Munce, et al. V. NH Dept. of Environmental Services, et al. CV-12-262-JL 3/25/13
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Munce’s Superior Petroleum Products, Inc. et a l .
v. Civil N o . 12-cv-262-JL Opinion N o . 2013 DNH 042 NH Department of Environmental Services
OPINION AND ORDER
This appeal from an order of the Bankruptcy Court in a
Chapter 11 proceeding presents a narrow issue of the priority of
postpetition fines assessed against a debtor-in-possession.
Debtors-in-possession Harold P. Munce and Munce’s Superior
Petroleum Products, Inc. (collectively, “appellants”1) argue that
the Bankruptcy Court erred in concluding that nearly $200,000 in
fines assessed against them for contempt in a state-court
environmental action qualified as “the actual, necessary costs
and expenses of preserving the estate,” 11 U.S.C. § 503(b)(1)(A),
such that those fines are entitled to administrative priority.
1 Appellants’ underlying bankruptcy cases are being jointly administered with the Chapter 11 bankruptcy cases of five other affiliated debtors: Gorham Oil, Inc.; Superior Trucking, Inc.; Munce’s Real Estate Ventures, LLC; BMRA Real Estate Ventures, LLC; and Marilyn Munce. Those other debtors, though nominally appellants, are not involved in this appeal and play only minor roles in the relevant events. For clarity’s sake, the court has omitted mention of them from the remainder of this order. The New Hampshire Department of Environmental Services, plaintiff
in the state-court action, argues that the priority of such
claims is well-established in this Circuit.
This court has jurisdiction to hear appeals from “final
judgments, orders, and decrees” of the Bankruptcy Court under 28
U.S.C. § 158(a)(1). See also L.R. 77.4. After hearing oral
argument, the court affirms the decision of the Bankruptcy Court.
The appellants have not meaningfully distinguished this case from
In re Charlesbank Laundry, 755 F.2d 200 (1st Cir. 1985), or
Cumberland Farms, Inc. v . Florida Department of Environmental
Protection, 116 F.3d 16 (1st Cir. 1997), the controlling cases on
this issue. Together, those cases establish that fines qualify
as administrative expenses where they are assessed for (1)
postpetition violations of state law and a prepetition
injunction–-the precise posture in which the fines at issue in
this case arose; and (2) the debtor-in-possession’s failure to
comply with environmental laws postpetition–-the precise nature
of the fines here.
I. Applicable legal standard
When hearing an appeal from the Bankruptcy Court, this court
applies the same standards of review governing appeals of civil
cases to the appellate courts. C f . In re Watman, 301 F.3d 3 , 7
2 (1st Cir. 2002). As such, findings of fact by the Bankruptcy
Court will not be set aside unless they are clearly erroneous.
Id.; see also Palmacci v . Umpierrez, 121 F.3d 7 8 1 , 785 (1st Cir.
1997); Fed. R. Bankr. P. 8013. “A finding of fact is clearly
erroneous, although there is evidence to support i t , when the
reviewing court, after carefully examining all the evidence, is
left with the definite and firm conviction that a mistake has
been committed.” Palmacci, 121 F.3d at 785 (quotations omitted).
The Bankruptcy Court’s legal conclusions are reviewed de novo.
Id.; In re Gonic Realty Trust, 909 F.2d 6 2 4 , 626 (1st Cir. 1990).
“Discretionary rulings made pursuant to the Bankruptcy Code, such
as whether to convene an evidentiary hearing, are reviewable only
for an abuse of discretion.” Gonic Realty Trust, 909 F.2d at
626. “A bankruptcy court may abuse its discretion by ignoring a
material factor that deserves significant weight, relying on an
improper factor, o r , even if it considered only the proper mix of
factors, by making a serious mistake in judgment.” In re Salem
Suede, Inc., 268 F.3d 4 2 , 44 (1st Cir. 2001) (quotations and
brackets omitted).
