Court Opinion

ID: 197425
Source: CourtListenerOpinion
Date Created: 2011-02-07 03:29:59+00
Date Added: 2024-06-11T08:47:52.558548
License: Public Domain

United States Court of Appeals
                    For the First Circuit
                                For the First Circuit

                                         

No. 96-2371

                   CUMBERLAND FARMS, INC.,

                          Appellant,

                              v.

       FLORIDA DEPARTMENT OF ENVIRONMENTAL PROTECTION,

                          Appellee.

                                         

         APPEAL FROM THE UNITED STATES DISTRICT COURT

              FOR THE DISTRICT OF MASSACHUSETTS

       [Hon. Douglas P. Woodlock, U.S. District Judge]
                                                                 

                                         

                            Before

                Torruella, Chief Circuit Judge,
                                                          

                Bownes, Senior Circuit Judge,
                                                        

                  and Stahl, Circuit Judge.
                                                      

                                         

Barbara D. Gilmore with whom Sullivan  & Worcester LLP and Mark G.
                                                                              
Howard were on brief for appellant.
              
Jonathan H.  Alden, Assistant General  Counsel, Florida Department
                              
of Environmental Protection for appellee.

                                         

                        June 19, 1997
                                         

          BOWNES, Senior  Circuit Judge.   This is  an appeal
                      BOWNES, Senior  Circuit Judge.
                                                   

from the judgment of the district court affirming the summary

judgment  of the  bankruptcy  court imposing  a fine  against

debtor-appellant  Cumberland  Farms,  Inc.,  for  failure  to

follow Florida  laws and regulations covering the maintenance

of petroleum  underground storage  tanks (USTs).   Cumberland

was  a debtor-in-possession  in a  Chapter 11  reorganization

proceeding.  The district court  also affirmed the ruling  of

the bankruptcy  court that  the fine be  given administrative

expense priority status.      Cumberland      appeals     the

imposition  of  the fine,  the amount  of  the fine,  and its

designation  as  a  priority  administrative  expense.    The

appellee   is   the  Florida   Department   of  Environmental

Protection  (FDEP).  It is the regulatory agency in charge of

administering   certain    Florida   environmental   statutes

including the maintenance of USTs for petroleum and petroleum

products.

                      Standard of Review
                                  Standard of Review
                                                    

          Our review, as was  that of the district  court, is

de novo.    In re  Varrasso, 37  F.3d 760,  762-63 (1st  Cir.
                                       

1994).   Federal Rule  of Bankruptcy 7056,  governing summary

judgment in the bankruptcy court incorporates Rule 56 of  the

Federal Rules of Civil Procedure.1

                    
                                

1.  Fed. R.  Civ. P.   56(c) provides  that summary  judgment
"shall be  rendered forthwith if  the pleadings, depositions,
answers to interrogatories, and  admissions on file, together

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                                          2

          Cumberland does not claim that summary judgment was

inappropriate.  Its brief attacks the findings and rulings of

the district and bankruptcy courts.  The relief sought is not

a new  hearing but summary judgment in  its favor.  We affirm

the judgment of the district court.

                          The Facts
                                      The Facts
                                               

          Cumberland   owned  and   operated  a   network  of

approximately  134 combined  convenience stores  and gasoline

stations in  Florida.   Each store-station  had  one or  more

USTs.  There was an average of three tanks per  location.  On

May  1,  1992,  Cumberland  filed  a  voluntary  petition  in

bankruptcy under Chapter 11 of the Bankruptcy Code.

          Under  ch. 376.309  of the  Florida Statutes,  each

owner of a UST location must "establish and maintain evidence

of financial responsibility."   Rule 62-761.480 of  Florida's

Administrative  Code requires  that an  owner of  a  UST site

shall demonstrate "the ability to pay for  faulty cleanup and

third  party  liability resulting  from  a  discharge at  the

facility"  in accord  with  the Code  of Federal  Regulations

(C.F.R.),  Title 40, Part 280, Subpart H.  This C.F.R. allows

a  UST   owner  to  establish  financial   responsibility  by

obtaining  insurance or satisfying a self-insurance standard.

                    
                                

with  the affidavits, if any,  show that there  is no genuine
issue  as to any  material fact and that  the moving party is
entitled to a judgment as a  matter of law."  It is axiomatic
that the  materials  must be  considered  in the  light  most
favorable to the non-moving party.

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                                          3

To meet the  self-insurance requirements,  documents must  be

filed within  120 days of the  end of the fiscal  year of the

UST  owner.   Satisfaction of  financial responsibility  is a

prerequisite   for  enrollment   in  the   Florida  Petroleum

Liability and  Restoration Insurance  Program (PLIRP).   Fla.

Stat. ch. 376.3072 (1996).

