BANKRUPTCY ESTIMATION OF CERCLA CLAIMS: THE PROCESS AND THE ALTERNATIVES. Joel M. Gross* and Suzanne Lacampagne**

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1 BANKRUPTCY ESTIMATION OF CERCLA CLAIMS: THE PROCESS AND THE ALTERNATIVES Joel M. Gross* and Suzanne Lacampagne** I. INTRODUCTION Both the Bankruptcy Code' and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) 2 deal with "discharges" and with concepts of adequate protection. One fundamental difference between them, the ability to estimate future claims, has led to much judicial and scholarly debate and some real-life litigation challenges. Bankruptcy laws rest on the assumption that all of a debtor's liabilities at the time of filing can be liquidated readily so that all creditors can share in the debtor's assets. When necessary to allow a bankruptcy action to move forward with little delay, the Bankruptcy Code encourages the estimation of unliquidated claims. Underlying CERCLA, however, is a competing assumption: Determining the ramifications of the long history of hazardous substance disposal and release-and the associated liabilities of responsible parties-is an evolutionary process. Sites presenting potential risks to the public health and environment must first be identified and preliminarily assessed and then, if necessary, studied in depth. Appropriate responses must then be evaluated, selected, implemented and in many cases periodically reviewed for effectiveness. Once clean-up decisions have been made, the site's impact on natural resources must also be assessed so that actions for restoration or replacement of damaged resources can proceed. Significantly, CERCLA delays litigation over * Deputy Chief, Environmental Enforcement Section, U.S. Department of Justice. In that capacity, Mr. Gross has responsibility for the management of the section's bankruptcy docket. He was counsel for the United States in a number of the cases discussed in this Article. ** Trial Attorney, Environmental Enforcement Section, U.S. Department of Justice. The authors were, along with their colleagues Anna Wolgast, Philip Karmel, Jeffery Gordon and Peter Jaffe, counsel for the United States in the National Gypsum estimation hearing discussed in this Article. The authors would like to thank John Wheeler, Philip Karmel and Alan Tenebaum for their insights in reviewing this Article. The views expressed in this Article do not necessarily represent the official views of the U.S. Department of Justice or of the United States. 11 U.S.C (1988 & Supp. III 1991). 2 The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund), 42 U.S.C (1988 & Supp ).

2 236 Virginia Environmental Law Journal [Vol. 12:235 response activities until those activities have occurred-the effect of the statute's crucial "clean up first, litigate later" philosophy. The Bankruptcy Code understandably encourages "guesstimates" for unknown costs and activities in order to bring them within the purview of the bankruptcy. CERCLA, on the other hand, encourages and even mandates a careful and methodical decision-making process for determining the extent of cleanup required. This Article will explore that inconsistency. First, it will review response procedures and liabilities under CERCLA and analyze developing case law on the issue of when a CERCLA cost recovery claim arises. Next, it will discuss how those concepts were actually applied in a recent, remarkable estimation hearing during which a bankruptcy court estimated the federal government's claims at three CERCLA sites. Finally, the article will explore alternatives to the CERCLA estimation hearing and discuss how one creative alternative has been implemented in a number of seminal settlements in this area. II. CERCLA's PLACE IN BANKRUPTCY Enacted in 1980, CERCLA contains detailed provisions governing the identification and cleanup of hazardous substance releases, and the assignment of liability for such releases. When the issue of CERCLA liability arises during bankruptcy, it is necessary to determine when potential CERCLA liability becomes a bankruptcy claim. Various triggering events have been proposed for determining when a CERCLA cost recovery claim accrues for bankruptcy purposes. A. Overview: The CERCLA Response and Liability Scheme Before considering how and when CERCLA clean-up liabilities become claims in bankruptcy, it is useful to review briefly the nature of CERCLA cleanups and liabilities. CERCLA was enacted in 1980 to comprehensively address the extraordinary threats to public health and the environment presented by past disposal of toxic chemicals. 3 Section 104 of CERCLA provides the Environmental Protection Agency (EPA) with broad authority to use the funds in the Hazardous Substance Superfund to respond to releases and threatened releases of hazardous substances. 4 Section 104(a) authorizes "any... 3 New York v. Shore Realty Corp., 759 F.2d 1032, 1040 (2d Cir. 1985). When Superfund was initially enacted, Congress estimated that 30,000 to 50,000 hazardous waste sites existed nationwide. Those toxic sites threatened as much as half of the groundwater relied on for drinking water in the United States. H.R. Rep. No. 1016, 96th Cong., 2d Sess. pt. 1 at 18 (1980), reprinted in 1980 U.S.C.C.A.N. 6119, CERCLA 104, 42 U.S.C (1988). Superfund actually grants authority directly to

3 19931 Estimating Environmental Claims 237 response measure consistent with the national contingency plan which... [the EPA] deems necessary to protect the public health or welfare or the environment" in cases where "any hazardous substance is released or there is a substantial threat of such a release into the environment." 5 "Release," a pivotal concept under CERCLA, is broadly defined as "any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment." 6 The response process at a CERCLA site can extend over many years and may not begin until decades after disposal activities at the site have ceased. The procedures for response are set forth both in the statute itself and in the National Contingency Plan (NCP), CERCLA's implementing regulations. 7 Response can only begin once the EPA has discovered the release or threatened release of a hazardous substance.' For immediate or short-term threats, such as leaking drums posing a risk of fire or explosion, the EPA can undertake a "removal" action. 9 For sites presenting long-term threats, the EPA can perform a preliminary assessment of the site's overall risk and, after notice and comment, place it with others of sufficiently high risk on the CERCLA National Priorities List (NPL). 1 For NPL sites, the EPA must perform a remedial investigation and feasibility study (RI/FS) to assess site conditions and evaluate possible clean-up remedies. " Having completed those studies, the EPA the President who has in turn delegated authority to various agencies by executive order. The broad authority to respond to hazardous substance releases has been granted to the EPA. Shore Realty Corp., 759 F.2d at 1037 n.2. 5 CERCLA 104(a)(l), 42 U.S.C. 9604(a)(1). 6 CERCLA 101(22), 42 U.S.C. 9601(22). 7 The National Oil and Hazardous Substances Pollution Contingency Plan (NCP) is set forth at 40 C.F.R. 300 (1991) C.F.R In addition to authorizing response actions to address releases of hazardous substances, CERCLA also authorizes response actions if "there is a release or substantial threat of release into the environment of any pollutant or contaminant which may present an imminent and substantial danger to the public health or welfare... CERCLA 104(a)(1), 42 U.S.C. 9604(a)(1). 9 CERCLA 101(23), 42 U.S.C. 9601(23); 40 C.F.R "Remove" or "removal" is defined as "the cleanup or removal of released hazardous substances from the environment, such actions as may be necessary taken in the event of the threat of release of hazardous substances into the environment, such actions as may be necessary to monitor, assess, and evaluate the release or threat of release of hazardous substances, the disposal of removed material, or the taking of such other actions as may be necessary to prevent, minimize, or mitigate damages to the public health or welfare or to the environment, which may otherwise result from a release or threat of release." CERCLA 101(23), 42 U.S.C. 9601(23). 10 See CERCLA 105(1), 42 U.S.C. 9605(c) C.F.R (a)(2).

4 Virginia Environmental Law Journal [Vol. 12:235 can choose a remedial action 12 for the site, selecting from among those alternatives considered in the RI/FS.' 3 The EPA bases its selection on the site's administrative record 4 using nine criteria set forth in the NCP.'- Before making its selection, the EPA publishes notice of its proposed remedial plan and provides an opportunity for public comment.' 6 The remedy chosen is set forth in a Record of Decision (ROD) 7 and implemented. Implementation, however, is not necessarily the end of the process. If the remedy is one that allows hazardous substances to remain on the site, the EPA must review the action "no less often than each 5 years after the initiation of such remedial action to assure that human health and the environment are being protected by the remedial action being implemented.' 8 If the EPA determines that the remedy is not protective, it may take further response action. ' 9 In addition to granting response authority, CERCLA also creates broad liabilities. Section 107(a) 20 imposes strict liability 2 l on four 12 "Remedial action" or "remedy" is defined at 42 U.S.C. 9601(24) as "those actions consistent with permanent remedy taken instead of or in addition to removal actions in the event of a release or threatened release of a hazardous substance into the environment, to prevent or minimize the release of hazardous substances so that they do not migrate'to cause substantial danger to present or future public health or welfare or the environment." See also definition at 40 C.F.R C.F.R ( C.F.R (a). 15 The nine criteria are: (I) overall protection of human health and the environment; (2) compliance with "applicable or relevant and appropriate requirements"; (3) long-term effectiveness and permanence; (4) reduction of toxicity, mobility, or volume through treatment; (5) short-term effectiveness; (6) capacity for implementation; (7) cost; (8) state acceptance; and (9) community acceptance. 40 C.F.R (e)(9)(iii). The nine criteria are used to select a remedy. 40 C.F.R (0(1)(i). 16 CERCLA 117(a), 42 U.S.C. 9617(a); 40 C.F.R (0(2) C.F.R (f)(ii). 18 CERCLA 121(c), 42 U.S.C. 9621(c). 19 Id. 20 CERCLA 107(a), 42 U.S.C. 9607(a). 21 United States v. Kayser-Roth Corp., 910 F.2d 24, 26 (1st Cir. 1990), cert. denied, 111 S. Ct. 957 (1991). Courts have held that liability under 107 is joint and several if the environmental harm is indivisible. United States v. Monsanto Co., 858 F.2d 160, (4th Cir. 1988), cert. denied, 490 U.S (1989); Shore Realty Corp., 259 F.2d at 1042 n.13. The defendant held liable under CERCLA carries the burden of showing that the harm is divisible or otherwise subject to apportionment among several generators. O'Neil v. Picillo, 682 F. Supp. 706, 724 (D.R.I. 1988) (citing United States v. Dickerson, 460 F. Supp. 448, 450 (D. Md. 1986)). Generally, courts have held that once the government proves that a defendant's waste contains hazardous substances and is present at the site, the defendant may be held jointly and severally liable for the entire cost of the cleanup, even though other parties may have contributed hazardous substances to the site. Id. at 725 (citing United States v. New Castle County, 642 F. Supp. 1270, 1276 (D. Del. 1986)). However, the Third Circuit recently

