Trust(ee) and Abandonment Issues: a Proposal for New Action Regarding Abandonment of Environmentally Contaminated Property
| Publication year | 2016 |
Trust(ee) and Abandonment Issues: A Proposal for New Action Regarding Abandonment of Environmentally Contaminated Property
Michael P. Arwood
Section 554(a) of the Bankruptcy Code permits trustee abandonment of property that is "burdensome to the estate or that is of inconsequential value and benefit to the estate." Environmentally contaminated property is certainly burdensome to the estate due to the exorbitant costs associated with Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") cleanups, and paying for these cleanups out of the estate may render the property worth less than its initial value. Thus, the question becomes: When is it proper for a chapter 7 trustee to abandon environmentally contaminated property?
The one Supreme Court case on the matter, Midlantic Nat'l Bank v. N.J. Dep't of Envtl. Prot. did not give a clear answer to the question. The Court held that abandonment was proper if the contamination did not pose an immediate and identifiable threat to public health. Because this guidance is ambiguous, courts are at a loss for how to rule when these cases are presented, implementing their own rules for determining when abandonment is proper. As a result, the situation is a mess; however, there are a few possible solutions.
This Comment explores four potential solutions to this problem: 1) a bankruptcy trustee can assert the "innocent landowner defense" under CERCLA, maintaining title while not paying for the cleanup; 2) an amendment to CERCLA or the Bankruptcy Code that gives federal and state governments a "superlien" for recovery of proceeds used in environmental cleanups; 3) an amendment to § 554 of the Bankruptcy Code that establishes an "abandonment test" for determining when abandonment of environmentally contaminated property is proper; and 4) a potential balancing test courts could use to determine when abandonment of environmentally contaminated property is proper.
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Imagine a situation in which you are appointed trustee in a chapter 7 liquidation of a business. Early on, you learn that the property is not in compliance with state environmental laws. Bringing the property into compliance may be incredibly expensive, possibly resulting in a minimal payment to creditors and yourself. conversely, you can attempt to abandon the property under § 554(a), revesting the deed to the property and the cleanup liability to the debtor.1 Because the rules regarding abandonment are different in different circuits2 , it is necessary to explore other potential options.
In bankruptcy, abandonment is the process of a trustee removing property from a chapter 7 estate, effectively returning title to the bankrupt party.3 Unfortunately, statutes and courts alike have been vague regarding trustee abandonment of environmentally contaminated property for nearly three decades. While some cases have involved minor environmental contamination, others have involved cleanups under the comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") that cost hundreds of millions of dollars. Although the property will eventually be cleaned, the primary issue is determining who will pay for these cleanups.
Because there is no hardline rule governing trustee abandonment of environmentally contaminated property, this Comment proposes four solutions: (1) applying the "innocent landowner defense" found in CERCLA4 to chapter 7 trustees in bankruptcy, which no trustee has ever asserted; (2) amending the Bankruptcy Code or CERCLA to provide the government with a "superlien" for cleanup costs;5 (3) amending the Bankruptcy Code to provide a test similar to the means test6 that would aid in discerning when abandonment of environmentally contaminated property is proper; and (4) creating a
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balancing test for courts to use rather than the arbitrary and vague standard laid out by the Supreme Court in 1986.7
To argue for alternative solutions to abandonment based upon environmental grounds, it is pertinent to understand several facets of the law. This background section discusses the following: CERCLA, § 554 of the Bankruptcy Code, Midlantic National Bank v. New Jersey Department of Environmental Protection,8 subsequent inconsistent interpretations of Midlantic, the innocent landowner defense as an affirmative defense to CERCLA, and the secured creditors exemption under CERCLA.
