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In re Quanta Resources Corp.

decided: July 20, 1984.


On Appeal from the United States District Court for the District of New Jersey

Gibbons, Garth, and Higginbotham, Circuit Judges.

Author: Garth


GARTH, Circuit Judge:

This case presents an issue of major importance under the Bankruptcy Reform Act of 1978: does 11 U.S.C. § 554 (1982) permit the abandonment of property of the bankrupt estate in contravention of state and local environmental protection laws? In proceedings before the bankruptcy court, the trustee in bankruptcy here asserted the power to abandon a waste oil processing and storage facility. He was opposed by the State and City of New York, who argued that the trustee's power was limited by state and local laws regarding the abandonment of hazardous wastes. The bankruptcy court granted permission to abandon. The district court affirmed the bankruptcy court. We reverse.


Quanta Resources Corp. (Quanta), which owned and operated a waste oil storage and processing facility in Long Island City, New York (the geographic center of New York City), filed a voluntary petition in bankruptcy under Chapter 11 of the Act on October 6, 1981. The action was converted to a liquidation proceeding under Chapter 7 on November 12, 1981. Thomas J. O'Neill (Trustee), the appellee here, was appointed trustee in bankruptcy on November 18, 1981.

The Trustee filed a notice of intention to abandon the facility under 11 U.S.C. § 554. That section provides that "after notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate, or that is of inconsequential value to the estate." At the time of the notice there were on the side fuel storage tanks containing more than 500,000 gallons of waste oil and other chemicals, of which at least 70,000 gallons were contaminated with polychlorinated biphenyls (PCB's).

PCB's are extremely hazardous chemicals.*fn1 Reflecting the hazards associated with these compounds, numerous federal, state, and local laws govern the storage and disposal of PCB's. E.g., 15 U.S.C. § 2605(e) (1982); 40 C.F.R. §§ 761.1-761.80 (1983); N.Y. Envtl. Conserv. Law §§ 27-0900 to 27-0923 (McKinney Supp. 1982); N.Y. Admin. Code Tit. 6, § 366.4(e) (1982); New York, N.Y. Admin. Code § C19-50.0. Compliance with these laws would have required substantial expenditures to guard, repair, and clean up the facility and to dispose of the waste.*fn2 The Trustee's notice of intention to abandon was predicated on the assertions that the requisite expenditures would render the property a burden on the estate, and that the property would be of inconsequential or no value to the estate.

At the time of proposed abandonment, the site was subject to two mortgage liens.*fn3 Although there were objections filed to abandonment, there was no dispute as to the fact that the requisite expenditures would rapidly dissipate whatever equity there was in the property.Thus, the bankruptcy court found that the property was burdensome and of inconsequential or no value to the estate.*fn4

The objections to abandonment filed by New York asserted that abandonment of the property would itself violate state and local law. This is because "abandonment" under Section 554 revests title subject to liens in Quanta,*fn5 which has no other assets, having lost title to these in favor of the estate upon commencement of the bankruptcy case. 11 U.S.C. § 541 (1982). Quanta was itself, then, unable to act with respect to the site. Thus abandonment would, in effect, constitute disposal of the hazardous wastes, see N.Y. Envtl. Conserv. Law § 71-7702 (McKinney Supp. 1982) ("disposal"). In addition, abandonment of the facility in its then state of disrepair, itself irremediable by Quanta, would create a continuing violation of state and local hazardous waste storage laws, see supra.

New York asserted, therefore, that because these laws are designed to decresae the risk of uncontrolled toxic chemical discharge, abandonment would create a substantial danger to the public health and safety. Thus New York requested that permission to abandon be denied until all hazardous wastes were removed from the property and lawfully disposed of. New York grounded its objection in both "public policy considerations" reflected in the applicable local laws and the provisions of 28 U.S.C. § 959(b) (1982), which requires that a trustee "manage and operate its property in his possession as such trustee . . . according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof."

After a hearing, the bankruptcy court rejected New York's objections and issued an order, on July 7, 1982, permitting abandonment. The court refused to stay the order pending appeal, and refused to grant New York a first lien on the property to the extent of any monies that New York might expend to bring the abandoned property into compliance with law. In fact, following the abandonment New York did proceed to clean up the facility,*fn6 with the exception of contaminated subsoil, at a cost of about $2.5 million (Affidavit of Richard Mendes).

New York appealed to the district court from the bankruptcy court's order, without raising the question of New York's right to a first lien. New York appealed to this court. The Commonwealth of Pennsylvania and the State of New Jersey submitted briefs as amici curiae. The questions raised by New York in this appeal are the property vel non of abandonment, and New York's right to reimbursement for its cleanup costs as an administrative expense, see 11 U.S.C. §§ 503(b), 507(a).


