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Signed March 20, 2020.

Ronald B. King

Chief United States Bankruptcy Judge

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF TEXAS

WACO DIVISION

IN RE: §

§

BVS CONSTRUCTION, INC., § CASE NO. 19-60004-RBK

§

DEBTOR § CHAPTER 11

OPINION

The issue in this case is whether post-petition penalties incurred by a chapter 11 debtor as

a result of workplace safety violations are allowable as administrative expenses under 11 U.S.C.

§ 503(b). BVS Construction, Inc. (the “Debtor’”) filed a voluntary chapter 11 petition on

November 11, 2014. The Debtor filed a second voluntary chapter 11 petition on January 2, 2019;

therefore, the Debtor is a “chapter 22” filer. Since the date of filing the second chapter 11

petition, the Debtor has been cited for 18 workplace safety violations by the Mine Safety and

Health Administration (“MSHA”) and has incurred a total of $34,676.58 in fines in connection

with the Debtor’s mining operations in Brazos County, Texas.

MSHA filed a motion to allow administrative expenses under 11 U.S.C. § 503(b), to

compel payment of the post-petition penalties. At the hearing, the Debtor cited case law from

Delaware and the Court of Appeals for the Third Circuit to support its assertion that the penalties

are not allowable as administrative expenses under § 503(b)(1)(A).

The Court finds that MSHA has met the requirements for administrative expenses under

§ 503(b). Case law cited by the Debtor, which bars criminal penalties from treatment as an

administrative expense, is inapposite in this case because the post-petition penalties incurred by

the Debtor are not criminal penalties. The Court finds that the post-petition penalties imposed

against the Debtor are civil in character and are therefore allowable as administrative expenses.

JURISDICTION AND VENUE

The Court finds that it has jurisdiction to render a final order in this core proceeding

pursuant to 28 U.S.C. §§ 157(b)(2)(B) and 1334. Venue is proper under 28 U.S.C. §§ 1408 and

1409. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant

to FED. R. BANKR. P. 7052 and 9014.

BACKGROUND

The Debtor filed its second voluntary petition for chapter 11 bankruptcy on January 2,

2019. The Debtor has continued to operate its business as a debtor-in-possession during the

pendency of this bankruptcy. As part of its ordinary business, the Debtor maintains a mining

operation in Brazos County, Texas.

MSHA is a component of the Department of Labor and is responsible for developing and

enforcing workplace safety regulations for mine operations across the country under the Mine

Safety and Health Act of 1977. See 30 U.S.C. §§ 801–820. MSHA exercises regulatory authority

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over the Debtor’s mining operations at the Palasota Mine in Brazos County. The Debtor has been

issued citations for MSHA violations dating back to January 2012. Since the petition date, the

Debtor has been cited for 18 workplace safety violations and has incurred a total of $34,676.58

in fines for those violations.

In its response to MSHA’s motion, the Debtor acknowledged that these penalties are not

contested, but argued that the penalties are not allowable as administrative expenses. The Debtor

cited two recent opinions from Delaware and the Third Circuit to support its assertion that these

penalties are not allowable as administrative expenses under § 503(b)(1)(A). See Pa. Dep’t of

Envtl. Res. v. Tri-State Clinical Labs., Inc., 178 F.3d 685 (3d Cir. 1999); In re Exide Techs.,

601 B.R. 271 (Bankr. D. Del. 2019) (Carey, J.).

DISCUSSION

Section 503(b) of the Bankruptcy Code states that, after notice and a hearing, “there shall

be allowed administrative expenses . . . including . . . the actual, necessary costs and expenses of

preserving the estate.” 11 U.S.C. § 503(b)(1)(A). To make a prima facie case for allowance of an

administrative expense, the movant is required to meet a two-pronged test by showing (1) that

the claim arises from a transaction with the debtor’s estate; and (2) that it has directly and

substantially benefitted the estate. McBride v. Riley (In re Riley), 923 F.3d 433, 439 (5th Cir.

2019).

