Re 229 Main St L.P.

• Decision Date: 05 June 2001
• Docket Number: No. 00-2236,00-2236
• Citation: 262 F.3d 1
• Parties: (1st Cir. 2001) IN RE 229 MAIN STREET LIMITED PARTNERSHIP, Debtor. 229 MAIN STREET LIMITED PARTNERSHIP, Appellant, v. MASSACHUSETTS DEPARTMENT OF ENVIRONMENTAL PROTECTION ET AL., Appellees. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1

262 F.3d 1 (1st Cir. 2001)

IN RE 229 MAIN STREET LIMITED PARTNERSHIP, Debtor.

229 MAIN STREET LIMITED PARTNERSHIP, Appellant, v. MASSACHUSETTS DEPARTMENT OF ENVIRONMENTAL PROTECTION ET AL., Appellees.

No. 00-2236

United States Court of Appeals For the First Circuit

Heard June 5, 2001

Decided August 22, 2001

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge] Catherine J. Savoie, with whom Rosanna Sattler, Susan S. Riedel, and Posternak, Blankstein & Lund, L.L.P. were on brief, for appellant.

Dana M. Gershengorn, Assistant Attorney General, with whom Thomas F. Reilly, Attorney General, was on brief, for appellees.

Before Selya, Circuit Judge, Cyr, Senior Circuit Judge, and Lipez, Circuit Judge.

SELYA, Circuit Judge.

Like the contaminated property that gave rise to it, the case before us demands careful handling. The pivotal question, heretofore untouched by any appellate court, is whether the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a), prevents a state from simultaneously creating and perfecting an environmental superlien on a debtor's property after the institution of a bankruptcy proceeding. Both the bankruptcy court and the district court answered this surpassingly close question in the negative, holding that the environmental superlien evades the grasp of the automatic stay. We affirm.

I. BACKGROUND

The debtor, 229 Main Street Limited Partnership, owns a shopping plaza on Main Street in Natick, Massachusetts (the Property). For many years, a dry cleaning business leased space in the plaza. As a result, the Property became profoundly contaminated with chemicals and other pollutants. In time, the Massachusetts Department of Environmental Protection (the Commonwealth) concluded that contamination from the Property posed a dire threat to drinking water in the town of Natick. To avert this threat, the Commonwealth spent large sums of money on emergency cleanup activities. It then sought reimbursement for these expenses, along with assurances in respect to anticipated future expenditures, from the debtor. Moreover, the Commonwealth informed the debtor, by letter dated November 5, 1998, that it intended to record a lien against the Property to secure present and future cleanup costs. See Mass. Gen. Laws ch. 21E, § 13 (the environmental superlien statute).

Initially, the debtor denied responsibility for the contamination and contested the dollar amount that the Commonwealth placed on cleanup costs. Accordingly, it demanded an adjudicatory hearing. See 310 C.M.R. § 40.1254. The hearing moved slowly. Before it concluded, the debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1101-1174. By the debtor's own admission, a principal reason behind this filing was a desire to avoid perfection of the Commonwealth's lien. To that extent, the maneuver failed; the hearing officer ruled that the environmental superlien statute fell within an exception to the automatic stay and refused to adjourn the administrative proceeding.

The debtor countered by asking the bankruptcy court to hold the Commonwealth in contempt for continuing to press forward in the postpetition period. The bankruptcy court refused the debtor's request. When the debtor appealed, the district court followed suit, ruling that the automatic stay did not preclude continuation of the proceedings necessary to perfect the Commonwealth's environmental superlien. See 229 Main St. Ltd. P'ship v. Mass. Dep't of Envt'l Prot., 251 B.R. 186, 193 (D. Mass. 2000). This appeal ensued. Because its resolution turns on questions of statutory interpretation, we exercise plenary review. See Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 973 (1st Cir. 1997).

II. THE STATUTES

As this case perches at a crossroads formed by the intersection of federal and state law, we set out the pieces of the statutory puzzle before attempting to fit them together. We begin with familiar fare: the automatic stay provision.

The automatic stay, 11 U.S.C. § 362(a), is one of the fundamental protections afforded to debtors by the bankruptcy laws. Midatlantic Nat'l Bank v. N.J. Dep't of Envt'l Prot., 474 U.S. 494, 503 (1986). It gives debtors breathing room by stopping collection efforts in their tracks and permitting their resumption only when the stay is lifted by the bankruptcy court or dissolved by operation of law. Soares, 107 F.3d at 975. To accomplish these objectives, the statute provides that the filing of a bankruptcy petition halts a wide variety of specified creditor activities. See 11 U.S.C. § 362(a). This appeal does not require us to call the roll. It suffices for present purposes to note that the stay applies, inter alia, to "any act to create, perfect, or enforce any lien against property of the estate." Id. § 362(a)(4).

