Daily Development for Thursday, September 27, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

A portion of this report comes from DIRTer Larry Schnapf's excellent Environmental Law Newsletter. Larry's Website is: www.environmental-law.net

HAZARDOUS SUBSTANCES; STATE "SUPERLIEN" STATUTES; BANKRUPTCY: Bankruptcy code does not preclude enforcement of state superlien law.

In re: 229 Main Street Limited Partnership, 2001 U.S. App. LEXIS 18804, No. 00-2236 (1st Cir. 8/22/01)

The Court of Appeals for the First Circuit ruled in that the automatic stay provision of the Bankruptcy Code did not preclude Massachusetts from perfecting a "superlien" on land after the owner had filed for bankruptcy.

A "superlien" allows a state to place a lien on property that has priority over previously recorded security interests or liens on the property.

The court noted that this is an issue of first impression for an appeals court.

Here, contamination from property owned by 229 Main Street Ltd. Partnership had migrated into drinking water wells, causing the state to incur emergency cleanup costs. In November 1998, the state notified the partnership that the state intended to file a superlien on the property.

The partnership initially denied responsibility for the contamination, objected to the dollar amount of the cleanup, and demanded an administrative hearing on the proposed lien.

After an administrative law judge ("ALJ") denied the owner's request for a stay of the proceeding, the partnership filed a Chapter 11 petition for bankruptcy in June 1999 along with a notice of automatic stay. The state opposed the request for stay and the ALJ once again declined to stay the proceeding.

The debtor asked the bankruptcy court to hold the state in contempt for continuing to try to enforce the superlien. The bankruptcy court refused the debtor's request and the debtor appealed. The district court ruled, however, that the automatic stay did not preclude continuation of the proceedings necessary to perfect the Commonwealth's environmental superlien.

The automatic stay prohibits the commencement or continuation of proceedings, or enforcement of judgments based on claims that arose prior to the bankruptcy proceeding. The purpose of the automatic stay is to provide the debtor with breathing room so that it can reorganize and develop a plan for equitably distributing its assets. The court noted, however, that there is an exception to the automatic stay for enforcement actions or proceedings brought by the government to enforce police or regulatory powers. It did not appear to rely entirely on this statute, however, perhaps because it recognized that the establishment of a lien is not, in and of itself, an enforcement of policy or regulatory powers.

Another exception allows acts to perfect, or to maintain or continue the perfection of an interest in property. Bankruptcy Code Sections

362(b)(3); 546b. The debtor argued that the state had not filed a lien when the bankruptcy petition was filed, it did not have an "interest" in the property and therefore could not avail itself of the exception. The court found that "interest in property" was not synonymous with the filing of a lien.

"[W]e ascribe considerable significance to the fact that section 362(b)(3) uses the term "interest in property" rather than the term "lien." Giving Congress's word choices their full effect is an especially attractive option here. After all, the text of section 362(b)(3) is straightforward and leads to a perfectly plausible result. That makes the case for plain meaning extremely compelling . . . We therefore conclude that the term "interest in property" as used in section 362(b)(3) is broader than the term 'lien.'"

Relying on a New Jersey case interpreting a virtually identical superlien law, the court said the state obtained an interest in the debtor's property on the date the state notified the debtor.

The court also said the act of simultaneously creating and perfecting a property interest under the Massachusetts superlien statute qualified as an "act to perfect." It conceded that only "acts to perfect" an interest are protected, and not acts to both create and perfect an interest. The Massachusetts statute, as pointed out, states that the recordation actually creates the lien. But the court was up to this challenge. It noted that the Bankruptcy Code provides that actions to "perfect . . . an interest in property" are exempt from the automatic stay under the Bankruptcy Code, not simply actions to perfect a lien. The court had already found that the state's expenditure of funds and pursuit of the lien established an interest in the property. It then moved to the conclusion that the simultaneous postpetition creation and perfection of the lien was in fact a "perfection" of that preexisting "interest in property."

Comment: As the claim that the "interest in property" didn't exist until it was filed, the debtor certainly had a point, if one looks only at the language of the state statute:

"Any liability to the commonwealth [for cleanup costs] shall constitute a debt to the commonwealth. Any such debt ... shall constitute a lien on all property owned by persons liable under this chapter when a statement of claim naming such persons is recorded, registered or filed. ... Any lien recorded, registered or filed pursuant to this section shall have priority over any encumbrance theretofore recorded, registered or filed with respect to any site ... described in such statement of claim."

The statute seems to say that a lien does not exist until the claim is so recorded. The precedent upon which the court relied dealt with property tax lien claims. Although the court does not give us the language of tax lien statute involved in the precedent case, it is not unusual for tax lien statutes to provide that the lien is in existence long before it is recorded.

Further, Congress saw fit to amend the Bankruptcy Code after the precedent case to provide specifically for the priority of tax liens in bankruptcy even if they were not perfected before filing.

Of course, the court insists that some other kind of interest in the debtor's property was in existence prior to the filing of the lien.

Aside from relying upon the prior case involving tax liens, the court undertakes zero analysis as to what sort of "interest in property"it had in mind and on what basis the court decided that it came into existence. Here is the court's total analysis of this issue on the basis of Massachusetts law:

In this case, the debtor was liable to the Commonwealth for past and future cleanup costs; the Commonwealth had a present right to record a lien on the Property; and it had set that process in motion by notifying the debtor of its intentions and participating vigorously in the administrative hearing process. Viewing these facts through the prism of Acme Laundry, we conclude, as did the district court, 229 Main St., 251 B.R. at 192, that this amalgam --

the Commonwealth's expenditures, together with its notice of intent to record a lien and its tenacious pursuit of that lien through administrative channels -- sufficed to satisfy section 362(b)(3)'s "interest in property" requirement."

Comment 2: The notion that the filing of the lien "perfected" the interest the court identified in the property depends, of course, on the nature of that interest, which is left entirely unexplained. Thus, we have shadow built upon shadow. Oh well, it's probably all in the public interest.

Right?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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