Charlesbank Laundry, Inc., In re

• Decision Date: 25 February 1985
• Docket Number: No. 84-1138,84-1138
• Citation: 755 F.2d 200
• Parties: 12 Collier Bankr.Cas.2d 686, Bankr. L. Rep. P 70,275 In re CHARLESBANK LAUNDRY, INC., Debtor. Shepard A. SPUNT, et al., Plaintiffs, Appellants, v. CHARLESBANK LAUNDRY, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 200

755 F.2d 200

12 Collier Bankr.Cas.2d 686, Bankr. L. Rep. P 70,275

In re CHARLESBANK LAUNDRY, INC., Debtor.

Shepard A. SPUNT, et al., Plaintiffs, Appellants, v. CHARLESBANK LAUNDRY, INC., et al., Defendants, Appellees.

No. 84-1138.

United States Court of Appeals, First Circuit.

Submitted Sept. 14, 1984.

Decided Feb. 25, 1985.

Stuart DeBard and Weston, Patrick, Willard & Redding, Boston, Mass., on brief, for plaintiffs, appellants.

Janice L. Burnham and Looney & Grossman, Boston, Mass., on brief, for defendants, appellees.

Before CAMPBELL, Chief Judge, COFFIN and BOWNES, Circuit Judges.

COFFIN, Circuit Judge.

This case raises the interesting question 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 under 11 U.S.C. Sec. 503(b)(1)(A) as "actual, necessary costs and expenses of preserving the estate."

In 1976 a number of Cambridge residents and one Spunt of Brookline instituted proceedings in Middlesex Superior Court to enjoin the debtor, Charlesbank Laundry, Inc. (Charlesbank), from committing a private and public nuisance and from violating a Cambridge zoning ordinance. On June 1, 1976 a preliminary injunction issued, ordering Charlesbank to refrain from actions to the detriment of plaintiffs and others abutting the laundry. The laundry, unsuccessful in its efforts to obtain a zoning variance, continued its past practice. Plaintiff Nichols and others sought equitable relief in superior court. There was also pending the 1976 action commenced by plaintiff Spunt and others seeking both damages and injunctive relief. Shortly before both actions were scheduled to be tried, on December 11, 1980, Charlesbank filed a Chapter 11 petition. Subsequently, in August, 1982, the bankruptcy judge vacated the automatic stay of Bankruptcy Rule 11-44 and allowed the state actions to proceed.

After considerable negotiations the state actions were settled in the spring of 1983. A consent judgment, noting that one of the debtor's buildings had been destroyed by fire and could be replaced only by a building conforming to the zoning ordinance, restricted certain activities such as parking, laundry operations, vibration, fuel use, and sidewalk and street cleaning for 180 days, after which time laundry operations were to cease. The court having taken testimony and received affidavits as to legal services and disbursements, also ordered Charlesbank to "pay to plaintiffs ... a compensatory fine assessed civilly for violation of the temporary injunction herein of $16,283.85 being $4,752.95 due for legal services and disbursements prior to December 11, 1980 (the date it filed its petition for reorganization) and the balance of $11,530.90 for services and disbursements after that date forthwith."

The plaintiffs then sought allowance of the latter amount, $11,530.90, as a priority claim. ¹ Their motion invoked various sections of 11 U.S.C. Sec. 503: subsections (b)(3)(D) (expenses of a creditor "in making a substantial contribution"); (b)(4) (compensation for services of an attorney of an entity whose expense is allowable); (b)(3)(C) (expenses of a creditor in connection with the prosecution of a criminal offense.) We consider only what we deem to be the relevant subsection, (b)(1)(A) ("The actual, necessary costs and expenses of preserving the estate").

The bankruptcy judge denied plaintiffs' motion, reasoning that there was "no benefit to the estate" or "contribution to the creditors" resulting from the "adversarial" efforts of plaintiffs. The district court distinguished Reading Co. v. Brown, 391 U.S 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), on which plaintiffs principally relied, on the ground that there were "no cases equating a civil penalty for the violation of a temporary restraining order with a tort". ² 35 B.R. 756 at 757. It also felt itself bound by "the common-law rule that attorneys' fees do not qualify as recoverable damages in tort ... actions in the absence of specific statutory authorization" at 757.

Although there seems to be no authority precisely covering the circumstances of the instant case, we think it falls within the clearly enunciated rationale of Reading Co. v. Brown. In Reading, because of the negligence of a receiver conducting the debtor's business under Chapter 11 authority, a fire destroyed property in adjoining premises. Various fire loss claimants filed 147 claims for "administrative expenses" in a sum exceeding total assets of the estate. The estate put forward much the same argument as appellees here--that allowing first priority for negligence claims would not aid the rehabilitation of the business or preserve a maximum of assets for distribution.

The Court responded by stressing one overlooked "decisive, statutory objective: fairness to all persons having claims against an insolvent." 391 U.S. at 477, 88 S.Ct. at 1762. It then applied that principle to the case before it:

"At the moment when an arrangement is sought, the debtor is insolvent. Its existing creditors hope that by partial or complete postponement of their claims they will, through successful rehabilitation, eventually recover from the debtor either in full or in larger proportion than they would in immediate bankruptcy. Hence the present petitioner 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. at 478, 88 S.Ct. at 1763.

Not only did the Court hold that "tort claims arising during an arrangement [are] actual and necessary expenses of the arrangement", id. at 482, 88 S.Ct. at 1765, because it seems "more natural and just" to allow those injured by operation of a business during arrangement to "recover ahead of ... those for whose benefit the business is carried on", id., but it refused to distinguish, "within the class of torts committed by receivers while acting in furtherance of the business, between those 'integral' to the business and those that are not." Id. at 485, 88 S.Ct. at 1767.

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...