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BY BUD STEPHEN TAYMAN

Bankruptcy is often an individual or business debtor’s (2) the enforcement, against the debtor or against  last resort to maintain financial survival through  protection from creditors. A cornerstone policy of bankruptcy is the orderly and equal distribution of value to allowed claims of creditors within classes. Environmental regulation is a government’s endeavor, if not obligation, to protect the land, air, and waterways of the country and to protect and promote the public health and welfare of its citizens. What happens when these three competing interests meet? Is it possible for these three ideals to co-exist? The answer is yes. However, not necessarily to everyone’s satisfaction. 

The United States Bankruptcy Code, title 11, United States Code (the “Code”) is an extensive statutory scheme intended to balance the competing interests of debtors and creditors. This is clearly reflected in the mission statement of the United States Bankruptcy Court for the District of Maryland, which states that it is “[p]romoting social and economic order by reconciling the opportunity of debtors to a fresh start with the right of creditors to be paid.” 

This balancing is also reflected in the relationship of bankruptcy and environmental law. This article offers a brief, non-exhaustive review of this relationship through three distinct but potentially intertwined aspects of a bankruptcy case, to wit: (1) the automatic stay, (2) dischargeability of debt, and (3) abandonment of assets. 

THE AUTOMATIC STAY IN BANKRUPTCY — 11 U.S.C. § 362(A) 

The imposition of the automatic stay is one of the cornerstone policies of the Code. Virtually all creditor and collection action against a debtor immediately stops upon the filing of the bankruptcy case. The policy behind the automatic stay is to impose complete, but temporary, relief to the debtor from creditors and to prevent dissipation of the debtor’s assets before orderly distribution of the assets may be accomplished through the Code.

The automatic stay is found at Code, § 362(a) and provides as follows: 

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title … operates as a stay, applicable to all entities of 

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; 

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; 

(3)  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; 

(4)  any act to create, perfect, or enforce any lien against property of the estate; 

(5)  any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; 

(6)  any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; 

(7)  the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and 

(8)  the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. 

There are 27 exceptions to the automatic stay found at subsection 362(b). Only one the police and regulatory power exception is relevant for this article. 

THE POLICE AND REGULATORY POWER EXCEPTION TO THE AUTOMATIC STAY 11 U.S.C. § 362(b) (4) 

The police and regulatory power exception is found at Code § 362(b)(4) and provides as follows: 

(b) The filing of a petition under section 301, 302, or 303 of this title … does not operate as a stay 

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(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the [Chemical Weapons Convention], to enforce such governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power; (emphasis added). 

SELECTED ASPECTS OF THE OPERATION OF THE POLICE AND REGULATORY POWER EXCEPTION TO THE AUTOMATIC STAY 

As stated, the exercise of police and regulatory power is not subject to the automatic stay for any of the actions contained at Code § 362(a)(1), (2), (3), and (6), but is subject to any of the actions contained at Code § 362(a)(4), (5), (7), and (8). 

For purposes of the enforcement of environmental regulations, the police and regulatory power exception enables the governmental unit or organization to obtain injunctions and judgments against a debtor to enforce compliance with applicable laws, as well as to obtain judgment to include money judgments. “police and regulatory power.” The difficulty in applying this exception comes in distinguishing between situations in which the state acts pursuant to its “police and regulatory power” and situations in which the state acts merely to protect its status as a creditor. To make this distinction, we look to the purpose of the law that the state is attempting to enforce. If the purpose of the law is to promote “public safety and welfare, [internal citation omitted], or to effectuate public policy [internal citation and quotation marks omitted], then the exception applies. On the other hand, if the purpose of the law relates to the protection of the government’s pecuniary interest in the debtor’s property [internal citation and quotation marks omitted], or to adjudicate private rights [internal citation and quotation marks omitted], then the exception is inapplicable. The inquiry is objective: we examine the purpose of the law that the state seeks to enforce rather than the intent 

However, the collection of a money judgment, if not subsumed into and forming an integral aspect of the public interest and welfare purpose of the enforcement action, is stayed by the automatic stay and must be collected inside of the bankruptcy proceeding. The police and regulatory power exception to the automatic stay is a Congressional abrogation of the impact on state law by the Supremacy Clause of the U.S. Constitution which otherwise would render conflicting state law subject to bankruptcy law.

