Free Motion for Leave to File - District Court of Delaware - Delaware

Case 1:08-cv-00250-RLB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

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

)

Case No. 01-01139 (JK)

) ) )
) ) )

Adversary No. 05-52724

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

) )
) ) ) ) ) )

Case No. 08-0250 (RLB)

Appellants,
v.

) ) )
) ) ) ) )

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

)

APPELLEES' MOTION FOR LEAVE TO FILE SUR-REPLY BRIEF

Grace respectfully requests leave to fie the attached sur-reply to respond to the new

arguments raised in the NJDEP's Reply Brief. It is well-established that paries canot raise
arguments for the first time in a reply brief. See Werner v. Werner, 267 F.3d 288, 302 (3d Cir.

2001) ("A reply brief is like rebuttal-an opportity for the appellant to 'reply' to arguments of
the appellee, not to raise a new issue at a time when the appellee cannot respond. That is
unfair."); Stern v. Hallgan, 158 F.3d 729, 731 n. 3 (3d Cir. 1998) ("A par canot raise issues

for the first time in a reply brief."). Because the NJDEP raised new arguments in its reply, Grace
requests the opportunity to respond to those new arguments in a short sur-reply.

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WHEREFORE, Grace respectfully requests that the Court grant leave to file the attached
sur-reply.

Dated: August 8, 2008

KIRKAND & ELLIS LLP David M. Bernck, P.C.
Janet S. Baer Salvatore F. Bianca 200 East Randolph Drive Chicago, IL 60601
Telephone: (312) 861-2000 Facsimile: (312) 861-2200

- and -

P ACHULSKI, STANG, YOUNG & JONES

Co-Counsel for Appellees

2

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
In re:

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

) ) ) ) ) ) )
) ) ) ) ) ) ) ) ) ) ) ) ) ) )

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

BRADLEY M. CAMPBELL, COMMISSIONER OF THE NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, in his official capacity, PETER C. HARVEY, ATTORNEY GENERAL OF NEW JERSEY, in his official capacity,

Appellants,
v.

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

)
)

On Appeal From The United States Banptcy Cour
Delaware (Fitzgerald, J.) Case No. 01-01139, Adversary No. 05-52724
For The District of

SUR-REPLY BRIEF OF APPELLEES

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TABLE OF CONTENTS
Page

INTRODUCTION............................................................................................................ ..............1
ARGUMENT .............................................................................................................................. ....2

i. The Banptcy Cour Correctly Held that the Penalty Action is Not
Exempt from the Automatic Stay. ...........................................................................2
II. The Banptcy Cour Correctly Enjoined the NJDEP from Pursuing the

Penalty Action Against Mr. Bettacchi and Mr. Burll............................................3
III. The Banptcy Cour's Section 105 Injunction was Appropriate to Avoid

Interference with Grace's Reorganzation ... .............. ...... ................ .............. .... .....5
CON CL U S i ON .............................................................................................................................. 6

TABLE OF AUTHORITIES
Page(s)

Cases
Brock v. Morysvile Body Works, Inc., 829 F .2d 383 (3d Cir. 1987)................................................................................................ 2
Danny Kresky Enter. Corp. v. Magid, 716 F .2d 206 (3d Cir. 1983)..................... ........... .... ..... .......... ......... ...... ... ................... ........ 3

In re Suprema Specialties, Inc. Securities Litig., 438 F.3d 256 (3d Cir. Feb. 23, 2006).................................................................................. 3
In re W.R. Grace & Co. (Gerard v. W.R. Grace & Co.)

115 Fed. Appx. 565 (3d Cir. 2004).................................................................................... 4
In re W.R. Grace & Co.,

2008 WL 687357 (D. DeL. 2008) ........................................................................................ 6
United States v. LTV Steel Co., Inc., 269 B.R. 576 (W.D. Pa. 2001)........................................................................................1,2

Statutes
11 V.S.C. § 105....................................................................................................................... 1,4,5

11 V.S.C. § 362............. ....... .............. .............. ..................................... ................. ........... ... ...... ..... 5

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INTRODUCTION
The NJDEP's Reply Briefis remarkable in that there is little response to any of

the cases

or arguments in Grace's brief. For good reason. The case law firmly supports the Banptcy
Cour's holding that (1) the NJDEP's Penalty Action against Grace violated the automatic stay
and should also be enjoined under section 105 and (2) an injunction should issue with respect to

Mr. Bettacchi and Mr. Buril under section 105. The new arguments raised by the NJDEP in its
Reply Brief fail to demonstrate otherwise.

