MIDLANTIC NAT. BANK v. N. J. DEPT. OF E. P.
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
ORAL ARGUMENT OF WILLIAM F. MC ENROE, ESQ., ON BEHALF OF THE PETITIONER IN NO. 84-805
Chief Justice Burger: We will hear arguments first this morning in Midlantic National Bank against New Jersey Department of Environmental Protection.
Mr. McEnroe, you may proceed whenever you are ready.
Mr. Enroe: Mr. Chief Justice, and may it please the Court, this case presents to the Court the question of the scope of the abandoned tower rented to a trustee in bankruptcy under Section 554(a) of the Bankruptcy Code.
That section provides that after notice and a hearing, a trustee may abandon a property of the estate that is burdensome to the estate or of inconsequential value to the estate.
The specific issue here is whether the trustee may abandon property where it is uncontroverted that that property is both burdensome and of inconsequential value, but where abandonment is opposed by governmental agencies on environmental grounds.
The debtor in this case, Quanta Resources Corporation, was engaged in the business of recycling waste oils.
They operated sites in New York and New Jersey.
In 1981, it was determined that there existed on both sites substantial quantities of oil that were contaminated with PCB's.
In July of 1981, Quanta ceased its operations.
At the time it ceased its operations, there were already in effect orders from the states of New York and New Jersey requiring Quanta to clean up the sites and to take other remedial actions.
In October, 1981, Quanta filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.
Those proceedings were converted to a Chapter 7 liquidation in November, and Thomas J. O'Neill was appointed trustee.
Upon his appointment as trustee, Mr. O'Neill undertook an analysis of the property of the estate similar to the procedure outlined by this Court in its decision in Ohio versus Kovaks.
He obtained appraisals of the property, searches as to judgments and liens, and also estimates of the cleanup costs for the sites.
It was determined that the cleanup costs would far exceed the value of the property that is in question in this case.
It was also determined that because of the liens against the property, even if the property were cleaned up, there would be no value to the estate.
Under those circumstances, the trustee had no alternative.
He was obligated by the duties of a trustee under the Bankruptcy Code to seek authorization to abandon.
The Bankruptcy Court held that he succeeded in establishing the grounds of burdensome and inconsequential value and granted the application to abandon.
The District Court also upheld that decision, holding that the language of Section 554(a) was very clear, and once the trustee had established the standards of burdensome and inconsequential value, the Court could not look to any additional conditions on the trustee's right to abandon.
That decision, however, was reversed by the Third Circuit.
Both the Third Circuit and the respondents in this case contend that the right of abandonment pursuant to Section 554(a) is not unconditional.
They contend that Section 554(a) codified a body of pre-Code law that imposed certain conditions upon the trustee's right of abandonment, and specifically a public safety or public purpose doctrine.
Unidentified Justice: Mr. McEnroe, what are the legal consequences of the bankruptcy law of abandonment, insofar as the title to the property goes?
If the bankruptcy judge approves abandonment, does that mean that title... where does title then go?
Mr. Enroe: In this particular case, the property can be abandoned to anyone with a possessory interest.
In this case it would be abandoned back to the debtor, Quanta Resources Corporation, and it would remain in that corporation.
Unidentified Justice: Are there liens on the property?
Mr. Enroe: Well, there are two different properties.
In New York there is real property containing the oil.
There are substantial liens against that property which according to the estimates we obtained exceeded even the fair market value in a clean state.
The New Jersey property consists of personal property.
The site was leased by the debtor.
There are liens against personal property of the debtor, but that particular site is owned by a third party.
Unidentified Justice: But the legal effect of abandonment is to have the title of the property revert back to the debtor.
Mr. Enroe: That's correct.
The interpretation urged--
Unidentified Justice: Under the new Bankruptcy Act, does... I know under the old title was vested in the trustee.
Is it now?
Mr. Enroe: --No, it is not.
Unidentified Justice: It is not.
And it remains in the debtor.
Mr. Enroe: It remains in the debtor, and possession and title after abandonment are in the debtor.
Unidentified Justice: Well, and before and after, then, the technical title--
Mr. Enroe: Title does not change.
Unidentified Justice: --Yes.
But what interest does the trustee have?
Mr. Enroe: The trustee has custody of the property while it is in--
Unidentified Justice: And with all the powers to do with it what the bankruptcy law gives it.
Mr. Enroe: --That's correct.
The interpretation of Section 554(a) urged by the respondents is wrong, and it is wrong for several reasons.
First, there is no established body of pre-code law which imposed the conditions on the right of abandonment that they urge.
The respondent cites to this Court two isolated cases, the cases of Ottenheimer versus Whittaker and In Re Louis Jones, in which the abandonment power was conditioned.
However, two cases, isolated cases, which were never passed upon by this Court do not constitute an established body of law.
Moreover, both of those cases specifically recognize that at the time abandonment was not a statutory power.
Abandonment at that time was only a judge-made rule which had come down to facilitate the administration of bankruptcy states.
Courts recognized that in weighing the merits of the case, the judge-made rule would have to give in the case of the public welfare.
Both of those cases, it is very likely that both of those cases would have been decided differently had there been a statutory right of abandonment at that time.
Unidentified Justice: Mr. McEnroe, do you concede that there may be some limitation on the power of abandonment to meet public safety concerns?
For example, the Solicitor General in a brief has suggested that the act of abandonment cannot create a public nuisance.
Do you concede there is any limitation at all?
Mr. Enroe: No, Your Honor, other than the burdensome and inconsequential value set forth in the statute.
As far as the facts of this case and creating a nuisance, I do not believe that the act of the trustee in abandoning creates any nuisance.
If anything, the abandonment by the trustee allowed the environmental agencies to correct the problem.
The abandonment by the trustee avoids the possibility of a nuisance being created.
Unidentified Justice: Do you mean that the trustee could abandon a burning building, or a great excavation that would attract a nuisance and a hazard?
Mr. Enroe: In all cases, the analysis by the trustee would be the same.
He must analyze first whether the property in question is of any value to the estate or is of burdensome nature to the estate.
If he determines that that property is of no value to the estate, then it is his obligation to proceed with an application for abandonment, which is upon notice to the applicable bodies, as in this case the state of New York, the state of New Jersey, to notify them of the imminent danger.
