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In re Hanna

filed: June 15, 1994.

IN RE: DANIEL C. HANNA, DEBTOR. GULL INDUSTRIES, INC., AN OREGON CORPORATION, AND BP OIL COMPANY, AN OHIO CORPORATION, APPELLANTS / CROSS-APPELLEES,
v.
JOHN MITCHELL, INC., TRUSTEE OF THE ESTATE OF DANIEL C. HANNA AND DANIEL C. HANNA, APPELLEES / CROSS-APPELLANTS.



Appeal from the United States Bankruptcy Court for the District of Oregon. Bankruptcy No. 390-33990-S11, Adversary No. 90-3388S. Honorable Donal D. Sullivan, Bankruptcy Judge, Presiding

Before: Volinn, Meyers, and Jones, Bankruptcy Judges.

Author: Jones

JONES, Bankruptcy Judge:

BACKGROUND

The debtor, Daniel C. Hanna ("Hanna"), and appellant, Gull Industries, Inc. ("Gull"), owned adjacent filling stations in Gresham, Oregon. Both filling stations leaked petroleum products into the soil, causing contamination. However, only Hanna's leakage reached the groundwater. The contamination of the groundwater is apparently a slow, continuing process which occurs after the soil is saturated with petroleum.

Gull began cleaning up its site in August 1989, in conjunction with the sale of its property to BP Oil Company ("BP"). That sales agreement required Gull to clean up environmental damage to the site according to a specific timetable. Findings of Fact and Conclusions of Law (4-7-92) at 7. Gull hired Applied Geotechnology, Inc. ("AGI") to perform a site assessment and cleanup which eventually cost about $130,000. AGI determined that the groundwater beneath the Gull site was contaminated by one to three inches of free petroleum product. The bankruptcy court found that "Gull asserted and proved at trial that contaminated subsurface water continued to migrate to its land from the polluted Hanna land. . . ." Findings (4-7-92) at 3.

After beginning its remediation efforts by installing three twenty-four inch recovery wells on the Gull site in June 1990, Gull demanded that Hanna stop the flow of contamination from the Hanna site to the Gull site.*fn1 About a week later on July 27, 1990, Hanna filed for relief under Chapter 11. Three days later the bankruptcy court appointed John Mitchell, Inc. ("Mitchell), as Chapter 11 trustee.

Gull continued its remediation efforts by installing an "air stripper" to clean the groundwater, and on August 24, 1990, brought an adversary complaint seeking injunctive relief and tort damages under Oregon Revised Statute § 465.255. Gull asked that these claims be treated, as administrative expenses under 11 U.S.C. § 503.*fn2

In October 1990, Mitchell emptied the leaking underground storage tanks on Hanna's site, and in April 1991 removed them; however, he failed to remove the underlying contaminated soil or to perform a site study as directed by the bankruptcy court in its December 13, 1990 order.

On April 7, 1992, the bankruptcy court denied administrative status but concluded that Gull's expenses were "remedial action costs" recoverable as a general unsecured claim under O.R.S. § 465.255. Gull now appeals the denial of administrative status, and Mitchell cross-appeals the granting of the general unsecured claim. We affirm both.

STANDARD OF REVIEW

We review for an abuse of discretion the bankruptcy court's award or denial of administrative claims pursuant to 11 U.S.C. § 503(b)(1)(A). See In re Dant & Russell, Inc., 853 F.2d 700, 707 (9th Cir. 1988). In general, we review findings of fact for clear error and Conclusions of law de novo. E.g., In re Comer, 723 F.2d 737, 739 (9th Cir. 1984).

ISSUES PRESENTED

1. Whether Gull's cleanup costs performed on property not owned by the estate and relating to pre-petition damages are entitled to § 503(b)(1)(A) administrative expense status.

2. Whether the bankruptcy court erred as a matter of fact or law in granting Gull an unsecured claim for its cleanup costs.

Discussion

We construe § 503(b)(1)(A) strictly. E.g., In re Catalina Spa & R.V. Resort, Ltd., 97 Bankr. 13, 17 (Bankr. S.D. Cal. 1989) (citing Standard Oil Co. v. Kurtz, 330 F.2d 178, 180 (8th Cir. 1964)). The applicant must prove by a preponderance of the evidence entitlement to the administrative expense. Id. (citing In re Patch Graphics, 58 Bankr. 743, 746 (Bankr. W.D. Wis. 1986)).

