Opinion ID: 3010461
Heading Depth: 2
Heading Rank: 2

Heading: The Effect of Reading's Bankruptcy on

Text: Conrail's § 113(f) Claim How then has Reading's bankruptcy discharge affected Conrail's claim for contribution. The law of this circuit regarding the discharge of claims in bankruptcy has been established in a series of cases, many of which involve § 77 railroad reorganizations. The leading case is Schweitzer v. Consolidated Rail Corp., 758 F.2d 936 (3d Cir. 1985). In Schweitzer, a group of employees sued Reading after its reorganization for asbestos-related injuries under the Federal Employers' Liability Act, 45 U.S.C. § 51 et seq.. Reading invoked its bankruptcy discharge to bar the employees' claims, pointing out that the plaintiff-employees were exposed to the asbestos well before the plan consummation date. We rejected Reading's claim to absolute protection, noting that the language of § 77 provides for the discharge of all claims against the debtor. We interpreted this language to mean that the employees' claims would only be discharged if their causes of action existed at the time of plan consummation. 758 F.2d at 941. We explained that a bankruptcy claim must be based on state or federal law that, wholly apart from bankruptcy, created substantive obligations. Id. (citation omitted). We looked to federal tort law to determine when the claim arose. Noting that identifiable, compensable injury was a basic element of a tort claim, we held that no cause of action accrued until that element had been satisfied. Because the plaintiffs' injuries did not become manifest until after the reorganization, their claims did not exist until after plan consummation, and for that reason the claims were not discharged. Id. at 942; see also In re Central R.R. Co., 950 F.2d 887 (3d Cir. 1991) (following Schweitzer); Zulkowski v. Consolidated Rail Corp., 852 F.2d 73 (3d Cir. 1988) (same); cf. In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984) (applying Schweitzer analysis to claim for contribution and indemnity arising after automatic stay under Bankruptcy Code). 17 In Schweitzer, we also discussed the concept of a contingent claim, that is, a claim which would enable a person to be a creditor in the bankruptcy action even though that person had no present cause of action against the debtor. We found statutory support for such a claim in the language of § 77(b), which defined claims to include interests of whatever character. 758 F.2d at 942. We cited In re Radio-Keith-Orpheum Corp., 106 F.2d 22 (2d Cir. 1939), as providing an example of a contingent claim. There, the Second Circuit barred the contingent claim of a landlord against the debtor/guarantor of a lease. The court found that because an express contract of guarantee existed, the landlord could not stand idly by while the guarantor went into bankruptcy. The court determined that the claim on the guarantee had been discharged. Id. at 942-43. Schweitzer, however, was a tort claim for personal injury; there was no guarantee, no legal relationship, and no contingent claim that could be discharged. We have followed Schweitzer in cases involving environmental damage. The first such case was In re Penn Cent. Transp. Co., 944 F.2d 164 (3d Cir. 1991) (Paoli Yard). In Paoli Yard, the United States brought suit against Conrail, the Southeastern Pennsylvania Transportation Authority (SEPTA), and Amtrak as a result of a release of environmental contaminants at the Paoli Rail Yard. Conrail petitioned to implead the Penn Central Corporation (PCC), the reorganized entity that emerged from the § 77 reorganization of the Penn Central Transportation Company (PCTC). SEPTA and the United States also brought claims against PCC. As Reading has done in the present case, PCC argued that its § 77 reorganization barred the United States' claim. Applying Schweitzer, we held that the petitioners' claims were not barred. We first looked to see if a claim existed under CERCLA prior to the consummation date. We held that no claim existed because CERCLA had not been passed at the time of the reorganization: On October 24, 1978, the reorganization of PCTC was consummated and the injunction against the filing of future lawsuits . . . was entered. We note, however, that at the moment of the bankruptcy discharge and 18 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 PCTC 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 brought claims under CERCLA prior to the Consummation Date. Id. at 167. The Paoli Yard court then turned to the possibility of contingent claims. As in Schweitzer we found that there were no contingent claims to be discharged because of the absence of a legal relationship. [I]t was not until the passage of CERCLA that a legal relationship was created between the petitioners and PCC 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 PCTC. 