Without any disregard for the trustee in this case, I don't think a trustee is in a position where he is going to be able to fight a burning fire.
It is his duty to immediately notify the appropriate authorities to avoid any possibility of a nuisance being created or danger to the public.
Unidentified Justice: That may be true about what the trustee should do.
He should try to abandon, but what about the judge?
What about the court?
Do you think the court must let him abandon it if he shows it is a burden?
Mr. Enroe: Yes.
Unidentified Justice: He cannot say, well, wait a minute, you can't abandon it without taking some precautions against having this property be a public danger?
Mr. Enroe: I think the Bankruptcy Code as it is written says that the court must consider only the standards of burdensome and of inconsequential value.
Unidentified Justice: Bankruptcy Courts are courts of equity, I suppose, aren't they?
Mr. Enroe: They are courts of equity, but in doing their... exercising their equitable powers, they cannot act contrary to the Bankruptcy Code.
And think that would be acting contrary to the Bankruptcy Code if the property was valueless to the estate and the claims, for instance, of the estate agencies here.
If the trustee expended money in any way on those sites, he would be giving priority to their claims over the claims of other debtors, which I do not believe he has the power to do.
It would be allowing for a distribution to the state other than is set forth in the Bankruptcy Code.
Well, it takes time to go through the process of deciding whether to abandon, to file the petition, and to have the hearing conducted.
Unidentified Justice: Is there no obligation even in the interim for the trustee to take emergency measures to prevent something in the estate from constituting a public nuisance, for example?
Mr. Enroe: In the interim, the trustee should do what is necessary if he has the ability to do so.
If he has no ability to comply with state law or to remedy any situations, then his obligation at that point is to on an emergency basis seek the authorization to abandon with notice to the appropriate governmental authorities who can do something about the problem.
Unidentified Justice: Well, suppose he has some... suppose there are assets in the estate that hopefully would be distributed later to pay the claims of unsecured creditors, but while he is waiting for the action on the abandonment petition, he thinks he has to spend some money to keep the property in decent shape, and he spends some money.
Is that an administrative expense?
Mr. Enroe: If he spends money in the interim?
Yes, it is.
Unidentified Justice: And which would deplete the assets available to unsecured creditors, I suppose.
Mr. Enroe: That's correct, it would.
Unidentified Justice: But you think he would be breaching his duties if he used those free assets to clean up the site.
Mr. Enroe: If it is clear that the asset will never be of any value to the state, that the cost of cleanup will exceed the value of the estate, and in a clean state would never generate any benefit for the estate.
Unidentified Justice: Well, what if... so it means that he... so it means... well, suppose the assets available to creditors are plenty to clean up the site, and the site would then be worth something.
Mr. Enroe: Then he would clean up the site.
Unidentified Justice: He would.
Would you say then that he could use the assets available to creditors, other creditors to clean up the site?
Mr. Enroe: If it is clear that after he expended the assets to clean up the site, the value of that property would exceed what he expended on it.
Unidentified Justice: I know, but there may be liens on the property.
Mr. Enroe: Well, that is a different situation.
It has to be clear that after cleaning up the site, and the extent of the liens are paid off, that there is still a--
Unidentified Justice: So the creditors would then just have an interest in the property instead of the other assets.
Mr. Enroe: --That's correct.
Unidentified Justice: May I pursue that?
I am a little puzzled.
Say you have three oil tanks and one of them is contaminated, and it costs a lot of money to clean it up, and the authorities say clean it up.
The other two could be sold.
Could he... is he required regardless of the economics of it to abandon the one?
He can't use the assets by selling the other two to clean up that one?
Mr. Enroe: That's correct.
Unidentified Justice: That is inconsistent with what you said, isn't it?
Suppose he could, by selling the other two tanks, he could clean up the other one.
And it would be of some use.
Mr. Enroe: That particular asset, again, is of no value to the estate.
Unidentified Justice: I see.
Mr. Enroe: And he could abandon.
An example may be in this case the debtor also owned trucks.
Unidentified Justice: Yes.
Mr. Enroe: The trucks contained certain residues of PCB's which in order to sell the property needed to be cleaned up.
The trustee did undertake that duty because it was clear that even after cleaning up, and after paying off the liens, there would be benefit to the estate upon the sale of those trucks.
Unidentified Justice: I see.
Mr. Enroe: I believe that is the distinction there.
Unidentified Justice: I suppose if the state has a law that gives the state a first lien on property which it has to clean up and restore and expend its funds to do so, that that state's first lien can take priority over the secured creditor?
Mr. Enroe: I believe it would depend on the time.
For instance, here, with the New York site after the trustee was granted the right to abandon, the state of New York undertook a cleanup on this site, and asserted their liens for the property.
The other lienholders, there was no judicial determination, but they walked away from the property.
Unidentified Justice: But that wouldn't be settled in the Bankruptcy Court.
Mr. Enroe: No, once the property was abandoned, and the bankruptcy judge recognized that when he refused to consider that issue, once it was abandoned it was beyond his jurisdiction.
It was matter of state law.
Unidentified Justice: But as a matter of state law it is possible that the state can give itself a first lien that would come in ahead of any security interest on the property.
Is that right?
Mr. Enroe: Well, that involves an interpretation of state law and the rights of creditors, which... or the rights of lienholders, which is not, I don't believe--
Unidentified Justice: But you concede it is possible.
Mr. Enroe: --It is certainly possible.
Unidentified Justice: Were any of these sites covered by the mortgage?
Were any of the sites subject to a lien?
Mr. Enroe: Yes, the New York real estate was subject to a mortgage lien.
Two mortgage liens.
And the extent of those liens exceed the fair market value of the property even in a clean state.
Unidentified Justice: The mortgage would attach to the excess value, if any.
Mr. Enroe: That's correct.
I believe in determining the proper construction of Section 554(a)... my time is up, Your Honor.
Unidentified Justice: Mr. Terrell.
ORAL ARGUMENT OF A. DENNIS TERRELL, ESQ., ON BEHALF OF PETITIONER IN NO. 84-801
Mr. Terrell: Mr. Chief Justice, and may it please the Court, Midlantic National Bank asked this Court to reverse the decision of the Third Circuit because in its opinion the Third Circuit decision effectively destroys its admittedly valid and existing security interest, and the inventory, certain equipment, and accounts receivable of the debtor.
