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Penn Terra Limited v. Department of Environmental Resources

April 30, 1984


On Appeal from the United States District Court for the Western District of Pennsylvania.

Seitz, Chief Judge, Garth and Becker, Circuit Judges.

Author: Garth


GARTH, Circuit Judge.

This case demonstrates the difficulty encountered when two governmental policies -- one federal and one state -- come into arguable conflict. On the one hand, the federally created bankruptcy policy requires that the assets of a debtor be preserved and protected, so that in time they may be equitably distributed to all creditors without unfair preference. On the other hand, the environmental policies of the Commonwealth of Pennsylvania requires those within its jurisdiction to preserve and protect natural resources and to rectify damage to the environment which they have caused. The potential conflict between these two policies is presented in this case, in which the Commonwealth has attempted to force a company which has petitioned in bankruptcy to correct violations of state antipollution laws, even though this action would have the effect of depleting assets which would otherwise be available to repay debts owed to general creditors.

Both the bankruptcy court and the district court found that the actions by the Commonwealth to compel the debtor to correct the environmental damage were prohibited by the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362, which generally acts to halt the commencement or continuation of any legal proceedings against a debtor while a bankruptcy administration is pending. The Commonwealth was therefore enjoined from enforcing a state court order which it had obtained, which mandated remedial action on the part of the debtor company. Because we find that the courts below did not give adequate consideration to the statutory exception contained within the automatic stay provision which exempts certain actions by a governmental unit, we reserve and direct that, to the extent that the Section 362 stay remains operative, it be vacated together with the November 4, 1982 permanent injunction against the Commonwealth Court order of May 24, 1982.


The facts in this case are largely undisputed. Penn Terra Limited was the operator of coal surface mines in Armstrong County in western Pennsylvania. The Commonwealth's Department of Environmental Resources (hereafter "DER") found that Penn Terra was operating its mines in violation of various state environmental protection statutes.*fn1 In February 1981, DER served Penn Terra with a total of 36 citations, both against the corporation and against Harvey Taylor, the president of Penn Terra, for these violations. App. at 70a-71a. Penn Terra apparently never contested that these violations existed. On November 9, 1981, DER and Mr. Taylor entered into a consent order and agreement to rectify these infractions and thus place Penn Terra in compliance with the state statutes. The consent agreement listed the violations, and established a schedule for corrective measures to be taken.*fn2 Penn Terra, however, apparently did not comply with that schedule.

On March 15, 1982, Penn Terra filed a Petition for Bankruptcy under Chapter 7 of the Bankruptcy Code, having previously ceased all operations. In its schedule of assets, Penn Terra listed total property worth $14,000. Of this, $13,500 was designated as "certificates of deposit with DER," which Penn Terra had furnished as bonds for the backfilling operation. The schedule further noted that the cost of reclamation, as required under the consent agreement, would greatly exceed the market and book value of those bonds. The total amount of debts listed was $660,000.

On April 14, 1982, DER brought an equitable action in the Commonwealth Court of Pennsylvania, seeking a preliminary injunction against Penn Terra and Harvey Taylor to correct the violations of the state statutes and to enforce the terms of the consent order. DER apparently did not receive a notice of Penn Terra's bankruptcy petition until April 29, 1982. A hearing was conducted on DER's application in Commonwealth Court on May 24, 1982, as previously scheduled; Harvey Taylor appeared but Penn Terra did not, nor did the Trustee. After taking testimony, The Commonwealth Court granted injunctive relief to DER.*fn3

On May 28, 1982, Penn Terra filed a Petition for Contempt in the bankruptcy court against DER and two of its attorneys, Patti J. Saunders and Diana J. Stares, for proceeding with the Commonwealth Court hearing. Penn Terra contended that this proceeding violated the automatic stay provision of 11 U.S.C. § 362(a). DER responded that the proceedings and the resulting injunction fell within the exception to the automatic stay which exempts actions by governmental units performed pursuant to the police power of the government. 11 U.S.C. §§ 362(b)(4)-(5).

The bankruptcy court found that the actions by DER were, in its opinion, actions to enforce a money judgment, which do not fall within the exception to § 362(a). The bankruptcy judge opined that, given the "obvious insolvency" of the debtor, DER's persuit of its action in state court has resulted in the entry of a "meaningless order." Pursuant to that ruling, on June 29, 1982, the bankruptcy court preliminarily enjoined DER from enforcing the Commonwealth Court injunction. On November 4, 1982, the preliminary injunction was made permanent.

On appeal, the district court affirmed the bankruptcy court's injunction. The district court noted that

in the instant case, although the DER's action was ostensibly undertaken to enforce state entironmental laws, the effect of the action, in light of the disparity between the costs and funds available to do the reclamation work, was to collect a money judgment against Penn Terra; the purpose was not only to enforce a regulation, but to exhaust the debtor's assets.

App. 5-6. Appeal to this court ensued.DER argues that the courts below misconstrued the Bankruptcy Code's automatic stay provision by applying it to the Commonwealth of Pennsylvania, and thus it was error to issue an injunction forbidding DER from enforcing the order obtained from the Commonwealth Court.*fn4


A. The Statutory Framework

The crux of this case depends on an interpretation of 11 U.S.C. § 362, which provides in pertinent part:

§ 362 Automatic stay

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title operates as a stay, applicable to all entities, of --

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commmencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the ...

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