Filed: Nov. 20, 2013
Latest Update: Mar. 02, 2020
Summary: 1, DES took the position before the bankruptcy court that had, the state court imposed penalties for a period of time straddling, both sides of the petition date, it would have asked that only the, penalties attributable to the post-petition period be given, administrative priority.fines may not.
United States Court of Appeals
For the First Circuit
No. 13-1380
IN RE: MUNCE'S SUPERIOR PETROLEUM PRODUCTS, INC.;
GORHAM OIL, INC.; SUPERIOR TRUCKING, INC.; MUNCE'S REAL ESTATE
VENTURES, LLC; BMRA REAL ESTATE VENTURES, LLC; HAROLD P. MUNCE;
MARILYN J. MUNCE,
Debtors.
MUNCE'S SUPERIOR PETROLEUM PRODUCTS, INC.;
HAROLD P. MUNCE,
Appellants,
v.
N.H. DEPARTMENT OF ENVIRONMENTAL SERVICES,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Joseph N. Laplante, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya, Circuit Judge,
and Hillman,* District Judge.
Robert J. Keach, with whom Jessica A. Lewis, Bernstein Shur
Sawyer & Nelson, Daniel W. Sklar, Holly J. Kilibarda, and Nixon
Peabody were on brief, for appellants.
Peter C.L. Roth, Senior Assistant Attorney General, with whom
Ann M. Rice, Deputy Attorney General was on brief, for appellee.
Frederick H. Turner, with whom James Bove, Aaron P. Avila,
and Robert G. Dreher, Acting Assistant Attorney General, were on
brief, for United States, amicus curiae.
*
Of the District of Massachusetts, sitting by designation.
November 20, 2013
-2-
LYNCH, Chief Judge. This case arises at the intersection
of environmental law and bankruptcy law. It involves the important
question of whether a post-petition contempt fine assessed by a
state court against a debtor-in-possession is entitled to
administrative expense priority under 11 U.S.C. § 503(b)(1)(A). On
the facts of this case, we hold that it is, and so affirm the
bankruptcy court's order, as did the district court. See Order
Granting Motion for Allowance of Administrative Expense Claim, In
re Munce's Superior Petroleum Prods., Inc., No. 11-10975-JMD
(Bankr. D.N.H. May 30, 2012).
The $194,219.70 in contempt fines (and attorneys' fees)
was levied against Munce's Superior Petroleum Products, Inc. and
Harold P. Munce (collectively, MSPP), appellants here. The fines
resulted from MSPP's failure to comply with an earlier state
superior court order compelling it to take particular actions to
bring its facilities into compliance with New Hampshire
environmental law. Both of these state court orders (the one
assessing the fine and the one ordering specific compliance
actions) were issued after MSPP filed its Chapter 11 petition,
though the underlying violations of New Hampshire law began and
were the subject of a consent preliminary injunction entered by the
state court before MSPP filed its Chapter 11 petition.
The bankruptcy court granted the New Hampshire Department
of Environmental Services' (DES) motion to give the fines
-3-
administrative expense priority,1 and the district court affirmed.
Under Reading Co. v. Brown, 391 U.S. 471 (1968), and our case law,
we affirm.
I.
A. Background
MSPP engages in a number of business ventures, primarily
involving fuel distribution and the ownership and operation of
convenience stores. To this end, MSPP stores fuel in above-ground
oil tanks at three different facilities. All of the facilities are
licensed by DES, and are subject to extensive state regulations.
Most of MSPP's facilities are located near the
Androscoggin River, along Route 16 in Gorham, New Hampshire. New
Hampshire law requires these kinds of bulk oil facilities to have
secondary containment systems installed. N.H. Code Admin. R. Env-
Wm 1402.35(a). These systems are designed to protect the
surrounding areas in the event of leaks and even catastrophic tank
failures, and include double-walled pipes and retaining structures
constructed around the oil tanks. Id. at 1402.21, 1402.22.
