IN RE: Penn Central Trans. Co.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
12-12-1995
IN RE: Penn Central Trans. Co.
Precedential or Non-Precedential:
Docket 94-2154
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IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-2154
IN THE MATTER OF:
PENN CENTRAL TRANSPORTATION COMPANY
USX Corporation and Bessemer and
Lake Erie Railroad Company,
Appellants
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil Action No. 70-00347)
Argued July 24, 1995
Before: BECKER, NYGAARD and ALITO, Circuit Judges
(Opinion Filed December 12, 1995)
TIMOTHY W. BERGIN, ESQUIRE
Squire, Sanders & Dempsey
1201 Pennsylvania Avenue, N.W.
P.O. Box 407
Washington, DC 20044
Attorney for Appellants
THOMAS S. KILBANE, ESQUIRE (Argued)
Squire, Sanders & Dempsey
127 Public Square
4900 Society Center
Cleveland, OH 44114-1304
Attorney for Appellants
WILLIAM J. TAYLOR, ESQUIRE
Taylor & Taylor
1801 Market Street
811 Ten Penn Center
Philadelphia, PA 19103
Attorney for Appellants
DAVID A. LYNCH, ESQUIRE
Senior General Attorney
1
USX Corporation
600 Grant Street
Pittsburgh, PA 15129-4776
Attorneys for Appellants
MATTHEW J. SIEMBIEDA, ESQUIRE (Argued)
CARL M. BUCHHOLZ, ESQUIRE
Blank, Rome, Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attorneys for Appellee
KENNETH N. HART, ESQUIRE
JAMES J. CAPRA, ESQUIRE
Donovan, Leisure, Newton & Irvine
30 Rockefeller Plaza
New York, NY 10112
Attorneys for Appellee
ARLIN M. ADAMS, ESQUIRE
Schnader, Harrison, Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Attorneys for Appellee
ROBERT W. OLSON, ESQUIRE
MICHAEL L. CIOFFI, ESQUIRE
American Premier Underwriters, Inc.
One East Fourth Street
Cincinnati, OH 45202
Attorneys for Appellee
OPINION OF THE COURT
NYGAARD, Circuit Judge.
Appellants, USX Corporation and the Bessemer and Lake
Erie Railroad Company, sued the reorganized Penn Central
Transportation Company (now known as American Premier
Underwriters, Inc.) for contribution and indemnity based on Penn
Central's participation with them in an antitrust conspiracy.
2
Although appellants were held liable for nearly $600 million in
damages from that conspiracy, see In re Lower Lake Erie Iron Ore
Antitrust Litig., 998 F.2d 1144 (3d Cir. 1993), the courts ruled
that the direct claims against Penn Central were barred by its
reorganization.
In response to the underlying lawsuit for contribution
and indemnity, Penn Central filed a petition in its bankruptcy
case to require the dismissal of the suit, alleging that the 1978
Consummation Order and Final Decree barred it. The district
court granted the petition. In re Penn Central Transp. Co., No.
70-347 (E.D. Pa. Oct. 13, 1994). We will reverse.
I.
The Penn Central bankruptcy proceeding is more than a
quarter-century old; and the facts of the antitrust conspiracy
are even older. Andrew Carnegie built the Bessemer to link his
Pittsburgh-area steel mills to raw materials sources,
specifically iron ore, received from ore ships at Lake Erie
ports. The railroad was a wholly-owned subsidiary of United
States Steel Corporation (now USX Corporation) until 1989, when
it was spun off. USX, however, retained liability for the
antitrust claims at issue under its indemnity agreement with the
Bessemer.
Beginning in 1956, the Bessemer and several other
railroads, including the Penn Central's predecessors, entered
into a joint ratemaking agreement, which was given limited
immunity from antitrust attack under § 5(a) of the Reed-Bulwinkle
Act, ch. 491, 62 Stat. 472 (1948). In 1970, the Penn Central
3
filed a bankruptcy petition under § 77 of the Bankruptcy Act of
1898. This action, and the bankruptcies of several other
regional railroads, motivated Congress to pass the Regional Rail
Reorganization Act of 1973, under which the Penn Central conveyed
its rail assets to Conrail in 1976. In 1978, the district court
entered its Final Decree and Consummation Order, which included a
limitation or bar date for all claims against the debtor. The
Consummation Order transferred the reorganized Penn Central's
railroad property and discharged it from any further claims
predicated upon its pre-consummation acts or conduct. The
district court retained jurisdiction over any claims that might
later be asserted against Penn Central.
