Kovacs, In re, 82-3629

Citation717 F.2d 984
Decision Date22 September 1983
Docket NumberNo. 82-3629,82-3629
Parties, 9 Collier Bankr.Cas.2d 284, 12 Bankr.Ct.Dec. 133, Bankr. L. Rep. P 69,382, 14 Envtl. L. Rep. 20,253 In re William Lee KOVACS, dba B & W Enterprises, et al. STATE OF OHIO, ex rel., William J. BROWN, Attorney General, et al., Plaintiffs, Appellants, v. William Lee KOVACS, et al., Defendants, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

E. Dennis Muchnicki, Asst. Atty. Gen. (argued), Environmental Law Section, Columbus, Ohio, for plaintiffs, appellants.

E. Hanlin Bavely, William H. Eder, Jr., Steve Williams (argued), Cincinnati, Ohio, for defendants, appellees.

Before KENNEDY and WELLFORD, Circuit Judges, and McRAE, District Judge. *

WELLFORD, Circuit Judge.

Plaintiff-appellant, State of Ohio, has appealed from an order of the United States District Court for the Southern District of Ohio which held that the obligation of William Lee Kovacs, appellee, under an Ohio court order, was dischargeable in Bankruptcy. A prior opinion of this Court addressed the issue of whether the same obligation was subject to the automatic stay provisions of the Bankruptcy Court. In re Kovacs, 681 F.2d 454 (6th Cir.1982), vacated and remanded, --- U.S. ----, 103 S.Ct. 810, 74 L.Ed.2d 1010 (1983). Kovacs operated an industrial and hazardous waste disposal facility in Hamilton, Ohio. In 1976, proceedings had been instituted by Ohio's Environmental Protection Agency and Department of Natural Resources against Kovacs, individually and as an officer in Chem-Dyne Corp., Spray-Dyne Corp., and Iron-Tree, Inc., in the Court of Common Pleas of Butler County, Ohio, charging Chem-Dyne and Kovacs, in particular, with polluting the "waters of the state" with pesticides and industrial wastes. As noted in the prior opinion of this Court, "Kovacs signed a Stipulation and Judgment Entry in the Butler County Common Pleas Court on July 18, 1979, which enjoined him from causing further pollution and required him to remove all industrial wastes from the premises of Chem-Dyne Corporation within twelve months." 681 F.2d at 454.

By the following February Kovacs' compliance with this earlier judgment was substantially behind schedule, and, upon motion by Ohio, the state court appointed a receiver over Kovacs' "non-exempt property and assets along with the assets of related corporate entities. 1 The receiver was also directed to effect the clean-up of the Chem-Dyne site." 681 F.2d at 454 (footnote added).

The pertinent portions of the state court receivership order provided as follows:

It is further ordered that Mr. Jack Zettler be appointed receiver of all property or assets, wherever situated, whether real or personal, tangible or intangible, and all interests, whether legal or equitable, in property or assets, of William Kovacs, except to the extent of any property exempt from the control of a receiver by operation of law;

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The receiver shall have power and authority to receive and collect any and all sums of money due or owing to the defendant business entities or defendant Kovacs in any manner, whether the same are now due or shall hereafter become due and payable....

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It is further ordered ... that each of the business entities and defendant Kovacs, and all officers, agents, and employees of the Defendant business entities and defendant Kovacs be enjoined and ordered to cooperate fully with the receiver in the performance of such duties or the exercise of such powers.

In July of 1980 Kovacs filed his Chapter 11 petition for personal bankruptcy. The proceedings were converted to straight bankruptcy under Chapter 7 by order of the Bankruptcy Court in September of 1980. The state of Ohio then sought by motion in the state court to "determine Kovacs' current employment status and income." 681 F.2d at 455. Kovacs, in turn, moved in the Bankruptcy Court to restrain these state proceedings pursuant to the "automatic stay" of 11 U.S.C. Sec. 362. 2

The bankruptcy judge concluded that the State sought the information in state court about Kovacs's current income "as a preliminary to requesting an order from that court which would require that part of debtor's current income be applied" to the receiver's efforts to complete Kovacs's unfulfilled obligation to clean up the industrial wastes from the Chem-Dyne location. The bankruptcy judge determined that Kovacs was entitled to an automatic stay of the state court proceedings under 11 U.S.C. Sec. 362 (Supp.1979), and accordingly enjoined the state of Ohio on October 31, 1980 from proceeding further in state court in its attempt to levy on Kovacs's post-petition earnings.

