Act”). The Debtor denies that

it violated any of those laws. However, for purposes of

these motions for summary judgment the Debtor argues

essentially that even if it did violate those laws, any resulting

obligations it may have to the State of New Jersey are debts

which are dischargeable in bankruptcy. The DEP argues that

such obligations are not debts, but rather are “regulatory

obligations” which are not dischargeable. The first question

then is as to the definitions of the terms “debt” and “claim”

under the Bankruptcy Code.

Code § 101(5) states that

“claim” means--

(A) right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed,

undisputed, legal, equitable, secured, or unsecured;

32a

or (B) right to an equitable remedy for breach of

performance if such breach gives rise to a right to

payment, whether or not such right to an equitable

remedy is reduced to judgment, fixed, contingent,

matured, unmatured, disputed, undisputed, secured

or unsecured.

Code § 101(12) defines “debt” as “liability on a claim.”

Under Code § 101(10)(A), the term “creditor” means an

“entity that has a claim against the debtor that arose at the

time of or before the order for relief concerning the debt-

or.”’ The legislative history expresses Congressional intent

that “the terms debt and claim are coextensive: a creditor has

a claim against the debtor; the debtor owes a debt to the

creditor.” 2nd Sess. 23 (1978); S. Rep. No. 95-589, 95th

Cong., H.R. Rep. No. 95-595, 95th Cong. Ist Sess. 310,

1978 U.S. Code Cong. & Admin. News 6267 (1977).

Congress intended that these terms should be defined very

broadly:

By this broadest possible definition [of the term

“claim”], and by the use of the term throughout the

title 11, especially in subchapter I of chapter 5, the

bill contemplates that all legal obligations of the

debtor, no matter how remote or contingent, will be

able to be dealt with in the bankruptcy case. It

permits the broadest possible relief in the bankrupt-

cy court.

” Code § 301 provides that in a voluntary bankruptcy case, the filing of

the bankruptcy petition constitutes an order for relief under the chapter

of the Bankruptcy Code under which the petition was filed.

———ooo

33a

S. Rep. No. 95-989, 95th Cong., 2d Sess. 21-22 (1978);

H.R.Rep. No. 95-595, 95th Cong., Ist Sess. 309, 1978 U.S.

Code Cong. & Admin. News 6266 (1977).

In three recent cases, the United States Supreme Court

has held that the term “claim” is to be defined as broadly as

Congress intended. In Pennsylvania Dept. of Public Welfare

v. Davenport, 495 U.S. 552, 110 S. Ct. 2126, 109 L. Ed. 2d

588 (1990), the Supreme Court held that restitution obliga-

tions imposed as conditions of probation in state criminal

actions are “debts” which are dischargeable under chapter 13

of the Bankruptcy Code. In so doing, the Court held that the

fact that restitution orders are imposed for the benefit of the

State as well as the victims makes no difference as to whether

such obligations are “claims” in bankruptcy:

But the language employed to define “claim” in

§ 101(4)(A) makes no reference to purpose. The

plain meaning of “right to payment” is nothing

more nor less than an enforceable obligation,

regardless of the objectives the State seeks to serve

in imposing the obligation.

110 S. Ct. at 2131.

The Supreme Court reaffirmed this holding this year in

Johnson v. Home State Bank, on * ee eT

2150, 115 L. Ed. 2d 66 (1991). The issue in Johnson was

whether a debtor can include a mortgage lien in a chapter 13

bankruptcy reorganization plan once the personal obligation

secured by the mortgaged property has been discharged in a

chapter 7 proceeding. The Court held that in such a circum-

stance the mortgage lien remains a “claim” against the debtor

that can be rescheduled under chapter 13. Code § 524(a)(1)

provides that a bankruptcy discharge extinguishes “the

personal liability of the debtor with respect to any debt,” and

the defendant argued that after such discharge, the obligation

34a

secured by the remaining lien was no longer a “debt.” The

Court noted that Code § 102(2) establishes as a rule of

construction that the phrase “’claim against the debtor’

includes claim against property of the debtor.” Hence, the

fact that the defendant could still look to the debtor’s real

property as a source of payment meant that the defendant still

had a “claim” against the debtor.

In both Johnson and Davenport, the Supreme Court

relied on its holding in Ohio v. Kovacs, 469 U.S. 274, 83 L.

Ed. 2d 649, 105 S. Ct. 705 (1985). In Kovacs, the State of

Ohio obtained an injunction ordering William Kovacs to

clean up a hazardous waste site. A receiver was subsequent-

ly appointed. Then Kovacs filed a bankruptcy petition. The

Supreme Court stated that “[t]he question before us is

whether in the circumstances present here, Kovacs’ obliga-

tion under the injunction is a ‘debt’ or ‘liability on a claim’

subject to discharge under the Bankruptcy Code.” /d. at

275, 105 S. Ct. at 706.

Kovacs was an officer and stockholder of a corporation

which caused pollution in Ohio. The State obtained a

consent judgment which required the corporation and Kovacs

to cease polluting, to clean up the property, and to pay the

State $75,000 in damages. When there was no compliance,

Ohio appointed a receiver for Kovacs’ assets to implement

the judgment. When Kovacs filed a bankruptcy petition,

Ohio sought a declaratory judgment that Kovacs’ obligation

under the injunction requiring cleanup was not a “debt.” In

a unanimous opinion, the Supreme Court held as follows:

The State resorted to the courts to enforce its

environmental laws against Kovacs and secured a

negative order to cease polluting, an affirmative

order to clean up the site, and an order to pay a

sum of money to recompense the State for damage

35a

done to the fish population. Each order was one to

remedy an alleged breach of Ohio law: and if

Kovacs’ obligation to pay $75,000 to the state is

dischargeable in bankruptcy, which the State freely

concedes, it makes little sense to assert that because

the cleanup order was entered to remedy a Statutory

violation, it cannot likewise constitute a claim for

bankruptcy purposes. Id. at 279, 105 S. Ct. at 708

[emphasis added].

The Court therefore held that the obligation of the debtor

under the cleanup order was a “claim” which was discharge-

able in bankruptcy.

In all three of these cases, the Supreme Court has held

in no uncertain terms that any enforceable obligation to pay

money is a “claim” of the obligee and a “debt” of the

obligor under Code §§ 101(5) and (12), which can be

discharged in bankruptcy. Moreover, the unanimous opinion

of the Court in Kovacs is directly on point. In Kovacs, as in

this case, the State was seeking to compel the debtor to pay

money to clean up environmental contamination. In Kovacs,

as in this case, there was no Suggestion by the State that the

debtor was personally capable of Cleaning up the environ-

mental damage which he may have caused. “In reality, the

only type of performance in which Ohio is now interested is

a money payment to effectuate the Chem-Dyne Cleanup.” /d.

at 282.