While the automatic stay is an important part of the bankruptcy protection framework, it is not an absolute. Congress has crafted certain exceptions to the automatic stay. See id. § 362(b). One of them, pertinent here, makes the automatic stay inapplicable to "any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the [bankruptcy] trustee's rights and powers are subject to such perfection under section 546(b) of [the Bankruptcy Code]." Id. § 362(b)(3). The companion statute, 11 U.S.C. § 546(b), limits the debtor's powers to avoid statutory liens¹ by providing that they "are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection." Id. § 546(b)(1)(A). Thus, sections 362(b)(3) and 546(b)(1)(A), read together, plot the boundaries of the exception to the automatic stay which is at issue here.

To this point, we have been discussing relevant federal statutes. But this appeal also involves a state environmental superlien statute, Mass. Gen. Laws ch. 21E, § 13 (formally known as the Massachusetts Oil and Hazardous Material Prevention Act). The state legislature designed this statute to assure the prompt and efficient cleanup of hazardous materials.² Acme Laundry Co. v. Sec'y of Envt'l Affairs, 575 N.E.2d 1086, 1089 (Mass. 1991). It provides in pertinent part that once the Commonwealth spends money assessing or cleaning up a polluted tract of land, it may place a priority lien on that property:

Any liability to the commonwealth [for cleanup costs] shall constitute a debt to the commonwealth. Any such debt . . . shall constitute a lien on all property owned by persons liable under this chapter when a statement of claim naming such persons is recorded, registered or filed. . . . Any lien recorded, registered or filed pursuant to this section shall have priority over any encumbrance theretofore recorded, registered or filed with respect to any site . . . described in such statement of claim.

Mass. Gen. Laws ch. 21E, § 13.

The question here is whether the environmental superlien fits within the exception described in sections 362(b)(3) and 546(b) of the Bankruptcy Code. The debtor argues that the superlien falls outside the narrow boundaries of the exception and thus succumbs to the automatic stay. The Commonwealth demurs, maintaining that its superlien comes within the safe harbor dredged by the exception and thus evades the automatic stay. In the pages that follow, we examine these dueling interpretations.

III. THE STATUTES IN ACTION

Eligibility for the pertinent exception to the automatic stay depends upon the existence vel non of three elements: there must be (1) an "act to perfect" (2) an "interest in property" (3) under circumstances in which the perfection-authorizing statute fits within the contours of section 546(b)(1)(A). We deal with the first two elements in Part III(A), reserving the third for discussion in Part III(B).

A. Section 362(b)(3).

In parsing section 362(b)(3), we alter the natural progression: because the question of what constitutes an interest in property is crucial to the resolution of the questions that follow -- both section 362(b)(3) and section 546(b)(1)(A) contain an "interest in property" requirement -- we begin there.

1. "Interest in property." The threshold question is whether the Commonwealth had a prepetition interest in the Property.³ Although the parties are at loggerheads on a variety of issues, they are in perfect harmony on two important preliminary matters. First, the debtor acknowledges at this point in the proceedings that it was indebted to the Commonwealth under chapter 21E. This is as it should be, for Massachusetts law makes it pellucid that once the Commonwealth expends any funds in connection with the assessment or cleanup of a contaminated property, a debt is created. See Acme Laundry, 575 N.E.2d at 1090. Second, it is beyond cavil that at the time the debtor sought the protection of the bankruptcy court, the Commonwealth had not recorded a lien against the Property.

These agreed facts bring us to the crucial question: Did the Commonwealth have an interest in the Property at the time the debtor filed its bankruptcy petition? On that issue, the harmony dissipates. The debtor contends that section 362(b)(3)'s "interest in property" requirement only can be satisfied by the existence, prepetition, of a lien; and that, since no such lien was of record when the bankruptcy court's jurisdiction attached, the Commonwealth had no interest in the Property (and, therefore, cannot qualify for the balm of section 362(b)(3)). The Commonwealth sings a different tune. It asserts that the term "interest in property," as used in section 362(b)(3), is broader than the term "lien"; and that it had a prepetition interest in the Property arising out of a medley of factors, including its expenditures for cleanup, its right to record a superlien, its notice to the debtor that it...