Opposition Brief — Pennsylvania Department of Environmental Protection v. Nigro, 120 S. Ct. 790 (2000) (No. 99-663)

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No. 99-663

IN THE

Supreme Court of the United States

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF ENVIRONMENTAL PROTECTION,

Petitioner.

JOSEPH P. NIGRO, TRUSTEE FOR THE ESTATE OF

TRI-STATE CLINICAL LABORATORIES, INC.,

Respondent.

ON PETITION FOR A Writ OF CERTIORARI TO THE

UniveD STATES CourRT OF APPEALS FOR THE THIRD CIRCUIT

RESPONDENT?’S BRIEF IN OPPOSITION

JAMES M. MALLEY MATTHEW M. PAVLOVICH

Counsel to Trustee Special Counsel to Trustee

NiGRO & MALLEY Counsel of Record

Two Gateway Center Suite 1240

Suite 1270 Lawyers’ Building

Pittsburgh, PA 15222 Pittsburgh, PA 15219

(412) 471-8118 (412) 391-1014

Attorneys for Respondent

156270 @©) Counsel Press LLC

FORMERLY LUTZ APPELLATE SERVICES

(800) 274-3321 + (800) 359-6859

QUESTION PRESENTED

Where a Debtor commits a crime during the pendency

of a Chapter 11 bankruptcy, is the actual amount of the

resulting criminal penalty assessed against the Debtor

properly classified and prioritized as an administrative

expense under the Bankruptcy Code?

LIST OF PARTIES

Respondent defers to Petitioner’s presentation of the

Parties to this action as stated in Petitioner’s brief.

STATEMENT PURSUANT TO RULE 29.6

At the time the Debtor, Tri-State Clinical Laboratories.

Inc., filed its bankruptcy petition, and throughout the entirety

of this case, no parent corporations were in existence and no

publicly held company owned 10% or more of Tri-State

Clinical Laboratories, Inc.’s stock.

TABLE OF CONTENTS

Page

Question Presented ..................cccccuae i

Ns arn cack aba a bcd ssccccevace ll

Statement Pursuant to Rule 29.6 ............... 11

MI cc ec cc cae cccce 11

Table of Cited Authorities .................... \

Bore Or AMOONGICSS ...... 6. cca. Vii

memsommems OF Mee Case ...... ww eee l

Reasons for Denying the Writ ................. 3

I. The Actual Amount Of A Criminal Penalty

Imposed On A Bankruptcy Debtor In

Possession Is Not An Administrative Expense

Under The Bankruptcy Code And This Court

Should Not Review The Third Circuit’s

Decision To The Contrary. .............. 3

A. The Third Circuit Did Not Depart From

This Court’s Decision In Reading Co. v.

Brown When It Decided That Criminal

Penalties Assessed For Conduct

Engaged In During A Chapter 11

Proceeding Are Not An Administrative

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BRR PRAT EN LPG” tg Gy RELL Me gees NG Se BASS

ACO Ee EI gee Le 3

Conclusion

Contents

The Court Of Appeals Did Not

Misconstrue The Legislative History Of

The Bankruptcy Code, And It Did Not

Depart From The Themes Of Reading.

aS eS SA RSS SDAA S OEE ES Oe ON AS 6S SS Ss

The Third Circuit’s Decision Does Not

Render 28 U.S.C. § 959(b) Inoperable.

2 De Se ESE Oe ee eS. eS ee ee ee ee oe ek ee

The Third Circuit’s Decision Is Not

Contrary To This Court’s Policy That

Federal Bankruptcy Courts Should Not

Invalidate State Criminal Proceedings.

2 RE eS > ae) ee es ee

The Third Circuit’s Decision Does Not

Stand Alone And In Conflict With The

Authoritative Decisions Of All Other, Or

Of Any Other, United States Courts Of

Appeals That Have Addressed This

Issue, Since No Other Courts Of Appeals

Have Addressed This Specific Issue.

a OR BS SOR OR ee ai i i ae oe a

The Third Circuit’s Decision Is

Consistent With The Concise Wording

Of § 503(b) Of The Bankruptcy Code,

Which Limits Administrative Expenses.

Pe SO ES PSE SO eee SS ee ee ee ee oe

2S eS SED OR OR SCA OS eS SO Oe Oe Oe Bb 6 ee Be

Page

TABLE OF CITED AUTHORITIES

Page

Cases:

Bates v. United States, 522 U.S. 23 (1997) ....... 16

Cumberland Farms v. Florida Dep't of Envtl.

