chapter 7 smcra enforcement in bankruptcy: regulatory powers … · 2018-06-29 · smcra...

Chapter 7SMCRA Enforcement in Bankruptcy:

Regulatory Powers RevisitedBy Maureen D. Carman

Richard WarneWyatt, Tarrant & Combs, LLP

Lexington, Kentucky

Synopsis§ 7.01. Introduction ................................................................................. 185§ 7.02. SMCRA Regulation in the Coal Industry ................................. 187

[1] — Overview ............................................................................ 187[2] — Key Provisions ................................................................... 187

[a] — Permit Requirements ............................................... 187[b] — Financial Responsibility

Requirements (Bonding) ......................................... 188[c] — Inspection, Investigation, and Compliance ............. 189[d] — Administrative and Judicial Review ........................ 191[e] — Applicant Violator System....................................... 193

§ 7.03. The Bankruptcy Code and Regulatory Enforcement .............. 194[1] — Overview ............................................................................ 194[2] — The Automatic Stay of Section 362(a) .............................. 194[3] — The “Police Power” Exception of Section 362(b)(4) ....... 196[4] — The Debtor’s Duty to Comply with

State Law: 28 U.S.C. Section 959(b) ................................ 205[5] — The Bankruptcy Court’s

Equitable Powers: Section 105(a) ..................................... 208§ 7.04. The Coal Company in Bankruptcy ............................................ 211

[1] — Monetary Claims for Compliance Investigationor Site Cleanup .................................................................. 212

[2] — Orders to Clean Up Contaminated Sitesand Remedy Violations ..................................................... 216

[3] — Ongoing Compliance with Laws and Regulations ........... 222§ 7.05. Conclusion .................................................................................... 227

§ 7.01. Introduction.Recent years have seen several large coal companies experience extreme

financial distress, and for the least fortunate, enter the uncertain waters of

CITE AS25 Energy & Min. L. Inst. ch. 7 (2005)

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bankruptcy. While the recent surge in crude oil prices offers the promise ofa revitalized coal industry, an industry-wide permanent recovery is far fromcertain as interest rates rise and financial capital becomes increasinglyscarce. This is particularly true in light of the continuing paucity of availablesureties to satisfy state bonding requirements.

In such times, federal and state regulators will keep a watchful eye oncoal operations to ensure operators comply with environmental laws. Giventhe extensive authority granted to regulators under state and federal schemes,the regulators have a significant advantage in the balance of power betweenthem and coal operators. However, once the financial condition of the coaloperator becomes dire enough that a bankruptcy petition is filed, the powersand protection afforded a bankruptcy debtor shift that balance radically infavor of the bankrupt coal company. Indeed, the inability to comply withlong-term environmental obligations is often the precipitating factor in thefiling of a bankruptcy petition. Once the petition is filed, the debtor isimmediately entitled to an automatic stay of certain enforcement activitiesby the regulators.

But the government is not powerless to enforce its laws and regulationsagainst the bankrupt. The ability of state and federal regulators to enforcestatutes and regulations against a coal company in bankruptcy is the subjectof this chapter. The Bankruptcy Code and other provisions of federal lawrequire a coal company in bankruptcy to continue to follow applicable lawsand regulations, and give regulators the power to force compliance in manyinstances. The bankruptcy court, however, has the authority to curtail suchenforcement in certain instances where needed to prevent the collapse ofthe struggling debtor.

This chapter begins with a discussion of the surface mining regulationsthat coal operators must abide by in the ordinary course of their business,followed by an overview of federal laws that relate to the ability of federaland state regulators to enforce laws generally upon a company in bankruptcy.The chapter then provides a survey of the cases applying these provisionsin a variety of contexts, and continues with an analysis of cases that relatespecifically to environmental regulations in the energy and coal industries.The chapter concludes with some insight into the way the law is developingin this area.

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SMCRA ENFORCEMENT IN BANKRUPTCY

§ 7.02. SMCRA Regulation in the Coal Industry.[1] — Overview.Surface and underground coal mining is regulated under the federal

Surface Mining Control and Reclamation Act (SMCRA).1 SMCRA waspassed by Congress in 1977 in order to protect the environment from theimpact of both surface coal mining and the above-ground effects ofunderground coal mining. The Act sets forth a comprehensive structure ofregulations for those engaged in such activities. Under Title V of the Act,coal mine operators are required to obtain a permit and post bond prior tothe commencement of mining, to reclaim land disturbed by the miningcontemporaneously with the mining activity, to permit inspections uponthe property by regulators, to promptly remediate spills and other violations,and to pay penalties and fines, or to forfeit bonds, for violations of the Act.

Like many federal environmental statutes, SMCRA is enforced at boththe federal and state level. At the federal level, the Office of Surface MiningReclamation and Enforcement (OSM) is responsible for the implementationand enforcement of SMCRA. SMCRA permits states to pass “mini-SMCRAs” at the state level which mimic the federal provisions.2 Suchstate regulatory schemes must not conflict with SMCRA and must be atleast as strict in their requirements. If the state system satisfies certainconditions, OSM may approve the state system to obtain “primacy,” grantingthe state primary regulatory authority over coal mining activities within itsborders. Kentucky, along with other states such as Utah and Colorado, hasobtained primacy from OSM. In Kentucky, the Environmental and PublicProtection Cabinet (EPPC) is charged with enforcement of Kentucky’ssurface mining regulations.

[2] — Key Provisions.[a] — Permit Requirements.

The central requirement of SMCRA is that the regulatory authoritymust approve a permit before any person may operate a coal mine. Forsurface mining, 25 detailed performance standards guide the determination

§ 7.02

1 SMCRA is codified at 30 U.S.C. §§ 1201 et seq.2 Kentucky’s implementation of SMCRA is set forth in Chapter 350 of the KentuckyRevised Statutes.


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of whether a permit may issue.3 Similar standards exist for applications tomine underground.4

Kentucky law likewise establishes that no surface coal mining activitiesmay be conducted until a permit has been acquired from the Environmentaland Public Protection Cabinet (EPPC).5

[b] — Financial Responsibility Requirements(Bonding).

Another precondition to the issuance of a mining permit is the coalmine operator’s demonstration of financial responsibility, satisfied byposting a reclamation bond in an amount “sufficient to assure the completionof the reclamation plan if the work had to be performed by the regulatoryauthority.”6

Not only must the bond be sufficient at the time the permit is granted,but the bond must be adjusted in light of increased or decreased costs ofreclamation during the course of operations.7 Kentucky’s regulationslikewise require an applicant for a surface coal mining permit to post aperformance bond for its reclamation obligations as a precondition toissuance.8, 9

In lieu of providing a surety bond or reclamation bond, a permiteemay satisfy the bonding requirement by providing “collateral” bonds as

3 30 U.S.C. § 1265 (2004).4 30 U.S.C. § 1266.5 Ky. Rev. Stat. Ann § 350.060 (West 2004).6 30 U.S.C. § 1259(a); 30 CFR § 800.11 (2004).7 30 U.S.C. § 1269(e).8 Ky. Rev. Stat. Ann. § 350.064 provides:

(1) After a surface mining and reclamation permit application has beenapproved but before the permit is issued, the applicant shall file with theregulatory authority, on a form prescribed and furnished by the regulatoryauthority, a reclamation bond for performance payable, as appropriate, tothe state, and conditional upon faithful performance of all the requirementsof this chapter and the permit. The reclamation bond shall cover that areaof land within the permit area upon which the applicant will initiate andconduct surface coal mining and reclamation operations within the initialterm of the permit. As succeeding increments of surface coal mining andreclamation operations are to be initiated and conducted within the permit

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security for its reclamation obligations, which may include cash deposits,certificates of deposit, letters of credit, and real property.10

Apart from the requirement that a reclamation bond be posted, apermitee must provide proof of comprehensive liability insurancecoverage.11

[c] — Inspection, Investigation, and Compliance.One of the primary methods to ensure compliance with SMCRA is on-

site investigation by state regulators, at least where the state has obtainedprimacy, to ensure compliance with SMCRA and ensure the operator’scontemporaneous reclamation of the land as the mining progresses.12

SMCRA mandates the frequency of inspections, and mandates thatinspectors are required to formally cite violations when they are observed.13

Further, fines for any violation are mandatory and cited violations accruedaily.14

area, the permitee shall file with the Cabinet an additional bond or bonds tocover the increments in accordance with this section.

See also 405 Ky. Admin. Regs. 10:010 § 2.9 Like SMCRA itself, the primary operative details of Kentucky’s implementation ofSMCRA are found in the administrative regulations promulgated by EPPC under theauthority of the statute. Ky. Rev. Stat. Ann. § 350.028 authorizes EPPC to promulgateadministrative regulations, conduct investigations, issue orders suspending the operationsof a permitee for violations of the Article, to impose civil penalties, to revoke miningpermits, and to adopt administrative regulations to permit Kentucky to administer SMCRA,but such administrative regulations “shall be no more stringent than required by[SMCRA].”10 C.F.R. § 800.21; 405 Ky. Admin. Regs. 10:030 § 2(6).11 30 C.F.R. § 800.60; 405 Ky. Admin. Regs. 10:010 § 4.12 SMCRA does not permit an operator to defer reclamation until it has extracted allthe coal from a mining site, instead requiring that reclamation progress over time as themining continues. Ky. Rev. Stat. Ann. § 350.093. As reclamation progresses, EPPC isauthorized to partially or wholly release the reclamation bond if it is satisfied that theongoing reclamation activities so warrant.13 30 U.S.C. §§ 1267(c), 1267(e), 1271(e).14 30 U.S.C. § 1268(a). While fines are an important deterrent, they are considered farless effective than bonding at ensuring compliance with SMCRA. See Courtney Shae,“Coal Mining and the Environment: Does SMCRA Give Regulators AppropriateEnforcement Tools?,” 8 Nat. Resources and Envt. 17, 59 (Spring 1994)(“Once coal

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Should an inspection of the mining site reveal a violation of SMCRAor a deviation from the mine plan,15 the operator is issued a citation whichspecifies the action that must be taken to remedy the violation and a timeframe within which the action must be taken.16 Such citations are referredto as Notices of Violation, or a “Notice of Non-Compliance and Order forRemedial Measures” in Kentucky.