5 19931 Estimating Environmental Claims 239 classes of potentially responsible parties (PRPs): present site owners or operators; past owners or operators at the time of disposal; any person who arranged for disposal or transport of hazardous substances; and anyone who accepts or accepted hazardous materials to transport. 22 CERCLA liability requires proof of three elements: There has been a release or threatened release of a hazardous substance at a facility; the release has resulted in the incurrence of response costs; and the person sought to be held liable falls within one of the four prescribed classes. 23 Section 107 liability is imposed, by its terms, "[n]otwithstanding any other provision or rule of law, and subject only to" four enumerated defenses. 24 This liability extends to those response costs incurred by the government which are "not inconsistent with the national contingency plan," ' 2 as well as to natural resource damages. 26 CERCLA also addresses the issue of when courts may review liability issues. According to the Second Circuit, "[C]ongress embraced a policy of delaying litigation about clean-up costs until after the held that a defendant in a CERCLA action must be given the opportunity to prove divisibility of harm at a site before a finding of liability is made. United States v. Alcan Aluminum Corp., 964 F.2d 252, (3d Cir. 1992). The court of appeals remanded the case to the district court to determine the divisibility of harm, ruling that summary judgment on the issue of liability without a hearing was inappropriate. Id. The Second Circuit also recently addressed the divisibility issue. While the Second Circuit noted that the Third Circuit's approach of resolving divisibility at the initial liability phase "may be contrary to the dictates of CERCLA," it ruled that the decision as to when to address divisibility should be left to the discretion of the trial court. United States v. Alcan Aluminum Corp., Nos & , slip op. at (2d Cir. Apr. 6, 1993). 22 CERCLA 107(a), 42 U.S.C. 9607(a). 23 Dedham Water Co. v. Cumberland Farms Dairy, Inc., 889 F.2d 1146, 1150 (1st Cir. 1989). See also Monsanto Co., 858 F.2d at (discussing joint and several liability). 24 CERCLA 107(a), 42 U.S.C. 9607(a). The defenses are set forth in CERCLA 107(b), 42 U.S.C. 9607(b), and include a showing that the harm was caused "solely" by an act of God, an act of war, or, under limited conditions, an act of an unrelated third party, or a combination of these. It is interesting that although 107(b) does not include discharge in bankruptcy as an enumerated defense, it has been implicitly accepted by all of the courts that have considered issues relating to the extent of discharge that CERCLA was not intended to exclude all non-substantive defenses. Thus, for example, although 107(b) does not list a statute of limitations as a defense, the statute elsewhere establishes a statute of limitations. CERCLA 113(g), 42 U.S.C. 9613(g). In a recent case, the Washington State Department of Transportation argued that the language of 107 excludes bankruptcy discharge as a defense. Brief of Appellant Washington State Department of Transportation at 27-31, In re Chicago, M., St. P. & Pac. R.R., 974 F.2d 775 (7th Cir. 1992) (No ). The court did not address this argument in its decision. 974 F.2d at CERCLA 107(a)(4)(A), 42 U.S.C. 9607(a)(4)(A). 26 CERCLA 107(a)(4)(C), 42 U.S.C. 9607(a)(4)(C). In addition to undertaking response pursuant to 104 and seeking cost recovery under 107, the EPA may also require responsible parties to undertake the response actions themselves, either through issuance of an administrative order or by seeking a court order. CERCLA 106(a), 42 U.S.C. 9606(a).

6 240 Virginia Environmental Law Journal [Vol. 12:235 cleanup. Thus, under CERCLA, liability is not assessed until after the EPA has investigated a site, decided what remedial measures are necessary, and determined which [parties] will bear the costs." '27 Courts may not review liability issues, nor may parties challenge response actions, until the EPA brings a civil enforcement action. 28 Even then, "[j]udicial review of any issues concerning the adequacy of any response action... shall be limited to the administrative record." ' 29 The United States may not maintain an action for natural resource damages before the EPA selects a remedial action if the Agency is diligently proceeding with a remedial investigation and feasibility study. 30 B. Defining Claims for Bankruptcy: The Competing Interests of the Debtor and the Government In considering the extent to which CERCLA liabilities can be addressed in bankruptcy, courts focus on defining "claim" and determining when a potential CERCLA liability becomes a bankruptcy claim. For a potential creditor, the existence of a claim is at once advantageous and disadvantageous. On one hand, only creditors with claims are allowed to participate in distributions from the bankruptcy estate." Section 501(a) of the Bankruptcy Code provides that a "creditor... may file a proof of claim." '3 2 "Creditor" is defined in section 101(10) of the Code as an "entity that has a claim against the debtor that arose at the time of or before" the commencement of the bankruptcy. 33 On the other hand, claims can be discharged in a Chapter 11 reorganization by the confirmation of a reorganization plan. Section 1141(d) provides that, except as otherwise provided, the confirmation of a plan "discharges [or releases] the debtor from any debt that arose before the date of such confirmation. '3 4 "Debt" is defined as "liabil- 27 In re Combustion Equip. Assocs., Inc., 838 F.2d 35, 37 (2d Cir. 1988). 28 CERCLA 113(h), 42 U.S.C. 9613(h). 29 CERCLA 113(j)(1), 42 U.S.C. 9613(j)(1). 30 CERCLA 113(g)(l), 42 U.S.C. 9613(g)(1). 31 Bankruptcy Code, 11 U.S.C. 501, 502 (1988); Fed. R. Bankr. P. 3002(a) (stating that an unsecured creditor must file a proof of claim for the claim to be allowed); Fed. R. Bankr. P (stating that.after the confirmation of a plan, distribution shall be made to creditors whose claims have been allowed) U.S.C. 501(a) U.S.C. 101(10)(A) (Supp. III 1991) U.S.C. 1141(d)(1) (1988). In effect, the old claims of the creditors are exchanged for new claims against the reorganized firm to the extent provided by the reorganization plan. Douglas G. Baird & Thomas H. Jackson, Cases, Problems, and Materials on Bankruptcy 949 (1990); see also 11 U.S.C

7 19931 Estimating Environmental Claims ity on a claim." '35 The Code defines "claim" broadly as a: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. 36 Courts have given this definition the wide scope that Congress intended it to have. 3 In a bankruptcy proceeding, it is important to determine when a CERCLA cost recovery claim arises. 38 In a typical case, a company might generate waste one year and dispose of it the next. Releases of wastes at the disposal site could begin five years later. Ten years after that, the EPA might discover the site and determine that cleanup is required. 39 Response action could conceivably continue for many more years, proceeding from short-term removal actions, through remedial investigation and feasibility studies and the selection of a remedy, to the implementation of a remedy, and then to any further actions required if the remedy fails or turns out not to be protective U.S.C. 101(12) (Supp. III 1991) U.S.C. 101(5). 37 In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997, 1003 (2d Cir. 1991) (citing H.R. Rep. No. 595, 95th Cong., 2d Sess. 309 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6266). See also Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558 (1990) (stating that the Bankruptcy Code has a "broad rather than restrictive view of the class of obligations that qualify as a 'claim' giving rise to a 'debt' "). 38 A related issue, but one beyond the scope of this Article, is the extent to which administrative or injunctive orders issued pursuant to 106 of CERCLA are "claims" for purposes of 101(5) of the Bankruptcy Code, the issue being whether breach of such an order can be said to "give rise to a right to payment." For a discussion of this issue, see LTV Corp., 944 F.2d at (finding such injunctions not to be claims); Thomas L. Stockard, Note, In re Chateaugay Corp., An Analysis of the Interaction Between the Bankruptcy Code and CERCLA, 6 B.Y.U. J. of Public Law, 443, (1992). 39 See, e.g., O'Neil v. Picillo, 682 F. Supp. 706 (D.R.I. 1988) (chemicals dumped during the 1970s, site exploded in 1977, four-year cleanup began in 1979), aff'd, 883 F.2d 176 (1st Cir. 1989), cert. denied, 493 U.S (1990); United States v. Northeastern Pharmaceutical & Chem. Co., 579 F. Supp. 823 (W.D. Mo. 1984) (chemicals dumped in 1971, site discovered eight years later), aff'd in part and rev'd in part, 810 F.2d 726 (8th Cir. 1986), cert. den., 484 U.S. 848 (1987); see also William Glaberson, Love Canal: Suit Focuses on Records From 1940's, N.Y. Times, Oct. 22, 1990, at BI (noting that chemicals were dumped at Love Canal from as early as the 1940s and the site contamination did not manifest itself until the 1970s). 40 See Glaberson, supra note 39, at B I.

8 242 Virginia Environmental Law Journal [Vol. 12:235 A court must determine when on this continuum a claim for reimbursement of the EPA's expenses arises for bankruptcy purposes. 1. Implications of an Early Claims Trigger It is useful first to review some of the policies that underlie the "claims-accrual" issue and some ramifications of how courts have resolved it. Reorganizing debtors have at least three potential interests in an early "claims" trigger. First, the more claims addressed during the course of a bankruptcy, the greater will be the certainty that results from the reorganization process. This allows the debtor to emerge with its "fresh start," free of the liabilities that arose from its pre-bankruptcy conduct. 4 Hazardous waste cases, like other cases where manifestation of harm is delayed, present a conflict between the reorganizing debtor's need for certainty and the creditor's inability to assert and pursue a claim before the claim has manifested itself. Reorganizing debtors do not need absolute certainty to reorganize, and reorganized companies typically emerge from bankruptcy with uncertainties about their business prospects and their ability to fully consummate their reorganization plans. 42 The Bankruptcy Code recognizes that total certainty is impossible and requires only that a plan of reorganization be feasible, in other words, that the reorganization will not likely be followed by subsequent liquidation or further financial reorganization. 43 Second, a debtor might have an interest in adjudicating a claim during bankruptcy because the court will likely value the claim at a lower amount than it would outside of bankruptcy. As a practical matter, because bankruptcy often entails massive liabilities and limited assets, bankruptcy courts might produce lower valuations than would non-bankruptcy courts addressing each claim separately. Similarly, when bankruptcy advances the time for adjudicating a CERCLA claim, the government might have difficulty proving its claim because response actions at the site have yet to be completed 41 See H.R. Rep. No. 595, 95th Cong., 2d Sess. 180 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6141 (The Bankruptcy Code is intended to "permit a complete settlement of the affairs of a bankrupt debtor, and a complete discharge and fresh start."). 42 For example, in the National Gypsum case discussed in this Article, the debtor devoted an entire section of the disclosure statement in its plan of reorganization to "risk factors of the plan." That section discusses a wide range of risks including general- and industry-specific economic conditions, availability of financing, capital market volatility, tax uncertainties and other risks. First Amended and Restated Joint Disclosure Statement at (Sept. 4, 1992), In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993) U.S.C. 129(a)(1l) (1988).

