In re Wall Tube and Metal Products Co.

No. CIV-2-86-99 (E.D. Tenn. August 12, 1986)

The court holds that hazardous waste cleanup response costs incurred by Tennessee that would be recoverable from the debtor under the Comprehensive Environmental Response, Compensation, and Liability Act are not entitled to administrative expense priority in voluntary bankruptcy proceedings under the Bankruptcy Code. The court agrees with the bankruptcy court, 16 ELR 20547, that the state's inspection and identification expenses were not the actual and necessary costs and expenses of preserving the estate as required by 11 U.S.C. § 503(b)(1)(A) for treatment as administrative expenses. The court disagrees with In re T.P. Long Chemical, Inc., 15 ELR 20635, which held that response costs incurred by the Environmental Protection Agency were entitled to priority, concluding that the bankruptcy court in that case inadequately addressed the language and purpose of § 503. The Supreme Court's decision in Midlantic National Bank v. New Jersey Department of Environmental Protection, 16 ELR 20278, also does not compel a decision in favor of the state. Although Midlantic involved related issues, the Court specifically excluded the question of whether the state's hazardous waste response expenditures should be accorded priority as administrative expenses. The court rejects the state's argument that Midlantic dictates that 28 U.S.C. § 959(b) be construed to mean that a liquidating trustee must assume the same duties and responsibilities under state environmental laws as any property owner. Although § 959(b) requires that the trustee manage the property in accordance with state law, § 959(a) indicates that the provision is addressed to trustees carrying on business connected with the property. Moreover, language in the Midlantic decision suggests that the Supreme Court did not find § 959 applicable at all to the liquidating trustee, but cited it in support of its interpretation of congressional intent concerning abandonment under the Bankruptcy Code.

Counsel for State of Tennessee
W. J. Michael Cody, Attorney General; Michael D. Pearigen, Ass't Attorney General
450 James Robertson Pkwy., Nashville TN 37219
(615) 741-6474

Counsel for Trustee
Ferdinand Powell Jr.
115 E. Unaka Ave., Johnson City TN 37605
(615) 926-0716

Counsel for Debtor
Robert M. Child
Child, O'Connor & Petty
15th Fl., Third Nat'l Bk. Bldg., Knoxville TN 37901
(615) 525-7115

[17 ELR 20284]

Holl, J.:

Memorandum and Order

This is an appeal by the State of Tennessee (State) from a final decision of the Bankruptcy Court for this District. The issue presented in this appeal is whether environmental response costs incurred by the State in connection with the protection of the public health and safety from hazardous wastes, and which would be recoverable by the State from the debtor under the Comprehensive Environmental Response Act of 1980 (CERCLA), 42 U.S.C. § 9607(a), are entitled to administrative expense priority in Chapter VII bankruptcy proceedings. In a thorough and well-reasoned opinion Judge Bare, of the Bankruptcy Court, denied the State administrative expense priority for these costs. In re Wall Tube & Metal Products Co., Inc., 56 B.R. 918 [16 ELR 20547] (Bkrptcy. E.D. Tenn. 1986). For the reasons that follow, the decision of the Bankruptcy Court is hereby AFFIRMED.

The debtor corporation was in the business of miscellaneous metal fabrications at a location in Newport, Tennessee. The premises on which it conducted its manufacturing operations were leased for a period of twenty years from a local corporation. The debtor's manufacturing operations generated several hazardous wastes which were drummed and stored on the premises. In October 1983 the debtor ceased operations. On December 8, 1983, an inspector for the Tennessee Department of Health and Environment (TDHE) visited the premises, noted the possibility of escape of some hazardous substances, and recommended that certain actions be taken to avoid such escape. On February 22, 1984 the debtor filed a voluntary petition in bankruptcy. On June 11, 1984 TDHE, apparently suspecting that there may be some hazardous waste problems at the manufacturing site, had its hazardous waste removal contractor inspect the facility and prepare an emergency cleanup proposal in the event that it was determined to present an imminent and substantial danger to the public. On June 15, 1984 the TDHE inspector, [17 ELR 20285] representatives of the removal contractor and the president of the corporation owning the premises conducted an inspection which revealed evidence of dumping or spilling and leaking of several hazardous substances both inside and outside the buildings on the property.

