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In Bankruptcy Case, Environmental Fines Get Priority

By Gabriella Khorasanee, JD on November 25, 2013 | Last updated on March 21, 2019

Last week, the First Circuit had to determine whether lower courts properly gave post-petition orders, related to environmental law violations and administrative expense priority in a bankruptcy proceeding. The First Circuit, affirming the lower courts, and departing from the Third and Ninth Circuits, found that they did.

The Timeline

Munce's Superior Petroleum Products, Inc. and Harold Munce (collectively "MSPP") are in the business of distributing fuel and operating convenience stores. Due to its business, MSPP stores fuel, in three different locations, in above-ground oil tanks. State laws require the installation of secondary containment systems to protect the environment in case of leaks or tank failures. The Department of Environmental Services ("DES") notified MSPP that it was in violation of environmental laws on four separate occasions in a two-year period, and MSPP did nothing.

In July 2010, DES initiated a state court action seeking injunctive relief, and civil penalties, for violations of state environmental laws. On August 23, 2010, the court entered a preliminary injunction requiring MSPP to comply with the laws, or close the facilities within thirty to sixty days. Again, MSPP did not comply. In January 2011, DES filed a motion to hold MSPP in contempt, and a hearing on the issue was held on March 7, 2011. Just 11 days later, while the contempt motion was pending, MSPP filed for Chapter 11 bankruptcy, and as a debtor-in-possession, continued to operate the business.

Because of the automatic stay, DES filed to have the stay lifted, and it was successful because the suit involved public health and safety. After the stay was lifted, the state court granted DES' motion for contempt, on September 19, 2011. The court gave MSPP ten days to take the tanks out of service, with penalties of $1,000/day for noncompliance. For the third time, MSPP did nothing.

In February 2012, DES asked the court to assess the penalties for noncompliance, and after a hearing, ordered MSPP to pay $192,000 plus $2,219.70 in fees and costs. Can you guess? MSPP did nothing. In April 2012, DES asked the bankruptcy court to categorize the fine as an administrative priority claim, and the bankruptcy court granted the motion. On appeal, the district court affirmed.

First Circuit Precedent

The main issue before the court was whether the fine was for pre-, or post-petition, conduct. MSPP argued that the fine was for pre-petition conduct and that the DES should get in line with the other creditors. The First Circuit disagreed. First the court "reject[ed] the proposition that it mattered," but nonetheless found that the fine was for violation of orders that the court granted after the lift of the automatic stay. The court relied on its own circuit precedent and held that "fines for noncompliance post-petition with state environmental law can be granted administrative expense priority."

While the court was able to distinguish the Third and Ninth Circuit cases on their facts, it was clear the First Circuit had drawn a line in the sand. Where the public's health and safety are at issue, a debtor-in-possession is not going to be able to argue around environmental law violations.

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