Torwico Electronics, Inc., In re, 93-5021

• Decision Date: 25 October 1993
• Docket Number: No. 93-5021,93-5021
• Citation: 8 F.3d 146
• Parties: , 62 USLW 2281, 30 Collier Bankr.Cas.2d 86, 24 Bankr.Ct.Dec. 1394, Bankr. L. Rep. P 75,487, 24 Envtl. L. Rep. 20,016 In re TORWICO ELECTRONICS, INC., Debtor. TORWICO ELECTRONICS, INC., Appellant, v. STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION.
• Court: U.S. Court of Appeals — Third Circuit

Page 146

8 F.3d 146

37 ERC 1809, 62 USLW 2281, 30 Collier

Bankr.Cas.2d 86,

24 Bankr.Ct.Dec. 1394, Bankr. L. Rep. P 75,487,

24 Envtl. L. Rep. 20,016

In re TORWICO ELECTRONICS, INC., Debtor.

TORWICO ELECTRONICS, INC., Appellant, v. STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION.

No. 93-5021.

United States Court of Appeals, Third Circuit.

Argued Aug. 3, 1993.

Decided Oct. 25, 1993.

Robert J. Del Tufo, Atty. Gen., Joseph L. Yannotti, Asst. Atty. Gen., Rachel Jeanne Lehr (argued), Deputy Atty. Gen., Trenton, NJ, for appellee.

Timothy P. Neumann (argued), David E. Shaver, Wood, Broege, Newmann & Fischer, Manasquan, NJ, for appellant.

Before: STAPLETON, HUTCHINSON and ROTH, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge.

This case involves an attempt by the State of New Jersey to force Torwico Electronics, a debtor in chapter 11 bankruptcy, to comply with its obligations under state and federal environmental laws. Torwico asserts that these obligations are "claims," within the meaning of 11 U.S.C. § 101(5), and that, because the state failed to timely file a proof of claim, it is no longer responsible for them. The state claims that what is involved here are regulatory obligations, not bankruptcy claims. The bankruptcy court decided the issue in Torwico's favor, but was reversed by the district court. We conclude that the district court adopted the correct approach to this issue and will affirm.

I.

Torwico Electronics conducted a manufacturing business from a location in Ocean County, New Jersey until September 1985 when it moved to a new location. The Ocean County site ("the property") was owned by George Allen Associates and was leased to Torwico during the time Torwico did business at that address.

On August 4, 1989, Torwico filed for chapter 11 bankruptcy and listed the New Jersey Department of Environmental Protection and Energy (NJDEPE) on its schedules as a creditor with a disputed and unliquidated claim. On October 4, 1989, the bankruptcy court sent notice to all creditors, including NJDEPE, of Torwico's Chapter 11 bankruptcy and informed them that the last day to file a proof of claim was January 2, 1990. The following month, on November 13, 1989, NJDEPE performed an on-site inspection of the property and found a hidden illegal seepage pit containing hazardous wastes--wastes which were allegedly migrating into local waters. NJDEPE also found that Torwico was operating at its new site without the identification number required by EPA. NJDEPE immediately issued three notices of violation to Torwico, one concerning the failure to obtain a new identification number at the new place of business, and the others concerning the hazardous wastes found at the property. Torwico claims no knowledge of the seepage pit and the wastes found there.

The January 2, 1990 deadline for filing a proof of claim passed without any filing by NJDEPE. While Torwico did obtain an ID number for its new place of business, it did nothing about the seepage pit at the property. On April 9, 1990, NJDEPE issued an Administrative Order and Notice of Civil Administrative Penalty Assessment to Torwico relating to the violation noted in November 1989. The Order required Torwico to submit a written closure plan for the seepage pit and assessed a $22,500 penalty for failure to take action following the November notice. The Order also stated: "No obligations imposed [by this order] ... are intended to constitute a debt, damage claim, penalty or other civil action which should be limited or discharged in a bankruptcy proceeding. All obligations are imposed pursuant to the police powers of the State of New Jersey, intended to protect the public health, safety, welfare, and environment."

Torwico and NJDEPE filed cross-motions for summary judgment before the bankruptcy court, with Torwico seeking to avoid its obligations to the state by claiming that they were claims barred by the absence of a filing prior to the bar date. The court agreed with Torwico and released the company from its obligations because NJDEPE had failed to timely file a proof of claim. On appeal, the district court reversed, 153 B.R. 24. Torwico then filed this appeal. ¹

II.

A.

