In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3948
IN RE:
R ESOURCE T ECHNOLOGY C ORPORATION,
Debtor.
A PPEAL OF:
S AMUEL J. R OTI.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 10 C 3173—Matthew F. Kennelly, Judge.
A RGUED S EPTEMBER 7, 2011—D ECIDED O CTOBER 31, 2011
Before P OSNER, FLAUM, and H AMILTON, Circuit Judges.
P OSNER, Circuit Judge. This appeal presents a novel
issue: the priority of a claim against the debtor’s estate
in a Chapter 7 bankruptcy for damages arising from a
tort committed by the debtor during the interval between
the appointment of the trustee in bankruptcy and the
liquidation a few months later of the bankrupt’s assets
that had been the source of the tort.
The dramatis personae (besides the Chapter 7 trustee) are
Roti, the claimant; Resource Technology Corporation, the
2 No. 10-3948
bankrupt (which the parties call “RTC”); and Congress
Development Company (“CDC”), like Roti a creditor
of the bankrupt estate.
Roti owned a Holiday Inn in a Chicago suburb. The
hotel was adjacent to a landfill owned and operated by
CDC. Back in 1996 CDC had hired RTC to build a system
for preventing the methane, carbon dioxide, hydrogen
sulfide, and other gases generated in the landfill from
leaking; the system would also extract energy from the
gas, which RTC would sell, paying CDC a royalty. So:
a gas collection and control system.
In 1999 RTC was forced into bankruptcy under
Chapter 11 (reorganization). Roti bought the Holiday
Inn three years later, and in 2005 it followed RTC
into Chapter 11, though for unrelated reasons. RTC’s
Chapter 11 bankruptcy was converted to a Chapter 7
bankruptcy (liquidation) in September 2005. A trustee
was appointed on September 21 and six days later was
authorized by the bankruptcy judge to operate the
debtor’s business for a period of just under three
months, but the period could be extended and presum-
ably would be until the liquidation was complete. RTC
operated gas collection and control systems at other
landfills, but the record is silent on how the liquidation
of those assets proceeded.
Four days after the trustee was given operational
control of RTC’s business en route to liquidation, RTC’s
gas collection and control system at CDC’s landfill failed;
it had been malfunctioning for years and RTC had lacked
the financial wherewithal to fix it. The system’s failure
No. 10-3948 3
released foul odors that, traveling underground, wafted
into the hotel through electrical outlets and floor cracks.
The odors sickened guests and employees, resulting
(according to Roti) in a disastrous fall off in the hotel’s
business.
Illinois’s environmental protection agency issued
notices of violation of the Illinois Environmental Protec-
tion Act and other environmental regulations to both
RTC and CDC. RTC’s trustee responded that the bank-
rupt estate had no money to repair the gas collection
and control system. On January 13 CDC was permitted to,
and did, terminate its contract with RTC, and by
February 7 the trustee had abandoned all of RTC’s assets
at CDC’s landfill.
RTC was required by state and federal law to comply
with environmental regulations, and “a trustee may not
abandon property in contravention of a state statute
or regulation that is reasonably designed to protect the
public health or safety from identified hazards.” Midlantic
National Bank v. New Jersey Dep’t of Environmental
Protection, 474 U.S. 494, 507 (1986). There is no sugges-
tion that the trustee abandoned RTC’s assets at CDC’s
landfill either prematurely or belatedly.
In September 2006 Roti sold the Holiday Inn for
$5 million. He claims that had it not been for the odors, he
could have sold it for almost five times as much; his
claim against RTC in the bankruptcy court is for the
difference. (The reason it is his claim, rather than the
claim of the LLC that owned the Holiday Inn, is that Roti,
4 No. 10-3948
the sole member of the LLC, caused the company’s claim
to be assigned to him.) Roti also sued CDC in an Illinois
state court for having tortiously caused the damage to
his business. That case has been settled.
The bankrupt estate has other creditors besides Roti.
But he contends that his claim is an administrative
claim that trumps the claims of the other creditors (with
at least one exception, as we’re about to note). Administra-
tive expenses, which consist of the “actual, necessary
costs and expenses of preserving the [bankrupt] estate,”
receive priority in the distribution of the estate’s assets
to creditors. 11 U.S.C. §§ 503(b)(1)(A), 507(a)(2).
The bankruptcy judge, seconded by the district
judge, rejected Roti’s administrative claim, and Roti has
appealed to us. CDC also filed an administrative claim
against the bankrupt estate, seeking reimbursement of
expenses that it had incurred to rebuild RTC’s system
before it terminated its contract with RTC. That claim
was allowed, in the amount of $1.5 million—adding to
Roti’s indignation at the rejection of his administrative
claim.
The emission of foul odors as the result of negligent
maintenance of the gas collection and control system,
which interfered with Roti’s use and enjoyment of his
property and caused economic loss and property
damage, was a nuisance, Woods v. Khan, 420 N.E.2d 1028,
1030 (Ill. App. 1981); Baldwin v. McClendon, 288 So.2d
761, 763-66 (Ala. 1974); Susquehanna Fertilizer Co. v.