Generally, liabilities incurred by a bankruptcy estate for post-petition operations

constitute “actual and necessary” costs. Al Copeland Enters. v. Texas (In re Al Copeland

Enters.), 991 F.2d 233, 238–40 (5th Cir. 1993). The first prong of the test for an administrative

expense is easily met in this case because the mine was operated by the Debtor during the

administrative claim period. MSHA argues that the second element for an administrative

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expense is also met because the penalties in this case are ordinary business expenses that

constitute “actual and necessary costs” under § 503(b). Even though post-petition penalties

relating to workplace safety violations do not benefit the bankruptcy estate in a traditional sense,

MSHA argues that the penalties are a direct “benefit to the estate” because they are costs

incident to the Debtor’s business operation.

In Reading Co. v. Brown, the Supreme Court held that consideration of “fundamental

fairness and logic” sometimes requires the allowance of a claim of administrative priority, and

that “actual and necessary” costs should include “costs ordinarily incident to operation of a

business.” Reading Co. v. Brown, 391 U.S. 471, 483 (1968). Multiple court of appeals cases also

support the proposition that post-petition civil fines and penalties are simply part of the cost of

doing business and are allowed as an administrative expense. See Cumberland Farms, Inc. v.

Fla. Dep’t of Envtl. Prot., 116 F.3d 16 (1st Cir. 1997); Ala. Surface Mining Comm’n v. N.P.

Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449 (11th Cir. 1992); U.S. Dep’t of Interior v.

Elliott (In re Elkins Energy Corp.), 761 F.2d 168 (4th Cir. 1985). Payment of civil fines and

penalties are generally part of the cost of doing business. So, if the MSHA penalties are civil in

character, then the requirements for an administrative expense under § 503(b) have been met

because the post-petition MSHA penalties are related to the Debtor’s mine which was operated

during the pendency of the bankruptcy case.

The Debtor relied heavily on the Delaware case of Exide Technologies, which involved

post-petition penalties imposed on the chapter 11 debtor-in-possession by the South Coast Air

Quality Management District (the “District”), an air pollution agency in southern California. In

re Exide Techs., 601 B.R. at 275–76. The debtor in Exide manufactured lead-acid batteries, and

issues arose due to environmental contamination at the debtor’s facility in Vernon, California.

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Id. at 275. The District filed a proof of claim alleging $38,915,000 in fines and penalties in

connection with the debtor’s operations. Id. Violations were for items such as failing to file

reports and emission exceedances. Id. at 276. The debtor was accused of, and later admitted to,

violating numerous provisions under the federal Resource Conservation and Recovery Act and

the Hazardous Materials Transportation Act. Id. at 278.

In a related state court suit between the debtor and the District which was removed to

federal district court, the District argued that the suit should be remanded to California state

court because the penalties at issue in the case were “quasi-criminal” in character. Id. at 277. The

District Court for the Central District of California agreed that the penalties were quasi-criminal

in nature and granted the District’s motion for remand. Id.

Later, in bankruptcy court, the District in Exide claimed that the penalties were entitled to

administrative expense priority treatment under § 503(b). Id. at 284–85. Judge Kevin Carey

affirmed the two-prong test for an administrative expense under § 503(b)(1)(A), that “the debt

must arise from a transaction with the [estate] . . . [and] the consideration supporting the

claimant’s right to payment [must be] beneficial to the debtor-in-possession in the operation of

the business.” Id. at 285. To determine whether these penalties qualified, the Exide court looked

to the Third Circuit’s decision in Tri-State. See Pa. Dep’t of Envtl. Res. v. Tri-State Clinical

Labs., Inc., 178 F.3d 685 (3d Cir. 1999).

The Third Circuit Court of Appeals in Tri-State held that “noncompensatory criminal

penalties” resulting from post-petition conduct are not given administrative expense priority

because they are not “ordinarily incident to operation of a business.” Id. at 698 (“We hold that

punitive criminal fines arising from post-petition behavior are not administrative expenses under

11 U.S.C. § 503(b), and therefore, are not accorded priority status pursuant to § 507(a)(1).”). The

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Delaware bankruptcy court in Exide, therefore, had to determine whether the post-petition

penalties imposed against the debtor were criminal, civil, or a hybrid (quasi-criminal). The

bankruptcy court in Exide followed Tri-State and ultimately held that the penalties were not

entitled to treatment as an administrative expense because, by the District’s own argument, the

penalties were quasi-criminal in nature. In re Exide Techs., 601 B.R. at 285 (“To support its

efforts for remand of the California State Action, the District emphasized the criminal or ‘quasi-

criminal’ nature of its penalties. Ultimately, the District . . . [persuaded] the federal court that,

while the District’s penalties are nominally civil, they fulfill the same function as a criminal

enforcement action. Now, as Exide points out, the District has changed course and characterizes

its penalties as ‘civil.’ Accordingly, Exide argues that judicial estoppel should apply . . . .”).