First, none of the cases cited by the NJDEP in its opening brief are contrar to the
Banptcy Cour's holding that the Penalty Action violated the automatic stay. Rather than
dispute this point, the NJDEP now cites a single district cour case, United States v. LTV Steel

Co., Inc., 269 B.R. 576 (W.D. Pa. 2001), for its proposition that a penalty action may constitute a

police power action. Not only is LTV Steel distinguishable for the reasons stated by the
Banptcy Cour (which the NJDEP simply ignores), the proposition for which it is cited by the
NJDEP conflcts with controlling Third Circuit authority.

Second, contrary to the NJDEP's mischaracterizations, the Banptcy Cour did not
hold that the automatic stay applied to non-debtor individuals, nor did it hold that the Penalty
Action violated the automatic stay because the NJDEP failed to file a proof of claim. The

NJDEP simply conflates the Banptcy Court's holding that the Penalty Action violated the
automatic stay with its granting of an injunction under section 105.

Finally, the case law is clear that the Banptcy Cour had the authority to issue a
section 105 injunction and appropriately exercised its discretion in doing so. Although the
NIDEP now disputes that allowing the Penalty Action to proceed would interfere with Grace's
reorganization, the NJDEP fails to provide any support for this newfound disagreement.

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

the Automatic Stay.
Rather than responding to any of the cases cited by Grace or disputing that every case
relied upon by the NJDEP in its opening brief is distinguishable, the NJDEP cites United States
v. LTV Steel Co., Inc., 269 B.R. 576 (W.D. Pa. 2001) for the proposition that a governent

action to impose retrospective penalties is exempt from the automatic stay. (NJDEP Reply at 5).

LTV Steel is distinguishable, does not bind this Cour and ignores the Third Circuit's decision in

Brock v. Morysvile Body Works, Inc., 829 F.2d 383 (3d Cir. 1987), which does bind this Cour.

In Brock, the Third Circuit held that the Banptcy Code permitted OSHA to enforce a
regulatory citation that would "prevent futue har to employees and to restore the work site to a safe condition," 828 F.2d at 388, but it did not permit the agency to enforce an order imposing

civil penalties for past violations. (See Grace Brief at 6-7). The NJDEP presents no controllng
authority to the contrary.
Even if a penalty action could constitute a police power action, LTV Steel is inapposite to

the present case. As the Banptcy Cour recognized, unlike the action at issue in LTV Steel,

the "NJDEP's action does not have a nexus to protection of public health and safety or welfare."
(Opinion at 5 n.4). In LTV Steel, the governent sought penalties for actual environmental har
(coal plant emissions in violation of

the Clean Air Act). In contrast, the Penalty Action does not

seek to correct any past environmental har or to deter futue har. Instead, the Penalty Action

solely seeks to impose penalties for alleged non-compliant reporting activity that occured more

than 13 years ago. The NJDEP makes no attempt to refute that the Banptcy Court correctly
distinguished LTV Steel on these grounds.

2

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The NJDEP also argues that its failure to file a proof of claim canot serve as the basis
for holding that the Penalty Action violates the automatic stay. (NJDEP Reply at 5) ("Failure to

fie a proof of claim canot make the filing of this complaint a violation of the automatic stay.