The DEP argues that Kovacs is not controlling. It states

that the Kovacs decision “is a very narrow one involving a

money judgment and a chapter 7 individual debtor who had

already been replaced with a receiver, by the state” before he

filed his bankruptcy petition.* There is nothing in Kovacs,

* DEP’s brief dated December 6, 1990, page 12.

36a

however, which suggests that its analysis of the terms

“claim” and “debt” should be limited to chapter 7 cases or

to cases involving individuals. Furthermore, Code 103(a)

provides that chapter 1, which includes the definitions of

“debt” and “claim” in Code § 101, applies in all cases under

chapters 7, 11, 12 and 13.

It is true that the appointment of a receiver was relevant

in Kovacs. Accordingly, the Court declined to “address what

the legal consequences would have been had Kovacs taken

bankruptcy before a receiver had been appointed... .” /d.

at 284. Consequently, the opinion is not entirely clear as to

what the Court would have held if there had not been a

receiver. Certain inferences, however, can be drawn from

a close reading. The Court noted that William Kovacs was

not the only person whose assets were placed in receivership:

William Kovacs was the chief executive officer and

stockholder of Chem-Dyne Corp., which with other

business entities operated an industrial and hazard-

ous waste disposal site in Hamilton, Ohio. In 1976,

the State sued Kovacs and the business entities in

State court for polluting public waters, maintaining

a nuisance, and causing fish kills, all in violation of

State environmental laws. In 1979, both in his

individual capacity and on behalf of Chem-Dyne,

Kovacs signed a stipulation and judgment entry

settling the lawsuit. Among other things, the

Stipulation enjoined the defendants from causing

further pollution of the air or public waters, forbade

bringing additional industrial wastes onto the site,

required the defendants to remove specified wastes

from the property, and ordered the payment of

$75,000 to compensate the State for injury to

wildlife.

37a

Kovacs and the other defendants failed to

comply with their obligations under the injunction.

The State then obtained the appointment in state

court of a receiver, who was directed to lake

possession of all property and other assets of Kov-

acs and the corporate defendants and to implement

the judgment entry by Cleaning up the Chem-Dyne

site. The receiver took possession of the site but

had not completed his tasks when Kovacs filed a

personal bankruptcy petition.

Id. at 276, 175 S. Ct. at 706 [emphasis added]. Thus, it was

significant that Chem-Dyne and other business entities

operated the site in question, that the injunction required all

of the defendants to clean up the site, and that the receiver

took possession of all assets of Kovacs and the corporate

defendants, including the site. The Supreme Court analyzed

the effect that this had on any ability which Kovacs may

otherwise have had to effect the Cleanup:

. . . the State secured the appointment of a receiv-

er, who was ordered to take Possession of all of

Kovacs’ nonexempt assets as well as the assets of

the corporate defendants and to comply with the

injunction entered against Kovacs. As wise as this

course may have been, it dispossessed Kovacs,

removed his authority over the site, and divested

him of assets that might have been used by him to

clean up the property. Furthermore, when the

bankruptcy trustee sought to recover Kovacs’ assets

from the receiver, the latter sought an injunction

against such action. Although Kovacs had been

ordered to “cooperate” with the receiver, he was

disabled by the receivership from personally taking

charge of and carrying out the removal of wastes

seen i

38a

from the property. What the receiver wanted from

Kovacs after bankruptcy was the money to defray

cleanup costs. At oral argument in this Court, the

State’s counsel conceded that after the receiver was

appointed, the only performance sought from

Kovacs was the payment of money. Tr. of Oral

Arg. 19-20. Had Kovacs furnished the necessary

funds, either before or after bankruptcy, there

seems little doubt that the receiver and the State

would have been satisfied. On the facts before it,

and with the receiver in control of the site, we

cannot fault the Court of Appeals for concluding

that the cleanup order had been converted into an

obligation to pay money, an obligation that was

dischargeable in bankruptcy.

Id. at 282-83, 105 S. Ct. at 709-10 [emphasis added].

It therefore appears that the receivership raised a

question as to whether Kovacs could somehow have used the

assets of the business entities to effectuate cleanup if he had

not been precluded from doing so by the receivership. The

opinion does not state what those assets were, and the Court

appears to have had a question as to whether such assets

included equipment and other items which could have been

used to clean up. Kovacs was, however, “. . . disabled by

the receivership from personally taking charge of and

Carrying out the removal of wastes from the property.” /d.

at 283, 105 S.Ct. at 710.

Since it was clear that as a result of the receivership the

only way Kovacs could comply with the injunction would be

to pay money, the injunction became a dischargeable mone-

tary obligation. Quoting from the Court of Appeals, the

Supreme Court stated:

39a

“Ohio does not suggest that Kovacs is capable of

personally cleaning up the environmental damage he

may have caused. * * * In reality the only type of

performance in which Ohio is now interested is a money

Payment to effectuate the Chem-Dyne cleanup.

“The impact of its attempt to realize upon Kovacs’

income or property cannot be concealed by legerdemain

or linguistic gymnastics. Kovacs cannot personally clean

up the waste he wrongfully released into Ohio waters.

He cannot perform the affirmative obligations properly

imposed upon him by the State court except by paying

money or transferring over his own financial resources.

The State of Ohio has acknowledged this by its steadfast

pursuit of payment as an alternative to personal perfor-

mance.” /In re Kovacs] 717 F.2d [984] at 987-988 [6th

Cir. 1983]. As we understand it, the Court of Appeals

held that in the circumstances the cleanup duty had been

reduced to a monetary obligation. We do not disturb

this judgment.

Id. at 282 [emphasis added].

This court concludes from the foregoing that the holding

in Kovacs is that where a debtor in bankruptcy cannot clean

up environmental contamination himself or itself without

paying money, the obligation to clean up pursuant to an

injunction is a debt which is dischargeable in bankruptcy.

Since the definitions of “claim” and “debt” are the same

regardless of the chapter in which the case is pending or the

nature of the debtor, this holding applies to corporate debtors

as well.’

* In some chapter 11 cases in which the debtor is reorganizing, the court

must address the relationship between Kovacs and 28 U.S.C. § 959(b),

(continued...)

40a

The DEP argues that a different result is required by

Penn Terra Ltd. v. Dept. of Envtl. Resources, 733 F.2d 267

(3d Cir. 1984)..In that case, the debtor operated coal mines

in Pennsylvania. That state’s Department of Environmenta!

Resources (“DER”) entered into a consent order with the

debtor which required it to take certain actions to correct

violations of state environmental laws. The debtor did not

comply with the consent order, ceased operations and filed

a petition for liquidation under chapter 7 of the Bankruptcy

Code. The debtor’s remaining assets consisted of $13,500

which it had furnished to the DER as bonds for its obliga-

tions under the consent order, and $500 of other unidentified

assets. The cost of cleanup was greatly in excess of the

bonds.

