                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-18-1994

Com. of PA, Dept. of Env.'l Resources v. Conroy et
al.
Precedential or Non-Precedential:

Docket 93-3284




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          UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT
                   ____________

                   No. 93-3284
                   ____________

           COMMONWEALTH OF PENNSYLVANIA,
       DEPARTMENT OF ENVIRONMENTAL RESOURCES

                        v.

                 FRANK D. CONROY;
                ROSEMARY P. CONROY;
            OFFICE OF THE U.S. TRUSTEE
              (D.C. Civil No. 93-10)

                 FRANK D. CONROY;
                ROSEMARY P. CONROY

                        v.

           COMMONWEALTH OF PENNSYLVANIA,
       DEPARTMENT OF ENVIRONMENTAL RESOURCES

               STEPHEN I. GOLDRING,
                      Trustee
              (D.C. Civil No. 93-11)

      FRANK D. CONROY and ROSEMARY P. CONROY,
                    Appellants
               ____________________

  ON APPEAL FROM THE UNITED STATES DISTRICT COURT
     FOR THE WESTERN DISTRICT OF PENNSYLVANIA
      (D.C. Civil Nos. 93-00010 and 93-00011)
               ____________________

     Submitted Under Third Circuit LAR 34.1(a)
                  January 10, 1994
Before: STAPLETON, COWEN, and ALITO, Circuit Judges

          (Opinion Filed: May 19, 1994)
               ____________________

               OPINION OF THE COURT
               ____________________

                  EDWARD S. STOKAN
                  Assistant Counsel


                         1
                            KENNETH T. BOWMAN
                            Assistant Counsel
                            Commonwealth of Pennsylvania
                            Department of Environmental Resources
                            400 Waterfront Drive
                            Pittsburgh, PA 15222-4745

                            Attorneys for Appellee

                            REED J. DAVIS, ESQ.
                            Davis & Riley
                            1124 Frick Building
                            Pittsburgh, PA 15219

                            Attorneys for Appellants

ALITO, Circuit Judge:


           Frank Conroy operated and, through another corporation,

owned a printing company.    After the company ceased doing

business, drums and canisters of hazardous waste were found on

the premises.   The Commonwealth of Pennsylvania Department of

Environmental Resources (DER) ordered Conroy to arrange for

proper disposal of the waste, but he failed to comply with this

order.   Instead, he and his wife, Rosemary Conroy, filed a

chapter 11 bankruptcy petition.       Concerned that Conroy's failure

to remove the hazardous waste was endangering public health and

safety and the environment, the DER decided to initiate an

"interim response" under Pa. Stat. Ann., tit. 35, § 6020.505(b),

and the DER obtained a court order giving it access to the

printing company's premises.    Through a private contractor, the

DER cleaned up this facility and then filed an administrative

expense claim with the bankruptcy court under 11 U.S.C.

§503(b)(1)(A), seeking to recover the costs it had incurred.      The

bankruptcy court awarded the DER $103,293.00 -- the amount it had


                                  2
paid to the contractor -- but the bankruptcy court denied the

DER's request for an additional 10% to cover administrative and

legal expenses.   On appeal, the district court held that the DER

was entitled to the entire amount it sought.      We affirm.

            The Pennsylvania Hazardous Sites Cleanup Act prohibits

the "release" of a hazardous substance and imposes liability and

penalties on those responsible.       See Pa. Stat. Ann., tit. 35,

§§6020.507(a), 6020.1101, 6020.1104.      Abandonment of a hazardous

substance constitutes a "release."      Pa. Stat. Ann., tit. 35,

§6020.103.   Therefore, Pennsylvania law effectively prohibited

the Conroys from abandoning the hazardous wastes located on the

printing facility premises.

