STATE OF OHIO, PETITIONER V. WILLIAM LEE KOVACS No. 83-1020 In the Supreme Court of the United States October Term, 1983 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit Memorandum for the United States as Amicus Curiae Supporting Petitioner TABLE OF CONTENTS Interest of the United States Statement Discussion Conclusion INTEREST OF THE UNITED STATES Like its predecessor, Kovacs I, /1/ this case presents an important question about the use of the 1978 Bankruptcy Code to impede the ability of state and federal governments to safeguard public health and safety by enforcing environmental protection statutes. In this instance, the issue is whether a bankrupt defendant may rely on the discharge provisions of the Bankruptcy Code, 11 U.S.C. 524 and 727(b), to void an injunction which requires him to clean up a hazardous waste disposal site. The problem extends beyond state enforcement actions. It also arises when the United States seeks to enforce cleanup obligations imposed by federal law, including the Clean Water Act, 33 U.S.C. (& Supp. V) 1251 et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. 6901 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (Supp. V) 9601 et seq.; the Surface Mining Control and Reclamation Act of 1977, 30 U.S.C. (Supp. V) 1201 et seq.; and the Clean Air Act, 42 U.S.C. (Supp. V) 7401 et seq. Even as it bears on local enforcement efforts, the Sixth Circuit decision implicates the national commitment to a safer environment by encouraging offenders to file for bankruptcy, and thereby excuse themselves from performing orders which require them to abate the health hazards they have created. /2/ STATEMENT 1. Prior to filing his petition in bankruptcy, the respondent, William Kovacs, had been engaged in the business of industrial waste disposal in Ohio. In 1979, the State of Ohio sued Kovacs as an individual and as the officer of several business entities, including the Chem-Dyne Corporation, for alleged violations of various state environmental laws. At that time, Kovacs signed a stipulation and judgment entry in the Butler County Common Pleas Court (Pet. App. A43-A51). That state court order prohibited him from causing further pollution, required him to remove all hazardous wastes from the premises of the Chem-Dyne Corporation by July 1980, and directed him to pay $75,000 to the Ohio Department of Natural Resources (Pet. App. A46-A47, A48-A50). When Kovacs failed to comply (see Pet. App. A53-A56), the state court appointed a receiver to collect Kovacs' non-exempt assets and use them to finance the cost of cleanup at the Chem-Dyne site (No. 82-815, Pet. App. A27-A38). /3/ Subsequently, in July 1980, Kovacs filed a personal petition in bankruptcy in the United States Bankruptcy Court for the Southern District of Ohio. In re Kovacs, Bankr. No. B-1-80-1499. /4/ In an effort to ensure the availability of adequate funds to implement the cleanup order, Ohio sought a state court hearing on Kovacs' current employment status and income. Kovacs thereupon moved the bankruptcy court to enjoin Ohio from proceeding in state court. He argued that the State's goal was to obtain an order permitting the state-court receiver to use his post-bankruptcy income to satisfy the unfilled obligation to clean up the Chem-Dyne site and that such an order would violate the automatic stay provision of 11 U.S.C. 362. The bankruptcy court agreed (No. 82-815 Pet. App. A16-A26). 2. The bankruptcy court readily acknowledged that neither the cleanup order nor the order imposing the receivership gave the State a money judgment with respect to cleaning up the Chem-Dyne premises. /5/ Nonetheless, the bankruptcy court enjoined the State from proceeding in state court "to levy on" Kovacs' post-filing wages (Pet. App. A4). It reasoned that "there is no difference in substance between efforts to collect money from a debtor by securing a court order, and efforts to enforce a money judgment against him * * * (and) therefore, that the State is estopped to deny that it is seeking to enforce a money judgment against debtor" (No. 82-815 Pet. App. A21). The State appealed to the United States District Court for the Southern District of Ohio, which affirmed. The district court, too, found that the State sought to collect money "just as though it were enforcing a money judgment" (No. 82-815 Pet. App. A13). Accordingly, the district court held the automatic stay applicable "because the state's effort is clearly to enforce a judgment obtained before the filing of the Bankruptcy petition." Ibid. 3. The Sixth Circuit affirmed, per curiam (681 F.2d 454 (1982)). The court concluded that, while Section 362(b) clearly permitted governmental units to continue to enforce their police power through mandatory injunctions despite the filing of a bankruptcy petition, it denied them the power to collect money in their enforcement efforts (id. at 456). Like the two lower courts, the court of appeals also believed that Ohio had returned to state court in