After the bankruptcy petition, the DER brought an action

in state court to compel the debtor to clean up. The state

court granted injunctive relief requiring such cleanup. The

debtor then filed an application to hold the DER in contempt

for violating the automatic stay of Bankruptcy Code § 362(a).

The DER argued that the state court proceedings and

injunction fell within the exceptions to the automatic stay in

Code §§ 362(b)(4) and (5) for certain actions by governmen-

tal units pursuant to their police or regulatory powers. The

bankruptcy court enjoined the DER from enforcing the state

court injunction on the grounds that the debtor did not have

* (...continued)

which requires that a debtor in possession operate according to the valid

laws of the state in which such property is situated. See this court's

opinion in /n re Heldor Industries, Inc., 131 B.R. 578, rendered on the

same date as this opinion. That section, however, is not applicable in this

case because the debtor has not been in possession of the subject property

since September 1985, almost four years before the filing of the

bankruptcy petition.

4la

sufficient funds to comply with it. The district court

affirmed, but the Court of Appeals reversed. It held that the

term “money judgment” in Code § 362(b)(5) is to be

construed narrowly, so that enforcement of a cleanup order

other than a money judgment could proceed without obtain-

ing relief from the automatic stay.

Penn Terra was issued before the Supreme Court’s

decision in Kovacs. Penn Terra distinguished the Sixth

Circuit's opinion in Kovacs in a footnote, stating simply that

“since different sections of the Bankruptcy Code are at issue

which involve different policies and considerations, we are

not prepared to declare that our decision is in conflict” with

the Sixth Circuit’s decision in Kovacs. Penn Terra, supra,

733 F.2d at 277 n. 11. Similarly, in affirming the Sixth

Circuit the Supreme Court distinguished Penn Terra:

. . in that case, [i.e. Penn Terra], there had been

no appointment of a receiver who had the duty to

comply with the state law and who was seeking

money from the bankrupt. The automatic stay

provision does not apply to suits to enforce the

regulatory statutes of the State, but the enforcement

of such a judgment by seeking money from the bank-

rupt -- what the Court of Appeals for the Sixth

Circuit concluded was involved in this case -- is

another matter.

Kovacs, supra, 469 U.S. at 283 n. 11 [emphasis added].

Thus, the Supreme Court interpreted Penn Terra as a case in

which the state was not seeking money from the debtor. The

court makes it clear that if the DER had been seeking money

from the debtor, the automatic stay would have barred such

an action.

This renders the relationship between Kovacs and Penn

Terra unclear at first blush. The question is, if a cleanup

42a

order can only be implemented by the debtor paying money,

does it make any difference for purposes of classification of

that obligation under the Code whether the debtor pays a

state-appointed receiver or a cleanup specialist to fulfill the

obligation? The DEP has consistently taken the position in

this court that Kovacs only applies in cases in which state-ap-

pointed receivers spend the debtor’s money to clean up

(which is rare), and that Penn Terra is the general rule,

requiring the debtor to employ and pay a private cleanup

specialist under Code § 362(b)(4) and (5). The DEP argues

that the cleanup obligation is an unsecured claim only if a

State-appointed receiver has seized the debtor’s assets, and

that the obligation has some higher priority if there has been

no such seizure. However, there is nothing in Kovacs or the

Code to suggest that a cleanup obligation should receive

preferred treatment in bankruptcy if the debtor spends the

money to effect cleanup, but not if the state seizes and

spends the debtor’s money. Such a distinction has no sound

basis in law or logic.

This court, therefore, believes that the DEP has distorted

the relationship between these cases. In a unanimous

opinion, the Supreme Court held in Kovacs that where the

debtor cannot perform a cleanup without payment of money,

a Cleanup order is a monetary obligation which is discharge-

able in bankruptcy. /d. at 283. The Supreme Court also

concluded that by seeking to compel payment, “. . . the State

seeks to enforce his cleanup obligation by a money judg-

ment.” Id. at 283 [emphasis added]. Comparison of the

cases reveals that the Supreme Court’s definition of “money

judgment” in Kovacs is much broader than the Third Cir-

cuit’s definition in Penn Terra. In Penn Terra, the Third

Circuit held that “a money judgment is an order entered by

the court or by the clerk, after a verdict has been rendered

for plaintiff, which adjudges that the defendant shall pay a

43a

sum of money to the plaintiff.” Penn Terra, supra, 733 F.2d

at 275. It further held that “the adjudication of liability for

a sum certain [is] an essential element of a money judg-

ment.” Jd. The Third Circuit ascertained that “the defini-

tion of ‘money judgment’ implied in [the Sixth Circuit's

opinion in} Kovacs and adopted by the bankruptcy court is

unduly broad.” Jd. 469 U.S. at 277. The Third Circuit

added the following comment regarding the Sixth Circuit’s

definition of “money judgment” in Kovacs:

Nor are we prepared to predict that the Sixth

Circuit, if confronted with the issue that is present-

ed in this case, would hold that the commonwealth

was enforcing a money judgment by requiring

compliance with an environmental injunction. We

would disagree with such a result if it did so, for

the reasons we have expressed in text. (Jd. at 275

n. 11 emphasis added).

After Penn Terra was written, however, the Supreme Court

affirmed and adopted the Sixth Circuit’s definition of “money

judgment” in Kovacs. The cleanup order at issue in Kovacs

was not “an adjudication of liability for a sum certain,” and

it therefore did not meet Penn Terra’s definition of “money

judgment.” Furthermore, the Supreme Court held that “it

makes little sense to assert that because the Cleanup order

was entered to remedy a statutory violation, it cannot

likewise constitute a claim for bankruptcy purposes.”

Kovacs, supra, 469 U.S. at 279. Because Ohio sought

payment-of money to effectuate a cleanup, “the Cleanup

order had been converted into an obligation to pay money. .

.” Id. at 283, 105 S. Ct. at 710. That obligation had

become a money judgment: “. . . the State seeks to enforce

his cleanup obligation by a money judgment.” /d. at 285,

105 S. Ct. at 711.

44a

In Kovacs, the Supreme Court distinguished Penn

Terra’s holding that the automatic stay does not apply to suits

to enforce state regulatory statutes including the entry of

money judgments under Code § 362(b)(5). However, the

Supreme Court clearly defined “money judgment” more

broadly than the Third Circuit did in Penn Terra. Although

Penn Terra still stands for the proposition that a state can

enforce a cleanup order against a bankruptcy estate under

Code § 362(b)(5) without obtaining relief from the automatic

stay, Kovacs now defines “money judgment.” Thus, if a

cleanup order entered under Code § 362(b)(5) requires that

the debtor spend money, a determination must be made as to

whether the meen order is a “money peegmeet under the

Kovacs definition.'°

The significance of the definition of “money judgment,”

of course, is that if an obligation is not a money judgment,

the state is not automatically stayed by Code § 362(a) from

ordering a debtor to fulfill the obligation. A money judg-

ment, however, is only a form of claim. Where, as in

Kovacs, a claim is a general unsecured claim, it is not

entitled to any better treatment under the Bankruptcy Code

than other claims of the same level of priority. Southern Ry.

Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir.

1985). The Third Circuit noted further that “Penn Terra

does not deal with the priority to be afforded to a claim

against the estate for the cost of an environmental cleanup.”

' The debtor had no money to spend in Penn Terra, the case was in

chapter 7, and there were presumably no further operations. What, then,

did the DER accomplish in Penn Terra? For one thing, since the Third

Circuit required that the automatic stay be vacated, the DER -- which was

a secured creditor to the extent of $13,500, in bonds -- presumably

applied the bonds to payment for cleanup. However, since there were no

other assets, the cleanup order was meaningless beyond that.

45a

Id." If the state can compel satisfaction by a bankruptcy

estate of cleanup obligations which are unsecured claims, the

state can effectively overrule the Bankruptcy Code system of

classification and payment of obligations by designating an

obligation underlying an unsecured claim as “regulatory” in

nature. Since the Bankruptcy Code does not afford any

priority to environmental cleanup obligations, permitting the

State to effectively remove such obligations from the Code

'' Environmental cleanup obligations can have a priority higher than that

of unsecured claims under certain circumstances. Such obligations can

be secured by statutory liens. Kovacs, supra, 469 U.S. at 285-86

(O’Connor, J., concurring). see also the Spill Act, N.J.S.A. 58:10-23.1-

1f(f), and Comment, “State ‘Superlien’ Statutes: An attempt to Resolve

the Conflict between the Bankruptcy Code and Environmental Law,” 59

Temp. L. Q. 981 (1986). In addition, the cost of cleaning up any

contamination which occurs postpetition will be an administrative expense

under Code § 503‘b). In re Pierce Coal and Const., Inc., 65 B.R. 521

(Bkricy. N.D.W.Va. 1986). see also In re United Trucking Service, Inc..,

851 F.2d 159 (6th Cir. 1988). But see In re T. P. Long Chemical, Inc.,

45 B.R. 278 (Bkricy. N.D.Ohio 1985), holding that the cost of cleaning

up prepetition contamination is also to be treated as an administrative

expense. For the reasons set forth in this opinion, this court disagrees

with the decision in 7. P.Long.

For an insightful discussion of this and related issues, and other case

citations, See Mirsky, Conway and Humphrey, “The Interface Between

Bankruptcy and Environmental Laws,” 46 The Bus. Law. 626, 648

(1991) and Comment, “Toxic Tug-of-War: Environmental Cleanup Costs,

Bankruptcy and the Administrative Expense Priority -- Is It a Collision

of Conflicting Policies or Just Plain Confusion?”, 21 Seton Hall Law

Rev. 832 (1991).

The burden of proving entitlement to administrative expense status

is on the claimant. Matter of Patch Graphics, 58 B.R. 743, 745 (Bkrtcy.

W.D.Wis. 1986); In re Transouth Truck Equipment, Inc., 87 B.R. 937

(Bkricy. E.D.Tenn. 1988). Similarly, the burden of proving the

existence of a lien is on the claimant. See Code § 363(0)(2).

aaa aaa ane a aaa aaa eee

46a

classification and payment provisions by designating such

obligations as “regulatory” would violate the Code.

It follows that obligations to clean up environmental

contamination which occurred prepetition, and which can

only be satisfied by spending money, should generally be

defined as money judgments for purposes of Code § 362(b)(-

5), rather than as other types of claims. Otherwise, injunc-

tive relief would be required under Code § 105(a) in all of

these cases to prevent violation of the Bankruptcy Code

provisions regarding priority of payment. Congress could

not have intended such a result.

Moreover, this analysis takes into account the relation-

ship among Code §§ 362(a)(1), (a)(2), (a)(3), (b)(4) and

(b)(5). Subsections (b)(4) and (b)(5) of § 362 provide that

the automatic stay of § 362(a)(1) and (a)(2) do not apply to

actions to enforce police and regulatory powers. Subsections

362(a)(1) and (a)(2) merely deal with the commencement or

continuation of the police or regulatory action. (b)(4) and

(b) (5), however, do not provide an exception to 362(a)(3),

which enjoins “any act to obtain possession of property of

the estate or of property from the estate or to exercise

control over property of the estate.”'* If subsection 362(a-

)(3) enjoins any such acts, it makes no difference whether the

state is attempting to compel cleanup through payment of

money to the state itself or to some third party who will

perform the cleanup; either way, the automatic stay of

§ 362(a)(3) still applies, and the court must approve the

expenditure as justified under the Code’s classification and

distribution scheme if there is any dispute about it.

The DEP also argues that cleanup is required under

Midlantic Nat’l. Bank v. New Jersey Dept: Envtl. Protection,

2 See Mirsky, Conway and Humphrey, n. 11 supra, at 638-39.

iii aaa eal

ea eee

47a

106 S. Ct. 755 (1986), 474 U.S. 494, 88 L. Ed. 2d 859,

Although Midlantic can be reconciled with Kovacs," it is

| unnecessary to do so in this case, because Midlantic is

| distinguishable for a very basic reason. In Midlantic, the

trustee was attempting to abandon property under Code

§ 554. Abandonment is “the release from the debtor’s estate

of property previously included in that estate.” 2 W.

Norton, Bankruptcy Law and Practice, § 39.01 (1984).

Midlantic created a narrow exception to the abandonment

power for certain types of environmental obligations.

However, there can be no abandonment unless the estate has

some property interest to abandon. In this case, the debtor

has had no such interest for years. Hence, mimiantic is

obviously not applicable.

THE DEP’S CLAIM IS TIME-BARRED

Bankruptcy Rule 3003(c)(2) provides that any creditor

whose claim is scheduled as disputed must file a proof of

claim within the time prescribed by the court. Bankruptcy

Rule 2002(a)(8) requires that the court clerk must give not

less than 20 days notice by mail of the time fixed for filing

proofs of claims under Rule 3003(c). In this case, the clerk

mailed the order and notice of the bar date to the Attorney

General and the DEP, but they have no record of receipt of

the order, and hence they deny service.

Bankruptcy Rule 9006(e) provides that service of notice

by mail is complete on mailing. There is a presumption that

an item which is mailed to an accurate address has been

received by the addressee. Hagner v. United States, 285

° See this court’s opinion in Jn re Heldor, 131 B.R. 578, rendered on

the same date as this opinion.

48a

U.S. 427, 76 L. Ed. 861, 52 S. Ct. 417 (1932). That

presumption has been recognized in a long line of bankruptcy

cases, and denial of receipt does not rebut the presumption.

In re Longardner & Associates, 855 F.2d 455 (7th Cir.