DES notified MSPP of secondary containment system
violations, along with other violations of environmental laws, by
letters dated October 20, 2006, September 7, 2007, November 5,
1
DES took the position before the bankruptcy court that had
the state court imposed penalties for a period of time straddling
both sides of the petition date, it would have asked that only the
penalties attributable to the post-petition period be given
administrative priority.
-4-
2007, and July 24, 2008. MSPP did not remedy any of its violations
in response to these letters.
B. Procedural History
In July 2010, DES brought an action against MSPP in state
court, alleging that MSPP had engaged in a series of violations of
state environmental laws and seeking injunctive relief and
assessment of civil penalties. DES argued that the "scope and
number of violations of the environmental statutes, the long
history of violation, and the unresponsiveness of [MSPP] to DES's
compliance and enforcement activities amount to a complete
disregard of the basic requirements for safe management of
petroleum products." DES charged that the violations posed
significant risks of environmental harm and hazards to public
safety, and that MSPP had gained an unfair economic advantage over
its competitors through its noncompliance.
On August 23, 2010, the state court entered an agreed-
upon preliminary injunction. It required MSPP to bring its bulk
oil facilities into full compliance or take the facilities out of
service within thirty to sixty days. MSPP did not comply by
January 2011, and DES filed a motion to hold MSPP in contempt. The
state court held a hearing on that motion on March 7, 2011, in
which both parties were represented by counsel. DES offered
evidence that MSPP had wholly failed to comply with the preliminary
-5-
injunction, while MSPP contended in its offers of proof that it was
in substantial compliance.
On March 16, 2011, while the motion for contempt was
pending, Munce's Superior Petroleum Products filed for bankruptcy
under Chapter 11.2 MSPP continued to operate the businesses as a
debtor-in-possession. Debtors-in-possession are required to comply
with state environmental laws. See Ohio v. Kovacs, 469 U.S. 274,
285 (1985) ("[W]e do not question that anyone in possession of the
[estate's] site . . . must comply with the environmental laws of
the State of Ohio. Plainly, that person or firm may not maintain
a nuisance, pollute the waters of the State, or refuse to remove
the source of such conditions.").
As a result of the automatic stay, the state court stayed
its proceedings. See 11 U.S.C. § 362(a). On June 3, DES filed a
motion in the bankruptcy court pursuant to 11 U.S.C. § 362(b)(4),
asking the bankruptcy court to declare that the stay did not apply
to the DES state action. After a hearing, on June 21 the
bankruptcy court ruled that the automatic stay did not apply to the
DES state court action because it was "brought for the purpose of
protecting public health and safety, and the environment, and to
effectuate public policy."
2
On May 10, 2011, Harold Munce filed a Chapter 11 petition.
The two cases have since been consolidated, and the distinction
between the company's March 16 filing and Munce's May 10 filing
does not affect our analysis.
-6-
With the stay lifted, on September 19, 2011, the state
court issued an order granting DES's motion for contempt. The
court reasoned:
The basic problem that the State raises to the
Court and upon which it [bases] its request
for contempt, is that the respondent has
failed to comply with the requirements for
certification . . . . The respondent [MSPP]
had the affirmative obligation within specific
timelines to take certain action with respect
to certifications. The respondent failed to
do so. The potential for environmental
contamination disaster is very real in
connection with these facilities.
The state court ordered MSPP to take all of the tanks out of
service3 within ten days, and stated that it would assess penalties
of $1,000 per day of noncompliance if MSPP did not meet the ten-day
deadline. MSPP did not appeal the contempt order, nor did it seek
a stay in the bankruptcy court. Nor did it comply with the order.
On February 17, 2012, DES filed a motion in the state
court seeking the assessment of contempt penalties against MSPP,
citing MSPP's failure to comply with the court's September 19, 2011
order. After a full hearing, on April 12, 2012 the court entered
an order in favor of DES, ordering MSPP to pay civil penalties in
the amount of $192,000 (representing $1,000 per day for 192 days of
noncompliance following the initial ten-day grace period), plus an
3
Under New Hampshire law, taking a tank "out of service"
requires more than simply suspending its active use. To take a
tank out of service, operators are required to clean, empty, and
remove vapors from the tank, and must notify DES of a change in
use. See N.H. Code Admin. R. Env-Wm 1402.12.
