Smith-Douglass, Inc., In re
| Decision Date | 06 September 1988 |
| Docket Number | Nos. 87-1683,INC,SMITH-DOUGLAS,WELLS-FARGO,87-1684,s. 87-1683 |
| Citation | 856 F.2d 12 |
| Parties | , 103 A.L.R.Fed. 61, 57 USLW 2291, 18 Bankr.Ct.Dec. 528, Bankr. L. Rep. P 72,451, 18 Envtl. L. Rep. 21,472 In re, Debtor. BORDEN, INC., Plaintiff-Appellant, and Bernard R. Garrett; State of Illinois, Plaintiffs, v.BUSINESS CREDIT; Defendant-Appellee, Gregory B. Crampton, Trustee for Smith-Douglass, Inc., Appellee. In re, Debtor. STATE OF ILLINOIS, Plaintiff-Appellant, and Borden, Inc.; Bernard R. Garrett, Plaintiffs, v.BUSINESS CREDIT; Defendant-Appellee, Gregory B. Crampton, Trustee for Smith-Douglass, Inc., Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
John M. Murchison, Jr. (Kennedy, Covington, Lobdell & Hickman, Charlotte, N.C., Thomas W. Hill, Melvin D. Weinstein, Emens, Hurd, Kegler & Ritter, Columbus, Ohio, on brief), for Borden, Inc.
Marcia Bellows, Asst. Atty. Gen., Environmental Control Div., Chicago, Ill. for State of Ill.
Gregory B. Crampton (Merriman, Nicholls & Crampton, P.A., Raleigh, N.C., on brief), for Gregory B. Crampton, Trustee.
Thomas B. Anderson, Jr. (Jenkins & Gilchrist, P.C., Dallas, Tex., on brief), for Wells Fargo Business Credit.
Before HALL and WILKINSON, Circuit Judges, and MERHIGE, Senior District Judge for the Eastern District of Virginia, sitting by designation.
The matter before the Court presents the question of the conditions under which a trustee in bankruptcy will be permitted to abandon property on which violations of state environmental laws exist. For the reasons set forth below, we affirm the finding that unconditional abandonment was appropriate.
In the course of its attempted reorganization, 1 the debtor Smith-Douglass, Inc. ("Smith-Douglass" ) moved to abandon its fertilizer plant at Streator, Illinois. The State of Illinois, Bernard Garrett ("Garrett"), and Borden, Inc. ("Borden") objected on the ground that the property contained violations of Illinois environmental laws and regulations. The Bankruptcy Court granted the debtor's request and the district court affirmed.
The Streator facility was formerly owned by Borden and operated by the Smith-Douglass division of Borden as a fertilizer plant. In 1981, certain assets of Borden's Smith-Douglass Division including the Streator facility were acquired by Garrett Acquisition Corporation ("GAC"), which was then renamed Smith-Douglass, Inc. Wells Fargo financed GAC's purchase and received a first lien on all the properties.
On March 11, 1983, Smith-Douglass filed a voluntary petition under Chapter 11 of the bankruptcy code. Three months later, Smith-Douglass leased the Streator plant to another company, SECO, Incorporated ("SECO"), which is now in bankruptcy. SECO left the premises in August, 1985 and operations ceased.
At some point after the petition was filed, Smith-Douglass concluded that it would not be able to reorganize successfully. Wells Fargo, as first lien creditor, agreed to provide post-petition financing while Smith-Douglass liquidated its assets. There were no unencumbered assets.
Smith-Douglass attempted, unsuccessfully, to sell the Streator facility both privately and by public auction. By mid-1986, the Streator facility was the only piece of property remaining in the estate. The debtor moved for leave to abandon the property and Wells Fargo moved for leave to terminate funding of post-petition operations.
An evidentiary hearing was held on June 30, 1986. The debtor's motion to abandon was supported by Wells Fargo. Borden, Garrett and the State of Illinois opposed the proposed unconditional abandonment on the ground that the debtor should be required to clean up alleged environmental hazards. 2
The bankruptcy court found that conditions at the Streator facility violated provisions of the Illinois Environmental Protection Act and regulations promulgated thereunder in the following respects:
A. Ponds 1, 2, 3, 4 and 5 were considered as treatment works, but they were operated without operating permits.
B. Pond 2 was subject to flooding during wet weather periods. It was not constructed, nor was it being operated, to minimize violations during such wet weather periods.