          Cumberland operated its UST  sites from February 1,

1992 through  August 27,  1993 without meeting  the financial

reporting   requirements  of   Florida  laws   and  pertinent

regulations.  Effective August 27, 1993, Cumberland  obtained

insurance  to  satisfy  Florida's   financial  responsibility

requirements.   Cumberland  was, therefore,  in  violation of

Florida's financial responsibility law and regulations during

the bankruptcy period of May 1, 1992 to August 27, 1993.

          Florida law also  incorporates 40 C.F.R. 280.110(a)

into its UST regulatory regimen.  Section 280.110(a) mandates

that a UST owner notify the regulatory agency within ten days

of  the  filing  of a  voluntary  or  involuntary  Chapter 11

proceeding.  Cumberland failed to notify  the FDEP within the

ten-day period of its Chapter 11 filing.

          Florida law provides for  the imposition of a civil

penalty  of up  to  $10,000  per  offense  for  each  day  of

violation  for  each  violation  of  Florida  laws  and  FDEP

regulations.  Fla. Stat. ch. 403.161 and 403.141 (1995). 

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          The  FDEP  brought an  application on  September 1,

1993   in  the  bankruptcy  court  for  an  Allowance  of  an

Administrative Expense  Claim in  the amount of  $200,000 for

the bankruptcy period of May 2 to August 27, 1993.   This was

the civil  penalty that  FDEP asked  the bankruptcy  court to

impose on Cumberland.  The FDEP moved for summary judgment on

its  application.   A  hearing was  held  on the  motion  for

summary judgment  on  May 23,  1996.   The  bankruptcy  court

granted  the FDEP's  motion for  summary judgment,  imposed a

penalty of $200,000 and  ruled that the claim would  be given

priority as an  administrative expense.   Cumberland appealed

to the  district court, which affirmed  the bankruptcy court.

The case is  now before  us on Cumberland's  appeal from  the

district court.

          Cumberland  makes  three arguments  on appeal.   We

treat them  seriatim, quoting them as  stated in Cumberland's

brief.

          I.      THE   BANKRUPTCY  COURT   WRONGLY
          CONCLUDED    CUMBERLAND   WAS    NOT   IN
          COMPLIANCE WITH PLIRP DURING THE DISPUTED
          PERIOD.

          As part of this argument Cumberland maintains  that

it was  in  "substantial compliance"  with  PLIRP.   It  also

asserts that  its failure to  file an affidavit  of financial

responsibility "should be deemed waived."

          There  can be no  doubt that Florida  law gives the

FDEP  the  authority  to  establish rules  and  regulate  the

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                                          5

operations  of  USTs  in Florida.    Fla.  Stat. ch.  376.303

(1995).    Under chapter  403.141  and  .161  of the  Florida

Statutes, failure to comply with any rule, regulation, order,

or permit  issued by  the  FDEP is  a violation  of the  law.

Cumberland does not deny that it failed to file the requisite

financial  responsibility information  when due.   It  argues

that  on February 1, 1992,  which was pre-bankruptcy, the law

making a UST owner eligible for enrollment  in PLIRP required

only  "substantial compliance."   Cumberland asserts  that it

was in substantial compliance.  

          We agree with the district court that enrollment in

the PLIRP  during the disputed  period is not  an issue.   We

note, as did  the district court,  that the bankruptcy  court

made no findings as  to Cumberland's eligibility under PLIRP.

The FDEP brought its claim for penalties under  the statutory

and regulatory provisions of  Florida law.  The PLIRP  is not

implicated.  Violation of the PLIRP results only in exclusion

from the insurance program, not in regulatory penalties.  The

bankruptcy  court, therefore,  was  not the  proper forum  to

determine Cumberland's PLIRP status.

          We  find no  basis  for  holding that  Cumberland's

failure  to  file an  affidavit  of  financial responsibility

should be deemed  waived.  Cumberland's argument  seems to be

that  the gravamen  of the  financial responsibility  test is

that the owner or operator of a UST facility have a net worth

                             -6-
                                          6

of $10 million; that Cumberland at all times had  a net worth

of  at least $10.2 million and that, therefore, the filing of

the  financial  reports  should   be  "deemed  waived."    We

disagree.   The gravamen of the offense  is not the net worth
                                                           

of the  UST owner, but the timely filing by such owner of the

required  financial  reports.   Cumberland  failed  to do  so

despite its knowledge  of the legal  requirements.  And  such

failure  cannot be  excused or  condoned on  the basis  of an

affidavit  filed  by  a  corporate  official  (Arthur  C.G.K.

Koumantzelis)  on February  15, 1994,  which itself  fails to

meet the reporting requirements.  

