Burlington Northern Railroad Company appeals from the district court order denying its claim for administrative expense priority against the bankruptcy estate of Dant & Russell, Inc. We affirm in part and reverse in part and remand for further proceedings.
Dant & Russell, Inc. (debtor-in-possession), operated a wood treatment plant and storage facilities on two parcels of land *702 from 1972 to December 1983. Logs were stored on one parcel, the Vadis site, and then treated with creosote and other chemicals at the North Plains site.
Debtor-in-possession owned most оf the land at each site. A portion of the land at each site, however, is owned by Burlington Northern and is leased to debtor-in-possession.
On November 22, 1982, debtor-in-possession filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. On March 1, 1983, debtor-in-possession’s president executed new leases with Burlington Northern for the North Plains and Vadis sites. Burlington Northern knew that debtor-in-possession had filed under Chapter 11, and therefore insisted on short-term, five-year leases instead of the previous fifteen-year leases. For more than a year after filing the petition, debtor-in-possession continued to operate the sites. Debtor-in-possession did not cease operations at the Northern Plains site until December of 1983. That site was used only for treatment of remaining inventory to facilitate liquidation.
Debtor-in-possession entered into new leases, postpetition, without consulting bankruptcy counsel or seeking court approval. Debtor-in-possession’s president testified that he failed to seek court approval for the new leases because he believed that the new leases merely extеnded the existing leases and the status quo.
The leases contain several provisions pertaining to environmental hazards. These provisions are identical in both leases. 1 Additionally, paragraph 14 of the leases provides that lessee (debtor-in-possession) agrees to restore the premises to a condition satisfactory to the lessor before abandoning the premises.
Oregon’s Department of Environmental Quality, subsequent to the execution of the postpetition leases, identified both sites as contaminated with creosote, chromium, arseniс, pentachlorophenol, and other hazardous wastes. The cumulative effect of operations by debtor-in-possession’s predecessors-in-interest and its own wood-treatment operations since 1972 was massive toxic waste contamination.
On January 2, 1985, the Department wrote Burlington Northern a letter which stated that debtor-in-possession had failed to respond to requests for on-site investigations, “indicat[ing] that its [debtor-in-possession’s] creditors will not allow expenditures of funds for any environmental investigations or even removal of hazardous wastes stored onsite.” The letter noted that “significant concentrations” of pentachlorophenol were found in the creek and the groundwater near the North Plains site, and that the City of North Plains and North Plains Elementary School draw drinking water from within one-quarter mile of the contaminated property. Burlington Northern notes that a subsequent, unidentified, Environmental Protection Agency (EPA) study also found dioxins at the North Plains site which have been linked to an increased incidence of liver cancer in the area.
Burlington Northern claims to have spent in excess of $250,000 to mitigate the most serious hazards under an agreement with the EPA. No arrangements have been made to clean up the site. With cleanup costs estimated at $10-30 million, *703 the land has a substantial negative value no matter who ultimately takes possession.
Debtor-in-possession’s unencumbered assets, after satisfaction of secured claims, are estimated at $3 million.
Bankruptcy Court Proceedings
Burlington Northern filed a “Supplemental Proof of Claim” with the bankruptcy court, requesting administrative expense priority for the clean-up costs at the site. Debtor-in-possession contested Burlington Northern’s claim for administrative expense priority, and requested an 11 U.S.C. § 502(c) (1982 & Supp. IV 1987) estimation of liability. Administrative priority in practical effect would wipe out the claims of all nonpreferred creditors.
The court deferred estimating the claim under 11 U.S.C. § 502(c) (1982 & Supp. IV 1987), but granted debtor-in-possession’s other motions. Further, the court held that the postpetition leases were avoidable under 11 U.S.C. § 549(a) (1982 & Supp. IV 1987), because they were transactions unauthorized by the court or the Bankruptcy Code. The court further found that execution of the postpetition leases was not in the ordinary course of business and without notiсe or a hearing. The court approved neither the holdover tenancy nor the postpetition leases, and consequently disallowed Burlington Northern’s request for administrative expense priority.