            Since the bankruptcy laws were revised in 1978, debtors

have argued that state laws prohibiting the abandonment of

hazardous substances are preempted by the literal language of

Section 554 of the Bankruptcy Code, 11 U.S.C. § 554.       However, in

Midlantic National Bank v. New Jersey Department of Environmental

Protection, 474 U.S. 494 (1986), the Supreme Court held that

Section 554 does not preempt a state law that, in a reasonable

effort to promote public health or safety, prohibits the

abandonment of property containing hazardous wastes.       It appears,

therefore, that if the DER had not itself undertaken to clean up

the printing company facility, the Conroys could not have escaped

their obligation to do so by abandoning the hazardous property in

question.    Furthermore, if Frank Conroy had arranged for cleanup

of the facility after he had filed a chapter 11 petition, the

costs of this cleanup would have constituted administrative

                                  3
expenses under 11 U.S.C. § 503(b)(1)(A), since they are a portion

of "the actual, necessary costs and expenses of preserving the

estate, including wages, salaries, or commissions for services

rendered after the commencement of the case."

            Here, the DER, rather than Conroy, arranged and paid

for cleanup of the printing facility.    Under similar

circumstances, the Second and Sixth Circuits have held that

response costs incurred by environmental agencies should be

classified as administrative expenses.    In re Chateaugay Corp.,

944 F.2d 997, 1009-10 (2d Cir. 1991); In re Wall Tube & Metal

Products, Co., 831 F.2d 118, 123-24 (6th Cir. 1987).     These

courts have reasoned that since the estate could not avoid such

costs through abandonment, the "expenses to remove the threat

posed by such substances are necessary to preserve the estate."

Chateaugay, 944 F.2d at 1010.    We agree with these decisions, cf.

In re Torwico Electronics, Inc., 8 F.3d 146, 149-50 (3d Cir.

1993) (discussing Chateaugay approvingly), and we therefore hold

that the costs incurred by the DER in contracting for cleanup of

the printing facility were properly classified as administrative

expenses.

            Contrary to the Conroys' argument, this court's

decision in Southern Railway Co. v. Johnson Bronze Co., 758 F.2d
137 (3d Cir. 1985), does not dictate a different result.      We read

the portion of that decision that is most closely related to the

present case to mean that a state administrative order requiring

cleanup of hazardous wastes may not be afforded priority over

unsecured claims pursuant to 11 U.S.C. § 105(a), which provides

                                 4
that a bankruptcy court "may issue any order, process, or

judgment that is necessary or appropriate to carry out the

provisions of this title."   Southern Railway said nothing about

whether a bankruptcy court may grant administrative expense

priority to the costs that an environmental agency incurs in

cleaning up a hazardous waste site that could not be abandoned

under state law.1

1
Several courts and commentators have read Southern Railway as
declaring that Ohio v. Kovacs, 469 U.S. 274 (1985), resolved the
question whether such costs are administrative expenses entitled
to priority reimbursement. See, e.g., In re Hemingway Transp.,
Inc., 73 B.R. 494, 502 (Bankr. D. Mass. 1987), aff'd, 126 B.R.
656 (D. Mass. 1991), aff'd in part and vacated in part, 993 F.2d
915 (1st Cir. 1993), cert. denied, 114 S. Ct. 303 (1993); In re
Pierce Coal & Constr., Inc., 65 B.R. 521, 529 (Bankr. N.D. W.Va.
1986); In re Virginia Builders, Inc., 153 B.R. 729, 734 n.10
(Bankr. E.D. Va. 1993); In re Kent Holland Die Casting & Plating,
Inc., 125 B.R. 493, 500 (Bankr. W.D. Mich. 1991). See also
Daniel Klerman, Earth First? CERCLA Reimbursement Claims and
Bankruptcy, 58 U. Chi. L. Rev. 795, 803 & n.56 (1991). Even if
this reading of Southern Railway is plausible, we believe that it
would be unwise to adopt such a reading in light of the Supreme
Court's subsequent opinion in Midlantic. Midlantic, we think,
indicates that the Supreme Court does not view Kovacs as having
resolved the reimbursement priority issue. See Midlantic, 474
U.S. at 498 n.2 (noting that whether a state's cleanup costs are
administrative expenses is "not before us"). Cf. Virginia
Builders, 153 B.R. at 734 n.10 (stating that in light of Supreme
Court's Midlantic decision, Southern Railway "is questionable
precedent").