The operation and purpose of the police and regulatory power exception to the automatic stay has been described by the 4th Circuit, as follows: 

[T]he automatic stay does not apply to any state action “to enforce [a] governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment” [internal citation omitted]. The question is whether the financial assurance requirements here are part of South Carolina’s in enforcing the law in a particular case [internal citation omitted]. Of course, many laws have a dual purpose of promoting the public welfare as well as protecting the state’s pecuniary interest. The fact that one purpose of the law is to protect the state’s pecuniary interest does not necessarily mean that the exception is inapplicable. Rather, we must determine the primary purpose of the law that the state is attempting to enforce [internal citations omitted]. Only if the action is pursued solely to advance a pecuniary interest of the governmental unit will the automatic stay bar it. [However], the fact that the state action requires the debtor to make an expenditure does not necessarily mean that the regulatory exception is inapplicable. See, e.g. Commonwealth Oil Refining Co. v. EPA (In re Commonwealth Oil Refining Co.), 805 F.2d 1175, 1186 (5th Cir. 1986)(holding that the EPA could force debtor to comply with environmental regulations even though compliance would cause debtor to spend money).

DISCHARGEABILITY OF DEBT 

Claims which arise prior to the date of the filing of the bankruptcy case are covered by the bankruptcy case and are included in the bankruptcy discharge, unless specifically excluded from discharge. A business entity does not receive a discharge in a Chapter 7 bankruptcy case, but does receive a discharge in many circumstances in Chapter 11 or Chapter 12 bankruptcy cases. 

Claim is intentionally broadly defined at Code § 101(5) as follows: 

(5) The term “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; 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. 

Notably, under the broad definition of “Claim”, a prepetition environmental clean up order may constitute a claim under the Code and the financial liability thereunder is subject to the bankruptcy discharge, as long as the action is an attempt to collect cleanup costs as a debt, and not as a fine, penalty, or forfeiture. 

As may be seen, whether the claim arises prepetition or postpetition is crucial to the determination of whether and to what extent it is covered by the bankruptcy proceeding. This will be an issue to be determined by the facts of the specific case. In the 4th Circuit, for a tort or breach of warranty, the generally accepted test to determine when a claim arises is the “conduct test,” which looks to the time the acts constituting the tort or breach of warranty occurred, regardless of whether a right to payment existed under state law at that time. This may not be absolute, however, and will constitute an issue ripe for litigation. 

III. ABANDONMENT OF ASSETS 

Code § 554(a) allows a bankruptcy trustee to abandon any property of the bankruptcy estate that is burdensome and of inconsequential value to the bankruptcy estate. Abandonment occurs for many reasons including protection of the estate from tax or other liabilities including liability for environmental contamination or other damage. Ordinarily, abandonment is within the sound discretion of the trustee, subject to bankruptcy court approval. 

However, that is not always the case when it comes to assets involving environmental issues. In 1986, the Supreme Court imposed restrictions on the trustee’s unfettered right to abandon assets which were environmentally compromised and held that “a trustee may not abandon assets in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards”. 

Of considerable significance to the precedential value of the Midlantic Bank decision is a footnote which states, This exception to the abandonment power … is a narrow one… and does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm. (emphasis added). 

As a result, the majority view is that abandonment should be prohibited only in situations in which an imminent and serious threat exists as opposed to a remote and speculative threat which might occur as a result of the abandonment. The minority view would not allow abandonment in violation of state environmental laws even if no imminent and identifiable harm to public health and safety exists. 

CONCLUSION 

The foregoing presents a brief overview of some of the major issues which will be encountered in a bankruptcy case involving environmental issues and represents a starting point for further research depending on the facts of the case.