Malone, 20 Atl. 900 (Md. 1890); Restatement (Second) of
Torts § 822(b) (1979), and thus a tort. And a tort for
No. 10-3948 5
which RTC was responsible, though perhaps jointly
with CDC, the owner of the landfill. Although RTC
didn’t own the landfill, its poor maintenance of its gas
collection and control system was a cause and quite
possibly the major cause of the leak of gas from the
landfill into the Holiday Inn.
It is unusual for nuisance to be alleged against
someone other than the owner or lessee of the property
that emits the fumes or noise or dust or other harmful
emanations that give rise to the nuisance claim. But the
key to liability is not ownership; it’s control. See People
v. Brockman, 574 N.E.2d 626, 635 (Ill. 1991); Laflin-Rand
Powder Co. v. Tearney, 23 N.E. 389, 390 (Ill. 1890); Restate-
ment (Second) of Torts § 834 and comment c (1979). By
virtue of its control of the gas collection and control
system embedded in the landfill, RTC was the author
of the nuisance, or at least a joint tortfeasor with CDC.
The trustee had been operating RTC’s system for only
four days before the failure occurred. The failure
resulted from the many years of RTC’s neglect, and
there is no evidence that the trustee was aware of
that neglect, did anything to exacerbate it, could have
done anything to prevent the failure triggered by that
neglect within the few days in which he was in
nominal control of the system before it failed, or could
have done anything to mitigate the damage afterward.
His predecessor, the trustee in RTC’s Chapter 11 bank-
ruptcy, had been appointed in August 2003 (until then—
for remember that RTC had declared bankruptcy in
1999—RTC had operated without a trustee, as a debtor
6 No. 10-3948
in possession, as is common in Chapter 11 bankruptcies).
That was two years before the Chapter 7 trustee was
appointed; and maybe the Chapter 11 trustee bore re-
sponsibility for the neglect of the gas collection and
control system. There no longer is a Chapter 11 estate
from which Roti could seek relief, 11 U.S.C. § 348(e);
Fed. R. Bankr. P. 1019(4); see In re Sidebottom, 430 F.3d
893, 897-99 (7th Cir. 2005); and “all claims actually filed
by a creditor before conversion of the case are deemed
filed in the chapter 7 case.” Fed. R. Bankr. P. 1019(3). But
Roti never filed a claim against the Chapter 11 estate,
doubtless because the gas leak that hurt his hotel’s busi-
ness didn’t occur until after the conversion.
Roti is right to note the oddity of a tort without a
suable tortfeasor, but the fact that the Chapter 11 estate
is not suable, nor the trustee in his personal capacity,
still leaves the Chapter 7 estate as the suable party.
A tort occurs not when the antecedent acts that precipi-
tated it occurred but when there is an injury, Jones v.
Searle Laboratories, 444 N.E.2d 157, 162 (Ill. 1982);
Rozenfeld v. Medical Protective Co., 73 F.3d 154, 156 (7th
Cir. 1996) (Illinois law), and so the nuisance in this case
did occur on the Chapter 7 trustee’s “watch,” as the
cliché has it. But he is no more personally responsible
for it than the owner of an apartment house is re-
sponsible for the murder of one of his tenants by another
tenant. The Chapter 7 estate is the suable tortfeasor, the
trustee merely an innocent agent. And the Chapter 7
estate is RTC (more precisely, RTC’s remaining assets),
which caused the nuisance by neglecting to keep its
gas collection and control system in good repair. The
No. 10-3948 7
neglect began years earlier but extended right up to the
time the system failed, and it would be absurd to ex-
onerate RTC because it changed from being a Chapter 11
bankrupt to a Chapter 7 one after most of the damage to
the system by its neglect had been done. We add that
if Roti’s claim had been against the trustee as trustee,
that is, in his official rather than personal capacity, it
would have been treated as a claim not against him
but against the debtor’s estate, which is to say against
RTC. Robinson v. Michigan Consolidated Gas Co., 918 F.2d
579, 584 (6th Cir. 1990); In re marchFirst, Inc., 448 B.R. 499,
512 (Bankr. N.D. Ill. 2011). So we would end up in the
same place.
Roti does have a claim against the bankrupt estate, and
that makes him a creditor, yet he is not asking, as an
alternative to the recognition of his claim, that he be
dumped in with the general creditors; for him it is ad-
ministrative claim or nothing, which is doubtless why
the district court stopped with ruling that he has no
administrative claim.
The reason administrative claims are given priority
is that they are claims for reimbursement by the bank-
rupt estate of expenses incurred after the declaration
of bankruptcy, in order to preserve and if possible
enhance the value of the bankrupt estate for the benefit
of its creditors. J. Catton Farms, Inc. v. First National Bank
of Chicago, 779 F.2d 1242, 1249-50 (7th Cir. 1985). Such
expenses are particularly important in a Chapter 11 case,
in which the bankrupt business continues in operation
with hopes (granted, they are usually dashed, as in the
case of RTC) of survival as a going concern, albeit with
8 No. 10-3948
an altered capital structure, such as the substitution of
the creditors for the pre-bankruptcy shareholders as
owners of the business. Unless those who extended credit
to a bankrupt business were given a priority claim, it
would be very hard for such businesses to obtain credit,
as they would be competing for a diminished pool of
assets with the pre-petition creditors. Trustees of Amalgam-
ated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir.