In re Dant & Russell, Inc.,
District Court Proceedings
Although the district court concluded that the leases were necessary to the debt- or-in-possession’s business operation, it did not consider whether the continued business operation would augment or dissipate the bankruptcy estate. The district court found that the debtor-in-possession was liable for the reasonable amount of rent under the leases during the holdover period, November 22, 1982 to March 1, 1983. It concluded that Burlington Northern’s claim under this finding was a general unsecured claim dating back to the date before debtor-in-possession filed its bankruptcy petition pursuant to 11 U.S.C. § 365(g) (1982 «fe Supp. IV 1987). It determined that these claims were not entitled to administrative expense priority. The district court also found that Burlington Northern would not be entitled to administrative expense priority for its environmental cleanup costs.
In re Dant & Russell, Inc.,
Avoidability of Postpetition Leases
Burlington Northern argues that the debtor-in-possession’s obligations under the postpetition leases are valid under 11 U.S.C. § 363(b) (1982 «fe Supp. IV 1987) becаuse they were executed in the debtor-in-possession’s ordinary course of business. Consequently, Burlington Northern claims that the postpetition leases may not be avoided under 11 U.S.C. § 549(a) (1982 <& Supp. IV 1987). Debtor-in-possession, on the other hand, asserts that the postpetition leases were void because they were not executed within its ordinary course of business, nor were they executed with notice to creditors and a hearing as required under section 363(b). Debtor-in-possession contends that its liability thereunder is avoidable under section 549(a), which provides in pertinent part:
Excеpt as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and ...
(2)(B) that is not authorized under this title or by the court.
11 U.S.C. § 549(a) (1982 «fe Supp. IV 1987) (emphasis added). Although section 549(a) refers to a
trustee’s
powers and rights, 11 U.S.C. § 1107 (1982) provides that a debtor-in-possession
2
may be properly regarded as a trustee for section 549(a) purposes.
See Johnston v. First Street Companies, Inc. (In re Waterfront Companies, Inc.),
If the business of the debtor is authorized to be operated under section 721, 1108,1304, 1203, or 1204, of this title and unless the court orders otherwise, the trustee [or debtor-in-possession] may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.
11 U.S.C. § 363(c)(1) (1982 & Supp. IV 1987) (emphasis added). Reading subsections (b) and (c)(1) together indicates that the general rule is that unauthorized lease transactions are permissible only to the extent that they are executed in the debt- or’s “ordinary course of business.”
See Waterfront,
In analyzing this question, we note that neither the Bankruptcy Code nor the legislative history of section 363(e)
4
offers guidance as to what constitutes “ordinary course of business;” however, courts interpreting the term have established guidelinеs which are helpful and persuasive here.
Id.
at 35;
In re Johns-Manville Corp.,
A. Horizontal Dimension Test
The horizontal dimension test was first articulated in
Waterfront,
The facts here suggest that the horizontal dimension test has been satisfied. Debtor-in-possession operated the wood-treatment facility for eleven years following its execution of the leases with Burling *705 ton Northern in 1971. It operated on owned land combined with the leased land. Debtor-in-possession’s predecessors executed similar leases and operated in substantially the same manner in the same wood-treatment facility as early as 1958. The debtor-in-possession’s products were in part shipped by rail, and the leased premises provided a rail siding. Debtor-in-possession’s leasing activities recurred over a period of more than 13 years. The execution of the renewal leases obviously did not occur on a day-to-day basis; however, a transaction can be considered as in the ordinary course of business even though it occurs only occasionally. Thus, under the horizontal dimension test analysis and Economy Milling, the postpetition renewal leases are properly regarded as within the debtor-in-possession’s ordinary course of business.
B. Vertical Dimension or Creditor’s Expectation Test
The vertical dimension, or creditor’s expectation test, views the disputed transaction “from the vantage point of a hypothetical creditor and inquires whether the transaction subjects a creditor to economic risks of a nature different from those he accepted when he decided to extend credit.”
Johns-Manville,
[t]he touchstone of “ordinariness” is ... the interested parties’ reasonable expectations of what transactions the debtor in possession is likely to enter in the course of its business. So long as the transactions conducted are consistent with these expectations, creditors have no right to notice and hearing, because their objections to such transactions are likely to relate to the bankrupt’s Chapter 11 status, not the particular transactions themselves.
