1992-08-13_GENERAL DOCUMENTS - C1981017 (2)

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In In re T.P. Long Chemical, Inc., 45 Bankr. 278 (Bankr. N.D.Ohio 1985), a bankruptcy trustee sold various items of personal property at auction. A bank held a security interest in equipment and inventory, and therefore claimed a security interest in proceeds held by the trustee. It then was discovered that the debtor had stored drums containing toxic substances on the premises. The EPA removed the toxic substances and attempted to recover cleanup costs from the trustee and the secured creditor. The court had no difficulty in finding that the EPA was entitled to an administrative priority against the estate. However, the unencumbered assets of the estate were insufficient to pay the administrative claim. The EPA therefore attempted to reach the sales proceeds claimed by the secured creditor. EPA's main argument was that it was entitled to surcharge the secured property pursuant to § 506(c) of the Bankruptcy Code, which permits a trustee to recover from secured property the reasonable, necessary costs of preserving or disposing of the property, to the extent of any benefit to the secured party. The court noted that § 506(c) "represents an exception to the traditional rule that costs of administration of a bankruptcy estate may not be charged against secured creditors." However, noting that the sale of the bank's collateral occurred before the toxic substances were removed or even the court found that "the EPA's expenditures cannot be considered as a cost incident to the sale of property such as a fee for an appraiser or auctioneer. Nor can the EPA's .expenditure be considered as a cost of preserving [the] collateral." Since no benefit was conferred on the secured party by the cleanup, no surcharge under § 506(c) was appropriate. The EPA also argued that it was entitled to an equitable lien ahead of the secured creditor. The court rejected the argument, holding that it would be inequitable to make the secured creditor bear the risk of all damage caused by property in which it holds a security interest. Although the result of T.P.Lonq was favorable to the secured creditor, the reasoning would support a different result on different facts. In Resources' case, it is reasonable to assume that the mine site is unmarketable without an environmental cleanup, or at least that the value of the real property would be enhanced as a result of cleanup. Costs of _Cleanup could very well be viewed as a cost incident to the sale of the property. With respect to mine equipment, it will be difficult to separate cleanup costs from costs of removal which would occur as an incident to sale. If benefit is conferred on Sanwa as a result of the cleanup, a surcharge on Sanwa's secured claim pursuant to § 506(c) is entirely appropriate. -8-