Midlantic did not have a mortgage on any of the land.
Atlantic had a mortgage on the personality of the debtor, and in our opinion the Third Circuit opinion effectively destroys that lien by mandating that the trustee use available funds in the estate for cleanup purposes rather than to pay secured liens.
Unidentified Justice: How does that disadvantage Midlantic as a secured credit?
Mr. Terrell: Well, Justice Rehnquist, here we have an estate that is valued at about $400,000.
We have a New York cleanup cost which admittedly is $2.5 million.
If the trustee as directed by the Third Circuit is to clean up the site, clearly the $400,000 is going to go for that cleanup.
There will be nothing left for secured creditors... nothing left for unsecured creditors, but I am only concerned with secured creditors.
Unidentified Justice: So your lien isn't on any particular property?
Mr. Terrell: Our lien is on the inventory which included the good waste oil in this case, certain equipment which the trustee sold, and accounts receivable, of which there were none.
Unidentified Justice: Well, did the Third Circuit say your lien was subordinated then to the cleanup costs?
Mr. Terrell: It did not in so many words, but I think the net effect of their opinion, and especially Footnote 11, comes down to that.
In essence, in Footnote 11, they found that there was no taking problem by finding that the exercise, by subjecting the exercise of abandonment to the cleanup costs, that would be valid regulatory powers.
We don't think that's what happened at all here.
We think that what happened is that by expending all the moneys in the estate, it effectively does destroy our... and that is why we are here before you today.
Unidentified Justice: What would have happened if no bankruptcy had been filed at all, and the corporation had dissolved?
Could New York have come in and done its cleanup and had a first lien under state law that would come in ahead of secured creditors?
Mr. Terrell: First of all, Justice O'Connor, our lien covered personal property in New Jersey, and personal property in New York, but it never got that far because that personal property was never sold by the trustee.
So, our lien covered only personal property in New Jersey.
Unidentified Justice: Well, let's talk about the theoretical--
Mr. Terrell: Fine.
Unidentified Justice: --possibilities, if you would for a minute.
What would happen... if you remember the question--
Mr. Terrell: Yes, I do.
Unidentified Justice: --go ahead and answer it.
Mr. Terrell: Under state law, in New Jersey, our lien would have priority to any other liens, including that of the state of New York, and so under state law, if the corporation went defunct, we could have foreclosed under New Jersey law and sought sale of those assets to pay for our secured interest.
I do not know--
Unidentified Justice: Is it possible, of course, that a state could give itself first priority?
Mr. Terrell: --Yes, you are absolutely right.
As a matter of fact, New Jersey does have such a state law.
And I think that if New Jersey... if the DFP in New Jersey came in pre-bankruptcy, cleaned up that site, under the Spill Act, there is an absolute law which gives them a first priority.
If they clean up, and if they assert the lien... of course, they didn't do that in this case, but that certainly is possible.
There is no question about that.
But in the facts of this case, if Quanta had not gone bankrupt, and the state did not clean up, there is no question but that Midlantic has a first prior lien to those assets on which it has a lien.
That is what the Third Circuit decision destroys, we believe.
Unidentified Justice: May I ask at that point, did your lien also include, also attach to the property that the trustee sought to abandon?
Mr. Terrell: Yes, it did.
It covered all inventory.
Unidentified Justice: So basically what you are saying is, you could foreclose your lien by taking the valuable property and ignoring the... you could make a selective foreclosure.
Mr. Terrell: --Yes, I believe state law permits you to do that.
I think the T.P. Long case also supports that position, that the secured creditor can pick and choose among the security he wishes to foreclose.
I think this Court's analysis in Security Industrial Bank is where one must begin the analysis of Midlantic's position in this case.
As the Court well knows, in that case this Court did not reach a constitutional issue by construing the statute in a way that avoided the constitutional issues.
We believe the Third Circuit opinion does raise a constitutional issue of taking by construing 554 in a way that we don't believe Congress intended, and of course that construction was to condition the abandonment power on compliance with state environmental laws.
Under Security Industrial Bank, we believe that what the result should be is that 554 should be construed not to be so conditional, and therefore not to raise the taking question.
That is what the Court held in Security Industrial Bank.
That is what we think has to be done here.
I think there is another issue that overshadows all this.
All of the briefs from, the amicus from the various states, the DEP and the New York Department of Environmental Protection stress environmental concerns, and Midlantic National Bank is not here saying that it is not concerned with the environment, but there is an equal and, I think, just as valid concern with the commercial side of public policy.
It is certainly in the interest of public policy to have commercial lenders lend to companies and lend to companies in environmentally sensitive industries.
But if those companies lend to those businesses, and believe they have a security interest and a first priority lien, and that lien is knocked out as per the Third Circuit opinion, I think we are going to find that financial institutions will tread very lightly in this field, and will not lend to these companies.
I don't think that's what Congress intended by the abandonment power, and I think that is an interest that this Court should be concerned with, just as it is concerned with the environmental aspect of this case.
Obviously, it is a balancing act, and I think the Bankruptcy Act under 554 did occasion that balance, and the balance came out on the side of the trustee to permit him to abandon, as the trustee's counsel pointed out, in those circumstances where the property is either burdensome or of inconsequential value to the estate.
It did not put any condition on that power.
In addition, I believe it should... the Court should be aware that there are other alternatives to the state when they clean up sites like this.
The trustee isn't the only pocket here, and as pointed out, I believe, by Judge Davida in the Bankruptcy Court opinion below, the trustee didn't create the situation.
The secured lenders didn't create the situation.
The debtor created the situation.
Unidentified Justice: Could I ask, when a secured creditor has a... well, he has a lien on real or personal property, and he wants to foreclose the debtors in bankruptcy, you must get permission to foreclose?
Mr. Terrell: If the debtor is in bankruptcy, that's right.
You get relief from the automatic stay.
Unidentified Justice: But the only time you wouldn't get it is if the property is worth more than the debt, I suppose.
Mr. Terrell: No, that is not the only reason.
If the property is necessary for an effective reorganization--
Unidentified Justice: No, this is straight bankruptcy.
Mr. Terrell: --Straight bankruptcy.
That would be the only case.