Protection, 116 F.3d 16 (Ist Cir. 1997) ....... 13,14

Grogan v. Garner, 498 U.S. 279 (1991) ......... 16

In re Charles Bank Laundry, Inc., 755 F.2d 200 (Ist

Ee Pe ea ene 14

In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir.

cca. OE Cee re ee ee ene 14

In re N.P. Mining Co., 963 F.2d 1449 (11th Cir.

ena eee slg ua cee ee 12, 13, 14

Kelly v. Robinson, 479 U.S. 40 (1986) .......... 8

K-Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988)

[AUKGNADMES SOM Hehe ek aR eee 16

Oregon v. Witcosky (In re Allen Care Centers, Inc.)

96 F.3d 1328 (9th Cir. 1996) ................ 15, 16

Pennsylvania Department of Public Welfare v.

Davenport, 495 U.S. 552 (1990) ............. 8, 15

Reading Co. v. Brown, 391 U.S. 471 (1968) ......

Pere ee Wee Cee un pk baua eae ence 4,5, 6, 7, 12, 16

Cited Authorities

Page

United States Department of Interior v. Elliot, 761

F.2d 168 (G0 Ss ca cee ee ek 14

Statutes:

18 Pa. Stat. An Or kaa cere ks 1]

11 U.S.C. § 1QGGRER 5a ee ee 15

1] U.S.C. § SOD 222 eae ee ee 17

11 U.S.C. § Si or eee 10, 12, 16, 17

11 U.S.C. § SOR eee eae 17

11 U.S.C. § SPARE Rei ee ee ees 2

11 U.S.C. § S2xGe cere rene ass mth, U7

11 U.S.C. § TR ee re 2

1] U.S.C. § FR ee ee 8

28 U.S.C. § 5G aa ete 9

Other Authority:

Black’s Law Dictionary 521 (6th ed. 1990) ...... 17

Vil

TABLE OF APPENDICES

Appendix — Relevant Statute

Respondent respectfully prays that a writ of certiorari

not issue to review the judgment and opinion of the United

States Court of Appeals for the Third Circuit which has held

that the actual amount of a punitive criminal fine imposed

upon a Debtor during the pendency of a Chapter 11 Petition

was not an administrative expense of the Bankruptcy Estate.

STATEMENT OF THE CASE

On August 14, 1990, a voluntary petition pursuant to

Chapter 11 of the United States Bankruptcy Code was filed

by Tri-State Clinical Laboratories, Inc. (hereinafter,

“Debtor”). On January 21, 1992, a criminal complaint

(hereinafter, “Complaint”) was filed against Debtor

for alleged violations of Pennsylvania’s Solid Waste

Management Act (hereinafter, “Act”). Count I of the

Complaint accused Debtor of allegedly unlawfully storing

municipal waste on or about July 18, 1990. Count II of the

Complaint alleged that Debtor violated the Act on October

4, 1990, by allegedly disposing of infectious waste in a

municipal dumpster.

Debtor was ordered to pay a criminal fine in the amount

of $10,000.00, as a result of the allegations in Count I. Debtor

was also ordered to pay a criminal fine in the amount of

$20,000.00, as a result of the allegations in Count II.

Joseph P. Nigro was appointed as the Chapter 11 Trustee

in September, 1992. On Motion of Mr. Nigro, the case was

converted to Chapter 7 on October 6, 1992, and Mr. Nigro

was appointed the Chapter 7 Trustee on December 1, 1992.!

1. From this point forward “Respondent” will be used to refer

to Mr. Nigro acting solely in his Capacity as Trustee of the

Bankruptcy Estate of the Debtor.

On August 19, 1994, Petitioner filed a proof of claim in

which it asserted: 1) a $10,000.00 subordinated unsecured

claim pursuant to § 726(a)(4) of the United States Bankruptcy

Code (hereinafter, “Code”), on the basis of the Count |

criminal fine; and, 2) a $20,000.00 Administrative Claim

pursuant to § 726(a)(1) and § 507(a)(1) of the Code, on the

basis of the Count II] criminal fine.