In 1980, Pinney Dock and Litton filed antitrust
complaints against the Bessemer, Penn Central and other
railroads. The claims against Penn Central were held barred by
the discharge. In re Penn Central Transp. Co. ("Pinney Dock"),
42 B.R. 657, 676 (E.D. Pa. 1984), aff'd, 771 F.2d 762 (3d Cir.),
cert. denied, 474 U.S. 1033, 106 S. Ct. 596 (1985). Between 1982
and 1984, several plaintiffs filed suits under federal and Ohio
antitrust law against the signatories to the § 5(a) agreement,
including Penn Central and the Bessemer. These claims were
consolidated as the "MDL 587" litigation. The district court
dismissed Penn Central as a defendant, concluding that because
the claims arose pre-consummation they were discharged. All
remaining defendants except the Bessemer settled with plaintiffs.
The Bessemer went to trial and lost. Judgment was entered
against it in excess of $592 million, and paid by USX. The
4
Bessemer and USX then filed complaints in federal and Ohio courts
seeking indemnity and contribution from Penn Central, as the
instigator, enforcer and primary beneficiary of the conspiracy.
II.
The predicate conduct of appellants' antitrust
liability began before Penn Central filed its bankruptcy
petition. Thus, Penn Central asserts that appellants' claims
against it have been discharged by the Consummation Order and
Final Decree. Appellants argue, however, that their claims
seeking contribution and indemnity could not possibly have been
filed before the 1978 bar date, because they were not sued until
later; and, hence should be treated as post-consummation claims,
i.e., neither discharged nor barred.
A.
We look to nonbankruptcy law to determine when these
claims accrued. See Schweitzer v. Consolidated Rail Corp., 758
F.2d 936, 941 (3d Cir.), cert. denied, 474 U.S. 864, 106 S. Ct.
183 (1985); In re M. Frenville Co., 744 F.2d 332, 335 (3d Cir.
1984), cert. denied, 469 U.S. 1160, 105 S. Ct. 911 (1985). We
agree with appellants that their claims for contribution and
indemnity could not accrue until the MDL 587 complaints were
filed against them between 1982 and 1984. In Frenville, applying
New York law, we opined that:
For both separate actions and
third-party complaints, a claim for
contribution or indemnification does not
accrue at the time of the commission of the
underlying act, but rather at the time of the
payment of the judgment flowing from the act.
5
744 F.2d at 337. The MDL 587 claims arose under federal and Ohio
law. That law, for our purposes at least, is consistent with the
law applied in Frenville. For example, the Ohio Supreme Court
has stated that
the right to contribution is inchoate from
the time of the creation of the relationship
giving rise to the common burden until the
payment by a co-obligor of more than his
proportional share, and . . . the right
becomes complete and enforceable only upon a
payment by the claimant extinguishing the
whole of the common obligation.
National Mut. Ins. Co. v. Whitmer, 435 N.E.2d 1121, 1123 (Ohio
1982); see Ross v. Spiegel, Inc., 373 N.E.2d 1288, 1295 (Ohio
App. 1977) (similar rule for indemnity). Applying federal
admiralty law, we reached a similar conclusion. See Sea-Land
Serv., Inc. v. United States, 874 F.2d 169, 171 (3d Cir. 1989).
B.
That conclusion frames the issue that was before the
district court and is now before us: whether a claim that arose
after the 1978 Consummation Order was nevertheless discharged by
that order. We have already answered that question in the
negative, at least in the context of the § 77 reorganization
presented by this case.1
1
Indeed, our holding today was foreshadowed two decades ago in
the § 77 case of In re Reading Co., 404 F. Supp. 1249 (E.D. Pa.
1975), which involved similar facts. There, the court held that
claims for contribution and indemnity asserted against a bankrupt
railroad were not prepetition in nature--even though the facts
giving rise to primary liability occurred before the railroad
declared bankruptcy--because the railroad settled with the
plaintiff post-bankruptcy and only then did the cause of action
for contribution and indemnity accrue. Id. at 1251.
6
In Schweitzer,2 plaintiffs were exposed to asbestos
during their employment with the Reading Railroad and the Central
Railroad of New Jersey. Later, but before plaintiffs' injuries
manifested themselves, these railroads consummated a
reorganization under § 77. When plaintiffs discovered their
injuries, they filed FELA actions against Conrail, which had
succeeded to the former railroads' rail assets.
Conrail argued that the consummation order discharged
any claims asserted by the injured workers, but we disagreed,
noting first "that plaintiffs' rights only could have been
affected by the discharge of all 'claims' against their employer
if they had 'claims' within the meaning of section 77 prior to
the consummation date of their employer's reorganization." Id.
at 941. We concluded "that if plaintiffs had causes of action
that existed under FELA prior to the relevant consummation dates
they had 'claims.'"Id. We then analyzed plaintiffs' claims under
FELA and concluded that no cause of action accrued until the
manifestation of plaintiffs' injuries. Id. at 942.