Where it is contended, as it is here, that federal law confers a power that is not limitable by state law, the supremacy clause, U.S. Const. Art. VI, cl. 2, requires that we determine whether application of the state law frustrates the full effectuation of the objectives of federal bankruptcy legislation. Perez v. Campbell, 402 U.S. 637, 652, 29 L. Ed. 2d 233, 91 S. Ct. 1704 (1971). In general, preemption of state law "is not favored 'in the absence of persuasive reasons -- either that the nature of the regulated subject matter permits no other conclusion, or that Congress has unmistakably so ordained.'" Consolidated Edison v. Montana, 453 U.S. 609, 634, 69 L. Ed. 2d 884, 101 S. Ct. 2946 (1981) (quoting Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142, 10 L. Ed. 2d 248, 83 S. Ct. 1210 (1963)); see Penn Terra Ltd. v. Department of Envtl. Resources, 733 F.2d 267 (3d Cir. 1984). See also Stellwagen v. Clum, 245 U.S. 605, 613, 62 L. Ed. 507, 38 S. Ct. 215 (1918) (state laws are suspended only to the extent of actual conflict with the scheme of federal regulation). Thus, analysis must proceed in two stages: first, an examination of the primary purposes of each of the laws at issue; second, a determination whether state law is an obstacle to the effectuation of federal objectives. Perez, supra, 402 U.S. at 644, 649.

The objectives of federal bankruptcy law can be broadly stated: to provide for an equitable settling of creditors' accounts by usurping from the debtor his power to control the distribution of his assets.*fn7 See Kothe v. R.C. Taylor Trust, 280 U.S. 224, 226, 74 L. Ed. 382, 50 S. Ct. 142 (1930). The purpose of a liquidation proceeding under Chapter 7, as under Chapter VII of the Bankruptcy Code, see S. Rep. No. 989, 95th Cong. 2d Sess. 6, reprinted in 1978 U.S. Code Cong. & Ad. News 5792 (new law essentially tracks previous law), is to provide a fair distribution of the debtor's assets among the creditors; to that end, a trustee for the creditors is appointed by the court or elected by the creditors. 11 U.S.C. §§ 702 (election), 703 (appointment), 704 (duties). The trustee must collect the debtor's assets for the estate, reduce the assets to money, and distribute the property of the estate. Id. §§ 704, 726.The abandonment power embodied in Section 554 enables the trustee to rid the estate of burdensome or worthless assets, and so speeds the administration of the estate, see id. § 704(1); and also protects the estate from diminution. In such manner, abandonment serves the creditors' interest in expeditiously obtaining a fair amount on settlement of their claims.

The primary purpose of the state and local laws regulating disposal of hazardous wastes is obviously to protect the public from the toxic effect of dangerous substances by preventing their uncontrolled discharge into the environment.

On the surface, these two purposes cannot be reconciled where the trustee legitimately invokes his power to abandon an asset whose manner of abandonment the state regulates. The question thus presents itself: did Congress intend that the trustee's abandonment power be unrestricted by public health and safety regulations? Our examination of the bankruptcy laws and the authorities interpreting these laws reveals no such congressional intent.


We start with the basic assumption that Congress did not intend to displace state law. Maryland v. Louisiana, 451 U.S. 725, 746, 68 L. Ed. 2d 576, 101 S. Ct. 2114 (1981); Penn Terra, supra, slip op. at 272-73. Where it is argued that Congress intended to withdraw police power from a state, that intention must be unmistakable. Penn Terra, supra, slip op. at 272-73.

There is no legislative history of Section 554. Although there had been no express recognition of an abandonment power in the pre-1978 bankruptcy statute, courts approved the trustee's exercise of such a power as part of his larger power to dispose of the assets of the estate. See 4A Collier on Bankruptcy P70.42 at 502-504 & n. 4 (J.W. Moore 14th ed. 1978) (citing cases); see also 11 U.S.C. §§ 64a(4), 70a(2), 70b (1976) (repealed 1978) (provisions contemplating abandonment, respectively, of property against which taxes are assessed; of rights in pending applications for patents, copyrights, and trademarks; and of executory contracts). Section 554 obviously codifies this judge-made law.

Cases under prior law held that "the trustee in the exercise of the power to abandon is subject to the application of general regulations of a police nature." 4A Collier on Bankruptcy (14th ed.), supra, para 70.42[2] at 502-04. Ottenheimer v. Whitaker, 198 F.2d 289 (4th Cir.), aff'g 102 F. Supp. 913 (D. Md. 1952), held that the trustee could not abandon four worthless barges in a harbor, where abandonment would violate federal law relating to the obstruction of the harbor, even though the cost of complying with the laws would be much greater than the value of the barges. The court acknowledged the general rule that the trustee may abandon burdensome property, and then held it inapplicable.

This rule would be applicable here were it not for the unusual consequences that would follow.There can be no doubt that the property not only has no value, but also that the care and disposition of it will involve the expenditure of a substantial sum of money. But it is equally true that if the trustee abandons the barges and at the same time holds on to the valuable assets of the estate, the title to the barges will revert to the bankrupt and he will be left without means to care for or dispose of them in the manner prescribed by the statute.

In that event, the barges would sink and become an obstruction to the passage of other vessels, and it might well be held that the bankrupt or the trustee had become liable to the punishment of fine or imprisonment prescribed by the statute for the person who voluntarily or carelessly allows a vessel to be sunk in a navigable channel. It seems obvious to us that a rule which is not provided by statute but built up by the courts to facilitate the administration and distribution of the assets of a bankrupt estate should not be extended so as to reach such an unreasonable and unjust result. The judge-made rule must give way when it comes into conflict with a statute enacted in order to ensure the safety of navigation; for we ...

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