There have been no averments or allegations that the

fines were assessed in relation to any actual costs or expenses

incurred by Petitioner, or for any monies disbursed by

Petitioner relating to the criminal acts, generally, or relating

to the prosecution of the criminal acts, specifically. The fines

were assessed solely as a punitive measure.

On April 1, 1997, Respondent filed the Trustee’s

Objection to Proof of Claim Filed by the Commonwealth of

Pennsylvania, Department of Environmental Resources, and

a Notice of Hearing With a Response Deadline, on April 1,

1997. Although Respondent’s Objection did not address the

claim based upon the Count I criminal fine, Respondent has

objected to the Administrative characterization of the actual

amount of the Count II criminal fine.

On April 9, 1997, a hearing was held before the

Bankruptcy Court, at which point in time it was determined

that the facts were not in dispute. On August 21, 1997, the

Bankruptcy Court entered an order sustaining Respondent’s

objection, and held that Petitioner had a valid unsecured

claim.

An appeal was timely filed by Petitioner to the United

States District Court for the Western District of Pennsylvania.

On May 5, 1998, the decision of the Bankruptcy Court was

affirmed by the District Court.

A timely appeal was filed with the United States Court

of Appeals for the Third Circuit, and on June 2, 1999, the

Court of Appeals affirmed the decision of the District Court,

which had affirmed the decision of the Bankruptcy Court.

Petitioner’s request for hearing en banc was denied on July

21, 1999.

REASONS FOR DENYING THE WRIT

THE ACTUAL AMOUNT OF A CRIMINAL PENALTY

IMPOSED ON A BANKRUPTCY DEBTOR IN

POSSESSION IS NOT AN ADMINISTRATIVE

EXPENSE UNDER THE BANKRUPTCY CODE AND

THIS COURT SHOULD NOT REVIEW THE THIRD

CIRCUIT’S DECISION TO THE CONTRARY.

Petitioner is correct when it states that the issue presented

before this Honorable Court is “clear cut and

straightforward.” However, Petitioner is incorrect when it

states that the Third Circuit’s decision ignores “the text of

the Bankruptcy Code and misconstru[es] legislative history

to circumvent this Court’s decision in Reading Co. v. Brown,

391 U.S. 471 (1968), [which] encourages other debtors in

possession to engage in similar cost-benefit analysis when

deciding if they should comply with state and federal laws.”

Pet. at 4.

On the contrary, in its decision, the Third Circuit has

applied the plain text of the Code, and properly refused to

create legislation by adopting a holding which would do what

the United States Congress has chosen not to do, as of this

date. Despite Petitioner’s attempts to have the judicial branch

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legislate in this case, the Third Circuit has honored the intent

of Congress by properly interpreting the legislative history

of the Bankruptcy Code while honoring the themes

established by this Honorable Court in Reading.

Additionally, Petitioner’s argument that Chapter 11 debtors

in possession (hereinafter, “DIPs”) will now somehow be

encouraged to commit criminal acts as cost-cutting measures

is unrealistic and without merit. Furthermore, no other circuit

courts have ruled on the specific issue of the prioritization

of the actual amounts of punitive criminal fines incurred by

a DIP, and as such, the Third Circuit’s decision does not

conflict with any other courts in this land. This case’s holding

stands alone because the facts of this case clearly make this

case unique. Therefore, no compelling reasons exist for this

Petition to be granted by this Honorable Court.

A. The Third Circuit Did Not Depart From This Court’s

Decision In Reading Co. v. Brown When It Decided

That Criminal Penalties Assessed For Conduct

Engaged In During A Chapter 11 Proceeding Are Not

An Administrative Expense.

Contrary to Petitioner’s analysis of the Third Circuit’s

holding in this case, the Third Circuit’s decision actually

furthers the rationale espoused by this Honorable Court in

Reading.

Whether this present case is contrasted with Reading,

or compared to Reading, it is important to study the

underlying claim of both subject creditors in each of the

cases. In Reading, this Honorable Court was confronted with

a claim filed by a Creditor whose house was destroyed by a

fire which resulted from the negligence of the receiver of

the Debtor’s estate, and one of the receiver’s workmen. The.

claim of the creditor was based upon a civil tort, through

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which the creditor sought reimbursement of actual damages

caused by the estate. The claim in Reading arose through a

mere accidental act of a receiver. Reading Co., 391 US. at

477. It was in this context that this Honorable Court stated

that those creditors that suffer an actual injury by the

operation of the business should recover ahead of other

creditors. /d. at 482, 485.