C. Contaminants were deposited upon the land so as to create a water pollution hazard. Contaminants also had entered waters of the state at a number of locations at the facility and had caused violations of the Stream Water Quality Standards.
D. The discharge from sewer 4 and the discharge ditch out of pond 4 were considered point source discharges which require National Pollutant Discharge Elimination System permits. The facility had no such permits.
E. Waters in the abandoned creek bed violated the water quality standards as follows:
1. The waters contained unnatural sludge, bottom deposits, color and turbidity.
2. Two water samples demonstrated a low pH (less than 6.5) and contamination by excessive amounts of fluoride, sulfate, cadmium, iron, and manganese.
F. Contaminants were entering Phillips Creek, causing the creek to contain unnatural sludge, bottom deposits, color and turbidity.
G. Waters contained in the roadside ditch adjacent to Smith-Douglass Road violated water quality standards as follows:
1. The waters contained unnatural sludge, bottom deposits, color, turbidity and odor.
2. A water sample showed a low pH (less than 6.5) and contamination by excessive amounts of fluoride, sulfate, iron, and manganese.
H. A sediment sample at pond 2 indicated an arsenic concentration that is higher than authorized but not at the danger level.
I. A liquid sample in a sump at the base of two tanks had a pH of less than one which is considered "hazardous" under regulations.
J. There were several 55 gallon drums of liquid waste with a flash point below 140.
K. One 55 gallon drum contained hazardous waste.
L. There were over ten drums of spent vanadium pentoxide waste which is a hazardous waste.
M. Three tanks contained spent sulfuric acid.
The evidence further demonstrated that the State of Illinois monitored the facility. The Illinois Environmental Protection Agency had made on-site inspections and received environmental reports from the debtor and its predecessor. The state agency, however, never took any enforcement action against any owner of the Streator facility for environmental violations. Though concluding that violations of state environmental laws existed, the Court found that they did not present any imminent harm or danger to the public. Coupling that conclusion with the fact that the debtor was devoid of unencumbered assets with which to finance a clean up, the bankruptcy court authorized unconditional abandonment of the facility.
The district court affirmed on the ground that abandonment is precluded only where there is an imminent danger present, and the bankruptcy court's determination that there was no such imminent danger was not clearly erroneous. 75 B.R. 994 (E.D.N.C.1987). The district court, however, found the bankruptcy court's consideration of the financial condition of the debtor irrelevant. Borden and Illinois appealed.
A trustee may abandon burdensome, income-draining property pursuant to section 554(a) of the Bankruptcy Code (the "Code"). 3 In Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986), the Court recognized a narrow exception to that power. The issues before this Court relate to the contours of that exception. 4
In Midlantic, a five member majority held that "a trustee may not abandon property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards." 474 U.S. at 507, 106 S.Ct. at 762. The Court qualified the holding with the following footnote:
This exception to the abandonment power vested in the trustee by Sec. 554 is a narrow one. It does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.
Id. at 507 n. 9, 106 S.Ct. at 762 n. 9.
Little in the Midlantic opinion elucidates the meaning of this qualification. Not surprisingly, the bankruptcy courts interpreting Midlantic have reached inconsistent results. Some courts have determined that the Midlantic exception applies only where there is an imminent danger to public health and safety. See, e.g., In re Purco, Inc., 76 B.R. 523, 533 (Bankr.W.D.Pa.1987); In re Franklin Signal Corp., 65 B.R. 268, 271-72 (Bankr.D.Minn.1986). Other courts have determined that Midlantic requires full compliance, prior to abandonment, with the applicable environmental law. In re Peerless Plating Co., 70 B.R. 943, 946-47 & n. 1 (Bankr.W.D.Mich.1987).
The problem faced by the Midlantic court was a conflict in the implementation of two statutes, one state and one federal, both of which serve important purposes. Under the Supremacy Clause of Article VI of the United States Constitution, when enforcement of a state law or regulation would undermine or stand as an obstacle to the accomplishment of the full purposes and objectives of Congress in enacting a federal statute, the conflict must be resolved in favor of the federal law. Hines v. Davidowitz, 312 U.S. 52, 66-67, 61 S.Ct. 399, 403-04, 85 L.Ed. 581 (1941). The overriding purpose of the Code is the expeditious and equitable distribution of the assets of the debtor's estate. Midlantic, 474 U.S. at 508, 106 S.Ct. at 763 (Rehnquist, J., dissenting). State laws which obstruct expeditious and equitable distribution therefore, are preempted by the Code. National Collection Agency, Inc. v. Trahan, ...
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