II. Background
Prior to filing its Chapter 11 petition, Munce’s Superior
Petroleum Products (“MSPP”) was engaged in a number of business
3 activities, primarily involving fuel distribution and the
ownership and operation of convenience stores. In connection
with those ventures, MSPP stored fuel in above-ground tanks at a
commercial bulk storage facility (“Facility 1 " ) ; conducted its
fuel distribution business from a nearby location (“Facility 2 " ) ;
and operated a nearby convenience store (“Facility 3") as well.
Munce owns or owned all three facilities.
In July 2010, the New Hampshire Department of Environmental
Services, or “DES,” sued MSPP and Munce in Coös County Superior
Court, alleging they had violated New Hampshire’s groundwater
protection laws “by causing or suffering the discharge of oil at
their facilities and failing to construct and maintain required
spill protection at their facilities.” See N.H. Rev. Stat. Ann.
§§ 146-A, 485, 485-C. The following month, the Superior Court
entered an agreed-upon preliminary injunction that required
appellants to bring the above-ground fuel storage tanks at all
three facilities into compliance with those laws (by, for
example, providing secondary containment for the tanks, see
generally N.H. Code. R. Env-Wm 1402.01 et seq., and submitting a
plan to avoid stormwater contamination) within 30 days o r ,
alternatively, to take those tanks out of service. Appellants
failed to comply with the injunction, prompting DES to move the
court to find them in contempt.
4 In March 2011, after the Superior Court had held a hearing
on DES’s contempt motion, but before it acted on the motion, MSPP
filed a petition in the Bankruptcy Court seeking relief under
Chapter 11 of the Bankruptcy Code. That filing was followed two
months later by Munce’s own petition for relief under Chapter 1 1 ,
which shortly thereafter came to be jointly administered with
MSPP’s Chapter 11 case.
In late June 2011, on DES’s motion, the Bankruptcy Court
ordered that the automatic stay did not apply to DES’s state-
court action against MSPP and Munce because it was “brought for
the purpose of protecting public health and safety, and the
environment, and to effectuate public policy.” See 11 U.S.C.
§ 362(b)(4). The parties thus returned to Superior Court seeking
a resolution of DES’s contempt motion. On September 1 9 , 2011,
the Superior Court issued an order finding MSPP and Munce2 in
contempt and ordering them to “take[] all of [their] tanks at
Facilities 1 , 2 and 3 out of service forthwith until such time as
[they] demonstrate[] full compliance with the terms of the
preliminary injunction.” The order gave appellants ten days
2 From this court’s reading of this order, it appears to apply only to Munce. See Aplts.’ Appx. at 1555-59. In a later order, however, the Superior Court stated that its contempt order applied to both MSPP and Munce, see id. at 1560-64, and this court accepts that statement (which the parties do not dispute) as accurate as to the scope of the contempt finding.
5 within which to comply, and warned them that failure to do so by
that deadline would result in “a monetary fine in the amount of
$1,000.00 per day for each day of continued noncompliance.” It
also awarded DES “its reasonable attorney’s fees and costs
required to pursue this matter.”
Nonetheless, appellants did not bring their facilities into
compliance with the preliminary injunction or New Hampshire law,
nor did they take the tanks at those facilities out of service.
Instead, they attempted to sell the facilities, along with other
assets related to MSPP’s fuel distribution and convenience store
businesses, while continuing to operate them. On February 3 ,
2012, Facility 3 was sold to a third party, CMRK, Inc.
Aggrieved that appellants had not complied with either the
preliminary injunction or the Superior Court’s order of September
1 9 , 2011, DES moved the Superior Court for an assessment of
penalties against appellants. The Superior Court held a hearing
on DES’s motion on April 1 0 , 2012, at which DES and appellants
appeared and made offers of proof. Following the hearing, the
Superior Court found that appellants had not complied with its
previous orders or state environmental regulations. It therefore
“assesse[d] monetary penalties of $1,000 a day commencing October
4 , 2011 [ten business days after the contempt order] through
6 April 1 2 , 2012,” for a total of $192,000. It also awarded DES
attorney’s fees and costs in the amount of $2,219.70.
