Free Appellee's Brief - District Court of Delaware - Delaware

Case 1:08-cv-00250-RLB

Document 9-2

Filed 07/07/2008

Page 1 of 4

Case 1:08-cv-00250-RLB

Document 9-2

Filed 07/07/2008

Page 2 of 4

WR Grace - NJ EP A District Court Appeal Servce List (08-250)
Doc. No. 138640
01- Hand Delivery

01 - First Class Mail

Hand Delivery
)

Stuart B. Drowos, Esquire Deputy Attorney General Revenue Division of Departent of Finance Carvel Office Building
820 North French Street, 8th Floor

Wilmington, DE 19801

First Class Mail
)

Rachel J. Lehr, Esquire John F. Dickinson, Jr., Esquire

New Jersey Richard J. Hughes Justice Complex 25 Market Street P.O. Box 093 Trenton, NJ 08625
Office of the Attorney General of

Case 1:08-cv-00250-RLB

Document 9-2

Filed 07/07/2008

Page 3 of 4

W. R. Grace Core Group Service List Case No. 01-1139 (JKF)
Document Number: 27348

Hand Delivery

07 - Hand Delivery 11 - First Class Mail
(Counsel to Debtors and Debtors in Possession) Laura Davis Jones, Esquire
James E. O'Neil, Esquire

(Counsel for The Chase Manattan Bank) Mark D. Collns, Esquire Deborah E. Spivack, Esquire Richards, Layton & Finger, P.A. One Rodney Square P.O. Box 551 Wilmington, DE 19899
Hand Delivery (Counsel for Property Damage Claimants) Michael B. Joseph, Esquire
Ferr & Joseph, P.A.

Pachulski Stang Ziehl & Jones LLP 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705
(Copy Service)
Parcels, Inc.

824 Market Street, Suite 904 P.O. Box 1351 Wilmington, DE 19899
Hand Delivery (United States Trustee) David Klauder, Esquire

Vito i. DiMaio 10th & King Streets Wilmington, DE 19801
Hand Delivery (Counsel to Official Committee of
Unsecured Creditors)

Offce of the United States Trustee 844 King Street, Room 2311 Wilmington, DE 19801
Hand Delivery (Equity Committee Counsel)

Michael R. Lastowski, Esquire Richard W. Riley, Esquire Duane, Morrs & Heckscher LLP 1100 North Market Street, Suite 1200 Wilmington, DE 19801-1246
Hand Delivery (Local Counsel to DIP Lender) Steven M. Yoder, Esquire The Bayard Firm 222 Delaware Avenue, Suite 900 P.O. Box 25130

Teresa K. D. Currer Buchanan Ingersoll & Rooney
1 000 West Street, Suite 1410

Wilmington, DE 19801

First Class Mail
(Counsel to Debtor) David B. Bernick, P.C. Janet Baer, Esquire Kirkland & Ells LLP 200 East Randolph Drive Chicago, IL 60601

Wilmington, DE 19899
Hand Delivery (Local Counsel to Asbestos Claimants) Marla Eskin, Esquire Mark T. Hurford Campbell & Levine 800 North King Street, Suite 300

First Class Mail
(W. R. Grace & Co.) Mark Shelniz W.R. Grace and Co. 7500 Grace Drive Columbia, MD 21044

Wilmington, DE 19801

Case 1:08-cv-00250-RLB

Document 9-2

Filed 07/07/2008

Page 4 of 4

First Class Mail
(Official Committee of

Unsecured

First Class Mail (Counsel to Offcial Committee of
Unsecured Creditors) Wiliam S. Katchen, Esquire Duane Morrs LLP 744 Broad Street Suite 1200 Newark, NJ 07102-3889

Creditors)
Lewis Krger, Esquire

Kenneth Pasquale, Esquire Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, NY 10038-4982

First Class Mail
Personal Injury (Official Committee of Claimants) Elihu Inselbuch, Esquire Rita Tobin, Esquire Caplin & Drysdale, Charered
375 Park Avenue, 35th Floor

First Class Mail
(Counsel to DIP Lender) J. Douglas Bacon, Esquire Latham & Watkins Sears Tower, Suite 5800 Chicago, IL 60606

New York, NY 10152

First Class Mail
(Counsel for David T. Austern)
Roger Franel, Esquire

First Class Mail
Property Damage Claimants) Scott L. Baena, Esquire Member Bilzin Sumberg Dunn Baena Price & Axelrod LLP First Union Financial Center 200 South Biscayne Blvd, Suite 2500
(Offcial Committee of

Richard H. Wyron, Esquire Matthew W. Cheney, Esquire Orrck Herrngton & Sutcliffe LLP Columbia Center
1152 15th Street, N.W.

