In re Lazar
| Decision Date | 03 September 1996 |
| Docket Number | Bankruptcy No. LA 92-39039SB,LA 92-39042 SB. Adv. No. LA 96-01575 SB. |
| Citation | 200 BR 358 |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re Gary LAZAR and Divine Grace Lazar, Debtors. In re CALIFORNIA TARGET ENTERPRISES, INC., et al., Debtors. George E. SCHULMAN, Chapter 7 Trustee, Plaintiff/Petitioner, v. CALIFORNIA STATE WATER RESOURCES CONTROL BOARD, et al., Defendants/Respondents. |
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David Gould, Mary Ellen Hogan, McDermott, Will & Emory, Los Angeles, CA, for debtors.
Daniel E. Lungren, Attorney General of the State of California, Charles W. Getz, IV, Assistant Attorney General, William S. Abbey, Deputy Attorney General, Los Angeles, CA, for California State Water Resources Control Board.
This adversary proceeding raises the issue of whether a chapter 7 trustee can be compelled to litigate in state court the denial of his administrative claim filed against the California Underground Storage Tank Cleanup Fund ("the Fund"), where the denial was based on the prepetition misconduct of the debtors, and the state has filed a claim for unpaid taxes to support this fund and has otherwise taken an active role in this case. The Court holds that the state's motion to remand this proceeding to state court must be denied. The police power disqualification for removal does not apply, because the removed action is not an action by the state, and it does not involve the exercise of its police or regulatory power. This proceeding is not subject to mandatory abstention, because it involves a core proceeding under the Bankruptcy Code, and it does not raise purely state law questions. The factors relevant to discretionary abstention weigh substantially against such abstention, and equitable grounds also weigh substantially in favor of denying the motion.
In addition, the Eleventh Amendment does not deny this Court jurisdiction to hear this proceeding, because the state has waived its sovereign immunity rights thereunder in two respects. First, it has filed claims that are logically related to this proceeding such that this proceeding arises out of the same transaction or occurrence, within the meaning of Bankruptcy Code § 106(b). Second, the state has made a general appearance in this case, which waives its right to object to this Court's exercise of jurisdiction over it based on the Eleventh Amendment.
The underlying bankruptcy cases are nine substantively consolidated cases filed by corporations under the control of Divine Grace Lazar and Gary Lazar, which are jointly administered with the personal case of the Lazars. Prior to the filing of the cases, the Lazars and their entities held interests in some 200 retail gasoline stations in Southern California, which the entities owned, operated or leased. The Lazars filed their joint case and eight of the corporate cases under chapter 11 in July, 1992, when the State of California seized the debtors' bank accounts for nonpayment of gasoline taxes, including the taxes imposed for contributions to the fund at issue in this motion. The final corporate case, which is substantively consolidated with the others, was filed approximately a year prior to the other cases.
George Schulman was appointed as chapter 11 trustee by the district court in September, 1994, during a brief period of time when the reference of the case to the bankruptcy court had been withdrawn. The corporate cases were subsequently substantively consolidated and ordered jointly administered with the Lazar individual case. A year later the cases were converted to cases under chapter 7, and Schulman was appointed as the chapter 7 trustee.
The Lazars were apparently some of the worst actors in the petroleum industry. Each is now serving an eight-year sentence for environmental crimes in connection with the operation of the gasoline stations. In fact, they were the first ever to be prosecuted for the criminal violation of the California environmental laws.1 In addition, each is under indictment for federal crimes arising out of the same conduct and for the underreporting of federal gasoline taxes. On the state charges, the corporations have been fined a total of $400 million. Furthermore, Texaco appeared early in this case and claimed that the debtors were selling adulterated gasoline at branded Texaco stations:2 this controversy was resolved when the debtors gave up the Texaco brand rights.
Leaking tanks at retail gasoline stations constitute one of the most serious environmental problems in the United States. Prior to the 1990's, gasoline stations installed single-hulled tanks, which tended to rust and develop leaks as they aged. More recently, double-hulled tanks, which are much less prone to leakage, have been required. The leaking of older gas tanks has rendered virtually every gas station in the United States an environmental disaster. The Lazar's specialized in the ownership of older stations, which were economically marginal, and where the tanks were especially prone to leakage.