          II.   UNDER THE  GRACE PERIOD FOR  FILING
          FINANCIAL RESPONSIBILITY  AFFIDAVITS, THE
          DEP  COULD  NOT DENY  CUMBERLAND COVERAGE
          UNDER PLIRP UNTIL AFTER  CUMBERLAND FILED
          ITS BANKRUPTCY PETITION.

          This  is  a  variation  of  the  PLIRP  eligibility

argument already made  and answered.   We reject  it for  the

same reasons.

          III.  EVEN IF CUMBERLAND WAS NOT ENROLLED
          IN PLIRP DURING THE DISPUTED  PERIOD, THE
          BANKRUPTCY COURT ABUSED ITS DISCRETION IN
          GIVING AN AWARD OF PUNITIVE DAMAGES AS AN
          ADMINISTRATIVE EXPENSE CLAIM.

          Cumberland  first   argues  that  the   FDEP  lacks

authority  to impose  civil penalties.   The short  answer to

this  contention is that the FDEP did not impose the penalty,

the bankruptcy court did.  Under Florida law the penalty must

be judicially imposed.   Cumberland argues that the DEP never

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                                          7

sought to impose such  penalties in any Florida court.   This

ignores two things:  There is no Florida requirement that the

penalty sought be imposed  by a Florida state court,  and the

bankruptcy court was  the proper  forum for the  DEP to  seek

imposition of the penalty sought.

          It  is  by  now  abundantly clear  that  in  state-

regulated  areas such  as  protection of  the environment,  a

bankruptcy court  must  comply with  the  laws of  the  state

involved.  In re  Virginia Builders, Inc., 153 B.R.  729, 735
                                                     

(E.D. Va. 1993).  Debtors in  possession, such as Cumberland,

do  not have  carte blanche  to ignore  state and  local laws

protecting  the  environment  against pollution.    Midlantic
                                                                         

Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S.
                                                               

494, 505 (1986).

          Cumberland  next  challenges   the  amount  of  the

penalty.   The  assessment  of the  sum  of $200,000  by  the

bankruptcy  court is a  finding of fact  reviewed against the

clearly erroneous  test.   We note  first  that the  $200,000

penalty is considerably less than the maximum of $647 million

that  could have been assessed.  Cumberland's failure to file

was  either  willful or  grossly  negligent.   It  has  never

submitted   the   documents  required   under   Florida  law.

Moreover,  Cumberland  did  not   notify  the  FDEP,  as  was

required,  that  it  had  filed a  voluntary  petition  under

Chapter 11 of  the bankruptcy code.  We have  read the record

                             -8-
                                          8

carefully and can find  no compelling basis for  reducing the

$200,000 penalty.

          The  final issue  is  whether the  bankruptcy court

erred in giving the fine administrative expense status.

          Both the district and bankruptcy courts found In re
                                                                         

Charlesbank Laundry, Inc., 755 F.2d 200, 203 (1st  Cir. 1985)
                                     

controlling.  Before we discuss Charlesbank, however, we must
                                                       

first examine  Reading  Co. v.  Brown,  391 U.S.  471  (1968)
                                                 

because Reading was themainstay of the opinion inCharlesbank.
                                                                        

          In Reading the negligence of a receiver  conducting
                                

debtor's  business under  Chapter  11 of  the Bankruptcy  Act

resulted in a fire that totally destroyed a building that was

debtor's  only  significant  asset.     The  fire  spread  to

adjoining premises  and destroyed real and  personal property

belonging to  petitioner Reading.  Id. at  473.  The issue as
                                                  

stated  by  the Court  was,  "whether  the  negligence  of  a

receiver  administering   an  estate  under   a  Chapter   XI

arrangement gives rise to  an 'actual and necessary cost'  of

operating  the debtor's business."  Id. at 476.  In rejecting
                                                   

the  position of the trustee that no negligence claims should

receive priority, the Court stated:

          In  our view  the trustee  has overlooked
          one   important,   and   here   decisive,
          statutory  objective:    fairness to  all
          persons   having    claims   against   an
          insolvent.    Petitioner  suffered  grave
          financial injury from what is here agreed
          to   have  been  the  negligence  of  the
          receiver and a workman.

                             -9-
                                          9

Id. at 477.  The Court also stated,
               

               Although there appear to be no cases
          dealing with tort  claims arising  during
          Chapter  XI   proceedings,  decisions  in
          analogous cases suggest 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.

Id. at 483.
               

          We think this last  observation is pertinent to the

case at  bar.   The  payment of  a fine  for failing,  during

bankruptcy, to meet the requirements of Florida environmental

protection laws  is a cost "ordinarily  incident to operation

of a  business" in  light of today's  extensive environmental

regulations.