Washington, DC 20005-1706

First Class Mail
(Counsel to David T. Austern, Futue
Claimant' s Representative)

Miami, FL 33131

First Class Mail
(Equity Committee Counsel) Philip Bentley, Esquire Douglas Mannal, Esquire Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, NY 10036

Phillps, Goldman & Spence, P.A. John C. Philips, Jr. 1200 North Broom Street Wilmington, DE 19806

First Class Mail Peter Van N. Lockwood, Esquire
Julie W. Davis, Esquire Trevor W. Swett, III, Esquire Nathan D. Finch, Esquire Caplin & Drysdale, Chartered One Thomas Circle, N.W. Washington, DC 20005

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 1 of 15

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
In re:
) ) )
) ) ) ) ) ) ) ) ) ) ) )

W. R. GRACE & CO., et al.,
Debtors.

Case No. 08-0250 (RLB) Hon. Ronald L. Buckwalter United States Distrct Judge (by special designation)

BRALEY M. CAMPBELL,
COMMISSIONER OF THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, in his official capacity, PETER C. HARVEY, ATTORNY GENERAL OF NEW JERSEY, in his official capacity,
Appellants,
v.

)
) )

W. R. GRACE & CO., et al.
Appellees.

) ) ) ) ) )

On Appeal From The United States Bankptcy Court Delaware (Fitzgerald, J.) For The Distrct of Case No. 01-01139, Adversary No. 05-52724

BRIEF OF APPELLEES

DOCS-ÐE: 138664. i

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 2 of 15

TABLE OF CONTENTS
INTRODUCTION ...........................................................................................................................1

BACKGROUND .............................................................................................................................2

ARGUMENT...................................................................................................................................4
A. Section 362(b)(4)'s Police Power Exception To The Automatic Stay Does

Not Apply To The Penalty Action. ..........................................................................4

B. The Banptcy Court Correctly Issued an Injunction Under Section 105. ............8
CONCLUSION .................... .... .......................... .................... .................. ......................... .............10

1

DOCS_DE:138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 3 of 15

TABLE OF AUTHORITIES
Cases
Brock v. Morysvile Body Works, Inc., 829 F.2d 383 (3d Cir. 1987)............................................................................................ 6, 7

Chao v. Hosp. Staffng Servs., Inc., 270 F.3d 374 (6th Cir. 2001) .............................................................................................. 5
Cournoyer v. Town of Lincoln, 790 F .2d 971 (1 st Cir. 1986)............................................................................................... 6
Hilis Motors, Inc. v. Hawaii Auto. Dealers' Ass 'n,

997 F .2d 581 (9th Cir. 1993) .............................................................................................. 5

In re Baldwin-United Corp. Litig., 765 F.2d 343 (2d Cir. 1985)................................................................................................ 9
In re Commerce Oil Co., 847 F.2d 291 (6th Cir. 1988) .............................................................................................. 6
In re Commonwealth Oil Refining Co.,

805 F.2d 1175 (5th Cir. 1986) ............................................................................................ 6

In re Cousins Restaurants, Inc., 11 B.R. 521 (Bank. W.D.N.Y. 1981).................................................................................. 6
In re Hunt, 93 B.R. 484 (N.D. Tex. 1988)............................................................................................. 8

Missouri v. United States Bankrptcy Court, 647 F.2d 768 (8th Cir. 1981) .............................................................................................. 5
NLRB v. Superior Forwarding, Inc.,

762 F.2d 695 (8th Cir. 1985) ........................................................................................ 8, 10
Penn Terra Ltd. v. Dep't of Env't Resources, 733 F.2d 267 (3d Cir. 1984).... ............ ......... ..... ................... ....... ........... .................... passim
SEC v. First Financial Group of

Texas,

645 F.2d 429 (5th Cir. 1981) .............................................................................................. 8
United States v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988)........................................................................................ 5, 6, 7