Should the inspection reveal that the violation presents an imminentdanger to health or public safety, or may be causing significant, imminentenvironmental harm, the regulator must immediately issue a CessationOrder.17 The regulator must also issue a Cessation Order where the operatorhas failed to timely remedy the violations set forth in a prior Notice ofViolation.18 A Cessation Order will direct the operator to immediatelyshut down all or a part of the mining operation, and the issuance of theCessation Order is mandatory, not discretionary, once the violations have

extraction is completed, the company is less concerned with the cessation of operations.If a small, financially troubled operation falls behind in its reclamation obligations aftercoal extraction is completed, the regulatory authority may have to invoke bond forfeitureor other regulatory sanctions to obtain final reclamation . . . bonds are an essential safeguardfor mining operations that encounter financial difficulties and cease mining. No othermechanism – citations, penalties, or permit blocks, can address the rehabilitation of sitesmined and abandoned by an impecunious operator as effectively as an adequate bond”).15 When the application is filed, an applicant for a mining permit must submit a miningand reclamation plan, which must be approved as part of the permitting process. Ky. Rev.Stat. Ann. § 350.090(1).16 30 U.S.C. § 1261(a); Ky. Rev. Stat. Ann. § 350.130(1)(“When any of the requirementsof this chapter . . . have not been complied with the Cabinet shall forthwith cause a noticeof non-compliance to be issued upon the permitee, person, or operator. The Cabinet shallset forth in its notice a reasonable time period but not more than ninety (90) days for theabatement of the violation.”).17 Ky. Rev. Stat. Ann. § 350.130(4) states “. . . the secretary, . . . after inspection, shallimmediately order the cessation of the condition or operation when he determines thatthe condition or operation creates an imminent danger to the health or safety of the publicor that the condition or operation is causing or can reasonably be expected to causesignificant, imminent environmental harm . . . .”18 Ky. Rev. Stat. Ann. § 350.130(1)(“If any permitee, person, or operator has not abatedthe violation within the time prescribed in the notice of non-compliance, the secretary orother authorized personnel of the Cabinet shall issue to the permitee, operator, or personan order for immediate compliance and cessation of any mining activities or operationswhich are contributing to the violation. The order shall require the permitee, person, oroperator to abate the violation in the most expeditious manner possible. . . .”).

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been identified. SMCRA authorizes the imposition of civil penalties if aNotice of Violation or Cessation Order is issued.

Further, in the event the surety on the operator’s reclamation bondsbecomes insolvent, enters insurance rehabilitation or receivershipproceedings, or files bankruptcy, the state insurance regulatory authoritymay suspend its certificate of authority to conduct business in the state.19

In that event, EPPC is authorized to issue a Notice of Violation or CessationOrder for the operator’s failure to satisfy the requirement of valid andadequate reclamation bond coverage. The EPPC will typically give theoperator from 30 to 90 days to provide a new bond with valid surety.

[d] — Administrative and Judicial Review.An operator can challenge the Notice of Violation or Cessation Order

at an informal hearing held at the mining site.20 The operator can alsoseek formal administrative review of the citation.21 Similarly, the regulatorshave the authority to initiate an administrative proceeding to revoke themining permit if the operator fails to remedy the violation identified in theNotice of Violation or Cessation Order within the time frame indicated inthe notice. The regulators also may seek to have the operator’s permitrevoked and its reclamation bond forfeited to pay the civil fines and penaltiesor to pay for remediation costs incurred by the state to reclaim the miningsite.22

If the state regulators intend to seek forfeiture of the bond, the operator,bond issuer, and/or surety is entitled to notice of that fact, and the opportunityto contest the forfeiture at an administrative hearing.23 In lieu of paying its

19 Ky. Rev. Stat. Ann. § 304.020.20 30 U.S.C. § 1271(a)(5).21 30 U.S.C. § 1275(a)(1).22 Ky. Rev. Stat. Ann. § 350.130(1)(“If the permitee, person, or operator has not . . .complied with the requirements set forth in the notice of non-compliance or order forimmediate compliance and cessation within time limits set therein, the permit may berevoked or the operation terminated, after an opportunity for a hearing, by order of theCabinet, and the performance bond, if any, shall then be forfeited to the Cabinet, providedthat failure to attend a hearing shall be excused for good cause shown.”23 Any person “aggrieved” by a determination made by the Cabinet may invoke anadministrative review process under Ky. Rev. Stat. Ann. § 350.0301, and may appeal a

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obligations under the bond, the surety may elect instead to remedy theviolations itself if it believes doing so may be more cost effective.24

In the event an operator fails or refuses to remedy SMCRA violationsidentified in a Notice of Violation or Cessation Order, the state regulatorsmay obtain forfeiture of the bond, and use some or all of the funds to reclaimthe mining site.25 If the bond is insufficient to pay all the requiredreclamation costs, the regulators are authorized to collect any deficiencyfrom the operator.26 Further, if the state regulators can demonstrate that anofficer, director, or agent of an operator knowingly and willingly authorized,ordered or carried out any violation of SMCRA, they can obtain a court-ordered injunction compelling that person to personally remedy the violationor reclaim the site.27

SMCRA authorizes regulators to seek the revocation of a permit fromany operator with an established history of repeated violations. A permitmay be suspended or revoked where regulators can establish that violationswere “willfully caused” or “unwarranted.”28 Office of Surface Mining(OSM) regulations require an examination of the operator’s history ofviolations during the preceding 12 months before invoking the process.

Finally, regulators can seek to compel compliance with SMCRArequirements through a court-ordered injunction,29 civil penalties,30 and

final order by EPPC to the Franklin Circuit Court. Ky. Rev. Stat. Ann. § 350.0305. Adistinct but similar procedure is available for any notice of noncompliance, order forcessation and immediate compliance, assessment of civil penalties, or bond forfeiture.Ky. Rev. Stat. Ann. § 350.032.24 Ky. Rev. Stat. Ann. § 350.130(1).25 Ky. Rev. Stat. Ann. § 350.130.26 K.A.R. 405:050 § 2(3) states: “In the event the amount forfeited is insufficient topay for the full cost of reclamation, the permitee or operator shall be liable for remainingcosts. The Cabinet may complete, or authorize completion of, reclamation of the bondedarea and may recover from the permitee or operator all costs of reclamation in excess ofthe amount forfeited.”27 In Kentucky, these “alternative enforcement” provisions are set forth in Ky. Rev.Stat. Ann. § 350.990.28 30 U.S.C. § 1271(a)(4).29 30 U.S.C. § 1271(c); Ky. Rev. Stat. Ann. § 350.990(1), (3) permit EPPC to seekinjunctive relief to halt a violation.30 30 U.S.C. § 1268(f); Ky. Rev. Stat. Ann. § 350.990(1) permits the Cabinet to levy acivil penalty of up to $5,000.00 for each day the violation continues.

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under certain circumstances, criminal sanctions.31 In addition, injunctiverelief may be available not only against the owner or operator of the coalcompany, but can be directed to any agent charged with responsibility forcompliance with SMCRA.32

[e] — Applicant Violator System.In an effort to avoid circumvention of its requirements, SMCRA

includes a system that imposes sanctions on third parties who “own” or“control” any person or entity that violates or has violated the Act. Thissystem is known as the “Applicant Violator System,”33 and it mandatesthe denial of any mining permit application for any person or entity whoeither owns or controls any mining operation with an outstanding SMCRA

31 30 U.S.C.§ 1268(e); Ky. Rev. Stat. Ann. § 350.990(4)-(9) detail criminal penaltiesfor violations of KRS Chapter 350.32 United States v. Dix Fork Coal Co., 692 F.2d. 436, 440 (6th Cir. 1982).33 The system is actually a database operated by OSM. When an applicant applies fora mining permit, the database is used to identify and review ownership and controlrelationships between the applicant and any operator with an unresolved violation. Suchrelationships are based upon the applicant’s ownership of or managerial, financial, orcontractual control over the coal mine operator in violation of SMCRA. Kentuckyregulators have established certain instances where the applicant is irrebuttably presumedto be an owner or controller of the violator:

(1) Being a permittee of a surface coal mining operation;(2) Based on instruments of ownership or voting securities, owning of recordin excess of 50% of an entity; or(3) Having any other relationship which gives one person authority directlyor indirectly to determine the manner in which an applicant, an operator, orother entity conducts surface coal mining operations.

405 Ky. Admin. Regs. 8:001 § 1(76)(a). Other circumstances give rise only to a rebuttablepresumption of ownership or control:

(1) Being an officer or director of an entity;(2) Being the operator of the surface coal mining operation;(3) Having the ability to commit the financial or real property assets orworking resources of an entity;(4) Being a general partner in a partnership;(5) Based on the instruments of ownership or the voting securities of acorporate entity, owning of record 10 to 50 percent of the entity; or

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violation.34 Further, state regulators must conclude that each applicant isnot such an owner or operator in violation before granting any permitapplication. Any party denied an application on such grounds is “permitblocked.” While that applicant is not legally required to remedy theviolations of the other entity, it may be effectively precluded from furthermining activity until either the block is removed by remedying the violationor the applicant convinces the regulators that it is not an owner or controllerof the company in violation.

§ 7.03. The Bankruptcy Code and RegulatoryEnforcement.

[1] — Overview.The primary goal of Congress in enacting the Bankruptcy Code was to

afford a “fresh start” to those debtors whose financial condition haddeteriorated to such a degree that they were severely hampered in theirability to survive and prosper financially. Aided by a discharge in bankruptcyand hence unencumbered by most of their debts, the intent was that thesedebtors could begin anew and contribute positively to the economy insteadof becoming a public welfare burden.

The federal bankruptcy laws permit a debtor to liquidate its debts inexchange for a surrender of all of its nonexempt assets. Alternatively, adebtor may choose to reorganize its financial situation, which permits moreassets to be retained in exchange for a recovery by creditors that is at leastas good or better than a liquidation. In both of these approaches, each ofthe general creditors of the debtor is treated alike, receiving a pro rata portionof the distribution from the debtor’s assets.

[2] — The Automatic Stay of Section 362(a).The salutary goals of bankruptcy would be completely undermined if

a creditor could, upon the debtor’s bankruptcy filing, sue the debtor or seize

(6) Owning or controlling coal to be mined by another person under a lease,sublease or other contract and having the right to receive such coal aftermining or having authority to determine the manner in which that person oranother person conducts a surface coal mining operation.

405 Ky. Admin. Regs. 8:001 § 1(76)(b).34 30 U.S.C. § 1260(c).

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its property in an effort to collect upon its debt. Because bankruptcy isdesigned to effect an orderly and fair distribution to all creditors, and notjust some at the expense of others, the Bankruptcy Code prevents suchcollection efforts through the imposition of an automatic stay. Section 362of the Bankruptcy Code provides:

(a) Except as provided in subsection (b) of this section, a petitionfiled under section 301, 302, or 303 of this title, . . . operates as astay, applicable to all entities, of —

(1) the commencement or continuation, including the issuanceor employment of process, of a judicial, administrative, orother action or proceeding against the debtor that was or couldhave been commenced before the commencement of the caseunder this title, or to recover a claim against the debtor thatarose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property ofthe estate, of a judgment obtained before the commencementof the case under this title;

(3) any act to obtain possession of property of the estate or ofproperty from the estate or to exercise control over propertyof the estate;

(4) any act to create, perfect, or enforce any lien againstproperty of the estate;

(5) any act to create, perfect, or enforce against property ofthe debtor any lien to the extent that such lien secures a claimthat arose before the commencement of the case under thistitle;

(6) any act to collect, assess, or recover a claim against thedebtor that arose before the commencement of the case underthis title;

(7) the setoff of any debt owing to the debtor that arose beforethe commencement of the case under this title against anyclaim against the debtor; and

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(8) the commencement or continuation of a proceeding beforethe United States Tax Court concerning the debtor.35

Taken together, these detailed provisions prevent almost all efforts bycreditors to collect upon debts owed by the debtor before the petition wasfiled. As one court has explained,

Recognizing a debtor’s need, after the filing of a petition inbankruptcy, for a breathing spell in the reorganization of its affairs,Congress enacted as part of the Bankruptcy Code the provisions of11 U.S.C. Section 362(a). Those provisions, commonly referred toas the automatic stay, give the debtor such a breathing spell byeffectively staying any post-petition action by pre-petition creditorsto enforce claims against the debtor.36

[3] — The “Police Power” Exception of Section 362(b)(4).Congress recognized, however, that the protections afforded by the

automatic stay could be abused by a debtor in certain instances, and that inothers, countervailing policies justified a different result. In such cases,Congress determined that certain activities should not be stayed by thefiling of a bankruptcy petition. Those exceptions to the automatic stay arecontained in Section 362(b) of the Bankruptcy Code.37

Of particular importance to state and federal governments, however, isthe “police power” exception. This exception provides that the filing of abankruptcy petition does not stay:

Under paragraph (1), (2), (3), or (6) of subsection (a) of this section,the commencement or continuation of an action or proceeding by a

35 11 U.S.C. § 362(a).36 In re Kaiser Steel Corp., 87 B.R. 662, 664 (Bkrtcy. D. Colo. 1988).37 Section 362(b) details over a dozen exceptions to the automatic stay. These exceptionsprovide that filing a bankruptcy petition does not automatically stay certain acts, includingcriminal proceedings; child support or alimony proceedings; perfection or maintenanceof security interests or mortgages under certain identified circumstances; or tax audits orassessments or issuance of tax deficiency notices.