One thing has nothing to do with the other."). Of course, neither the Banptcy Cour nor
Grace has ever stated that the failure to fie a proof of claim affects whether the Penalty Action

violates the automatic stay. Rather, the Opinion is clear that the Banptcy Cour considered
the NJDEP's failure to file a proof of claim in holding that the requirements for granting an
injunction had been met. (See Opinion at 7, Grace Brief at 2, 9).1
II. The Bankruptcy Court Correctly Enjoined the NJDEP from Pursuing the Penalty
Action Against Mr. Bettacchi and Mr. Burril

For the first time, the NJDEP argues that the Banptcy Cour erred in enjoining the
NJDEP from pursuing its Penalty Action against Mr. Bettacchi and Mr. BurilL. (NJDEP Reply

at 3-4, 8). The NJDEP did not dispute this issue before the Banptcy Cour or in its opening
brief in this appeal, and thus is bared from doing so in its Reply Brief. Indeed, the NJDEP's

argument that it should be allowed to proceed against Bettacchi and Buril is contrary to the

to the Third Circuit that its failure to fie a proof of claim pertained to the Bankrptcy Court's decision to grant an injunction rather than its holding that the Penalty Action violated the automatic stay. See 6/20/08 Reply to W.R. Grace's Opposition to Hold Briefing in Abeyance (3d Cir., Case No. 08-2069) at 2 ("The injunction was issued in large part because the court found that the debtors likely would be successful on the merits due to the State's inabilty to receive a distribution from the estate based on its failure to fie a proof of claim.").
I Interestingly, the NJDEP previously recognized in a recent brief

2 It is axiomatic that reviewing courts "do not ordinarily consider issues which the parties have failed to raise
below," Danny Kresky Enter. Corp. v. Magid, 716 F.2d 206, 214-15 (3d Cir. 1983), or in their opening brief on

appeal, see, e.g., In re Suprema Specialties, Inc. Securities Litig., 438 F.3d 256,286 n.l7 (3d Cir. 2006) ("(I)t is well-settled in this court that an appellant's failure to identify or argue an issue in his opening brief constitutes
waiver of that issue on appeaL.") (internal quotation omitted).

3

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NJDEP's representations to the Banptcy Cour. As the Banptcy Cour noted in its
Opinion, the NJDEP represented that it would not seek to proceed against the individuals:

2007, counsel for NJDEP stated that the New Jersey action, if permitted to proceed, would proceed only against Debtors
At a hearing before this cour in April of

and not the individual defendants. See Transcript of April 2, 2007, Doc. No.
15117, at 80-81.

(Opinion at 10). The NJDEP has never disputed this representation to the Banptcy Cour and
its attempt to argue the opposite to this Cour should not be countenanced. Furher, the NJDEP's
arguments that the Banptcy Cour erred in enjoining the NJDEP from pursuing the penalty

action with respect to the individuals are baseless.
The NJDEP argues that "the possibilty that Grace may have to indemnify Bettacchi

and/or Buril pursuant to a provision of Grace's by-laws. . . does not extend the jurisdiction of
(the) banptcy cour to Bettacchi and BurilL." (NJDEP Reply at 4). Contrary to the NJDEP's

unsupported assertion, the Third Circuit, in this case, has made clear that a debtor's

indemnification obligation is a sufficient, but not necessary, ground for extending an injunction

to include third paries. See In re WR. Grace & Co. (Gerard v. WR. Grace & Co.) 115 Fed.
Appx. 565, 568-69 (3d Cir. 2004) (holding that the "prospect of indemnification by Grace made
inclusion of a stay of suits against MCC appropriate.").
The NJDEP also argues that because Mr. Bettacchi and Mr. Buril are not in banptcy,

the Banptcy Cour erred in holding that the automatic stay applies to them (NJDEP Reply at

3-4). But the Banptcy Cour never held that the automatic stay applied to them. Rather, the

Banptcy Cour explicitly stated that although the automatic stay does not apply to Mr.
Bettacchi and Mr. Buril, it issued a section 105 injunction as to these individuals due to Grace's

indemnty obligation and the fact that Grace would be compelled to defend the allegedly false
report in providing a defense for the individuals:
4

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(W)e will issue an order granting a preliminary injunction with respect to Mr. Bettacchi and Mr. Buril inasmuch as the time, cost of defense, and potential liabilty to these estates based upon the indemnty obligation wil have the same
adverse effect upon the Debtors' estates as would a direct action against Debtors. Even though Mr. Bettacchi and Mr. Buril are not debtors and, therefore, the stay of § 362 does not automatically apply to them, the continuation of the action with respect to them would compel Debtors to defend the allegedly false report in the course of providing a defense to the individuals, thereby involving Debtors in the
suit notwithstanding the automatic stay. The impact on the estates, in terms of

time and cost, would be similar if not identical to that Debtors would face in
defending their own alleged liability.