If there was equity in the property, then the Bankruptcy Court would--
Unidentified Justice: If there is no equity in the property, couldn't the trustee say if the secured creditor is... couldn't the trustee say, I want to abandon this property?
Mr. Terrell: --Well, the trustee must go to the Court to--
Unidentified Justice: Exactly.
He says, I want to abandon this property.
The lien on it is worth more than the property.
Mr. Terrell: --Certainly that happens every day in the--
Unidentified Justice: Why shouldn't it have happened in this case?
Your lien is worth more than the personal property, isn't it?
Or do you know?
Mr. Terrell: --Well, it is worth more than the personal property, but there was a combination of assets here, Justice White.
There were a number of vehicles on which there were--
Unidentified Justice: You had no lien on.
Mr. Terrell: --We had no lien.
There were liens by the GMAC or whatever the truck companies were, but those vehicles on which we had no lien were worth a lot more than the liens, and the trustee did move ahead and sell those vehicles.
Unidentified Justice: Thank you.
Mr. Terrell: There is, as I indicated, there is an important consideration here about how the state can go about cleaning up the site other than reaching into the pockets of either the trustee or secured lenders.
Certainly here there are landlords involved in this site.
The Quanta site in New Jersey was a leasehold interest.
The owners of that site are still existing, and own the site, and under New Jersey's environmental laws, they certainly have responsibility for the site.
The state and federal government themselves by statute have provided avenues and ways to proceed to clean up these sites, and so there is that avenue to clean up the site.
There is also suits that happen now every day against the generators of these wastes on these sites.
The generators can be sued or can be coerced into paying for the cleanup of these sites, so that it seems to me to say that the assets of the estate are the only way this site can get cleaned up really does not focus on the true state of affairs in the environmental area.
There is another overriding concern here, I believe, for secured lenders such as Midlantic.
The thrust of the environmental laws is to place upon private parties initially the burden to clean up the sites.
New Jersey happens to be a state where there are a lot of environmentally sensitive industries.
Probably there is as much cleanup going on in New Jersey as in any place in the country.
Certainly these companies, if they are to seek financing for these businesses, must rely upon banks such as Midlantic to do that.
Midlantic, if they are going to finance this kind of industry, certainly has a legitimate aim in having its lien secured.
Obviously secured loans carry less interest.
Obviously, they carry less risk.
And obviously, they are the preferred means of borrowing both from the borrower's standpoint and the lender's standpoint.
By allowing the Third Circuit opinion to stand, it seems to me you are sending the signal to financial institutions that you must beware if you lend to environmentally sensitive industries.
I don't believe that that is the signal that should go out from this Court.
I believe that the signal should be that financial institutions should be encouraged to finance these industries, should be encouraged to finance these industries so that they can take care of their environmental problems themselves.
By permitting the Third Circuit opinion to stand, that signal does not go out to the financial community, and I think they will shy away from these kinds of industries.
Unidentified Justice: Mr. Terrell, you mentioned the fact that the New Jersey site was leased.
Mr. Terrell: Yes, sir.
Unidentified Justice: The lease was terminated.
Is the owner of the fee according to this case?
Mr. Terrell: He is not according to this case.
No, he is not.
Unidentified Justice: And no action has been instituted against... him?
Mr. Terrell: In the Bankruptcy Court, not this case on appeal, there was a separate action started by the landlord.
Basically the landlord said to the trustee, I want a lot of rental.
I want you to give me the assets in the estate to pay me for the rental of the property that you have had for the many months that you have had prior to abandonment.
The DEP intervened in that case and said, no, we want the moneys for cleanup costs.
Midlantic intervened in that case and said, no, we want our secured lien paid.
That case was stayed pending resolution of this matter before the Court, so while the landlord is not here before you, the landlord is involved in the bankruptcy proceeding, albeit in an ancillary proceeding.
Unidentified Justice: He would be an unsecured credit, or would he?
Mr. Terrell: Well, he claims he is entitled to administrative rent.
Unidentified Justice: Landlord.
Mr. Terrell: Yes, he claims that he has an administrative lien for rent, but his claim was dismissed by the Bankruptcy Court, and that is all the farther that has gotten.
It has not gotten any farther than that.
Unidentified Justice: Well, did he claim priority over your lien?
Mr. Terrell: No, he did not claim priority over our lien, but he claimed an administrative lien.
Unidentified Justice: Expense.
Mr. Terrell: Expenses.
Unidentified Justice: Mr. Terrell, could I ask you about your signal to the financial community.
Couldn't one argue the contrary, that the signal ought to be that you should not be lending money to these companies unless you are satisfied they will be able to comply with the environmental laws?
That that is just another precaution that the business community ought to take before financing a venture like this takes place?
Mr. Terrell: I don't disagree, Justice Stevens.
Certainly when a bank loans to an environmentally sensitive industry, it has to take that into consideration, but I don't think it should have the added burden that when it thinks it has a secured lien on its assets, it has to worry about the fact that if this company goes in bankruptcy with the Third Circuit opinion on the books, that it won't have a lien at all.
I think that is the signal that the Third Circuit opinion gives to the financial community which we are asking this Court to reverse, but I agree with you.
I think that a bank in the environmentally sensitive area has to be concerned about that, but I don't think it should have the added concern that if it believes it has a security interest in a secured lien that has taken all the steps under state law to have a secured lien, that it should worry that in bankruptcy that lien will be wiped out, and that is what we believe the signal is from the Third Circuit opinion, and that is why we are asking this Court to reverse that Third Circuit opinion.
Unidentified Justice: Very well.
ORAL ARGUMENT OF ROBERT HERMANN, ESQ., ON BEHALF OF RESPONDENTS IN NO. 84-805
Mr. Hermann: Mr. Chief Justice, and may it please the Court, seven years ago Congress codified the power of a trustee in bankruptcy to abandon worthless, burdensome property.
In so doing, the trustee here argues Congress meant to displace not only existing case law, but other provisions of the Bankruptcy Code section of the Judicial Code, and much significant environmental legislation that had been enacted to that time, even though Congress never said so in codifying Section 554(a).
Furthermore, as a result, the trustee argues that he has an absolute right to abandon property that can't do the estate any good, whether that property consists of toxic wastes or plutonium rods from a failing nuclear plant.
We hope that that view is wrong, and we submit that it is.
