Cumberland Farms v. Florida Department ( 1997 )

United States Court of Appeals
For the First Circuit
For the First Circuit
No. 96-2371
CUMBERLAND FARMS, INC.,
Appellant,
v.
FLORIDA DEPARTMENT OF ENVIRONMENTAL PROTECTION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Torruella, Chief Circuit Judge,
Bownes, Senior Circuit Judge,
and Stahl, Circuit Judge.
Barbara D. Gilmore with whom Sullivan & Worcester LLP and Mark G.
Howard were on brief for appellant.
Jonathan H. Alden, Assistant General Counsel, Florida Department
of Environmental Protection for appellee.
June 19, 1997
BOWNES, Senior Circuit Judge. This is an appeal
BOWNES, Senior Circuit Judge.
from the judgment of the district court affirming the summary
judgment of the bankruptcy court imposing a fine against
debtor-appellant Cumberland Farms, Inc., for failure to
follow Florida laws and regulations covering the maintenance
of petroleum underground storage tanks (USTs). Cumberland
was a debtor-in-possession in a Chapter 11 reorganization
proceeding. The district court also affirmed the ruling of
the bankruptcy court that the fine be given administrative
expense priority status. Cumberland appeals the
imposition of the fine, the amount of the fine, and its
designation as a priority administrative expense. The
appellee is the Florida Department of Environmental
Protection (FDEP). It is the regulatory agency in charge of
administering certain Florida environmental statutes
including the maintenance of USTs for petroleum and petroleum
products.
Standard of Review
Standard of Review
Our review, as was that of the district court, is
de novo. In re Varrasso, 37 F.3d 760, 762-63 (1st Cir.
1994). Federal Rule of Bankruptcy 7056, governing summary
judgment in the bankruptcy court incorporates Rule 56 of the
Federal Rules of Civil Procedure.1
1. Fed. R. Civ. P. 56(c) provides that summary judgment
"shall be rendered forthwith if the pleadings, depositions,
answers to interrogatories, and admissions on file, together
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Cumberland does not claim that summary judgment was
inappropriate. Its brief attacks the findings and rulings of
the district and bankruptcy courts. The relief sought is not
a new hearing but summary judgment in its favor. We affirm
the judgment of the district court.
The Facts
The Facts
Cumberland owned and operated a network of
approximately 134 combined convenience stores and gasoline
stations in Florida. Each store-station had one or more
USTs. There was an average of three tanks per location. On
May 1, 1992, Cumberland filed a voluntary petition in
bankruptcy under Chapter 11 of the Bankruptcy Code.
Under ch. 376.309 of the Florida Statutes, each
owner of a UST location must "establish and maintain evidence
of financial responsibility." Rule 62-761.480 of Florida's
Administrative Code requires that an owner of a UST site
shall demonstrate "the ability to pay for faulty cleanup and
third party liability resulting from a discharge at the
facility" in accord with the Code of Federal Regulations
(C.F.R.), Title 40, Part 280, Subpart H. This C.F.R. allows
a UST owner to establish financial responsibility by
obtaining insurance or satisfying a self-insurance standard.
with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." It is axiomatic
that the materials must be considered in the light most
favorable to the non-moving party.
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To meet the self-insurance requirements, documents must be
filed within 120 days of the end of the fiscal year of the
UST owner. Satisfaction of financial responsibility is a
prerequisite for enrollment in the Florida Petroleum
Liability and Restoration Insurance Program (PLIRP). Fla.
Stat. ch. 376.3072 (1996).
Cumberland operated its UST sites from February 1,
1992 through August 27, 1993 without meeting the financial
reporting requirements of Florida laws and pertinent
regulations. Effective August 27, 1993, Cumberland obtained
insurance to satisfy Florida's financial responsibility
requirements. Cumberland was, therefore, in violation of
Florida's financial responsibility law and regulations during
the bankruptcy period of May 1, 1992 to August 27, 1993.
Florida law also incorporates 40 C.F.R. 280.110(a)
into its UST regulatory regimen. Section 280.110(a) mandates
that a UST owner notify the regulatory agency within ten days
of the filing of a voluntary or involuntary Chapter 11
proceeding. Cumberland failed to notify the FDEP within the
ten-day period of its Chapter 11 filing.
Florida law provides for the imposition of a civil
penalty of up to $10,000 per offense for each day of
violation for each violation of Florida laws and FDEP
regulations. Fla. Stat. ch. 403.161 and 403.141 (1995).
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The FDEP brought an application on September 1,
1993 in the bankruptcy court for an Allowance of an
Administrative Expense Claim in the amount of $200,000 for
the bankruptcy period of May 2 to August 27, 1993. This was
the civil penalty that FDEP asked the bankruptcy court to
impose on Cumberland. The FDEP moved for summary judgment on
its application. A hearing was held on the motion for
summary judgment on May 23, 1996. The bankruptcy court
granted the FDEP's motion for summary judgment, imposed a
penalty of $200,000 and ruled that the claim would be given
priority as an administrative expense. Cumberland appealed
to the district court, which affirmed the bankruptcy court.