United States v. Wheeling-Pittsburgh Steel Corp., 818 F .2d 1077 (3d Cir. 1987).............................................................................................. 6

11
DOCS_DE:138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 4 of 15

Statutes
11 U .S.C. § 1 05( a) .......... ......... ....... ........... ..... ................................................ ......... ............. ..... ..... 8

11 U . S.C. § 362(b)( 4) ..................................................................................................................... 4

11
DOCS_DE: 138664. 1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 5 of 15

INTRODUCTION
The New Jersey Departent of Environmental Protection (the "NJDEP") appeals an
order of the Banptcy Cour (the "Opinion")

1 holding that its state cour action seeking
the automatic

penalties for an alleged false report (the "Penalty Action") was filed in violation of

stay and is enjoined. The Bankptcy Cour followed well-established case law in finding that

the Penalty Action is not a valid exercise of police power and, thus, does not qualify for
exemption from Bankptcy Code section 362's automatic stay of

litigation.

The Bankruptcy Court Correctly Held that the Penalty Action is Not Exempt from the

Automatic Stay. Although a state action to protect the environment can constitute a valid
exercise of its police powers, the Penalty Action is not a valid police power exercise exempted

from the automatic stay. In the cases cited by the NJDEP, cours found actions to be exempt
from the automatic stay only where the governent had brought suit either to (1) force the debtor

to remedy a hazardous situation or (2) fix liability for clean-up efforts that the governent had
undertaken on its own. In none of those cases did the governent seek solely to collect milions
of dollars in penalties where, as here, the remediation has been completed, the debtor has already
paid for the remediation, and there is no ongoing threat to the public.

The Bankruptcy Court Correctly Exercised Its Discretion in Also Enjoining the
Penalty Action Under Section 105. Because the Penalty Action violated the automatic stay, it is
null and void under section 362. However, even where state actions are considered to be a valid
exercise of

police power exempted from the automatic stay (which the Penalty Action is not), the

Third Circuit has explicitly held that bankptcy courts nonetheless have discretion to issue an

1 Memorandum Opinion dated April 1,2008 (Adv. Pro. 05-52724, Dkt. No. 30).

DOCS_DE: 138664. 1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 6 of 15

injunction under section 105(a) to prevent unecessar interference with the banptcy. See

Penn Terra Ltd. v. Dep't of Envtl. Res., 733 F.2d 267,273 (3d Cir. 1984). Here, the NJDEP has
not disputed the Bankptcy Cour's finding that the Penalty Action would unduly interfere with

Grace's reorganization if it were allowed to proceed (Opinion at 7). Given the penalties sought
by the NJDEP, Grace would need to divert significant resources from its reorganization to

defend against the Penalty Action. (Id.). In addition, the Bankptcy Cour found that even if
the NJDEP were to prevail in the Penalty Action, the NJDEP would not be able to collect any
penalties because it failed to file a proof of claim by the bankptcy bar date:

More significant at this stage of the case, however, is that NJDEP wil have no claim to be paid in this case in any arhount inasmuch as it failed to file a proof of claim by the bar date. Thus, the irreparable harm by virte of the expense to the estate of defending an action to liquidate a potential $800 milion claim only so that the NJDEP can have some comfort in knowing what it could prove but could
not collect is self-evident.

(Id.). Accordingly, for the reasons set forth herein, the Bankptcy Cour's decision should be
affrmed.

BACKGROUN
On June 1, 2005, more than four years after Grace sought Chapter 11 bankptcy
protection, the NJDEP brought an action against Grace seeking to recover more than $800
milion in penalties. (Opinion at 2-3). Although the State of

New Jersey was aware of Grace's

bankptcy, the NJDEP fied its action in the Superior Cour of New Jersey, Mercer County,
without seeking leave from the Banptcy Cour to do so. (Id. at 4). The complaint alleges that
Grace, Grace's former vice president Robert J. Bettacchi, and Grace's former employee, Jay H.

Burrll, should have provided additional information in a June 5, 1995 report to NJDEP about
alleged contamination at Grace's industral plan in Hamilton Township, New Jersey. (Id. at 3).

