Hemingway Transport, Inc., In re

• Citation: 954 F.2d 1
• Decision Date: 03 September 1991
• Docket Number: Nos. 91-1389,91-1437,s. 91-1389
• Parties: 26 Collier Bankr.Cas.2d 372, Bankr. L. Rep. P 74,431, 22 Envtl. L. Rep. 20,719 In re HEMINGWAY TRANSPORT, INC., et al., Debtors. WOBURN ASSOCIATES, Appellant, v. Herbert C. KAHN, Trustee for Hemingway Transport, Inc. and Bristol Terminals, Inc., Appellees. In re HEMINGWAY TRANSPORT, INC., et al., Debtors. WOBURN ASSOCIATES, Appellee, v. Herbert C. KAHN, Trustee for Hemingway Transport, Inc. and Bristol Terminals, Inc., Appellants. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 1

954 F.2d 1

26 Collier Bankr.Cas.2d 372, Bankr. L. Rep. P 74,431,

22 Envtl. L. Rep. 20,719

In re HEMINGWAY TRANSPORT, INC., et al., Debtors.

WOBURN ASSOCIATES, Appellant, v. Herbert C. KAHN, Trustee for Hemingway Transport, Inc. and Bristol Terminals, Inc., Appellees.

In re HEMINGWAY TRANSPORT, INC., et al., Debtors.

WOBURN ASSOCIATES, Appellee, v. Herbert C. KAHN, Trustee for Hemingway Transport, Inc. and Bristol Terminals, Inc., Appellants.

Nos. 91-1389, 91-1437.

United States Court of Appeals, First Circuit.

Heard Sept. 3, 1991.

Decided Jan. 16, 1992.

Thomas V. Urmy, Jr., with whom Michelle H. Blauner and Shapiro, Grace & Haber, Boston, Mass., were on brief, for Woburn Associates.

Martin P. Desmery with whom William F. Macauley, Peter J. Roberts and Craig and Macauley P.C., Boston, Mass., were on brief, for Herbert C. Kahn, Trustee.

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

CYR, Circuit Judge.

In the competition for what little is left for distribution in the consolidated chapter 7 estate of Bristol Terminals, Inc. and Hemingway Transport, Inc., Woburn Associates appeals from a district court judgment affirming a bankruptcy court order denying Woburn's request for administrative priority status for attorney fees incurred in defending against a postpetition action brought by the trustee in bankruptcy. The trustee in bankruptcy cross-appeals, challenging the affirmance of a bankruptcy court order allowing Woburn's claim for attorney fees as an unsecured prepetition claim. 126 B.R. 650.

I BACKGROUND

Hemingway, a Massachusetts corporation, leased a parcel of real estate ("Property") from Woburn in 1974. The lease contained an indemnification clause whereby Hemingway agreed to hold Woburn harmless for all attorney fees incurred by Woburn as a consequence of Hemingway's occupation and possession of the Property. ¹ In 1980, Woburn sold the Property to Bristol, the wholly-owned subsidiary of Hemingway, receiving in return, inter alia, Bristol's $100,000 purchase money note secured by a second mortgage on the Property.

In 1982, Hemingway and Bristol simultaneously filed voluntary chapter 11 petitions pursuant to Bankruptcy Code §§ 109(d) and 301, 11 U.S.C. §§ 109(d) & 301 (1987). An application for an order authorizing joint administration of the Bristol and Hemingway chapter 11 estates was immediately granted by the bankruptcy court. See Fed.R.Bankr.P. 1015(b). Woburn promptly filed its proof of claim based on the Bristol note and second mortgage. ² Woburn did not file a separate proof of claim based on its indemnification agreement with Hemingway, Bristol's parent corporation.

Bristol, in its capacity as a chapter 11 debtor in possession, sold the Property to Juniper Development Group ("Juniper") in May 1983. Seven months later, the Hemingway-Bristol chapter 11 proceedings were voluntarily converted to chapter 7 liquidation proceedings and cross-appellant Kahn was appointed trustee in bankruptcy of both chapter 7 estates. See Fed.R.Bankr.P. 2009(c)(1). In April 1987, the bankruptcy court, after notice and hearing, granted the trustee's application for substantive consolidation of the chapter 7 estates. See 11 U.S.C. § 105(a). Woburn filed no further proof of its indemnification claim against the consolidated Bristol-Hemingway chapter 7 estate.