9 1993] Estimating Environmental Claims 243 and the predicate studies have yet to be undertaken. 44 Although it is understandable that debtors might seek to utilize their home-court advantage and adjudicate as many bankruptcy claims as possible to help ensure lower valuations, 45 this does not in itself justify an early trigger policy for the accrual of CERCLA claims. 46 Third, and perhaps most importantly, a reorganizing debtor might seek an early trigger for a CERCLA claim in order to handle that claim like other pre-bankruptcy claims and satisfy it with discounted dollars or non-cash distributions under a reorganization plan. When a reorganization plan provides for unsecured creditors to receive stock in the reorganized company, an early trigger could mean that the debtor will satisfy the CERCLA claim by issuing more stock. A later trigger, however, could result in the reorganized company having to pay the claim in cash. 2. Implications of a Late Claims Trigger From the government's perspective as a claimant, a later claims trigger has two major advantages and one disadvantage. First, a late trigger means that more claims arise post-bankruptcy and thus cannot be discharged. The reorganized debtor must pay in full rather than satisfy claims partially under a plan of reorganization. Although advantageous to the government, this "priority" for CERCLA claims does not justify a late trigger. Some critics have argued for a general priority for all CERCLA claims, 47 but the Bankruptcy Code does not now provide for one. Courts therefore treat claims for recovery of pre-bankruptcy clean-up costs as general unsecured claims, without priority. 48 There is no policy reason why a CERCLA claim should be entitled in all cases to priority merely because the cleanup was under- 44 See David F. Williams et al., A Whole New Ballgame: Judicial Review and Estimation of CERCLA Claims in Bankruptcy, 22 Envtl. L. Rep. (Envtl. L. Inst.) 10,785 (1992). 45 Note, however, that in at least some cases, it may be contrary to a debtor's interest to have its CERCLA liabilities determined during the bankruptcy. If the debtor were one of many liable parties at a site, the government would likely seek to have the claim adjudicated based on joint and several liability, meaning the claim would be for the full costs of site cleanup even if many other parties contributed to the contamination at the site. See In re National Gypsum Co., 139 B.R. 397, 401, (N.D. Tex. 1992). In contrast, outside of bankruptcy, even though joint and several liability would apply, the debtor would likely be only one of a number of parties sued and would not likely have to shoulder the entire burden of the clean-up costs itself. 46 See generally, Douglas G. Baird, A World Without Bankruptcy, 50 Law & Contemp. Probs., 173 (1987) (arguing that bankruptcy policies should be based on substantive policies determined outside of bankruptcy). 47 See, e.g., Gary E. Claar, The Case for a Bankruptcy Code Priority for Environmental Cleanup Claims, 18 Wm. Mitchell L. Rev. 29 (1992). 48 Section 507 of the Bankruptcy Code, 11 U.S.C. 507 (1988), establishes priorities for

10 Virginia Environmental Law Journal [Vol. 12:235 taken after, rather than before, the bankruptcy filing. 49 The government's other advantage from a later trigger, and the advantage that provides the legal justification for its arguments in this area, is that an early trigger can conflict with the "clean up first, litigate later" policies of CERCLA. An early trigger can distort the clean-up priorities that would otherwise be established and can effectively force the EPA to litigate a remedy before the remedy has even been selected. Further, if the trigger is early enough, the government could have a claim for a site's cleanup without even knowing of the site's existence or its connection to the debtor. Finally, the government as a claimant is disadvantaged by a late trigger in one significant way: The government might not be able to recover on its claim as part of the bankruptcy at all. In Chapter 7 liquidations of businesses, where there is no discharge, a late trigger provides no benefit to the government because the government will forego its one opportunity to receive any return on its claim. 50 C. Triggering Events. When Does a CERCLA Cost Recovery Claim Arise for Bankruptcy Purposes? At least five different triggering events have been proposed and adopted for determining when a CERCLA cost recovery claim has accrued for bankruptcy purposes. Here, varying triggers will be considered in the order in which they arise in the course of a cleanup, from earliest to latest. 1. Debtor's Activities Trigger The earliest possible triggering event for a claim in bankruptcy is eight different types of claims. Pre-bankruptcy clean-up costs do not fall into any of the eight categories. 49 Courts have afforded priority to post-bankruptcy clean-up costs incurred on debtorowned property. In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997 (2d Cir. 1991); In re Wall Tube & Metal Prods. Co., 831 F.2d 118 (6th Cir. 1987); In re Hemingway Transp. Inc., 73 B.R. 494 (Bankr. D. Mass. 1987). In such cases, however, the justification for the priority includes that the party incurring the clean-up costs is in essence fulfilling an obligation of the debtor or its estate. See infra note 118 and accompanying text. 5o The court in LTV Corp., 944 F.2d at 1005, noted the disadvantage to the EPA presented by the very position the EPA was taking in that case: [W]e are not unmindful of the observations of Justice O'Connor concerning the disadvantage to environmental claimants if 'claim' is interpreted to exclude items like unincurred CERCLA response costs. See Ohio v. Kovacs, 469 U.S. 274, , 105 S. Ct. 705, 711, 83 L.Ed. 2d 649 (1985) (O'Connor, J., concurring). Accepting EPA's argument in this Chapter 11 reorganization case would leave EPA without any possibility of even partial recovery against a dissolving corporation in a Chapter 7 liquidation case.

11 19931 Estimating Environmental Claims 245 the completion of the debtor's activities, such as the disposal of wastes at the site in question. This debtor's-activities approach, the one most advantageous to debtors, was adopted by the Bankruptcy Appellate Panel in In re Jensen. 51 The approach that "most closely reflects legislative intent," the court held, is one which recognizes that a "bankruptcy claim arises upon conduct by the debtor which would give rise to a cause of action, if other elements may later be satisfied." ' 52 The rationale for this approach is that bankruptcy proceedings should address all consequences of the debtor's pre-bankruptcy conduct; any later trigger would allow pre-bankruptcy conduct to give rise to postbankruptcy claims and would frustrate the fresh-start policy. 53 The debtor's activities trigger was recently rejected in In re Chateaugay Corp., commonly known as the LTV Corp. case. 54 The court disagreed with the notion that a claim includes "any ultimate right to payment arising from pre-petition conduct by the debtor. 55 To illustrate its position, the court imagined a situation where a company built 10,000 bridges with the statistical expectation that one would fall, killing ten people. Because no one could know which bridge would fall, 56 the court reasoned, the ten future victims could not have a claim for bankruptcy purposes. 57 The court observed that "enormous practical and perhaps constitutional problems would arise from recognition of such a claim. The potential victims are not only unidentified, but there is no way to identify them. Sheer fortuity will determine who will be on that one bridge when it crashes." ' 58 In other words, however theoretically desirable it would be to address during the bankruptcy all claims arising from a debtor's pre-bankruptcy conduct, in practice it cannot be B.R. 27 (Bankr. 9th Cir. 1991), appeal docketed, No (9th Cir. June 1991). 52 Id. at See, e.g., Brief of Defendants-Appellees and Cross Appellants LTV Corp. et al. at 9, In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997 (2d Cir. 1991) (Nos et al.) ("LTV's liabilities for environmental cleanup arising from its pre-petition actions are 'claims' subject to discharge upon confirmation of a plan of reorganization... Otherwise... a disproportionate recovery would be available in a Chapter 11 reorganization case."). 54 In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997, 1004 (2d Cir. 1991). 55 Id. at Id. 57 See id. 58 Id. The court cited the decision in Schweitzer v. Consolidated Rail Corp., 758 F.2d 936, 943 (3d Cir.), cert. denied, 474 U.S. 864 (1985), where the court ruled that claims by former railroad employees for personal injury that occurred during their employment did not arise for purposes of the pre-1978 Bankruptcy Act at the time of the railroad's conduct. Instead, such a claim only arose when there was a cognizable claim under applicable substantive law, which was not until manifestation of the disease.

12 246 Virginia Environmental Law Journal [Vol. 12:235 done fairly. a 2. Release Trigger The next earliest triggering event for a CERCLA cost recovery claim in bankruptcy is a release or threatened release of hazardous substances at the site, whether or not the site has been identified by the government as one requiring cleanup. This release trigger was adopted by the Second Circuit in L TV Corp. In L TV Corp., the United States, the State of New York and the debtors-the LTV Corporation and its subsidiaries-asked the court to determine, among other things, the appropriate trigger for cost recovery claims under CERCLA. The LTV Corporation argued for a debtor's activities trigger; 6 the governments argued for the costsincurred trigger. 62 The district court, however, adopted a release trigger, which the court of appeals later affirmed. 6 a Acknowledging the "important issues at the intersection of bankruptcy law and environmental law," 6 the Second Circuit reasoned on appeal that even though CERCLA and the Bankruptcy Code might "point in different directions," they did not present the court with a conflict "between two statutes, each designed to focus on a discrete problem, which happen to conflict in their application to a specific set of facts." ' 65 Instead, the court explained, the Bankruptcy Code was "intended to override many provisions of law that would apply in the absence of bankruptcy. ' 66 Although not all issues needed to be resolved to favor bankruptcy's fresh-start objective, the court was not compelled to accept "arguments advanced by EPA that a narrow reading of the Code will better serve the environmental interests Congress wished to promote in enacting CERCLA.1 67 If bankruptcy law impedes environmental cleanup, the court stated, Congress, not the 59 Since "debtor's activities" is the earliest trigger that has been proposed for accrual of a CERCLA claim, if the debtor's activities continue post-bankruptcy, a new, non-discharged claim would accrue. This is significant for those cases where a debtor continues to own contaminated property post-bankruptcy. Because ownership alone is sufficient to give rise to liability under CERCLA, post-bankruptcy ownership would result in a debtor's continuing to be liable notwithstanding any previous discharge. See In re CMC Heartland Partners, 966 F.2d 1143 (7th Cir. 1992). 60 See CERCLA 104, 106, 107, 42 U.S.C. 9604, 9606, 9607 (1988). 61 In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997, (2d Cir. 1991). 62 Id B.R. 513, 522 (S.D.N.Y. 1990), aff'd, 944 F.2d 997 (2d 1991) F.2d at Id. at Id. 67 Id.

13 19931 Estimating Environmental Claims courts, should provide a solution. 8 Next, the court addressed the trigger issue, distinguishing the EPA's claims for costs not yet incurred from tort claims lacking any manifestation of injury: Though there does not yet exist between EPA and LTV the degree of relationship between claimant and debtor typical of an existing though unmatured contract claim, the relationship is far closer than that existing between future tort claimants totally unaware of injury and a tort-feasor. EPA is acutely aware of LTV and vice versa. The relationship between environmental regulating agencies and those subject to regulation provides sufficient "contemplation" of contingencies to bring most ultimately maturing payment obligations based on prepetition conduct within the definition of "claims." True, EPA does not yet know the full extent of the hazardous waste removal costs that it may one day incur and seek to impose upon LTV, and it does not yet even know the location of all the sites at which such wastes may yet be found. But the location of these sites, the determination of their coverage by CERCLA, and the incurring of response costs by EPA are all steps that may fairly be viewed, in the regulatory context, as rendering EPA's claim "contingent," rather than as placing it outside the Code's definition of "claim."9 69 The court then held that the district court had properly adopted a release trigger. Under L TV Corp., then, a cost recovery claim will apparently exist in bankruptcy for all costs ever to be incurred at a site, as long as there has been a pre-petition 7 1 release or threatened release of hazardous substances. A release trigger is subject to a number of criticisms, particularly when applied to sites which the EPA has not yet identified. Because the EPA does not know that these sites exist and that they require response, it cannot file a proof of claim without conducting a detailed environmental audit of each and every company in Chapter 11 reorganization. 7 2 This audit would first have to identify each site that the debtor ever owned, operated or used for hazardous substance dispo- 68 Id. 69 Id. at Id. 71 Although the court refers to the time of the petition as the key date, it is likely that the court meant to refer to the time of plan confirmation, since that is the key date for determining which claims are discharged in a Chapter 11 reorganization. 11 U.S.C (1988). 72 To preserve a claim in bankruptcy, the government must file a proof of claim. Fed. R. Bankr. P. 3002(a). Bankruptcy Rule 3001 provides that "[a] proof of claim is a written statement setting forth a creditor's claim." Fed. R. Bankr. P

