Tort Claim Does Not Get Administrative Claim Status When Bankrupt Business Is Liquidating
IN RE: RESOURCE TECHNOLOGY CORP. (OCTOBER 31, 2011)
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Samuel Roti owned a Holiday Inn just outside Chicago, adjacent to a landfill operated by Congress Development Company. Resource Technology Corporation was under contract with Congress to build and operate a system for collecting gases generated by the landfill. As of September, 2005, Resource was in Chapter 7 bankruptcy and a trustee was appointed to operate the business until liquidation. Days after the trustee was appointed, the landfill gas collection system failed, causing foul odors to be released into the Holiday Inn. Roti filed an administrative claim in the Resource bankruptcy for the damages to his business. The bankruptcy court rejected the claim. Judge Kennelly (N.D. Ill.) agreed. Roti appeals.
In their opinion, Seventh Circuit Judges Posner, Flaum, and Hamilton affirmed. The Court acknowledged that the foul odors that emanated from the property as a result of the failure of the gas collection system could constitute a nuisance -- and a nuisance for which Resource was responsible. That fact makes Roti a creditor of Resource's Chapter 7 estate. But Roti never asked to be a general creditor of the estate. Instead, he sought administrative claim priority status. Generally, administrative claims get priority because they either enhance or preserve the value of the estate and thereby benefit the other creditors. Paying off a tort claim, at least under these circumstances, would not seem to benefit the other creditors. In Reading, the Supreme Court held that tort claims arising from the operation of a Chapter 11 bankruptcy estate should be treated as administrative claims. The Court distinguished Reading, but not on the obvious Chapter 11 versus Chapter 7 basis. Instead, it concluded that the important factor was whether the firm was operating. Here, the trustee was not operating Resource's gas collection system. The bankruptcy estate had no money to repair the system an had minimal revenues there from. The trustee’s mandate was to liquidate the operations as quickly as possible. Under those circumstances, tort liability should not be considered an administrative expense.
South Beach Securities, Inc. is controlled by Leon Greenblatt and was once a registered securities dealer. In the early 2000s, Greenblatt orchestrated a number of financial transactions among South Beach and other companies, including Scattered Corporation, which he controlled in whole or in part. At the time, South Beach's only potential assets were net operating losses. As a result of the transactions, Scattered became South Beach's only creditor. South Beach filed a Chapter 11 petition and submitted a plan of reorganization. The U.S. Trustee opposed confirmation of the plan. The bankruptcy court refused confirmation and dismissed the petition. Judge Lefkow (N.D. Ill.) affirmed. Scattered and South Beach appeal.