The case is now before us on Cumberland's appeal from the
district court.
Cumberland makes three arguments on appeal. We
treat them seriatim, quoting them as stated in Cumberland's
brief.
I. THE BANKRUPTCY COURT WRONGLY
CONCLUDED CUMBERLAND WAS NOT IN
COMPLIANCE WITH PLIRP DURING THE DISPUTED
PERIOD.
As part of this argument Cumberland maintains that
it was in "substantial compliance" with PLIRP. It also
asserts that its failure to file an affidavit of financial
responsibility "should be deemed waived."
There can be no doubt that Florida law gives the
FDEP the authority to establish rules and regulate the
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operations of USTs in Florida. Fla. Stat. ch. 376.303
(1995). Under chapter 403.141 and .161 of the Florida
Statutes, failure to comply with any rule, regulation, order,
or permit issued by the FDEP is a violation of the law.
Cumberland does not deny that it failed to file the requisite
financial responsibility information when due. It argues
that on February 1, 1992, which was pre-bankruptcy, the law
making a UST owner eligible for enrollment in PLIRP required
only "substantial compliance." Cumberland asserts that it
was in substantial compliance.
We agree with the district court that enrollment in
the PLIRP during the disputed period is not an issue. We
note, as did the district court, that the bankruptcy court
made no findings as to Cumberland's eligibility under PLIRP.
The FDEP brought its claim for penalties under the statutory
and regulatory provisions of Florida law. The PLIRP is not
implicated. Violation of the PLIRP results only in exclusion
from the insurance program, not in regulatory penalties. The
bankruptcy court, therefore, was not the proper forum to
determine Cumberland's PLIRP status.
We find no basis for holding that Cumberland's
failure to file an affidavit of financial responsibility
should be deemed waived. Cumberland's argument seems to be
that the gravamen of the financial responsibility test is
that the owner or operator of a UST facility have a net worth
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of $10 million; that Cumberland at all times had a net worth
of at least $10.2 million and that, therefore, the filing of
the financial reports should be "deemed waived." We
disagree. The gravamen of the offense is not the net worth
of the UST owner, but the timely filing by such owner of the
required financial reports. Cumberland failed to do so
despite its knowledge of the legal requirements. And such
failure cannot be excused or condoned on the basis of an
affidavit filed by a corporate official (Arthur C.G.K.
Koumantzelis) on February 15, 1994, which itself fails to
meet the reporting requirements.
II. UNDER THE GRACE PERIOD FOR FILING
FINANCIAL RESPONSIBILITY AFFIDAVITS, THE
DEP COULD NOT DENY CUMBERLAND COVERAGE
UNDER PLIRP UNTIL AFTER CUMBERLAND FILED
ITS BANKRUPTCY PETITION.
This is a variation of the PLIRP eligibility
argument already made and answered. We reject it for the
same reasons.
III. EVEN IF CUMBERLAND WAS NOT ENROLLED
IN PLIRP DURING THE DISPUTED PERIOD, THE
BANKRUPTCY COURT ABUSED ITS DISCRETION IN
GIVING AN AWARD OF PUNITIVE DAMAGES AS AN
ADMINISTRATIVE EXPENSE CLAIM.
Cumberland first argues that the FDEP lacks
authority to impose civil penalties. The short answer to
this contention is that the FDEP did not impose the penalty,
the bankruptcy court did. Under Florida law the penalty must
be judicially imposed. Cumberland argues that the DEP never
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sought to impose such penalties in any Florida court. This
ignores two things: There is no Florida requirement that the
penalty sought be imposed by a Florida state court, and the
bankruptcy court was the proper forum for the DEP to seek
imposition of the penalty sought.
It is by now abundantly clear that in state-
regulated areas such as protection of the environment, a
bankruptcy court must comply with the laws of the state
involved. In re Virginia Builders, Inc., 153 B.R. 729, 735
(E.D. Va. 1993). Debtors in possession, such as Cumberland,
do not have carte blanche to ignore state and local laws
protecting the environment against pollution. Midlantic
Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S.
494, 505 (1986).
Cumberland next challenges the amount of the
penalty. The assessment of the sum of $200,000 by the
bankruptcy court is a finding of fact reviewed against the
clearly erroneous test. We note first that the $200,000
penalty is considerably less than the maximum of $647 million
that could have been assessed. Cumberland's failure to file
was either willful or grossly negligent. It has never
submitted the documents required under Florida law.
Moreover, Cumberland did not notify the FDEP, as was
required, that it had filed a voluntary petition under
Chapter 11 of the bankruptcy code. We have read the record
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carefully and can find no compelling basis for reducing the
$200,000 penalty.
The final issue is whether the bankruptcy court
erred in giving the fine administrative expense status.