14 Virginia Environmental Law Journal [Vol. 12:235 sal. Merely compiling a list of all potential sites would be difficult: For large debtors, sites could number in the thousands. For each site, the EPA would have to determine whether there is, or ever has been, an actual or threatened release of a hazardous substance and, if so, whether any response action is or ever might be necessary. That, in turn, would require the EPA to conduct mini-ri/fss for each site identified. Such an undertaking would be done not to effectuate a cleanup but solely to preserve a claim in bankruptcy. Even if only for one debtor, the task would be overwhelming. To undertake it for each reorganizing company in the United States is plainly impossible. There is no basis for suggesting that the EPA could formulate such a claim statistically, for instance, by determining the volume of wastes a company generated and then somehow extrapolating to future CERCLA liability. No statistical methods or algorithms, like those used for future tort claims (e.g., asbestos disease claims), exist for predicting future CERCLA liability based on a company's past disposal activities. Further, even if such a statistical approach were devised, it would require the EPA to have full and complete information about a company's entire history of hazardous waste activity. Neither the EPA nor most companies have anything close to that sort of information. 7 The L TV Corp. court's analysis in support of a release trigger suggests another criticism: It ignores the fact that incurrence of response costs is an essential element of a CERCLA cost recovery claim. CERCLA defines "release" broadly to give the EPA broad leeway in deciding which situations require response. 7a The vast majority of releases, however, do not require any response; and in fact they occur without the EPA ever learning about them. Because spilling a single ounce of any hazardous substance is a release within the meaning of CERCLA, 75 millions of releases must occur each year. They become significant, however, only when the EPA determines that a response action is required. The NCP sets forth a detailed framework for how the EPA should make that assessment and respond to releases. 76 The decision to undertake a response, not merely the fact of a release, is thus the critical event in the accruing of a cost recovery claim Hazardous waste regulation and record-keeping requirements under the Resource Conservation and Recovery Act, 42 U.S.C (i) (1988), began only after CERCLA 101(22), 42 U.S.C. 9601(22) (1988). 75 United States v. Alcan Aluminum Corp., Nos & , slip op. at 13 (2d Cir. Apr. 6, 1993) C.F.R. pt. 300 (1992). 77 See United States v. Price, 577 F. Supp. 1103, 1110 (D.N.J. 1983); M. Drabkin et al., Bankruptcy and the Cleanup of Hazardous Waste, 15 Envtl. L. Rep. (Envtl. L. Inst.) 10,168,

15 1993] Estimating Environmental Claims The Second Circuit misconstrued CERCLA if it meant to suggest that incurrence of response costs was not an element of a CERCLA cost recovery claim. On the other hand, if the court meant by its holding that even if no claim exists under the applicable substantive law of CERCLA, one can exist for bankruptcy purposes, then its decision is at odds with cases that have held that only claims valid under applicable substantive law can exist in bankruptcy. The Third Circuit in In re Penn Central Transportation Co.,8 for example, considered whether CERCLA liabilities attributable to a rail yard Penn Central had owned and operated until 1976 had been discharged upon confirmation of the company's 1978 reorganization plan. The Third Circuit held that the claims had not been discharged. 79 Because CERCLA had not yet been enacted, the court reasoned, the EPA could not have had a bankruptcy claim pre A dischargeable claim would not exist for bankruptcy purposes unless there was a cognizable claim under the applicable substantive law. 8 " The claims arose, therefore, only after the reorganization. 3. Fair Contemplation Trigger Several courts have adopted a third possible triggering event for a 10,175 (1985) ("A premature CERCLA claim is unlike a tort that has been committed prepetition but not yet sued upon, because crucial elements of the liability have yet to take place... [T]he expenditure of recoverable funds... [is a predicate] to liability."). Numerous courts have held that incurrence of response costs is an essential element of a CERCLA cost recovery claim. See, e.g., Kelley v. Thomas Solvent Co., 727 F. Supp. 1532, 1541 (W.D. Mich. 1989); United States v. Stringfellow, 661 F. Supp. 1053, 1059 (C.D. Cal. 1987); United States v. Wade, 577 F. Supp. 1326, (E.D. Pa. 1983). In adopting a release trigger, the court in LTV Corp. failed to address the problems such a trigger might present. The United States had identified these problems in its appeal brief, arguing, for example, that: In declaring that a claim arises upon the release or threatened release of a hazardous substance, [the district court] picked a moment almost temporally opposite of when Congress provided that a CERCLA claim exists. Moreover, [the court] picked an event that can occur without conferring the slightest degree of knowledge on EPA as creditor that it might have a bankruptcy claim, or on LTV as debtor that it might owe money. The district court's test also fails to recognize that the release of hazardous substances at a site might not be a single event: toxic chemicals may leach into the ground over a period of years, changing the character and gravity of the environmental harm over time. The event picked by the district court as the touchstone of liability simply does not trigger any obligation on the part of any PRP or give EPA any right to cost recovery. Brief for the United States at 35, In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997 (2d Cir. 1991) (Nos et al.) F.2d 164 (3d Cir. 1991), cert. denied, 112 S. Ct (1992). 79 Id. at Id. at Id.

16 250 Virginia Environmental Law Journal [Vol. 12:235 CERCLA cost recovery claim in bankruptcy: 2 when potential liability is within the fair contemplation of the parties. This "fair contemplation" trigger was first adopted in In re National Gypsum Co. 8 3 In that case, the district court discussed the LTV Corp. release trigger and, although finding that the existence of a release was a relevant inquiry, held that it was not the only inquiry. The court stated: While similarly of the view that conduct giving rise to release or threatened release of hazardous substances pre-petition should be the relevant inquiry in determining the existence of a claim in bankruptcy, this Court is not willing to favor the Code's objective of a "fresh start" over CERCLA's objective of environmental cleanup to the extent exhibited by [L TV Corp.]. Despite the distinction drawn in [LTV Corp.],... under the terms of CERCLA, there exists no meaningful distinction between debtor's conduct and the release or threatened release resulting from this conduct. The only meaningful distinction that can be made regarding CERCLA claims in bankruptcy. is one that distinguishes between costs associated with pre-petition conduct resulting in a release or threat of release that could have been "fairly" contemplated by the parties; and those that could not have been "fairly" contemplated by the parties.84 The In re National Gypsum court then discussed a number of factors that could be used to determine whether fair contemplation of future costs existed, including "knowledge by the parties of a site in which a [PRP] may be liable, NPL listing, notification by EPA of PRP liability, commencement of investigation and cleanup activities and incurrence of response costs." See infra notes and accompanying text B.R. 397 (N.D. Tex. 1992). 84 Id. at (citations omitted). 85 Id. at 408. The In re National Gypsum approach has been followed in two recent cases. Although it emphasized that it was not establishing a legal rule on the accrual of a CERCLA claim, and although it did not cite In re National Gypsum, the court in In re Chicago, M., St. P. & Pac. R.R., 974 F.2d 775 (7th Cir. 1992) appeared to favor a similar rule. The court stated that: [R]ather than adopting...any rule, we explain below that when a potential CERCLA claimant can tie the bankruptcy debtor to a known release or a hazardous substance which this potential claimant knows will lead to CERCLA response costs, and when this potential claimant has, in fact, conducted tests with regard to this contamination problem, then this potential claimant has, at least a contingent CERCLA claim [for bankruptcy purposes]. Id. at 786. Second, in AM International, Inc. v. Datacard Corp., 146 B.R. 391 (N.D. I ), the district court adopted the magistrate's recommendation which had accepted the In re National Gypsum fair contemplation trigger. See also Kevin J. Saville, Note, Discharging CERCLA Liability in Bankruptcy, When Does A Claim Arise?, 76 Minn. L. Rev. 327 (1991).

17 1993] Estimating Environmental Claims The fair contemplation test goes far-but not far enough-toward solving some of the problems inherent in the L TV Corp. release trigger. First, because the standard is open-ended, parties cannot know with sufficient certainty which CERCLA claims will be discharged. More importantly, the test is easily manipulated: A debtor could arguably create fair contemplation by providing the EPA with a laundry list of several hundred sites. Having done so, the debtor might then argue that because the EPA could investigate each of those sites, each one is within the EPA's fair contemplation. This tactic, however, would put the EPA in the unenviable position of either having to investigate countless sites solely for bankruptcy purposes or losing any right to assert claims involving those sites. Finally, to the extent that the fair contemplation approach allows accrual of a CERCLA claim for sites at which no response action has yet been taken by the EPA, it ignores (like the release trigger approach) that the undertaking of response action is an essential element of a CERCLA cost recovery claim. 4. Initiation-of-Response Trigger and Costs-Incurred Trigger A fourth possible triggering event for a CERCLA claim in bankruptcy is the EPA's identification of the site as requiring response and its initiation of some response. Under this initiation-of-response trigger, once some response action has been taken for the site, claims exist for any related future costs to be incurred there. If an RI/FS is in progress, for example, a claim would already exist for the costs of some remedy not yet selected.6 The United States has advocated the initiation-of-response trigger subsequent to the L TV Corp. decision. 87 A fifth and related triggering event is the selection of a response action. 8 Under this costs-incurred trigger, no claim would exist for the costs of a response action until that action was actually selected. 86 This approach was adopted in In re Allegheny International, Inc., 126 B.R. 919 (W.D. Pa.), aff'd, Allegheny Int'l, Inc. v. AL Tech Specialty Steel Corp., 950 F.2d 721 (3d Cir. 1991). The Court stated: "As to each facility, if any costs were incurred pre-petition, then a CERCLA claim arose as to that facility pre-petition, and all response costs incurred and to be incurred remediating the facility are dischargeable." Id. at In In re National Gypsum, the United States asserted that no CERCLA claim exists before the EPA has incurred at least some response costs. United States' Motion for Legal Determination of Issues Raised in Debtors' Objection at 27, 34, (Oct. 28, 1991), In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992)' (Nos H, BK SAF- II & BK SAF-1 ). 88 Although this approach generally yields the latest trigger, there could be exceptions depending on how courts develop the reasonable contemplation trigger. If "reasonable contemplation" is focused on only the site itself, "costs incurred" will yield a later trigger. But if "reasonable contemplation" also means identification of the debtor as a liable party, it will

18 Virginia Environmental Law Journal [Vol. 12:235 This trigger was the one advocated by the United States in L TV Corp. and by several state governments in a number of cases. 8 9 Each of these last two approaches requires that response costs be incurred 9 " as an essential element of a cost recovery claim. Under both approaches, until the EPA determines that a site requires some response, no claim exists, not even a contingent one. The government's disadvantage from the initiation-of-response trigger, the earlier of the two, is that it could provoke frequent litigation about remedial decisions not yet made and thus would directly violate CERCLA's "clean up first, litigate later" philosophy. 9 ' If the EPA has already taken some response action at the site, however, the Agency can file the necessary proof of claim in an unliquidated amount; and concerns about premature remedy litigation can be addressed by appropriate rules, proposed below, for the estimation of such claims during the course of the bankruptcy. III. USING ESTIMATION TO RECONCILE REORGANIZATION AND DILIGENT CLEANUP Bankruptcy courts can estimate the amount of claims in several situations. Recent cases have addressed the issue of whether CERCLA claims can be estimated for Chapter 11 bankruptcy proceedings. The In re National Gypsum case illustrates the actual workings of a CERCLA liability estimation in bankruptcy. Because of the problems entailed in such estimations, courts should make "speedy and rough" estimations for voting purposes and permit CERCLA claims allowances to occur in due course. A. The Purpose and Effect of Estimating CERCLA Claims in Bankruptcy When debtors and creditors do not agree on the existence or amount of a creditor's contingent or unliquidated claim, the bankruptcy court can estimate the amount of the claim. Section 502(c) of the Bankruptcy Code states: result in a later trigger than "costs incurred" where the EPA has cleaned up a site but has not identified the liable parties. 89 In two cases in Minnesota, the same district judge has ruled that a CERCLA claim for recovery of response costs does not accrue prior to the incurrence of those response costs. United States v. Union Scrap & Iron Metal, 123 B.R. 831 (D. Minn. 1990); Sylvester Bros. Dev. Co. v. Burlington N. R.R., 133 B.R. 648 (D. Minn. 1991). 90 Although only the fifth trigger is labeled "costs-incurred," both the fourth and fifth triggers involve the incurring of costs. 91 See supra text accompanying notes