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governmental unit . . . to enforce such governmental unit’s ororganization’s police and regulatory power, including theenforcement of a judgment other than a money judgment, obtainedin an action or proceeding by the governmental unit to enforce suchgovernmental unit’s or organization’s police or regulatory power.38,

39

This section is designed to make clear that the ability of local, state,and federal governments to enforce ordinary laws is not adversely affectedby the filing of a bankruptcy petition.40 As one court explained,

The reorganization process is designed to afford debtors with theopportunity to compose their debts and to reorganize themselvesin order to continue in business. It is not designed to displace validstate and local statutes that do not conflict with the Bankruptcy

38 11 U.S.C. § 362(b)(4). In this chapter, § 362(b)(4) is referred to as the police powerexception. However, before amendments to the Bankruptcy Code in 1999, this “exception”was actually two, more limited, “exceptions.” Before the 1999 amendments, Section362(b)(4) excepted government proceedings or actions to enforce police or regulatorypowers, but only from the automatic stay under § 362(a)(1). Likewise, § 362(b)(5) exceptedthe enforcement of a non-monetary judgment against the debtor to enforce police orregulatory powers, but only from the automatic stay of § 362(a)(2). The 1999 amendmentscombined these two provisions into the current § 362(b)(4), and excepted them from theautomatic stays of § 362(a)(1), (2), (3), and (6). Thus, these amendments were not merelyclerical, but noticeably expanded the scope of government activity excepted from theautomatic stay. See 2 Norton Bankr. L. & Prac. 2d § 36:18 (2004).39 This provision only “nullifies” the automatic stay “[u]nder paragraph (1), (2), (3),or (6) of subsection (a) of this section, . . . ” Thus, while the state may enforce lawsimplementing its “police power” to do those acts identified in § 362(a)(1), (2), (3), or (6),the acts identified in § 362(a)(4), (5), (7), and (8) remain automatically stayed. Thus,while a state agency could continue an administrative proceeding against the debtornotwithstanding Section 362(a)(1), it could not take action to perfect a lien against thedebtorsdebtor’s property notwithstanding § 362(a)(4).40 In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988)(“Congress clearlyintended for the police power exception to allow governmental agencies to remainunfettered by the bankruptcy code in the exercise of their regulatory powers.”); In reSynergy Development Corp., 140 B.R. 958, 959 (Bankr. S.D.N.Y. 1992)(“The purposeof the automatic stay is to allow a debtor to maintain the status quo in order to file a plan

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Code. . . . Notwithstanding the desire for calm seas leeward of therocks of regulation and for full sails, the Code does not change thebusiness and regulatory environment in which a debtor operates. Adebtor in possession under Chapter 11 is not pro tanto excused byvirtue of its bankruptcy from complying with valid and enforceablestate and local regulation. By virtue of 28 U.S.C. § 959(b), it isrequired to obey them. . . . An ongoing business is not to be givena competitive edge merely by virtue of its attempt to reorganizeunder Article 11.41

The Bankruptcy Code does not define or clarify what types of laws orregulations fall within the “police or regulatory” power of the government.However, the legislative history does provide some guidance. Importantly,that legislative history identified environmental protection laws as a primeexample of laws that may be enforced notwithstanding the automatic stay.42

Speaking more broadly, the House and Senate reports accompanying Section362(b)(4) explain that the provision was designed to except from thecoverage of the automatic stay, and hence to permit, the

. . . commencement or continuation of actions and proceedings bygovernmental units to enforce police or regulatory powers. Thus,where a governmental unit is suing a debtor to prevent or stopviolations of fraud, environmental protection, consumer protection,safety, or similar police or regulatory laws, or attempting to fix

of reorganization, not as a sword to stop the State from enforcing its police or regulatory

powers.”)41 In re Beker Indus. Corp., 57 B.R. 611, 623-24 (Bankr. S.D.N.Y. 1986).42 Indeed, the House Report accompanying Section 362(b)(4) of the 1978 Act states:

Under present law, there has been some overuse of the stay in the area ofgovernmental regulation. For example, in one Texas bankruptcy court, thestay was applied to prevent the State of Maine from closing down one of thedebtor’s plants that was polluting a Maine river in violation of Maine’senvironmental protection laws. In a Montana case, the stay was applied toprevent Nevada from obtaining an injunction against a principal in acorporation who was acting in violation of Nevada’s anti-fraud consumer

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damages for violation of such a law, the actual proceeding is notstayed under the automatic stay.43

Section 362(b)(4) has been applied to permit a state court to sanction afrivolous litigant,44 to permit the public service commission to establish awater utilities rate base,45 to compel a well operator to plug and abandonidle oil wells post-petition,46 to enforce state and city zoning laws againstprohibited use of property,47 to order a debtor to remediate a publicnuisance,48 to demolish buildings in violation of city building and firecodes,49 to deny a debtor’s application for a license to buy and sellproduce,50 to enforce state laws against usury and deceptive tradepractices,51 to enforce employment discrimination laws,52 to prosecute

protection laws. The bill excepts these kinds of actions from the automaticstay. The States will be able to enforce their police and regulatory powersfree from the automatic stay. The bankruptcy court has ample additionalpower to prevent damage to the bankrupt estate by such actions on acase-by-case basis. By exempting these State actions from the scope of theautomatic stay, the court will be required to examine the State actions morecarefully, and with a view to protecting the legitimate interests of the Stateas well as of the estate, before it may enjoin actions against the debtor orthe estate.

As discussed below, the fact that a state is not automatically prevented from enforcing itslaws under the police power exception to the automatic stay under § 362(b)(4) does notnecessarily end the inquiry. While perhaps not favored, a bankruptcy court retains thepower to enjoin the state from enforcing its laws under Section 105 under the propercircumstances.43 H.R. Rep. No. 95-595, at 343 (1977); S. Rep. No. 95-989, at 52 (1978), 1978

U.S.C.C.A.N., 5787, 5838, 6299.44 Janis v. Janis, 684 N.Y.S. 2d 426 (1998).45 Application of Timberon Water Co., 836 P.2d 73 (N.M. 1992).46 Wells Fargo Bank v. Goldzband, 61 Cal. Rptr. 2d 826 (1997).47 In re Porter, 42 B.R. 61 (Bankr. S.D. Tex. 1984).48 In re Lenz Oil Serv., Inc., 65 B.R. 292 (Bankr. N.D. Ill. 1986).49 Javens v. City of Hazel Park, 107 F.3d 359 (6th Cir. 1997).50 In re Fresh Approach, Inc., 49 B.R. 494 (Bankr. N.D. Tex. 1985).51 In re Asset Control Co. of North Carolina, 90 B.R. 192 (Bankr. S.C. 1988).52 In re Valley Kitchens, Inc., 68 B.R. 372 (Bankr. S.D. Ohio 1986).

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violations before the National Labor Relations Board,53 to require the debtorto post a bond required of all health clubs,54 to revoke a debtor’s corporatecharter,55 to remove scrap metal left on property in violation of zoninglaws,56 and to prosecute civil fraud claims by the government under theFalse Claims Act.57 In sum, the automatic stay does not apply

. . . where a governmental unit is suing a debtor to prevent or stopviolation of fraud, environmental protection, safety, or similar policeor regulatory laws, or attempting to fix damages for violation ofsuch a law, . . . the exception extends to permit an injunction andenforcement of an injunction, and to permit the entry of a moneyjudgment, but does not extend to permit enforcement of a moneyjudgment.58

The scope of this exception is limited: the statute provides that onlythe exercise of “police and regulatory powers” is excepted.59 In cases wheregovernment action cannot be found to be in furtherance of these powers,its conduct remains subject to the automatic stay.60 Courts have developeda number of tests to determine whether a certain action by the governmentconstitutes an exercise of its police powers within the meaning of Section

53 NLRB v. Twin Cities Elec., 907 F.2d 108 (9th Cir. 1990).54 In re Synergy Dev. Corp., 140 B.R. 958 (Bankr. S.D. N.Y. 1992).55 Matter of Jesus Loves You, Inc., 40 B.R. 42 (Bankr. M.D. Fl. 1984).56 Cournoyer v. Lincoln, 53 B.R. 478 (D.R.I. 1985), aff’d, 790 F.2d. 971 (1st Cir.

1985).57 In re Commonwealth Cos., 913 F.2d 518 (8th Cir. 1990).58 In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988).59 Chao v. Hospital Staffing Serv., Inc., 270 F.3d 374, 389 (6th Cir. 2001)(“In fashioning§ 362(b)(4), Congress did not except from the automatic stay all lawsuits undertaken byappropriate governmental authorities; it expressly limited the exception to suits by agovernmental unit ‘to enforce such governmental unit’s police and regulatory power.’”).60 In some instances, courts have indicated that, regardless of how the government’saction is characterized, it will not be excepted from the automatic stay if instituted ormaintained in “bad faith.” See, e.g., In re Beker Indus. Corp., 57 B.R. 611, 627 (Bankr.S.D. N.Y. 1986)(“Section 362(b)(4), in its qualification ‘to enforce such governmentalunit’s police or regulatory power,’ apparently excludes actions or proceedings brought

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362(b)(4). As the Sixth Circuit Court of Appeals61 recently explained inthe Chao case,

To determine whether an action qualifies as a proceeding pursuantto a governmental unit’s police or regulatory power, and thereforefalls outside the ambit of the automatic stay, this court applies twotests: the pecuniary purpose test and the public policy test.62

These tests have developed over time in the district and appellate courts,and have their genesis in comments made as part of the legislative historyof the section.63 As the court explained the tests,

Under the pecuniary purpose test, reviewing courts focus on whetherthe governmental proceeding relates primarily to the protection ofthe government’s pecuniary interest in the debtor’s property, andnot to matters of public safety. Those proceedings which relateprimarily to matters of public safety are excepted from the stay.Under the public policy test, reviewing courts must distinguishbetween proceedings that adjudicate private rights and those that

for an ulterior motive and thus in bad faith. . . . Bad faith, however, is to be distinguishedfrom concern for the well-being of constituents, the local environment and the appropriateusages of land. Concern for the types of people who would live or conduct business in acommunity is similarly to be distinguished from the political desirability of a particularindustry and the general effects it may have on the community.”) Not all courts haveadopted this approach, however, and it remains unclear in both its scope and its application.61 The Sixth Circuit has appellate jurisdiction over federal cases arising in Michigan,

Ohio, Kentucky and Tennessee.62 Chao at 374, 385-86.63 As Representative Edwards and Senator DeConcini remarked at the time theBankruptcy Code was enacted, “Section 362(b)(4) indicates that the stay under section362(a)(1) does not apply to affect the commencement or continuation of an action orproceeding by a governmental unit to enforce the governmental unit’s police or regulatorypower. This section is intended to be given a narrow construction in order to permitgovernmental units to pursue actions to protect the public health and safety and not toapply to actions by a governmental unit to protect a pecuniary interest in property of thedebtor or property of the estate.” 124 Cong. Rec. H11092 (daily ed. Sept. 28, 1978);

S.17409 (daily ed. Oct. 6, 1978).

