Opinion ID: 2977150
Heading Depth: 3
Heading Rank: 3

Heading: The Reading v. Brown Exception.

Text: Finally, the 1974 Plan asserts that the “benefit to the estate” standard does not apply to its claim because withdrawal liability is a statutorily-imposed obligation that was incidental to the postpetition operation of the Debtors’ businesses. To support this assertion, the 1974 Plan relies upon Reading Co. v. Brown, 391 U.S. 471, 88 S. Ct. 1759 (1968), for the principle that a claim may be afforded administrative priority even if it does not benefit or help preserve a debtor’s estate, so long as the claim relates to certain aspects of the estate’s postpetition operations. The debtor in Reading was under the protection of a bankruptcy receivership17 when its primary asset, an eight-story industrial building, was totally destroyed by fire. The fire spread to adjoining properties and damaged several neighboring businesses. After the debtor was adjudicated bankrupt and the receiver was appointed trustee, the owners of the adjoining properties filed more than $3.5 million in claims against the debtor’s bankruptcy estate. The Reading Company, one of the fire loss claimants, asserted that its claim was entitled to administrative priority because the fire was caused by the negligence of the receiver in operating the debtor’s business. The trustee objected to allowance of the claim as an administrative expense on the ground that payment of the fire loss claim would confer no benefit on the debtor’s bankruptcy estate. The Supreme Court held that the fire damage claim, which resulted from the postpetition negligence of the receiver, was an “actual and necessary cost” of operating the debtor’s business, even though payment of the claim provided no benefit to the bankruptcy estate. The Court explained that “actual and necessary costs” should “include costs ordinarily incident to operation of a business, and not be limited to costs without which rehabilitation would be impossible.” Reading, 391 U.S. at 483. In reaching this conclusion, the Court cited “one important, and here decisive” objective of the bankruptcy laws: “fairness to all persons having claims against an insolvent.” Id. at 477. The Court noted that by postponing their claims during a Chapter XI arrangement, the debtor’s prepetition unsecured creditors could hope to benefit from a successful rehabilitation of the debtor and “eventually recover from the debtor either in full or in larger proportion than they would in 17 Reading was decided under § 64a(1) of the former Bankruptcy Act, the predecessor to § 503(b). However, because the two statutory sections are similar, courts have consistently applied the reasoning of Reading to cases under the Bankruptcy Code. See, e.g., Ala. Surface Mining Comm’n v. N.P. Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449, 1455-56 (11th Cir. 1992). -26- immediate bankruptcy.” Id. at 478. The fire loss claimant, by contrast, “did not merely suffer injury at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law.” Id. The Court reasoned that: in considering whether those injured by the operation of the business during an arrangement should share equally with, or recover ahead of, those for whose benefit the business is carried on, the latter seems more natural and just. Existing creditors are, to be sure, in a dilemma not of their own making, but there is no obvious reason why they should be allowed to attempt to escape that dilemma at the risk of imposing it on others equally innocent. Id. at 482-83. In applying Reading, courts have actively limited the use of the exception to claims for tort damages, or cases involving intentional misconduct by the trustee or debtor-in-possession. Beneke Co. v. Econ. Lodging Sys., Inc. (In re Econ. Lodging Sys., Inc.), 234 B.R. 691, 698 (B.A.P. 6th Cir. 1999); see also Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755, 758 (9th Cir. 1998) (“The Reading exception operates to deter the trustee from injuring third parties.”). For example, in Charlesbank Laundry, the First Circuit granted administrative priority to a claim for civil compensatory damages stemming from the debtor’s operation of its laundry facility in violation of zoning laws and a temporary injunction. Spunt v. Charlesbank Laundry, Inc. (In re Charlesbank Laundry, Inc.), 755 F.2d 200 (1st Cir. 1985). The First Circuit explained: We see no reason why the claim of plaintiffs in this case does not fall within both the letter and the spirit of Reading. The same fairness principle favors plaintiffs here, whose premises, lives, or businesses were adversely affected by [the debtor’s] continuing conduct in violation of the temporary injunction. Id. at 202. In fact, the court suggested that the facts before it presented a potentially stronger case for priority than those in Reading, because the debtor deliberately operated its business in violation of the zoning laws and injunction. “If fairness dictates that a tort claim based on negligence should be paid ahead of pre-reorganization claims, then . . . an intentional act which violates the law and damages others should be so treated.” Id. at 203. Similarly, in Al Copeland Enterprises, the Fifth Circuit granted administrative expense priority to an award of interest on sales taxes wrongfully and deliberately withheld by a chapter 11 trustee. Al Copeland Enters., Inc. v. Tex. (In re Al Copeland -27- Enters., Inc.), 991 F.2d 233, 238 (5th Cir. 1993). Finally, in a slight extension of the Reading exception, the Eleventh Circuit in N.P. Mining allowed an administrative expense claim for punitive civil penalties assessed as a result of postpetition environmental violations committed during the operation of the chapter 11 debtor’s strip mining business. Ala. Surface Mining Comm’n v. N.P. Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449, 1455-56 (11th Cir. 1992) (acknowledging that, unlike compensatory damages, the penalties would not be used to repair the environmental damage or to protect the public’s health, but holding that under Reading and 28 U.S.C. § 959(b) penalties assessed for postpetition mining operations are “costs ordinarily incident to the operation of a business” and are entitled to administrative priority); but see Penn. Dept. of Envtl. Res. v. Tri-State Clinical Labs., Inc., 178 F.3d 685 (3d. Cir. 1999) (punitive criminal fines for illegally disposing of infectious waste postpetition are not entitled to administrative priority). To our knowledge, the Sixth Circuit has granted administrative priority under the Reading exception on only one occasion. See Lancaster v. Tenn. (In re Wall Tube & Metal Prods. Co.), 831 F.2d 118 (6th Cir. 1987). In Wall Tube, the Sixth Circuit determined that response costs incurred by the State of Tennessee as a result of hazardous wastes stored at the debtor’s manufacturing site were entitled to administrative priority. The court explained that prior Supreme Court decisions “have created a special emphasis on the importance of complying with laws that protect the public health and safety.” Id. at 123 (citing Midlantic Nat’l Bank v. N.J. Dept. of Envtl. Protection, 474 U.S. 494, 106 S. Ct. 755 (1986) and Ohio v. Kovacs, 469 U.S. 274, 105 S. Ct. 705 (1985)). In Wall Tube, it was undisputed that the hazardous substances on the debtor’s property could have caused as many as fifteen different health problems, ranging from loss of consciousness to death, to anyone who came into contact with them. When the debtor, and later its trustee, did nothing to remedy these health hazards, the State of Tennessee was entitled under its own state laws and CERCLA to “expend funds to assess the gravity of the environmental hazard.” Id. at 124. Although these expenses produced no corresponding benefit to the estate, the court held that the expenses were “actual and necessary, both to preserve the estate in required compliance with state law and to protect the health and safety of a potentially endangered public.” Id. At least one judge on the Sixth Circuit has suggested that the reasoning in Wall Tube should be applied beyond the context of environmental cases. See Pension Benefit Guar. Corp. v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 821 (6th Cir. 1997) (Kennedy, -28-