A. CERCLA
CERCLA provides a mechanism for cleaning up environmentally contaminated property. The Act sets environmental laws and gives the EPA the authority to issue regulations that "protect public health and the environment by facilitating the cleanup of environmental contamination and imposing costs on the parties responsible for the pollution."9 Congress wanted to establish laws that determined liability and created a system that provided funding for cleanup.10 CERCLA creates a complicated scheme11 that ultimately "promotes the 'private allocation of responsibility' for costs incurred in responding to threatened or actual releases, spills, or discharges of hazardous substances12 at existing or abandoned sites."13 Once an agency determines that a site has been
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contaminated, CERCLA "lay[s] liability at the feet of a broadly defined 'potentially responsible party.'"14 Additionally, the Act creates a governmental response by authorizing "federal and state governments to clean up hazardous waste sites and to undertake emergency responses to releases of hazardous substances."15 Although it is important for the polluter to pay, CERCLA's underlying purpose is to, protect the environment and public health by cleaning up contamination.16
CERCLA developed a system to pay for cleanup for when either the responsible parties were unable to pay or an emergency situation arose that called immediate government action.17 Commonly known as the "Superfund," CERCLA created a trust "comprising revenues from taxes . . . to be used by the federal and state governments to pay for site cleanups where the responsible parties do not."18 If the government pays for the cleanup of hazardous materials, then it can legally sue the responsible parties for reimbursement costs.19 This method of indemnification occurs frequently even though the massive costs of cleanup may result in a lack of full compensation.20
Responsible parties' ability to indemnify the government becomes understandably more limited when bankruptcy is involved. A party may be unable to bear the brunt of such high cleanup costs.21 A CERCLA claim that is brought by the EPA or another governmental agency for reimbursement of cleanup costs incurred prepetition is dischargeable.22 Similarly, a cleanup order that has been converted into an obligation to pay money is also
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dischargeable.23 For example, in Ohio v. Kovacs, the Court held that an affirmative cleanup obligation that gives rise to a right to payment is "alternative to requiring" the debtor to undertake corrective action.24 The costs associated with cleaning up the property are essentially the same as any other obligation to pay, and, as a result, are dischargeable.
Whether cleanup orders themselves are dischargeable is less clear. In In re Torwico Electronics, Inc., the Third Circuit reiterated the Supreme Court's proposition that the parties in possession of the contaminated property are the parties who "'must comply with the environmental laws of the State' and cannot 'refuse to remove' hazardous wastes."25 Furthermore, the cleanup-demanding injunction is a nondischargeable claim, and a party cannot shirk its responsibility once the government has determined liability.26 The court also held that Torwico, as the producer of the hazardous waste, had an ongoing responsibility for cleaning up the hazardous waste even though it no longer possessed the property.27 As the responsible party, the polluter has a duty to comply.
The Second Circuit has also found that a cleanup order does not constitute a claim.28 In In re Chateugay Corp., the court held that any order to ameliorate current pollution is "not a dischargeable claim."29 Additionally, if the government bears that cost, the funds used count as administrative claims and are granted priority.30 The court found "that expenses to remove the threat posed by such [hazardous] substances are necessary to preserve the estate," and are thus awarded administrative priority in creditor payment.31
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B. Bankruptcy, Abandonment, and Midlantic
There is an inherent tension between bankruptcy law and environmental law.32 The Bankruptcy Code provides two objectives: "1) to provide the debtor with a fresh start financially, and 2) to provide the creditor with a mechanism for the orderly distribution of the debtor's estate."33 Environmental laws exist to protect public health and the environment.34 Courts have had a difficult time determining how to enforce environmental laws while still providing the debtor with a fresh start.35
1. Section 554: Abandonment in the Bankruptcy Code
One way that clean up liability is passed back and forth is through trustee abandonment.36 Under § 554 of the Bankruptcy Code, a trustee is permitted to abandon nonexempt property of the estate if it "is burdensome to the estate or that is of inconsequential value and benefit to the estate."37 Environmentally contaminated property is obviously a burden to the estate to pay for cleanup,38 and it could be considered of inconsequential value because of the minimal property value that immediate liquidation would yield.
Abandonment is a crucial issue because it determines who will pay for cleanup of the contaminated property: the government or the trustee and creditors. "[I]f the trustee is permitted to abandon property before complying with clean-up obligations, the burden of clean-up falls upon the government...
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