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effectuate public policy. Those proceedings that effectuate a publicpolicy are excepted from the stay.”64

In other words, the pecuniary purpose test asks whether the governmentis seeking to recover funds from the debtor in order to satisfy the debtor’sobligation to the government, or whether the government seeks merely toprotect the broader public.65 If the proceeding is designed primarily tobenefit the government as a creditor of the debtor, the exception does notapply, and the government action is stayed.66 The public policy testinvestigates whether the government action is designed to benefit not thegeneral public but instead a specific individual or class of creditors. If thegovernment’s conduct is geared toward benefiting a narrow class ofindividuals, the exception will not apply and the government may notproceed.67 The government conduct at issue must pass both tests in orderto be excepted from the stay. As explained by the Sixth Circuit,

The public policy test calls upon courts to analyze whether aparticular lawsuit is undertaken by a governmental entity in orderto effectuate public policy or, instead, to adjudicate private rights. .. . This court’s pecuniary interest and public policy tests . . . aredesigned to sort out cases in which the government is bringing suitin furtherance of either its own or certain private parties’ interest inobtaining a pecuniary advantage over other creditors.68

64 Chao at 374, 386.65 See, e.g., In re North, 128 B.R. 592, 601 (Bankr. D. Vt. 1991)(exception will notapply “where the questioned action seeks to enhance pecuniary interests such as paymentof taxes or fulfillment of some other monetary requirement as a prerequisite for a licenserenewal.”)66 See In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988)(“Under either test,the state’s actions should have been stayed under 11 U.S.C. § 362 if the state was seekinga monetary sum merely as collection of a debt or as compensation for reclamation it hadalready performed.”).67 See, e.g., In re Kuck, 116 B.R. 821, 824-25 (Bankr. S.D. Ala. 1990), where Alabama’sfinancial responsibility statute requires the applicant, as a precondition to the issuance ofa driver’s license, to post a bond to pay any unsatisfied judgment arising out of a caraccident, “and, in so doing, acts primarily to facilitate the collection of a private debt for

the alleged victim.”68 Chao at 374, 389.

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In those instances where the government’s action benefits both thepublic at large and a small and discrete class of private interests, thegovernment action satisfies the public policy test unless the private interests“significantly outweigh” the public benefit from enforcement.69

The significance of the “pecuniary interest” and “public policy” testsis best illustrated through their application to various government activities.For example, these tests have been applied to permit the government toassess civil penalties against bankruptcy debtors for violations of certainkinds of state and federal laws,70 although such penalties generally mayonly be enforced and collected through the bankruptcy process. However,the government has been prohibited from setting off its financial obligationsto the debtor against monies owed by the debtor to the government, evenwhere the regulations permitting the setoff apply equally to non-bankruptdebtors.71 Nor may the government refuse to renew the debtor’s license todo business because the debtor owes the government a prepetition debt forsales taxes72 or has failed to pay workers compensation premiums.73 The

69 Id. at 390.70 In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988); In re Arnett, 731 F.2d358, 360 (6th Cir.1984); NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 942-43(6th Cir. 1986); U.S. v. Jones & Laughlin Steel Corp., 804 F.2d 348, 351 (6th Cir. 1986);In re Kovacs, 717 F.2d 984, 988 (6th Cir.1983), aff ’d sub nom Ohio v. Kovacs, 469 U.S.

274, 105 S. Ct. 705, 83 L. Ed.2d 649 (1985).71 Matter of Haffner, 25 B.R. 882, 886 (Bankr. N.D. Ind. 1982)(“. . . the enforcementof the regulations, to the extent that they require the retention of money to recoverprepetition debts in a postpetition transaction involving debtors constitutes a violation ofBankruptcy Code § 362(a)(6). . . . Clearly the enforcement of the ‘setoff’ requirement isan attempt to collect a prepetition debt.”).72 In re Blarney, Inc., 53 B.R. 162, 165 (Bankr. D. Minn. 1985)(“. . . as the section362(b)(4) exception relates to proceedings concerning nonrenewal or revocation of liquorlicenses for reason of tax delinquency, courts addressing the issue have found itinapplicable. Those courts based their decisions on the determination that the proceedingsat issue therein related primarily to matters other than state health, welfare, morals, andsafety concerns. . . . [Such statutes are] enacted for the primary purpose of protecting thestate’s pecuniary interests, and not its health, welfare, morals, or safety concerns.”); seealso In re North, 128 B.R. 592, 602 (Bkrtcy.D. Vt. 1991)(proceeding to revoke debtor’smedical license for nonpayment of taxes advances state’s purely pecuniary interests).73 In re Geffken, 43 B.R. 697, 701 (Bankr. N.D. Ohio 1984)(“It appears to this courtthat [the statute] was enacted for the primary purpose of enforcing the state’s pecuniary

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government may also not refuse to renew the driver’s license of a participantin an auto accident until a bond is posted to satisfy a judgment against thedriver.74 In these instances, the government’s action may be correctlycharacterized as trying to collect a prepetition debt of either the government,as in the case of unpaid sales or income taxes, or unemployment or workers’compensation premiums, or for private interests, as in the case of damageclaims arising from an automobile accident. The first type of governmentaction will not be excepted because it advances merely the government’specuniary interest as a creditor; the second type of action is considered toadvance private interests, not public policy.

In contrast, the government does not violate the automatic stay byenforcing a requirement that a company post a bond in order to do business,either by revoking or refusing to renew its license until it posts a valid andadequate bond.75 And instituting proceedings to forfeit a criminaldefendant’s bail bond for non-appearance has been held to serve the purpose

interest. . . . If this court were to let the Commission proceed with its action, then theCommission could virtually coerce the debtor into paying his pre-petition premiums. In

such a case the Commission would have obtained a preference over other creditors.”).74 In re Kuck, 116 B.R. 821, 824-25 (Bankr. S.D. Ala. 1990)(while insisting uponproof of insurance as condition to issuance of driver’s license may serve valid goal ofensuring financial responsibility, requirement that participant in auto accident post bondfor benefit of victims is primarily to benefit private parties and is not related to publicsafety); compare with the laws in In re Christmas, 102 B.R. 447, 459, 460 (Bankr. D. Md.1989)(“. . . there is a subtle but important distinction between requiring a debtor to makegood on outstanding debts (which are dischargeable in bankruptcy) as opposed to requiringlicensees to demonstrate their prospective financial responsibility as a condition for thegranting or renewal of licenses. This rule does not per se require the debtor to satisfy hisoutstanding judgments. . . . The actions of the Maryland Racing Commission in theenforcement of its rules of financial responsibility by suspending the debtor’s license asa horse trainer in the instant case [constitute] a valid exercise of the state’s police andregulatory power to which the automatic stay of section 362 does not apply.”) and Duffeyv. Dollison, 734 F.2d 265, 272 (6th Cir. 1984)(Section 363(b)(4) applies where the statute“provides that a judgment stayed or discharged in bankruptcy need not be satisfied by thejudgment debtor as a condition to the restoration of driving privileges . . . the Act neitherprovides creditors ‘leverage for the collection of damages,’ nor under the facts here doesit coerce bankrupts into reaffirming discharged debts.”).75 In re Apache Const., Inc., 34 B.R. 415, 416-17 (Bankr. D. Or. 1983)(“Thus, theBuilder’s Board does not withhold licensing for non-payment of discharged debts or

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of compelling appearance, not to advance the state’s pecuniary interest inthe amount of the bond itself.76 Such actions both serve to protect thebroad public welfare, and hence fall neatly into Section 362(b)(4)’sexception to the automatic stay.

The foregoing examples demonstrate that while the automatic stay ofSection 362 entitles the debtor to a “breathing spell” from its obligations toits creditors, including the government, it does not excuse violations ofapplicable law. But Section 363(b)(4) is not the only provision that makesthis point clear.

[4] — The Debtor’s Duty to Comply with State Law:28 U.S.C. Section 959(b).

Federal law has long required a receiver, trustee, or bankruptcy debtor-in-possession77 to comply with applicable law in the discharge of its duties,and to be accountable for any violation of that law occurring from theoperation of the business of the estate:

(a) Trustees, receivers or managers of any property . . . may besued, without leave of the court appointing them, with respect toany of their acts or transactions in carrying on business connectedwith such property . . .

debts provided for by an approved plan. Although future builder’s competence under thelaw may require bond or deposit for future work, such requirement is unrelated to the

debtor’s duties relating to pre-petition claims under the regulatory scheme.”).76 Bean v. Colorado., 72 B.R. 503, 504-05 (D. Colo. 1987)(“Few proceedings couldpossibly occupy a more central role in the operation of the state’s traditional police powerthan the enforcement of criminal bail proceedings as part of a criminal prosecution. . . .Appellants frankly admit the state’s goal in pursuing relief from the stay “is to secure thereturn of Quintin Wortham so that it may serve him with an arrest warrant and prosecutehim as the Capitol Hill rapist . . . . Thus, the state is not pursuing a pecuniary interest inthe instant proceeding.”).77 Bankruptcy debtors in Chapter 11 and Chapter 13 reorganization cases, but not inChapter 7 liquidation cases, are given the rights and responsibilities of trustees under theBankruptcy Code. See 11 U.S.C. §1107 (“. . . a debtor in possession shall have all therights, . . . and powers, and shall perform all the functions and duties, . . . of a trustee

serving in a case under this chapter.”); 11 U.S.C. § 1303.