Appellants did not appeal the Superior Court’s order
assessing penalties against them, and DES promptly filed an
application in the Bankruptcy Court seeking an order allowing an
administrative expense claim in the amount of $194,219.70, see 11
U.S.C. § 503(b)(1)(A), to which appellants objected. After
hearing argument, the court made a preliminary ruling from the
bench, indicating that it would grant DES’s application because
the Superior Court awarded penalties for “a post-petition
violation of a post-petition order.” That oral ruling was
followed shortly thereafter by a written order granting the
application. This appeal followed.
III. Analysis
Section 503 of Chapter 11 of the Bankruptcy Code provides
that certain administrative expenses “shall be allowed” after
notice and a hearing. 11 U.S.C. § 503(b). Among these are “the
actual, necessary costs and expenses of preserving the estate.”
Id. § 503(b)(1)(A). The Bankruptcy Court relied on this
subsection of Section 503 in allowing DES’s claim. It did not
err in doing s o .
7 “As a general rule, a request for priority payment of an
administrative expense pursuant to [Section 503] 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.”
Cumberland Farms, 116 F.3d at 21 (quoting In re Hemingway
Transport, Inc., 954 F.2d 1 , 4-5 (1st Cir. 1992)). This rule,
however, does not govern all cases. The Court of Appeals has
recognized a special category of expense entitled to administrative priority status, based on considerations of fundamental fairness, consisting of amounts due entities 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.
Id. (quoting Hemingway Transport, 954 F.2d at 4-5) (internal
citations omitted). It is this “special category” upon which DES
relied in seeking allowance of an administrative expense before
the Bankruptcy Court, and upon which DES now relies on appeal.
While the briefing submitted in this case is extensive and
might, based solely upon its length, seem to warrant an equally
extensive analysis, that appearance is misleading. As discussed
at the outset, this case is governed by the Court of Appeals’
opinions in Charlesbank Laundry and Cumberland Farms, both of
8 which dealt with the “special category of expense” DES claims
here.
The question in Charlesbank Laundry was quite similar to
that presented here: “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. § 503(b)(1)(a) as
‘actual, necessary costs and expenses of preserving the estate.’”
755 F.2d at 201. In that case, a number of private citizens had
filed state-court actions seeking to enjoin a laundry “from
committing a private and public nuisance and from violating a
[local] zoning ordinance,” and obtained preliminary injunctive
relief to that effect. Id. After the laundry failed to comply
with the injunction, the plaintiffs sought further relief from
the state court, but before the court acted, the laundry filed a
Chapter 11 petition. After the Bankruptcy Court vacated the
automatic stay to allow the state actions to proceed, the state
court awarded the 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 1 1 , 1980 (the date [the laundry]
filed its petition for reorganization) and the balance of
$11,530.90 for services and disbursements after that date.” Id.
9 The plaintiffs then sought allowance of the postpetition
part of the fine, $11,530.90, as a priority claim. The
Bankruptcy Court denied that motion, but on appeal, the Court of
Appeals reversed. In so doing, the court relied on the Supreme
Court’s opinion in Reading C o . v . Brown, 391 U.S. 4 7 1 , 482
(1968), which held that “tort claims arising during an
arrangement are actual and necessary expenses of the
arrangement,” 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.” The Court of Appeals reasoned that “[t]he same
fairness principle” favored the plaintiffs, “whose premises,
lives, or businesses were adversely affected by [the laundry’s]
continuing conduct in violation of the temporary injunction.”
