ELR Citation: ELR 20719
No(s). s. 91-1389, -1437 (1st Cir. Jan 16, 1992)

The court holds that the pre-petition owner and lessor of property, which was sold to the wholly owned subsidiary of the lessee who is now a Chapter 7 debtor in bankruptcy, is not entitled to administrative expense priority for attorney fees incurred in resisting the bankruptcy trustee's post-petition third-party action for contribution under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The lease between the owner and the parent corporation contained an indemnification clause whereby the corporation agreed to hold the owner harmless for all attorney fees incurred by the owner as a consequence of the corporation's occupation and possession of the property. After the owner sold the property to the corporation's subsidiary, carrying back a purchase money note secured by a second mortgage, both the corporation and the subsidiary filed voluntary Chapter 11 petitions under the Bankruptcy Code seeking reorganization, and the bankruptcy court immediately ordered joint administration of both bankrupts' Chapter 11 estates. The owner promptly filed its proof of claim based on the subsidiary's note and second mortgage, but did not file a separate proof of claim based on the indemnification agreement with the corporation. After the subsidiary debtor, in its capacity as a Chapter 11 debtor in possession, sold the property, the joint Chapter 11 proceedings were voluntarily converted to Chapter 7 liquidation proceedings. Subsequently, the U.S. Environmental Protection Agency (EPA) issued the property's new owner an administrative cleanup order under CERCLA based on discovering and investigating hazardous substances on the property. After the new owner initiated an adversary proceeding against the consolidated Chapter 7 estate for indemnification and contribution on its CERCLA response costs, the bankruptcy trustee filed a third-party complaint against the original owner for contribution. The owner counterclaimed asserting its indemnification agreement with the corporation shifted the risk of the owner's potential CERCLA liability to the corporation, and also counterclaimed that the indemnity clause in the corporation's lease obligated the trustee to hold the owner harmless for attorney fees incurred in defending against the trustee's third-party CERCLA action. The owner subsequently appealed the bankruptcy court's denial of administrative priority to the court's grant of attorney fees, and now appeals the district court's affirmance of the bankruptcy court.

The court first holds that because the owner incurred attorney fees in resisting the efforts of the Chapter 7 trustee to liquidate the CERCLA claim against the owner, the fees are not eligible for administrative expense priority under applicable case law. A request for priority payment of an administrative expense under §503(a) of the Bankruptcy Code may qualify if the right to payment arose from a postpetition transaction with the debtor estate and the consideration supporting the right to payment benefitted the estate. The owner's attorney fees request is based on resisting the trustee's third-party action for CERCLA contribution based on the owner's prepetition ownership of the property, which had nothing to do with any post-petition operation of the debtors' business.

The court next holds that the district court properly found the owner's counterclaim for attorney fees allowable as a general unsecured claim against the consolidated estate of the Chapter 7 debtors. Although the owner held a prepetition claim against the corporation at the time of the Chapter 11 petition, albeit a right to payment contingent on a future occurrence reasonably within the contemplation of the parties as evidenced by the terms of the indemnification agreement in the lease, the contingent nature of a claim is not determinative of either the characterization or the allowability of a claim under the Bankruptcy Code. Rather, the owner's timely filing against the subsidiary in Chapter 11 bankruptcy based on the second mortgage, which explicitly provided that the sale was subject to the corporation lease containing the indemnification clause, put the debtors' estate on reasonable notice of the owner's contingent indemnification claim. Moreover, the owner's counterclaim to the trustee's third-party contribution action constituted an allowable amendment to the owner's original proof of claim, since the counterclaim implicated the same prepetition lease-sale-mortgage transaction that was the subject of the original proof of claim, and other holders of unsecured claims against the debtors' estate were caused no unfair prejudice, even though the original proof of claim was filed directly against the subsidiary, rather than the corporation. The court observes that one simply could not have examined the original proof of claim, filed against the subsidiary estate and docketed on the joint debtors' estate claims docket, without being alerted to the owner's indemnification agreement with the corporation. Moreover, no evidence exists that the owner intentionally refrained, out of any improper or dilatory purpose, from asserting a more particularized indemnification claim under the lease in the original proof of claim.

Counsel for Appellant
Thomas V. Urmy Jr., Michelle H. Blauner
Shapiro, Grace & Haber
75 State St., Boston MA 02109
(617) 439-3939

Counsel for Appellee
Martin P. Desmery, William F. Macauley, Peter J. Roberts
Craig & Macauley
600 Atlantic Ave., Federal Reserve Plaza, Boston MA 02210
(617) 367-9500

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.