In re Hemingway Transport, Inc.
| Citation | 126 BR 656 |
| Decision Date | 26 March 1991 |
| Docket Number | 90-10431-Z and 90-10432-Z.,Civ. A. No. 90-10302-Z |
| Parties | In re HEMINGWAY TRANSPORT, INC. and Bristol Terminals, Inc., Debtors. JUNIPER DEVELOPMENT GROUP, a Massachusetts Partnership; and George D. Whitten, Amy Whitten and Charles Whitten, as Trustees of 60 Olympia Nominee Trust, Appellants and Cross-Appellees, v. Herbert C. KAHN, Trustee for Hemingway Transport, Inc. and Bristol Terminals, Inc., Appellee and Cross-Appellant. |
| Court | U.S. District Court — District of Massachusetts |
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Louis N. Massery, Roy Patrick Giarrusso, Cooley, Manion, Moore & Jones, Boston, Mass., for appellants and cross-appellees.
William Francis Macauley, Martin P. Desmery, Craig & Macauley, Boston, Mass., for appellee and cross-appellant.
This consolidated bankruptcy appeal presents several issues of law arising out of three different decisions of the Bankruptcy Court. See In re Hemingway Transport, Inc., 108 B.R. 378 (D.Mass. 1989); 105 B.R. 171 (D.Mass.1989); 73 B.R. 494 (D.Mass.1987). Briefly, the underlying facts are these: On July 28, 1982, the Debtors, Hemingway Transport, Inc. and Bristol Terminals, Inc. (collectively, "Hemingway"), filed voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code. (The proceedings subsequently were converted to Chapter 7 on November 18, 1983.) While in Chapter 11, the Debtors, with Court approval, sold a parcel of real property located at 60 Olympia Avenue, Woburn, Massachusetts ("the Property") to Juniper Development Group.
In April, 1985, a representative of the Environmental Protection Agency ("EPA") discovered a number of barrels containing hazardous waste on the Property. The EPA then issued an order pursuant to section 106(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), 42 U.S.C. § 9606(a) (1988), directing Juniper to remove the drums and surrounding soil. Juniper complied with the order. In 1986, Juniper commenced the instant adversary proceeding in which it seeks indemnification or contribution under CERCLA for past and future "response costs" incurred as a result of compliance with the EPA order. Two years later, on April 20, 1988, the EPA notified Juniper of its status as a "Potentially Responsible Party" in connection with the so-called Wells G & H Superfund Site, a 330-acre parcel of land which includes the Property now owned by Juniper.
Three separate decisions of the Bankruptcy Court are at issue. First, on May 8, 1987, the Bankruptcy Court, 73 B.R. 494, on a motion for summary judgment, held that Juniper's claims for response costs were entitled to administrative expense priority under the Bankruptcy Code. Hemingway appeals from this decision. Second, Juniper appeals from a decision, dated September 13, 1989, 105 B.R. 171, which (on another motion for summary judgment) disallowed, as contingent claims for reimbursement or contribution under § 502(e)(1)(B) of the Bankruptcy Code, Juniper's claims for future response costs. Third, in a decision dated December 18, 1989, 108 B.R. 378 (), the Bankruptcy Court held that neither attorney's fees nor prejudgment interest were recoverable as response costs under CERCLA. At the October 17 hearing, the Bankruptcy Court also excluded evidence concerning certain labor expenses which Juniper claimed as recoverable response costs; Juniper appeals this ruling as well.
The opinions of the Bankruptcy Court, dated May 8, 1987 and September 13, 1989, both resolved motions for summary judgment. A district court, sitting in review, considers a bankruptcy court's decision to grant summary judgment de novo. In re Two "S" Corp., 875 F.2d 240, 242 (9th Cir.1989). The standard for granting summary judgment in an adversarial bankruptcy proceeding is the same as in Rule 56(c), Federal Rules of Civil Procedure. Bankruptcy Rule 7056, 11 U.S.C. (1988). Summary judgment is appropriate if, viewing the evidence in the light most favorable to the party opposing the motion, the court finds that there is no genuine issue of material fact. Fed.R.Civ.P. 56(c); see also General Office Prods. Corp. v. A.M. Capen's Sons, 780 F.2d 1077, 1078 (1st Cir. 1986).