-7-
additional $2,219.70 in costs and fees. In so holding, the state
court noted:
It was not the Court's intention to separately
assess penalties on each of the facilities for
non-compliance. The respondents'
responsibility is to comply with the state
regulations with respect to the operation of
its business. The Court finds, after review
of the pleadings and offers of proof, that the
respondents are not in compliance with the
State regulations. The Court further finds
that the respondents have not complied with
the Court's order of September 19, 2011.
(emphasis added). The court made an affirmative finding that
MSPP's inaction caused environmental harm: "DES, through its offer
of proof, indicated that an inspection done on August 3, 2011,
showed significant evidence of overfilling and spills in the area
of these tanks." MSPP also did not appeal from that state court
order.
On April 27, DES filed a motion in the bankruptcy court
seeking to have the state court fine classified as an
administrative priority claim against MSPP pursuant to 11 U.S.C.
§ 503(b).4 The bankruptcy court granted the motion and ordered
4
DES took the position that it did not have to prove actual
environmental harm under Cumberland Farms, Inc. v. Florida
Department of Environmental Protection, 116 F.3d 16, 20-21 (1st
Cir. 1997), but it offered to prove that MSPP's noncompliance was
resulting in an actual harm and present danger if the court took a
different view. As discussed later, before the bankruptcy court
MSPP suggested it be given an evidentiary hearing on whether harm
was a necessary finding. The bankruptcy court quite properly
declined to hold an evidentiary hearing. It declined to look
behind the state court order. DES was correct that it did not have
to prove harm to the environment independently in the bankruptcy
-8-
MSPP to pay DES's claim. The district court upheld that decision,
Munce's Superior Petroleum Prods., Inc. v. N.H. Dep't of Envtl.
Servs., 490 B.R. 5, 7 (D.N.H. 2013), and this appeal followed.
II.
When reviewing a district court's review of a bankruptcy
court decision, we "cede no special deference to the district
court's initial review of the bankruptcy court's decision." HSBC
Bank, USA v. Branch (In re Bank of New Eng. Corp.), 364 F.3d 355,
361 (1st Cir. 2004). We focus instead on the bankruptcy court's
decision, reviewing its conclusions of law de novo and its findings
of fact for clear error. Arch Wireless, Inc. v. Nationwide Paging,
Inc. (In re Arch Wireless, Inc.),
534 F.3d 76, 80 (1st Cir. 2008).
Under the bankruptcy code, the "actual, necessary costs
and expenses of preserving the estate" are entitled to
administrative expense priority, and are paid in full ahead of the
claims of other general creditors. 11 U.S.C. § 503(b)(1)(A). In
Reading Co. v. Brown, the Supreme Court held that post-petition
tort damages caused by the court-appointed receiver can be treated
as "actual and necessary" costs of the estate, regardless of
whether they are beneficial to the estate, and so may qualify for
administrative priority. 391 U.S. 471, 485 (1968). The Court said
its decision was consistent with the Bankruptcy Act's "important"
and "decisive" statutory objective: "fairness to all persons having
court. See
id.
-9-
claims against an insolvent."
Id. at 477. We have interpreted and
applied Reading in two cases concerning the environment, Spunt v.
Charlesbank Laundry (In re Charlesbank Laundry, Inc.),
755 F.2d 200
(1st Cir. 1985), and Cumberland Farms, Inc. v. Florida Department
of Environmental Protection,
116 F.3d 16 (1st Cir. 1997). DES and
the amicus curiae United States argue that Charlesbank Laundry and
Cumberland Farms are decisive in this case and result in
affirmance. We agree.
