In re Dant & Russell, Inc.

No. 382-03742 (Bankr. D. Or. December 3, 1985)

The court holds that a lessor may not claim administrative priority for the costs of cleaning up a bankrupt lessee's hazardous waste site. The court first holds that a lease signed after the debtor filed for Chapter 11 bankruptcy is avoidable as an unauthorized postpetition transaction. A debtor may not take action that causes a prepetition obligation to become a postpetition administrative expense without notice to the creditors and a hearing. The lease was not an ordinary course-of-business transaction and would not have been approved by the creditors. The lessor's right to compel cleanup is merely a claim against the debtor, and nothing in the Bankruptcy Code gives it special priority. Neither may the court grant the claim priority as a matter of public policy. The court notes that this case may be distinguished from those involving abandonment or claims by a government for costs of cleaning up postfiling spills. The court reserves judgment on the priority of any claims for damage resulting from the debtor's postpetition operations.

Counsel for Debtor
Richard C. Josephson
Stoel, Rives, Boley, Fraser & Wyse
900 SW 5th Ave., Portland OR 97204-1268
(503) 224-3380

Counsel for Creditor Committee
Kevin D. Padrick
Stoel, Rives, Boley, Fraser & Wyse
900 SW 5th Ave., Portland OR 97204-1268
(503) 224-3380

[16 ELR 20191]

Sullivan, J.:

Findings of Fact and Conclusions of Law Denying Priority Status to Claim of Burlington Northern (#151)

Burlington Northern Railroad Company ("Burlington") filed a claim asserting administrative priority for the potential cost of cleaning up toxic waste deposited by the debtor on land Burlington leased to the debtor prior to and during the chapter 11 proceeding. The debtor moved for permission to reject both the lease in effect at the time of filing chapter 11 and a subsequent lease signed by the debtor's chief executive; objected to the priority status of the claim; and asked the Court to estimate the claim. By agreement, the Court deferred the estimation of Burlington's claim and tried the other issues.

Burlington is not entitled to administrative priority for the potential cost of removing toxic waste deposited by the debtor and its predecessors in interest on the Vadis and North Plains sites prior to filing chapter 11, under either the lease executed on March 1, 1983 or the earlier lease in effect at the time of filing.

Specifically, the March 1, 1983 lease is avoidable under 11 U.S.C. § 549(a) as a post-petition transaction unauthorized either by the Court or under the Bankruptcy Code. The debtor-in-possession may not lease property other than in the ordinary course of business and may not assume a pre-petition, unsecured obligation as an administrative expense without notice to creditors and a hearing. 11 U.S.C. § 363(b). Otte v. Manufacturers Hanover Commercial Corp. (In re Texlon), 596 F.2d 1092, 1097-98 (2d Cir. 1979). The parties, who estimate the potential cleanup costs in the millions, [16 ELR 20192] agree that the debtor's conduct giving rise to the cleanup liability occurred for the most part before filing chapter 11. The damages, if allowed administrative priority, may be large enough to make confirmation of a plan legally impossible under 11 U.S.C. § 1129(a)(9) without Burlington's consent. Under the evidence, neither party intended this result at the time.

The execution of a lease which Burlington now argues upgraded enormous pre-petition debt to a post-petition priority administrative liability is not an ordinary course of business transaction which the Bankruptcy Code permits without notice and hearing. Had Burlington sought Court approval of either the holdover tenancy or the new lease for the purpose of claims advancement, it would not have been granted after notice and hearing and should not be granted now on a retroactive basis. Consequently, after filing, the debtor occupied the land as a tenant at sufferance and not pursuant to the old lease or pursuant to the avoidable March 1, 1983 lease.

This case is governed by the ruling in Southern Railway Co. v. Johnson Bronze Co. (In re Johnson Bronze Co.), 758 F.2d 137 (3d Cir. 1985). Burlington's pre-filing right to compel the debtor to restore the leased premises is no more than a claim in the chapter 11 proceeding. Ohio v. Kovacs, U.S. , 105 S. Ct. 705, 83 L. Ed. 2d 649 (1985). The debtors' liability for damage to Burlington arose prior to chapter 11 and there is nothing in the Bankruptcy Code which grants priority for such a claim. It is pure sophism and offensive to the rights of other unsecured creditors to use either the unapproved March 1, 1985 lease or the debtors' post-filing occupancy under the earlier lease to transform the claim into an administrative claim.

Burlington and counsel for the United States suggested that this Court create a special administrative priority treatment for this type of claim based on "public policy." This suggestion must be rejected. First, priorities are statutory. Designation of priorities is the province of Congress, and courts are not free to fashion their own super- or sub-priorities. See 3 Collier on Bankruptcy 507-17 (15th ed. 1979 & Supp. 1985) and cases there cited. Secondly, to maintain the integrity and uniformity of the bankruptcy system, historically priority statutes have been strictly construed. Thirdly, public policy arguments are not peculiar to cases of environmental damage but can also be made to support priority for other cases of delayed damages. Matter of Cott Corp., 47 B.R. 487, 491 (Bankr. D. Conn. 1984). Lastly, even if the above were not true, whatever discretion might remain under 11 U.S.C. § 549(a)(2)(B) to now approve either lease as a means of granting priority should be weighed against the danger of allowing statutory priorities set forth in the Code and carried into chapter 11 by 11 U.S.C. § 1129(a)(9) to be swallowed by Court created administrative prioritties. Any discretion allowable under sections 363, 365, 549(a) or other statutes to approve post-filing transactions in order to elevate pre-petition tort debt to administrative priority outside of a plan should not be exercised unless reasonably beneficial to all creditors in light of the existing statutory priorities. In short, the public policy arguments put forth by Burlington and the government, while worthy of consideration in this case, should be addressed to Congress.

To the extent that In re Quanta Resources Corp., 739 F.2d 927 [14 ELR 20563] (3d Cir. 1984), cert. granted sub nom. O'Neil v. City of New York, 105 S. Ct. 1168, 84 L. Ed. 2d 319 (1985) suggests a different result, it is distinguishable. As pointed out in Johnson Bronze, supra, priority was not an issue in Quanta. In addition, unlike the Quanta case, here the debtor-in-possession qua trustee has not petitioned to abandon the property to a bankrupt corporate debtor thereby passing the ultimate cost of cleanup onto the public fisc. Similarly, In re T.P. Long Chemical, Inc., 45 B.R. 278 (Bankr. N.D. Ohio 1985) is distinguishable because that case, unlike the present case, involved a direct claim by regulatory authorities for the cost of cleaning up a post-filing spill of a hazardous substance.

For the foregoing reasons, Burlington's claim should be denied administrative priority and the March 1, 1983 lease ordered avoided. Further proceedings shall be held to fix Burlington's general claim and to determine if Burlington should be allowed a priority claim for damage resulting from the debtor's post-filing operation. In this regard, the priority and taxation of the costs of a cleanup study is reserved based on the parties' representations at the November 26, 1985 hearing that a comprehensive study, including all land affected, is underway.

Order Avoiding Burlington Northern Lease of March 1, 1983, Denying Priority to Claim #151

Based upon separate findings,

IT IS ORDERED that:

(1) The lease of March 1, 1983 between Burlington Northern Railroad Company and the debtor is hereby avoided.

(2) Claim No. 151 shall be allowed as a general claim but denied administrative priority for damages in restoring leased land to the condition required by law on the day of filing chapter 11.

(3) A further conference shall be held on January 6, 1986 at 3:00 p.m. for the purpose of resolving the issues remaining under the findings entered in this matter.