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(b) A Trustee, receiver or manager appointed in any cause pendingin any court of the United States, including a debtor-in-possession,shall manage and operate the property in his possession as suchtrustee, receiver or manager according to the requirements of thevalid laws of the state in which such property is situated, in thesame manner that the owner or possessor thereof would be boundto do if in possession thereof.78

This provision is deeply rooted in federal law.79 Most importantly,Section 959(a) constitutes “an express statutory exception to the blanket [§362(a)] stays inherent to the bankruptcy process.”80 Accordingly, Section959 is just as important a qualifier on the protections afforded to a debtorunder the Bankruptcy Code as those set forth in Section 362(b)(4). Indeed,one court has commented that a failure to consider both provisions can,and frequently does, lead to the wrong result:

Cases on the issue of whether the bankruptcy court can controlregulatory agencies has focused on the automatic stay provisionrather than on 28 U.S.C. § 959. Such focus is understandable fromthe point of view of the debtor. If the debtor can lead the courtaway from 28 U.S.C. § 959 and argue only the propriety of thestay, then he has a chance to hinder such regulatory actions. Thewording of the stays in [§362(a)] is very broad and leads one easilyto the mistaken conclusion that all actions, even those by State andlocal governments, are stayed. It’s only when 28 U.S.C. § 959 isconsidered, are the limits of the stay clearly drawn. No case whichhas upheld a stay as applied to governmental agencies has everconsidered 28 U.S.C. § 959.81

78 28 U.S.C. § 959.79 Matter of The Briarcliff, 15 B.R. 864, 866 (D. N.J. 1981)(“The ability of a regulatorybody to assert its will on a federal receiver was first established in 1887.”).80 Pereira v. Phillips, 583 N.Y.S.2d. 793, 796 (1992).81 Matter of The Briarcliff, 15 B.R. 864, 868 (D. N.J. 1981).

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However, Section 959(a) does not authorize suit against the trustee ordebtor for all postpetition conduct. The debtor may not be sued for conductthat is part of the normal administration of the bankruptcy estate, such ascollecting assets of the estate, even through litigation.82 Section 959(a)only permits suit where the conduct complained of was a necessary incidentof the operation of the debtor’s affairs or business as a going concern.83, 84

Unfortunately, there will be many instances where it will be far from clearhow to characterize the debtor’s activities.85

A plaintiff need not obtain relief from the stay in order to pursue itsclaim under Section 959(a) against a debtor or trustee arising out of theoperation of its business. Such suits are characterized as being against thedebtor or trustee in his or her “personal capacity,” whereas suits arisingfrom activities normal and incident to the bankruptcy process are suitsagainst the trustee in his or her “official capacity.” Suits of the latter typeare only permitted with the permission of the court appointing the trusteeor receiver.86 However, even when a debtor is sued for activities within the

82 Matter of Campbell, 13 B.R. 974, 976 (Bankr. Idaho 1981)(“Merely collecting,taking steps to preserve, and/or holding assets, as well as other aspects of administeringand liquidating the estate, do not constitute ‘carrying on business’ as that term has beenjudicially interpreted.”).83 Matter of American Assoc. Sys., Inc., 373 F. Supp. 977, 978-79 (E.D. Ky. 1974).84 Suits against the debtor or trustee under § 959(a) may always be brought in thebankruptcy court, even without an independent basis for federal jurisdiction. Robinsonv. Michigan Consol. Gas Co., 918 F.2d 579, 586 (6th Cir. 1990)(“actions against a receiverarising out of his conduct of the receivership business may be brought in the appointingcourt even though there may not be any independent grounds for asserting federaljurisdiction.”).85 See, e.g., In re Wall Tube & Metal Prods. Co., 831 F.2d 118, 122 (6th Cir. 1987)(“Norare we convinced that Section 959(b) is inapplicable to liquidating trustees, as respondentsargue. We believe that whether a trustee is liquidating, managing or reorganizing thedebtor’s estate, his efforts under the Code remain the same—the consolidation anddistribution of the estate’s assets to the benefit of the creditors. As such, that the trusteein this case is liquidating the estate rather than reorganizing it is inconsequential, especiallyin the critical context of the public’s welfare. In either case, an environmental hazard onthe estate’s property is within the control of the trustee.”).86 In re DeLorean Motor Co, 991 F.2d 1236, 1240 (6th Cir. 1993)(“. . . leave of theappointing forum must be obtained by any party wishing to institute an action in a non-

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scope of Section 959(a), “a court action against reorganization trusteesrelating to business activities of the bankrupt carried on by the trustee mayproceed unless the bankruptcy court, exercising sound discretion, finds thatthe action would embarrass, burden, delay or otherwise impede thereorganization proceedings.”87

Where Section 959(a) renders the bankrupt or trustee subject to suitfor claims arising out of post-petition business activities, whether arisingout of statute, contract, or tort, Section 959(b) reinforces the bankrupt’sobligation to conduct such business activities in conformity with applicablestate law.88 For example, the Supreme Court has held that the statutorypredecessor to Section 959(b) required the federal receiver of an oil companyto comply with local statutes requiring the business to maintain a license todo business and post a bond, notwithstanding the fact that the cost of postingthe bond would hinder the receiver’s ability to operate the business.89 Adebtor is also required to continue to comply with air quality emissionscontrols mandated by the Clean Air Act.90 These holdings are stillapplicable under the current version of Section 959.91

[5] — The Bankruptcy Court’s Equitable Powers:Section 105(a).

While Section 959 requires a bankrupt operating its business to complywith state law and Section 362(b)(4) permits state and federal regulators tocompel adherence to such laws, there may be situations where rigid

appointing forum against a trustee, for acts done in the trustee’s official capacity and

within the trustee’s authority as an officer of the court”).87 Matter of Investors Funding Corp. of New York, 547 F.2d 13, 16 (2d Cir. 1976); In

re Chicago Pacific Corp., 773 F.2d 909, 918 (7th Cir. 1985).88 In re Beker Indus. Corp., 57 B.R. 611, 624 (Bankr. S.D.N.Y. 1986)(“A debtor inpossession under Chapter 11 is not pro tanto excused by virtue of its bankruptcy fromcomplying with valid and enforceable state and local regulation. By virtue of 28 U.S.C. §

959(b), it is required to obey them.”).89 Gillis v. California, 293 U.S. 62,(1934).90 U.S. v. Wheeling-Pittsburgh Steel Corp., 818 F.2d 1077 (3d Cir. 1987).91 Matter of The Briarcliff, 15 B.R. 864, 867 (D. N.J. 1981).

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adherence to otherwise valid and enforceable laws may jeopardize the abilityof a bankrupt to reorganize. While a company that is bankrupt is requiredto compete on a level playing field with its competitors, and in compliancewith the same laws, in some instances the bankruptcy court may determinethat a debtor is entitled to some limited relief from such laws. Congressrecognized this need, and expressly authorized a bankruptcy court to giveneeded relief in appropriate circumstances:

The court may issue any order, process, or judgment that is necessaryor appropriate to carry out the provisions of this title.92

The language of Section 105 is extremely broad, permitting the courtto enter “any order” that is “necessary or appropriate” to achieve the goalsof the Bankruptcy Code. Of particular importance here is Congress’expressed intention that a bankruptcy court may use Section 105 to issuean injunction to achieve a result different from that which would haveresulted from application of Section 362 alone:

[Section 362(b)] lists five exceptions to the automatic stay. Theeffect of an exception is not to make the action immune frominjunction. . . . The court has ample other powers to stay actionsnot covered by the automatic stay. Section 105, of proposed title 11. . . grants the power to issue orders necessary or appropriate tocarry out the provisions of title 11. . . . Stays or injunctions issued[under Section105] will not be automatic upon the commencementof the case, but will be granted or issued under the usual rules forthe issuance of injunctions. By excepting an act or action from theautomatic stay, the bill simply requires that the trustee move thecourt into action, rather than requiring the stayed party to requestrelief from the stay. There are some actions, enumerated in theexceptions, that generally should not be stayed automatically uponthe commencement of the case, for reasons of either policy orpracticality. Thus, the court will have to determine on a case-by-casebasis whether a particular action which may be harming the estateshould be stayed.93

92 11 U.S.C. § 105.93 House and Senate Reports (Reform Act of 1978).

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A bankrupt faced with compliance activities by state regulators thatare excepted from the automatic stay by virtue of Section 362(b)(4) maynonetheless seek an injunction from the bankruptcy court under Section105 to enjoin enforcement.94 In such cases the debtor must show morethan the mere annoyance of complying with the law, or the ordinary costsincident to compliance – the debtor must show “irreparable harm” causedby the enforcement, including that the demands made upon it by complyingwith the law will jeopardize its efforts to reorganize.95 Further, courts haverecognized that together Section 362(b)(4) and Section 959(b) evidenceCongress’ strong desire that bankruptcy debtors and trustees must complywith applicable law.96 Courts have therefore exercised the discretionaryauthority vested in them under Section 105 sparingly and with appropriatedeference to that expressed congressional policy.97

94 In re Kaiser Steel Corp., 87 B.R. 662, 665 (Bankr. D. Colo. 1988)(“The Courtrecognizes that enforcement actions by Utah may effectively place in jeopardy the ‘freshstart’ which the Debtor would hope to achieve by way of its reorganization plan. If so,the Debtor may have a remedy under the injunctive provisions of 11 U.S.C. § 105.”);Matter of Commonwealth Oil Refining Co., 805 F.2d 1175, 1188 n.16 (5th Cir.1986)(“Courts considering the scope of § 105 have seen it as an avenue available forstaying actions that are found to fall within an exception to the automatic stay.”)(citingBrowning v. Navarro, 743 F.2d 1069, 1084 (5th Cir.1984); State of Missouri v. U.S.Bankruptcy Court, 647 F.2d 768, 776-77 (8th Cir.1981); In re Bel Air Chateau Hosp.,Inc., 611 F.2d 1248, 1251 (9th Cir.1979); Penn Terra, 733 F.2d at 273; In re Global Int’lAirways Corp., 48 B.R. 849, 851 (W.D. Mo. 1985); In re Prof. Sales Corp., 48 B.R. at660; In re Jerzak, 47 B.R. 771, 773 (Bankr. W.D. Wisc.1985); In re Farmers & RanchersLivestock Auction, Inc., 46 B.R. 781, 796 (Bankr. E.D. Ark.1984); In re King MemorialHosp., Inc., 4 B.R. 704, 709 (Bankr. S.D. Fla.1980); NLRB v. Superior Forwarding, Inc.,

762 F.2d 695, 699 (8th Cir.1985).95 Matter of Commonwealth Oil Refining Co., 805 F.2d 1175, 1188 n.16 (5th Cir.1986); Matter of Envtl. Waste Control, Inc., 125 B.R. 546, 551 (N.D. Ind. 1991)(denyinginjunction against enforcement of RCRA under § 105 to liquidating debtor where there

was no reasonable likelihood of reorganization and public interest would not be served).96 Wilner Wood Prod. v. Maine, Dep’t of Envtl. Protection, 128 B.R. 1, 3 (D.Me.1991)(“Nothing in the general language of section 105 suggests that Congress intended

it to override the specific prohibition of section 959(b).”).97 Kathryn R. Heidt, Environmental Obligations in Bankruptcy, § 4:30 (West2004)(hereinafter Heidt)(“. . . if an action is excepted from the stay, courts do not easilygrant § 105 injunctions to bar the action.”); Matter of Commonwealth Oil Refining Co.,

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Section 105 therefore exists as a limited safety valve to the strictapplication of Section 362(b)(4) and Section 959(b). Collectively theseprovisions reflect a balanced approach to the application of federal, state,and local laws and regulations to the debtor in bankruptcy. As seen in thenext section of this Chapter, each of these provisions plays an importantrole in the regulatory treatment of surface coal mining operations as theynavigate through the bankruptcy process.

