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State of New Jersey Department v. Atkinson

May 23, 2000


Bankr. Case No. 98-50249 (SAS)



COOPER, District Judge

This matter comes before the Court on an appeal by the State of New Jersey Department of Environmental Protection (the "DEP") from an Order (the "Order") of the bankruptcy court dated October 27, 1999, which incorporated a Memorandum Opinion *fn1 (the "Opinion") dated October 7, 1999, granting the motion of Bruce Atkinson, Esq., Chapter 7 Trustee (the "Trustee"), to abandon real property of the bankruptcy estate. The DEP seeks reversal of the Order claiming that the bankruptcy court erred by allowing the Trustee to abandon real property without first complying with state environmental laws and abused its discretion by placing the burden of proof for opposing the Trustee's motion upon the DEP. For the reasons expressed in this Memorandum and Order, the decision of the bankruptcy court is affirmed.


On November 13, 1995, St. Lawrence Corp., the debtor, filed a voluntary petition for relief under chapter 11 of title 11, United States Code (hereinafter the "Bankruptcy Code" or "Code"). *fn2 In re St. Lawrence Corp., 239 B.R. 720, 722 (Bankr. D.N.J. 1999). The debtor's primary asset is real property (hereinafter "the property") consisting of two commercial buildings and adjacent land. Id. Prior to bankruptcy, the debtor operated its business of managing the property, which was leased to one residential and six commercial tenants, and continued to do so as debtor in possession until a trustee was appointed. Id.

The bankruptcy court directed the appointment of a chapter 11 trustee in January 1996 and Stephen Tsai was appointed. Id. His appointment was terminated in June 1997 and Ellen B. Kulka was appointed as substitute trustee. Id. Mr. Tsai and Ms. Kulka shall be referred to henceforth as "the chapter 11 trustee." Id. Starbare III Partners, L.P. ("Starbare") holds liens on the real property, rent and fire insurance proceeds, securing a claim of approximately $1.2 million. Id. There is no equity in the assets subject to Starbare's lien. Id. The chapter 11 trustee administered the property and attempted to sell it. Id. In April 1998, a fire damaged the main building on the property, displacing three tenants and causing the loss of the rent from their leases. Id. While partial insurance payments have been made, only minimal repairs have been done. Id. Notwithstanding the fire damage, competing offers were made by William M. Richardson and Harry A. Richardson, principals of the debtor, to purchase the property for amounts less than the amount due to Starbare. Id. Both offers were, however, eventually withdrawn. Id.

Having determined that sale of the property was not possible and that the property had no other value to the estate, the chapter 11 trustee filed a motion on November 25, 1998 to abandon the property, or in the alternative to convert the case to chapter 7. Id. The DEP opposed abandonment, arguing that the trustee is required to comply with state environmental law before abandoning the property. Id. At a hearing on December 17, 1998, the bankruptcy court converted the case to chapter 7 and adjourned the motion as to abandonment. Id. The Trustee was appointed chapter 7 trustee. Id. On May 17, 1999, the court heard oral argument on the motion for abandonment and reserved decision. Id.

Meanwhile, on March 19, 1999, Starbare moved for relief from the automatic stay as to the property and for turnover of all cash of the estate as its cash collateral. Id. The Trustee did not oppose the motion as to the property, but opposed it as to the cash collateral. Id. However, on June 17, 1999, an agreed order was entered granting Starbare relief from the automatic stay as to the real property, fire insurance proceeds and rents, net of specified compensation amounts to the Trustee and the chapter 11 trustee and their professionals for administering the property. Id. It appears from the certification of the Trustee filed on March 30, 1999 in opposition to Starbare's motion that he did administer the property to the extent possible in view of the limitations imposed by Starbare on the expenditure of its cash collateral, while determining if sale was possible, and he continued to employ a property manager who had been employed by the chapter 11 trustee. Id. The Trustee did not, however, obtain authorization from the bankruptcy court under Code section 721 to operate the debtor's business. Id.

The chapter 11 trustee and the Richardsons assumed during the negotiations for the sale of the property that the provisions of the New Jersey Industrial Site Recovery Act ("ISRA"), N.J. Stat. Ann. ("N.J.S.A.") 13:1K-6 to -14 (West 1991 & Supp. 1999) would have to be complied with in connection with a sale. *fn3 Id. at 722-23. Harry Richardson therefore obtained a Phase I Environmental Site Assessment, which, according to the verified motion for abandonment, "disclosed no serious or material environmental remediation issues and certainly no imminent or other danger to public health or safety." Id. at 723 (citing Trustee's Verified Motion filed 11-25-98 ¶ 22). William Richardson never provided a site assessment, but his counsel alleged in a letter dated November 20, 1998 that his environmental consultant said there was possible contamination and used that as a justification for modifying his purchase offer. Id. (citing Trustee's Verified Motion Ex. A). The DEP's objection to the abandonment motion states that an unidentified tenant has submitted a preliminary site assessment and obtained a "no further action" letter, but the DEP knows nothing about the rest of the property. Id. The DEP states further that a Phase I Environmental Audit (presumably, Harry Richardson's audit) is not acceptable. Id. (citing DEP Objection filed 12-10-98 at 2).

On October 7, 1999, the bankruptcy court granted the Trustee's motion to abandon the property over the DEP's objection, finding:

The record on the motion contains no other evidence as to whether there is any environmental contamination of the property. The hearsay in the November 20, 1998 letter from William Richardson's counsel does not rise to the level of proof of contamination. It follows that there is also no proof that any contamination constitutes an imminent and identifiable harm to the public, or that abandonment will aggravate any threat of such harm. Id.

The bankruptcy court's findings of fact and conclusions of law were memorialized in the Opinion and incorporated by reference into the Order.

The DEP appeals the Order, arguing: (1) the bankruptcy court erred by allowing the Trustee to abandon the property without first complying with ISRA, N.J.S.A. 13:1K-6 et seq., and (2) the bankruptcy court abused its discretion by placing the burden of proving that contamination was present at the property upon the DEP rather than upon the Trustee. (Appellant's Br. at 5.)


This Court must accept the bankruptcy court's findings of fact unless those findings are clearly erroneous. Fed. R. Bankr. P. 8013; In re Reid, 757 F.2d 230, 233 (10th Cir. 1985). To the extent that a question presented is one of law, we must exercise plenary review. See In re Sharon Steel Corp., 871 F.2d 1217, 1222-23 (3d Cir. 1989). Where there are mixed questions of law and fact, ...

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