1988), cert. denied 489 U.S. 1015, 103 L. Ed. 2d 191, 109

5. Ct. 1130 (1989); In re Ricketts, 80 B.R. 495 (9th Cir.

B.A.P. 1987); In re Robintech, 69 B.R. 663 (1987), rev. on

other grounds 863 F.2d 393, cert. denied 493 U.S. 811, 110

S. Ct. 55, 107 L. Ed. 2d 24 (1987); United States v. Cresta,

40 B.R. 953 (Bkrtcy.E.D.Pa. 1984); In re Thole, 31 B.K.

548 (Bkricy.D.Minn. 1983); In re Cleary, 18 B.R. 114

(Bkrtcy.W.D.Pa. 1982); In re Heyward, 15 B.R. 629

(Bkrtcy.E.D.N.Y. 1981); In re Torres, 15 B.R. 794 (Bkricy-

.E.D.N.Y. 1981); American Family Insurance Group v.

Gumieny, (In re Gumieny), 8 B.R. 602 (Bkrtcy. E.D. Wis.

1981). The rule is apparently to the contrary in the Sixth

Circuit, according to In re Yoder Co., 758 F.2d 1114 (6th

Cir. 1985). That case, however, is distinguishable on its

facts, because there was no proof that the notice was actually

mailed to the creditor, and his name was not listed on the

~matrix of creditors filed with the court. To the extent that

Yoder contains language extending its holding to cases where

mailing is proven, it is clearly the minority view, and its

reasoning is unpersuasive.

If a party were permitted to defeat the presumption

of receipt of notice resulting from the certificate of

mailing by a simple affidavit to the contrary, the

scheme of deadlines and bar dates under the Bank-

ruptcy Code would come unraveled.

Ricketts, supra, 80 B.R. at 497.

The Court, therefore, finds that the State of New Jersey

was served through the Attorney General and DEP with the

order setting the bar date for filing proofs of claim, together

49a

with notice that its claim was disputed and that it had to file"

a proof of claim by January 2, 1990. Since the State failed

to file such a claim, Bankruptcy Rule 3003(c)(2) provides

that the State shal! not be treated as a creditor with respect

to such claim for purposes of voting on any plan of reorgani-

zation and distribution of funds thereunder.‘

VI.

THE SECTIONS OF ECRA, AND REGULATIONS AND

ADMINISTRATIVE ORDERS THEREUNDER WHICH

PURPORT TO LIMIT THE EFFECT OF BANKRUPTCY

ON CLEANUP OBLIGATIONS, AND WHICH PURPORT

TO CREATE NEW OBLIGATIONS WHEN A BANK-

RUPTCY CASE IS FILED, VIOLATE THE SUPREMACY

CLAUSE OF THE UNITED STATES CONSTITUTION.

This opinion has thus far held that in a bankruptcy case,

a Cleanup obligation arising from prepetition environmental

contamination is a claim which is subject to the Bankruptcy

Code provisions regarding classification, distribution and

dischargeability. ECRA, however, says otherwise. N.J.S.A.

13:1K-12, entitled “Obligations imposed by act not affected

by bankruptcy proceedings and constitute continuing regula-

tory obligations imposed by state,” provides as follows:

No obligations imposed by this act shall constitute

a lien or claim which may be limited or discharged

in a bankruptcy proceeding. All obligations im-

posed by this act shall constitute continuing regula-

tions imposed by the State. ;

“* For a general discussion of the filing of proofs of claim by environ-

mental creditors, see Mirsky, Conway & Humphrey, n. 11 supra, at

670-71.

50a

It is therefore necessary to consider the relationship between

that section of ECRA and the relevant sections of the

Bankruptcy Code.

The United States Constitution, Article VI, Clause 2,

provides that “this Constitution, and the Laws of the United

States, which shall be made in pursuance thereof. . . shall

be the supreme Law of the Land.” Article VI, Clause 2 of

the Constitution is generally referred to as the Supremacy

Clause. “Deciding whether a state statute is in conflict with

a federal statute and hence invalid under the Supremacy

Clause is essentially a two-step process of first ascertaining

the construction of the two statutes and then determining the

constitutional question whether they are in conflict.” Perez

v. Campbell, 402 U.S. 637, 91 S. Ct. 1704 (1971), 29 L.

Ed. 2d 233. If either the purpose or the effect of a state

Statute interferes with the effectiveness of a federal statute,

the state statute is rendered invalid by the Supremacy Clause.

Id. at 652.

In Perez, the plaintiff was involved in an automobile

accident in Arizona which resulted in a judgment against

Perez for injuries and property damage suffered by others

involved. Perez did not have liability insurance. He later

filed a bankruptcy petition under the Bankruptcy Act, the

predecessor to the Bankruptcy Code, and received a dis-

charge of the tort judgment. However, Arizona’s Motor

Vehicle Safety Responsibility Act required payment of such

judgments and provided that the judgment debtor’s driver’s

license and registration shall be suspended until such pay-

ment. § 28-1163(B) of the Arizona Act aiso provided that

“[a] discharge in bankruptcy following the rendering of any

such judgment shall not relieve the judgment debtor from any

of the requirements of this Article.”

The Court found that the purpose of the Arizona Act

was the protection of the public using the highways from

aeiniaiaeidaeaaneiaiiatiaaaanaiasilll

S5la

financial hardship which may result from the use of the

automobile by financially irresponsible persons. Id. at 644

(quoting Schecter v. Killingsworth, 93 Ariz. 273, 280, 380

P.2d 136, 140 (1963)). The Court also found that one of the

purposes of the Bankruptcy Act was to give debiors a new

opportunity in life and a clear field for future effort, unham-

pered by the pressure and discouragement of preexisting

debt. /d. 402 U.S. at 648. The Court stated that its function

is to determine whether a challenged state statute stands as an

obstacle to the accomplishment and execution of the full

purposes and objectives of Congress. Id. at 649, 91 S. Ct.

at 1711. The Court concluded that the Arizona Act had both

the purpose and the effect of giving judgment creditors a

powerful weapon with which to force bankrupts to pay their

debts despite their discharge. Id. at 654. Hence, § 28-1163-

(b) of the Arizona Act was unconstitutional.

By comparison, the primary purpose of ECRA is to

ensure cleanup of property which has been contaminated by

hazardous substances or wastes by requiring the execution of

an approved cleanup plan as a precondition to the closure,

sale or transfer of such property. Senate Energy and

Environment Committee Statement, Assembly No. 1231-L.

1983, c.330, printed in N.J.S.A. after 13:1K-6. To that

end, “the bill further requires the owners of hazardous

substance or waste operations to obtain a surety bond or

other financial security which should guarantee the imple-

mentation of the cleanup plan.” Jd. Although the Committee .

