Court Says Bankrupt Firms Can’t Evade Toxic Cleanups

In an important environmental ruling, the Supreme Court held Monday that states may prevent bankrupt firms from evading the cost of toxic waste cleanups by abandoning the sites.

The justices, by a vote of 5 to 4, upheld a lower court ruling that barred a bankruptcy trustee from abandoning waste disposal sites in New Jersey and New York that were contaminated with hazardous materials.

“We hold that a trustee may not abandon property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards,” Justice Lewis F. Powell Jr. wrote for the court majority.

The ruling was a victory for California authorities, who had joined the two states in urging the court to uphold their efforts to make waste site firms help pay for cleanups. The Reagan Administration also backed state officials, saying that the legal ability of a bankrupt firm to abandon property should be subject to laws guarding public safety.

Environmental contamination from hazardous substances has drawn increased concern in recent years in the wake of incidents at the Love Canal in New York, the Stringfellow Acid Pits near Riverside, Calif., and other locations throughout the nation. According to a 1984 study, California ranked third among the states in the amount of hazardous wastes generated. As of last May, the state had identified 209 sites as requiring remedial action.

State programs funded with millions of dollars have been established to pay for cleanups when responsible parties refuse or are unable to do the work themselves. But, according to officials of some states, public funding still falls short of meeting the need.

In a “friend of the court” brief, California Atty. Gen. John K. Van de Kamp said that unless state laws restricting the ability of firms to avoid cleanup costs were upheld, there would be “substantially less” private funding available for toxic abatement, with “serious impacts” on California and other states.

Decision Praised

California Deputy Atty. Gen. Reed Sato praised the ruling Monday, saying that “this was about as good a decision as we could get.” Sato said that an undetermined number of firms in California had been contemplating bankruptcy and abandonment and that the decision “will make them think twice.”

The case before the court (Midlantic vs. New Jersey, 84-801; O’Neill vs. City of New York, 84-805) pitted a provision of federal bankruptcy law allowing abandonment of property against state laws aimed at protecting the environment. The underlying question was not whether the hazardous sites would be cleaned up, but whether public funds or the remaining assets from a bankrupt firm would be used to do the job.

In the case, Quanta Resources Corp., which owned waste oil storage and processing facilities in New Jersey and New York, went into bankruptcy and was placed in the hands of a trustee.

Sought to Abandon Sites

The trustee, in turn, sought to abandon the properties--both contaminated with PCBs, a highly toxic carcinogen--through federal statutes that permit such action if the properties are “burdensome” to the estate.

The two states protested, contending that the company’s remaining assets could cover cleanup costs, which they cited at $2.5 million in New York alone. The states were upheld by a federal appeals court in Philadelphia, holding that abandonment in such circumstances should not be permitted.

The high court majority affirmed the appellate court, holding that abandonment should not be authorized “without formulating conditions that will adequately protect the public’s health and safety.”

In dissent, Justice William H. Rehnquist, joined by Chief Justice Warren E. Burger and Justices Byron R. White and Sandra Day O’Connor, said he was “unconvinced” that the states had such authority to restrict federal bankruptcy provisions.

Barring abandonment and forcing a cleanup, in effect, placed state claims on company assets ahead of claims by other creditors, Rehnquist said. Congress did not intend that result, he said.

Mexican and U.S. officials are investigating the shipping and dumping of suspected toxic wastes across the border. Part II, Page 1.