DES argues that the fine arises from a post-petition
violation of the state court's post-petition order. By contrast,
MSPP argues that the fine arises from pre-petition conduct, that
is, its failure to comply with the state court injunction, and the
continuation of that failure post-petition. MSPP argues that its
conduct for which the penalty was imposed was merely a continuation
of its pre-petition conduct and so the penalty cannot be given
priority. The state, it says, must get in line with its other pre-
petition creditors. We disagree that the fine was for pre-petition
conduct and reject the proposition that it mattered, for purposes
of assessing priority, either that the violations of law started
pre-petition or that the preliminary injunction was pre-petition.
The state court's April 2012 order assessing the fines
stated that it "finds that the respondents [MSPP] have not complied
with the Court's order of September 19, 2011." The September 19
order, of course, was issued several months after MSPP filed its
-10-
Chapter 11 petition. In short, the fines were plainly assessed for
MSPP's post-petition failure to comply with the state court's post-
petition order.5
We explain the sequence of events. After the filing of
MSPP's Chapter 11 petition, the state court issued an order finding
MSPP in contempt and setting per-diem fines, should there be
noncompliance. Then, months later, the state court issued a second
post-petition order imposing those fines for 192 days of wholly
post-petition failure to comply. Those fines were for only a
specific period, 192 days, all of which occurred post-petition. We
affirm the bankruptcy court's finding that the state court fine was
for a "post-petition violation of a post-petition order." As we
discuss below, that finding is consistent with our precedent.6
5
Arguing that its violations can only be characterized as
pre-petition, MSPP relies on In re Boston Regional Medical Center,
Inc., 291 F.3d 111, 126 (1st Cir. 2002), for the proposition that
the fines cannot be accorded administrative priority because
granting priority for a fine for a pre-petition violation would
"look past the distinction" between pre- and post-petition
expenses. MSPP misreads Boston Regional Medical Center, and that
case is plainly distinguishable on its facts and the issues
addressed.
6
MSPP attempts to argue that it could not, as a practical
matter, have complied, and that it did attempt some remediation.
We will not look behind the state court order. MSPP had a full
hearing there. As the bankruptcy judge observed, the arguments
MSPP raised in bankruptcy court as to its ability to comply with
the initial post-petition contempt order "could have or should have
been raised with the state court as to why its order wasn't
complied with or why the debtor couldn't fully comply with it."
Its belated argument that the bankruptcy court had to give it an
evidentiary hearing on issues which should have been raised in the
state court is both waived and wrong.
-11-
MSPP attempts a variation on its attack. It argues that
while "compensatory" fines may be given priority, punitive civil
fines may not. We do not accept the attempted distinction, and
could not do so, under our precedent.
In Charlesbank Laundry, we considered "whether a civil
compensatory fine for violation of an injunction by a debtor
corporation engaged in a Chapter 11 reorganization qualifies for
first priority treatment as an administrative expense . . . as
'actual, necessary costs and expenses of preserving the estate.'"
755 F.2d at 201 (quoting 11 U.S.C. § 503(b)(1)(A)). Charlesbank
Laundry was sued for public nuisance by its neighbors, and in June
1976 a state court enjoined it from actions that harmed individuals
in the surrounding area.
Id. In December 1980, Charlesbank
Laundry filed a Chapter 11 petition, and the bankruptcy court later
lifted the automatic stay as to the state court proceedings. The
parties entered into a consent judgment in the spring of 1983,
following Charlesbank Laundry's continued noncompliance with the
June 1976 injunction.
Id. As part of this consent judgment, the
state court had ordered Charlesbank Laundry to pay plaintiffs a
"compensatory fine" for violating the preliminary injunction. The
fine included amounts attributed to both pre- and post-petition
activity, but the plaintiffs sought administrative priority only as
to the portion of the fine that applied to the post-petition
violation of the injunction.
Id.
-12-
We held that the post-petition fine in Charlesbank
Laundry fit within the Reading Co. framework and was entitled to
administrative priority:
The debtor in this case deliberately continued
a violation of law month after month
presumably because it was more lucrative for
the business to operate outside the zoning
ordinance than within it. If fairness
dictates that a tort claim based on negligence
should be paid ahead of pre-reorganization
claims, then, a fortiori, an intentional act
which violates the law and damages others
should be so treated.