Statement does not refer to N.J.S.A. 13:1K-12, it is clear

that its purpose is to further the express requirement of

financial security for cleanup obligations by stating that a

bankruptcy proceeding shall not discharge, limit or affect an

obligation imposed by ECRA.

The primary purposes of the Bankruptcy Code are to

give debtors a fresh start and to provide for an orderly and

52a

equitable distribution of their assets among creditors. See

generally Weintraub & Resnick, Bankruptcy Law Manual,

para. 1-3 and para. 8-89 (1986). To those ends, “claim” is

defined very broadly as, essentially, any right to payment.

Code § 101(5)(A). As previously noted, the Supreme Court

held in Davenport that “the plain meaning of ‘right to

payment’ is nothing more nor less than an enforceable

obligation, regardless of the objectives the State seeks to

serve in imposing the obligation.” 110 S. Ct. at 2131.

Moreover, the Code also defines “liens” for bankruptcy

purposes. “‘Lien’ means charge against or interest in

property to secure payment of a debt or performance of an

obligation.” Code § 101(33). The legislative history to

§ 101(33) states:

the definition is new and very broad. A lien is

defined as a charge against or interest in property to

secure payment of a debt or performance of an

obligation. It includes inchoate liens.

H.R. Rep. No. 595, 95th Cong. 1st Sess. 312 (1977); S.Rep.

No. 989, 95th Cong., 2d Sess. 25 (1978). Thus, Congress

has determined what shall constitute claims and liens for

bankruptcy purposes, and those definitions are very broad.

The purpose of such breadth is to deal in bankruptcy cases

with all obligations of the debtor requiring payment of

money. By attempting to dictate that cleanup obligations

triggered by ECRA do not fall within those definitions, and

hence are not affected by bankruptcy, N.J.S.A. 13:1K-12

plainly has both the purpose and effect of interfering with the

Bankruptcy Code provisions in question."

'S Although N.J.S.A. 13:1K-12 says a cleanup obligation imposed by

ECRA is not a lien, it is arguable that it is a lien within the broad

(continued...)

53a

'S (.. continued)

definition of Code § 101(33), since it is arguably a “charge against” or

“mterest in” property. Albeit ECRA refuses to call the obligation a lien,

it nevertheless treats it like one by providing that unless the obligation is

satisfied prior to a transfer of the subject property, the transferee can void

the sale and recover damages. See N.J.S.A. 13:1K-13 (West Supp.

1991). Such rights are similar to the rights that the holder of an

unsatisfied lien would have, in that the lien would remain a charge against

the property notwithstanding the transfer. The obligation might be

construed as an inchoate lien. See Simon v. Oldmans Tp., 203 N.J.

Super. 365, 375, 497 A.2d 204, 210 (Ch. Div. 1985) (the existence of

contamination covered by the Spill Act creates “the potential existence of

a super lien” which must be disclosed to a purchaser).

ECRA and the other state environmental statutes do not create the

obligation to clean up contamination; they merely provide procedures for

enforcement of it. The state has an inherent right to require remediation

of injuries to the environment. See Department of Envtl. Protection v.

Ventron Corp., 94 N.J. 473, 499, 468 A.2d 150 (1983) (“the Spill Act

does not so much change substantive liability as it establishes new

remedies for activities recognized as tortious both under prior statutes and

the common law.”) see also Lansco, Inc. v. Dept. of Envil. Protection,

138 N.J. Super. 275, 283, 350 A.2d 520, 524 (Ch. Div. 1975), aff'd.

145 N.J. Super. 433, 368 A.2d 363 (App. Div. 1976) cert. denied 73

N.J. 57, 372 A.2d 322 (1977). The Spill Act, N.J.S.A. 58:10-23.11 ef

seq. covers the same hazardous substances as ECRA, and provides that

if the state cleans up the contamination itself, it has a first lien on the

subject property to the extent of the cost of cleanup when a notice of lien

is filed. N.J.S.A. 58:10-23-11f(f) (West Supp. 1991). See Superior Air

Prod. v. NL Industries, 216 N.J. Super. 46, 522 A.2d 1025 (App. Div.

1987) (analyzing the relationship between ECRA and the Spill Act). It

is arguable that the state therefore has an inchoate statutory lien for

cleanup obligations which are the subject of the Spill Act and ECRA, and

which have not been cleaned up by the State under the Spill Act. That

is exactly how purchasers and sellers of industrial establishments treat the

obligation, because purchasers will not close until the obligation is

satisfied or an administrative consent order is entered. However, if the

(continued...)

—

54a

For the same reasons, the provisions in N.J.S.A.

13:1K-12 to the effect that cleanup obligations cannot be

limited or discharged in bankruptcy also conflict with the

Code. Code sections 1141(d), 727 and 523 specify which

obligations shall and shall not be discharged, and they

contain no reference to environmental cleanup obligations.

By defining cleanup obligations as “continuing regulato-

ry obligations” in N.J.S.A. 13:1K-12 the State of New

Jersey apparently wanted “continuing regulatory obligations”

to be treated as some new class of obligations for bankruptcy

purposes which transcend the categories set forth in the

Bankruptcy Code as described in Section III, supra. This the

State cannot do. To the extent that they require expenditure

of a bankruptcy estate’s money, even “continuing regulatory

obligations” are either secured claims, administrative

expenses, priority claims or unsecured claims as defined by

Congress, and are subject to the provisions of the Bankruptcy

Code regarding payment.

Because N.J.S.A. 13:1K-12 conflicts with the Bankrupt-

cy Code in both its purpose and its effect, it violates the

Supremacy Clause and is void on its face.'®

'S (...continued)

obligation is not a lien, it is not because N.J.S.A. 13:1K-12 so states; it

will be because the courts determine that the intention of Congress in

enacting Code § 101(33) was to exclude such charges against property

from the definition of lien. For purposes of this case, it is assumed that

the obligation is not a lien, without deciding the question.

(Bkricy. D.N.J. 1984) held to the contrary, this court disagrees with it

and declines to follow it for the reasons set forth herein. Borne

Chemical, however, compared the Code with ECRA generally, without

focusing on the sections of ECRA addressed herein. This court does not

(continued...)

55a

Moreover, the other provisions of ECRA, its regulations

and orders which provide for treatment of cleanup obligations

in bankruptcy meet the same fate. N.J.S.A. 13:1K-8(b)

States that ECRA is triggered by the filing of a bankruptcy

petition. N.J.A.C. 7:26B-1.6 specifies the proceedings or

events in any bankruptcy proceeding which trigger ECRA.

N.J.A.C. 7:26B-1.8(A)(4) provides that any corporate

reorganization not substantially affecting ownership or

control of the industrial establishment does not trigger

ECRA. And N.J.A.C. 7:26B-1.3 states that:

“corporate reorganization not substantially affecting

Ownership” means the restructuring or

reincorporation by the board of directors or the

shareholders of a corporation, which does not

diminish the availability of assets for any environ-

mental cleanup, diminish the Department’s ability to

reach those assets, or otherwise hinder the owner’s

or operator’s ability to cleanup the industrial estab-

lishment. . . . [emphasis added].