Id. 6
The creditor’s expectation test was reformulated as the vertical dimension test in
Waterfront,
That leasing transactions had been previously engaged in by debtor-in-possession and Burlington Northern is not in question. Creditors, if asked, would have assumed that an ongoing business wоuld renew the lease on its business premises. The debtor-in-possession’s execution of the postpetition leases therefore satisfies the vertical dimension test. Because both the vertical and horizontal dimension tests have been met, the postpetition leases were executed in the ordinary course of debtor-in-possession’s business for section 549(a) purposes and are not avoidable as being outside the ordinary course. Because the postpetition leases are not an extraordinary business activity of debtor-in-possession, creditors reasonably would have expected it to continue its leasing activities, without requir
*706
ing notice or a hearing.
Johns-Manville,
A proper application of persuasive legal authorities requires that the postpetition leases be regarded as within the debtor-in-possession’s ordinary course of business. Consequently, the postpetition leases are valid under section 363(a) and are therefore not avoidable for section 549(a) purposes. Thus, the conclusions of the bankruptcy court on this point are erroneous and cannot be upheld.
In re Camino Real Landscape Maintenance Contractors, Inc.,
Contrary to debtor-in-possession’s contention, section 365(a) is inapplicable to leases executed postpetition as that section contemplates a prepetition lease or executory contract which is unexpired on the date of the petition.
See, e.g., NLRB v. Bildisco & Bildisco,
Administrative Expense Priority under Section 503(b)(1)(A)
Section 503(b)(1)(A) provides as follows:
(b) After notice and a hearing, there shall be allowed, administrative expenses ... including ... the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commission for services rendered after the commencement of the casе[.]
The statute is explicit. Any claim for administrative expenses and costs must be the actual and necessary costs of preserving the estate for the benefit of its creditors.
Matter of Baldwin-United Corporation,
Since the goal in a Chapter 7 case is to “cash out” the bankrupt entity, rather than continue its operations, Chapter 7 is more concerned with maximizing the size of the estate to be distributed than with *707 the Chapter 11 goal of inducing third parties to contribute towards the continued operations of the business.
Broadcast,
Hence, two factors must be weighed: maintaining the estate in as healthy a form as possible for the benefit of creditors while allowing essential costs of administering an ongoing business venture to be paid up front, therеby giving the debtor its best shot at emerging as a vital concern.
Baldwin-United Corp.,
Moreover, if the trial court elects to award administrative expense priority, that amount should not exceed the fair and reasonable rental value.
In re Tucci,
The amount of the administrative expense claim is limited to the “portion of the leased property” that is actually used or occupied.
Thompson,
The question of the fair market value of the premises occupied by debtor-in-possession before default was not reached by the district court because it had determined that the postpеtition leases were not
*708
executed in the ordinary course of business.
See In re Dant & Russell, Inc.,
Rejection of Unexpired Postpetition Leases Involving Contaminated Leased Property.
Burlington Northern also contends that it is entitled to administrative expense priority because it is jointly liable under section 101(21) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), 42 U.S.C. § 9601(21) (1982), for the cleanup costs on its property caused by the debtor-in-possessiоn’s operation of the wood-treatment facility. Burlington Northern asserts that public policy considerations entitle it to administrative expense priority. In support of its contention that it is entitled to administrative expense priority under section 503(b)(1)(A) for cleanup of the contaminated sites, Burlington Northern cites to and discusses at length, as controlling authority, the Supreme Court’s decision in
Midlantic Nat’l Bank v. New Jersey Dep’t of Environ. Protection,
Debtor-in-possession claims that Burlington Northern’s claim is not entitled to administrative expense priority because its prospеctive claim for cleanup costs and its claim for reimbursement of monies already expended on cleanup costs arises from pre-petition activities, thereby constituting a general unsecured claim which is not entitled to administrative expense priority for purposes of sections 503(b)(1)(A) and 507(a).
In
Midlantic,
the Supreme Court expressly reserved the question whether environmental cleanup costs are to be given priority.
Id.
at 507,
However, the leading case, for the instant purposes, is
Ohio v. Kovacs,
In a similar case,
Southern Ry. Co. v. Johnson Bronze Co.,
Southern Railway, already deemed a general unsecured creditor, sought administrative expense priority in its claim upon Johnson Bronze’s bankruptcy estate. Id. at *709 140. The Third Circuit concluded that Ko-vacs controlled and that Southern Railway’s general unsecured contract indemnity claim should not be given administrative expense priority. Id. at 141-42.
