## Facts

- N.P. Mining Company, Inc. operated surface coal mining activities in Alabama and was regulated under the Alabama Surface Mining Control and Reclamation Act.
- Alabama required surface mine operators to maintain noncancelable reclamation bonds to fund land reclamation even if the operator became insolvent; the surety paid the state more than $2 million for reclamation, and reclamation costs were not disputed.
- The Alabama Surface Mining Commission (ASMC) was required to inspect mines monthly and issue citations and fines for environmental violations.
- ASMC assessed numerous civil penalties against N.P. for violations; the penalties were purely punitive and unrelated to reclamation costs.
- N.P. filed for Chapter 11 bankruptcy and initially continued limited operations as a debtor-in-possession; ASMC assessed penalties for violations occurring after the petition date.
- A Chapter 11 trustee was later appointed; active mining ceased, and the trustee maintained the business at a status quo while administering the estate; ASMC assessed additional post-petition penalties during this period.
- The case converted to Chapter 7 liquidation; total post-petition penalties were about $2,349,000.
- ASMC sought administrative-expense priority for all post-petition penalties under 11 U.S.C. § 503(b).

## Issues

1. Whether punitive civil penalties assessed by a state regulator for post-petition violations during bankruptcy qualify as administrative expenses under 11 U.S.C. § 503(b)(1)(A).
2. Whether such penalties may be treated as “actual, necessary costs and expenses of preserving the estate” when they do not confer a direct benefit on the estate.
3. How to distinguish penalties attributable to periods of actual post-petition operation from penalties tied to pre-petition conduct or non-operating periods.

## Decision

- The Eleventh Circuit reversed the district court and bankruptcy court.
- The court held that punitive civil penalties for post-petition mining-related violations can qualify as administrative expenses to the extent they were incurred as a consequence of operating the business post-petition.
- The court rejected a categorical “benefit to the estate” requirement for these penalties where the estate operated subject to state law.
- The court remanded for fact-finding to segregate penalties arising from post-petition operational activity from penalties tied to pre-petition conduct or periods when the estate was not operating.

## Legal Principles

- Administrative-expense priority under 11 U.S.C. § 503(b)(1)(A) may include obligations incurred from post-petition operation of the debtor’s business, not limited to items that directly increase estate value.
- Under 28 U.S.C. § 959(b), a debtor-in-possession or trustee operating estate property must comply with valid state law; liabilities arising from noncompliance during operation may be treated as ordinary operational costs.
- The fairness rationale of Reading Co. v. Brown supports administrative priority for certain post-petition liabilities caused by court-authorized operation, even when the liability does not “benefit” the estate.
- Penalties attributable to pre-petition violations are pre-petition claims and do not become administrative expenses solely because assessed after filing.
- Penalties incurred after active operations cease, or not tied to actual operation of the estate, are not administrative expenses merely because they are post-petition in time.

## Conclusion

Punitive state mining penalties assessed for post-petition violations may receive administrative-expense priority when they result from the estate’s actual post-petition operation under state regulatory law, but the bankruptcy court must determine which penalties are operational and post-petition versus those tied to pre-petition conduct or non-operating periods.


Ala. Surface Mining Comm’n v. N.P. Mining Co. (In re N.P. Mining Co.), 963 F.2d 1449 (11th Cir. 1992)