Both the district and bankruptcy courts found In re
Charlesbank Laundry, Inc., 755 F.2d 200, 203 (1st Cir. 1985)
controlling. Before we discuss Charlesbank, however, we must
first examine Reading Co. v. Brown, 391 U.S. 471 (1968)
because Reading was themainstay of the opinion inCharlesbank.
In Reading the negligence of a receiver conducting
debtor's business under Chapter 11 of the Bankruptcy Act
resulted in a fire that totally destroyed a building that was
debtor's only significant asset. The fire spread to
adjoining premises and destroyed real and personal property
belonging to petitioner Reading. Id. at 473. The issue as
stated by the Court was, "whether the negligence of a
receiver administering an estate under a Chapter XI
arrangement gives rise to an 'actual and necessary cost' of
operating the debtor's business." Id. at 476. In rejecting
the position of the trustee that no negligence claims should
receive priority, the Court stated:
In our view the trustee has overlooked
one important, and here decisive,
statutory objective: fairness to all
persons having claims against an
insolvent. Petitioner suffered grave
financial injury from what is here agreed
to have been the negligence of the
receiver and a workman.
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Id. at 477. The Court also stated,
Although there appear to be no cases
dealing with tort claims arising during
Chapter XI proceedings, decisions in
analogous cases suggest that "actual and
necessary costs" should include costs
ordinarily incident to operation of a
business, and not be limited to costs
without which rehabilitation would be
impossible.
Id. at 483.
We think this last observation is pertinent to the
case at bar. The 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.
The question in Charlesbank Laundry was "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 . . . ." 755 F.2d at 201. A state preliminary
injunction had been issued against Charlesbank Laundry
prohibiting it from committing a public and private nuisance
and from violating a zoning ordinance. The laundry continued
its past practices undeterred. Shortly before a hearing on
the merits Charlesbank Laundry filed a Chapter 11 petition in
bankruptcy. The state court actions were ultimately settled.
Charlesbank was ordered to pay a compensatory fine assessed
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civilly for violation of the temporary injunction.
Plaintiffs sought allowance of the amount incurred after the
bankruptcy filing ($11,000) as a priority claim. The
bankruptcy court rejected the priority claim and the district
court affirmed.
With Reading as the lodestone, we reversed,
stating: "We see no reason why the claim of plaintiffs in
this case does not fall within both the letter and the spirit
of Reading." 755 F.2d at 202. We think the last paragraph
of Charlesbank Laundry is pertinent to the $200,000 penalty
imposed in the case before us:
We now touch briefly on what might
be considered an alternative ground for
the district court's holding--the
ordinary presumption against the awarding
of attorney's fees. We think the court
misperceived the nature of the award.
Counsel fees were not added on to damages
under any notion of automatic entitlement
flowing from the nature of the action
brought. They were, instead, the measure
of the compensatory fine awarded to
plaintiff. Such a measure had been
agreed upon by the parties, the amount
thereof being left to the informed
discretion of the judge. Clearly, had
the judge simply set the amount of the
fine without revealing how he arrived at
it, there would be no basis for
challenging it here. We thus see no
justifiable reason for not recognizing
the award here as an administrative
expense deserving of first priority
treatment.
755 F.2d at 203. This means, at the least, that a penalty
can be given priority status.
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In In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st
Cir. 1976), we noted that priority status could be given to
claims of creditors "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." We cited to Reading as authority
for this statement. In In re Hemingway Transport, Inc., 954
F.2d 1 (1st Cir. 1992), we made a general survey of First
Circuit law on priority claims. We first noted that, "The
traditional presumption favoring ratable distribution among
all holders of unsecured claims counsels strict construction
of the Bankruptcy Code provisions governing requests for
priority payment of administrative expenses." Id. at 4-5.
We then stated:
As a general rule, a request for
priority payment of an administrative
expense pursuant to Bankruptcy Code
503(a) 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.
Id. This was followed by the observation:
We have recognized a special
category of expense entitled to
administrative priority status, based on
considerations of fundamental fairness,
see Reading Co., 391 U.S. at 477, 88
S.Ct. at 1763, consisting of amounts due
entities "injured by the debtor-in-
possession's operation of the business
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even though their claims did not arise
from transactions that were necessary to
preserve or rehabilitate the estate." In
re Mammoth Mart, 536 F.2d at 954.
Id. We then analyzed Reading and Charlesbank Laundry. We
held that the "request for allowance of an administrative
expense priority is not within the ambit of either Reading or
Charlesbank . . . ." Id. at 6. We ended this section of the
opinion stating: "We are aware of no authority that the
Reading-Charlesbank exception encompasses a right to payment
originating in a prepetition contract with the debtor." Id.
at 7 (footnote omitted).
We hold that the present case does come within the
ambit of Reading and Charlesbank. This was a postpetition
claim incurred during the operation of Cumberland Farms'
business while it was operating under Chapter 11. We think
it would be fundamentally unfair to allow Cumberland Farms to
flout Florida's environmental protection laws and escape
paying a penalty for such behavior.
The judgment of the district court is affirmed.
affirmed
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