Charlesbank Laundry, 755 F.2d at 202. It noted, in fact, that
the case before it was “an even stronger one for priority than
was Reading,” which involved a negligence action, because the
debtor had “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.” Id. at
203 (emphasis in original). It continued: “If fairness dictates
that a tort claim based on negligence should be paid ahead of
pre-reorganization claims, then, a fortiori, an intentional act
10 which violates the law and damages others should be so treated.”
Id.
As DES notes, the facts in Charlesbank Laundry closely
parallel those of the present case: here, as there, the debtor
estate violated both a state law and a prepetition preliminary
injunction, the violations began prepetition and continued
postpetition, and a state court awarded monetary sanctions as a
result of the postpetition violations. It might be argued that
Charlesbank Laundry ’s rationale is limited to damages awarded
the victims of the debtor estate’s postpetition torts, and
therefore does not support prioritizing fines for the debtor’s
failure to comply with state environmental laws (indeed,
appellants suggested as much in their brief before the Bankruptcy
Court). The Charlesbank Laundry court itself observed, however,
that Reading had “some resilience . . . even beyond the field of
torts,” id., and in Cumberland Farms, the Court of Appeals picked
up where Charlesbank Laundry left off.
Not unlike appellants, the eponymous debtor in Cumberland
Farms operated a chain of convenience stores and gas stations
across the state of Florida; each of these facilities had at
least one underground petroleum storage tank. 116 F.3d at 1 8 .
State environmental laws imposed financial reporting requirements
on the owners of such tanks, and further provided for a civil
11 penalty of up to $10,000 per day for each violation of these
requirements. Id. The debtor failed to comply with those
requirements for an 18-month period commencing in February 1992–-
a period interrupted in May 1992 by the debtor’s filing of a
Chapter 11 petition. Id. The state Department of Environmental
Protection applied for, and the Bankruptcy Court awarded, an
administrative expense in the amount of $200,000, representing a
penalty for the postpetition violations. Id. On appeal, the
Court of Appeals, relying on Reading and Charlesbank Laundry,
affirmed. The court noted that “[t]he 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,” and that “it would be fundamentally
unfair to allow Cumberland Farms to flout Florida’s environmental
protection laws and escape paying a penalty for such behavior.”
Id. at 20-21.
The path of this case is therefore well-trodden. Following
Charlesbank Laundry and Cumberland Farms, fines and penalties for
a Chapter 11 debtor-in-possession’s postpetition violation of
state court orders and environmental laws are properly accorded
administrative priority under 11 U.S.C. § 503(b)(1)(A)–-even if
(as here) those violations began prepetition. Appellants wisely
12 do not disagree with this conclusion. See Reply B r . (document
n o . 17) at 8 .
Instead, in an attempt to escape this conclusion, appellants
recast the conduct for which the state court imposed sanctions as
a “failure to remedy an alleged prepetition violation of state
environmental law.”3 Aplts.’ B r . (document n o . 13) at 3 ; see
also id. at 35 (“The state law claim here [arises from] a
‘passive’ failure of the Appellants to correct a condition that
existed prepetition.”). Citing ample authority, they argue that
the costs of remediating prepetition environmental violations
cannot be given administrative priority (at least in the absence
of “an imminent and actual threat to public health and safety,”
which, they say, is not supported by the record–-an issue the
court need not reach). Aplts.’ B r . (document n o . 13) at 26-28;
cf., e.g., In re N.P. Mining Co., 963 F.2d 1449, 1458-59 (11th
3 Appellants also argue that the fines they incurred as a result of their postpetition violations of the injunction and New Hampshire law cannot be given administrative priority status because they were “not operating [their] business post-petition, but . . . merely maintaining the status quo pending abandonment or sale.” Aplts.’ B r . (document n o . 13) at 30 (emphasis in original); see also id. at 38 (“Unlike the Appellants, the debtor in Cumberland Farms did not have any intent to sell assets and was operating its business at full capacity.”). That theory was not argued in appellants’ brief before the Bankruptcy Court, and this court will not consider it now. See In re LaRoche, 969 F.2d 1299, 1305 (1st Cir. 1992) (appellate tribunal will not consider arguments not raised before the Bankruptcy Court).
