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 Co. Precedential or Non-Precedential: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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Recommended Citation "IN RE: Penn Central Trans. Co." (1995). 1995 Decisions. Paper 305. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/305

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact [email protected]. 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.,

(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,

(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"),

(E.D. Pa. 1984), aff'd,

(3d Cir.),

cert. denied,

,

(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.,

, 941 (3d Cir.), cert. denied,

,

(1985); In re M. Frenville Co.,

(3d Cir.

1984), cert. denied,

,

(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

. 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,

(Ohio 1982); see Ross v. Spiegel, Inc.,

(Ohio

App. 1977) (similar rule for indemnity). Applying federal

admiralty law, we reached a similar conclusion. See Sea-Land

Serv., Inc. v. United States,

(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.,

(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.

.

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.,

, 892 (3d Cir. 1991) (following Schweitzer), cert. denied,

,

(1992); Zulkowski v. Consolidated Rail Corp.,

, 74 (3d Cir.) (same), cert. denied,

,

(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"),

(2d Cir.), cert.

denied,

,

(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,

("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"),

(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.

. 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.

.

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

(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