          The question in Charlesbank  Laundry was "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  . .  . ."   755 F.2d  at 201.   A  state preliminary

injunction   had  been  issued  against  Charlesbank  Laundry

prohibiting it from committing  a public and private nuisance

and from violating a zoning ordinance.  The laundry continued

its past  practices undeterred.  Shortly before  a hearing on

the merits Charlesbank Laundry filed a Chapter 11 petition in

bankruptcy.  The state court actions were ultimately settled.

Charlesbank was  ordered to pay a  compensatory fine assessed

                             -10-
                                          10

civilly   for  violation   of   the   temporary   injunction.

Plaintiffs sought allowance of  the amount incurred after the

bankruptcy  filing  ($11,000)  as  a  priority  claim.    The

bankruptcy court rejected the priority claim and the district

court affirmed.

          With  Reading   as  the  lodestone,   we  reversed,
                                   

stating:  "We see  no reason why  the claim of plaintiffs  in

this case does not fall within both the letter and the spirit

of Reading."  755 F.2d at 202.   We think the  last paragraph
                      

of Charlesbank  Laundry is pertinent to  the $200,000 penalty
                                   

imposed in the case before us:

               We now  touch briefly on  what might
          be considered an  alternative ground  for
          the    district    court's   holding--the
          ordinary presumption against the awarding
          of attorney's  fees.  We think  the court
          misperceived  the  nature  of the  award.
          Counsel fees were not added on to damages
          under any notion of automatic entitlement
          flowing  from  the nature  of  the action
          brought.  They were, instead, the measure
          of  the  compensatory  fine   awarded  to
          plaintiff.    Such  a  measure  had  been
          agreed  upon by  the parties,  the amount
          thereof  being  left   to  the   informed
          discretion  of the  judge.   Clearly, had
          the  judge simply set  the amount  of the
          fine without revealing how he  arrived at
          it,   there   would  be   no   basis  for
          challenging  it here.    We  thus see  no
          justifiable  reason  for not  recognizing
          the  award  here  as   an  administrative
          expense   deserving  of   first  priority
          treatment.

755 F.2d  at 203.  This  means, at the least,  that a penalty

can be given priority status.

                             -11-
                                          11

          In In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st
                                                 

Cir. 1976), we noted  that priority status could be  given to

claims  of creditors  "injured by  the debtor-in-possession's

operation of the  business even though  their claims did  not

arise from  transactions that  were necessary to  preserve or

rehabilitate  the estate."  We cited  to Reading as authority
                                                            

for  this statement.  In In re Hemingway Transport, Inc., 954
                                                                    

F.2d 1 (1st  Cir. 1992),  we made a  general survey of  First

Circuit  law on priority claims.   We first  noted that, "The

traditional presumption favoring  ratable distribution  among

all  holders of unsecured claims counsels strict construction

of  the  Bankruptcy  Code provisions  governing  requests for

priority payment  of administrative  expenses."  Id.  at 4-5.
                                                                

We then stated:

               As  a general  rule,  a request  for
          priority  payment  of  an  administrative
          expense  pursuant  to  Bankruptcy Code   
          503(a) may  qualify if  (1) the  right to
          payment   arose   from   a   postpetition
          transaction   with  the   debtor  estate,
          rather    than    from   a    prepetition
          transaction with the debtor, and  (2) the
          consideration  supporting  the  right  to
          payment was  beneficial to the  estate of
          the debtor.

Id.  This was followed by the observation:
               

               We   have   recognized   a   special
          category    of   expense    entitled   to
          administrative priority  status, based on
          considerations  of  fundamental fairness,
          see  Reading Co.,  391  U.S. at  477,  88
                                      
          S.Ct. at 1763, consisting of  amounts due
          entities   "injured  by   the  debtor-in-
          possession's  operation  of the  business

                             -12-
                                          12

          even  though their  claims did  not arise
          from transactions that were  necessary to
          preserve or rehabilitate the estate."  In
                                                               
          re Mammoth Mart, 536 F.2d at 954.
                                     

Id.   We then analyzed  Reading and Charlesbank  Laundry.  We
                                                                    

held  that the  "request for  allowance of  an administrative

expense priority is not within the ambit of either Reading or
                                                                      

Charlesbank . . . ."  Id. at 6.  We ended this section of the
                                     

opinion  stating:   "We are  aware of  no authority  that the

Reading-Charlesbank  exception encompasses a right to payment
                               

originating in a prepetition contract  with the debtor."  Id.
                                                                         

at 7 (footnote omitted).

          We hold that  the present case does come within the

ambit  of Reading and  Charlesbank.  This  was a postpetition
                                              

claim  incurred during  the  operation of  Cumberland  Farms'

business while it was  operating under Chapter 11.   We think

it would be fundamentally unfair to allow Cumberland Farms to

flout  Florida's  environmental  protection laws  and  escape

paying a penalty for such behavior.

          The judgment of the district court is affirmed.
                                                            affirmed
                                                                    

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