ELR Citation: ELR 21217
No(s). 91-7342 (11th Cir. Jun 23, 1992)

The court, in a case of first impression, holds that state-imposed non-tax punitive civil penalties assessed post-petition against a Chapter 11 bankruptcy debtor for mining violations during the operation of a coal strip-mine by the debtor in possession or the trustee must be given administrative expense priority under §503(b) of the Bankruptcy Code. However, the court holds that penalties assessed prior to and subsequent to the filing of a bankruptcy petition for mining violations that occurred prior to the filing of the bankruptcy petition may not be given §503(b) administrative expense status. The court first notes that its decision is not based on Bankruptcy Code policies of fairness to claimholders or environmental protection, but on the federal policy embodied in 28 U.S.C. §959(b), which requires that trustees must "operate" an estate in compliance with state law. The U.S. Supreme Court has not construed the meaning of administrative expense narrowly to encompass only claims that the business must be able to pay in full if it is to be able to deal at all, but has included tort claims and state and federal taxes accruing during a receivership as actual and necessary costs of preserving the bankruptcy estate as entitled to administrative expense priority. Thus, if such post-petition costs "ordinarily incident to operation of a business," which do not confer a benefit on the estate, can qualify as actual and necessary costs of preserving the estate, a strong case can be made that when a licensed business operates in the regulated atmosphere of strip mining in a state, incurring regulatory penalties is a cost ordinarily incident to operating such a business and should be accorded administrative priority. The court next finds that the language of §503(b) and its predecessor, §104(a)(1), indicate that Congress intended that first priority claims include claims against other than those that serve to preserve the bankruptcy estate. Thus, the Court's interpretation of §104(a)(1) in Reading Co. v. Brown, 391 U.S. 471, that post-petition costs ordinarily incident to operation of a business can be entitled to administrative expense priority, is still valid for interpreting §503(b). However, application of the Reading Court's holding to this case is limited to allowing administrative priority for compliance with state laws, not for other grounds the Reading Court established for granting administrative expense priority, such as for compensating innocent victims for an estate's actions and for environmental protection. In this case, the state fines do not represent compensation for any injury nor will they be used to abate any identified environmental hazard caused by the estate. The policy of ensuring that trustees comply with state law is sufficient justification to place civil penalties assessed for post-petition mining operation violations in the category of costs accorded administrative expense priority. Otherwise, a mining operation could, under the protection of Chapter 11, cut costs by ignoring safety and environmental regulations, affording it an unfair advantage over nonbankrupt competitors. However, because the business in this case was not being administered for the purpose of continuing operations after the trustee took control, the policy of allowing administrative expense priority to penalties for compliance with state law applies only to those fines assessed for mining operations after the petition was filed and before the Chapter 11 trustee took control.

Counsel for Appellant
Grady McCarthy
Alabama Surface Mining Commission
P.O. Box 2390, Jasper AL 35502
(205) 221-4130

Counsel for Appellee
David Larsen
Berkowitz, Lefkovits, Isom & Kushner
1600 S. Trust Tower, Birmingham AL 35203
(205) 328-0480

Counsel for Trustee
Ronald Davis
Rosen, Cook, Sledge, Davis, Carol & Jones
P.O. Box 2727, Tuscaloosa AL 35403
(205) 345-5440

Before KRAVITCH, Circuit Judge, HENDERSON and CLARK,^* Senior Circuit Judges.