13 Cir. 1992) (“[W]e exclude from consideration as an administrative
expense any penalty assessed postpetition for the failure of the
debtor in possession or the trustee to abate a prepetition
violation of the statute.”); In re Lazar, 207 B.R. 6 6 8 , 670 (C.D.
Cal. 1997) (“[W]here the fines and penalties arise solely from
the postpetition failure to remediate prepetition contamination,
the fines and penalties do not qualify for administrative expense
priority in any respect.”). This was also the gravamen of their
argument before the Bankruptcy Court, where they asserted that
“the NH DES’s claim is based on a pre-petition failure to remove
underground storage tanks as required by New Hampshire
environmental law.” Aplts.’ Appx. at 1569; see also id. at 1571
(“The basis of the penalties assessed against the Debtors in this
case is the mere failure to remove the tanks . . . . ” ) .
The court cannot credit appellants’ attempt to rewrite
history by characterizing their contumacious conduct as a failure
to remediate wholly prepetition violations. Contrary to
appellants’ arguments before both this court and the Bankruptcy
Court, the injunction that they violated did not require them to
“remove underground storage tanks.”4 Rather, that order required
4 In fact, the injunction did not require appellants to take any action with respect to underground storage tanks. Rather, it applied to appellants’ above-ground storage tanks. See Aplts.’ Appx. at 562-64. That, however, is ultimately beside the point.
14 them to bring their fuel storage tanks and associated piping into
compliance with New Hampshire law by constructing the spill
protection required by New Hampshire law, see N.H. Code. R. Env-
Wm 1402.21-.22, and having a professional engineer certify those
upgrades, see id. 1402.35, o r , alternatively, to take those tanks
out of service (not remove them), see id. 1402.12.
Appellants elected to do neither of those things, instead
keeping their tanks in service and out of compliance with New
Hampshire law, and, indeed, installing new tanks that were also
not in compliance with state law or the injunction, as the
Superior Court specifically found. See Aplts.’ Appx. at 1560-64.
While doing these things, they were affirmatively operating their
facilities in violation of state environmental law, not simply
passively failing to correct a previous violation. See id. at
1563-64 (“[Appellants’] responsibility is to comply with the
State regulations with respect to the operation of [their]
business. The Court finds, after review of the pleadings and
offers of proof, that the respondents are not in compliance with
the State regulations.”). As the Court of Appeals explained in
In re Boston Regional Medical Center, Inc., 291 F.3d 1 1 1 , 126
(1st Cir. 2002)--which appellants’ counsel contended at oral
argument was the “controlling authority” from this Circuit on
15 administrative expense priority5--the Charlesbank Laundry and
Cumberland Farms line of cases “attempted to avoid a situation in
which a bankruptcy estate may engage in activities regulated by
state law while avoiding the costs associated with that
regulation.” That is precisely the situation appellants urge on
the court here. Just as in Charlesbank Laundry, appellants
“deliberately continued a violation of law month after month
presumably because it was more lucrative for the business to
operate outside the [law] than within it.” 755 F.2d at 203
(emphasis omitted). It was their deliberate continuation of
their violation after filing for bankruptcy that the Superior
Court penalized, and those penalties are entitled to priority
under § 503(b)(1)(A).
Appellants also argue that the Bankruptcy Court erred by
relying on the Superior Court’s orders without holding an
independent evidentiary hearing to examine whether their
violations of state law occurred postpetition. By doing s o ,
appellants contend, the Bankruptcy Court in essence delegated to
the Superior Court its task of determining the priority of DES’s
5 This contention came as somewhat of a surprise to the court, given the relative infrequency with which Boston Regional was cited in appellants’ briefs.