pursuit of what "in essence" amounted to a money judgment against Kovacs, which was "properly" subject to the automatic stay (ibid). Concerned that the state court had ordered Kovacs to release all non-exempt assets, including money payable to himself in the future, the Sixth Circuit could find "little in substance to distinguish that order and a money judgment" (ibid.). It concluded that Ohio's attempt to reach Kovacs' post-bankruptcy earnings would "subvert" the purpose of the Bankruptcy Code to rehabilitate debtors (ibid.) 4. Subsequently, this Court granted Ohio's petition for certiorari, vacated the judgment, and remanded the case to the Sixth Circuit "to consider the question of mootness" (No. 82-815 (Jan. 24, 1983)). At that time, an appeal was pending in the Sixth Circuit from the lower courts' determination that the state court injunction would be voided by a discharge under the Bankruptcy Code. /6/ 5. On October 20, 1980, the State of Ohio had filed a complaint in the bankruptcy court seeking a declaration that the obligations imposed on Kovacs by the consent decree and the state court injunction -- to remove and dispose of industrial and other wastes at the site -- could not be discharged in bankruptcy (Pet. App. A29). The State argued that the injunction did not constitute a "claim" or "debt" and thus could not be discharged. See 11 U.S.C. 101(4), 101(11), 524, 727(b). /7/ The bankruptcy court extended the reasoning of its earlier decision that the automatic stay prevented the State from enforcing the injunction and held that because Kovacs would have to spend money in order to comply with the injunction, Kovacs "owes plaintiff a debt" which is dischargeable (Pet. App. A22). The court also ruled that only those debts listed within the exemption to the discharge, 11 U.S.C. 523, could survive bankruptcy (Pet. App. A22). 6. The United States District Court for the Southern District of Ohio affirmed (Pet. App. A11-A16). It concluded that "under the law of the case principles, we must accept the determination of the Sixth Circuit that the State was seeking what amounted to a money judgment against Kovacs" (id. at A15). /8/ Thus, perceiving the State's attempt to enforce the injunction as a request for a monetary payment, the court deemed the request a dischargeable "claim" or "debt" (ibid.). 7. The Sixth Circuit again affirmed. 717 F.2d 984 (1983) (Pet. App. A1-A10). That court, like the district court and the bankruptcy court, ruled that efforts to force Kovacs to comply with the cleanup injunction by turning his income over to the court receiver could not be distinguished from an attempt by the State to collect an "alternate right to payment" on a dischargeable "claim" (Pet. App. A9). Though it recognized that there was no law of the case to apply since this Court had vacated the decision in Kovacs I, the Sixth Circuit expressly readopted the reasoning in its earlier opinion: "Ohio is essentially seeking to obtain a money payment from Kovacs" (Pet. App. A10). Like the bankruptcy court, the Sixth Circuit suggested that only those debts listed within the Section 523 exemption could survive a discharge (ibid.). DISCUSSION The Sixth Circuit's decision effectively releases Kovacs from a mandatory injunction designed to protect public health and safety. At least in principle, its holding conflicts with decisions of other courts, including the Court of Appeals for the Fifth Circuit. By propounding an expansive definition of "money judgment" in Kovacs I, and then extending that same faulty approach in Kovacs II, the court eviscerated the difference between a dischargeable right to payment for a breach of performance and a non-dischargeable right to enforce an injunction that entails the expenditure of money. The consequence is that a preexisting obligation to clean up a hazardous waste disposal site -- incorporated in a final judgment -- has been wholly excused. /9/ This holding obviously encourages polluters to abuse the Bankruptcy Code and defy state and federal environmental protection laws. Accordingly, we join Ohio in urging the Court to grant review. 1. To determine whether the cleanup injunction was a "claim" that could be discharged in bankruptcy, the Sixth Circuit bypassed the statutory definition and opted for a simpler test: if the injunction entails the expenditure of money, then it must be a right to payment which is a dischargeable claim. See Pet. App. A9-A10. In fact, the Bankruptcy Code does not define "claim" so sweepingly. Only two classes of rights are dischargeable in bankruptcy: (1) any right to payment, and (2) a right to an equitable remedy for breach of performance if such breach itself gives rise to a right to payment. 