Opinion
No. 70-347
August 8, 1990
Kenneth N. Hart, James J. Capra and Alan B. Howard, Donovan, Leisure, Newton Irvine, attorneys for the Penn Central Corporation.
Roger J. Marzulla, Edward S. G. Dennis, Jr., James G. Sheehan, Joanna Jacobs and Joel M. Gross, attorneys for the United States.
Patrick Ryan, Drinker, Biddle Reath, attorney for SEPTA.
David Richman, Pepper, Hamilton Scheetz, and Ralph G. Wellington, Schnader, Harrison, Segal Lewis, attorneys for Conrail.
Railroad Reorganizations — Successor Entity — Liability for Debtor's Torts. — This is a railroad reorganization from the pre-Code era. Plaintiffs claimed that they were entitled to compensation from the reorganized company (that is, the successor entity) for pollution caused by the debtor prepetition. The plan of reorganization had been confirmed and consummated. It is justifiably characterized as a liquidating plan. Among other things, the reorganized company did not continue in the railroad business but simply managed its own investments; the debtor's assets were distributed to creditors; and no surplus funds remained for distribution after the plan was consummated. Since the pollution and the bases for toxic tort claims were known in character if not in extent before the plan was confirmed, and since the applicable Federal environmental law was not enacted until two years after plan confirmation, and did not contain anything to undermine the consummation order, and finally since the plan enjoined any suits against the reorganized company based on the debtor's pre-filing activities, the reorganized company cannot be held responsible for the debtor's wrongdoing. "[T]here is simply no way that the pre-consummation activities of the Debtor could give rise to any kind of claim against the reorganized company unless the Plan so provides." To some degree, the issue joined here implicated notions of when a latent tort claim arises. However, by citing the known existence of the pollution in the pre-filing period, the court (ED Pa.) did not have to confront directly whether potential claims for prepetition injuries manifesting themselves only in the postpetition period are capable of discharge. At least when a liquidating plan is involved, with an injunction against suing the reorganized company, then claims against the successor are barred.
Cf. Sec. 1101(2) at ¶ 12,003, Sec. 1141(a) at ¶ 12,201, Sec. 1141(c) at ¶ 12,203, Sec. 1141(d) at ¶ 12,204, Sec. 1172 at ¶ 12,319, Sec. 1173(a) at ¶ 12,321, and Sec. 1174 at ¶ 12,323.
A remaining issue in this litigation is the extent to which liability may be asserted against Penn Central Company ("PCC") (the reorganized company) for environmental pollution and related toxic torts attributable to Penn Central Transportation Company ("PTCC") (the Debtor), notwithstanding the consummation of the reorganization of the Debtor and the injunctive provisions of the Consummation Order of October 24, 1978. By Memorandum and Order No. 4311, entered January 14, 1988, I expressed certain tentative conclusions on this subject, permitted certain personal injury claims to proceeds on an interim basis, directed the parties to supply certain supplemental information in the form of written reports, and invited further briefing.
I interpret the materials filed by the United States Government, Conrail and SEPTA as constituting, in part, a motion for reconsideration. They contend, properly in ny view, that the issue before the court is not whether the petitioners have potentially meritorious claims for cleanup costs under CERCLA, but rather whether any such claims they may have are precluded by the injunctive provisions for the Consummation Order. This court's retention of jurisdiction under §§ 7.02 and 7.04 of the Consummation Order did not include jurisdiction to decide the merits or proposed lawsuits, but only whether the Consummation Order precludes their assertion.
The pertinent facts are set forth in the Memorandum accompanying Order No. 4311, and will not be detailed here. Briefly, PCB pollution at the Paoli Yard began long before Penn Central Transportation Company entered bankruptcy in 1970, continued until the rail properties were conveyed to Conrail in 1976, and continued under Conrail's ownership thereafter. On October 24, 1978, the Consummation Order was entered, enjoining litigation against PCC "based upon any right, claim or interest of any kind or nature whatsoever which any such person . . . may have in, to or against" the Debtor, PCTC; and enjoining all persons from attempting to proceed against PCC or its property "on account of any obligation" incurred by the Debtor PCTC (¶ 7.02). More than two years later, in December 1980, Congress enacted CERLA, imposing liability for toxic cleanup costs from, inter alia, corporations which had owned the property in question at the time the toxic spillage occurred.