On July 23, 1984 the trustee gave notice, pursuant to Bankruptcy Rule 6007, of intent to convey property of the debtor to its lessor in exchange for the release by the lessor of the debtor's liability under the lease. This agreement was approved after no objection was made. Pursuant to this agreement, the lessor also assumed responsibility for the removal and clean up of two large tanks believed to contain hazardous chemicals.

On November 9, 1984 TDHE authorized its contractor to document the existence of hazardous materials on the premises. The contractor submitted its reports to TDHE in January, February, and April of 1985. Even though the debtor had relinquished its leasehold and transferred the permanently affixed equipment to the lessor, (as well as the two large tanks of hazardous chemicals) almost all of the inspection and identification expense¹ of the State related to property which remained part of the debtor's estate.² (e.g., the numerous drums on the premises in which hazardous wastes were stored.). See, In re Wall Tube and Metal Products Co., supra, at 924. It is the response costs associated with property of the estate with which we are concerned on appeal.

The debtor does not dispute its liability under 42 U.S.C. § 9607(a)³ for the expenditures made by the State in this case, but asserts that the State's claim should be treated as a general unsecured claim rather than an administrative expense. 11 U.S.C. § 503(b)(1)(A) states that administrative expenses to be allowed include "the actual, necessary costs and expenses of preserving the estate. . . ." As Judge Bare aptly stated, "The question is whether the particular expenses claimed in this proceeding come within the language and purpose of the current statute." In re Wall Tube, supra, at 927.

The language of the statute is relatively clear, especially when viewed in the context of the bankruptcy law as a whole and the specific purpose for prioritizing these expenses. "Congress granted priority to administrative expenses in order to facilitate the efforts of the trustee or debtor in possession to rehabilitate the business," or in a liquidation, to expeditiously administer the estate for the benefit of all the estate's creditors. Trustees of Amalgamated Insurance Fund v. McFarlin's, Inc., __ F.2d __ (2d Cir. April 10, 1986). Such expenses inure to the benefit of pre-petition creditors. This priority must be narrowly construed so that as much of a debtor's limited resources as possible will be equally distributed among his creditors. Joint Industry Board v. U.S., 391 U.S. 224 (1968). Like the court below, this Court cannot understand how the State's expenditures may be said to fall within the definition of "actual, necessary costs and expenses of preserving the estate." The estate has received no benefit from these expenditures, and, if forced to accord the State priority, will be seriously depleted to the detriment not only of the remaining unsecured creditors, but also of those with true administrative claims.

A different result was reached in the In re T.P. Long Chemical, Inc., 45 B.R. 278 [15 ELR 20635] (Bkrptcy. N.D. Ohio 1985) decision. After discussing the fact that the estate could not avoid liability under CERCLA for the cleanup of several drums containing hazardous wastes, the court stated that "[s]ince the estate cannot avoid the liability imposed by CERCLA, it follows that the cost incurred by the E.P.A. in discharging this liability is an actual necessary cost of preserving the estate entitled to administrative expense priority." Id. at 286. The only further explanation of how the liability conformed to the statutory administrative expense requirements was that, "The necessity of the expense cannot be questioned since the removal of the wastes was an obligation of the estate under CERCLA." Id. at 287. This Court finds such pronouncements unpersuasive. The estate has many obligations when bankruptcy proceedings are initiated, Congress has only provided that the obligations incurred in continuing the debtor's business, or administering the debtor's estate, for the benefit of the pre-petition creditors are entitled to priority as administrative expenses. The Court in the Long decision paid little attention to the language and purpose of § 503, and ostensibly created an exception to the administrative expense requirements based upon public policy considerations gleaned from another congressional enactment.