In the time allotted to the states here insofar as some division of responsibility will be helpful to the Court, I am going to address our overview of the case, the abandonment provision, and its relationship to other statutes and case law, and the preemption question, and my co-counsel from New Jersey is going to address the taking question, whether this case is really about priorities and money, and the applicability of the Kovaks case to the situation here.
I think it is important at the outset to underscore that the situation before the Court here is a limited one.
This case is not about the $2 million which New York spent to clean up the site.
The case in our view is about the bankruptcy's decision to allow abandonment in an emergency situation.
The states were faced--
Unidentified Justice: Why are you here?
Mr. Hermann: --We are here, Your Honor, to reaffirm what we think is an essential police power of the state, the ability of the states to step in in an emergency situation to get an order maintaining the status quo and preventing a situation where toxic wastes are leaking into the Hudson River and the court of equity is powerless to do anything about it.
Unidentified Justice: So you... did you go into the Bankruptcy Court and attempt to have this effected?
Mr. Hermann: Yes, we did, Your Honor.
We opposed the abandonment on--
Unidentified Justice: On that ground.
Mr. Hermann: --Well, the situation was not simply that the trustee proposed to walk away from dangerous property.
The trustee proposed to eliminate the safety precautions that were necessary at the same time to keep those facilities from becoming even more dangerous.
In New York City, for example, it amounted to dismissing the guard service, removing the fire suppression equipment.
In New Jersey it involved failing to keep an eye on the pollution control equipment, in essence not simply abandoning a property, but making more grave and serious a situation that was already highly dangerous with some of the most toxic carcinogens known.
Unidentified Justice: Well, how are you any worse off than before Quantas' bankruptcy?
The title has gone back to Quantas.
Mr. Hermann: Well, Quantas in this situation, Your Honor, was completely without assets to do anything about the situation.
Unidentified Justice: But I presume that was the case on the day it filed for bankruptcy.
Mr. Hermann: I believe that the situation deteriorated substantially over a period of eight months in New York, and over more than a year, I believe, in New Jersey.
There were actual leaks in these cases which were growing more grave.
Pollution control equipment had during the time the trustee was in possession of the property become inoperative, and what was proposed was to remove even the minimum amount of security that was already there.
So, the situation, as the Solicitor General's office says in its brief, the trustee has no right to take a grave situation worse.
And that is what happened during the--
Unidentified Justice: What you wanted to effect was to make the trustee use whatever assets he had to minimize the danger.
Mr. Hermann: --That's right, Your Honor.
I think it is important to emphasize that New York here--
Unidentified Justice: I suppose you wouldn't have come in if you thought he was absolutely without any assets.
Mr. Hermann: --That's right.
And I emphasize--
Unidentified Justice: Assets such as... some of the assets were under a lien.
Mr. Hermann: --That's correct, Your Honor.
Unidentified Justice: You claim a right to those security assets, too, I take it.
Mr. Hermann: That is right, Your Honor, we do.
Unidentified Justice: Well, isn't this really a question of priority of claims?
It seems to me the abandonment question in this context is pretty much of a red herring.
Mr. Hermann: Well, Your Honor, we don't think it is.
We believe that the relief we are asking here for was of an emergency short-term nature.
The Bankruptcy Court as a court of equity should have the ability to essentially enjoin the trustee from walking away, to look into the factual--
Unidentified Justice: Well, in the present posture of the case, money has been expended by New Jersey and by the city of New York.
They want to be repaid to the extent there are assets in the estate.
Isn't that right?
Mr. Hermann: --That's correct, but that's not the issue we--
Unidentified Justice: So it really is a priority claim.
Mr. Hermann: --But that is not the issue before the Court now.
There has been no finding about that.
New Jersey hasn't cleaned up the site.
That hasn't happened yet in New Jersey, and New York didn't clean up the site until after the relevant proceedings in the Bankruptcy Court and in the District Court.
Unidentified Justice: After the abandonment.
Mr. Hermann: After the abandonment took place.
So we believe that issue isn't before the Court.
Certainly New York--
Unidentified Justice: What if the corporation had just chosen to dissolve and walk away from all these assets?
Then the state would have to come in and take whatever measures it wanted to take, and by its own law try to get priority to be recouped, right?
Mr. Hermann: --That's right, Your Honor.
Unidentified Justice: And why should the filing of a bankruptcy change that outcome?
Mr. Hermann: Well, the debtor here was seeking to avail itself of some of the protections of the Bankruptcy Code which would not otherwise have been available in a dissolution proceeding.
What we were arguing for, if I may emphasize this, is simply the ability of the Bankruptcy Court to deal with the emergency situation.
As I say, New York would like to be able to recover cleanup costs.
New York is obviously not able to step in and clean up every toxic waste site as soon as someone is prepared to abandonment.
But the most fundamental state interest that we are trying to assert here is the ability of the state to go in on an emergency basis and prevent the situation from getting worse.
We are not saying necessarily that an owner... that the trustee operating a toxic waste facility must ensure a cleanup before that property can be abandoned.
What we are saying is that a court... as a court of equity, the Bankruptcy Court should take into consider the public health and safety and environmental consequences, and stabilize the situation so that the abandonment power does not become subject to abuse.
Unidentified Justice: But certainly if the state of New York were concerned with emergency environmental situation, and wherever this place was in New York, it wouldn't be logical to go to the trustee in bankruptcy and say we need emergency action in the next 12 hours, you take it.
I mean, the trustee in bankruptcy is the last place you would go for that sort of action.
Mr. Hermann: I think that's right, Your Honor, but we are asking essentially for status quo relief.
In essence we were saying, don't take away these precautionary devices that are needed to protect the public until this situation can be taken in hand by the state or by the Bankruptcy Court until a hearing can be held on the question of what assets there really are in the estate.
I can't emphasize too strongly that there has been no healing to determine what assets really are in the estate.
Unidentified Justice: You mean the Court shouldn't act on the abandonment petition until all that is sorted out?
Mr. Hermann: Well, I think the abandonment provision itself provides for notice in a hearing, and the hearing, we believe, should consider those public health and safety consequences.
Unidentified Justice: Why?
Mr. Hermann: In the same way that any other emergency situation is dealt with by a court of equity.
Unidentified Justice: That may be so, but what do you mean, you have to have a hearing to see what assets are available?