19 1993] Estimating Environmental Claims 253 There shall be estimated for purpose of allowance under this section-() any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case It is significant that the Bankruptcy Code does not provide for estimation of contingent claims in all cases, but only in those where estimation is necessary to avoid undue delay in the administration of the case. 93 Although the Bankruptcy Code permits estimation for purposes of allowance, estimation can serve other purposes. 94 For example, estimation can assist the court and the parties in preparing and evaluating a reorganization plan. Prior to a plan's confirmation, estimation of unliquidated and contingent claims might be necessary so that creditors and the court can evaluate the plan's feasibility without waiting for the claims to be liquidated. 95 In determining whether a claim should be estimated, "[o]ne pertinent question is whether the uncertain status of the claim impedes the parties' ability to prepare a plan of reorganization within a reasonable time." 96 Both the Second Circuit's decision in L TV Corp. 97 and the district court's decision in In re National Gypsum 98 considered whether and for what purposes the U.S. government's CERCLA claims could be estimated for use in a Chapter 11 bankruptcy proceeding. In L TV Corp., the court held that a CERCLA claim would accrue for bankruptcy purposes if there were a release or threatened release of a hazardous substance at the site. 99 In response to the EPA's concerns that an estimation process would require premature and disruptive litigation over remedies not yet selected, the court stated that CERCLA U.S.C. 502(c) (1988). For a discussion of pre-code treatment of contingent and unliquidated claims, see David Kauffman, Note, Procedures for Estimating Contingent or Unliquidated Claims in Bankruptcy, 35 Stan. L. Rev. 153, (1982) U.S.C. 502(c). 94 See In re National Gypsum Co., Nos H, BK SAF-11 & BK SAF-11, Memorandum Opinion and Order at 6 (N.D. Tex. Nov. 12, 1991) (order granting debtors' request for bifurcation of proceedings into an estimation phase and a liability phase). 95 In re Dennis Ponte, Inc., 61 B.R. 296, 299 (Bankr. 9th Cir. 1986); In re MacDonald, 128 B.R. 161, 164 (Bankr. W.D. Tex. 1991) (citing In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1382 (9th Cir. 1985)). 96 In re Bellucci, 119 B.R. 763, 778 (Bankr. E.D. Cal. 1990). If resolution of a claim would unduly delay the closing of a case, the court is required to estimate the claim and assign it a dollar value to the best of its ability. See H.R. Rep. No. 595, 95th Cong., 2d Sess. 354 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, In re Chateaugay Corp. (LTV Corp.), 944 F.2d 997, 1006 (2d Cir. 1991). 98 In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992). 99 See supra notes and accompanying text.

20 Virginia Environmental Law Journal [Vol. 12:235 claims could be estimated for purposes of the EPA's voting rights in the bankruptcy proceeding, but liquidation would be deferred until the normal CERCLA process was completed: The assumption that appears to underlie EPA's concern that the bankruptcy proceeding amounts to pre-enforcement judicial review of CERCLA claims is that extensive factual inquiry will have to be undertaken. EPA contends that it "would be forced to litigate in the bankruptcy proceedings to liquidate and fix any claims it might conceivably have against [LTV] for post-confirmation response costs" at numerous sites. Brief for United States at 42. This is not necessarily so. Contingent claims may be estimated if their liquidation "would unduly delay administration of the case." 11 U.S.C. 502(c) (1988). Though EPA fears that even an estimation process would "embroil the parties and the bankruptcy court in disputes over the wisdom and scope of possible remedies," Brief for United States at 42, nothing prevents the speedy and rough estimation of CERCLA claims for purposes of determining EPA's voice in the Chapter 11 proceeding, with ultimate liquidation of the claims to await the outcome of the normal CERCLA enforcement proceedings in which EPA will be entitled to collect its allowable share (full or pro rata depending on the reorganization plan) of incurred response costs.' The court's suggestion that estimation can be limited in most cases to voting is highly significant.'' Although like all creditors, the EPA might have some interest in being allowed to vote on a proposed plan of reorganization, that interest is unlikely to result in extensive litigation over future costs In fact, if the EPA prefers not to litigate F.2d at See Bitner v. Borne Chem. Co., 691 F.2d 134, 137 (3d Cir. 1982); In re Radio-Keith-Orpheum Corp., 106 F.2d 22 (2d Cir.), cert. denied, 308 U.S. 622 (1939). 101 Sections 1126 and 1129 of the Bankruptcy Code, 11 U.S.C. 1126, 1129 (1988), generally require as a precondition to confirmation of a plan that each class of impaired creditors (those not being paid in full) must accept the plan by a vote of two-thirds in dollar amount and more than one-half in number. 102 One reason is that in most cases, even if the EPA's claim is substantial, it will still be only a small percentage of the overall claim in the case. For example, in the In re National Gypsum case, total claims exceeded one billion dollars; the EPA's claims were resolved for approximately $23 million. First Amended and Restated Joint Disclosure Statement at 7-11 (Sept. 4, 1992), In re National Gypsum Co., Nos. BK SAF-ll & BK SAF-I 1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993); United States' Memorandum in Support of Approval of Second Settlement Agreement at 8 (Jan. 22, 1993), In re National Gypsum Co., Nos, BK SAF-11 & BK SAF-11; In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. Feb. 11, 1993) (order approving the second settlement agreement between the debtors and the United States). Thus, the EPA's vote on the plan would not have had a major effect on the results of the voting.

21 1993] Estimating Environmental Claims over future costs, it can have its future costs claim estimated at zero for voting purposes without prejudicing its claim for allowance purposes In In re National Gypsum, the United States and the debtors disagreed over the purpose and effect of estimating the government's disputed environmental claim. The debtors argued that the purpose of the hearing should be to reasonably estimate the actual likely value of the claim and allow it." The estimate would "fix, or 'cap,' the [c]laim for purposes of distribution, subject only to a motion for reconsideration under Section 502(j) of the Code."' 1 5 The government contended that any estimation proceeding should not be for the purposes of allowance of its claim, but rather only for determining plan voting rights The government further asserted that, following LTV Corp., allowance should be determined once response actions for the site were selected, and that allowed claims should be treated like any other general unsecured claims under the reorganization plan. 107 In an earlier ruling, the district court had appeared to follow the LTV Corp. analysis and had suggested that estimation should not be for purposes of allowance. 108 However, the bankruptcy judge later granted the debtors' motion for a ruling on the purpose and effect of the estimation hearing. The judge ruled that pursuant to section 502(c)(1) of the Bankruptcy Code, the disputed government claims would be: estimated for purposes of allowance, as well as for voting and for all plan confirmation purposes, including, without limitation, assisting the Court in fulfilling its obligation to make the findings requested by Sections 11 29(a)(7)(A)(ii) and (11) of the Code as well as the findings requested by Sections 1129(b)(1) and (b)(2), if necessary.' See Fed. R. Bankr. P. 3018(a) (enabling a court to temporarily allow a claim in an amount which the "court deems proper for the purpose of accepting or rejecting [the] plan"). 104 Debtors' Motion for a Ruling on Purpose and Effect of Estimation Proceeding at 2 (Apr. 14, 1992), In re National Gypsum Co., Nos. BK SAF-1 1 & BK SAF- I1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 1os Id. 106 United States' Briefing on Purpose and Effect of Estimation Hearing at 6-7 (Apr. 28, 1992), In re National Gypsum Co., Nos. BK SAF-I 1 & BK SAF-l Id. at In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992). 109 In re National Gypsum Co., Nos. BK SAF-I1, BK SAF-II, (Bankr. N.D. Tex. June 2, 1992) (court order). The district court also ruled that if the bankruptcy court found that one of the sites at issue, the Salford Quarry (which was owned by National Gypsum), posed an imminent and identifiable harm to the environment or public health, then costs incurred by the United States during the pendency of the proceedings would be entitled to administrative priority. In re National Gypsum, 139 B.R. at 415.

22 Virginia Environmental Law Journal [Vol. 12:235 The In re National Gypsum estimation hearing that ensued is described further in the next section. B. Estimation at Work. In re National Gypsum 1. Establishing the United States' Claims Prior to the Estimation Hearing In re National Gypsum was the first bankruptcy case in which a court estimated existing and potential liabilities at a number of CERCLA sites. National Gypsum Company, which manufactured various construction products including asbestos shingles and siding, filed a petition under Chapter 11 of the Bankruptcy Code on October 28, 1990, in the Northern District of Texas. The bankruptcy court set May 30, 1991 as the deadline for filing proofs of claims by all parties except certain excluded classes of creditors. On behalf of the EPA and the Department of the Interior, the United States filed a proof of claim on May 29, 1991,' " asserting that National Gypsum had liability under CERCLA"II for clean-up costs at seven sites and, in addition, at several of the sites for damages to federal natural resources. 1 2 National Gypsum objected to the proof of claim and raised a number of significant legal issues arising out of the intersection of CERCLA and bankruptcy law. 113 The United States successfully moved to have the district court rather than the bankruptcy court decide these and related issues.'" Proof of Claim of the United States on Behalf of the EPA and the Dep't of Interior (May 29, 1991), In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-l1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). i11 Id. at Section 107(a)(4)(C) of CERCLA, 42 U.S.C. 9607(a)(4)(C), allows the United States to recover costs of "damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury..." The Secretary of the Interior is the trustee under CERCLA for a wide range of federal natural resources. See 40 C.F.R (b)(2) (1992). 113 Debtors' Objection to Allowance of Claim of the United States and Amended Counterclaim (Oct. 25, 1991), In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992) (Nos H, SAF-I 1 & SAF-1 I). 114 In re National Gypsum Co., Nos H, BK SAF-I 1 & BK SAF-I 1 (N.D. Tex. Sept. 13, 1991) (order granting United States' motion for withdrawal of reference). The motion of the United States was filed pursuant to 28 U.S.C. 157(d), which requires the district court to withdraw its reference to a bankruptcy court of a proceeding the resolution of which "requires consideration of both title 11 [of the Bankruptcy Code] and other laws of the United States regulating organizations or activities affecting interstate commerce." The United States successfully argued in In re National Gypsum that the issues presented required consideration of both bankruptcy law and CERCLA and that CERCLA was a statute regulating interstate commerce. Id. See also United States v. ILCO, Inc., 48 B.R. 1016, 1022 (N.D. Ala. 1985) (finding that the withdrawal provision at 28 U.S.C. 157(d) should be invoked); AT&T v. Chateaugay Corp., 88 B.R. 581, 588 (S.D.N.Y. 1988) ("By