(Opinion at 10). The NJDEP simply confuses the Banptcy Court's granting of an injunction

under Section 105 with respect to the individuals with the cour's separate holding that the
Penalty Action against Grace violates the automatic stay.
III. The Bankruptcy Court's Section 105 Injunction was Appropriate to Avoid

Interference with Grace's Reorganization
The NJDEP fails to address any of

the well-established authority holding that banptcy

cours have the discretion to grant a section 105 injunction even if the automatic stay is not
applicable. (See Grace

Brief at 8-10).3 Instead, the NJDEP argues that "Grace and the

Banptcy Cour have incorrectly said that the DEP has not disputed that the State penalty
action would interfere with the reorganization of Grace." (NJDEP Reply at 5). However, the
NJDEP admits in the next sentence of its brief that it never disputed the issue in this case, but

instead relies upon an argument in its separate action to file a late proof of claim. (Id. at 5-6).

First, the fact remains that the NJDEP is bared from disputing this point because it neither

3 The NJDEP conceded this point in its brief to the Bankrptcy Cour. See Defendants' Brief in Support of
Defendants' Motion to Dismiss Debtors' Complaint for Declaratory and Injunctive Relief and In Opposition to Debtors' Motion for an Injunction (Adv. Pro. 05-52724, Dkt. No.7), at 11-12 ("Even in cases where the automatic
stay of Section 362(a) is inapplicable to a third-par action as a result of the Code's police power exception, 11

V.S.C. 362(b)(4), there stil may be a way for the debtor to stay that action. 11 V.S.C. 105(a) provides that: (l¡) 'The

court may issue any order, process, or judgment that is necessar or appropriate to carr out the provisions of this title.' 11 V.S.C. 105(a).").

5

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addressed the issue in this case, nor did it do so in its opening brief.4 Second, although the

NJDEP argued that allowing it to fie a late proof of claim would not interfere with the
reorganization, it never disputed that requiring Grace to litigate the Penalty Action at this time
would disrupt the reorganization. Third, even if

the NJDEP's argument that filing a late proof of

claim would not interfere with Grace's reorganization were relevant to the issues before this Cour (which it is not), that argument has been rejected by this Cour. See In re WR. Grace &

Co., 2008 WL 687357, *4 (D. DeL. 2008) (holding that "allowing the claim at this late date
would most certainly adversely impact the judicial administration of the estate."). Finally,

although the NJDEP now disputes that proceeding with the Penalty Action would interfere with

the reorganization, it provides no support whatsoever for disputing the Banptcy Court's
finding on this point. Accordingly, the Banptcy Cour appropriately exercised its discretion
in granting the section 105 injunction.

CONCLUSION

For the reasons set forth in Grace's Reply Brief and herein, the Banptcy Cour's order
should be affirmed.

4 See footnote 2 above.

6

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Dated: August 8, 2008

KIRKAND & ELLIS LLP
David M. Bernck, P.C.

Janet S. Baer Salvatore F. Bianca 200 East Randolph Drive Chicago, IL 60601
Telephone: (312) 861-2000 Facsimile: (312) 861-2200

- and -

PACHULSKI, STANG, YOUNG & JONES

Lau Davi ones (ar . 436)
James E. O'Neil (Bar o. 4 2)

Kathleen P. Makowski 0.3648)
919 North 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

7

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:
w. R. GRACE & CO., et ale

Debtors.
BRADLEY M. CAMPBELL, the New Jersey Commissioner of
Deparment of Environmental

PROTECTION, in his offcial capacity, PETER C. HARVEY, ATTORNEY GENERAL OF NEW JERSEY, in his official capacity,
Appellants,
v.