Meanwhile, in February 1986, the Environmental Protection Agency had issued an administrative order, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. §§ 9601-9657 (1981 & Supp.1990), which required Juniper, as the owner, to clean up hazardous substances which had been discovered on the Property. After expending more than $60,000 to comply with the CERCLA order, Juniper initiated an adversary proceeding against the consolidated Bristol-Hemingway chapter 7 estate for indemnification and contribution on its CERCLA response costs, which are made recoverable from "any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed...." 42 U.S.C. § 9607(a)(2) (emphasis added). ³

The trustee in bankruptcy filed a third party complaint alleging that Woburn became a "potentially responsible party" under CERCLA section 9607(a) by virtue of its ownership of the Property between 1974 and 1980. Woburn counterclaimed against the trustee, asserting that its indemnification agreement with Hemingway shifted the risk of Woburn's potential CERCLA liability to Hemingway. The Woburn counterclaim also asserted for the first time that the indemnity clause in the Hemingway lease obligated the trustee in bankruptcy to hold Woburn harmless for the attorney fees incurred in defending against the trustee's third party action under CERCLA.

The bankruptcy court granted summary judgment for Woburn on the trustee's third party complaint, on the ground that the indemnification clause in Woburn's lease with Hemingway "evidence[d] a clear and unequivocal intent to redistribute risks [to Hemingway] for purposes of section 107(e)(1) of CERCLA that does not violate public policy." The bankruptcy court further ruled that the lease indemnification clause entitled Woburn to recover $51,395.84 in attorney fees from the chapter 7 estate.

Relying on Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), Woburn argued that its attorney fees were entitled to priority payment as an "administrative expense," see 11 U.S.C. §§ 503(b)(1)(A) & 507(a)(1), since the fees were incurred as a direct result of the frivolous and ill-advised third party action brought by the trustee against Woburn in an unsuccessful attempt to restore to the chapter 7 estate the monies disbursed to satisfy Juniper's CERCLA judgment against the estate. The bankruptcy court found that the third party action against Woburn was neither frivolous nor ill-advised, and that Woburn's counterclaim for attorney fees derived from its prepetition indemnity agreement with Hemingway. The court accordingly denied administrative priority status and allowed Woburn's counterclaim as an unsecured prepetition claim.

Woburn appealed to the district court. The trustee cross-appealed, asserting that Woburn's failure to file a timely proof of claim under its lease indemnification agreement with Hemingway barred any distribution to Woburn, even as the holder of an unsecured claim. The district court affirmed the bankruptcy court order disallowing administrative priority status, but dismissed the trustee's cross-appeal on the ground that Woburn was not the holder of a "claim" for attorney fees against Hemingway at the commencement of the case, see 11 U.S.C. § 101(4), and that "[i]t would be unjust to punish Woburn for its failure to predict this lawsuit several years before its filing."

II DISCUSSION

A. The Woburn Appeal: Administrative Expense Priority

Woburn contends on appeal that the bankruptcy court committed reversible error by disallowing its request for priority payment of its attorney fees as an administrative expense. See 11 U.S.C. §§ 503(a), (b)(1)(A) & 507(a)(1). Woburn argues that administrative priority status is appropriate in these circumstances as a deterrent against the frivolous and ill-advised decision of the trustee to activate Woburn's right to indemnification under the Hemingway lease by commencing the third party action against Woburn. See, e.g., In re E.A. Nord Co., 78 B.R. 289, 292 (Bankr.W.D.Wash.1987). Woburn argues alternatively that principles of fundamental fairness warrant priority payment of its attorney fees as an administrative expense incurred as a consequence of the trustee's operation of the business of the debtor estate. See Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).

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. See Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir.1985); In re Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 658 F.2d 1149, 1163 (7th Cir.), cert. denied sub nom., Railway Labor Executives Ass'n. v. Ogilvie, 455 U.S. 1000, 102 S.Ct. 1632, 71 L.Ed.2d 867 (1982); In re Philadelphia Mortgage Trust, 117 B.R. 820, 825 (Bankr.E.D.Pa.1990); In re Massetti, 95 B.R. 360, 363 (Bankr.E.D.Pa.1989); In re SMB Holdings, Inc., 77 B.R. 29, 32 (Bankr.W.D.Pa.1987) (conferral of administrative expense priority where not clearly entitled under the Code dilutes priorities scheme prescribed by Congress). The burden of proving entitlement to priority payment as an administrative expense therefore rests with the party requesting it. See Woods v. City Nat. Bank & Trust Co., 312 U.S. 262, 268, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941); In re Patch Graphics, 58 B.R. 743, 745 (Bankr.W.D.Wis.1986).

The Bankruptcy Code permits top priority payment of "actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case," 11 U.S.C. § 503(b)(1)(A), as a means of enabling the debtor estate to acquire the requisite postpetition credit with which to preserve itself after the filing of the petition. Preservation of the estate includes protection of the assets of the estate, as well as postpetition operation of the business of the debtor. See, e.g., In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976); In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984); In re Pierce Coal & Constr., Inc., 65 B.R. 521, 530 (Bankr.D.W.Va.1986).

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...