The Nondischargeability of Government Cleanup Orders

(Excerpt) One of the primary purposes of title 11 of the United States Code (the “Bankruptcy Code”) is to provide debtors with a financial fresh start. Upon the filing of a bankruptcy petition by or against the debtor, section 362(a) of the Bankruptcy Code provides that all entities are barred from actions to collect, assess, or recover any pre-petition claims against the debtor. In general, the automatic stay serves to halt any pending legal proceedings against the debtor so that the pre-petition claims can be managed and discharged by the bankruptcy court. There are, however, exceptions to the automatic stay. One of those exceptions is known as the “police and regulatory exception.” Under this exception, the automatic stay does not preclude the government from enforcing its police or regulatory powers, nor does it bar the enforcement of any non-monetary judgement obtained by the government. When addressing the dischargeability of environmental obligations, such as cleanup, courts must determine whether the obligations constitute a claim under the Bankruptcy Code. Section 101(5)(A) of the Bankruptcy Code states that a “claim” includes a “right to payment, whether or not such right is reduced to judgement, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” While the automatic stay does not bar the enforcement of any non-monetary judgment obtained by the government, any right to payment by a government agency constitutes a “claim.” This prompts the question, can the government force a debtor to “clean up” a contaminated site, even if it costs the debtor money to comply? If cleanup orders by the government are considered “monetary judgements” or “claims,” this poses a substantial obstacle to successful reorganization. There is no agreed upon settled law to answer the present question. This memorandum explores whether a cleanup order is a dischargeable monetary claim by exploring the various ways different circuits have dealt with the issue. Part I discusses Ohio v. Kovacs, the only Supreme Court decision that has addressed the issue. Part II analyzes how the Third and Seven Circuits have approached government cleanup orders. Part III concludes by examining the emerging rule and exploring recent lower court decisions using that rule