16 claim under the Bankruptcy Code. This argument also does not
warrant reversing the Bankruptcy Court’s determination.
As an initial matter, this court, when sitting as an
appellate tribunal, will not consider arguments not presented to
the Bankruptcy Court, In re LaRoche, 969 F.2d at 1305, and
appellants did not argue in their brief to the Bankruptcy Court
that the Superior Court’s findings were insufficient to meet
DES’s burden or proving its claim, or that the Bankruptcy Court
should hold its own evidentiary hearing.6 Instead, their sole
argument, as already mentioned, was that the Superior Court
assessed sanctions for their failure to remediate prepetition
violations of New Hampshire law--an argument that, as just
discussed, was premised upon a misstatement of the Superior
Court’s order. Appellants did, in passing, assert at the hearing
on DES’s application to allow its claim that an evidentiary
hearing might be warranted. See Aplts.’ Appx. at 1637:4-:6
(“[I]f the State wants to come prove post-petition harm, they’ve
got to prove i t . We’d have to have an evidentiary hearing.”).
6 Appellants claim otherwise, asserting that their brief “argued the DES Application should be denied unless [DES] produced evidence of a post-petition violation and an imminent and identifiable harm.” Reply B r . (document n o . 17) at 5-6. That is incorrect. Neither the word “evidence” nor the assertion that the Superior Court’s order could not serve as competent proof of appellants’ post-petition violations appears anywhere in that brief. See generally Aplts.’ Appx. at 1568-72.
17 This passing reference, however, was not sufficient to preserve
this issue for appeal. “[A] party has a duty to incorporate all
relevant arguments in the papers that directly address a pending
motion,” and failure to do so waives any arguments not so raised.
Rocafort v . IBM Corp., 334 F.3d 115, 121-22 (1st Cir. 2003)
(internal quotation marks omitted); c f . United States v . Gertner,
65 F.3d 963, 969-70 (1st Cir. 1995) (“[W]e regularly turn a deaf
ear to protests that an evidentiary hearing should have been
convened but was not, where, as here, the protestor did not
seasonably request such a hearing in the lower court.”).
Appellants’ argument is unpersuasive in any event. By
taking notice of the Superior Court’s order and attendant factual
findings, the Bankruptcy Court was not delegating the task of
determining priority under the Bankruptcy Code to the Superior
Court. It reserved the ultimate determination of priority to
itself, applying the controlling precedents in this Circuit. It
may have deferred to the Superior Court’s findings of when and
what violations occurred, but that was not improper (nor was it
different in kind from the approach in Charlesbank Laundry).
Those findings were made in a prior judicial proceeding involving
the selfsame parties before the Bankruptcy Court. “The ordinary
rules of collateral estoppel and res judicata apply in most
actions in the bankruptcy court,” In re Spigel, 260 F.3d 2 7 , 33
18 (1st Cir. 2001), and the Superior Court’s contempt orders amount
to “final judgment[s] on the merits” for those purposes, Dillon
v . Select Portfolio Servicing, Inc., 2009 DNH 0 1 2 , 20 n.13.
Indeed, the Court of Appeals has specifically cautioned against
“relitigating state enforcement actions,” remarking that “[t]he
game is not worth the candle.” In re Spookyworld, Inc., 346 F.3d
1 , 10 (1st Cir. 2003). So too here.
IV. Conclusion
For the reasons set forth above, the order of the Bankruptcy
Court is AFFIRMED. The clerk shall enter judgment accordingly
and close the case.
SO ORDERED.
/ ___-____—
— spla—— Joseph N . Laplante United States District Judge
Dated: March 2 5 , 2013
cc: Jennifer Rood, Esq. Jessica A . Lewis, Esq. Robert J. Keach, Esq. Daniel W . Sklar, Esq. Holly J. Kilibarda, Esq. Peter C.L. Roth, Esq. Geraldine L . Karonis, Esq.