Kovacs
and
Johnson Bronze
are significant in that they involved assertions of administrative expense priority by a lessor for cleanup costs resulting from property not owned by the bankruptcy estate. Quite a different result, however, is warranted when the cleanup costs result from monies expended for the preservation of the bankruptcy estate.
See, e.g., Lancaster v. Tennessee (In re Wall Tube & Metal Prod. Co.,
In contrast, damages caused during the prepetition period are not entitled to administrative expense priority. Since the effect of rejection under 11 U.S.C. § 365(g) (1982 & Supp. IV 1987) is to treat the breach of an unexpired lease as occurring prepetition, it follows that consequent damages should likewise be regarded as prepetition.
11
Juniper Development Group v. Kahn (In re Hemingway Transport, Inc.),
Although Burlington Northern asserts that public policy considerations entitle its claims for cleanup costs to administrative expense priority, we acknowledge that Congress alone fixes priorities. 3 Collier on Bankruptcy ¶1 507.02, at 507-17, (15th ed. 1987). Courts are not free to formulate their own rules of super- or sub-priorities within a specifically enumerated class. Id. As Justice O’Connor noted in her concurrence in Kovacs:
[A] State may protect its interests in the enforcement of its environmental laws by giving cleanup judgments the status of statutory liens or secured claims.
AFFIRMED in part and REVERSED in part and REMANDED.
Notes
. Paragraph 8 provides that:
Lessee shall not permit the existence of any nuisance on said premises; shall maintain the same in proper, clean, safe and sanitary condition and free and clear of any explosive, flammable or combustible material ... except for such material as may be necessary to Lessee’s business; and further, Lessee shall ... observe ... all federal, state and local regulations, ordinances and laws ... and at Lessee’s sole cost shall make ... improvements, alterations, repairs ... required on said premises by or under any such regulations, ordinances or laws.... Lessee shall ... save harmless, defend and indemnify Lessor from ... costs ... connected with such violation or violations.
Paragraph 9 provides that:
Lessee shall comply with all applicable laws ... of any governmental authority ... controlling environmental standards and conditions on the premises_ Lessee shall ... save harmless, defend and indemnify Lessor from ... costs and expenses ... resulting from ... such violation or violations.
. Title 11 U.S.C. § 1101(1) (1982) provides that "debtor-in-possession” means debtor in the absence of appointment of a Chapter 11 trustee.
See In re Waterfront Companies, Inc. v. Johnston,
. Property as used here presumably includes leasehold interests.
. Other sections of the code using this term fail tо provide a definition or guidelines.
See, e.g.,
11 U.S.C. §§ 364(a) and 547(c)(2)(B) (1982 & Supp. IV 1987).
Travelers Indemnity Co.
v.
Chernicky Coal Co., Inc. (In re Chernicky Coal Co., Inc.), 67
B.R. 828, 833 (Bankr.W.D.Pa.1986);
Armstrong World Inds., Inc. v. James A. Phillips, Inc. (In re James A. Phillips, Inc.),
.The
Waterfront
court provided the following example: “[R]aising a crop would not be in the ordinary course of business for a widget manufacturer because that is not a widget manufacturer’s ordinary business.”
Waterfront,
. The Phillips court, in applying this test, determined that the accelerated timing of payments to certain creditors rendered those payments extraordinary. Id. at 394-95.
. The
Waterfront
court, in applying this test, concluded that an indemnity agreement which required shareholder approval was a type of transaction outside the debtor's ordinary course of business.
Waterfront,
. Section 64(a)(1), the predecessor to section 503(b)(1)(A) used the term "including” (“including the necessary costs of preserving the estate"), Congress in the revised statute deleted this term because of the implication that first priority claims included some addition to those that serve to preserve the bankrupt estate.
See Otte,
. In
Midlantic
the Supreme Court held that 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.
. Under section 101(4):
(4) "claim” means—
(A) right to payment, whether or not such right is reduced to judgment, liquidated, un-liquidated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
. Damages here include those resulting from any reversionary leasehold interest held by Burlington Northern.
See (Int’l Coins & Currency, Inc. v. Barmar Corp. (In re Int’l Coins & Currency, Inc),