11 U.S.C. 101(4). /10/ Thus, a mandatory injunction will only be dischargeable if the breach may be remedied either by an injunction or by a right to payment. Such is not the case here. The district court acknowledged that the Ohio statutes which authorized the state court to order Kovacs to remove and dispose of the industrial and hazardous wastes did not provide the State with an alternate right to money payment (Pet. App. A14-A15). See Pet. 22. The Sixth Circuit made no contrary finding. Instead, the court suggests that the State may pursue other remedies against Kovacs, such as penalties and criminal sanctions. But, of course, penalties and sanctions merely complement orders to abate a threat to public health and safety caused by environmental pollution. Effective public protection depends on the ability of state and federal governments to enforce their respective environmental protection statutes and permits. 2. The court below mistakenly assumed that the significance to Ohio of the consent decree and injunction is that Kovacs "pay compensation * * * for pecuniary loss" (Pet. App. A7) (emphasis in original). This approach obliterates the distinction between a money judgment for compensation and an injunction ordering the abatement of a health and safety hazard, the performance of which entails the expenditure of funds. Only the latter is at issue here. When the thrust of the government's action is not to collect money damages from the debtor but rather to protect the public health and safety, then the government does not stand in the shoes of an ordinary creditor and the bankrupt's obligation to comply with an order requiring him to abate a health and environmental endangerment may not be voided in bankruptcy. Many injunctions entail the expenditure of money for their performance. See United States v. Price, 688 F.2d 204, 213 (3d Cir. 1982). A defendant may be ordered to fund a study to determine the extent of the threat posed by its waste disposal practices, e.g., Price; to remove leaking drums of toxic wastes that threaten groundwater contamination, e.g., Kovacs; to remove industrial wastes previously deposited in navigable waters, e.g., United States v. Republic Steel Corp., 362 U.S. 482, 490-493 (1960); to operate its plant in compliance with environmental regulations, e.g., Commonwealth v. Peggs Run Coal Co., 55 Pa. Commw. 312, 423 A.2d 765 (1980). In each case, when the government seeks to enforce the order, its aim is to protect the public health, not to enhance the public fisc. In the Price case, the Third Court faulted the district court for adopting an unduly restrictive law of its equitable remedial powers in the context of environmental protection (688 F.2d at 211). The federal government had requested funds to conduct a diagnostic study of the threat posed by a hazardous waste landfill. The district court denied the request, believing it an attempt to transform a claim for damages into an equitable action. The Third Circuit disagreed (id. at 212): Damages are awarded as a form of substitutional redress. They are intended to compensate a party for an injury suffered or other loss. A request for funds for a diagnostic study of the public health threat posed by the continuing contamination and its abatement is not, in any sense, a traditional form of damages. The funding of a diagnostic study in the present case, though it would require monetary payments, would be preventive rather than compensatory. The study is intended to be the first step in the remedial process of abating an existing but growing toxic hazard which, if left unchecked, will result in even graver future injury, i.e., the contamination of Atlantic City's water supply. /11/ Similarly, in the present case, the state court's orders were preventive, not compensatory. Initially, the court ordered Kovacs himself to clean up the dumpsite. Only subsequently, upon the State's showing that Kovacs had not complied, did the court order Kovacs to release certain assets and future earnings to the court-appointed receiver. Although this latter order directed the payment of money by Kovacs to the receiver, the receivership was established for the limited purpose of implementing the cleanup order. Accordingly, this second order, directed to cleanup of the dumpsite, must be distinguishable from a traditional money judgment. /12/ Remedial orders obtained under the endangerment provisions may require the expenditure of money either directly or indirectly. Nevertheless, such remedial orders do not compensate the government for harm or expenses incurred. Their objective is, rather, to protect the public by assuring compliance with environmental laws. As such, the government's enforcement efforts should not be discharged in bankruptcy. 