
USCA1 Opinion

	




                            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                                         -2-                                          2                      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.                                         -3-                                          3            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).                                          -4-                                          4                      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                                         -5-                                          5            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                                         -6-                                          6            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                                         -7-                                          7            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                                         -8-                                          8            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.                                         -9-                                          9            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                                         -10-                                          10            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.                                         -11-                                          11                      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                                         -12-                                          12                      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                                                            ________                                         -13-                                          13