In Memorandum and Order Number 4311, I analyzed the relevant provisions of CERCLA, concluded that the statute did not purport to impose liability upon reorganized companies for pre-consummation toxic torts committed by bankrupt debtors, and therefore ruled that the petitioners should not be permitted to assert such claims against PCC. Upon reconsideration, I now agree that memorandum and Order 4311 purported to deal with the merits of petitioners' claims rather than their relationship to the Consummation Order.
What I should have said, and now express, is that there is nothing in the language of CERCLA itself which effectively undermines the provisions of the Consummation Order. That is, if the terms of the Consummation Order, properly construed in the light of controlling precedent, bar petitioners' proposed litigation, the CERCLA statute did not purport to change the law in that respect, or to mandate a different result.
In my earlier decision, I sought further clarification as to whether there might remain available some assets of the Debtor, PCTC, which petitioners might look to for payment of their environmental cleanup claims, within the framework of the Reorganization Plan itself — specifically, surplus funds allocated to creditors but not distributable for one reason or another, or liability insurance coverages. I now conclude, on the basis of the supplemental filings, that it is unlikely that any such source of payment will develop, and that, in any event, these are side issues not directly pertinent to decision of the issues presented by these petitions.
In Memorandum and Order No. 4311, I expressed the view that, unless a different result is compelled by the court of appeals' decision in Schweitzer v. Consolidated Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 474 U.S. 864 (1985), petitioners' claims would undoubtedly be precluded by the terms of the Consummation Order and firmly established principles of bankruptcy law. I persist in that view.
Petitioners seek to impose liability upon PCC, the reorganized company, for the pre-petition and pre-consummation activities of the debtor.
Section 77(f) of the Bankruptcy Act provides:
"Upon confirmation by the judge, the provisions of the plan and of the order of confirmation shall . . . be binding upon the debtor, all stockholders thereof, including those who have not, as well as those who have, accepted it, and all creditors secured or unsecured, whether or not adversely affected by the plan, and, whether or not their claims shall have been filed, and, if filed, whether or not approved, including creditors who have not, as well as those who have, accepted it." 11 U.S.C. § 205(f) (repealed 1978).
And that
"The property dealt with by the plan . . . shall be free and clear of all claims of the debtor, its stockholders and creditors." Id.
The statute adopts all-inclusive definitions of the terms "creditors" and "claim":
"The term `creditors' shall include, for all purposes of this section, all holders of claims of whatever character against the debtor or its property, whether or not such claims would otherwise constitute provable claims under this Act. . .
"The term `claims' includes debts, whether liquidated or unliquidated, securities (other than stock and option warrants to subscribe to stock), liens, or other interests of whatever character." 11 U.S.C. § 205(b) (repealed 1978).
As stated by the Supreme Court, "the sweeping, all-inclusive definitions of `claims' and `creditors' in § 77 leave room for no exception under it." Gardner v. New Jersey, 329 U.S. 565, 573 (1947).
The Consummation Order of October 24, 1978, provided that the Debtor was forever discharged and released from
"All obligations, debts, liabilities and claims against [PCTC], whether or not filed or presented, whether or not approved, acknowledged or allowed in these proceedings, and whether or not provable in bankruptcy." § 3.06(a).
And that the reorganized company, PCC, received PCTC's property
"free and clear of all claims, rights, demands, interests, liens and encumbrances of every kind and character, whether or not properly or timely filed and whether or not approved, acknowledged or allowed in these proceedings, of the Debtor, the Secondary Debtors and Penn Central Company, their creditors, claimants and stockholders." § 3.03(a).
Finally, as noted at the outset, § 7.02 of the same Order permanently enjoined all persons from asserting against PCC any possible claim or interest arising out of the activities of PCTC.
Once a reorganization plan has been confirmed and consummated, it cannot be amended. Duryee v. Erie R.R., 175 F.2d 58 (6th Cir.), cert. denied, 338 U.S. 861 (1949); Duebler v. Chernoff Corp., 160 F.2d 472, 474 (2d Cir. 1947); In re Peyton Realty Co., 148 F.2d 771, 773 (3d Cir. 1945).