Additionally, in Reading, this Honorable Court stated:

“We hold that damages resulting from the negligence of a

receiver acting within the scope of his authority as receiver

give rise to ‘actual and necessary costs’ of a Chapter XI

arrangement.” /d. at 485. Thus, claims that should be deemed

to be administrative expenses are those involving actual

damages, and which result from activity of a receiver (or

DIP, in this case) acting within the scope of its authority.

The Third Circuit’s opinion in the present case is

consistent with the aforementioned Reading analysis. In the

present case, Debtor engaged in “egregious” criminal

conduct, according to the Petition. Pet. at 3. The Proof of

Claim filed by Petitioner is comprised solely of the actual

amount of a punitive, criminal, fine assessed against the

Debtor as a result of the Debtor’s violation of criminal

Statutes. There are no facts of record which indicate that the

$20,000.00 fine has been assessed as reimbursement for

Petitioner’s damages.’

In the present case, the Third Circuit stated:

It is neither reasonable nor necessary for a

commercial enterprise to violate criminal laws and

2. In fact, Petitioner states in its statement of the case that the

proof of claim was filed seeking to collect the $20,000.00 criminal

“penalty” as a Chapter 11 administrative expense. Pet. at 3.

endanger the public ... Rather we believe

Congress intended only for those “actual

necessary costs and expenses” that arise in context

of, or compensate for, legitimate business

activity, or the losses resulting therefrom, to be

treated as expenses of preserving the estate, and

accorded priority as an administrative expense.

Petitioner’s App. at 13a.

Finally, Reading stated that an important statutory

objective in bankruptcy is: “fairness to all persons having

claims against an insolvent.” Reading Co., 391 U.S. at 477.

This Honorable Court placed such an emphasis on that

specific objective, that it was held to be the “decisive”

statutory objective. /d. In the present case, the Third Circuit

followed Reading’s theme of fairness to all creditors when

it stated that if Petitioner’s claim is deemed to be an

administrative expense:

The practical result would be that fines for

committing crimes would be paid by innocent

creditors ... rather than . . . the criminal. That is

as unfair as it is impractical. The payment of the

criminal fine would not compensate for any

damages resulting from Tri-State’s conduct. It

would merely cause Tri-State to satisfy its

obligations to the state out of the pockets of Tri-

State’s creditors.

Petitioner’s App. at 13a.

The Third Circuit’s opinion does follow the rationale

behind Reading’s belief that those who suffered actual

injuries from the operation of a business should recover ahead

of other creditors, and that fairness mandates that all innocent

creditors should not have to pay the punitive fine incurred

as a result of Debtor’s criminal acts.

None of the cases cited by Petitioner, including Reading,

are factually similar to this case. All cases cited by Petitioner

involve civil fines, and none involve punitive criminal fines.

Although the facts of this case make it truly unique, the Third

Circuit applied the themes of Reading to this case in order

to render a just decision.

B. The Court Of Appeals Did Not Misconstrue The

Legislative History Of The Bankruptcy Code, And

It Did Not Depart From The Themes Of Reading.

Seeking to have this Honorable Court do what only

Congress may do, Petitioner has taken a portion of the Third

Circuit’s opinion out of context.

Although the Third Circuit does reference and discuss

11 U.S.C. § 726(a)(4) in its opinion, the Third Circuit does

not rely upon the legislative history of § 726(a)(4) of the

Code, exclusively when rendering its decision in this case.

Petitioner’s App. at 212. The Third Circuit simply cites to

the legislative history of this code section in the context of

discussing the legislative history of the Code, in general. In

addition to considering the legislative history of the Code,

the Third Circuit stated that its decision was also based upon

policy considerations evidenced by the text of the code and

cases interpreting same. Petitioner’s App. at 21a.>

3. In fact, after discussing the legislative history of § 726(a)(4),

the Third Circuit specifically stated, “Thus, prepetition fines were

(Cont’d)

By analyzing the legislative history of the entire Code,

the Third Circuit concluded that there was a distinction

between a portion of a criminal fine which was compensatory

and a portion of which was non-compensatory. In its opinion,

the Third Circuit determined this by analyzing § 523(a)(7)

of the Code, and the cases of Kelly v. Robinson, 479 U.S. 40

(1986), and Pennsylvania Department of Public Welfare v.

