Penn Terra Ltd. v. Department of Environmental Resources
20 ERC 2185, 733 F.2d 267 (1984)
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Rule of Law:
A state's enforcement of an injunction requiring a debtor to perform environmental reclamation is an exercise of its police and regulatory power, not the enforcement of a money judgment, and therefore is not prohibited by the automatic stay provision of the Bankruptcy Code.
Facts:
- Penn Terra Limited operated coal surface mines in Pennsylvania.
- The Commonwealth's Department of Environmental Resources (DER) cited Penn Terra for 36 violations of state environmental protection statutes.
- Penn Terra and DER entered into a consent order and agreement that established a schedule for Penn Terra to take corrective measures and rectify the infractions.
- Penn Terra failed to comply with the schedule outlined in the consent agreement.
- Having previously ceased all operations, Penn Terra filed a Petition for Bankruptcy under Chapter 7.
- In its bankruptcy schedule, Penn Terra listed assets worth $14,000 and debts totaling $660,000.
- The schedule noted that the cost to perform the reclamation required by the consent agreement would greatly exceed the value of its assets.
Procedural Posture:
- Pennsylvania's Department of Environmental Resources (DER) brought an equitable action in the Commonwealth Court of Pennsylvania seeking an injunction against Penn Terra to enforce a consent order.
- The Commonwealth Court granted injunctive relief to DER, ordering Penn Terra to perform specific environmental reclamation tasks.
- Penn Terra filed a Petition for Contempt in the U.S. Bankruptcy Court for the Western District of Pennsylvania against DER, alleging the state proceeding violated the automatic stay.
- The bankruptcy court found DER's action was an attempt to enforce a money judgment, and it issued a permanent injunction preventing DER from enforcing the Commonwealth Court's order.
- DER (appellant) appealed the bankruptcy court's injunction to the U.S. District Court.
- The district court affirmed the bankruptcy court’s order.
- DER (appellant) appealed the district court's decision to the U.S. Court of Appeals for the Third Circuit.
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Issue:
Does the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a), prevent a state from enforcing a court order that requires a bankrupt company to perform environmental cleanup actions that necessitate the expenditure of its assets?
Opinions:
Majority - Garth, Circuit Judge
No. A state's action to compel a debtor to comply with an environmental injunction is a valid exercise of its police and regulatory power and is not stayed by bankruptcy, even if compliance requires the expenditure of money. The exception for governmental police power in § 362(b)(4) is construed broadly, while the exception to that exception for the 'enforcement of a money judgment' in § 362(b)(5) is construed narrowly. The court distinguished between actions seeking compensation for past harm, which are akin to money judgments, and actions seeking to prevent future harm and restore environmental conditions, which are equitable injunctions. Here, the DER's injunction was not intended to provide compensation for past injuries or award damages, but was meant to prevent future environmental harm and remediate existing hazards. The fact that compliance with the injunction requires the expenditure of money does not, by itself, transform the order into a money judgment, as doing so would render the police power exception a virtual nullity.
Analysis:
This decision significantly clarifies the conflict between federal bankruptcy policy and state environmental regulation, establishing that a debtor's environmental cleanup obligations are not automatically stayed. It empowers governmental agencies to continue enforcing regulations that protect public health and safety against companies that have filed for bankruptcy. The case sets a crucial precedent by defining 'enforcement of a money judgment' narrowly, focusing on the remedy's purpose (compensatory vs. preventive) rather than its financial cost. This ensures that bankruptcy cannot be used as a shield to evade responsibility for ongoing environmental hazards.
