IN RE: KARST ROBBINS COAL CO., INC. CASE NO. 90-60432

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

CORBIN

IN RE:

KARST ROBBINS COAL CO., INC. CASE NO. 90-60432

DEBTOR

SYNOPSIS

"[T]he application of the Commonwealth of Kentucky Natural Resources and Environmental Protection Cabinet requesting allowance as a first priority administrative expense under 11 U.S.C. § 503(b)(1)(A) of punitive civil penalties in the amount of $474,640 assessed against the debtor postpetition for violation of state environmental laws and regulations is denied, except as to the amount of $6,600, representing penalties for a violation that occurred postpetition while the debtor was conducting its mining operation."

"Obviously, if the debtor in possession had on hand sufficient funds to expend for public liability insurance, water quality monitoring tests, the preparation of quarterly reports, and maintenance of environmental standards in accordance with the terms of its mining permit, funds expended or amounts owed for these purposes would qualify as necessary costs and expenses of pereserving the mining permit as an asset of the estate. However, when a debtor in possession is financially unable to comply with environmental laws and regulations incident to preserving a mining permit, it is a stretch to conclude that civil penalties assessed against the debtor in possession for such noncompliance also qualify as necessary costs and expenses of preserving the mining permit as an asset of the estate.

This case is factually distinguishable from that considered by the court in In re Wall Tube & Metal Products Co., 830 F.2d 118 (6th Cir. 1987). In this instance the state has not expended and it is not likely that the state will be required to expend funds to correct problems resulting from the debtor's noncompliance with environmental laws. . . .

The question posed is whether civil penalties imposed under state law as a means of enforcing compliance with the state's environmental laws and regulations qualify for allowance under 11 U.S.C. § 503(b)(1)(A) as actual, necessary costs and expenses of preserving the estate.

Both the Commonwealth of Kentucky Natural Resources and Environmental Protection Cabinet and the debtor in possession rely on the decision in In re N.P. Mining Co., 963 F.2d 1449 (11th Cir. 1992). The court held that punitive civil penalties assessed postpetition against a chapter 11 debtor as punishment for environmental violations qualified as administrative expenses only to the extent they were incurred as consequences of mining operations while the debtor's business was still operating. . . .

If this case is converted to a case under chapter 7, the fines and penalties in question, because they do not represent compensation for actual pecuiary loss suffered by the Commonwealth of Kentucky, may be subordinated in distribution to bona fide administrative expenses and the claims of general creditors. 11 U.S.C. § 726(a)(4). This indicates to the court that interpreting the language of 11 U.S.C. § 503(b)(1)(A) so broadly as to elevate these punitive civil penalties, which bear no relationship to damages suffered by the Commonwealth, to first priority administrative expense status on the facts of this case when the statute does not specifically accord them such status, would be contrary to the intent of Congress."

Dated: July 6, 1994.

By the court -

Joe Lee, Chief Judge

Copies to:

W. Thomas Bunch

John S. Sawyer

Fred A. Bee

Stewart M. Fischbein

David Middleton