§ 7.04. The Coal Company in Bankruptcy.As seen in the previous sections, when the government is acting for the

benefit of the public at large, its conduct is not generally subject to theautomatic stay. Where, however, the government is acting as a creditor torecover money owed to it by the debtor, or where it champions the cause ofa small group of private creditors, such actions remain subject to theautomatic stay. But the line between these two types of activity is less clearwhere regulators are armed with a variety of licensing, financialresponsibility, bonding, and civil penalty provisions, as is the case withSMCRA.

As one commentator has explained,

There are three basic categories of environmental obligations:

Obligations to pay the government money for pre-petition liabilities,which includes both a. obligations to reimburse the governmentfor costs incurred for investigation of a site or for cleanup alreadyperformed by the government, b. obligations to pay the governmentfor pre-petition penalties.

Inc., 805 F.2d 1175, 1188 n.16 (5th Cir. 1986)(“We note however, that the powers of acourt under § 105 are not unlimited. See, e.g., United States v. Sutton, 786 F.2d 1305,1307-08 (5th Cir.1986); Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3dCir. 1985); In re Fox, 725 F.2d 661, 663 (11th Cir.1984); Johnson v. Nat. Bank ofMontevideo, 719 F.2d 270, 273 (8th Cir.1983), cert. denied, 465 U.S. 1012 (1984); In rePirsig Farms, Inc., 46 B.R. 237, 240 (D.Minn.1985); In re Wood, 33 B.R. 320, 322-23(Bankr. D. Idaho 1983); In re Candor Diamond Corp., 26 B.R. 850, 851 (Bankr. S.D.

N.Y.1983); In re Dunkle Assocs., Inc., 19 B.R. 481, 485-86 (Bankr. E.D. Pa.1982).”).

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Obligations to perform cleanup of a contaminated site or to restorea site to its former condition.

Obligations to refrain from future polluting and to comply with allapplicable laws in the future.98

Of these three types of obligations, only the first requires the debtor topay money to the state; the last two require the debtor to undertake activityto either correct a past violation or ensure a new violation does not occur inthe future. Understandably in light of both bankruptcy policy and the plainlanguage of Section 362(b)(4), each of these types is treated differently inbankruptcy. Each will be examined in turn.

[1] — Monetary Claims for Compliance Investigation orSite Cleanup.

Most courts have concluded that enforcement actions that seek, inessence, to enforce penalties or to recover environmental remediation costsare excepted from the automatic stay.99 However, the terms “enforce” and“recover” have a different meaning in the bankruptcy context in light ofSection 362(b)(4). Recall that this provision indicates that the automaticstay does not bar an action or proceeding to “enforce[] a judgment otherthan a money judgment, . . .”100 As one court has explained,

The automatic stay imposed under 11 U.S.C. § 362(a) is notimplicated because governmental actions under CERCLA to recovercosts in response to completed environmental violations are notstayed when an alleged responsible party files a bankruptcy case. .. . Such actions are regarded as subject to the exception to theautomatic stay set forth in 11 U.S.C. § 362(b)(4). Even though

98 Heidt, § 4.3 (West 2004).99 U.S. v. Sugarhouse Realty, Inc., 162 B.R. 113, 115 (E.D. Pa. 1993)(“Environmentalenforcement actions brought by federal, state and local governmental units to recoupclean-up costs are exempted from the automatic stay by § 362(b)(4); see also UnitedStates v. Nicolet, 857 F.2d 202, 210 (3d Cir. 1988); City of New York v. Exxon Corp.,

932 F.2d 1020, 1024 (2d Cir. 1991).100 11 U.S.C. §362(b)(4).

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governmental police power actions may continue against the debtor,any money judgment that the Board of Supervisors might obtain insuch action may not be enforced against the debtor without relieffrom the automatic stay. This is so because the enforcement ofmoney judgments is excluded from the exception expressed in 11U.S.C. § 362(b)(5).101

Thus, while a regulator is entitled to prosecute its claims for penaltiesor cleanup costs in order to establish the amount due and reduce it to ajudgment, it may only collect on that judgment by either obtaining relieffrom the automatic stay or by filing a claim in the bankruptcyproceedings.102

For example, the State of Tennessee’s actions in fixing a civil fine againsta debtor were held to fall within Section 362(b)(4)’s exception, as thatconduct was not undertaken to vindicate the state’s pecuniary interest inrecovering a fine from the debtor:

We do not find the rationale, policy and factors expressed in theTennessee Water Quality Control Act to be based upon the state’sownership of or pecuniary interest in the natural resources ofTennessee. Punishing wrongdoers, deterring illegal activity,recovering remedial costs of damage to the environment, providing

101 In re Trap Rock Corp., 153 B.R. 642, 645 (Bankr. S.D.N.Y. 1993). As previouslynoted, in 1999 the former §362(b)(5) to which the court refers has been combined in the

current § 362(b)(4).102 See, e.g., New York v. Exxon Corp., 932 F.2d 1020, 1024 (2d Cir. 1991),

The inclusion of [CERCLA reimbursement actions] together with injunctiverelief in this section furthers the purpose of the automatic stay’s regulatoryexception. The availability of a reimbursement action encourages a quickresponse to environmental crises by a government, secure in the knowledgethat reimbursement will follow. . . . The need to continue such deterrentactions, despite the pendency of a bankruptcy action, furthers the purposeof the regulatory exemption to the automatic stay squarely: to avoidfrustrating “necessary governmental functions by seeking refuge inbankruptcy court.” We therefore hold that governmental actions underCERCLA to recover costs expended in response to completed environmentalviolations are not stayed by the violator’s filing for bankruptcy.”

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for the costs of administration and weighing the social and economicvalue of a discharge source are exercises of the state’s regulatorypower to effectuate public policy and are not actions based uponthe state’s property interests. Likewise removing, correcting orterminating pollution and determining the severity and effect ofdischarges on the receiving waters are actions to protect the publichealth and safety, and are not grounded upon the state’s propertyinterests.

The proprietary or pecuniary reward in assessing penalties underthe Act is apparently of only secondary importance to the state. Inthis regard, although the state contends that it may fix civil liabilityunder Section 362(b)(4), it concedes that it may not collect anypenalties assessed or any judgment entered by the Board. The statelikewise concedes that even if it had been allowed to fix fines andpenalties in this case, that it still would have to pursue its claimsubject to the jurisdiction of the bankruptcy court.103

This approach has been followed in an action by OSM to collect a civilpenalty against the debtor for its violation of SMCRA. There, the courtconcluded that OSM’s action was permissible as one to enforce thegovernment’s police and regulatory power within the meaning of Section362(b)(4).104

One of the early cases discussing the treatment of a debtor’senvironmental reimbursement obligations reached the Supreme Court. InOhio v. Kovacs,105 the State of Ohio obtained a court order directing theoperator of a hazardous waste site to clean up the site and remedyviolations.106 When the operator failed to comply, the state appointed a

See also United States v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988)(CERCLA suit torecover cleanup costs and civil penalties excepted from the automatic stay under §

362(b)(4)).103 In re Commerce Oil Co., 847 F.2d 291, 295-96 (6th Cir. 1988).104 U.S. v. Energy Int’l, Inc., 19 B.R. 1020, 1021 (S.D. Ohio 1981).105 Ohio v. Kovacs, 469 U.S. 274 (1985).106 Id. at 275.

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receiver to take possession of the property and commence remediationefforts. After the receiver seized the operator’s nonexempt assets to fundthe cleanup efforts, the operator filed bankruptcy, and the bankruptcy trusteeattempted to recover the debtor’s assets for the bankruptcy estate. With theright to the debtor’s assets at issue, the Court concluded that

With the receiver in control of the site, we cannot fault the Court ofAppeals for concluding that the cleanup order had been convertedinto an obligation to pay money, an obligation that was dischargeablein bankruptcy.107

Because the state had converted the operator’s duty to performremediation on the site into a financial obligation to repay the state forhaving performed that duty where the debtor had failed to do so, the state’sclaim was transformed from a nondischargeable equitable obligation into adischargeable financial obligation.108 The court noted, however, that theduty to operate the property in compliance with environmental laws wasnot dischargeable in bankruptcy, and ran with the land.109

107 Id. at 282-83.108 Viewed in light of the policies underlying the environmental laws, this distinction

in treatment for remediation costs has very little to recommend it:

Under the current system, if the government cleans up a site pre-petitionand seeks to recover from the owner cum debtor, the government clearlyhas a claim that arose pre-petition; actions to collect it are stayed. If thegovernment does not perform the clean up, under current interpretations ofthe automatic stay, the government can compel the estate as current ownerto clean up the site. The most logical strategy from a recovery standpoint isfor the government to wait and not rush into a clean up, hoping it can forcethe estate to do so. As a result, the government has a disincentive to performclean up whenever the responsible party is not financially sound. This runsdirectly contrary to the congressional policy behind CERCLA: to provide ameans for quick and early clean up and then to give the government thepower to seek reimbursement.

Heidt, § 4.13.109 Id. at 285 (“Finally, we do not question that anyone in possession of the site—whether it is Kovacs or another in the event the receivership is liquidated and the trustee

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Not every circumstance where the state undertakes to completeresponsibilities, assigned by the law to the debtor, will leave the state withnothing more than a general unsecured claim for its efforts. In a slightlydifferent circumstance, the Sixth Circuit concluded that state regulatoryauthorities were entitled to investigate the debtor’s post-petition compliancewith state environmental laws, and to have the expenses incurred in suchinvestigation given administrative expense priority over the claims of generalcreditors.110

Section 362(b)(4)’s indication that the automatic stay does not bar anaction to enforce a non-money judgment has been read by courts to permitstate regulators only to fix the liability for and amount of civil penaltiesand for reimbursable remediation costs, but not to undertake collectionefforts outside of the bankruptcy claims process.

[2] — Orders to Clean Up Contaminated Sites andRemedy Violations.

Efforts by state regulators to compel the immediate compliance withenvironmental laws and remediation of violations have met with thestrongest resistance from debtors, as such efforts require the expenditureof funds from the estate, a dear commodity in bankruptcy. But as Section959(b) makes clear, the debtor is required to comply with applicable statelaw, and this obligation is meaningless unless the state can enforce it throughinjunctive relief. Accordingly, “Under most circumstances, governmentalunits may also seek injunctive relief to compel clean-up without runningafoul of the automatic stay.”111

abandons the property, or a vendee from the receiver or the bankruptcy trustee—mustcomply with the environmental laws of the State of Ohio. Plainly, that person or firm maynot maintain a nuisance, pollute the waters of the State, or refuse to remove the source ofsuch conditions.”).110 In re Wall Tube & Metal Prods. Co., 831 F.2d 118, 124 (6th Cir. 1987)(“The State ofTennessee, in the absence of compliance by the debtor’s estate, was entitled by its ownlaw to expend funds to assess the gravity of the environmental hazard. We thus find thoseexpenses to be actual and necessary, both to preserve the estate in required compliancewith state law and to protect the health and safety of a potentially endangered public.”).111 U.S. v. Sugarhouse Realty, Inc., 162 B.R. 113, 115 (E.D. Pa. 1993).

