Court Opinion

ID: 2964754
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:30:33.427994+00
Date Added: 2024-06-11T11:43:01.016980
License: Public Domain

USCA1 Opinion

	

                            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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                                          4

                      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

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                                          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.

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                                          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

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                                          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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