3. Because the present decision expressly builds on Kovacs I, it is relevant to note that the earlier ruling of the Sixth Circuit in this case is at odds with the approach followed by other courts deciding whether governmental enforcement actions fall within an exemption to the automatic bankruptcy stay. 11 U.S.C. 362(b)(4), (5). For example, the Fifth Circuit held an NLRB order that a bankrupt company reinstate two employees whom it had discriminatorily discharged exempt from the bankruptcy stay. NLRB v. Evans Plumbing Co., 639 F.2d 291 (5th Cir. 1981) (per curiam). Unconcerned by the fact that a reinstatement order was tantamount to an order to commence paying wages, the court ruled that: "The crucial issue is whether the NLRB is a governmental unit and whether this action is one to enforce police or regulatory powers" (639 F.2d at 293). /13/ Similarly, in a case closely analogous to Kovacs on its facts, the Commonwealth Court of Pennsylvania found the governmental action exempt from the bankruptcy stay. Commonwealth v. Peggs Run Coal Co., 55 Pa. Commw. 312, 423 A.2d 765 (1980). There, the Pennsylvania Department of Environmental Resources sued the owner of a coal mine and cleaning plant for alleged violations of various state environmental statutes. The complaint requested both a mandatory injunction ordering compliance with the laws and the posting of bonds to assure compliance with the injunction. The coal company, having filed a petition in bankruptcy, invoked the automatic stay provision of the Bankruptcy Code to block the agency's action. After analyzing the legislative history, the Pennsylvania court concluded that the agency was not attempting to enforce a money judgment. The court therefore held the proceeding exempt from the automatic stay. /14/ 423 A.2d at 767. 4. So, also, on the issue immediately presented by the pending petition, the decision below cannot be reconciled with the decisions of several other courts which have consistently held that a bankrupt defendant's obligation to pay criminal restitution -- whether ordered by another court before or after the petition in bankruptcy -- survives discharge. E.g., United States v. Carson, 669 F.2d 216 (5th Cir. 1982); In re Magnifico, 7 Collier Bankr. Cas.2d 258 (D. Ariz. July 12, 1982); In re Newton, 15 Bankr. 708 (Bankr. W.D. N.Y. 1981). Criminal restitution orders require bankrupt defendants to make payments to persons, the victims, who could not themselves bring civil actions against the defendants due to the Bankruptcy Code. The courts have uniformly held criminal restitution actions and orders immune from the Bankruptcy Code on the ground that the government's action is undertaken in the public interest, whether it be to protect the public by deterring criminal conduct or to rehabilitate criminal offenders. The analysis focuses on the purpose of the governmental action -- not the fact that the resulting order requires a bankrupt to spend money. Carson, 669 F.2d at 217; cf. In re Lare, 7 Collier Bankr. Cas.2d 394 (D.Md. Sept. 30, 1982) (court refuses to stay criminal prosecution that includes a request for a fine because suit aims to protect public, not simply to obtain payment). The same analysis should have been applied in Kovacs II. Here, too, the government's action was undertaken in the public interest to protect public health and safety. 5. Finally, the Sixth Circuit plainly erred in its conclusion that "in the absence of any contention by the State of Ohio in the Bankruptcy Court that the judgment obligation of Kovacs is exempted from discharge under some provision of Section 523, a discharge under Section 727 is warranted" (Pet. App. 10). Whether an order fits within an exemption (11 U.S.C. 523) to discharge provision is simply irrelevant to the threshold question: whether the order constitutes a "claim." Notably, there is no exemption provided for criminal restitution. Yet, as indicated above, the obligation to make such payments survives discharge. Similarly, the obligation to abate a health and environmental endangerment should survive discharge. 6. The importance of the question raised by the Sixth Circuit decision is obvious. The discharge of pollution abatement orders like that involved here elevates the Bankruptcy Code over federal and state health and safety laws, thus permitting and encouraging bankruptcy as an escape from the environmental protection laws. Because of the great number of dumpsites urgently requiring cleanup and the limited funds available to state and federal governments for the purpose, any rule that excuses the responsible polluter from performing cleanup work has grave consequences. The dimensions of the problem and the need for reasonably prompt solutions argue for clarification of the governing law by this Court without delay. In the circumstances, we urge the Court to review the decision below. CONCLUSION The petition for a writ of certiorari should be granted. /15/ Respectfully submitted. REX E. LEE Solicitor General F. HENRY HABICHT, II Assistant Attorney General LOUIS F. CLAIBORNE Deputy Solicitor General PETER R. STEENLAND, JR. DIRK D. SNEL WENDY B. JACOBS Attorneys JANUARY 1984 /1/ As we detail in a moment, in Kovacs I, 681 F.2d 454 (6th Cir. 1982), the court of appeals held that the automatic stay provision of the Bankruptcy Code (11 U.S.C. 362) barred enforcement of the same state court injunction involved here, insofar as it required the turn over of assets or income to implement the clean up of the