This case is analogous to Schweitzer. Like the
subclinical injuries there, appellants here had no cause of
action against Penn Central pre-consummation. Because they could
not have filed this action during the Penn Central bankruptcy,
2
See also In re Central R.R. Co., 950 F.2d 887, 892 (3d Cir.
1991) (following Schweitzer), cert. denied, 503 U.S. 971, 112 S.
Ct. 1586 (1992); Zulkowski v. Consolidated Rail Corp., 852 F.2d
73, 74 (3d Cir.) (same), cert. denied, 488 U.S. 994, 109 S. Ct.
559 (1988).
7
Schweitzer's lesson is that their claims could not have been
discharged.
Penn Central argues that appellants had pre-
consummation, contingent, and dischargeable claims. It relies on
our discussion in Schweitzer of the early § 77B case of In re
Radio-Keith-Orpheum Corp. ("RKO"), 106 F.2d 22 (2d Cir.), cert.
denied, 308 U.S. 622, 60 S. Ct. 377 (1939). We find that case to
be inapposite.
In RKO, landlords leased property to a corporation's
subsidiary, on condition that the parent corporation guarantee
rent payments. When the parent went bankrupt, the subsidiary was
still paying rent. The landlords did not file a claim against
the bankrupt's estate. But after the debtor's reorganization
when the subsidiary defaulted, they asserted that their claim on
the guarantee was not discharged. The Court of Appeals
disagreed:
The appellants . . . were not as [a] matter
of law entitled to stand aloof and obtain a
continuance of the guaranties unaffected by
reorganization, the equivalent of a
preference for them over unsecured creditors
with accrued or determinable claims. What
they were entitled to was treatment as nearly
like that accorded to ordinary unsecured
creditors as the circumstances permitted[.]
Id. at 26-27.
Penn Central maintains that appellants here stand in
the same position as the landlords in RKO. Schweitzer, however,
counsels otherwise;
The reasoning in Radio-Keith-Orpheum is
not controlling here, however, because we do
not believe plaintiffs had "interests" of any
8
character before injury manifested itself. In
our view, before one can have an "interest"
which is cognizable as a contingent claim
under section 77, one must have a legal
relationship relevant to the purported
interest from which that interest may flow.
In Radio-Keith-Orpheum, although there
had been no breach of the lease agreement and
thus there was no present cause of action
pursuant to the guaranties, there was a
guarantor-guarantee legal relationship from
which an interest in the guaranty could
flow.3 There is no legal relationship,
however, between a tortfeasor and a tort
victim until a tort actually has occurred. .
. .
758 F.2d at 943 (citation omitted).
Undaunted, Penn Central asserts that the § 5(a)
agreement to which the Bessemer was a party takes this case out
of the ambit of Schweitzer and places it squarely within the
holding of RKO. We cannot agree. The key to Schweitzer's
treatment of RKO was that the RKO landlords had explicitly
bargained to look to the unreorganized debtor for their security.
Here, however, the § 5(a) agreement confers no right of
indemnification. That agreement, although the source of
appellants' primary liability to the MDL 587 plaintiffs, simply
does not evidence an intent to look to the pre-reorganized Penn
Central for contribution or indemnity claims. Put simply,
3
Accord Frenville, 744 F.2d at 336 ("The present case is
different from one involving an indemnity or surety contract.
When parties agree in advance that one party will indemnify the
other party in the event of a certain occurrence, there exists a
right to payment, albeit contingent, Such a surety relationship
is the classic case of a contingent right to payment under the
Code--the right to payment exists as of the signing of the
agreement, but it is dependent on the occurrence of a future
event." (Citations omitted.)).
9
although there was a legal relationship between the Bessemer and
the Penn Central's predecessors, there was no legal relationship
from which a prepetition interest in contribution or indemnity
could flow. See id. at 943.
This conclusion is supported by the § 77 case of In re
Penn Central Transp. Co. ("Paoli Yard"), 944 F.2d 164 (3d Cir.
1991). Penn Central and its predecessors operated a railroad
yard on an electrified portion of its line. The land became
contaminated from PCBs common in the electrical transformers of
the period. As part of the Penn Central reorganization, the
Paoli Yard was conveyed to Conrail, and later to SEPTA. Two
years post-consummation, however, Congress imposed retroactive
liability on former owners of toxic waste sites. The United
States sued both SEPTA and Conrail, and Conrail sought
contribution and indemnity from the reorganized Penn Central. Id.
at 165-66.
The district court, construing Schweitzer narrowly,
held that the Consummation Order barred the claims against the
reorganized Penn Central. Id. at 166. We reversed, noting first
that
at the moment of the bankruptcy discharge and
the inception of the injunction, CERCLA had
not yet been passed by Congress. Indeed
CERCLA was not enacted until 1980.