To distinguish Exide and Tri-State, MSHA argues that the facts of the present case

warrant a different result because this case does not involve criminal or quasi-criminal penalties.

Rather, the post-petition MSHA penalties are civil in nature. The Court agrees that the post-

petition MSHA penalties are civil in nature and that Exide and Tri-State are inapposite to the

present case. Tri-State involved a criminal fine. Additionally, while the fines in Exide appear to

be similar to the MSHA penalties, the Exide court treated them as quasi-criminal because the

creditor in that case had previously argued that the fines were quasi-criminal in nature; therefore,

judicial estoppel applied. Here, MSHA has never argued that the post-petition penalties were

criminal or quasi-criminal in nature. Finally, the Court is persuaded by case law interpreting the

Mine Safety and Health Act of 1977 (and its statutory predecessor), and by the language of the

statute itself, which indicates that the penalties are civil in character.

The Mine Safety and Health Act of 1977 (the “Act”) was enacted for the purpose of

protecting the health and safety of miners. 30 U.S.C. § 801. The Act establishes “standards . . . to

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protect the health and safety of the Nation’s coal or other miners,” and requires each operator of

a mine to comply with such standards. Id. If the Secretary of Labor (through his authorized

representative) finds violations of the statute, citations are issued to the operator. Id. § 814. The

Act states that operators in violation “shall be assessed a civil penalty by the Secretary which

penalty shall not be more than $50,000 for each such violation.” Id. § 820(a)(1). Section 820(d)

specifically addresses the potential for criminal penalties, separate from civil penalties. Id. §

820(d). Criminal penalties may be issued against operators who “willfully” or “knowingly”

violate MSHA standards, and these penalties are limited to a $250,000 fine or imprisonment for

not more than one year. Id. The citations issued in this case, however, do not allege that the

Debtor violated MSHA health and safety standards “willfully” or “knowingly.”

The categorization of MSHA penalties as “civil” in nature, except when they are

specifically alleged as criminal penalties under § 820(d), is supported by case law. See United

States v. Finley Coal Co., 345 F. Supp. 62 (E.D. Ky. 1972), aff’d and remanded, 493 F.2d 285

(6th Cir. 1974), cert. denied, 419 U.S. 1089 (1974). The dispute in Finley Coal arose from an

underground explosion of interconnected mines, resulting in multiple fatalities and charges of

multiple violations of the Act’s statutory predecessor. Id. at 63. The defendant coal company

was issued a civil penalty under the statute in the amount of $53,600, similar to the penalties

imposed on the Debtor. Id. Separately, a federal indictment was returned against the defendant

charging 24 counts of MSHA violations. In a motion to dismiss, the defendant argued that “the

dual civil and criminal proceedings” constituted double jeopardy in violation of the Fifth

Amendment. Id. The District Court for the Eastern District of Kentucky held that “the threat of a

civil assessment and a criminal penalty” against the defendant under the Coal Mine Health and

Safety Act of 1969 did not constitute double jeopardy. Id. at 64.

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The Finley Coal court reasoned that Congress clearly enacted the predecessor statute to

establish “comprehensive penalties to be imposed under stated conditions, some of which are

civil and remedial in nature and . . . others criminal in nature to be sought only against wilful

violators.” Id. at 65. The citations issued in this case do not involve willful or knowing

violations. The Finley Coal case, interpreting penalties issued under the predecessor statute,

strongly supports the finding that the penalties imposed against the Debtor for MSHA violations

are civil in character.

CONCLUSION

Because the post-petition MSHA penalties are civil in character, the Court finds that the

post-petition penalties constitute (1) a transaction with the estate; and (2) directly benefit the

estate because civil penalties are generally part of the cost of doing business. For these reasons,

the Court has granted MSHA’s motion to allow an administrative expense for the post-petition

penalties under § 503(b)(1)(A). A separate order has been entered.

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