Reading these provisions together with N.J.S.A. 13:1K-12,

the obvious intent of the State of New Jersey and the DEP is

to provide that when a bankruptcy petition is filed, ECRA is

' (.. continued)

Suggest that sections of ECRA other than those addressed herein are

unconstitutional. Moreover, unlike Borne Chemical, this opinion does not

address cases in which a debtor in possession or trustee is selling or

assigning contaminated real property. While this court’s determinations

as to the effect of ECRA on such sales and assignments will be informed

in part by the analysis in this opinion, such transfers raise questions

which are beyond the scope of this case. There are compelling reasons

to require trustees and debtors in possession to comply with ECRA as a

condition to such transfers, and compliance in those cases may be

consistent with this opinion for reasons not addressed herein.

56a

triggered, and either the cleanup obligation must be satisfied

or the debtor’s assets must remain intact and subject to the

Department’s ability to reach them. Both the purpose and

the effect of these provisions is to require that cleanup

obligations must either receive the highest priority in

bankruptcy cases, or be undisturbed by them. For the

reasons previously stated, the State cannot limit the defini-

tions, purposes and effect of the Bankruptcy Code in that

manner. All of the subject provisions are therefore void

under the Supremacy Clause to the extent that they purport

to dictate the treatment of cleanup obligations in bankruptcy

cases. For the same reasons, the Administrative Order

which was entered in this case, and which purported to

dictate its own treatment in bankruptcy, is also void."

Vil.

CONSIDERATIONS REGARDING THERELATIONSHIPS

AMONG THE FEDERAL AND STATE LEGISLA-

TURES AND THE COURTS.

It is appropriate to add certain additional observations,

to place the foregoing analysis and conclusions in the proper

context. This court does not dispute that contamination of

the environment is a matter of grave concern to this country

'’ Alternatively, if the cleanup obligation is an inchoate lien which

becomes choate under ECRA when a bankruptcy petition is filed, see n.

15 supra, it is voidable under Code § 545(1)(A). Other so-called “ipso

facto” clauses of statutes or contracts which are triggered by the filing of

a bankruptcy petition are also void in bankruptcy. See 11 U.S.C. §§

365(b)(2)(A), 365(e)(1)(A) and 541(c)(1)(B); In re Texaco, Inc., 73 B.R.

960, 968 (Bkricy. S.D.N.Y. 1987).

57a

and this state.'* There are of course different degrees of

danger presented by different types of contamination, but the

worst forms can be life threatening. However, the ultimate

issue in cases such as this is not whether contamination

should be cleaned up, but who must pay for it. By attempt-

ing to compel bankruptcy estates to clean up contamination,

‘* Arguments, however, are being made with increasing frequency in

this State that environmental concerns are being exalted by state law over

other peblic policy concerns to an extent which extracts too great of a

price. An example follows from a recent New Jersey Law Journal

editorial entitled “The New Religion”:

For the past 20 years or so the protection of the environment

has taken on many of the attributes of a religion. Its adher-

ents, the environmentalists, have aligned themselves against

the purported forces of darkness and evil. Those who

question the faith are castigated and ridiculed as heretics and

worse -- the very despoilers of mother earth.

Nowhere has this passion play run as long and as consistently

as in New Jersey. And we would be remiss if we failed to

recognize that which is popular is also politically expedient.

Our candidates for elective office have tripped over themselves

extolling their environmental records and trumpeting the

strength of their commitment.

128 N.J.L.J., at 1218. (August 22, 1991). The editorial goes on to

Suggest that the state government’s approach to environmental questions

may have contributed to New Jersey’s loss of almost 200,000 jobs in two

years. The editorial urges greater balance and moderation by New Jersey

State government in weighing economic and environmental concerns.

This court expresses no opinion on this controversy, and merely

notes its existence. If it is true, however, that the state government’s

approach to environmental concerns has contributed to the recession and

consequent loss of employment in this State, then it would follow that that

approach has also contributed to the unprecedented explosion in the

number of bankruptcy cases filed in this State in the last several years.

58a

as opposed to having the state do so, the DEP is at least as

concerned with the public fisc as with the public health.’

The DEP admits as much: “Public money is scarce; neces-

sary cleanups abound.”* Both concerns are of course

important, but they do riot enable the DEP to rewrite the

Bankruptcy Code. Nor can the courts do so:

[Courts] are under the constraints imposed by the

judicia! function in our democratic society. As a

matter of verbal recognition certainly, no one will

gainsay that the function in construing a statute is to

ascertain the meaning of words used by the legisla-

ture. To go beyond that is to usurp a power which

our democracy has lodged in its elected legislature.

The great judges have constantly admonished their

brethren of the need for discipline in observing the

limitations. A judge must not rewrite a statute,

neither to enlarge it nor contract it.

F. Frankfurter, Some Reflections on the Reading of Statutes,

47 Colum. L.Rev. 527, 533-34 (1947). For that reason, it

has been held in this Circuit that the courts may not create a

new priority of payment in bankruptcy where the Congressio-

nal mandate is clear that no such priority shall be accorded.

'9 Midlantic Nat’l. Bank v. New Jersey Department of Envtl. Protection,

474 U.S. 494, 507, 106 S. Ct. 755 (1986), 88 L. Ed. 2d 859 (Rehnquist,

J., dissenting); Jn re Anthony Ferrante & Sons, Inc., 119 B.R. 45, 50

(D.N.J. 1990).

” Brief of DEP filed March 8, 1991, at 32. It should also be noted that

there are often other parties who are also responsible for cleanup,

including any owner or operator other than the debtor, see N.J.S.A.

13:1K-9, and prior owners or tenants who caused or contributed to

contamination. See, e.g. Superior Air Prod. v. NL Industries, 216 N.J.

Super. 46, 522 A.2d 1025 (App. Div. 1987).

59a

Southern Ry. Co. v. Johnson Bronze Co., supra; In re

Columbia Ribbon Co., 117 F.2d 999, 1002 (3d Cir. 1941).

For the same reason, the courts cannot create a new priority

for payment of environmental obligations. no matter how

compelling the public policy concerns rejiected in New

Jersey’s environmental laws.

We have recently seen a classic example of the proper

relationship between the judicial and the legislative branches

in situations such as this. In Davenport, supra, the Supreme

Court held that restitution orders imposed as a condition of

probate in state criminal proceedings were “claims” dis-

chargeable in a chapter 13 case. Congress subsequently

overruled the result in Davenport by withdrawing the power

to discharge restitution orders in chapter 13, rather than by

restricting the definition of “claim” under the Code. See

Criminal Victims Protection Act of 1990, Pub.L. 101-581,

§ 3, 104 Stat. 2865. See also Johnson, supra 111 S. Ct. at

2154, n. 4. If a federal statute needs to be changed, that is

how it should be done.