Davenport, 495 U.S. 552 (1990), which interpreted same.

Petitioner's App. at 20a-21a. It was only after this analysis

that the Court determined that a distinction between the

compensatory nature of a criminal fine, and the non-

compensatory nature of such a fine, should be maintained

throughout the Code:

We do not believe that Congress intended for us

to ignore the non-compensatory character of a

criminal fine in deciding if it is an administrative

expense under § 503, while explicitly requiring

that consideration under § 523(7). Rather, for the

reasons previously stated, we conclude that

§ 503’s restriction to “expenses of preserving the

estate” limits such expenses to those that

constitute compensation for expenditures

necessary to the operation of the Debtor-in-

possession’s business.

Petitioner’s App. at 21a.

(Cont’d)

accorded second class status in the distribution scheme.” Petitioner’s

App. at 18a. The Third Circuit never explicitly or implicitly stated

that its reference to § 726(a)(4) was dispositive in this case, in any

way. Petitioner’s App. at 18a.

Although the Third Circuit does mention Code sections

involving pre-petition penalties in its opinion, Petitioner is

incorrect in stating that the Third Circuit relied upon those

Code sections in its disposition of this case.

C. The Third Circuit’s Decision Does Not Render

28 U.S.C. § 959(b) Inoperable.

Respondent agrees that a DIP is required to manage and

operate property in its possession according to the

requirements of the valid laws of the state in which such

property is located, according to 28 U.S.C. § 959(b).

However, in claiming that the Third Circuit’s opinion

renders § 959(b) inoperable, Petitioner’s reasoning is flawed

when it states:

Any deterrent effect, however, is lost if a Debtor

operating postpetition is allowed to do so

with impunity, knowing that any penalty is

characterized as a general unsecured claim and,

therefore, in all probability will never be paid.

Treating the criminal penalty as an administrative

expense insures its payment, thereby reinforcing

the deterrent effect by not allowing a debtor in

possession and creditors to benefit from engaging

in cost-cutting criminal behavior.

Pet. at 9.

It was never held that Petitioner’s claim is denied in its

entirety. The Third Circuit affirmed the orders of the District

Court and the Bankruptcy Court, which held that Petitioner’s

claim is allowed as an unsecured claim.‘ Petitioner still has

a valid unsecured claim against the bankruptcy estate in this

case.

Petitioner would have this Honorable Court believe that

if Petitioner receives payment on its claim from the

bankruptcy estate, and possibly to the exclusion of other

creditors, this would have a deterrent effect on possible

criminal conduct of DIPs in the future. The opposite is true.

The true way to punish someone is to focus on the source of

payment of the fine, to the exclusion of the recipient of said

payment.

This case, however, involves the Debtor’s commission

of a criminal act. Deeming the actual amount of a criminal

fine to be an “administrative expense” will have no deterrent

effect on a criminal actor. The Third Circuit’s interpretation

that § 503(b) creates an administrative expense for claims

involving reimbursement of actual costs, and not for claims

involving the actual amounts of punitive criminal fines, does

not ‘““emasculate” any federal statute requiring DIPs to operate

a business in accordance with state law.

D. The Third Circuit’s Decision Is Not Contrary To This

Court’s Policy That Federal Bankruptcy Courts

Should Not Invalidate State Criminal Proceedings.

The Third Circuit held that Petitioner has an unsecured

claim, not an administrative claim pursuant to § 503(b) of

4. The Order of Court issued by the Bankruptcy Court is

reproduced in Petitioner’s App. at 42a; the Order of Court issued

by the District Court is reproduced in Petitioner’s App. at 29a; and,

the Judgment issued by the Third Circuit is reproduced in Petitioner's

App. at 25a.

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the Bankruptcy Code. The Third Circuit neither denied

Petitioner’s claim, nor did it ever deem that Petitioner’s claim

is dischargeable. If it had, it would indeed have had the effect

of invalidating the state criminal proceedings in this case,

as Petitioner claims is the result of the decision below. Just

because Petitioner’s claim is not treated preferentially, as

compared to other claimants, that does not mean that the

Third Circuit invalidated (either actually or theoretically),

Petitioner’s criminal complaint.

