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#1933

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

BILL'S COAL COMPANY, INC.,

CHEROKEE COAL COMPANY, INC.,

DEBTOR(S)

NO. 85-41428-7

NO. 85-41427-7

CHAPTER 7

MEMORANDUM OF DECISION

This matter is before the Court following a remand from the United States District Court. The question raised is whether certain penalties imposed by the Missouri Land Reclamation Commission (MLRC) constitute prepetition or postpetition obligations of the debtor, and if they are postpetition obligations, whether they qualify for administrative expense treatment. MLRC appears by Attorney General William L. Webster and Special Assistant Attorney General Sandra Stratton. The trustee appears by counsel Christopher J. Redmond and Laurie B. Williams.

The parties had originally submitted the matter on agreed fact stipulations. On remand, they have again stipulated to certain facts, but in addition presented some testimony and exhibits at trial. The matter is now ready for decision.

FINDINGS OF FACT

These two debtors apparently operated a joint coal-mining business at one mine site before they filed for bankruptcy. Shortly after filing, their cases were consolidated, so the Court will simply refer to both of them here even though certain facts or statements may be applicable, strictly speaking, to only one of them. Their dispute with MLRC arises from violations of state mining laws or regulations which occurred at that mine site.

The parties have submitted suggested findings. The Court adopts the trustee's suggested findings except for paragraphs 15, 20, 21, 26 and 27. The Court adopts MLRC's suggested findings except for paragraphs 8, 9 and 10.

In addition, the Court makes the following findings based upon the evidence presented. At the time the debtors filed their chapter 11 bankruptcy cases, they were no longer operating entities. At the outset of the cases, at the meeting of creditors held pursuant to 11 U.S.C.A. §341, the debtors informed their creditors, including MLRC, that they intended to liquidate. The intent was to sell the debtor entities along with their coal supply contracts, surface mine permits, and so forth, and the debtors anticipated that more money could be obtained through chapter 11 rather than chapter 7 liquidations. The debtors hoped to have more time to market themselves as whole entities through chapter 11, but they never intended to do any more mining business themselves. They had already stopped mining prepetition, and were merely attempting to hold their assets intact so they might be sold for a better price. MLRC was aware of and acquiesced in this effort, knowing such sales were in its best interest. The main reclamation bonds for the debtors' mining activities had become worthless because the bond companies that had issued them had ceased to exist as viable entities, and MLRC's best hope for the reclamation of the debtors' properties, a costly activity, lay in sales to new operators who would become responsible for the debtors' reclamation liabilities. See exhibits AAA through GGG.

The notices of violation (NOVs) which MLRC served on the debtors, exhibits B through S, were issued for failure to repair or correct conditions on the land which were created by the debtors' pre-bankruptcy coal mining operations. Though the conditions giving rise to the violations existed prepetition, many of the violations themselves did not arise until after the debtors had filed for bankruptcy. For example, rills and gullies were not a violation under MLRC's rules until they reached 9 inches in depth. Several NOVs were written for this problem. Some of the rills and gullies may already have constituted violations prepetition but not been discovered until postpetition while others may have been less than 9 inches prepetition but, through erosion caused by rainfall, have grown to more than 9 inches postpetition and thus become violations. Another sample problem concerns a pond which tested sufficiently non-acidic prepetition but, through evaporation which concentrated the contaminants in the water, became increasingly acidic and so exceeded MLRC's acidity standard postpetition. Both these problems are representaive of the type of violations for which the debtors received NOVs.

The evidence demonstrated that the problems for which the NOVs were written arose from conditions the debtors had created while conducting mining operations prepetition that gradually, as a result of natural forces, developed into violations sometime later, possibly prepetition in some cases and postpetition in others. The debtors set in motion processes which caused the violations, in some instances by failing to complete work and in others simply by not having money to do work Mother Nature refused to do, such as watering seed at the right time to grow grass that would prevent erosion. In essence, whether characterized as pre- or postpetition, the violations ultimately arose because of the natural forces of erosion, evaporation, rainfall, wind, and so forth, and not because of the debtors' postpetition actions or the operation of their businesses. In fact, according to the testimony of MLRC's witness, violations are more likely to occur on mining property like the debtors' when business has ceased.

Except for the NOVs represented by exhibits I and O, the Court finds that the conditions more likely than not reached the level of being violations postpetition.



DISCUSSION AND CONCLUSIONS

Though the District Court's remand order stressed the need to determine whether MLRC's claims arose pre- or postpetition, this Court believes that certain concepts surrounding the treatment of environmental claims in bankruptcy which existed before the District Court's decision but have developed more completely since that time make that determination of secondary importance in this case. For the purpose of determining whether MLRC is entitled to an administrative claim, the Court now believes the primary inquiry should be whether or not the debtors were engaged in business after the filing of the case.

The parties stipulated that no active mining operations have occurred at the debtors' mine site since they filed these chapter 11 cases. There is also no evidence that the conditions complained of here threaten public health or safety, or involve hazardous or toxic materials, or that payments on the fines levied would be used to rectify such conditions in any event. Furthermore, MLRC was aware that the debtors could not operate their mine without the required bonds in place, and was also aware from the information it obtained at the 341 meeting that the debtors did not intend to operate but merely wished to keep their assets intact through chapter 11 in hopes of negotiating a better sale than was likely through a quick, forced liquidation. MLRC acquiesced in this attempt because it was its best interest to do so.

The Eleventh Circuit recently faced the question whether fines, very similar in nature and amount to the instant fines, which were levied against a strip mining debtor that had ceased operations, were entitled to administrative expense status. In re N.P. Mining Co., 963 F.2d 1449 (11th Cir. 1992). The Circuit Court ruled that the Alabama Surface Mining Commission was entitled to administrative claims only for punitive civil penalities which were assessed against the chapter 11 debtor for environmental violations during the time the debtor's strip mining business was still operating. 963 F.2d at 1458-60 (in part construing 28 U.S.C.A. §959(b), which requires bankruptcy trustees managing and operating property to do so in compliance with valid state laws). Penalties incurred after cessation of business when the estate was merely being maintained for later distribution of assets could not be considered "costs ordinarily incident to operation of a business" and thus could not be "actual, necessary costs or expenses of preserving the estate," which would constitute administrative expenses under §503(b)(1)(A). 963 F.2d at 1460-61; see also In re Beck Industries, Inc. 725 F.2d 880, 886-87 (2nd Cir. 1984) (trustee's attempts to collect and liquidate assets of non-bankrupt subsidiary of debtor were not acts or transactions in carrying on business connected with debtor's property so as to make trustee subject under 28 U.S.C.A. §959(a) to suit without permission of bankruptcy court which appointed trustee); In re Heldor Industries, Inc., 131 B.R. 578 (Bankr. D.N.J. 1991) (28 U.S.C.A. §959(b) does not apply, at least ordinarily, where trustee is not operating debtor's business but liquidating it). As the court indicated in N.P. Mining, the reason to require a trustee who is operating a business to comply with state laws which regulate other such businesses is to prevent unfair competition, a goal which is not furthered by applying those laws to a trustee who is liquidating the business in his or her care.

For these reasons, the Court concludes the penalties the MLRC imposed on the debtors do not qualify as administrative expenses under 11 U.S.C.A. §503(b(1)(A).

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of August, 1993.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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