2
DOCS-ÐE:138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 7 of 15

The complaint seeks to assess a fine against each defendant in the amount of $25,000

under the Industral Site Recovery Act, N.J.S.A. 13:1k-8 et seq. ("ISRA") and for $50,000 under

the New Jersey Spil and Compensation Act, N.J.S.A. 58:1O-23.11b et seq ("the Spil Act") for

filing the allegedly false report. (See Complaint at 21-23, attached as Appendix 1 to NJDEP
Brief). In addition, the complaint alleges that the defendants' conduct constitutes a separate

violation of the ISRA and the Spil Act for "each day Defendants failed to correct the false
information" set forth in the report. (Id. at 22). The NJDEP claimed that defendants' refusal to
concede the falsity of the June 1995 report subjects them to a total liability of $75,000 for every
day from June 5, 1995 until the present day, for a total amount of civil penalties exceeding $800
milion (Opinion at 2-3).2
The Penalty Action does not seek cessation of a public health, safety or environmental
threat, remediation of the Hamilton Plant site, or recovery of clean-up costs. (Id. at 5, 8-9). The
remediation of the Hamilton Plant site occured under the auspices of the federal government,

with any and all oversight costs borne by the EP A and other potentially responsible parties, and

not by the NJDEP. (Ie!. The Penalty Action solely seeks to collect a penalty for Grace's failure
to "correct" the allegedly false 1995 report provided to the NJDEP.

On September 19, 2005, Grace filed in the Bankptcy Court (1) a complaint for
declaratory and injunctive relief against the Commissioner of the NJDEP and the Attorney

General of the State of New Jersey in their official capacities and (2) a motion for a preliminary
injunction. (Id. at 1). Grace argued that (1) because the Penalty Action does not constitute a

2 In its attempt to fie a late proof of claim, the NJDEP subsequently represented that it sought penalties of $31 million. The NJDEP did not explain the basis for its $31 millon claim amount or whether the NJDEP intended that
amount to be a cap on the penalties sought.

3
DOCS-ÐE: 138664. i

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 8 of 15

"police power" action under the Banptcy Code, the action is stayed pursuant to the automatic
stay of section 362 and (2) in the alternative, even if the action is not subject to the automatic
stay, the action "ru

( s) so contrar to the policy of the Bankptcy Code that it should not be

permitted," Penn Terra, 733 F.2d at 273, and thus should be stayed pursuant to the Banptcy
Cour's general equitable powers under section 105 of

the Banptcy Code. The NJDEP moved

to dismiss the complaint. On April 1, 2008, the Bankptcy Cour entered an order (1) holding
that the Penalty Action violated the automatic stay, and (2) enjoining the Penalty Action under
section 105.3

ARGUMENT
A. Section 362(b)(4)'s Police Power Exception To The Automatic Stay Does Not

Apply To The Penalty Action.
Contrary to the NJDEP's suggestion, Section 362(b)(4) does not entitle a state agency to

an absolute exception from the automatic stay. The Third Circuit has made clear that only
certain actions brought by a state agency qualify as actions "to enforce (a) governental unit's or

organization's police or regulatory powers." 11 U.S.C. § 362(b)(4). In determining whether an
action is exempt from the automatic stay, courts engage in a fact-intensive inquiry that measures

the state action against the purose of the exception, considering "whether the governental
proceeding relates principally to the protection of the governent's pecuniary interest in the
debtor's property, rather than to its public policy interest in the general safety and welfare."

3 The Banptcy Cour also entered a preliminar injunction with respect to Mr. Bettachi and Mr. BurilL. (Opinon the at 11-11). The NJDEP did not dispute before the Banptcy Cour, nor does it dispute in this appeal, that if Penalty Action is stayed against Grace, it should also be stayed against the individuals.

4
DOCS-ÐE: 138664. i

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 9 of 15

United States v. Nicolet, Inc., 857 F.2d 202, 209 (3d Cir. 1988).4 Thus, although actions to
enforce a state's environmental laws can constitute an exercise of the state's police and

regulatory powers, the question here is whether the Penalty Action is "principally" directed to

the "general safety or welfare" (in which case, the action qualifies for exemption) or to the
NJDEP's "pecuniar interest in the debtors' propert."