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With respect to a state regulator’s ability to obtain an injunctioncompelling the debtor to abide by environmental regulations duringbankruptcy, Penn Terra is the leading case governing those issues. In thiscase, a surface coal mining operation in western Pennsylvania was citedfor violation of applicable regulations. Thereafter it ceased all operationsand filed for bankruptcy protection. State regulators then filed suit in statecourt, seeking an injunction requiring the bankrupt operator to remedy theviolations.112

In determining whether the regulator’s actions in seeking the injunctionviolated the automatic stay, the court had little trouble at the outset indetermining that they were taken in furtherance of the state’s policepowers.113 While the state’s actions sought only injunctive relief compellingcompliance, the debtors countered the this compliance would require thebankrupt operator to expend estate funds that constituted property of theestate. Thus, the debtor argued, the state’s action was, in effect, an actioneither to enforce the equivalent of a money judgment, or an action to exercisecontrol over property of the estate. As such actions did not fall within theexceptions of Section 362(b)(4) in effect at the time this case was decided,the debtor urged the court to find the automatic stay fully applicable.114

The court first noted that, as a limitation on the state’s exercise of itspolice power, the application of the automatic stay to the “enforcement ofa money judgment” should be read narrowly by courts.115 The court thenrejected the debtor’s two arguments. First, the court concluded that aninjunction that effectively requires the debtor to expend money to achieve

112 Penn Terra Ltd. v. Dep’t of Envtl. Resources, 733 F.2d 267, 269 (3d Cir. 1984).113 Id. at 274 (“it first is clear to us that . . . obtaining and attempting to enforce theCommonwealth Court’s injunction falls squarely within Pennsylvania’s police andregulatory powers. DER seeks to force Penn Terra to rectify harmful environmentalhazards. No more obvious exercise of the State’s power to protect the health, safety, and

welfare of the public can be imagined.”).114 Id. at 272.115 Id. at 273 (“For the same policy reasons, the ‘exception to the exception’ created bysubsection 362(b)(5), rendering ‘enforcement of a money judgment’ by a governmentunit susceptible to the automatic stay, should be construed narrowly so as to leave to theStates as much of their police power as a fair reading of the statute allows.”).

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compliance with state law is not the same as a “money judgment,” whichdirects the debtor pay money directly to the state.116 As the Court explained,

. . . an important factor in identifying a proceeding as one to enforcea money judgment is whether the remedy would compensate forpast wrongful acts resulting in injuries already suffered, or protectagainst potential future harm. Thus, it is unlikely that any actionwhich seeks to prevent culpable conduct in futuro will, in normalcourse, manifest itself as an action for a money judgment, or one toenforce a money judgment.117

The court rejected the debtor’s second argument, likewise concludingthat the need to satisfy an order by expending funds does not necessarilyrender a judgment one for money.118 That is determined by what thejudgment compels the debtor to do: a money judgment compels the debtorto pay money to the plaintiff, a non-monetary judgment compels the debtorto perform actions, and does not lose its character as such if the debtorachieves those result by paying money to a third party.119

116 Id. at 275 (“. . . the proceeding initiated by DER in Commonwealth Court was not toenforce a money judgment. . . . DER brought its action in equity to compel the performanceof certain remedial acts by Penn Terra. It did not seek the payment of compensation tothe Commonwealth’s coffers, and the injunction actually issued by the CommonwealthCourt did not direct such payment. This proceeding, therefore, could never have resultedin the adjudication of liability for a sum certain, an essential element of a money judgment.Since this action was in form and substance . . . , not one to obtain a money judgment, it

follows that it could not be one to enforce the payment of such a judgment.”).117 Id. at 276-77. See also Heidt, § 4.16 (“Debtors have argued that the cost of complyingwith an order not to pollute costs money, and therefore constitutes a money judgment.However, most current environmental laws do not permit a violator to pay money in lieuof complying with the law. Therefore, these are not money judgments that are subject tobeing stayed.”).118 Matter of Canarico Quarries, Inc., 466 F. Supp. 1333 (D. P.R. 1979)(order requiringChapter 11 debtor to conform with air quality regulations even though compliance requiredexpenditure of $323,000 for dust control equipment); U. S. v. Price, 688 F.2d 204 (3dCir. 1982)(requiring landfill owner to conduct diagnostic study of toxic hazards at site isa proper use of the court’s equitable powers, because it would be “preventive,” ratherthan “compensatory.”).119 Id. at 278 (“. . . in defining the scope of the exception to the automatic stay, theBankruptcy Court in this case placed too much weight on the value of preserving thecorpus of the debtor’s funds and estate under its own exclusive control. . . . In enactingthe exceptions to section 362, Congress recognized that in some circumstances, bankruptcy

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Many courts that have faced the same issue have followed the holdingin Penn Terra, and ordered the debtor’s compliance with state environmentallaws notwithstanding the expense.120 For example, in Commonwealth OilRefining, the EPA was successful in requiring the bankrupt operator of ahazardous waste storage facility to either obtain a final operating permitpursuant to its regulations or cease operations, notwithstanding the debtor’sinsistence that it needed only more time before it could comply.121 Thebankruptcy court found that EPA’s actions fell squarely within Section362(b)(4)’s police power exception.122 On appeal to the Fifth Circuit, thecourt agreed that the action did not constitute an attempt to enforce a moneyjudgment, notwithstanding the expense of compliance to the estate.123 Thedebtor also argued that Section 362(b)(4) only applies to government actionstaken to prevent an “imminent and identifiable harm” to public health andsafety. The court rejected this argument as lacking any support in the literaltext of the statute:

policy must yield to higher priorities. . . . We believe that the inquiry is more properlyfocused on the nature of the injuries which the challenged remedy is intended to redress—including whether plaintiff seeks compensation for past damages or prevention of futureharm—in order to reach the ultimate conclusion as to whether these injuries aretraditionally rectified by a money judgment and its enforcement. Here, . . . TheCommonwealth was not seeking a traditional form of damages in tort or contract, andthe mere payment of money, without more, even if it could be estimated, could not satisfythe Commonwealth Court’s direction . . . Rather, the Commonwealth Court’s injunctionwas meant to prevent future harm to, and to restore, the environment.”).120 2 Norton Bankr.L. & Prac. 2d § 42:9 (2004)(“The courts have consistently upheldthe ability of governmental units or quasi-governmental units to compel the expenditureof bankruptcy estate assets in connection with the enforcement of police or regulatorypowers, broadly defined. The de facto priority effect of these orders, to the detriment ofother creditors and in contravention of the Bankruptcy Code’s priority scheme, has notdissuaded the courts.”) This argument has been rejected in other contexts as well. See,e.g., Javens v. Hazel Park, 107 F.3d 359 (6th Cir. 1997)(mere fact that order enforcingzoning laws would compel debtor to expend estate assets does not render action one to

exercise control over property of the estate).121 In re Commonwealth Oil Refining Co., 58 B.R. 608 (Bankr. W.D. Tex. 1985).122 Id. at 614 (“The Supreme Court’s implied approval of Penn Terra makes it apparentthat the Supreme Court is not concerned with the expenditure of money by the estaterequired to bring it into compliance with the environmental laws.”).123 Matter of Commonwealth Oil Refining Co., 805 F.2d 1175, 1183-84 (5th Cir. 1986).

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The exception from the automatic stay for proceedings to enforcepolice and regulatory powers is not, as appellants suggest, limitedto those situations where “imminent and identifiable harm” to thepublic health and safety or “urgent public necessity” is shown. Thewords of §§ 362(b)(4) and 362(b)(5) allow for no such reading.The language of these exceptions is unambiguous—it does not limitthe exercise of police or regulatory powers to instances where therecan be shown imminent and identifiable harm or urgent publicnecessity.124

The court also found that an injunction under Section 105 was properlyrejected by the bankruptcy court, concluding that the debtor had failed toshow that it was reasonably likely to prevail against the EPA in itsenforcement action, and that the public interest was better served by present,rather than deferred, enforcement of environmental laws.125

Because, in many instances, government regulators are successful inasserting their right to proceed under Section 362(b)(4) notwithstandingthe automatic stay, bankruptcy debtors have attempted to obtain aninjunction against the regulators under Section 105. Such injunctions havebeen issued in a number of cases by bankruptcy courts, citing the risk tothe debtor’s ability to succeed in bankruptcy. But in a number of instances,they have been vacated by the district court on appeal. For example, in onecase a bankruptcy enjoined the EPA from terminating the debtor’s permitto operate a hazardous waste management facility for its failure to complywith the RCRA and CERCLA and for failure to remediate violations on-site.126 On appeal, the district court admitted that injunctive relief againstthe EPA is available to the debtor in limited circumstances,127 but notedthat the EPA’s action in terminating the debtor’s permit did not take anytangible property of the debtor, and that to the extent the permit constituted

124 Id. at 1184.125 Id. at 1189-90.126 In re Professional Sales Corp., 56 B.R. 753, 757 (N.D. Ill. 1985).127 Id. at 762 (“. . . the legislative history is less than emphatic in authorizing § 105(a)stays against the government.”).

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property of the debtor’s estate, it was, like any permit granted by thegovernment, by definition subject to the debtor’s ongoing compliance withthe regulatory scheme.128 Because permitting the debtor to retain thebenefits of the permit without having to bear the burdens of regulatorycompliance would give the debtor a windfall unavailable to its competitors,the district court found that a Section 105 injunction excusing the debtorfrom compliance was unwarranted.129

Faced with the considerable expense of remedying a polluted site ormaintaining bond coverage, a debtor or trustee might reasonably concludethat it is simply more cost effective to abandon the property outright thanto pay the cleanup costs. However, the Supreme Court has foreclosed thisoption, at least in circumstances where the abandonment would not bepermitted outside of bankruptcy.130 In Midlantic Nat’l Bank v. New JerseyDep’t of Envtl. Protection, a Chapter 7 trustee attempting to liquidate theestate sought permission from the bankruptcy court to abandon propertyheavily contaminated with waste oil containing high concentrations of PCBs,a highly toxic carcinogen. The Supreme Court concluded that theBankruptcy Code did not afford the trustee any such right:

Neither the Court nor Congress has granted a trustee in bankruptcypower that would lend support to a right to abandon property incontravention of state or local laws designed to protect public healthor safety. . . . Congress has repeatedly expressed its legislative

128 Id. at 764 (“As noted in Pension Benefit Guaranty Corp. v. Braniff Airways, Inc.,700 F.2d 935, 942 n.5 (5th Cir. 1983), ‘whatever vitality the “threat to assets” theorymay have, it is inapplicable where . . . the very existence of the “asset” depends on theregulatory activity in question.’”).129 Id. (“To uphold a § 105 stay under these circumstances would allow PSC to operatethe facility as a hazardous waste site despite noncompliance with the RCRA. Neither theBankruptcy Code nor the RCRA is intended to promote such preferential treatment forChapter 11 debtors. . . . The bankruptcy court’s order, by suspending EPA limits onPSC’s future use of the property, does not preserve the status quo but expands PSC’sproperty rights beyond what they would be outside Chapter 11. Whatever authority §105 may give the bankruptcy court to enjoin regulatory action by the federal government,it does not reach so far.”).130 See Footnote 4.