    Contrary to the Conroys' suggestion, the Ninth Circuit's
decision in In re Dant & Russell, Inc., 853 F.2d 700 (1988), is
also distinguishable. That case held that a lessor who has a
bankruptcy claim against a lessee for the costs of cleaning up
hazardous wastes deposited by the lessee on the leased property
is not entitled to administrative expense priority. However, the
Dant & Russell court was careful to state that

          [q]uite a different result [] is warranted when the
          cleanup costs result from monies expended for the
          preservation of the bankruptcy estate. See, e.g.,
          Lancaster v. Tennessee (In re Wall Tube & Metal Prod.


                                5
          The Conroys have argued that the amount paid by the DER

to the cleanup contractor was excessive.   Both the bankruptcy

court and the district court held to the contrary, and after

reviewing the record, we likewise conclude that the Conroys'

argument lacks merit.

          We also hold that the district court was correct in

awarding the DER $10,329.30 to compensate for the costs it

incurred in obtaining authorization for the cleanup and in

coordinating and monitoring the contractor's work.    The Conroys

contend that this award was actually a "surcharge," rather than

compensation for "actual" and "necessary" expenses, and that in

any event the DER did not adequately substantiate these expenses.

We disagree.

          First, we see no reason why the administrative and

legal costs incurred by the DER in arranging for the cleanup

cannot qualify as administrative expenses under 11 U.S.C.

§503(b)(1)(A).   Such costs may constitute "actual, necessary

costs and expenses of preserving the estate."   Id.   Second, we

think that the amount of the award in this case -- 10% of the

          Co., 831 F.2d 118, 124 (6th Cir. 1987)) (state entitled
          to administrative expense priority for its response
          costs from the debtor's estate under CERCLA); . . . In
          re Distrigas Corp., 66 B.R. 382, 386 (Bankr. D. Mass.
          1986) (to the extent that the state expended funds to
          cleanup debtor's contaminated property (whose property
          absent cleanup had little or no value), it would be
          entitled to a first priority administrative expense
          claim); . . . In re Stevens, 68 B.R. 774, 783 (D. Maine
          1987) (state entitled to administrative expense
          priority for costs it incurred in removing waste from
          property of the estate).

853 F.2d at 709.

                                6
amount paid to the contractor -- was sufficiently substantiated.

In enacting Pa. Stat. Ann., tit. 35, § 6020.507(b),2 the

Pennsylvania legislature apparently concluded that the DER's

"administrative and legal costs" will generally amount to "10% of

the amount paid for the response action or the actual costs,

whichever is greater."   This implicit legislative finding is

reasonable, and we believe that it is sufficient to satisfy the

DER's burden of proving its entitlement to these administrative

expenses.   While the Conroys and other interested parties could

certainly have attempted to show that the 10% figure was

excessive in this case, the Conroys have not directed our

attention to any such evidence.       Moreover, there is evidence in

the record that tends to substantiate the reasonableness of the

amount awarded.3



2
This provision reads as follows:

           (b) Amount.--In an action to recover response costs and
           natural resource damages, the department shall include
           administrative and legal costs incurred from its
           initial investigation up to the time that it recovers
           its costs. The amount attributable to administrative
           and legal costs shall be 10% of the amount paid for the
           response action or the actual costs, whichever is
           greater.
3
 The Conroys also contend that the DER failed to substantiate its
claim in the manner required by a Rule 9016.1 of the Local Rules
of the United States Bankruptcy Court for the Western District of
Pennsylvania. This rule imposes general requirements on parties
submitting administrative claims. We do not interpret it to mean
that the DER may not satisfy its burden of proof under the
particular circumstances present here by relying on the
legislative finding implicit in Pa. Stat. Ann., tit. 35,
§6020.507(b). Therefore, we need not consider whether the
bankruptcy court, in promulgating local rules of practice, could
resolve a legal question of this nature.


                                  7
          For these reasons, we conclude that the district court

properly held that the DER is entitled to $113,622.30 in

administrative expenses, and we therefore affirm the order of the

district court.




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