The State relies heavily on one other case which was decided by the Supreme Court after the decision of the Bankruptcy Court in thiscase: Midlantic National Bank v. New Jersey Dept. of Environmental Protection, 54 U.S.L.W. 4138 [16 ELR 20278] (Jan. 27, 1986). The Midlantic case involves related issues, but in that case the Court specifically excluded the question of whether the State's hazardous waste response expenditures should be accorded priority as administrative expense. Id. at 4139, fn.2. Nevertheless, the State urges that in light of the Midlantic decision, 28 U.S.C. § 959(b) must be construed as requiring a liquidating trustee to assume the same duties and responsibilities under State environmental laws as any owner of property. This being so, it would follow that State environmental response costs would constitute "necessary" expenses within the meaning of the statute since the trustee would be required by state law to pay them. The Court below discussed § 959(b) at length and articulately pointed out its inapplicability in liquidation proceedings. Section 959(b) requires that the trustee "manage and operate the property in his possession . . . according to the requirements of the valid laws of the State in which the property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof." Reading the statute in its entirety, however, reveals that it is addressed to trustees "carrying on business connected with such property." 28 U.S.C. § 959(a). This Court finds itself in agreement with the Bankruptcy Court that "§ 959 was directed at permitting actions against the trustee or debtor in possession for acts in connection with the operation of the debtor's business." (footnote omitted). In re Wall Tube, supra, at 926. Thus, the State expenditures in this context cannot be bootstrapped into the requirements of § 503(b) administrative expenses by application of § 959(b).

The State reads too much into the Midlantic decision. That case was also a Chapter VII liquidation proceeding; and, in holding that a trustee may not abandon property in contravention of a state law reasonably designed to protect the public health and safety from identified hazards, the Court stated that "28 U.S.C. § 959(b) provides additional evidence that Congress did not intend for the Bankruptcy Code to preempt all state law." (emphasis added) Id. at 4141. Further in its discussion, the Court states that "[e]ven though § 959(b) does not directly apply to an abandonment under § 554(a) of the Bankruptcy Code — and therefore does not delimit the precise conditions of an abandonment — the section nevertheless supports our conclusion that Congress did not intend for the Bankruptcy Code to preempt all state laws that otherwise constrain the exercise of a trustee's powers." (emphasis added) Id. It seems clear to this Court that the Supreme Court never found § 959 applicable to the liquidating trustee, but rather, cited it as "additional evidence" for their interpretation of Congressional intent in that case. In seeking to assure that the Court's interpretation of § 959 is not misread, the dissent points out that the statute is applicable only in the situation of the continued operation of a facility. Id. at 4144.

Accordingly, this Court finds that the Bankruptcy Court did not misread the reach of § 959(b) in deciding that it does not impose, as "necessary" costs of the estate, the State's expenditures in response to a hazardous waste site in the context of a Chapter VII liquidation proceeding.

Since the State's claim cannot be rendered "necessary" by application of § 959(b) to the liquidating trustee, and since the claim does not otherwise comport with the language and purpose of § 503, the Court finds that the State's claim should not be accorded priority as an administrative expense. If an exception is to be carved out [17 ELR 20286] of the statutory scheme for government environmental protection expenditures, it is up to the Congress to do so.⁴

Judgment in a Civil Case

IT IS ORDERED AND ADJUDGED that for the reasons in the Memorandum and Order of this date, the decision of the Bankruptcy Court is affirmed and this case is closed.

1. No removal expense has been incurred by the State because the owner of the property has undertaken a complete clean-up of the site.

2. The State seeks to recover on appeal only for the response costs associated with the property not transferred out of the estate. These expenditures amount to $23,670.21. In the Bankruptcy Court the State claimed $23,866.90, which included costs attributable to examination of the two large tanks transferred to the lessor. For discussion of the inapplicability of the expenses associated with property transferred out of the estate to a solvent entity, see, In re Wall Tube, supra, at 922-924.

3. 42 U.S.C. § 9607(a) provides in pertinent part as follows:

Any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of . . . from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance, shall be liable for — all costs of removal or remedial action incurred by . . . a State not inconsistent with the national contingency plan. . . .

It thus appears that both the debtor and its lessor, the owner of the site, would be liable for the State's claim.

4. The states themselves may legislatively better their positions in proceedings such as this. See, Ohio v. Kovacs, 83 L. Ed. 2d 649, 660 [15 ELR 20121] (O'Connor, J., concurring) (1985).