Under these well-settled principles, there is simply no way that the pre-consummation activities of the Debtor could give rise to any kind of claim against the reorganized company unless the Plan so provides.
Although not quarreling with these familiar principles, petitioners contend that the decision of the Third Circuit Court of Appeals in Schweitzer v. Consolidated Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 474 U.S. 864 (1985), mandates that their petitions be granted, so that they can proceed against PCC on their clean-up claims. Although this argument is plausible and not without substance, I believe it reflects an unduly broad reading of the Schweitzer opinion, is at odds with other Third Circuit precedent, In re Penn Central Trans. Co., 42 B.R. 657 (E.D.Pa. 1984), aff'd, 771 F.2d 762 (3d Cir.), cert. denied, 474 U.S. 1033 (1985), and conflicts with the recent decision of the 6th Circuit Court of Appeals in In re Erie-Lackawanna Ry., 803 F.2d 881 (6th Cir. 1986), cert. denied, 107 S.Ct. 2463 (1987).
In Schweitzer, the court ruled that claims for personal injuries occasioned by exposure to asbestos were not discharged in the Reading bankruptcy if the claimants' injuries had not manifested themselves before consummation. The specific holding of the case was that an injured person does not have a "claim" which can be asserted in, or discharged in the course of, a bankruptcy proceeding until the injury has been manifested. In In re Penn Central Trans. Co., supra, on the other hand, it was held that potential antitrust claims attributable to the Debtor's activities could not be asserted against the reorganized company, but were barred by the Consummation Order, irrespective of whether the claimants had reason to know of the alleged violations before consummation. These seemingly disparate holdings can perhaps be reconciled on the basis that Schweitzer dealt with FELA claims of injured railroad workers — persons accorded uniquely favorable treatment under the scheme of § 77 of the Bankruptcy Act and the corresponding provisions of the current Bankruptcy Code.
It is noteworthy, too, that the Schweitzer court emphasized that its holding was limited to the proposition that latent asbestos-related injuries do not become "claims" which can be discharged in bankruptcy, until the injury manifests itself; the court left open the question whether such claims, arising post-consummation, could be sucessfully asserted against the reorganized company.
On remand, it is true, the district court interpreted the Third Circuit decision as mandating the conclusion that any claim against the Debtor which was not discharged could necessarily be asserted against the reorganized company. The correctness of this view is called into question by the later decision of the 6th Circuit in In re Erie-Lackawanna Ry., supra, which holds that, in a reorganization plan substantially equivalent to a liquidation ( i.e., where the assets of a railroad are to be liquidated by the reorganized company for purposes of payment of creditors, and the reorganized company will no longer continue in the railroad business), asbestos-related claims first arising after consummation cannot be prosecuted against the reorganized company.
Petitioners argue that, since CERCLA was not enacted until after the Consummation Order, claims for cleanup reimbursement under that statute did not arise, or become "claims" until after consummation, within the Schweitzer rubric. It is undisputed, however, that the existence of PCB contamination at the Paoli Yard and the environmental hazards associated with it were manifest, and well known to the petitioners, before the Consummation Order was entered. Although the full extent of the potential damage may not have been appreciated, and although cleanup had not yet been mandated, and the expanded scope of the statutory remedy had not yet been enacted, enough was known to suggest that torts had been and were being committed which could give rise to liabilities.
Finally, I believe the PCTC Reorganization Plan fits the mold of a "liquidation-type" reorganization as discussed in In re Erie-Lackawanna Ry., supra. The assets of the Debtor were marshalled and redistributed among its creditors and other claimants; the unsecured creditors were paid largely in stock, plus some contingent debt securities — a type of distribution normally associated with an insolvent company; and the reorganized company did not continue in the railroad business, but principally manages its investments. I see no reason not to follow the 6th Circuit precedent established in the Erie-Lackawanna case.
Because this case is distinguishable from Schweitzer on its facts; because the Schweitzer court expressly did not rule on whether the reorganized company could be held liable for the "claims" which were not "discharged"; and in conformity with the appellate decision in Erie-Lackawanna Ry., supra, I conclude that the petitions, to the extent not previously granted in Memorandum and Order No. 4311, should be denied.