Mr. Hermann: Well, we are accepting it at face value for purposes of the hypothetical here, that there were no assets in the estate to stabilize the situation in the short term.
There has been no finding to that effect in this record.
That is an assertion of the trustee that was never tested at a hearing in this case.
We think the state should be entitled to a hearing, to say, show us that there are no assets available to keep running... the trustee here was asking in essence to stop doing what he had been doing for over eight months already, which is to treat as administration expenses the cost of maintaining this property.
Unidentified Justice: General Hermann, do you think the equities in any sense enter into this balance?
For example, obviously, something has been going wrong here.
Now, the police power of New York and New Jersey was always available to put a stop to it a long time ago, wasn't it?
Mr. Hermann: That's true, Your Honor.
I think the equities do enter into the consideration that is before the Bankruptcy Court.
Certainly in a situation where the trustee has assets that are miniscule compared, for example, to the costs of a cleanup, or where in essence the situation is one of bleeding the estate dry bit by bit.
The Court should consider that.
As I say, we are not saying that the state is entitled to a total cleanup before the trustee can abandon the property or the Bankruptcy Court can take any other action, but we are saying these are factors which the Court should consider and which courts traditionally do consider in such situations.
Unidentified Justice: Do you think the old equity doctrine of in pari delicto would encourage comes into play here at all?
Mr. Hermann: I don't think in this situation that we were in pari delicto, because one of the things that was clear here is that on the record, this particular debtor was notorious, was subject to consent orders in both New York and New Jersey for violations.
One of the things that the lenders here certainly failed to do and hasn't been pointed out is to note that there were on record both in New York and New Jersey cleanup orders which required Quanta in both cases to clean up these sites.
It was only very shortly before these proceedings took place that these orders were in effect.
It would seem to me the most basic precaution on the part of a lender would be to say what are your outstanding obligations to the various states?
This wasn't a hypothetical situation.
This was a very real... a very real situation where there were people who had agreed in both states to clean up these very sites in question.
One of the interests that the state here is seeking is to prevent the creation of what we regard as a very large loophole in the environmental laws.
Certainly we believe that toxic waste dumpers should not be able to manipulate the bankruptcy laws to avoid compliance with them, but I would also point out that while this case has been cast in preemption terms, the result is really far broader, because the trustee is saying that there is an impossibility of dual compliance with both the bankruptcy abandonment power and the federal environmental--
Unidentified Justice: I thought a moment ago, General Hermann, that you were suggesting this was kind of an interim type of thing, that the trustee was... you are attacking him here for having made matters worse since he took over.
Mr. Hermann: --That's right.
Unidentified Justice: I would sense from what you just said that you would fault the trustee for things that Quantas had done in the past.
Mr. Hermann: No, I am merely pointing out, Your Honor, the breadth of the argument, that it goes not simply to ignoring state environmental concerns, but also to ignoring federal environmental concerns as well, and essentially granting them an unfettered right to abandon property which he regards as worthless.
Unidentified Justice: But that is what the Bankruptcy Court may well do.
It certainly has no conditions on it.
Mr. Hermann: That's right, Your Honor.
It doesn't expressly contain any conditions in it, but we believe that it incorporates prior case law, which we believe is more well developed than the trustee acknowledges.
Much has been made of the proposition that the Bankruptcy Court doesn't... that the abandonment provision doesn't expressly incorporate an exception into it, and we think that that proposition, essentially that Congress knew how to write the exception when it wished to do so, doesn't really help decide this case, because there are numerous other statutes in this case that are called into play which are equally unqualified, and which intersect with the policies of Section 554(a).
Unidentified Justice: Are you suggesting that the abandonment should just have been put off, so that the trustee could continue to take care of the property and avoid damage, or are you saying, go ahead and let him abandon it, but then the trustee would have to spend money to keep the property from deteriorating after abandonment?
Which are you?
Mr. Hermann: What we are suggesting, Your Honor, is that in the short term the trustee should be required to do what he had been doing for eight months.
Unidentified Justice: What short term?
Mr. Hermann: Until the court can hold a hearing and determine how serious the problems are, how much it would cost to clean those problems up, what assets are really available in the estate, what prospects there are for--
Unidentified Justice: That isn't what the abandonment power says.
The abandonment power focuses on the property the trustee wants to abandon.
Mr. Hermann: --That's right, Your Honor, but there are also other statutes which come into play here.
There is Section 959(b), about which very little has been said, which requires the trustee to obey the valid laws of the state.
There is Section 362(b)(4), which allows the government enforcement proceedings, which are already in place, to continue to fight the filing of a petition in bankruptcy.
All of these policies also come... essentially a situation of focusing on one statute.
The Court has before it several statutes which intersect in the circumstances that are presented here.
Unidentified Justice: May I ask this?
Is it your position in a situation like this, perhaps not your particular case, would New York insist that the assets of the estate could be totally exhausted or had to be totally exhausted if it were necessary to clean up the environmental problem?
Mr. Hermann: No, I don't think our position goes quite that far, Your Honor.
I think there is authority for it.
Unidentified Justice: Do you think there would come a point when something would be left for creditors?
Mr. Hermann: I think there is authority, Your Honor, if that would be... the situation were such that it could be stabilized, and there could be an orderly winding up of the estate, and responsible parties were on the scene, to handle the situation and prevent it from getting out of hand.
I don't think it is New York's position that all assets of the estate must be exhausted for abandonment of a particular property would be....
Unidentified Justice: You have to find somebody other than the state to clean up the sites.
Mr. Hermann: In many situations, reality forces us to recognize that the private parties are simply not in a position to do it.
In this case, New York spent over $2 million already, and the cleanup is only partial, and much remains to be done.
But we believe there is authority for it, and that authority relies on the administration expenses sections of the code, 503 and 506.
Furthermore, I would point out that the Bankruptcy Courts have continued since the enactment of the code in 1978 to apply this kind of public endangerment qualification, and Congress again has had an opportunity to reverse that, and has not done so.
Unidentified Justice: Mr. Hermann, I am puzzled by your response to Justice Powell, and I really can't think it through, perhaps, but are you contending, though, that the state's interest in recovering the cleanup costs... forget for a moment the costs of maintaining the guards, the temporary problem, but the large amount spent cleaning it up, are you contending that that comes ahead of the first lien in all--
Mr. Hermann: No, New York does not have a first lien statute, as New Jersey does.
