Abandonment of Contaminated Land A Toxic Quandary
The Midlantic Decision
In Midlantic, a debtor with facilities in New York and New Jersey processed waste oil.3 Prior to bankruptcy, the New Jersey Department of Environmental Protection (NJDEP) discovered that the debtor had violated a specific prohibition in its operating permit by accepting more than 400,000 gallons of oil contaminated with polychlorinated biphenol (PCB), a highly toxic carcinogen.4 The NJDEP ordered the debtor to cease operations and clean up the site; however, before undertaking any cleanup efforts, the debtor filed a voluntary chapter 11 petition.5 After the petition was filed, it was discovered that the debtor was also storing more than 70,000 gallons of PCB-contaminated oil in deteriorating and leaking containers at the New York facility.6
The case was later converted to a chapter 7, and a chapter 7 trustee was appointed. Following unsuccessful efforts to sell the debtor's property, the trustee moved to abandon both the New York and New Jersey facilities.7 The city and state of New York (collectively, "New York") objected, citing the threat to public health and the various violations of state and federal environmental law. The bankruptcy court approved the abandonment, reasoning that New York was in a better position than either the debtor's creditors or the chapter 7 trustee to protect the public from the environmental hazards created by the contaminated properties.8 The Third Circuit reversed the decision of the bankruptcy court. By this time, New York had already expended $2.5 million in the remediation of the property. (The Midlantic opinion did not address New York's administrative expense claim for the remediation costs.)
The Supreme Court ultimately affirmed the Third Circuit, holding that a trustee may not abandon property when doing so violates state law that is "reasonably designed to protect the public health or safety from identified hazards."9 The court, speaking through Justice Powell, admonished bankruptcy courts, when authorizing the abandonment of environmentally impacted property, to formulate conditions that will adequately protect the public's health and safety.10
In reaching this decision, the court weighed the Supremacy Clause issue implicated by the conflict between the federal statute allowing for abandonment and the state environmental law and found that Congress did not intend §554(a) of the Code to pre-empt all nonbankruptcy law, especially laws designed to protect the public health and safety. The court noted that, prior to the 1978 revisions to the Bankruptcy Code, a judicially developed rule had limited the trustee's abandonment power when it violated legitimate federal and state interests.11 Under this doctrine, when state law or "general equitable principles" exist to protect the public interests, these interests are not overridden by the judge-made abandonment power.12 The Midlantic court presumed that when Congress codified this power under §554(a), it included the corresponding limitation.13 Justice Powell reasoned that if Congress had wished to provide the trustee with an exemption from nonbankruptcy law by granting an unlimited abandonment power, it could have clearly expressed this desire in the language of the statute.14
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the government is empowered to take action necessary to "avert imminent and substantial endangerment to the public health or welfare of the environment because of an actual or threatened release of a hazardous substance."15 Congress's repeated emphasis on "its goal of protecting the environment against toxic pollution" is supportive of the restraint on the abandonment power in cases where the public health and safety is threatened.16 Basically, the power of abandonment under §554 does not give the trustee "carte blanche" to abandon property without regard to nonbankruptcy law.17
Midlantic in Practice
Midlantic was decided in 1986; since then, courts have followed its direction, allowing abandonment under the guidance given in footnote 9, which stated that "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."18 The Midlantic exception has generally been limited to situations where "there is a serious health risk, not where the hazards are speculative or may await appropriate action by an environmental agency."19 Courts have cited the lack of action by a state or federal agency to enforce compliance or report a violation as indicative of the lack of threat to the public health or safety.20 Under these principles, the "Midlantic exception" has been construed very narrowly. In fact, abandonment may still be allowed in the face of a state law violation if the violation is not causing an imminent or identifiable harm.21
Administrative Priority for Clean-up Costs
What happens when the Midlantic rule prevents abandonment by the trustee? The debtor is not allowed to simply possess the property in continuous violation of state law.22 The property must be remediated. The party that undertakes the remediation will in most circumstances be entitled to a first-priority administrative expense claim for the costs of the cleanup. However, priority status should only be granted for actual costs incurred post-petition that were deemed necessary to preserve the estate; potential costs, which may be incurred post-bankruptcy, have been held to be too speculative in nature to constitute an administrative expense.23 Once the remediation has been completed and the imminent harm removed, the trustee may then be able to abandon the property. At this stage, courts may differ on the level of compliance with state environmental law required to allow an abandonment to proceed. As will be discussed below, the length of time the case has been pending and the trustee's inability to locate a remediation source may strengthen the trustee's argument for abandonment.
The Longer the Case "Pends," the Easier to Abandon Contaminated Property? The Guterl Decision
In one of the more recent cases dealing with the Midlantic exception, the U.S. Bankruptcy Court for the Western District of Pennsylvania authorized the abandonment of property where enriched uranium was once processed in connection with the production of atomic and nuclear weapons. In In re Guterl Special Steel Corp.,24 the trustee's motion to abandon the radioactively contaminated property was initially denied based on the Midlantic exception, with Judge Markovitz finding that the contamination posed an "imminent threat to public health and safety."25 The trustee then attempted unsuccessfully to convince several federal agencies to fund the cleanup of the property. Some eight years after the denial of the initial motion to abandon the property, the trustee filed a second abandonment motion.26 This time the court authorized the abandonment.27
In its holding, the bankruptcy court noted that the Guterl cases had been pending for some 22 years and that "unlike fine wine, they have not improved with age."28 The court considered the fact that for numerous years the trustee had endeavored to find a remediation source without success and that the estate had no ability to fund the $17 million remediation project that would be required to bring the property into compliance with state and federal environmental laws. In seeking a solution to this 22-year saga, the Guterl court observed that in Midlantic the Supreme Court had reserved the question of whether abandonment can be authorized if a state environmental law is deemed to be so onerous as to completely "stymie" the bankruptcy process. The Guterl court answered this question affirmatively and thereby created an avenue for future courts to further narrow the application of the Midlantic exception. The longer a trustee holds on to contaminated property, the greater his or her chances are in obtaining an abandonment order.
1 John Ames is Board Certified in Business Bankruptcy Law by the American Board of Certification. The authors wish to acknowledge Alisa C. Peters, Vanderbilt School of Law class of 2006, who provided assistance in the writing of this article. Return to article
27 Prior to the first abandonment motion, the Guterl cases had already been pending for approximately 14 years while a chapter 11 trustee and later a chapter 7 trustee worked through the complex issues created by the toxic property. Return to article