944 F.2d 997 (2nd Cir. 1991), 90-5034, In re Chateaugay Corp.

Docket Nº:90-5034, 90-5038, 90-5040 and 90-5042.
Citation:944 F.2d 997
Party Name:Bankr.Cas.2d 620, 21 Envtl. In re CHATEAUGAY CORPORATION; Reomar, Inc.; The LTV Corporation, et al., Debtors. UNITED STATES of America, Plaintiff-Appellee, Plaintiff-Appellant, Cross-Appellee, v. The LTV CORPORATION, Defendant-Appellee-Cross-Appellant, The Committee of Equity Security Holders of the LTV Corporation, Defendant-Appellant. STATE OF NE
Case Date:September 06, 1991
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 997

944 F.2d 997 (2nd Cir. 1991)

Bankr.Cas.2d 620,

21 Envtl.


Corporation, et al., Debtors.

UNITED STATES of America, Plaintiff-Appellee,

Plaintiff-Appellant, Cross-Appellee,


The LTV CORPORATION, Defendant-Appellee-Cross-Appellant,

The Committee of Equity Security Holders of the LTV

Corporation, Defendant-Appellant.

STATE OF NEW YORK, Plaintiff-Appellant-Cross-Appellee,


LTV STEEL COMPANY, INC., Defendant-Appellee-Cross-Appellant,

The Committee of Unsecured Creditors of the LTV Steel

Company, Inc., Cross-Appellant.

Nos. 1076 to 1082, Dockets 90-5024, 90-5028, 90-5030,

90-5034, 90-5038, 90-5040 and 90-5042.

United States Court of Appeals, Second Circuit

September 6, 1991

Argued Feb. 4, 1991.

Page 998

Richard W. Mark, Asst. U.S. Atty., New York City (Otto G. Obermaier, U.S. Atty., Richard M. Schwartz, James L. Garrity, Jr., Edward T. Ferguson, III, Asst. U.S. Attys., New York City; Richard B. Stewart, Asst. Atty. Gen., Vicki L. Plaut, Appellate Sec., Joel M. Gross, Environmental Enforcement Sec., U.S. Dept. of Justice, Washington, D.C.; Leonard Shen, John Wheeler, and Jon Averback, U.S. E.P.A., Washington, D.C., on the brief), for plaintiff-appellee, plaintiff-appellant-cross-appellee.

Norman Spiegel, Asst. Atty. Gen., New York City (Robert Abrams, Atty. Gen., Nancy Stearns, Asst. Atty. Gen., New York City, on the brief), for plaintiff-appellant-cross-appellee State of New York.

Karen E. Wagner, New York City (Lewis B. Kaden, Christine Gatto, Daniel M. Mandil, Davis Polk & Wardwell, New York City; Herbert S. Edelman, Kaye, Scholer, Fierman, Hays & Handler, New York City, on the brief), for defendants-appellees-cross-appellants.

Brian M. Cogan, New York City (Lawrence M. Handelsman, Martin S. Baker, Mark A. Speiser, Diane Dresdale, Karen S. Jore, Stroock & Stroock & Lavan, New York City, on the brief), for cross-appellant.

Page 999

James E. Daniels, New York City (Edgar H. Booth, Donald L. Kuba, Mary S. Zitwer, Thomas A. Draghi, Warshaw Burstein Cohen Schlesinger & Kuh, New York City, on the brief), for defendant-appellant.

Michael H. Reed, Francis J. Lawall, James S. Lawlor, Pepper, Hamilton & Scheetz, Philadelphia, Pa., submitted a brief on behalf of amici curiae Commonwealths of Pa. and Ky. and the States of Ariz., Conn., Me., Md., Mo., N.J., N.C., R.I., S.C., and Vt.

Before NEWMAN and ALTIMARI, Circuit Judges, and CONBOY, District Judge. [*]

JON O. NEWMAN, Circuit Judge:

This appeal presents important issues at the intersection of bankruptcy law and environmental law. The issues arise on an appeal and a cross-appeal from the March 26, 1990, judgment of the District Court for the Southern District of New York (John E. Sprizzo, Judge) in connection with the Chapter 11 reorganization of the LTV Corporation and its related companies (collectively "LTV"). The United States, New York, and the Committee of Equity Security Holders of the LTV Corporation ("Equity Holders") appeal from the judgment to the extent that it holds that "response costs" incurred by the United States Environmental Protection Agency ("EPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. (1988), are pre-petition "claims," dischargeable in bankruptcy, regardless of when such costs are incurred, as long as they concern a release or threatened release of hazardous substances that occurred before the debtor filed its Chapter 11 petition. In re Chateaugay Corp., 112 B.R. 513 (S.D.N.Y.1990). LTV Corporation, LTV Steel Company, Inc., and the Committee of Unsecured Creditors of LTV Steel Company, Inc. ("Unsecured Creditors") cross-appeal from the judgment to the extent that it holds that the debtor's obligation to operate and maintain facilities it owns or operates as required by environmental laws, regardless of when the offending condition arose, is not dischargeable and that CERCLA response costs incurred during the bankruptcy at sites owned or operated by the debtor constitute expenses of administration entitled to priority. Id. We affirm.