) ) ) ) ) ) ) ) ) )
)

Case No. 08-0250 (RLB) Hon. Ronald L. Buckwalter

United States District Judge (by special designation)

) ) ) ) )
)

W.R. GRACE & CO., et aL.

)
)

Appellees.

)

CERTIFICATE OF SERVICE
I, Kathleen P. Makowski, hereby certify that on the 8th day of August, 2008, I

caused a copy of the following documents to be served on the individuals on the attached service
list in the maner indicated:

APPELLEES' MOTION FOR LEAVE TO FILE SUR-REPLY BRIEF AND SUR-REPLY BRIEF OF APPELLEES

No. 3648)

91100-001\DOCS_DE:134674.38

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

Hand Delivery ) Stuar B. Drowos. Esquie Deputy Attorney General
Division of

Revenue Deparent of Finance

Carel Office Buildig
820 Nort French Street, 8th Floor Wilmington, DE 19801

First Class Mail
) Rachel 1. Lehr, Esquire

John F. Dickison, Jr., Esquire
New Jersey the Attrney General of Offce of Richard J. Hughes Justice Complex 25 Market Street P.O. Box 093
Trenton, NJ 08625

Case 1:08-cv-00250-RLB

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

Hand Delivery

Mark D. Collns, Esquire

(Counsel for The Chase Manatt Ban)

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

Deborah E. Spivack, Esquie

Richards, Layton & Finger, P.A. One Rodney Square P.O. Box 551 Wilmington, DE 19899
Hand Delivery

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

(Counsel for Propert Damage Claimants)
Michael B. Joseph, Esquie
Ferr & Joseph, P.A.

824 Market Street, Suite 904 P.O. Box 1351
Wilmigton, DE 19899

Vito i. DiMaio 10th & Kig Streets Wilmington, DE 19801
Hand Delivery (Counsel to Official Committee of Unsecured Creditors) Michael R. Lastowski, Esquire Richard W. Riley, Esquire

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

Duane, Morrs & Heckscher LLP 1100 North Market Street, Suite 1200 Wilmington, DE 19801-1246
Hand Delivery

Teresa K. D. Cuer Buchanan higersoll & Rooney
1000 West Street, Suite 1410
Wilmigton, DE 19801

(Local Counel to DIP Lender) Steven M. Yoder, Esquire
The Bayard Fir

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

222 Delaware Avenue, Suite 900 P.O. Box 25130 Wilmington, DE 19899
Hand Delivery (Local Counsel to Asbestos Claimants)
Marla Eski, Esquire

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

Mark T. Hurord Campbell & Levine 800 North King Street, Suite 300 Wilmington, DE 19801

Case 1:08-cv-00250-RLB

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First Class Mail
(Offcial Committee of

Unsecured

Creditors)
Lewis Krger, Esquire

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

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

First Class Mail
(Offcial Commttee of

First Class Mail
Personal Injur

Claimants) Elihu Inse1buch, Esquire Rita Tobin, Esquire Caplin & Drysdale, Charered 375 Park Avenue, 35th Floor New York, NY 10152

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

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

First Class Mail
(Official Committee of

Property Damage

Claimants)
Scott L. Baena, Esquire

Member Bilzin Sumberg Dun Baena Price & Axelrod LLP First Union Financial Center 200 South Biscayne Blvd, Suite 2500 Miami, FL 33131

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

Washington, DC 20005-1706

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

First Class Mail (Equity Commttee Counsel) Philip Bentley, Esquire
Douglas Manal, Esquire

Phillps, Go1dian & Spence, P.A. John C. Philips, Jr. 1200 Nort Broom Street Wilmington, DE 19806

Kramer Levin Naftalis & Franel LLP 1177 Avenue of the Americas York, NY 10036 New

First Class Mail Peter Van N. Lockwood, Esquire
Julie W. Davis, Esquire
Trevor W. Swett, il, Esquie

Nathan D. Finch, Esquie Caplin & Drysdale, Charered

One Thomas Circle, N.W.
Washigtn, DC 20005