New York is in the process of considering that.
As of now, New York does not have a first lien statute.
Unidentified Justice: --Do you disagree with the suggestion by one of your adversaries that the lienholder could make a selective foreclosure and just foreclose on the good assets, and just ignore the liability aspect?
Mr. Hermann: Yes, we do.
We disagree with that.
Unidentified Justice: I am not clear, then, on why you don't think they are able to foreclose.
How does the abandonment of the tainted oil affect their right to foreclose their land on the assets that have a value--
Mr. Hermann: It doesn't.
Unidentified Justice: --under your view?
Mr. Hermann: I don't believe it does.
Unidentified Justice: Maybe I have asked too much for the time... when you don't have any time.
I really don't understand your position.
Mr. Hermann: I don't believe it does.
Unidentified Justice: It doesn't affect it at all.
Mr. Hermann: No, I don't believe it does.
Unidentified Justice: Yes.
Chief Justice Burger: Your time has expired now, counsel.
ORAL ARGUMENT OF MARY CAROL JACOBSON, ESQ., ON BEHALF OF THE RESPONDENT IN NO. 84-805
Mr. Jacobson: Thank you, Mr. Chief Justice, and may it please the Court.
What the Third Circuit held, and what we seek to have affirmed here, is that abandonment cannot go forward without regard for public health and safety concerns.
The bank in this case has argued that this holding amounts to a taking of creditors' property.
There is nothing in the decision of the Third Circuit, however, which directly interferes with the rights of creditors.
Indeed, it remanded the priority issue for a complete factual proceeding in the Bankruptcy Court.
Unidentified Justice: I am not sure I track that, Ms. Jacobson.
It is going to cost millions of dollars to clean up this problem, and that absorbs all of the assets that the preferred creditors are looking to.
How do you way that that doesn't hurt them?
Mr. Jacobson: It is an issue... the effect on the creditors is something that we don't know at this point, because the Bankruptcy Court has not looked at that issue on remand.
Certainly on remand the state of New Jersey is going to make whatever arguments are available to say that the existing assets should be used for cleanup purposes, but how the Bankruptcy Court--
Unidentified Justice: Do you include... your insistence is that even with respect to the inventory that is covered by the bank loan, that that inventory could have been used by the trustee to clean up.
Mr. Jacobson: --We would make that argument before the Bankruptcy Court.
Unidentified Justice: Well, you are making it.
Mr. Jacobson: Yes.
Unidentified Justice: And do you think New York shares this view, that it could... that the... even the assets with a lien on it could be dissipated, not dissipated, but used to clean up?
Mr. Jacobson: New York in their brief raised the possibility that under Section 506(c) of the Bankruptcy Code, it is possible under some circumstances that the state through the state could reach the assets of secured creditors.
Unidentified Justice: And that is your view, too, I gather.
Mr. Jacobson: That is one of the views that we would press before the Bankruptcy Court.
The other is simply an equitable argument that goes to the issue that Justice Stevens raised, and that is whether or not it is equitable for the bank to be able to foreclose only on the claim property while the contaminated property essentially becomes a ward of the state.
Unidentified Justice: Well, Ms. Jacobson, assuming that what you say may well be correct as to the priorities, why should all this marshalling of assets discussion turn on whether or not the property is allowed to be abandoned?
I mean, isn't it more, as Justice O'Connor suggests, just a question of priorities of claims that really doesn't turn on whether or not abandonment is granted at all?
Mr. Jacobson: Well, it certainly goes beyond the abandonment issue.
The problem is raised in this case in the abandonment context, and we are seeking not only to have whatever assets of the estate available for cleanup, but as Mr. Hermann pointed out, we are seeking to have... to establish a principle that the trustee in bankruptcy who has custodial care of the estate cannot allow the estate to become a further hazard or further endanger the public throughout his custodial... during his custodial responsibilities.
Unidentified Justice: Are you saying that he cannot through the process of abandonment relieve himself of those custodial responsibilities?
Mr. Jacobson: We are saying that the Bankruptcy Court should not allow abandonment until the public health and safety concerns are addressed.
Unidentified Justice: That means your answer is yes.
Mr. Jacobson: And this may be different given any... given the particular circumstances of the case.
For example, if the landlords here were in a position to step in on the New Jersey site and take care of all the cleanup, that would be something that should have been put before the Bankruptcy Court, and if the abandonment had been conditioned upon landlords taking over and cleaning up the site, well, that is something that would have been acceptable to the state of New Jersey.
What we were seeking to enforce in the abandonment context was that all the assets of the estate, everything that was available to the trustee should have been used for cleanup purposes.
Unidentified Justice: May I interrupt with a question?
It seems to me that at least arguably there are two different issues on the cost.
One is the cleanup cost independently of avoiding the risk of further deterioration of the property.
You don't need guards.
Somebody has got to clean up what has been done in the past.
And secondly, the problem presented by guarding the property to be sure it doesn't get worse.
Do you think the costs of both of those items present the same legal question?
Mr. Jacobson: It seems to be part of the same continuum.
On an immediate basis, in the short term, before a decision can be made on abandonment, it is our position that the trustee does have the obligation to secure and stabilize the property.
Unidentified Justice: I understand that.
Does he also have the obligation to decide who is going to pay the cleanup costs, the full, total bill, the $ [= 2.5] million, before he allows abandonment?
Mr. Jacobson: That is an issue that we want to raise with the Bankruptcy Court.
The trustee certainly is limited--
Unidentified Justice: Well, then, are you agreeing that they do present separate issues?
The analysis regarding the guards and the cost of keeping, maintaining the property does not necessarily apply to recovering the $2.5 million, the total cleanup?
Mr. Jacobson: --Well, we see it as the threshold part of the same issue.
If you had a different hypothetical, for example, where all the cleanup could be done easily within the assets available to the estate, then it might be one and the same question.
At this point we have to face the reality of the situation, which is that there were limited assets in this estate, and that the cleanup was going to cost far beyond the available assets.
Unidentified Justice: Your view then, as I understand it, is that cleanup costs should take priority over all other claims of creditors.
