In re Indus. Salvage, Inc.
| Decision Date | 06 June 1996 |
| Docket Number | Bankruptcy No. 93-40767,93-40768. Adv. No. 95-4107,95-4108. |
| Citation | 196 BR 784 |
| Parties | In re INDUSTRIAL SALVAGE, INC., Debtor. INDUSTRIAL SALVAGE, INC., Plaintiff, v. The PEOPLE OF the STATE OF ILLINOIS, Defendant. In re John PRIOR. John PRIOR, Plaintiff, v. The PEOPLE OF the STATE OF ILLINOIS, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
Robert T. Bruegge, Edwardsville, IL, for Plaintiffs.
Thomas Davis, Asst. Attorney General, State of Illinois, Springfield, IL, for Defendant.
These adversary proceedings present the common issue of whether the debtors' obligation to effect closure of three landfills and to abate or mitigate environmental damage caused by the lack of proper closure constituted a "claim" under 11 U.S.C. § 101(5) that was discharged by confirmation of the debtors' Chapter 11 plans. See 11 U.S.C. § 1141(d). The debtors contend that because compliance with the administrative order mandating closure of the landfills would require an expenditure of money by the debtors, it imposed a monetary obligation that was discharged as a "claim." The government responds that, rather than exacting a money payment from the debtors, the cleanup order granted equitable relief for which there was no alternative right to payment and thus imposed an obligation that survived the debtors' bankruptcy. In addition, the government asserts that because the environmental problems giving rise to the administrative cleanup order are ongoing and have continued beyond the debtors' discharge to the present time, the debtors cannot escape liability by reason of such discharge.
The facts are undisputed. On October 15, 1993, debtors John Prior and Industrial Salvage, Inc., filed for relief under Chapter 11 of the Bankruptcy Code. John Prior owned three landfills in Marion County, Illinois, known as the Centralia/Prior, Prior/Blackwell, and Industrial Salvage sites. The Industrial Salvage site had been operated through a permit issued to Industrial Salvage, Inc., a corporation of which Mr. Prior is the sole shareholder and president. At the time of bankruptcy, no waste disposal operations were being conducted at the landfills, having ceased at the Centralia/Prior and Prior/Blackwell sites in June 1987 and at the Industrial Salvage site in December 1989.
On December 8, 1993, the State of Illinois, acting at the request of the Illinois Environmental Protection Agency, began an enforcement action regarding these landfills before the Illinois Pollution Control Board ("Board").1 In its complaint, the State alleged that the debtors had failed to close the landfills in a manner that would control post-closure releases, as required by the Illinois Environmental Protection Act ("Act") and the Board's waste disposal regulations,2 and that this failure had resulted in pollution from leachate3 flows into the public waters.
In accordance with these findings, the Board ordered the debtors to immediately complete closure of the Centralia/Prior and Prior/Blackwell sites and to correct nonconforming conditions and initiate closure of the Industrial Salvage site. Id. at 25. Noting that the State had waived any monetary penalties against the debtors because of their pending bankruptcy proceedings, id. at 21, the Board limited its order to requiring the debtors to close the three sites and comply with reporting requirements regarding such closure. Id. at 21, 24-25. In addition, the Board directed the debtors to post financial assurance guaranteeing their performance as required by the Act and Board regulations. Id. at 25. The Board further revoked the debtors' development permit for the Industrial Salvage site because of the severity of the debtors' past and present violations and the threat to public health and the environment. Id.
Meanwhile, the debtors' reorganization proceedings continued, and their Chapter 11 plans were confirmed in June 1995 (John Prior) and August 1995 (Industrial Salvage, Inc.). Although the debtors' plans made no provision for the landfills at issue, their intention regarding the Industrial Salvage landfill was set forth in John Prior's disclosure statement, which indicated that the debtors would hire an individual to determine from the State "exactly what violations exist at the landfill" and seek a buyer "who can rectify the problems and purchase it `as is.'" Discl. St. of John Prior, filed April 4, 1995, at 5. Such a sale, Mr. Prior declared, would result in "a significant payment to the estate," since the net proceeds from the sale "would be available to the debtor's estate." Id.
Notwithstanding the debtors' intention, the Industrial Salvage landfill was not sold, and, in December 1995, following confirmation of the debtors' plans and entry of the Board's order, the debtors filed the present dischargeability actions. In these actions, the debtors argue that the Board's order requiring closure of the subject landfills imposed a financial burden constituting a "claim" in the debtors' bankruptcy proceedings. In support, the debtors cite a reference in the Board's order to cost estimates for closure and post-closure care of the landfills.4See Order, at 3-4. Further, the debtors note that the order required the debtors to post financial assurance guaranteeing their performance of the closure obligation. See id., at 15, 25. These provisions, the debtors contend, demonstrate that the environmental problems giving rise to the cleanup order are "something money will fix," rendering their obligation to close the landfills a financial obligation. In addition, the debtors point to the Board's statement that "it is technically practicable to alleviate the environmental problems referred to in the order through proper closure and post-closure care and monitoring." See Order, at 22. From this, the debtors reason that the problems referred to in the Board's order could have been "fixed permanently" prior to confirmation by an expenditure of money and that the order, therefore, imposed a monetary obligation that was discharged as a "claim" under 11 U.S.C. § 1141(d).
11 U.S.C. § 101(5)(A), (B). Under this definition, a "claim" includes two kinds of obligations: those involving purely legal rights, such as for money or damages, and those for which breach entails an equitable remedy — but only if such breach also gives rise to a right to payment. Thus, an equitable obligation constitutes a "claim" under § 101(5)(B) only if money can be substituted for the performance of such obligation.
An environmental cleanup order such as that in the present case, while affording equitable or injunctive relief, may nevertheless qualify as a "claim" under § 101(5)(B) if the government seeks to enforce the order by proceeding against the debtor's assets or if, under the operative statute, the government has the option of cleaning up the pollution itself and seeking reimbursement from the debtor. See generally Kathryn R. Heidt, Environmental Obligations in Bankruptcy: A Fundamental Framework, 44 Fla.L.Rev. 153, 173-74 (1992). In such circumstances, the debtor's affirmative obligation to perform a cleanup is transformed into a right to payment in favor of the government. Thus, in Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985), the court found that the debtor's obligation under an injunction requiring removal of hazardous wastes from his property was transformed into a "right to payment" when the government, prior to bankruptcy, obtained appointment of a receiver to complete the cleanup and then sought money from the debtor to fund the cleanup. Since the debtor, having been dispossessed, could no longer clean up the property himself, the court ruled that the only performance sought by the government was the payment of money and that the debtor's obligation under the cleanup order had been reduced to a monetary claim that was dischargeable in bankruptcy. Id., at 283, 105 S.Ct. at 710.
The court in In re Chateaugay Corp., 944 F.2d 997 (2d Cir.1991), extended the rule of Kovacs, finding that an order seeking injunctive relief against the debtor nevertheless constituted a "claim" when the statute under which it was imposed allowed the government to effect the cleanup itself and seek "recovery costs" against the debtor. Id., at 1008. Even though the government had not yet performed such a cleanup but had only an optional right to do so, the court reasoned that its decision not to exercise the right to payment in no way negated the existence of that right. Id.; see In re Chateaugay, 112 B.R. 513, 522 (S.D.N.Y.1990). Thus, the government's...
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