Court Opinion

ID: 2643317
Source: CourtListenerOpinion
Date Created: 2013-11-20 21:46:35.665123+00
Date Added: 2024-06-11T09:01:28.533577
License: Public Domain

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-