The Bankptcy Court correctly concluded that the Penalty Action did not relate
principally to general safety and welfare based upon two undisputed facts: (1) the action is solely
a claim for penalties based upon an alleged false report, and (2) the action did not seek to address
any risk to public health, safety or welfare:
In the instant matter, the U.S. Environmental Protection Agency ("EP A") has

cleaned up the New Jersey site and has filed a claim in this bankptcy case. We find that the purpose of the NJDEP action is solely to liquidate its monetary claim
for penalties, notwithstanding NJDEP's reliance on its police and regulatory

powers as the basis for its suit, inasmuch as the site as to which the report was filed has been cleaned up and the claim for cleanup belongs to the EP A. The NJDEP action seeking a fine with respect to an allegedly false report, paricularly where the cleanup has been completed by a federal agency, where the action is not to address a risk to public health, safety or welfare, and where a risk no longer
exists, does not fall under the §362(b)(4) exception to the automatic stay.

(Opinion at 5). Indeed, there is no public health, safety or environmental concern with respect to
the Hamilton Plant site because it has been remediated by the EP A. The NJDEP did not perform
nor pay for the clean-up. The Penalty Action is, as the NJDEP admits throughout its Brief,

4 Other cours have reached the same conclusion. See, e.g., Chao v. Hosp. Staffng Servs., Inc., 270 F.3d 374,385-

86 (6th Cir. 2001) ("(C)ours (must) focus on whether the governental proceeding relates primarly to the
protection of the governent's pecunar interest in the debtor's propert, and not to matters of public safety.");

Hilis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 591 (9th Cir. 1993) (the "terms 'police or
regulatory power' as used in (the Code) refer to the enforcement of state laws affecting health, morals, and safety but not regulatory laws that directly confict with the control of the res or propert by the bankptcy cour"); Missouri v. United States Bankrptcy Court, 647 F.2d 768, 776 (8th Cir. 1981) ("Missour's grain laws, although
regulatory in natue, primarily relate to the protection of the pecunar interest in the debtors' propert and not to matters of public safety and health.").

5
DOCS_DE: 138664. 1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 10 of 15

simply meant to punish Grace by hitting its pocketbook. As the Banptcy Cour recognized,

these facts distinguish the Penalty Action from the cases cited by NJDEP. (Opinion at 4-6).

The Third Circuit has recognized that an "obvious exercise" of a state's police power
arses when an agency seeks to enjoin the debtor to clean up an environmental hazard. See Penn

Terra, 733 F.2d at 274. Likewise, the Third Circuit has held that the governent exercises its

police power by bringing an action against a debtor to recover costs actually spent in
environmental remediation. See Nicolet, 857 F.2d at 210. The cases cited by NJDEP follow

these examples, placing the governent agency in the position of either attempting to enjoin the
debtor to remedy an environmental violation or fixing the debtors' liability for remediation costs.
(See NJDEP Br. at 19-20).5

At bottom, the NJDEP's appeal is based upon the NJDEP's failure to appreciate the
distinction between such cost recovery/remediation actions (which are exempt from the automatic

stay) and its action solely to collect penalties (which is not exempt). (See NJDEP Br. at 13-14)
("Cost recovery litigation has been found to be exempt from the automatic stay, thus, to say that a

penalty action is not does not make sense."). The Third Circuit dealt with precisely such a
distinction in Brock v. Morysvile Body Works, Inc., 829 F.2d 383 (3d Cir. 1987), one of

the cases

cited by NJDEP. In Brock, the Third Circuit held that the Bankptcy Code permitted OSHA to
5 In addition to Penn Terra and Nicolet, NJDEP cites six other cases on pages 19-20 of its Brief. Every one falls
within the categories set by Penn Terra and Nicolet. See City of

New York v. Exxon Corp., 932 F.2d 1020 (2d Cir.

1991) (governent may fix liability for costs incured in environmental remediation); In re Commerce Oil Co., 847 F.2d 291,297 (6th Cir. 1988) (state may brig action to stop river pollution and to fix penalties based on amount of
damage to environment); United States v. Wheeling-Pittsburgh Steel Corp., 818 F.2d 1077 (3d Cir. 1987)

(permtting the federal governent to bring an action requiring debtor to install pollution control equipment); Brock

v. Morysvile Body Works, Inc., 829 F.2d 383,388-89 (3d Cir. 1987) (enforcing OSHA citation ordering abatement for past health and safety hazards); In re Commonwealth Oil Refining Co., 805 F.2d 1175 (5th Cir. 1986) (permtting enforcement of environmental obligations); Cournoyer v. Town of Lincoln, 790 F.2d 971 (1st Cir. 1986) (enforcing state cour order to remove scrap metal from site); In re Cousins Restaurants, Inc., 11 B.R. 521 (Ban. W.D.N.Y. zonig ordinance). 1981) (permtting enforcement of