23 1993] Estimating Environmental Claims The district court issued a lengthy opinion addressing a number of CERCLA/bankruptcy issues." 5 The court ruled that "[a]ll future response and natural resource damages costs based on pre-petition conduct, fairly within contemplation of the parties at the time of Debtors' bankruptcy, are claims under the Bankruptcy Code." ' 6 Post-petition response costs incurred by the United States on property owned by National Gypsum were entitled to administrative priority 117 if those costs "were necessitated by conditions that posed an imminent and identifiable harm to the environment and public health." ' 18 Further, the principles of joint and several liability that applied outside of bankruptcy also applied within it; National Gypsum's liability would be joint and several absent a showing of divisibility of enacting 157(d), Congress determined that a district court of general jurisdiction shall be the forum for substantial and material conflicts between the Bankruptcy code and other federal laws."); In re Combustion Equip. Assocs., Inc., 67 B.R. 709, (S.D.N.Y. 1986) (holding that the proceeding should be withdrawn pursuant to 28 U.S.C. 157(d) because of the necessity of substantial and material consideration of CERCLA); In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986) (holding that the proceeding so greatly involved CERCLA that it should be withdrawn even with a very narrow reading of 28 U.S.C. 157(d)). 11 In re National Gypsum Co., 139 B.R. 397 (N.D, Tex. 1992). 116 Id. at The expenses for administering the bankruptcy estate are generally paid before any creditors, thus giving them "priority" over other claims. Douglas G. Baird & Thomas H. Jackson, Cases, Problems, and Materials on Bankruptcy (1990). See also Bankruptcy Code, 11 U.S.C. 503(b), 507 (1988). 118 Id. at 413. The issue of whether clean-up costs incurred post-petition on debtor-owned property are entitled to administrative priority has been hotly contested. The United States, state governments and private parties have argued under a variety of theories that such costs are entitled to priority under 503(b). Debtors have opposed such priority, arguing that if the contamination existed pre-bankruptcy, the claim is a pre-bankruptcy claim and not entitled to priority. Compare In re Chateaugay Corp., 944 F.2d 997, 1010 (2d Cir. 1991) (holding that post-petition clean-up costs on debtor-owned property are entitled to administrative priority) and In re Wall Tube & Metal Prods. Co., 831 F.2d 118, 124 (6th Cir. 1987) (holding that investigatory costs incurred by Tennessee on property of a Chapter 7 debtor were reimbursable as an administrative expense) and In re Smith-Douglas, Inc., 856 F.2d 12, 17 (4th Cir. 1988) (stating that "cleaning up [an] environmental violation is properly considered an administrative expense...") and In re Stevens, 68 B.R. 774, (D. Me. 1987) (holding that Maine was entitled to recover its response costs as an administrative expense since the cleanup was the responsibility of the bankruptcy estate) and In re Hemingway Transp. Inc., 73 B.R. 494, 505 (Bankr. D. Mass. 1987) (holding that clean-up costs incurred by a party who purchased property from the bankruptcy estate were entitled to administrative priority) aff'd 126 B.R. 656 (D. Mass. 1991), aff'd 954 F.2d 1 (1st Cir. 1992) with Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137 (3d Cir. 1985) (holding that a private party's clean-up costs on property of a Chapter 11 debtor were a general unsecured claim, not an administrative expense) and In re Security Gas & Oil, Inc., 70 B.R. 786, 795 (Bankr. N.D. Cal. 1987) (holding that a clean-up obligation arising from an environmental hazard created pre-petition is a general unsecured claim) and In re Pierce Coal & Constr. Inc., 65 B.R. 521, 531 (Bankr. N.D. W. Va. 1986) (holding that post-petition reclamation expenses resulting from pre-petition conduct of debtor were not administrative expenses).

24 Virginia Environmental Law Journal [Vol. 12:235 harm." 9 Finally, the court returned the case to the bankruptcy court for further proceedings with respect to the government's proof of claim The Estimation Hearing Granting National Gypsum's motion for a ruling on the purpose and effect of the estimation hearing, the bankruptcy court ruled that pursuant to section 502(c)(1) of the Bankruptcy Code, the government's disputed claims would be: estimated for purposes of allowance, as well as for voting and for all plan confirmation purposes, including, without limitation, assisting the court in fulfilling its obligation to make the findings requested by Sections 11 29(a)(7)(A)(ii) and (11) of the Code as well as the findings requested by Sections 1129(b)(1) and (b)(2), if necessary.121 The bankruptcy court then scheduled an estimation hearing for these claims for May 18-20, At the estimation hearing, the court addressed the government's CERCLA response cost claims for two sites, the Millington Asbestos Dump Site in Morris County, New Jersey, and the Salford Quarry in Lower Salford Township, Pennsylvania. The Millington Site comprised four separate properties, three of which were the subject of the estimation hearing. 23 Asbestos wastes generated by National Gypsum had been disposed of at the Millington properties on various occasions from the 1950s until the mid-1970s. 24 The government's 119 In re National Gypsum Co., 139 B.R. at 415. This was the first opinion to address this issue. National Gypsum had argued that bankruptcy courts have the equitable power to apportion liability as a matter of fairness. Id. at 414. The government argued that a claim in bankruptcy should be determined based on the identical legal principles that applied outside of bankruptcy. Id. 120 Id. at In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. June 2, 1992) (court order based on findings of court at hearing on May 6, 1992). 122 Id. 123 The United States' claims with respect to five of the seven sites included in its Proof of Claim, Proof of Claim of the United States on Behalf of the EPA and the Dep't of Interior at 5-7 (May 29, 1991), In re National Gypsum Co., Nos. BK SAF-I 1 & BK SAF-I 1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993), and with respect to the fourth Millington property, were settled prior to the estimation hearing. Settlement Agreement (July 15, 1992), In re National Gypsum Co., Nos. BK SAF-ll & BK SAF Pre-Trial Brief of the United States at (May 12, 1992), In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992) (Nos H, BK SAF-11 & BK SAF- 11).

25 1993] Estimating Environmental Claims claim sought all past and future response costs at these properties, as well as damages to natural resources at one part of the site within the Great Swamp National Wildlife Refuge. 25 At Salford, National Gypsum's predecessor in interest had disposed of tile manufacturing wastes in the quarry The United States claimed past and future response costs.' 27 Because the United States was asserting an administrative priority, the bankruptcy court also had to determine whether the site presented an "imminent and identifiable" threat to public health or the environment. 28 No decision on final cleanup had been made by the EPA, neither for the Salford site nor for one of the three Millington properties at issue, and the predicate studies for both had yet to be completed. The bankruptcy judge allowed a total of twelve hours for the presentation of evidence at the hearing; each of the two parties was allocated six hours. ' 29 To prove its claims, the United States relied on the testimony of nine expert witnesses including a hydrogeologist, a resource economist, a chemist, a wetlands restoration expert, a cost engineer, a toxicologist and a photogrammatrist. 30 National Gypsum called five expert witnesses: a toxicologist, a remedial engineer, a resource economist, an ecologist and a mathematician.' 3 ' Because of the time constraints imposed by the court, most witnesses, even those testifying in areas of great technical and scientific complexity, testified for less than an hour-and in some cases for less than thirty minutes. This schedule left time for nothing more than a cursory summary of each expert's opinion on direct examination and a short challenge on cross-examination. Many of the factual and legal issues were resolved prior to trial, 132 and much of the factual information and testimony was submitted through affidavits, deposition testimony and other written evidence. 125 Id. at Id. at Id. at In re National Gypsum Co., 139 B.R. at United States' Memorandum in Support of Approval of Second Settlement Agreement at 6 (Jan. 22, 1993), In re National Gypsum Co., Nos. BK SAF-I I & BK SAF-I 1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 130 Id. at Transcript of Proceedings at 63, 70, 84-85, (May 18, 1992), In re National Gypsum Co., Nos. BK SAF-I1 & BK SAF-11; Transcript of Proceedings, vol. II at 57 (May 19, 1992), In re National Gypsum Co., Nos. BK SAF-11 & BK SAF For example, National Gypsum admitted to liability for purposes of the estimation hearing regarding the Millington Site. Transcript of Proceedings, Court's Rulings at 4 (June 24, 1992), In re National Gypsum Co., Nos. BK SAF-II & BK SAF- 11.

26 260 Virginia Environmental Law Journal [Vol. 12:235 To substantiate its claims, the United States and National Gypsum submitted hundreds of exhibits, consisting of dozens of notebook volumes. Many significant complex issues remained unresolved prior to the hearing, however. The court's scheduling order allowed for fixed discovery, pretrial and trial deadlines for the identification of experts from late March until May when the three-day hearing commenced. 133 During the discovery that was to have been completed by May 1,134 the parties took dozens of factual and expert depositions. Because no decisions on final cleanup had been made for the Salford Quarry and for one of the Millington properties, the United States was obliged to present evidence on the possible remedies for these sites without having undertaken the studies on which remedy decisions would be based. 35 Accordingly, much of the evidence at the hearing reflected each side's attempt to mimic the process the EPA'would ultimately go through in selecting a remedial action. To predict the ultimate remedy that the EPA would select, each side was forced to perform expensive analyses similar to but not as complete as those that the EPA would actually perform. Not surprisingly, the government's experts and National Gypsum's experts came to different conclusions on the appropriate remedies to be implemented. For the one Millington property having no remedy selected, the differences were relatively small; the government's experts proposed a five-layer cap over the site along with a sheet-piling or slurry barrier wall, while National Gypsum's expert proposed a three-layer cap with a containing barrier wall of synthetic membrane. 1 " 6 The difference in cost was more substantial, however, because the parties used different methodologies to project the costs of implementing their respective remedies. The government's experts projected a cost of $8.2 million, 37 while National Gypsum's experts projected a cost of $1.8 million. 138 The EPA had already selected a remedy for two of the three Millington properties; for these the bank- 133 In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. March 16, 1992) (scheduling order). 134 Id. 135 The procedures for selection of CERCLA remedies are set forth in the National Contingency Plan, 40 C.F.R. pt. 300 (1992), and in particular at Transcript of Proceedings, Court's Ruling at (June 24, 1992), In re National Gypsum Co., Nos. BK SAF- I1 & BK SAF- I1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 137 Transcript of Proceedings, vol. I at 15 (May 19, 1992), In re National Gypsum Co., Nos. BK SAF-1 1 & BK SAF Transcript of Proceedings, Court's Ruling at I 1 (June 24, 1992), In re National Gypsum Co., Nos. BK SAF- 11 & BK SAF-11.