681 F.2d at 455.

It was that 1980 order of the Bankruptcy Court, affirmed by the District Court, which was appealed to this Court in the earlier proceeding. Concurring with the lower courts' conclusions, this Court held that Ohio's efforts to enforce the Stipulation Judgment and the receivership order were not exempt from the automatic stay provisions, and that the automatic stay of Sec. 362, applied "to deny those [Ohio] units the power to collect money in their enforcement efforts." 681 F.2d at 456 (emphasis added). This court further agreed that

the state of Ohio in its state court proceedings was seeking what in essence amounted to a money judgment against Kovacs, which was properly subject to the automatic stay.

681 F.2d 456 (emphasis added). 3

The issue before us in the present appeal arises from an effort by the State of Ohio in the same Bankruptcy Court in October, 1980, to obtain an order that Kovacs' identical obligation under the aforesaid state court judgment is nondischargeable because it is neither a "claim" nor a "debt" as those terms are used in 11 U.S.C. Sec. 727(b). 4

The Bankruptcy Court in February of 1982 ruled that "the affirmative obligation imposed upon defendant [Kovacs] by the Judgment Entry that he remove and dispose of all industrial and/or other wastes at the subject premises" was dischargeable. The Bankruptcy Judge took pains to note that the state of Ohio never claimed the obligation was exempted from dischargeability under 11 U.S.C. Sec. 523. The rationale for the Bankruptcy Court's decision was:

If plaintiff is successful here, it would be able to levy on defendant's wages, the action prevented by our Prior Decision, after defendant's bankruptcy case is closed and/or the stay of 11 U.S.C. Sec. 362 as interpreted by our Prior Decision is no longer in force.... Plaintiff [Ohio] in discussing the background for the Judgment Entry says that it expected that defendant would generate sufficient funds in his ongoing business to pay for the cleanup. Moreover, we take judicial notice that plaintiff sought discovery with respect to defendant's earnings, the matter dealt with in our Prior Decision, for the purpose of levying upon his wages, a technique which has no application other than in the enforcement of a money judgment. There is no suggestion by plaintiff that defendant can render performance under the affirmative obligation other than by the payment of money. We therefore conclude that plaintiff has a claim against defendant within the meaning of 11 U.S.C. Sec. 101(4), and that defendant owes plaintiff a debt within the meaning of 11 U.S.C. Sec. 101(11). Furthermore, we have concluded that that debt is dischargeable.

The essence of the decision by Bankruptcy Judge Burton Perlman was that "the significance to plaintiff [Ohio] of the affirmative obligation of the Judgment Entry is that the defendant [Kovacs] pay compensation ...... for pecuniary loss ..." App. at 13.

On appeal the district court affirmed on the basis of the "law of the case" doctrine, finding "no cogent reason justifying reconsideration of the Sixth Circuit's determination in In Re Kovacs." The district court also agreed that "the State was in fact seeking a money judgment from Kovacs and ... the injunction is dischargeable pursuant to 11 USC Sec. 727(b) ...."

We AFFIRM the District Court's decision, but for a different reason. Since the decision of this Court in In re Kovacs, supra, has been vacated by the Supreme Court, it can no longer constitute controlling authority, and the "law of the case" doctrine does not apply. 5

The State of Ohio takes the position that Kovacs' obligation under the state court orders does not meet the statutory definitions of "claim" or "debt" as set forth in 11 U.S.C. Sec. 101(4) and (11) 6. The obligation to Ohio under the order or injunction, says the State, is merely a right to an equitable remedy. As such, it is not a "claim," and, therefore, not dischargeable in bankruptcy unless (1) the remedy is sought for breach of performance, and (2) such breach also gives rise to an alternative right to payment. See, In re Newton, 15 B.R. 708 (Bkrtcy.N.D.Ga.1981); In re Button, 8 B.R. 692 (Bkrtcy.W.D.N.Y.1981). The State contends that it has no "alternative right to payment" under the order or state laws.

Not surprisingly, Ohio encounters great difficulty in distinguishing its actions to date from an attempt to enforce an alternative right to payment. Ohio's post-petition motion in state court to discover Kovacs' assets is described in the State's Reply Brief as a mere request,

that the court permit development of a factual record which might provide a basis for requiring part of Kovacs' income "to be applied to the unfinished task of the receivership," i.e., removal of the drums of chemical waste from the site. (emphasis added).

Ohio's Attorney General described this as "an imaginative mechanism for assuring that Kovacs fulfilled his duty to cooperate with the receiver." Although perhaps "imaginative," the efforts of Ohio still reveal the State's clear intention to use "part of Kovacs' income" to satisfy his obligation under the state court order.

Ohio futilely seeks support in the legislative history of Sec. 101(4). As an example of an equitable remedy that would be dischargeable as a claim,...

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