6
DOCS-ÐE:138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 11 of 15

enforce a regulatory citation that would "prevent futue har to employees and to restore the
work site to a safe condition," id. at 388, but it did not permit the agency to enforce an order
imposing civil penalties for past violations. As the Third Circuit recognized, "(a)s punishment
for past violations, (the penalty order) is not a fully prospective order, which, despite the financial

consequences to the distressed corporation, we may enforce to protect workers from the hazards

of an unsafe work (sic)." Id. at 389. Outside the governent's efforts to remediate an ongoing
environmental hazard, the "police power" exception does not permit a governent agency to

impose penalties for wholly past misconduct. Such actions are "principally directed" to the
"government's pecuniary interest in the debtor's property," and not to "its public policy interest
in the general safety and welfare." Nicolet, 857 F.2d at 209.

The magnitude of the threatened penalties and the lack of any public health or welfare
concerns demonstrate that the Penalty Action's principal purose is to put money in the NJDEP's

coffers, not to enforce any conceivable regulatory interest. The Penalty Action does not seek to
protect the "general safety and welfare" by requiring the debtors to clean up the environment or

repay the NJDEP for damages incured by the State, as was the case in Penn Terra and Nicolet.
Contrary to the NJDEP's assertion that it is seeking to fix damages caused by alleged violations

of the law, the record is undisputed that there are no damages to fix because the remediation of
the site occurred under the auspices of the federal governent, not the State of

New Jersey. The

State has not incured any costs for this site. Nor does the Penalty Action seek to deter future
har at the former industral site by imposing penalties for past environmental har there.

Rather, the NJDEP claims an entitlement to milions of dollars of the Debtors' property based

solely on Grace's failure to "correct" an allegedly false report fied over thirteen years ago.

7
DOCS_DE:138664.i

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 12 of 15

Accordingly, the Penalty Action is not exempted from the automatic stay because the NJDEP's
interest extends "principally" to an "interest in the debtors' property."

B. The Bankruptcy Court Correctly Issued an Injunction Under Section 105.
Although given short shrft, the NJDEP argues that the Banptcy Cour erred in issuing
an injunction under section 105 because "the authority is granted to the cours to supplement and
enforce the existing policies of

the Code, not to supplant or contradict them." (NJDEP Br. at 21).

The NJDEP, however, provides no explanation as to how the injunction purportedly supplants or

contradicts the Bankptcy Code. As demonstrated above, the injunction was appropriate
because the Penalty Action violated the automatic stay. But even if the Penalty Action were

exempted from the automatic stay, the Third Circuit has specifically recognized that under
section 105(a), "the exercise of State power, even for the protection of the public health and
safety, may ru so contrary to the policy of

the Bankptcy Code that it should not be permitted."

Penn Terra, 733 F.2d at 273.6

Section 105(a) empowers the Court to "issue any order, process, or judgment that is

necessary or appropriate to carr out the provisions of (the Bankptcy Code)." 11 U.S.c. §
105(a). In providing that the filing of a bankptcy petition does not automatically stay some
state regulatory actions, Congress specifically recognized that bankptcy courts retained the

authority under section 105 to stay such actions on a case-by-case basis, where a stay is
necessary to prevent "an impermissible dilution of federal bankptcy policy." Penn Terra, 733

6 Other cours similarly have held that injunctions should issue when the governent action would "unduly interfere with the banptcy adjudication," In re Hunt, 93 B.R. 484, 492 (N.D. Tex. 1988), or "threaten() the assets of the
debtor's estate." SEC v. First Financial Group of Texas, 645 F.2d 429, 440 (5th Cir. 1981); see also NLRB v.

Superior Forwarding, Inc., 762 F.2d 695, 699 (8th Cir. 1985). These cours agree that where a state regulatory action threatens to undermne the policies underlying the Banptcy Code or to waste the assets of the estate,
bankptcy cours have ample power to protect the reorganzation by issuing an injunction.