Instead, if Petitioner had objected to the dischargeability

of the debt underlying its claim, Petitioner’s claim would

have survived dischargeability, pursuant to § 523(a)(7) of

the Code. Additionally, and ironically, Petitioner has the

ability to pursue the officers of Debtor in this case pursuant

to a valid state law. 18 Pa. Stat. ANN. § 307.° As a result of

the Third Circuit’s decision, Petitioner could still choose to

pursue the officers of Debtor, personally ultimately place

the officers of the corporation in a position where they would

be forced to use whatever means necessary to pay the fines,

including selling their personal assets which are not even

part of the bankruptcy estate (since the Debtor is solely the

corporation). Just because Petitioner has failed to avail itself

of this potential remedy does not mean that it does not exist.

The Third Circuit’s decision does not “invalidate” any

state criminal proceeding. In fact, the Third Circuit’s decision

bolsters and reinforces the criminal proceedings involving

Petitioner in state court.

5. Subsection (e) of Section 307 of 18 Pa. Stat. ANN., entitled

“Liability of organizations and certain related persons” has been

reproduced in the Appendix to this Response. Respondent’s App.

at la.

E. The Third Circuit’s Decision Does Not Stand Alone

And In Conflict With The Authoritative Decisions

Of All Other, Or Of Any Other, United States Courts

Of Appeals That Have Addressed This Issue, Since

No Other Courts Of Appeals Have Addressed This

Specific Issue.

The Third Circuit was the first Circuit Court to address

the specific issue stated in the Question Presented portion

of this Reply. Thus, if the Third Circuit Court’s holding

“stands alone”, it is alone not due to a conflict with other

Circuit Courts, but due to the unique facts of this case.

In the Petition, Petitioner seeks to “boot-strap” the claim

in the present case which involves the actual amount of a

punitive criminal fine assessed for “egregious criminal

conduct”, into administrative expense priority pursuant to

§ 503(b). Petitioner attempts to do this by citing to other

circuits which have dealt with facts and issues not the same

as the facts and issue before this Honorable Court in the

present case.

Petitioner cites to Jn re N.P. Mining Co., 963 F.2d 1449

(11th Cir. 1992), which involved a civil fine imposed for

the violation of a strip-mining regulation. Pet. at 11. The

N.P. Mining court did not comment on punitive criminal fines

assessed for egregious criminal conduct of DIPs. N.P. Mining

chose to distinguish itself from Reading, a case relied upon

by Petitioner, since Reading involved reimbursement of

actual damages to the creditor. N.P. Mining, 963 F.2d at 1456.

Although adopting Reading’s view that in some cases

“costs ordinarily incident to operation of a business” are to

be accorded administrative-expense priority, N.P. Mining felt

that ensuring compliance by trustees with state law is

sufficient justification to place civil penalties in the category

of “some cases” where costs Ordinarily incident to the

operation of a business are deemed to be administrative

expenses. /d. at 1458.

However, if a DIP (through its corporate officers) is

clearly intent on engaging in criminal activity in violation

of acriminal statute, at the possible risk of losing the officer’s

liberty or personal assets to a state enforcement agency, then

merely deeming a criminal fine to be an administrative

expense of a bankruptcy estate is definitely not going to

encourage the DIPs to comply with state laws. The Third

Circuit correctly recognized that the facts of the present case

could not possibly allow for the N.P. Mining rationale to be

dispositive in this case without the Third Circuit first

inferring that criminal conduct is part of the ordinary and

necessary operation of a business:

... doing so [applying N.P. Mining’s rationale

here] would require us to infer that disposing of

infectious human waste in a manner that not only

endangers members of the general public, but also

constitutes criminal activity, is part of the ordinary

and necessary operations of a business.

Petitioner’s App. at 23a. Fortunately, the Third Circuit chose

not to insult the integrity of all business owners.

In its second attempt to illustrate a conflict where none

exists, Petitioner cites to Cumberland Farms v. Florida Dep't

of Envtl. Protection, 116 F.3d 16 (1st Cir. 1997). Cumberland

Farms involved a civil fine imposed upon a DIP, Cumberland

Farms, for its failure to “establish and maintain evidence of

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financial responsibility.” Cumberland Farms, 116 F.3d

at 18. Since Cumberland Farms involves the imposition of

a civil fine, its holding does not mandate a different decision

in the present case, for the same aforementioned reasons that

N.P. Mining does not mandate a different decision in this

case.°

Another case cited by Petitioner is United States

Department of Interior v. Elliot, 761 F.2d 168 (4th Cir. 1985).