The respective roles of the state and federal legislatures

and the courts in this situation can be summarized as follows.

A state legislature can determine whether environmental

contamination creates legal obligations. Only Congress,

however, can determine whether such obligations constitute

claims for bankruptcy purposes, and their priority and

dischargeability in bankruptcy cases. A state legislature can

determine whether environmental obligations shall be secured

by liens on a debtor’s property. Only Congress, however,

can deterr*ne how such liens shall be treated in bankruptcy

cases. And if there is a question as to whether particular

obligations are claims or liens for bankruptcy purposes, the

definitions provided by Congress in Code § 101 shall be

dispositive The obligation of the courts is to fulfill the

60a

legislative intent within that framework, without substituting

their own views of what the statutes should provide.

For the foregoing reasons, the Debtor’s motion for

summary judgment is granted, and the DEP’s motion is

denied. This adversary proceeding is closed. The Debtor is

to submit an order under the five-day rule.

6la

[SEAL]

State of New Jersey

DEPARTMENT OF ENVIRONMENTAL

PROTECTION

DIVISION OF HAZAR:*OQUS WASTE MANAGEMENT

Lance R. Milier, Acting Director

CN 028

Trenton, N.J. 08625-0028

Fax # (609) 633-1454

IN THE MATTER OF : ADMINISTRATIVE OR-

Torwico Electronics, DER AND NOTICE OF

Inc. CIVIL ADMINISTRA-

410 Oberlin Avenue . TIVE PENALTY ASSES-

South SMENT

Lakewood, NJ 08701

This Administrative Order and Notice of Civil Administrative

Penalty Assessment is issued pursuant to the authority vested

in the Commissioner of the New Jersey Department of

Environmental Protection (hereinafter “NJDEP” or the

“Department”) by N.J.S.A. 13:1D-1 et seqg., and the Solid

Waste Management Act, N.J.S.A. 13:1E-1 et seq. and duly

delegated to the Assistant Director for Enforcement of the

Division of Hazardous Waste Management pursuant to

N.J.S.A. 13:1B-4.

FINDINGS

1. The Department has determined that Torwico Electron-

ics, Inc. (hereinafter “Torwico”) is a generator of

hazardous waste as defined in N.J.A.C. 7:26-1.4.

Torwico was located at Block 1160.03, Lot 47, 1515

62a

Route 70, Township of Lakewood, County of Ocean,

State of New Jersey, with EPA Id# NJD002387108. In

September 1985, Torwico relocated to Block 1600, Lot

12, 410 Oberlin Avenue South, Township of Lakewood,

County of Ocean, State of New Jersey.

On November 13, 1989, a Department representative

conducted investigations at both the former and present

sites, referenced in paragraph 1 above, and noted the

following:

a. Torwico treated, stored, disposed of, transported or

offered for transportation, hazardous waste without

having received an EPA identification number.

Specifically, Torwico failed to obtain a new EPA Id

number for its new operating location, in violation

of N.J.A.C. 7:26-7.4(a)1.

b. Torwico caused, suffered, allowed or permitted the

construction, installation, modification or operation

of a hazardous waste facility without having submit-

ted Part A and B of a permit application. Specifi-

cally, Torwico disposed of hazardous wastes into

the seepage pit located in the former site, without

first obtaining a permit to operate a hazardous

waste facility, in violation of N.J.A.C. 7:26-12.1-

(a).

Based on a letter dated January 10, 1990 from Torwico,

the Department has determined that Torwico has attained

compliance with the violation of N.J.A.C. 7:26-7.4(a)1.

To this date, Torwico has not attained compliance with

the violation of N.J.A.C. 7:26-12.1(a).

Based on the facts set forth in these FINDINGS, the

Department has determined that Torwico has violated the

63a

Solid Waste Management Act, N.J.S.A. 13:1E-1 ef seq.,

and the regulations promulgated pursuant thereto,

N.J.A.C. 7:26-1 et seg., specifically N.J.A.C. 7:26-

7.4(a)1 and 12.1(a).

ORDER

NOW, THEREFORE, IT IS HEREBY ORDERED THAT

TORWICO SHALL:

6. Within fifteen (15) calendar days upon receipt of this

Administrative Order, submit a written closure plan

pursuant to N.J.A.C. 7:2609.8 et seq. , for closure of the

seepage pit referenced in paragraph 2b above, so as to

be in compliance with N.J.A.C. 7:26-12.1(a).

7. Within twenty (20) calendar days upon receipt of this

Administrative Order and Notice of Civil Administrative

Penalty Assessment submit the enclosed VERIFICA-

TION OF COMPLIANCE by certified mail, return

receipt requested or by hand delivery to the address

below, indicating that you have corrected the violations

referenced in paragraph 4 above.

New Jersey Department of Environmental

Protection

Division of Hazardous Waste Management

Bureau of Compliance and Technical Services

CN 028

Trenton, NJ 08625

Attention: Jay Basavanhally

THIS ORDER SHALL

BE EFFECTIVE UPON RECEIPT.

64a

NOTICE OF CIVIL

ADMINISTRATIVE PENALTY ASSESSMENT

8. Pursuant to N.J.S.A. 13:1E-9e and based upon the

above FINDINGS, the Department has determined that

a civil administrative penalty should be assessed against

Torwico in the amount of $22,500.00.

9. Payment of the penalty is due when a final order is

issued by the Commissioner subsequent to a hearing, if

any, or when this Notice of Civil Administrative Penalty

assessment becomes a final order (see following para-

graph). Payment shall be made by certified check

payable to “Treasurer, State of New my and shall

be submitted to:

New Jersey Department of

Environmental Protection

Division of Financial Management

Planning and General Services

Bureau of Revenue

CN 402

Trenton, NJ 08625

10. If no request for a hearing is received within twenty (20)

calendar days from receipt of this Notice of Civil

Administrative Penalty Assessment, it shall become a

final order upon the twenty-first calendar day following

its receipt and the penalty shall be due and payable.

NOTICE OF RIGHT TO A HEARING

11. Pursuant to N.J.S.A. 52:14B-1 et seq. and N.J.S.A.

13:1E-9, Torwico is entitled to an administrative hear-

ing. Any hearing request shall be delivered to the

address below within twenty (20) calendar days from

aici iene eal

12.

13.

65a

receipt of this Administrative Order and Notice of Civil

Administrative Penalty Assessment.

Assistant Director for Enforcement

Division of Hazardous Waste Management

401 East State Street

CN 028

Trenton, New Jersey 08625

Attention:

Wayne C. Howitz, Assistant Director

Torwico shall, in its request for a hearing, furnish

NJDEP with the following:

a. A statement of the

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