27 19931 Estimating Environmental Claims ruptcy court, relying on section 113(j)(1) of CERCLA, 39 limited review to the administrative record, allowing no extra-record evidence at the hearing." 4 National Gypsum unsuccessfully challenged the EPA's selected remedy as arbitrary and capricious. 4 ' The differences in remedies proposed for Salford were more fundamental. The government's experts proposed a multi-layer cap, a groundwater extraction and treatment system, and possible soil removal and off-site disposal. 142 National Gypsum's experts proposed to upgrade the existing cap. 143 The estimation hearing also addressed the government's claim for natural resource damages at Millington.'" Although CERCLA contemplates that natural resource damages assessments will be undertaken after the selection of a final remedy, the parties here were required to present evidence on such damages before any remedy had been selected. 145 The court then considered a wide range of issues raised by this claim including, for example, injury to air, water, soil or wetland resources at the site from asbestos disposal, as well as damages for lost use of recreational or interim resources.146 Evidence on all of these complex issues-from both sides-was presented in approximately two hours. In the end, the United States asserted that damages to natural resources exceeded $3,000, National Gypsum argued that there were no cognizable natural resource damages. 148 Due to the compressed time schedules and the complexity of the factual, scientific and legal issues, the costs of the hearing for both sides were substantial. The United States submitted evidence of legal fees and expenses amounting to $438,113; that calculation was made well before the hearing, however, and did not include all attorney, expert and litigation support costs ultimately incurred. 49 The natural 139 CERCLA 113(j)(1), 42 U.S.C. 9613(j)(1) (1988). 140 Transcript of Proceedings, Court's Rulings at 5 (June 24, 1992), In re National Gypsum Co., Nos. BK SAF-1 1 & BK SAF-I Id. at Transcript of Proceedings at 8-17 (May 20, 1992), In re National Gypsum Co., Nos. BK SAF- 11 & BK SAF Id. at Transcript of Proceedings, Court's Rulings at 13 (June 24, 1992), In re National Gypsum Co., Nos. BK SAF-I I & BK SAF Id. at Id. at Transcript of Proceedings at (May 20, 1992), In re National Gypsum Co., Nos. BK SAF- 1 & BK SAF Id. at The court estimated the United States' claim for legal fees and expenses at $293,536, or two-thirds of the United States' claim, based on the determination that two of the three sites

28 262 Virginia Environmental Law Journal [Vol. 12:235 resource damages assessment that the Fish and Wildlife Service was required to undertake for the purpose of the hearing alone cost $536, National Gypsum's special environmental counsel applied for approximately $1.7 million in total fees and $200,000 in expenses through June 30, 1992, related to its representation of National Gypsum in the bankruptcy proceedings. 5 ' Additionally, National Gypsum incurred fees and expenses of over $200,000 for experts hired to develop proposed remedies for the two sites and assess natural resource damages and to testify at trial.' 52 The total bill to the debtors for attorney and expert fees and expenses was over $2,000, Resolution of the Process On June 24, 1992, the bankruptcy court issued a bench ruling which resolved the issues presented in the estimation hearing. 54 The court conditionally upheld the EPA's remedy for those Millington properties for which a remedy had already been selected, 55 accepted litigated at the estimation hearing resulted in estimated allowable claims. Transcript of Proceedings, Court's Rulings at (June 24, 1992), In re National Gypsum Co., Nos. BK SAF- 11 & BK SAF o Id. at 17. '5' Fifth Application of Cadwalader, Wickersham & Taft for Interim Compensation and Reimbursement of Expenses at 8-14, exh. B (July 31, 1992), In re National Gypsum Co., Nos. BK SAF-l1 & BK SAF-11. The vast majority of these attorney's fees and expenses were related to litigating the U.S. claims for the Millington and Salford sites. See id. 152 See, e.g., Second Interim Application of SCS Engineers, Expert Witness for National Gypsum Co. for Allowance of Compensation and Reimbursement of Expense (Aug. 3, 1992), In re National Gypsum Co., Nos. BK SAF- II & BK SAF-l See Fifth Application of Cadwalader, Wickersham & Taft for Interim Compensation and Reimbursement of Expense at exh. B (July 31, 1992), In re National Gypsum Co., Nos. BK SAF-1 I & BK SAF-I 1. Litigation costs are particularly significant in bankruptcy matters, since debtors must pay their attorneys and experts in "real" dollars, not "plan" dollars. As Justice O'Connor recently noted: "An entity in bankruptcy can ill afford to waste resources on litigation; every dollar spent on lawyers is a dollar creditors will never see." Pioneer Investment Services Co. v. Brunswick Assoc. Ltd. Partnership, 1993 U.S. LEXIS 2402, at *51 (Mar. 24, 1993) (O'Connor, J., dissenting). 154 Transcript of Proceedings, Court's Rulings (June 24, 1992), In re National Gypsum Co., Nos. BK SAF-I I & BK SAF-I I (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 155 Id. at 8-9. The court estimated the total unsecured claim of the government for this site at $7,270,612, subject to the outcome of the treatability study the EPA was to conduct to determine the feasibility of the remedy as a long-term solution. Id. The EPA had selected a remedy of in situ solidification and stabilization of the asbestos and other hazardous substances at the site, a remedy which had not previously been implemented on such materials. Id. at 6-7. The court ruled that should the treatability study result in specific scientific findings which failed to support the long-term effectiveness of the remedy, the court would estimate the claim at $3,270,612, to reflect the difference between the cost of the EPA's chosen remedy and the

29 1993) Estimating Environmental Claims the EPA's estimate of the remedy's projected cost and allowed the United States the full amount of its claim, contingent on results from an ongoing study of the remedy's long-term effectiveness. 56 For the Millington site with no selected remedy, the court "selected" what was essentially a hybrid of those remedies proposed by the two parties, but based on National Gypsum's proposed methodology for remedy selection." 7 The court found that there had been damage to natural resources, but did not adopt a number of the government's theories for measuring those damages; instead, it estimated damages at about twenty percent of what the government had proposed.' Finally, for the Salford Quarry, the court did not address the remedy selection issue. Rather, it declined to find that National Gypsum was liable under CERCLA for the site.' 59 The United States filed appeals to the district court from certain parts of the bankruptcy rulingsi' but before those appeals proceeded, the parties settled all of the disputed claims. Entered by the bankruptcy court on November 4, 1992 and February 11, 1993,161 the lower cost of a remedy of capping the site with soil, a remedy considered and rejected by the EPA. Id. at Id. at Id. at The court determined that an appropriate remedy for the asbestos at this wetlands site would be a slurry cut-off wall tied into the clay beneath the site, and a three-layer cap over the asbestos. Id. at 11. The court estimated the costs of implementing this remedy at $2.9 million. Id. at Id. at The court estimated the government's natural resource damages claim at $182,642 and the reasonable costs of assessing such damage at $178,711. Id. at Id. at The primary liability issue had been whether trichloroethylene ("TCE"), a hazardous substance under CERCLA, was being released from the Salford Quarry. Id. at 19. The government presented evidence that TCE was being released, National Gypsum argued that it was not, and the bankruptcy court concluded that it could not "definitively find that TCE was or was not released from the quarry." Id. at 20. A complicating factor was that several days prior to the court's bench ruling, the United States Court of Appeal for the District of Columbia had issued a ruling, upholding a challenge by National Gypsum and another party to the listing of the Salford Quarry on the CERCLA National Priorities List ("NPL"). National Gypsum Co. v. U.S. Envtl. Protection Agency, 968 F.2d 40 (D.C. Cir. 1992). The District of Columbia Circuit vacated the EPA's decision to list the quarry on the NPL and remanded the matter for further consideration. Id. at 47. Whereas the circuit court ruling left open the possibility that the site would be relisted, the bankruptcy court held that the quarry would not be eligible for remediation using CERCLA resources. Id. at The United States filed notices of appeal on the bankruptcy court's two orders regarding the Salford Quarry site and the order regarding one of the Millington sites (OU-3, also known as the Great Swamp National Wildlife Refuge). United States' Notices of Appeal (Aug. 5 & 10, 1992), In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-I 1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 161 In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-I1 (Bankr. N.D. Tex. Feb. 11, 1993) (order approving the second settlement agreement); In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. Nov. 4, 1992) (order approving the first settlement agreement).

30 Virginia Environmental Law Journal [Vol. 12:235 settlements eliminated the need for further proceedings. Furthermore, the settlements removed any of the obstacles to confirming a reorganization plan which further proceedings might have encouraged. In one sense, the estimation hearing was a success because it resolved complex CERCLA claims in a manner that did not delay reorganization. The costs, however, were substantial. National Gypsum had to pay its own attorney and expert fees and expenses totalling over two million dollars. Additionally, the government was granted by court order an allowed claim of two-thirds of the United States' litigation fees and expenses which totalled over $400, Enormous effort and expense went into investigating these CERCLA sites-solely for litigation, not to expedite the cleanup. The sites after the hearing were no closer to being cleaned up than they were before the hearing. Legitimate questions also exist about the proceeding's fundamental fairness. The parties were asked to prepare these issues in a matter of months and try them in twelve hours; in normal enforcement proceedings, the preparation and the trial would probably have taken much longer.' 63 Bankruptcy courts by far have the most crowded dockets in the federal system. They are under increasing pressure to move their cases to resolution. It is not surprising, then, that this bankruptcy court allowed only three days for the hearing." 64 Indeed, 162 Transcript of Proceedings, Court's Rulings at (June 24, 1992), In re National Gypsum Co., Nos. BK SAF-11 & BK SAF-11 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 163 The United States has tried two other CERCLA cases in which remedy issues were litigated without a prior administrative hearing. In United States v. Ottati & Goss, Inc., 694 F. Supp. 977 (D.N.H. 1985), aff'd in part, vacated and remanded in part, 900 F.2d 429 (1st Cir. 1990), trial on the liability took 116 days, and the trial on the remedy took 68 days. (Not all trial days were full days.) In United States v. Hardage, 733 F. Supp (W.D. Okl. 1989), the Court employed various mechanisms to expedite trial; the trial nevertheless took almost three weeks. Each of these cases involved only one site. 164 A second estimation hearing on CERCLA claims occurred several months after National Gypsum. During June and July 1992, an estimation hearing was held on the debtor's CERCLA liabilities at the Roebling Steel Site in New Jersey. See Stipulation and Settlement (Nov. 25, 1992), In re CF&I Fabricators of Utah, Inc., No. 90B-6721 (Bankr. D. Utah reorganization confirmed Feb. 13, 1993). The EPA had selected remedies for only a small portion of the site by the time the hearing was held. The court allowed the hearing to take place over six and a half days, spread over the course of several weeks, with strict limits on the time allotted to each side. The United States pre-filed all of its direct testimony in writing. Although the hearing schedule was not as compressed as that in National Gypsum and involved only one site, the issues were extremely complex, involving proposals for complicated clean-up remedies based on little scientific data and no final RI/FS. Before closing arguments, the parties settled the United States' claims for a general unsecured claim of $27,098,870. Id.