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determination that the trustee is not to have carte blanche to ignorenon-bankruptcy law. Where the Bankruptcy Code has conferredspecial powers upon the trustee and where there was nocommon-law limitation on that power, Congress has expresslyprovided that the efforts of the trustee to marshal and distribute theassets of the estate must yield to governmental interest in publichealth and safety.131

Significantly, the Supreme Court further defined the circumstancesunder which abandonment may be allowed. While regulators argue that allenvironmental laws are designed to protect the public health or safety, the“abandonment power is not to be fettered by laws or regulations notreasonably calculated to protect the public health or safety from imminentand identifiable harm.” (emphasis added).132 In this regard, the ability toabandon properties is circumscribed only if there is imminent danger whichis identifiable. Therefore, the existence of minor violations, administrativeviolations or failure to complete all required reclamation are not necessarilyimpediments to abandonment.

[3] — Ongoing Compliance with Laws and Regulations.The cases discussed in the section above dealt with the debtor’s

obligation to comply with environmental regulations during the course ofits bankruptcy proceedings. In particular, those cases involve an on-siteviolation of some kind: either a mining or storage site that is contaminatedin violation of the statute, and hence in need of remediation, or the operator’sfailure to contemporaneously reclaim the land. The cases discussed in thissection involve the debtor’s failure to satisfy a financial responsibilityrequirement, such as the posting of the required bond. State and federalregulatory regimes frequently require a permit applicant to post and maintainan adequate performance or reclamation bond as a condition of doingbusiness. This requirement has two possible purposes: to safeguard thepublic fisc,133 and to encourage compliance with environmental regulations

131 474 U.S. 494 (1986).132 Id. at 763, n.9.133 A treasury of a kingdom, nation, state or other governmental body, Black’s Law

Dictionary, 5th Edition (1979).

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through the threat of forfeiture. These kinds of issues are typically resolvedwith comparative ease:

The obligation not to pollute in the future presents the most easilyaddressed post-petition obligation. A debtor, or the estate, mustcomply with all laws and regulations while it continues to operate.Bankruptcy does not provide the debtor a license to pollute or violateother laws while operating. Permitting the government to compelongoing compliance respects the purposes of the automatic staywithin the context of the bankruptcy system. To fail to allowenforcement of ongoing compliance would give the debtor acompetitive advantage over others merely because it is inbankruptcy.134

A frequent source of difficulty for a financially struggling operator isboth the expense of maintaining the bond and its potential inability to findan underwriter for the bond. Sometimes, however, the loss of bond coverageis largely outside the operator’s control. In the Safety Kleen case, FrontierInsurance Company had issued bonds to the debtor, but was removed bythe Treasury Department from the list of approved issuers when Frontieritself entered insurance rehabilitation proceedings in New York.135 As aresult, state regulators ordered the debtor to obtain substitute bond coverage.Because it lacked the financial capacity to comply, the debtor filedbankruptcy, and asserted that the order to obtain replacement bonds wasautomatically stayed.136 The court disagreed, finding that the requirementthat the operator maintain valid bond coverage was excepted from theautomatic stay under Section 362(b)(4):

The financial assurance regulations are within the regulatoryexception because they serve the primary purpose of deterringenvironmental misconduct. Stated more positively, the regulationsserve to promote environmental safety in the design and operationof hazardous waste facilities. The incentive for safety is obvious:

134 Heidt, § 4.16.135 In re Safety Kleen, 274 F.3d 846, 856-57 (4th Cir. 2001).136 Id. at 859.

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the availability and cost of a bond will be tied directly to thestructural integrity of a facility and the soundness of its day-to-dayoperations. When the EPA promulgated its financial assuranceregulations . . . it spelled out how the regulations would promoteenvironmental protection at active hazardous waste facilities.Specifically, the EPA emphasized that the financial assurancerequirements would give landfill owners and operators “an incentiveto locate, design, and operate facilities to minimize closure andpost-closure costs” and to “improve operating procedures and reducethe risk of accidents.” . . . This is a clear exercise of the state’sregulatory power. Accordingly, we hold that the regulatory exceptionapplies to DHEC’s issuance and enforcement of the bond order.The bankruptcy stay does not apply to these efforts.”137

Other courts have reached the same result in analogouscircumstances,138 including the reclamation bonds required to be postedunder SMCRA.139

These cases indicate that state regulators are generally successful incompelling debtors to satisfy state bonding requirements as a condition ofoperating the mine postpetition. Given the cost of maintaining the bond,

137 Id. at 865. Note that the Fourth Circuit’s approach to the “pecuniary interest” testdiffers from that employed by the Sixth Circuit. The Fourth Circuit takes an objectiveapproach by examining generally the purpose of the statute sought to be enforced. Id.(“To make this distinction, we look to the purpose of the law that the state is attemptingto enforce. . . . The inquiry is objective: we examine the purpose of the law that the stateseeks to enforce rather than the state’s intent in enforcing the law in a particular case.”)The Sixth Circuit instead employs a subjective test, asking whether the state’s enforcementof a law in a given instance actually furthers the statute’s broader public policy goals.Chao at 374, 389 (“the public policy test calls upon courts to analyze whether a particularlawsuit is undertaken by a governmental entity in order to effectuate public policy or,

instead, to adjudicate private rights.”).138 In re Madison Indus., Inc., 161 B.R. 363, 365-66 (D.N.J. 1993)(state environmentalauthority’s action in obtaining court order directing debtor to post bond and remediate

groundwater contamination exempt from the automatic stay under § 362(b)(4).139 In re Grace Coal Co., 155 B.R. 5 (E.D.Ky. 1993)(debtor required to comply withbonding requirement of KRS Chapter 350); Renfro v. Kentucky, Kentucky NaturalResources Envtl. Protection Cabinet, 112 B.R. 22 (Bankr. W.D. Ky. 1989)( Ky. Rev.Stat. Ann. 350.020 establishes that Chapter 350 was enacted for the environmental welfare

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however, debtors have sought to invoke the bankruptcy court’s generalequitable powers under Section 105 to avoid the result reached under Section362(b)(4) and Section 959. In the Kaiser Steel case, the mine operator waspermitted to “self-bond” for its reclamation obligations under Utah’s mini-SMCRA. Shortly after it filed for bankruptcy, the debtor informed Utahthat it no longer satisfied the statutory criteria for self-bonding. Utah thenentered an order directing the debtor to either post substitute bonds within90 days or cease coal extraction; the debtor did neither. Utah then soughtthe bankruptcy court’s declaration that it was entitled to commence statecourt enforcement proceedings under Section 364(b)(4).140 The debtorresponded by asserting that the cost to the estate of obtaining the bondswas prohibitive, and if compelled would likely prevent its reorganizationin bankruptcy.

Addressing the threshold question of whether Utah’s actions fell withthe police power section of Section 362(b)(4), the court stated:

The [362(b)(4)] exemption should be broadly construed and Utah,in seeking to exercise its police power, should not find itself inUtah’s present position, one of uncertainty as to whether it wouldbe violating Section 362(a) if it commences the proposedenforcement action. . . . It is clear, however, that Utah’s enforcementof its environmental laws [in this case, demand for appropriatereclamation bonds] constitutes the exercise by the state of itsregulatory or police powers.141

of the people and property in Kentucky, and therefore is not pecuniary in nature); U.S. v.Hubler, 117 B.R. 160, 164-65 (W.D. Pa. 1990). (“The bond initially sought by plaintiffwas not intended as a means of satisfying defendants’ obligations, but instead was intendedas a means of motivating defendants to comply with their obligations—failure to complywith the CO might have resulted in forfeiture of the bond but would not have relieveddefendants of their obligations under the CO.”); Pennsylvania v. Peggs Run Coal Co.,423 A.2d 765, 767 (Pa. 1980)(action by Pennsylvania department of environmentalresources seeking affirmative injunctive relief and posting of bonds was exempt fromautomatic stay as proceeding by governmental unit to enforce its police or regulatory

power).140 In re Kaiser Steel Corp., 87 B.R. 662, 663 (Bankr. D. Colo. 1988).141 Id. at 666.

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With respect to the concern that compelling the debtor to post a bondwould endanger its bankruptcy proceedings, the court declined to addressthe issue until the matter was ripe:

The Court recognizes that enforcement actions by Utah mayeffectively place in jeopardy the “fresh start” which the Debtorwould hope to achieve by way of its reorganization plan. If so, theDebtor may have a remedy under the injunctive provisions of 11U.S.C. § 105. . . . It may be that in its zeal to enforce itsenvironmental laws, Utah will otherwise transgress the policies ofthe Bankruptcy Code giving rise to an action by the Debtor forinjunctive relief pursuant to 11 U.S.C. § 105. If so, this Court willthen be called upon to weigh Utah’s interests against the broadpolicies of the Bankruptcy Code.142

However, other courts squarely presented with the issue have declinedto use Section 105 to excuse regulatory compliance. In the Grace Coalcase, the coal company’s mining permit expired by its terms after the debtorfailed to timely renew the permit after notice by EPPC. When the debtorcontinued to mine, EPPC issued a cessation order for mining without apermit.143 Only then did the debtor apply for a new permit, and petitionedthe bankruptcy court for an injunction under Section 105 to prohibit EPPCfrom interfering with its mining activity while its application was pending.In response, EPPC argued that the debtor was obligated by Section 959(b)to mine only in accordance with state law. The debtor argued that it wouldbe unable to generate income, thus dooming its reorganization efforts, ifforced to wait for the lengthy process for a new application to conclude.Unmoved, the bankruptcy court concluded that the debtor was requiredto comply with applicable state law by Section 959(b), and that the generallanguage of Section 105 should not be used to override the specificrequirements of Section 959(b).144 However, the presence of extenuating

142 Id. at 665, 666.143 In re Grace Coal Co., 155 B.R. 5 (Bankr. E.D. Ky. 1993).144 Id. at 6, citing Wilner Wood Prod. v. Dep’t of Envtl. Protection, 128 B.R. 1, 3 (D.Me. 1991)(“Nothing in the general language of section 105 suggests that Congressintended it to override the specific prohibition of section 959(b).”).

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circumstances, such as the unavailability of bonding in the generalmarketplace, can tip the balance in favor of relief for the debtor, andwarrant injunctive relief under Section 105.

§ 7.05. Conclusion.The foregoing should make clear that a coal operator that is struggling

financially for reasons apart from the cost of regulatory compliance mayfind bankruptcy a temporary safe harbor to reorganize and streamline itsoperations, hopefully emerging leaner and more competitive. But wherethe coal operator’s financial woes are caused in any significant part by itsinability to comply economically with environmental regulatory regimes,the bankruptcy code may offer little if any solace. The tests articulated bythe courts have resulted in state regulators being effectively precluded fromactually recovering civil penalties or reclamation costs where the state hasundertaken remediation of a contaminated site, but debtors remain obligatedunder Section 959(b) to comply with environmental laws and regulations,and Section 362(b)(4) preserves the regulator’s right to enforce thoseobligations in most instances. While the bankruptcy court is nonethelessauthorized to use Section 105 to enjoin the state from enforcing those lawsunder the proper circumstances, courts have used the provision sparingly.

§ 7.05

chapter 7 smcra enforcement in bankruptcy: regulatory powers … · 2018-06-29 · smcra...

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