The appeals arising out of the October 17 evidentiary hearing and the resulting opinion are governed by a different standard. Bankruptcy Rule 8013 mandates the application of the "clearly erroneous" standard of review with regard to findings of fact made by the Bankruptcy Court, and a "de novo" standard with respect to conclusions of law. First Software Corp. v. Computer Assocs. Int'l, 107 B.R. 417, 420 (D.Mass.1989). The issues presented in the instant appeal are questions of law.
In enacting the Bankruptcy Code, Congress recognized that, if a business that has filed for bankruptcy is to continue operating for even a limited period of time, third parties must be willing to provide necessary goods and services. Since these parties will obviously not be so willing unless they are assured of payment ahead of pre-bankruptcy creditors, Congress provided a priority for administrative expenses, that is, "the actual, necessary costs and expenses of preserving the estate...." 11 U.S.C. § 503(b)(1)(A) (1988).
The Bankruptcy Court undertook an extensive analysis of the relevant case law before reaching its conclusion that Juniper's claims are properly classified as administrative expenses. The Court relied primarily on a Supreme Court case, Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), and on a First Circuit opinion, In re Charlesbank Laundry, 755 F.2d 200 (1st Cir.1985).
In Reading, a fire caused by the negligence of a receiver acting within the scope of his employment destroyed property in adjoining premises. Fire loss claimants filed claims for administrative expenses. The Supreme Court held that "tort claims arising during a Chapter 11 reorganization are actual and necessary expenses of the reorganization." Reading, 391 U.S. at 482, 88 S.Ct. at 1765. The Court found that the "decisive statutory objective" was "fairness to all persons having claims against an insolvent." Id. at 477. Unlike creditors who chose to do business with the debtor prior to its petitioning for bankruptcy, the fire victims "did not merely suffer injury at the hands of an insolvent business: they had an insolvent business thrust upon them by operation of law." Id. at 478, 88 S.Ct. at 1763.
More than ten years after Reading, the First Circuit in Charlesbank held that a civil compensatory fine for a violation of a state court injunction imposed on the debtor, when that debtor was operating under Chapter 11, qualified for priority treatment as an administrative expense. Charlesbank, 755 F.2d at 202-03. The court noted:
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-organization claims, then, a fortiori, an intentional act which violates the law and damages others should be so treated.
The reasoning in Reading and Charlesbank logically compel the conclusion that Juniper's claims must be granted administrative expense priority. As the court below reasoned, "clearly, if damages leading to a negligence claim against a receiver qualify as administrative expenses then so do damages giving rise to a strict liability claim against a Chapter 11 debtor-in-possession under CERCLA." Hemingway, 73 B.R. at 505.
Hemingway takes issue with this analysis in several, related ways. First, it argues, Juniper's remedial efforts cannot be construed as "preserving the estate" of the debtor within the meaning of § 503(b)(1)(A), since the property had been sold and transferred to Juniper three years before the EPA issued its cleanup order. But while the costs themselves may not have materialized until years later, Hemingway's liability arose from acts and omissions that were a part of its business operations. The eventual cleanup order came about because Hemingway improperly disposed of waste on its property, and later failed to remove these drums. In addition, the sale of the Property to Juniper, out of which Hemingway's liability eventually arose, was an attempt to raise money in order to continue business operations. That the drums were only discovered by the authorities years later does not alter the fact that their presence was a result of Hemingway's post-petition business operations. Moreover, all response cost claims under CERCLA involve some delay between the acts or omissions giving rise to liability, and the eventual cleanup order; to hold, as urged by Hemingway, would necessarily deprive all such claims of the benefit of administrative expense priority. CERCLA claims would thus receive far less favorable treatment in the bankruptcy context than do more conventional torts, a conclusion at odds with the broad remedial purposes of CERCLA, Dedham Water Co. v. Cumberland Farms Dairy, 805 F.2d 1074, 1081 (1st Cir.1986), and the Supreme Court's emphasis on using the administrative expense priority system to achieve a fair result, Reading, 391 U.S. at 477, 88 S.Ct. at 1762-63.
Next, Hemingway contends that the Bankruptcy Court misapplied Reading and Charlesbank to these facts. Hemingway first points out that both of those cases involved debtors in Chapter 11 proceedings (where the debtor is charged with the continued operation of the insolvent business entity), rather than Chapter 7 liquidation proceedings. Chapter 7, however, also mandates that administrative expenses be given priority, see 11 U.S.C. § 726 (1988). Moreover, neither the Bankruptcy Code nor any court has drawn a distinction between Chapter 11 and Chapter 7 in...
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