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 168. Other Third Circuit cases are consistent with Paoli Yard and Schweitzer. In In re Penn Central Transp. Co., 771 F.2d 762 (3d Cir. 1985) (Pinney Dock), the plaintiffs brought antitrust actions against PCC and PCTC for pre- reorganization conspiracies. We examined the nature of the plaintiffs' antitrust claims and found that they existed at the time of the reorganization. Consequently, the claims were presumed discharged by § 77, absent other considerations.8 We expressly distinguished Pinney Dock's _________________________________________________________________ 8. We later rejected the plaintiffs' claims of fraudulent concealment and inadequate notice. Id. at 768-72. 19 facts, where all elements of the claim arose before reorganization, from Schweitzer, where one element of the claim, the manifestation of the injury, did not appear until after consummation. Id. at 767. In our most recent decision on the subject, we applied the same principles. See In re Penn Cent. Transp. Co., 71 F.3d 1113 (3d Cir. 1995) (Bessemer), cert. denied, ___ U.S. ___, 116 S.Ct. 1851 (1996). Here, the Bessemer Railroad and USX Corporation sought contribution from PCTC for judgments entered against them in antitrust conspiracies. PCTC raised the shield of its § 77 reorganization, and we applied the Paoli Yard/Schweitzer analysis. We first looked to nonbankruptcy law to determine when the claims accrued. We noted that the plaintiffs sought contribution. Id. at 1115. The event triggering contribution occurred after the date of PCTC's 1978 Consummation Order. As in Schweitzer, the claim did not yet exist at the time of reorganization and thus was not barred. Moreover, as in Schweitzer, the plaintiffs lacked any contingent claim that might have been dismissed because there was no legal relationship between the parties. The joint rate-making agreement signed by the parties did not confer a right of indemnification, so there was no intent to look to PCTC for indemnity or contribution. Absent such an agreement, the necessary legal relationship was lacking. Id. at 1116. These cases establish the framework for our § 77 discharge analysis. First, we must determine whether the CERCLA claim had accrued at the time of the reorganization. If so, then it was discharged. Pinney Dock, 771 F.2d at 766. To determine whether a claim existed, we look to the substantive area of law governing the underlying claim. See Bessemer, 71 F.3d at 1114. If a claim had not accrued, then we must determine whether the claimant possessed an interest rising to the level of a contingent claim that would be discharged. Schweitzer, 758 F.2d at 942. Applying these principles to Conrail's contribution claim yields a relatively straightforward answer. Under Paoli Yard, Conrail's § 113 claim was not discharged because SARA had not yet been enacted. In Paoli Yard, we rejected a CERCLA claim against PCTC because at the moment of the 20 bankruptcy discharge and the inception of the injunction, CERCLA had not yet been passed by Congress. . . . Consequently, at the time of the Consummation Order, there was no statutory basis for liability to be asserted against PCTC by the petitioners. 944 F.2d at 167. This rule applies to the current case. SARA was not passed until 1986. Consequently, at the time of Reading's consummation order, there was no statutory basis for contribution liability. Reading attempts to avoid this conclusion by arguing that § 113(f) permits a contribution action based on prospective liability. See 42 U.S.C. § 9163(f) (any person may seek contribution from any other person who is liable or potentially liable under section 9607(a) of this title . . .. Nothing in this subsection shall diminish the right of any person to bring an action for contribution in the absence of a civil action . . ..) (emphasis added). Reading also notes that courts, finding an implied right of action under § 107(a)(4)(B), interpreted that section as extending to cases of potential liability. See, e.g., City of Philadelphia v. Stepan Chemical Co., 544 F. Supp. 1135 (E.D. Pa. 1982) (early case finding private right of action). Adopting either of Reading's arguments would lead to a harsh result. Both would sanction Conrail for failing to allege claims that in December 1980 had no recognized legal form. Section 113's language on potential liability had not been enacted in 1980. Moreover, although we could interpret § 107(a)(4)(B)'s private right of action as emerging fully formed with the passage of CERCLA, the courts did not for several years interpret § 107(a) as containing such a cause of action. If we accepted Reading's position, we would penalize Conrail for failing to register a claim which would not be judicially recognized for two years. See Stepan Chemical, 544 F. Supp. at 1141-43. For these reasons, we will apply Paoli Yard and hold that Conrail's § 113(f) contribution claim did not yet exist at the time of Reading's § 77 reorganization. Thus, it was not discharged. This ruling on discharge does not, however, end matters. Although Conrail's contribution claim was not discharged by Reading's bankruptcy, the claim