1986).
A tort victim (Roti) is a creditor, but not a creditor
whose actions benefit his debtor, the tortfeasor. Yet in
Reading v. Brown, 391 U.S. 471 (1968), the Supreme Court
held that at least in a Chapter 11 bankruptcy, tort claims
arising from the continued operation of the bankrupt
business should be treated as administrative claims,
like other post-petition expenses. See also In re Chicago
Pacific Corp., 773 F.2d 909, 913-14 (7th Cir. 1985); In re
Zilog, Inc., 450 F.3d 996, 999 n. 1 (9th Cir. 2006); In re
Boston Regional Medical Center, Inc., 291 F.3d 111, 124-25
(1st Cir. 2002). Tort liability is an expense of doing busi-
ness, like labor or material costs, and should be treated
the same way. Businesses operating in bankruptcy
that were excused from tort liability would have an
inefficient competitive advantage over their solvent
competitors—and deficient incentives to use due care
in the operation of the business. It could indeed be
argued that in the interest of safety, insolvent firms, not
being deterrable by threat of tort suits, should not be
allowed to operate at all. Reading strikes a compromise
between the safety interest and the interest in saving
bankrupts from premature liquidation: the bankrupt
No. 10-3948 9
that continues to operate (normally under Chapter 11)
must give its tort victims priority access to such assets
as the bankrupt estate retains.
RTC was in Chapter 7 bankruptcy when the tort oc-
curred; can the principle of Reading be extended to
Chapter 7, given that the goal of such a bankruptcy is
liquidation of the bankrupt’s assets at the highest
possible price rather than the continuation of the bank-
rupt’s business? Sometimes yes; for the dichotomy
between operation and liquidation is too stark. There is
an interval between the appointment of the trustee and
the liquidation of the bankrupt’s assets under his super-
vision, and during that interval he may have operating
responsibilities. The policy that supports the Reading
doctrine—the policy against permitting bankrupt firms
to externalize the costs of their torts—depends on
whether the bankrupt firm is operating, not which part
of the Bankruptcy Code (that is, whether Chapter 7 or
Chapter 11) it is operating under. See Pennsylvania
Dep’t of Environmental Resources v. Tri-State Clinical Lab-
oratories, Inc., 178 F.3d 685, 689-93 and n. 7 (3d Cir.
1999); Leavell v. Karnes, 143 B.R. 212, 218-19 (S.D. Ill. 1990);
In re Women First Healthcare, Inc., 332 B.R. 115, 123 (Bankr.
D. Del. 2005).
But at least as far as the gas collection and control
system in CDC’s landfill was concerned, the bankrupt
in this case was not operating in any meaningful sense
during the brief period in which the trustee was in
charge. It had some minute revenue from energy
sales—less than 10 percent of its normal revenue from
10 No. 10-3948
such sales—but it is doubtful that this revenue covered
its costs, or that the continued operation of the system
in its diminished state can be attributed to anything
other than the bankrupt’s legal duty, noted in the
Supreme Court’s Midlantic decision, to minimize further
contamination.
RTC had no money that the trustee could have spent
on stemming the gas leak. Apart from the meager
energy sales that we just mentioned, he did sell some
gas engines for an amount not disclosed in the record
(all we know is that it could not have exceeded $6 mil-
lion). But the agreement of sale was made after CDC had
terminated RTC’s contract at the landfill, thus evicting
RTC, so the trustee could not have used the proceeds of
the engine sales to fix the leak. It’s not as if he had em-
barked on a project to increase the value of RTC’s assets
and the workers on the project had committed a tort.
We thus are far from Reading, where the Chapter 11
receiver (equivalent to a trustee) was managing a
building that was the debtor’s principal asset, when the
building burned down and in the process caused
damage to adjacent buildings, triggering tort claims
against the bankrupt estate. The receiver was either
collecting rents or otherwise obtaining or attempting to
obtain income for the estate from the building, and by
doing so he was unavoidably running a risk of fire. In
this case, in contrast, the trustee took over a bankrupt
company at the point of collapse, and the collapse was
unrelated to his control of the assets. He had neither the
mandate nor the resources to do anything with them
No. 10-3948 11
except liquidate them as quickly as possible, which he
proceeded to do. He could and did do nothing with
the assets that might (with however low a probability)
have enhanced their value for the creditors, in which
event they would have had to take the bad with the
good—the risk of tort liability along with the prospects
for successful management of the assets. The trustee
operated a losing venture under legal compulsion. There
is no basis for applying the doctrine of Reading to such
a case. See In re Hemingway Transport, Inc., 954 F.2d 1, 5-6
and n. 5 (1st Cir. 1992).
A FFIRMED.
10-31-11