Ian Howard

May 5, 2003

I. INTRODUCTION

The public policies behind the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and the Bankruptcy Code are in conflict. CERCLA operates to promote the clean up of unsafe disposal of toxic chemicals and hazardous substances by forcing the parties responsible for their release into the environment to pay for the clean up costs. In contrast, the Bankruptcy Code is intended to relieve overburdened debtors of their financial liabilities. What happens when a responsible party files for bankruptcy? Typically, the clean up costs incurred by the responsible party are discharged as a debt when a responsible party files its bankruptcy petition.

CERCLA's policy of making polluters pay and the Bankruptcy Code's policy of providing debtors with a fresh start are in diametric opposition with one another. Should environmental responsibility prevail over debtor relief? The answer is yes. There can be no greater policy than that of environmental responsibility. A healthy environment is the foundation from which all else follows. There must be some way to reconcile the competing policies of CERCLA and the Bankruptcy Code.

II. STATUTORY OVERVIEWS

(a) CERCLA

The Environmental Protection Agency (EPA) can clean up a hazardous waste site and seek monetary reimbursement from the responsible party[1] or it can issue an administrative order compelling the responsible party to clean up the waste site itself.[2] Any responsible party held liable by the EPA for the entire clean up cost of a waste site that may have had multiple contributors to the release of the hazardous waste may seek contribution from other responsible parties.[3] Those who may be held liable for the clean up costs include present and past owners and operators of a facility, arrangers for disposal, and transporters to disposal or treatment facilities.[4] The polluter must pay.

(b) The Bankruptcy Code

The filing of a Chapter 7 liquidation or Chapter 11 reorganization bankruptcy petition allows the debtor to discharge their debts,5 with a few exceptions,6 that create a liability on a claim.[7] A claim in bankruptcy is essentially any "right to payment."[8] The effect of a discharged claim voids any judgment that determines personal liability of the debtor to a creditor.[9] A creditor can be any entity that has a claim against the debtor that arose at the time of or before the filing of the bankruptcy petition.[10] The liquidation of the debtor's nonexempt property by the bankruptcy trustee[11] will be distributed to pay the debtor's creditors according to an established priority.[12] Obviously, the money that comprises the debtor's estate after liquidation is not enough to pay all the creditors in full if at all, thus the reason for the debtor's filing for bankruptcy. The debtor is relieved of their debts and receives a fresh start.

III. THE CASE LAW

Several courts have addressed the conflicting policies of CERCLA and the Bankruptcy Code. The first to issue a ruling on environmental claims in the context of a bankruptcy proceeding was Ohio v. Kovacs in 1985.[13] In Kovacs, the Supreme Court ruled that the monetary obligation to pay for environmental clean up costs was a dischargeable claim in bankruptcy.[14] In 1991, the United States Bankruptcy Appellate Panel of the Ninth Circuit in In re Jensen ruled that pre bankruptcy petition conduct that led to the release of a hazardous substance by a debtor was a dischargeable claim in bankruptcy.[15] It is, however, a 1991 ruling in In re Chateaugay Corp. by the Second Circuit Court of Appeals that most clearly resonates with an attitude favoring the debtor's fresh start policy of the Bankruptcy Code over the making the polluter pay policy of CERCLA thus resulting in the most profound undercutting of CERCLA.[16] The Chateaugay court acknowledged that CERCLA and the Bankruptcy Code have competing objectives[17] but determined that the Bankruptcy Code had such broad sweeping language that it was intended to override many laws, such as CERCLA, that would favor creditors.[18]

There are few fact patterns that would favor CERCLA over the Bankruptcy Code. One such fact pattern is exemplified by the 1991 ruling of In re Transp. Co.[19] In In re Transp. Co. the debtor filed for bankruptcy before CERCLA had been enacted in 1980. Subsequently, the EPA brought a claim after the filing of the bankruptcy petition and after the enactment of CERCLA for clean up of a release of hazardous waste that occurred before the filing of the bankruptcy petition. The Transp. Co. court reasoned that even though the release occurred before the bankruptcy petition, the EPA's ability to file a claim occurred after the petition and was therefore not dischargeable because the legal relationship and right to payment occurred post petition.[20]

Another such fact pattern involves a situation in which the EPA is unaware of an existing claim at the time of the bankruptcy petition and subsequently incurs response costs after discovering the waste site and cleaning the waste. The court in Sylvester Bros. Dev. Co. v. Burlington N. R.R. allowed CERCLA to prevail by holding that the EPA's claim in this circumstance was not dischargeable.[21] Should these two situations be the only ones that preclude CERCLA clean up costs from being dischargeable? If CERCLA is to be effective, pre bankruptcy petition conduct that is discovered by the EPA before the debtor's bankruptcy petition must not be dischargeable either.

