California Department of Health Services v. Jensen (In re Jensen)

Robert and Rosemary Jensen (debtors) owned Jensen Lumber Company (JLC). In December 1983, JLC filed for bankruptcy. In January 1984, a California water board inspector noticed a tank of lumber fungicide at JLC’s site. The inspector told Robert that a fungicide leak could have catastrophic environmental and public-health consequences and advised Robert to act to prevent leakage. Robert took no action. In February 1984, the Jensens filed for bankruptcy. A few weeks later, the water board asked the California Department of Health Services (DHS) (creditor) to remove the fungicide. During the removal, DHS discovered that the tank had been leaking. The Jensens were granted a discharge in their personal bankruptcy in July 1984, and both the Jensens’ and JLC’s bankruptcy cases were subsequently closed. After the cases were closed, DHS notified Robert that DHS considered him a responsible party liable for cleaning up JLC’s site and named Rosemary a potentially responsible party. DHS then spent over $900,000 remediating the site. DHS allocated the Jensens 10 percent financial responsibility for the cleanup. In 1988, the Jensens’ personal bankruptcy case was reopened so the Jensens could list DHS and other entities involved in the cleanup as creditors. The Jensens then asserted that their share of the cleanup costs had been discharged when the court granted discharge in July 1984. The bankruptcy court found that DHS’s claim had arisen post-petition and was not subject to discharge, but the bankruptcy appellate panel (BAP) reversed. The BAP held that DHS’s claim arose prepetition based on the Jensens’ conduct and thus that the claim had been discharged in the bankruptcy. DHS appealed.