8
DOCS-ÐE:138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 13 of 15

F.2d at 273. "The statute provides for such exigencies," because "(t)he banptcy cour, in its

discretion, may issue an appropriate injunction, even if

the automatic stay is not operative." Id.

(emphasis added); see also In re Baldwin-United Corp. Litig., 765 F.2d 343,348 (2d Cir. 1985)
("Even if it should ultimately be determined that the automatic stay. . . does not apply. .. the

Bankptcy Cour has authority under § 105 broader than the automatic stay provision of § 362
and may use its equitable powers to assure the orderly conduct of the reorganization
proceedings."). The Third Circuit in Penn Terra quoted at length from section lOS's legislative
history to emphasize that bankptcy cours should enjoin state "police power" actions when the

federal interests in the bankptcy proceeding outweighed the state's regulatory interest:

The effect of an exception is not to make the (state) action immune from injunction. The cour has ample other powers to stay actions not covered by the

automatic stay. Section 105 ... grants the power to issue orders necessary or appropriate to carry out the provisions of title 11 .... Stays or injunctions issued
under these other sections wil not be automatic upon commencement of the case, but wil be granted or issued under the usual rules for the issuance of injunctions.

Penn Terra, 733 F.2d at 273 (quoting S. Rep. No. 95-989, at 51; H. Rep. No. 95-595 at 342). In
this case, the Banptcy Court found that Grace had demonstrated an entitlement to injunctive

according to "the usual rules for the issuance of injunctions." Specifically, the Banptcy Cour
found that (1) Grace wil succeed on the merits because "the New Jersey action violates the stay

and because the NJDEP cannot receive a distrbution from this estate based upon its failure to

timely file a proof of claim, which it is now barred from fiing," (2) the Debtors wil suffer
irreparable harm if the action is allowed to go forward, (3) the NJDEP wil suffer significantly
less, if any har, if the injunction is issued, and (4) the injunction poses "no risk of harm to the

State or to the public interest as the site has been cleaned up." (Opinion at 6-8). Aside from
arguing that the Penalty Action does not violate the automatic stay, the NJDEP has not disputed
any of these findings in its appeaL.

9
DOCS_DE: 138664.1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 14 of 15

Accordingly, the law is clear that the Banptcy Cour had authority to enjoin the
Penalty Action under section 105 to protect the interests of

Grace's other creditors and to prevent

that action from interfering with the orderly administration of the estate. The Bankptcy Court
also appropriately granted the injunction to avoid wasting estate assets. As the Banptcy Court
noted, this Cour affrmed its order denying the NJDEP's motion to file a late proof of claim. (Id.

at 3,6, 11; Civil Action No. 07-536, Dkt. No. 18)). Because the NJDEP cannot fie a late proof

of claim, any claim it could establish in the Penalty Action would be discharged in Grace's
banptcy (Id.). Although the NJDEP is appealing this Cour's order affirming the denial of its
request to file a late proof of claim, the issuance of an injunction would stil be appropriate even

if the NJDEP is successful in its appeaL. The complexity of the New Jersey action and the
magnitude of the penalties sought could result in "an impermissible dilution of federal

bankptcy policy." Penn Terra, 733 F.2d at 274; see also Superior Forwarding, 762 F.2d at
699 (cour may stay under section 105(a) when an action "would threaten the debtor's estate").

CONCLUSION

For the reasons set forth herein, the Bankptcy Court's order is consistent with wellestablished Third Circuit authority and should be affirmed.

10
DOCS-ÐE: 138664. 1

Case 1:08-cv-00250-RLB

Document 9-3

Filed 07/07/2008

Page 15 of 15

Dated: July 7,2008

KIAND & ELLIS LLP
David M. Bernck, P.C.
Janet S. Baer

Salvatore F. Bianca
200 Eat Randolph Drive

Chicago, IL 60601
Telephone: (312) 861-2000 Facsimile: (312) 861-2200

- and -

PACHULSKI STAP? ZIEHL & JONES LLP

La Davis Jones (Bar No. 2436)
James E. O'Neil (Bar No. 4042)

~(l~

919 Nort Market Street, 16th Floor P.O. Box 8705 Wilmington, DE 19899-8705 (Courier 19801)
Telephone: (302) 652-4100 Facsimile: (302) 652-4400
Co-Counsel for Appellees

11