Id. at 203. MSPP, like Charlesbank Laundry, did not comply with a
pre-petition injunction either pre- or post-petition. And as in
Charlesbank Laundry, the fines at issue here are directly
attributable to post-petition violations of a post-petition court
order.
It is true the fine in Charlesbank Laundry was
compensatory in nature. That case arguably left open how our
interpretation of Reading Co. would apply to other types of fines,
including those sought by government agencies.
In Cumberland Farms, we answered that remaining question
as to a civil penalty imposed for a violation of a state
environmental law, and squarely held that "a penalty can be given
priority status." 116 F.3d at 21. In Cumberland Farms, the debtor
owned a number of gas stations and oil storage tanks in Florida,
which were subject to Florida's environmental regulations.
Id. at
18. From February 1, 1992 until August 27, 1993, Cumberland
-13-
operated in violation of several regulations requiring it to keep
certain evidence of financial responsibility to pay for clean up
efforts in the event of an oil spill. Id.
On May 1, 1992, Cumberland filed a Chapter 11 petition in
Massachusetts.
Id. Florida law provided for a civil penalty of up
to $10,000 per offense per day. In the bankruptcy court, Florida
sought to have its claim for $200,000 for post-petition civil
penalties allowed.
Id. at 18-20. The court allowed the penalties.
Florida also sought administrative expense priority, which was
allowed. We affirmed.
Id. at 18, 21.
We reasoned that in light of "today's extensive
environmental regulations," the payment of a fine for failing to
comply with those regulations is "a cost 'ordinarily incident to
operation of a business.'" Id. at 20 (quoting Reading
Co., 391
U.S. at 483). We also observed that "[d]ebtors in possession . . .
do not have carte blanche to ignore state and local laws protecting
the environment against pollution."
Id. The fact that the fine at
issue did not compensate private parties, as was true in
Charlesbank Laundry, did not change our conclusion that it would be
"fundamentally unfair,"
id. at 21, to allow Cumberland to actively
flout Florida's environmental laws and avoid paying a civil penalty
simply because it was involved in a Chapter 11 reorganization.
Cumberland Farms makes clear that fines for noncompliance
post-petition with state environmental law can be granted
-14-
administrative expense priority under Reading Co. and Charlesbank
Laundry. We reject MSPP's proposed distinction.7 This case fits
squarely within Cumberland Farms' application of the Reading Co.
"fairness" rationale.
We also reject MSPP's argument that cases from the Third
and Ninth Circuits should impact our analysis. In Pennsylvania
Department of Environmental Resources v. Tri-State Clinical
Laboratories, Inc., 178 F.3d 685 (3d Cir. 1999), the Third Circuit
rejected an administrative expense claim for a criminal fine
imposed on a Chapter 7 debtor. There, the court emphasized the
criminal nature of the fine, and reasoned that it is "neither
reasonable nor necessary for a commercial enterprise to violate
criminal laws . . . to preserve the estate."
Id. at 693. The
considerations driving Tri-State plainly are not present here.
Likewise, the Ninth Circuit's holding in NLRB v. Walsh
(In re Palau Corp.), 18 F.3d 746, 751 (9th Cir. 1994), which dealt
with a pre-petition employment contract and a resulting wage claim,
is plainly distinguishable on its facts. We are not bound by the
precedent of our sister circuits, and the out-of-circuit cases on
which MSPP relies are too factually dissimilar to influence the
outcome here.
7
No evidence was produced in this case as to the uses of the
contempt fine money, should it ever be collected, but our decision
does not turn on how the monies are used.
-15-
We are, of course, bound by existing circuit precedent.
Taken together, our cases interpreting Reading Co. have "attempted
to avoid a situation in which a bankruptcy estate may engage in
activities regulated by state law while avoiding the costs
associated with that regulation." In re Bos. Reg'l Med. Ctr.,
Inc., 291 F.3d 111, 126 (1st Cir. 2002). So too here.
III.
We affirm. Costs are awarded to DES.
-16-
