## Facts

- Resource Technology Corporation (RTC) contracted with a landfill operator to build and operate a landfill gas collection and control system intended to capture and combust landfill gas.
- RTC filed for bankruptcy in 1999; a Chapter 11 trustee was appointed in 2003.
- The case converted to Chapter 7 on September 21, 2005, and a Chapter 7 trustee briefly continued operations while liquidating the estate.
- The gas system had shown years of deterioration and regulatory noncompliance before conversion, including repeated exceedances in operational metrics tied to environmental requirements.
- Four days after the Chapter 7 trustee assumed control, the gas system failed, resulting in gas odors affecting a nearby hotel; guests and employees reportedly became ill.
- Environmental regulators issued violation notices to RTC and the landfill operator; the trustee stated the estate lacked funds to repair the system.
- The landfill operator terminated RTC’s contract in January 2006; the trustee abandoned the remaining landfill-related assets in February 2006.
- Samuel J. Roti (through an ownership entity) owned the affected hotel and claimed the odors diminished the hotel’s value; he later sold it for about $5 million and alleged it would have sold for nearly $25 million absent the odors.
- Roti filed a claim in RTC’s bankruptcy seeking approximately $20 million as an administrative expense based on alleged post-conversion conduct and omissions by the trustee.

## Issues

1. Whether the hotel owner’s alleged diminution-in-value damages qualified as an administrative expense under 11 U.S.C. § 503(b)(1)(A).
2. Whether the claimed injury was sufficiently attributable to post-conversion estate conduct (rather than pre-conversion deterioration) to justify administrative priority.
3. Whether a Chapter 7 trustee’s inability to repair an environmentally problematic system due to lack of estate funds can create administrative-expense-priority liability to third parties.

## Decision

- The Seventh Circuit affirmed the denial of Roti’s administrative expense claim.
- The court held the losses did not qualify as “actual, necessary costs and expenses of preserving the estate” under § 503(b)(1)(A).
- The court concluded the asserted harm was largely traceable to pre-conversion deterioration and underfunding rather than a post-conversion transaction that benefitted the estate.
- The court treated the claim, at most, as a nonpriority claim rather than an administrative expense entitled to priority payment.

## Legal Principles

- Administrative expense priority under 11 U.S.C. § 503(b)(1)(A) is limited to costs that are actual and necessary to preserve the estate.
- In the Seventh Circuit, administrative status generally requires a post-petition transaction with the estate and a direct, substantial benefit to the estate.
- Tort-like and environmental liabilities may receive administrative priority only when the estate’s post-petition operations create or materially worsen the injury in the course of preserving or operating the estate.
- Administrative priorities are construed narrowly to protect equal distribution among general unsecured creditors and to prevent dilution of the estate.

## Conclusion

The court denied administrative priority for a neighboring hotel owner’s claimed loss because the injury did not arise from a post-conversion, estate-benefitting transaction and was instead tied to longstanding pre-conversion deterioration of an underfunded system, with the trustee lacking funds to cure the problem.


In re Resource Tech. Corp., 662 F.3d 472 (7th Cir. 2011)