waste disposal site. When the State sought review in this Court, we filed a memorandum supporting the petition (No. 82-815, Ohio v. Kovacs). On January 24, 1983, the Court granted certiorari, vacated the judgment of the court of appeals, and remanded the case for consideration of mootness. No action has het been taken on remand. See note 6, infra. /2/ We have cause for concern that both Sixth Circuit decisions in this case may be used to cripple our own environmental enforcement efforts. Already, Kovacs himself has invoked Kovacs I to frustrate a federal action pending against him. At least one district court has refused to vacate a stay against an ongoing federal action in pursuit of an injunction that would order the defendant to abate the health hazard created by its disposal of asbestos wastes. United States v. Johns-Manville Sales Corp., Bankr. No. 81-299-D (D. N.H. Nov. 15, 1982). See also In re Penn Terra Ltd., 24 Bankr. 427 (W.D. Pa. 1982), relying on the Sixth Circuit decision in Kovacs I. /3/ The receiver was authorized "to receive and collect any and all sums of money due or owing to the defendant business entities or defendant Kovacs in any manner, whether the same are now due or shall hereafter become due and payable" (Pet. App. A3; No. 82-815 Pet. App. A35). The latter reference is to the appendix to the petition for certiorari filed in Kovacs I. /4/ His original petition sought reorganization under Chapter 11 of the Bankruptcy Code. In September 1980, the bankruptcy court converted the action to one for straight bankruptcy under Chapter 7 of the Code. See Pet. App. A3. /5/ The State concedes that it could not enforce that part of the 1979 order requiring Kovacs to pay the State $75,000 (Pet. 5 n.*). /6/ The present decision of the Sixth Circuit (rendered by a panel different from that in Kovacs I) recites that "(t)he panel of (the court of appeals) that considered the automatic stay aspect of the case dealing with 11 U.S.C. Section 362 has not yet had an opportunity to act on this remand (from the Supreme Court)" (Pet. App. A7 n.5). It seems obvious, however, that the automatic stay question will be moot, as a practical matter, if the present ruling stands, since the underlying obligation will be discharged. On the other hand, if this Court reverses the most recent decision of the Sixth Circuit, the automatic stay, unless vacated by special order, will remain in effect until the bankruptcy proceedings are concluded, thereby inhibiting cleanup operations in the interim. Accordingly, under petitioner's submission, the automatic stay question is not moot. We assume the State has not sought review of Kovacs I at this time only because that case is still pending in the court of appeals. Nevertheless, in light of the holdings below that the instant decision is effectively governed by Kovacs I, this Court may deem it appropriate, if certiorari is granted here, to direct the parties also to address the automatic stay issue. /7/ The Bankruptcy Code defines "debt" as "liability on a claim" and defines "claim" as either the "right to payment" or the "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment." 11 U.S.C. 101(4), (11). /8/ The district court rendered its ruling on September 17, 1982, before this Court vacated the Sixth Circuit's opinion. /9/ Under the Bankruptcy Code, a discharge "voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under (the Code)." 11 U.S.C. 524(a)(1). Moreover, a discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or any act, to collect, recover, or offset any such debt * * * ." 11 U.S.C. 524(a)(2). /10/ E.g., H.R. Rep. 95-595, 95th Cong., 1st Sess. 309 (1977). See generally Matthews, The Scope of Claims Under the Bankruptcy Code, 57 Am. Bankr. L. J. 221 (Installment 1) and 339 (Installment 2) (1983). /11/ For other reasons, the Third Circuit was unable to find that the district court had abused its discretion in denying the preliminary injunction (688 F.2d at 214). /12/ "A money judgment is one which adjudges the payment of a sum of money, as distinguished from one directing an act to be done or property to be transferred or restored. 2 Bouv. Law Dict. p. 2240." United States Fidelity & Guaranty Co. v. Ft. Misery Highway Dist., 22 F.2d 369, 372 (9th Cir. 1927). /13/ The court declined to express an opinion as to whether the award of back pay was a money judgment or whether the bankruptcy court had the power to issue a discretionary stay under 11 U.S.C. 105(a), notwithstanding the exemption of the NLRB's action from the automatic stay (639 F.2d at 293 & n.3). /14/ See also, In re Canarico Quarries, Inc., 466 F.Supp. 1333 (D. P.R. 1979) (vacating bankruptcy court order that stayed enforcement of Clean Air Act regulations against debtor's quarry operations). But see United States v. Johns-Manville Sales Corp., Bankr. No. 81-299-D (D. N.H. Nov. 15, 1982) (refusing to vacate stay against governmental action to obtain a pollution abatement injunction). /15/ See also n.6, supra.