31 1993] Estimating Environmental Claims it would be unrealistic at present to expect a bankruptcy court to devote the weeks of trial time that full consideration of multiple CERCLA claims requires. Adjudicating these important environmental claims in the most truncated of procedures does not, however, fully serve the public interest. C. Lessons from National Gypsum: How the LTV Corp. Directive Balances Fresh Start and CERCLA Priorities To alleviate the difficulties highlighted by In re National Gypsum, bankruptcy courts should follow the LTV Corp. directive, a readily available alternative to CERCLA estimation hearings, which in the vast majority of cases would serve the legitimate interests of the debtor, its creditors and the objectives of CERCLA. Under this alternative, if the parties could not reach an agreement, the court would make a "speedy and rough" estimation for voting purposes and permit allowance of the CERCLA claims to take place in due course but subject to the terms of a confirmed plan. This alternative better comports with CERCLA policy because it allows site assessments and remedy selections to occur as prescribed by the statute. In the usual CERCLA case, the government has prepared an administrative record to document its decision-making process. 165 The EPA bases its remedy selection on careful consideration of both the site conditions set forth in the record and the statutory and regulatory requirements that govern cleanups.166 Forcing the EPA to estimate the cost of a remedy not yet selected effectively asks the government to violate CERCLA's statutory remedy selection requirements. Furthermore, it deprives the EPA of its administrative record and, consequently, the deferential judicial review that would ask only if remedy selection were arbitrary and capricious.' 67 Like the debtor, the EPA under these circumstances must predict what might happen administratively at some point in the near or distant future. 6 ' When C.F.R (a) (1992) C.F.R ; 42 U.S.C. 9617(a) (1988) U.S.C. 9613(j)(1). 168 Another perspective on the lessons of the National Gypsum estimation hearing is contained in a recent article by National Gypsum's trial counsel. David F. Williams et al., A Whole New Ballgame: Judicial Review and Estimation of CERCLA Claims in Bankruptcy, 22 Envtl. L. Rep. (Envtl. L. Inst.) 10,785 (1992). This article correctly points out that forcing the EPA to litigate its CERCLA claims before a remedy has been selected and before there is an administrative record for remedial selection is advantageous for PRPs. As the authors put it, "[i]n the bankruptcy courts... PRPs may find themselves playing a whole new ballgame." Id. at 10,785. Because PRPs can do better under the rules of this new "ballgame," the author's

32 Virginia Environmental Law Journal [Vol. 12:235 faced with this situation, the government can rely either on non-governmental experts to estimate future clean-up costs or on the EPA witnesses who would be involved in the decision-making process in the future remedy selection. This latter option, however, presents another set of problems: It forces the EPA to abandon the NCP process and select a remedy which may be substantially modified or even rejected once the EPA has engaged in the official remedy selection process following the bankruptcy estimation hearing. In neither case can the government, prior to review, make the appropriate, wellgrounded decision about the cleanup that CERCLA requires. Litigating what the appropriate remedy should be well before the Agency has had the opportunity to investigate the site, develop an administrative record and examine appropriate clean-up alternatives does nothing but delay the cleanup and forces the selection of a clean-up remedy that may be inappropriate and ineffective. In contrast, following the L TV Corp. approach to estimation would eliminate the need for premature remedy litigation. Litigation would take place in due course once remedies have been selected. The less the EPA knows about a site, the more valuable it is to postpone potential litigation until the EPA has performed the necessary site studies and taken response action. Deferring issues of allowance would furthermore enable the government to litigate claims against all liable parties in the same proceeding, thus avoiding piecemeal litigation. Under the LTV Corp. approach, the government would recover in due course under the reorganization plan-an entirely appropriate result in the absence of a priority for CERCLA claims in general. From the debtor's perspective, the LTV Corp. approach would facilitate reorganization by treating the government's CERCLA claims like the claims of other pre-bankruptcy creditors. Complete certainty about the magnitude of the claims might not be realized. suggest that the rules should be changed outside of bankruptcy to afford PRPs equally favorable results. This reasoning is faulty. If the distances between the bases were increased from 90 to 150 feet, pitchers would do better in keeping scoring down, but they would no longer be playing baseball, and the game would not be what the inventors of baseball had in mind. It would indeed be a "whole new ballgame." Similarly, if the provisions of CERCLA precluding preenforcement review and requiring record review were eliminated, PRPs might well do better. But it would no longer be the "ballgame" the drafters of CERCLA, concerned about making sure that remedies were not delayed by litigation and that the EPA's remedial choices be afforded reasonable deference, had in mind. It, too, would be a "whole new ballgame." National Gypsum does not teach us that we should begin to have de novo trials for all sites and further increase the transaction costs associated with CERCLA; rather it teaches that even in bankruptcy cases, such trials are generally unnecessary and inappropriate.

33 19931 Estimating Environmental Claims Bankruptcy's objectives, however, require certainty only to the extent that uncertainty would interfere with reorganization. However desirable absolute certainty would be, it does not justify the burden on the government that requiring premature estimation of CERCLA claims entails. Debtors will undoubtedly argue that the uncertainty of unliquidated CERCLA claims would render reorganization impossible. Cases might arise where a CERCLA claim constitutes a high enough percentage of the debtor's total estate that leaving it unliquidated would mean effectively no certainty for the reorganization plan. In most cases, however, the facts are unlikely to bear this out. For example, in In re National Gypsum, the potential liability for cleanup at the Millington properties amounted to only a very small percentage of the company's total unsecured debt.' 69 National Gypsum failed to offer any evidence on how leaving these claims unliquidated would interfere with reorganization. Debtors would also likely argue that the LTV Corp. approach does not lend itself, for example, to reorganization under a plan that calls for creditors to receive stock; issuing stock years down the road when CERCLA claims are eventually liquidated would be administratively unworkable. Reorganization plans, however, are by nature unimaginably complex, so it strains credulity to suggest that some resolution could not be worked. Recent experience in fact demonstrates that the L TV Corp. approach is extremely workable. The United States has entered into four settlements with large Chapter 11 debtors: Uniroyal Adhesives and Sealants Company and four related corporations; 7 ' Insilco Corporation and its subsidiaries;' 7 ' LTV Corporation and its subsidiaries;' 72 and interestingly, National Gypsum itself. These agreements provide for a wide range of future cost claims to be adjudicated in due course and for any judgments to be satisfied in accordance with the terms of the confirmed reorganization plans. In each of those cases, certain CERCLA liabilities were liquidated by agreement; all other liabilities arising from pre-bankruptcy conduct were to be determined in due course and paid in plan dollars See supra note 102 and accompanying text. 170 Settlement Agreement and Stipulated Order (Aug. 7, 1992), In re U.E. Sys., Inc., No (Bankr. N.D. Ind. reorganization confirmed Aug. 19, 1992). 171 Settlement Agreement and Stipulated Order (Oct. 6, 1992), In re Insilco Corp., No. SA- 92-CA-210 (W.D. Tex. settlement agreement entered by the court Jan. 15, 1993). 172 Settlement Agreement and Stipulated Order (Apr. 15, 1993), In re Chateaugay Corp. (LTV Corp.), No (S.D.N.Y. confirmation of reorganization pending). 173 Settlement Agreement and Stipulated Order at (Aug. 7, 1992), In re U.E. Sys.,

34 Virginia Environmental Law Journal [Vol. 12:235 In In re Insilco Corp.,174 for example, the settlement agreement resolved claims asserted by the United States on behalf of the EPA and the Department of Interior against Insilco Corporation and its named subsidiaries. Under the agreement, Insilco agreed to pay $5,050,000 in cash and consented to an allowed general unsecured claim of $4,227,560 for CERCLA response costs at fifteen specified sites, and at some of those sites, for natural resource damages as well.' 75 In addition, the agreement provided that the debtors' prepetition liabilities to the United States at any additional sites not owned by the debtors post-petition would not be discharged under the bankruptcy laws. Rather, they would be liquidated and satisfied as general unsecured claims (i.e., paid in stock at discounted values), when and if the United States undertook subsequent enforcement activities. 176 The agreement allowed for liquidation of the debtors' liabilities in the court in which the United States could have brought its action if the bankruptcy had not occurred. 177 The In re Insilco court explicitly approved of this mechanism for dealing with unliquidated claims: The United States has also justified the fairness and reasonableness of the Agreement's provisions in paragraph 6 for dealing with CERCLA claims at additional sites arising from the prepetition conduct of Insilco. These sites will be handled in the ordinary course of CERCLA activities in the future, but any judgments or settlements that the United States obtains will be satisfied as general unsecured claims as described in the Agreement. The Agreement thus eliminates any need for unnecessary estimation hearings on these claims as part of the bankruptcy proceedings, and provides a fair and reasonable compromise treatment for these claims.' 7 1 Inc., No (CERCLA liability for pre-petition acts for additional sites other than debtor-owned sites and sites settled for specific sums would be discharged by confirmation of the plan of reorganization, and the United States would receive no distribution at that time; however, such liabilities could be "liquidated as general unsecured claims if and when the United States undertakes enforcement activities in the ordinary course"); Settlement Agreement and Stipulated Order at 13-23, 33, exh. A (Oct. 6, 1992), In re Insilco Corp., No. SA-92- CA-210; Second Settlement Agreement at (Nov. 25, 1992), In re National Gypsum Co., Nos. BK SAF- 11 & BK SAF-I 1 (Bankr. N.D. Tex. reorganization confirmed Mar. 9, 1993). 174 In re Insilco Corp., No. SA-92-CA Settlement Agreement and Stipulated Order at 13-19, 33, exh. A (Oct. 6, 1992), In re Insilco Corp., No. SA-92-CA Id. at Id. 178 Findings of Fact and Conclusions of Law and Order at 6, In re Insilco Corp., No. SA- 92-CA-0210 (W.D. Tex. Jan. 15, 1993).

35 1993] Estimating Environmental Claims There may of course be cases where the potential CERCLA liabilities are so large that the LTV Corp. approach used in Insilco and other recent settlements would effectively preclude reorganization. If so, the burden should be on the debtor to make such a showing. In the vast majority of cases, however, the approach advocated above effectively balances the goals and policies of the Bankruptcy Code and CERCLA, and avoids the costly and premature adjudications of CERCLA claims that can result solely from a bankruptcy. IV. CONCLUSION With increasing frequency, courts have had to address CERCLA issues in the context of bankruptcy. In doing so, they have had to develop rules that accommodate the objectives of both CERCLA and the Bankruptcy Code. That is appropriate, inasmuch as both statutes deal with important public policies: the rehabilitation of debtors and the rehabilitation of the environment. In fairly enforcing CERCLA, the government has had to become a participant in bankruptcies of PRPs, and it has had to come to grips with the fact that many CERCLA claims will be lost unless asserted in bankruptcy. This too is appropriate inasmuch as the Bankruptcy Code neither excludes environmental claims from its scope nor provides a priority for them. Requiring estimation of CERCLA claims during the course of bankruptcy proceedings is, however, generally inappropriate. Recent settlements have demonstrated that estimation is unnecessary to meet the bankruptcy goal of debtor rehabilitation; the National Gypsum trial showed that estimation is directly at odds with the CERCLA goal of environmental rehabilitation. In contrast, allowing such claims to be addressed in due course under the usual rules applicable to CERCLA litigation-but with any judgment satisfied on the same terms as were the claims of other creditors during the bankruptcywill generally satisfy all legitimate bankruptcy concerns without interfering with CERCLA's overriding concern, the expeditious cleanup of sites presenting threats to the public health and the environment.