IV. THE CERCLA EXCEPTION TO DISCHARGE

The Chateaugay court is correct in its determination that the Bankruptcy Code contains broad sweeping language that is meant to override many other statutes that protect creditors. After all, the need to protect overburdened debtors by establishing bankruptcy laws is explicitly mentioned in the enumerated powers afforded to the federal legislature by the United States Constitution.[22] CERCLA liability, however, should be included as an exception to discharge for two reasons.

First, the broad language of the Bankruptcy Code could not have temporally contemplated the environmental needs of the future. CERCLA was enacted in 1980; two years after the Bankruptcy Reform Act of 1978, which is commonly known as the Bankruptcy Code. The recognition of the danger to human health posed by hazardous waste was not the same in 1978 as it was in 1980.

Congressional concern during the 1980 enactment of CERCLA recognized the danger to human health presented by hazardous waste. The legislative history surrounding CERCLA indicates that Congress understood that the "field of environmental legislation has expanded to address newly discovered sources of such danger as the frontiers of medical and scientific knowledge have been broadened"[23] and that "[e]xisting law is clearly inadequate to deal with this massive problem."[24] As a means to address newly discovered sources of danger that are inadequately dealt with by pre 1980 law, Congress enacted CERCLA to establish a Federal cause of action in strict liability to enable the Administrator to pursue rapid recovery of the costs incurred for the costs of such actions undertaken by him from persons liable therefor [sic] and to induce such persons voluntarily to pursue appropriate environmental response actions with respect to inactive hazardous waste sites.[25]The Chateaugay court must have been unaware that the legislative history behind CERCLA overrides the Bankruptcy Code as opposed to the other way around.

Second, there is an explicit exception to discharge listed in § 523 of the Bankruptcy Code that is sufficiently broad enough to include environmental proof of claims filed by the EPA under CERCLA. Under § 523(a)(7), a debtor may not discharge any debt "to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit ."[26] A governmental unit is defined by the Bankruptcy Code in part as an "agency of the United States ."[27] The Bankruptcy Code is silent on defining fine, penalty, or forfeiture, but given the strong legislative intent behind CERCLA, reimbursement must be incorporated into one of these broad words. This exception to discharge is explicit and mandatory.

V. CONCLUSION

There can be no other policy greater than one that encourages environmental responsibility. With out such a primacy placed on CERCLA's policy of making the polluter pay, large scale environmental degradation caused by businesses could continue unmitigated as the CERCLA Fund[28] used by the EPA to pay for clean up costs dwindles as a result of the non renewal of the public tax used to supply the Fund. A destroyed environment leaves little need for any other policies.

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[1] See 42 U.S.C. § 9604(a) (2000).

[2] See id. § 9606(a).

[3] See id. § 9613(f).

[4] See id. § 9607(a) 1-4.

[5] See 11 U.S.C. § 727(a) 2000.

[6] See id. § 523.

[7] See id. § 101(12).

[8] Id. § 101(5)(A).

[9] See id. § 524(a).

[10] See id. § 101(10)(A).

[11] See id. § 704(1).

[12] See id. § 507.

[13] See Ohio v. Kovacs 469 U.S. 274 (1985).

[14] See id. at 283.

[15] See 127 B.R. 27, 32-33 (9th Cir. 1991).

[16] See In re Chateaugay Corp. 944 F.2d 997 (2d Cir. 1991).

[17] See id. at 1002.

[18] See id. at 1005.

[19] See In re Transp. Co. 944 F.2d 164 (3d Cir. 1991).

[20] See id. at 168.

[21] See Sylvester Bros. Dev. Co. v. Burlington N. R.R. 133 B.R. 648 (D. Minn, 1991).

[22] U.S. CONST. art. I, § 8, cl. 4.

[23]Act of Dec. 11, 1980, Pub. L. No. 96-510, 1980 U.S.C.C.A.N. (94 Stat.) 6120.

[24] Id.

[25] Id

[26] Supra note 5 at § 523(a)(7).

[27] Id. at § 101(27).

[28] Supra note 1 at § 9611(a).