108 In re: H.L.S. Energy Co., Inc.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
In re H.L.S. Energy Co., Inc., 151 F.3d 434 (5th Cir. 1998) holds that expenses incurred after a bankruptcy petition is filed (post-petition) for the remediation of post-petition environmental liabilities constitute an administrative expense entitled to priority in bankruptcy over the claims of other unsecured creditors. The debtor was the sole operating interest owner in wells which ceased producing for over one year, and the estate’s obligation to plug the wells under Texas law arose post- petition. The Chapter 11 Trustee negotiated an agreement with the State of Texas under which the state waived substantial penalties, plugged the wells and charged the cost of plugging to the estate.
 
The bankruptcy proceeding was converted from a Chapter 11 reorganization to a Chapter 7 liquidation. The Chapter 7 Trustee contested the state’s priority status, contending that the plugging did not benefit the bankruptcy estate.
 
The Court ruled that the costs incurred by the State of Texas in plugging debtor’s unproductive oil wells in accordance with Texas law was an “actual, necessary cost” of managing the estate because under federal law, bankruptcy trustees must comply with state law and may not abandon property in contravention of a state law reasonably designed to protect public health or safety. The state law requiring the plugging of debtor’s unproductive wells was designed to promote public health and safety. Therefore, the state’s claim was entitled to administrative expense priority. The Court expressly did not reach the question of whether post-petition expenses for the remediation of pre-petition environmental liabilities would likewise constitute an administrative expense.
 
This case is significant to the state’s continuing efforts to enforce plugging obligations because the failure to plug is frequently attributable to business failure.