Although the Elliot court did hold that post-petition penalties

should be treated on an equal basis, the rational applied by

the Elliot court is inapplicable in the present case. Petitioner

cites to Elliot for the proposition that Section 57(j) of the

bankruptcy act allowed “all postpetition penalty claims

regardless of whether they were incurred by the Trustee or

by the Debtor in possession.” Pet. at 14. However, the last

part of that quote is the heart of the Elliot court’s rationale:

“_. the critical inquiry is the extent to which the creditors

could prevent the accrual of the penalties.” Elliot, 761 F.2d

at 172. What Elliot sought to establish by its holding was

the allocation of responsibility to creditors of the bankruptcy

estate. However, there has been no finding in this present

case as to what the creditors of the Debtor’s estate could

6. Petitioner discusses other First Circuit cases referenced in

Cumberland Farms, which involve civil fines. None of those cases

are relevant to the present case for the same reason that Cumberland

Farms is not: Jn re Charles Bank Laundry, Inc., 755 F.2d 200

(1st Cir. 1985) (holding that a civil compensatory fine qualified for

first-priority treatment, when the DIP was fined for violating an

injunction); and, Jn re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir.

1976) (holding that claims entitled to first priority as cost or expense

of administration, must first pass through threshold of occurring

after filing of the Petition for relief, otherwise claim will not be

considered for administrative expense prioritization).

have possible done to prevent Debtor’s commission of the

criminal acts which prompted the fine. It is also difficult to

imagine that, in any bankruptcy case, any of the creditors

could possibly be expected to know that a DIP is engaging

in criminal activity.

Petitioner’s reliance upon the case of Pennsylvania Dep't

of Pub. Welfare vs. Davenport, 495 U.S. 552 (1990) for the

proposition that there is generally no difference between the

treatment of criminal and civil sanctions in the Bankruptcy

Code is misplaced. Pet. at 14. The issue in Davenport was

whether or not restitution obligations constitute “debts”

within the meaning of § 101(11), and would be therefore

dischargeable under Chapter 13. Davenport, 495 U.S. at 552.

The issue before this Honorable Court in Davenport did not

involve the treatment of criminal fines as compared to the

treatment of civil fines in terms of Bankruptcy Code.

Finally, Petitioner misapplies the case of Oregon v.

Witcosky (In re Allen Care Centers, Inc.), 96 F.3d 1328

(9th Cir. 1996) in its final attempt to show that the Third

Circuit’s decision conflicts with other circuit courts.

Petitioner alleges that the court in Witcosky denied

administrative expense status to the subject creditor’s claim

(based upon recoupment of funds advanced by a state agency

to the Debtor) because the “expenses were not a result of the

debtors wrongdoing, but simply from its insolvency.” Pet.

at 14. Petitioner also states that “in the Ninth Circuit, a state

only receives administrative expense priority if the Debtor

engages in wrongdoing.” Pet. at 14-15. What Petitioner fails

to state is that the Court in Witcosky was explaining why it

did not agree with the Oregon Department of Human

Resources’ assertion that its expenses “were entitled to

administrative priority under Reading as ‘costs ordinarily

incident to operation of a business.’ ” Witcosky, 96 F.3d at

1331. Ironically, the Ninth Circuit’s holding and rationale

actually narrow the application of Reading to prevent “boot-

strapping” efforts (such as the one attempted by Petitioner

in this case) when it stated, “the rule of Reading applies only

in cases involving ‘post-petition tort-like conduct.’ ” /d.

The Third Circuit is the first Circuit Court of Appeals

to encounter the issue of how to treat creditor claims based

upon the actual amount of purely punitive post-petition

criminal fines incurred during the pendency of a Chapter 11

bankruptcy. The Third Circuit’s analysis is consistent with

the analysis undertaken by all of the cases cited by Petitioner,

but since the subject matter of this case is different from all

others, there is no conflict between the circuits.

F. The Third Circuit’s Decision Is Consistent With The

Concise Wording Of § 503(b) Of The Bankruptcy

Code, Which Limits Administrative Expenses.

The United States Bankruptcy Code is clear and

unambiguous, and the Third Circuit’s decision is consistent

with the Code.