Because debts are dischargeable in Chapter 11, critical to the resolution of this case is whether Torwico's obligations constitute a "debt" under the bankruptcy code. A "debt" is defined as a "liability on a claim." 11 U.S.C. § 101(12) (1988). A "claim," in turn, is defined in part as a:

(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.

11 U.S.C. § 101(5) (1988). Torwico contends that this broad definition clearly encompasses its obligations to the state under the administrative order and the state statute pursuant to which it was issued. NJDEPE, on the other hand, contends that it has no "right to payment"; rather, it has only the right to enforce laws requiring Torwico to clean up the hazardous wastes it is responsible for under state law.

Both sides agree that a proper interpretation of the Supreme Court decision in Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985) is instrumental in resolving this case. In Kovacs, the state of Ohio obtained an injunction against Kovacs requiring him, inter alia, to clean up hazardous wastes on his property. When Kovacs failed to comply, the state obtained a court order appointing a receiver for the property. The receiver was directed to take possession of the property, as well as other assets, and complete the cleanup. After the receiver was appointed, but before he completed the cleanup, Kovacs filed for personal bankruptcy. The state, seeking to obtain some of Kovacs' post-bankruptcy income for use in paying for the cleanup, argued that Kovacs' obligation to clean up the property under the state's environmental laws was not a "debt" (or, in other words, that the state had no "claim") and was not dischargeable. The Supreme Court disagreed.

After looking at the definition of "claim" and the legislative history, the Court concluded that the state had a "right to payment" and thus possessed a "claim." It noted that Kovacs no longer had possession of the site nor control over the cleanup; all the state sought from Kovacs was money to fund the cleanup. In essence, the Court found that Kovacs' obligation had been reduced to a monetary claim. In reaching its decision, the Court noted a number of issues it was not deciding:

We do not address what the legal consequences would have been had Kovacs taken bankruptcy before a receiver had been appointed and a trustee had been designated with the usual duties of a bankruptcy trustee.... [W]e do not hold that the injunction against bringing further toxic wastes on the premises or against any conduct that will contribute to the pollution of the site or the State's waters is dischargeable in bankruptcy; we here address ... only the affirmative duty to clean up the site and the duty to pay money to that end.... [W]e do not question that anyone in possession of the site ... must comply with the environmental laws of the State of Ohio. Plainly, that person or firm may not maintain a nuisance, pollute the waters of the State or refuse to remove the source of such conditions.

Id. at 284-85, 105 S.Ct. at 710-11.

Torwico contends that Kovacs applies here: Torwico's "affirmative duty to clean up the site and the duty to pay money to that end" is a claim. In addition, Torwico is no longer in possession of the site and thus, the Court's admonition that parties in possession "must comply with the environmental laws of the State" and cannot "refuse to remove" hazardous wastes does not apply to it. NJDEPE contends that Kovacs is inapplicable here because it does not seek a monetary judgment, but rather seeks to remedy ongoing pollution by forcing Torwico to clean up the site.

B.

Considerable insight into the issue presented here may be gleaned from two recent appellate cases that have dealt with similar questions. In In re CMC Heartland Partners, 966 F.2d 1143 (7th Cir.1992), the debtor owned a hazardous waste site and went through bankruptcy under the Bankruptcy Act of 1898. Subsequently, EPA issued an order pursuant to CERCLA § 106, 42 U.S.C. § 9606, to the debtor, who still owned the site, requiring removal and remediation activity. The Seventh Circuit Court of Appeals held that the order, which was based on ownership of the land, survived reorganization. The court noted that "[t]o the extent [the relevant federal statutory sections] require a person to pay money today because of acts before or during the reorganization proceedings, CERCLA creates a 'claim' in bankruptcy." Id. at 1146. However, by authorizing cleanup orders to current owners, CERCLA § 106 creates a claim "running with the land," and a "statutory obligation attached to current ownership of the land survives bankruptcy." Id. at 1147. Thus, the court found in favor of EPA, but warned that EPA must show under § 106 that the releases were "threatened or ongoing"; otherwise, one might conclude that EPA merely "repackage[d] a forfeited claim for damages." Id.

In In re Chateaugay, 944 F.2d 997 (2d Cir.1991), the court faced the issue of what constituted a claim in the context of the bankruptcy of LTV, an entity that owned and operated literally dozens of hazardous waste sites. The Second Circuit held that the EPA's costs of responding to a release of hazardous waste, even if not yet incurred at the time of bankruptcy, involved claims; thus, EPA was forced to file a proof of claim with respect to these costs...