The environmental authorities depend on gas station owners and operators to test their own tanks for leakage and to report the test results to the state. Tanks are tested periodically by pumping a pressurized inert gas into the tanks and waiting a period of time to see whether the pressure holds. If the pressure decreases beyond a certain level, the tanks are diagnosed as leaking tanks and must be replaced at the owner's expense. The honest reporting of the pressure tests is an essential feature of the regulation of environmental hazards at gasoline stations. The Lazars pleaded nolo contendere in a state criminal proceeding to the charge of falsifying the tank tests, and are currently serving eight-year sentences for this conduct.
In 1989 the California legislature enacted the Barry Keene Underground Storage Tank Cleanup Trust Fund Act in response to the problem of leaking petroleum underground storage tanks and the threat that they posed to the public health and safety and to the environment. CAL.HEALTH & SAFETY CODE §§ 25299.10-25299.81 (West 1992 & Supp. 1996). This act imposes duties on owners and operators of underground storage tanks, including the duty to investigate the condition of the tanks periodically, and to clean up any leaks into the soil and ground water. Tank owners and operators are also required to establish evidence of financial responsibility for taking such corrective action and for compensating third parties for damage resulting from leaks.
The act also establishes the Fund to assist owners and operators with the costs of corrective action and the compensation of third parties. The Fund may also satisfy the financial responsibility requirements that the law imposes on owners and operators. The Fund is financed by a storage fee imposed on the tank owners for each gallon of gasoline or other petroleum product stored in a permitted tank. The Fund is administered by the State Water Resources Control Board ("SWRCB"), which has adopted regulations implementing and interpreting the statute. See CAL.CODE REGS., tit. 23, §§ 2610-2728 and 2803-2814.3.
The Fund is a reimbursement program. In order to obtain reimbursement from the Fund, or to use the Fund to meet financial responsibility requirements, an owner or operator must meet certain eligibility requirements. CAL.HEALTH & SAFETY CODE §§ 25299.57-25299.58 (West Supp. 1996). The eligibility requirements include an obligation to demonstrate compliance with the statute, and a showing that any unauthorized release of petroleum products did not result from gross negligence, or intentional or reckless conduct by the claimant. Id. § 25299.57.
The California State Board of Equalization ("SBE") and the state controller have filed claims in these consolidated cases totaling more than $44 million for unpaid taxes. An unspecified portion of this amount is for taxes payable to the Fund. In addition, California has imposed tax levies against the various debtors, and has appeared frequently in the case to protect its resulting secured claim.
In early 1992, some of the debtors filed numerous claims with the Fund, twenty of which are the subject of the underlying administrative action. The trustee inherited these claims when he was appointed in this case. In November, 1994 the SWRCB staff issued a decision denying the claims, and the trustee's administrative appeal has been unsuccessful. The claims were denied on the grounds of misconduct by the Lazars. On March 13, 1996 the trustee filed a petition for a writ of administrative mandamus3 in the Los Angeles County Superior Court, and on March 21 he removed it to this Court. The State of California now moves this Court to remand this adversary proceeding to the Los Angeles County Superior Court.
The California SWRCB moves to remand this proceeding to the Superior Court on both statutory and constitutional grounds. The Court reserves the constitutional issue until last, on the grounds that it should not be addressed if there is an adequate nonconstitutional basis for its decision.
The California SWRCB argues for remand on four separate statutory grounds. First, SWRCB contends that this adversary proceeding is not removable from state court, because it concerns the enforcement of the state's police or regulatory power. Second, SWRCB argues that this adversary proceeding is subject to mandatory abstention, and thus must be remanded. Third, SWRCB claims that the proceeding qualifies for discretionary abstention, which should be granted in this case. Fourth, SWRCB contends that equitable considerations compel the remand of this adversary proceeding...
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