This Honorable Court has held that whenever a court

analyzes the meaning of a particular statute, it must look to

the particular statutory language at issue, as well as the

language and design of the statute as a whole. Grogan v.

Garner, 498 U.S. 279, 287 (1991) (citing K-Mart Corp. v.

Cartier, Inc., 486 U.S. 281, 291 (1988)). Additionally, this

Honorable Court generally resists reading words or elements

into a statute that do not appear on its face. Bates v. United

States, 522 U.S. 23 (1997). It is against this backdrop that

the Third Circuit decided the present case.

Section 503(b) of the Code explicitly addresses the actual

amount of criminal fines, but only allows administrative

expense priority for the actual amount of criminal fines in

the context of taxes. Section 503(b) also explicitly addresses

administrative claims relating to criminal prosecutions, but

limits such claims to the “actual, necessary expenses”

incurred by a creditor “in connection with the prosecution

of a criminal offense relating to the case or to the business

or property of the Debtor.” 11 U.S.C. § 503(b)(3)(c)

(Emphasis added; text reprinted in Petitioner’s App. at

44a-4Sa).’

Further references to criminal fines in the Code are found

in § 523(a)(7), which explicitly references the actual amounts

of fines and penalties by exempting same from

dischargeability debts “to the extent such debt is for a fine,

penalty . . . payable to and for the benefit of a governmental

unit, and is not compensation for actual pecuniary loss, other

than a tax penalty .. .” 11 U.S.C. § 523(a)(7).

In its analysis of the Code, the Third Circuit found the

language of § 503(b) to be suggestive of a quid pro quo

exchange in which the estate accrues a debt for consideration

necessary to the operation of the business. Petitioner’s App.

at 7a. In its well reasoned opinion, the Third Circuit stated:

“Congress recognized the need to provide incentive to

creditors who would otherwise not continue to provide

7. The Third Circuit does state that since Congress expressly

included tax fines and penalties in § 503, this implies that had

Congress intended to include other types of fines and penalties within

the class of administrative expenses, it would have done so expressly.

Petitioner’s App. at 7a n.4. This follows the maxim “expressio unius

est exclusion alterius”, meaning the expression of one thing is the

exclusion of another. Black’s Law Dictionary 521 (6th ed. 1990).

services to a failing business. Accordingly, ‘the actual,

necessary costs and expenses of preserving the estate’ are

given priority under the Code.” Petitioner’s App. at 8a.

It was, in part, after this analysis of the actual language

of Bankruptcy Code, itself, that the Third Circuit properly

held that punitive criminal fines arising from post-petition

behavior are not administrative expenses. Petitioner's App.

at 23a.

There is no need for this Honorable Court to intervene

since Petitioner has failed to provide any compelling reasons

for this Honorable Court to grant its Petition.

CONCLUSION

For all of the foregoing reasons, Respondent respectfully

requests that this Honorable Court deny the Petition for Writ

of Certiorari to the United States Court of Appeals for the

Third Circuit.

Respectfully submitted,

JAMES M. MALLEY MATTHEW M. PAVLOVICH

Counsel to Trustee Special Counsel to Trustee

NiGro & MALLEY Counsel of Record

Two Gateway Center Suite 1240

Suite 1270 Lawyers’ Building

Pittsburgh, PA 15222 Pittsburgh, PA 15219

(412) 471-8118 (412) 391-1014

Attorneys for Respondent

APPENDIX

a 6 WO hse aren To 9

APPENDIX — RELEVANT STATUTE

18 Pa. C.S.A. § 307(e)

§ 307. Liability of organizations and certain related

persons

(e) Persons acting or under a duty to act for

organizations. —

(1) A person is legally accountable for any

conduct he performs or causes to be performed in

the name of a corporation or an unincorporated

association or in its behalf to the same extent as

if it were performed in his own name or behalf.

(2) Whenever a duty to act is imposed by law

upon a corporation or an unincorporated

association, any agent of the corporation or

association having primary responsibility for the

discharge of the duty is legally accountable for a

reckless omission to perform the required act to

the same extent as if the duty were imposed by

law directly upon himself.

(3) When aperson is convicted of an offense

by reason of his legal accountability for the

conduct of a corporation or an unincorporated

association, he is subject to the sentence

authorized by law when a natural person is

convicted of an offense of the grade and the degree

involved.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.