nevertheless fails as a matter of law. Conrail's contribution claim depends on 21 Conrail and Reading both being liable to a third party, in this case to the United States. Because, for the reasons we state below, we find that the United States's claim was discharged by Reading's bankruptcy, Conrail's contribution action, based on Reading's common liability with Conrail to the United States, cannot proceed. As a threshold matter, the United States argues that we need not reach the issue of Reading's liability to the United States. The United States claims that the sole issue raised by this appeal is whether the contribution claim was discharged in bankruptcy. The United States asks that we remand this case so that the derivative nature of the contribution claim and its potential failure can be resolved by the district court. We reject this contention for two reasons. First, as a matter of judicial efficiency, remand would be wasteful. The district court reached both issues, holding that Conrail's § 113(f) contribution is a derivative claim and that the United States' claim was discharged by bankruptcy. Both are matters of statutory interpretation, presenting questions of law subject to plenary review by this court. See Manor Care, 950 F.2d at 124. Rather than remanding to the district court so that it can reexamine the conclusions it has already reached, we will address the issues. Second, although an absence of joint liability may be a defense, when there is no question that joint liability is lacking, a necessary element to establish contribution cannot be proven. The claim for contribution must then, as a matter of law, fail. Consequently, the question of Reading's liability to the United States under § 107 is entirely germane to our current discussion. We held in Part III.A, supra, that § 113(f) uses the term contribution in its traditional, common law sense. This means that CERCLA contribution, like common law contribution, requires some form of joint liability. See David B. Lilly Co. v. Fisher, 18 F.3d 1112, 1123 (3d Cir. 1994); Green v. United States, 775 F.2d 964, 971 (8th Cir. 1985); Restatement (Second) of Torts § 886A(1) (1977) (when two or more persons become liable in tort to the same person for the same harm, there is a right of contribution among them, even though judgment has not been recovered against all or any of them). 22 CERCLA § 113(f) captures the requirements of joint liability in its statutory language: Any person may seek contribution from any other person who is liable or potentially liable under section 9607(a) of this title, during or following any civil action under section 9606 of this title or under section 9607(a) of this title. 42 U.S.C. § 9613(f). Conrail suggests, however, that this provision establishes a new form of statutory contribution that spreads liability beyond traditional common law principles. Quoting Sylvester Bros. Dev. Co. v. Burlington N.R. Co., 133 B.R. 648, 653 (D.Minn. 1991),9 Conrail argues that common liability by two or more defendants to one common government agency is not necessary under § 113(f). We disagree. Contribution, by its own definition, requires a common liability for the same injury. For example, the Uniform Contribution Among Tortfeasors Act provides where two or more persons become jointly or severally liable in tort for the same injury to person or property or for the same wrongful death, there is a right of contribution among them even though judgment has not been recovered against all or any of them. Uniform Contribution Among Tortfeasors Act (1955 Revised Act) § 1, 12 U.L.A. 194. We read the language of § 113(f) as adopting the same traditional sense of contribution. In permitting a party to seek contribution from any other person who is liable or potentially liable under § 107(a), it is inherent in the concept of contribution that the persons commonly liable be liable to the same entity. Otherwise, contribution could become an endless circle of attempts to seek reimbursement from unrelated parties. Because § 113(f)(1) reflects the traditional concept of contribution, its language does not permit contribution among liable parties who do not have a common derivation of liability. Section 113(f) parallels the scope of common law contribution, which _________________________________________________________________ 9. Conrail's quoted language from Sylvester (This provision [CERCLA § 113(f)(1)] does not expressly require common liability to a governmental agency, as would be the case under common law contribution. 133 B.R. at 653) is arguably dictum because the court reached this conclusion only after it had already determined that the State of Minnesota's claim against the debtor had not been discharged in bankruptcy and that a common law right to contribution existed. 