Consequently, at the time of the Consummation
Order, there was no statutory basis for
liability to be asserted against [Penn
Central] by the petitioners. Just as the
employees in Schweitzer had no recognizable
tort causes of action under the FELA prior to
the employer railroad's relevant consummation
dates, the petitioners here could not have
10
brought claims under CERCLA prior to the
Consummation Date.
Id. at 167. We then went on to reject the theory that a
contingent, dischargeable claim existed pre-consummation:
Under the facts now before us in this appeal,
it was not until the passage of CERCLA that a
legal relationship was created between the
petitioners and [Penn Central] relevant to
the petitioners' potential causes of action
such that an interest could flow. Because
this legal relationship did not evolve until
after the Consummation Date, the petitioners
did not have contingent claims against [Penn
Central]. Accordingly, our decision in
Schweitzer leads us to the conclusion that
the petitioners' asserted claims under CERCLA
did not constitute dischargeable claims
within the meaning of section 77 and thus
survive the discharge of the debtor.
Id. at 167-68 (emphasis added).
In Paoli Yard, we made explicit what was implicit in
Schweitzer: it is not sufficient for dischargeability purposes
that there was some pre-consummation legal relationship between
the debtor and the party seeking now to assert a claim; rather,
that relationship must be relevant to the claimant's cause of
action. When CERCLA was enacted, two fundamental changes
occurred in that relationship: first, Conrail became primarily
liable for the toxic waste cleanup. Second, and more importantly
for our purposes, CERCLA made Penn Central potentially liable to
Conrail for contribution and indemnity. Only then did a legal
relationship relevant to the cause of action arise.4
4
Likewise, in Schweitzer, there was undoubtedly an employer-
employee contractual relationship between the railroads and the
injured workers. That relationship, by itself, was not
sufficiently relevant to their tort claims that the workers
11
Although not necessary to our holding, Frenville also
supports our conclusion that appellants' claims against the
reorganized Penn Central were not discharged. In that case,
banks sued an accounting firm for negligently preparing the
debtor's financial statements. The firm sought relief from the
automatic stay to claim contribution and indemnity from the
debtor. 744 F.2d at 333-34. We held that, because the firm's
claims for contribution and indemnity could not accrue until the
banks sued the firm, the firm's claims arose post-petition and
were nondischargeable; hence, the automatic stay was
inapplicable. Id. at 337.
Frenville, of course, arose under the Bankruptcy Code,
not § 77 of the 1898 Bankruptcy Act. Key to our analysis in
Frenville was the definition of "claim" as a "right to payment"
in 11 U.S.C. § 101(4), which we held was intended by Congress to
be interpreted broadly. See id. at 336. Penn Central seizes on
this distinction and urges us not to apply Frenville to this § 77
case. This, however, is a distinction without a difference.
Section 77(b) of the 1898 Act defined "claims" as "debts" or
"other interests of whatever character." In neither brief nor
argument could counsel for Penn Central explain how these two
definitions differ and why that difference should lead us to a
5
different result here than in Frenville.
somehow agreed to look only to the debtors' estates for
compensation.
5
In response to Penn Central's argument that Frenville was
wrongly decided and has not been well received by courts outside
the Third Circuit, we direct its attention to Third Circuit
Internal Operating Procedure 9.1.
12
Our holding makes for sound policy. Appellants could
not have been expected to file a contingent claim pre-
consummation based on the speculative possibility that their
conduct, which began in the 1950s, might have extended beyond the
bounds of its statutory antitrust immunity and that they might
successfully be sued years later. If the Bessemer were required
to act with such clairvoyance, then countless other entities that
did business with the Penn Central and its predecessors, would
also have been required to file contingent claims. Affixing
value to these claims, both individually and in the aggregate,
would be impossible, and the uncertainty thus created would
render any reorganization plan unworkable. Indeed, we find the
Schweitzer analysis of when asbestos-caused disease claims accrue
both analogous and persuasive:
If mere exposure to asbestos were sufficient
to give rise to a F.E.L.A. cause of action,
countless seemingly healthy railroad workers,
workers who might never manifest injury,
would have tort claims cognizable in federal
court. It is obvious that proof of damages
in such cases would be highly speculative,
likely resulting in windfalls for those who
never take ill and insufficient compensation
for those who do.
758 F.2d at 942.
C.
As a final ground for affirmance, Penn Central argues
that, as a matter of law, appellants have no valid claims for
indemnity or contribution. This argument, however, goes to the
merits of appellants' indemnity and contribution claims currently
13
pending in other courts, which will proceed there once our
mandate issues. Hence, we do not reach the issue.
III.
Because appellants' claims against Penn Central arose
post-consummation and were not discharged, we will reverse and
remand the cause for the district court to deny Penn Central's
petition.
14