LTV is a diversified steel, aerospace, and energy corporation with operations in several states. LTV filed a bankruptcy petition under Chapter 11 on July 16, 1986. The debtor's schedule of liabilities included 24 pages of claims, labeled "contingent," that were held by EPA and the environmental enforcement officers of all fifty states and the District of Columbia. The schedule provided no details concerning these claims. EPA filed a proof of claim for approximately $32 million, representing response costs incurred pre-petition at 14 sites where LTV had been identified as a "potentially responsible party" ("PRP") under CERCLA. See 42 U.S.C. § 9607(a) (1988). EPA alleges that only one of these sites has reached the point where no further response costs are anticipated, and that the 14 sites are not necessarily all of the sites for which LTV might ultimately be determined to be a PRP. Thus, the $32 million in incurred response costs might be only a small fraction of the total CERCLA liability that EPA will ultimately assert against LTV.

Appreciating the distinction between the listed contingent claims and the claim for incurred response costs requires some understanding of the framework for recovery of CERCLA response costs. Section 104 of CERCLA authorizes EPA to take "any ... response measure consistent with the national contingency plan which [EPA] deems necessary to protect the public health or welfare or the environment" whenever "any hazardous substance is released or there is a substantial threat of such a release into the environment...."

Page 1000

Id. § 9604(a). Upon identification of a release or threatened release, EPA makes an investigation to determine if the environmental risk is of sufficient severity to warrant inclusion of the site on the National Priorities List. Thereafter, EPA selects an appropriate remedy and can either order the potentially responsible party to take the remedial action under section 106(a), id. § 9606(a), or take the remedial action itself, using so-called Superfund money, and seek reimbursement for such response costs under section 107(a), id. § 9607(a), after the costs have been incurred.

With respect to the listed contingent claims, i.e., those for which response costs had not been incurred pre-petition, LTV informed the Government that it expected confirmation of a reorganization plan to discharge all obligations of LTV concerning environmental liabilities that are traceable to pre-petition conduct of LTV, including obligations for response costs that are incurred post-confirmation. In disagreement with that position, the Government brought an adversary proceeding for a declaratory judgment that response costs incurred post-confirmation are not dischargeable because they do not arise from pre-petition claims. In the Government's view, it does not have a "claim" within the meaning of the Bankruptcy Code, 11 U.S.C. § 101(4) (1988), for reimbursement of CERCLA response costs until those costs have been incurred.

On the primary issue between the parties, the District Court ruled substantially in favor of LTV. Judge Sprizzo did not go quite so far as to consider response cost claims to be dischargeable whenever based on LTV's pre-petition conduct, a position that would have included LTV's pre-petition conduct of placing hazardous substances in sealed containers, followed by release of the substances into the environment years after confirmation. However, he agreed with LTV to the extent of ruling that an obligation to reimburse EPA for response costs is a dischargeable claim whenever based upon a pre-petition release or threatened release of hazardous substances. This ruling covers releases that have occurred pre-petition, even though they have not then been discovered by EPA (or anyone else).

The Court then considered which environmental claims based on injunctions were dischargeable. Applying that portion of the Code definition of "claim" that includes a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment," id. § 101(4), Judge Sprizzo stated that claims for injunctive relief based on a pre-petition release or threatened release would be dischargeable if the injunctive relief was an option EPA was electing to use in lieu of incurring response costs itself and thereafter seeking reimbursement; on the other hand, he continued, "where there is no right to such payment for cleanup or other remedial costs, claims for injunctive relief do not fall within the Bankruptcy [Code] and are not dischargeable." 112 B.R. at 523.

This deceptively simple statement perhaps obscures difficult questions of application because it is not clear which forms of injunctive relief Judge Sprizzo regards as being an option to EPA's right of response cost reimbursement and which entail "no right to such payment." As an example of the latter category, the District Judge cited section 106 of CERCLA, yet this is the provision the Government views as its alternative remedy to incurring and seeking reimbursement for response costs under section 107. Brief for United States at 13. In any event, it is clear that Judge Sprizzo intended to render nondischargeable some forms of injunctive relief that go far beyond merely ordering LTV to stop a release or threatened release of hazardous substances. He expressly rejected LTV's contention that an injunctive provision should be dischargeable "merely because the debtor would be required to expend money in order to comply with the injunction," 112 B.R. at 523, and observed, "To accept that argument would render dischargeable any claims for injunctive...

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