Mr. Jacobson: That is the view that we want to press before the Bankruptcy Court.
Unidentified Justice: Well, if you just... considering that part of the problem of preventing further deterioration, if the trustee is going to have to maintain guards and what-not, that means that he can't abandon the property.
But he certainly isn't going to spend money on property that he has already abandoned.
Mr. Jacobson: That is correct.
Unidentified Justice: So it just means essentially that if you must spend... if you must prevent the property from deteriorating further, you just can't abandon it.
Mr. Jacobson: That's correct, and that's essentially what the Third Circuit held.
Unidentified Justice: Yes, it is.
Mr. Jacobson: That where you have an imminent public health and safety threat, you can't abandon property without regard to that threat.
Unidentified Justice: And you must use whatever assets that's available to the trustee to prevent that hazard.
Mr. Jacobson: That is an implication of the decision which--
Unidentified Justice: A pretty strong one.
Mr. Jacobson: --which absent factual findings it is hard to play out in this case.
The taking issue itself is an issue in the area of law which requires expensive factual findings.
It is our position that they simply aren't present in this case, and that the issue therefore is not before the Court.
As the representative of the estate, the trustee certainly had an obligation to the public to prevent that estate from becoming a public danger.
In this situation, we did have a case where the property was getting increasingly worse throughout the trusteeship.
In the Kovaks decision decided last term by this Court, it was explicitly stated that the trustee must comply with state law.
The court was also careful to point out that the Kovaks decision did not give bankrupts, debtors a license to pollute, nor, do we submit, does the Kovaks decision give the trustee a license to exacerbate an already dangerous situation.
In the Kovaks case, the debtor there had been completely dispossessed by the property, dispossessed from the property, and all that remained for him to do was to pay a money judgment.
In this case, the trustee had complete management control of the premises, a situation very different from Kovaks, and it is our position that the trustee had an obligation to use that management control to protect the public.
He had to consider the public interest as well as the interest of creditors.
The Kovaks case, of course, did not squarely have the abandonment issue before it.
It did not have a situation of imminent public health and safety such as is involved in this case.
When the Court looks at the factual situation here and the danger involved to the public, we submit that it should affirm the ruling of the Third Circuit.
One thing that was raised earlier was, why couldn't the landlords or some other party, including the state, step in to take the remedial action that was necessary.
In this case, the state sought to have whatever responsible parties it could find take remedial action on the site.
We did seek enforcement activities against the landlords, but as the documents filed with the Court by the Solicitor General demonstrate, those efforts came to naught.
Again, the Bankruptcy Court did not look at the environmental health and safety concerns at all.
In regard to the state participation in this matter, the funds were simply not available in New Jersey in 1981 to step in and take the remedial action that was necessary on this property.
Unidentified Justice: Could I ask you, why do you think that the costs of cleanup or of avoiding some public health hazard should be paid by the secured and unsecured creditors?
It is one thing, I suppose, if there were an equity in the property to make the stockholders pay for it, but just by definition this is a bankrupt company.
It is insolvent.
The stockholders no longer have an interest.
There are no assets available to them whatsoever.
Why do you... you think it is... you say that it is equitable to saddle the creditors with the expense.
Do you think just because they have been dealing with the company?
They took the risk?
Mr. Jacobson: Well, in this case the creditors certainly did take the risk.
At the time the bank--
Unidentified Justice: Both the secured and unsecured creditors?
Mr. Jacobson: --Certainly the secured creditor in this case, Midlantic National Bank.
At the time they made the loan, it was June of 1981.
At that time all of the state and federal environmental statutes had been in place for many years.
Unidentified Justice: Were there any wage claims in this case, do you know?
Mr. Jacobson: --I don't know.
Unidentified Justice: But you say that regardless of who the unsecured creditor is, his claim should be subordinated to the administrative expense of cleaning up.
Mr. Jacobson: That's correct, Your Honor.
The reach of the police power is very great, as this Court has recognized, sometimes so great that even the destruction of property interests are allowed.
In the Miller Versus Shoen case, for example, the owners of those cedar trees that were endangering the apple orchard next door had to have all those cedar trees destroyed to protect the apple orchard.
Society makes different choices, and the legislature of New Jersey and the Congress have decided that the environment--
Unidentified Justice: Of course, you would have to be... you certainly would be implying quite a variation in the priority structure of the Bankruptcy Act.
It certainly isn't express that these kinds of expenses would be--
Mr. Jacobson: --But the Bankruptcy Code is known for its equity and its flexibility, and when it is faced with a situation--
Unidentified Justice: --Well, you are just saying... you are saying, yes, you have to be an implied, but that there is... it certainly is the right approach because of the equitable powers of the court.
Mr. Jacobson: --Because of the equitable powers of the Bankruptcy Court.
The equitable powers of the Bankruptcy Court in the past were used to address public endangerment problems.
Under the common law in the cases that we sited, the Ottenheimer case and the Lewis Jones case, the bankruptcy laws were made flexible enough to take into account public danger, even at the expense of creditors.
What the states are seeking here is to enforce the most classic of their police powers, and that is the protection of the public through the prevention and control of serious public nuisances.
Unidentified Justice: But as between the bank and the state, who had the opportunity to correct this earlier?
Mr. Jacobson: As to the bank?
Unidentified Justice: As between the bank and the state.
The state... you have been talking about the police powers, the state.
Mr. Jacobson: Right.
Well, in this situation--
Unidentified Justice: The bank has put some money in here.
Mr. Jacobson: --In this situation the--
Unidentified Justice: Should the bank be monitoring this thing, or should the state?
Mr. Jacobson: --Both the bank and the state have to monitor the situation, the bank because it is interested in protecting its property and should be interested in what the person it loaned the money--
Unidentified Justice: What police powers does the bank have?
Mr. Jacobson: --The bank does not have the police powers of the state, and it is a balancing test, as the Third Circuit held, and you have to look at the rights of secured creditors and what they knew or should have known at the time they made this loan to Quanta.
In addition to the regulatory background that was in place when the loan was made, there was also outstanding administrative consent orders against Quanta ordering cleanup.
The bank knew or should have known about these things, and this should have been factored into their decision.
They made a business risk, and it is the position of the states that that risk should not be transferred to the public.
Chief Justice Burger: Thank you, counsel.
The case is submitted.