Administrative status is allowed when a claim (1) is incurred postpetition, (2) directly and substantially benefits the estate, and (3) is an actual and necessary expense. E.g., In re Great Northern Forest Prods., Inc., 135 Bankr. 46, 60 (Bankr. W.D. Mich. 1991). We affirm based on the first element and therefore do not address the other two.

1. Damages Caused Pre-Petition

Although the bankruptcy court's findings of fact and Conclusions of law raise some questions, the court clearly found that the petroleum leaks on the Hanna property occurred pre-petition, and that neither Hanna nor Mitchell "added any significant new contamination to the Hanna land postpetition." Findings (4-7-92) at 2-7.

As noted above, the bankruptcy court also found:

Gull asserted and proved at trial that contaminated subsurface water continued to migrate to its land from the polluted Hanna land. . . .

Findings (4-7-92) at 3. The apparent inconsistency in these findings is resolved through the court's citation to In re Jensen, 127 Bankr. 27 (9th Cir. BAP 1991), aff'd, 995 F.2d 925 (9th Cir. 1993).*fn3

In Jensen, the BAP discussed when claims arise for purposes of dischargeability.*fn4 The BAP held that the estate's cost-recovery claim was dischargeable because it arose from the debtor's prepetition actions even though the state's right to recover did not arise until postpetition when it cleaned up the site. 127 Bankr. at 33.

Jensen cites as authoritative In re Chateaugay Corp., 112 Bankr. 513 (S.D.N.Y. 1990), aff'd, 944 F.2d 997 (2d Cir. 1991), for the proposition that a claim arises upon the actual or threatened release of hazardous waste by the debtor. Consequently, if a tort occurs prepetition, with the injury occurring postpetition, such claim is deemed to have arisen prepetition. Jensen, 127 Bankr. at 33 (citing Chateaugay, 112 Bankr. at 522). In other words, so long as a prepetition triggering event had occurred, the claim was dischargeable regardless of when the claim for relief was ripe for adjudication. Chateaugay, 112 Bankr. at 522.

In the instant case the bankruptcy court identified the acts giving rise to the alleged liability as the petroleum spills from the underground storage tanks into the soil. The later leaching from the soil to the groundwater required no activity by Mitchell, but was rather "passive." See Findings (4-7-92) at 5. Consequently, the bankruptcy court found that all environmental damage was deemed to have occurred pre-petition. See id. We agree.

The Ninth Circuit has held that "damages caused during the pre-petition period are not entitled to administrative expense priority." Dant, 853 F.2d at 709. Dant also held that "consequent damage" occurring postpetition should be regarded as having occurred prepetition. Id.*fn5

For all practical purposes, the instant appeal is equivalent to Dant. In Dant, a pre-petition debtor operated a wood treatment plant on land partially owned by the debtor and partially leased from the Burlington Northern Railroad Company. The wood treatment facility operated for over a decade and caused massive toxic waste contamination on both properties, including significant concentrations of PCP in the groundwater. The pre-petition debtor clearly caused the pollution to both properties.

Burlington Northern spent approximately $250,000 under a separate agreement with the EPA to clean up its property. Burlington requested that these cleanup costs be given administrative expense status, which request was denied for two reasons: (1) because the damages occurred pre-petition; and (2) because the remedial efforts occurred off-site on property not owned by the bankruptcy estate. Dant, 853 F.2d at 709. See also Ohio v. Kovacs, 469 U.S. 274, 83 L. Ed. 2d 649, 105 S. Ct. 705 (1985)). The Dant court reasoned, pursuant to § 503(b)(1)(A), that the off-site remediation had not been shown to be for "the actual, necessary costs and expenses of preserving the estate. . . ." Dant, 853 F.2d at 709. Gull has cited no case wherein off-site cleanup costs were given administrative expense status.

In light of Dant, the bankruptcy court did not abuse its discretion in denying Gull administrative expense status for the continuing effects of pre-petition damages. See e.g., In re Bill's ...


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