23 applies to all joint tortfeasors, in the sense of two or more persons who are liable to the same person for the same harm. It is not necessary that they act in concert or in pursuance of a common design, nor is it necessary that they be joined as defendants. Restatement (Second) of Torts § 886A, cmt. b. (1977). Applying this traditional meaning of contribution to the current case, we conclude that Reading's liability to Conrail depends on Reading's liability to the United States. To be liable for contribution, Reading must be liable to the United States under § 107(a). Conrail points out that there are two relevant bases of liability under § 107(a). As provided in § 107(a)(4)(A), a PRP is liable in contribution for all costs of removal or remedial action incurred by the United States Government or a State or an Indian tribe not inconsistent with the national contingency plan . . .. Or, under § 107(a)(4)(B), a party is liable for any other necessary costs of response incurred by any other person consistent with the national contingency plan. 42 U.S.C. § 9607(a)(4)(B). Conrail contends that, because Reading can be liable to Conrail under § 107(a)(4)(B) for costs incurred by Conrail, contribution is not dependent on Reading's liability to the United States under § 107(a)(4)(A). But Conrail is mixing apples and oranges. It is describing a direct action for cleanup costs and arguing that the possibility of such an action demonstrates that common liability is not necessary for contribution. We do not accept this circular argument as valid. As we have demonstrated in Part III.A., to the extent that Conrail seeks apportionment of the expenses of cleanup, it must do so under § 113(f). Reading's § 113(f) liability for contribution depends on its liability to the United States. Having come to this conclusion, we must then examine the effect of Reading's § 77 reorganization on the United States's claim against Reading. Applying the Schweitzer/ Paoli Yard analysis, we find that all four CERCLA elements making up the United States' claim existed at the time of Reading's § 77 reorganization. The United States' claim against Reading had therefore accrued, and it was discharged by the consummation order. 24 We set out the elements of a § 107(a) CERCLA claim in Part III.A., supra. As to the four elements, there is no dispute that Reading was a responsible party, that hazardous substances were disposed of at the Douglassville facility, or that a release occurred. The only issue is whether the United States incurred response costs prior to December 31, 1980. It did. Under the law of this circuit, if a particular government action qualifies as a `removal action' under the definition contained in CERCLA, the government's costs are recoverable under the unambiguous language of § 107, regardless of what statutory authority was invoked by EPA in connection with its action. United States v. Rohm & Haas, 2 F.3d 1265, 1274-75 and n.15 (3d Cir. 1993) (emphasis added). A removal action involves the cleanup or removal of released hazardous substances from the environment, such actions as may be necessary taken in the event of the threat of release of hazardous substances into the environment, such actions as may be necessary to monitor, assess, and evaluate the release or threat of release of hazardous substances, the disposal of removed material, or the taking of such other actions as may be necessary to prevent, minimize, or mitigate damage to the public heal or welfare or to the environment. 42 U.S.C. § 9601(23). In both 1970 and 1972, federal environmental agencies, acting pursuant to the Clean Water Act, 33 U.S.C. § 1321, undertook cleanups of massive releases from the Douglassville site. These cleanups meet the definition of a removal action. The United States never recovered its response costs for these efforts. Consequently, on the date of Reading's § 77 reorganization, all four CERCLA elements were met. The United States possessed an actual claim against Reading. The United States has not challenged any of these elements on appeal, choosing instead to advance a novel interpretation of Schweitzer. The United States suggests that Schweitzer always requires a legal relationship between the claimant and the debtor before a claim can be barred. 25 The United States then metamorphoses the legal relationship requirement into a test turning on whether the government had knowledge of the potential claim. This is simply wrong. Schweitzer requires a legal relationship only for the discharge of a contingent claim in bankruptcy. No such relationship is needed for an accrued claim. The United States' CERCLA claim had accrued at the time of the reorganization. The question of a legal relationship is therefore irrelevant. See Paoli Yard, 944 F.2d at 167-68 (discussing legal relationship only for contingent claim); Schweitzer, 758 F.2d at 943 (same); see also In re Remington Rand Corp., 836 F.2d 825, 833 (3d Cir. 1988) (applying Schweitzer; holding government contract claim discharged where claim was contingent and relationship arose from government audit revealing claim). Moreover, even if we were to accept the United States's argument and assume that some degree of knowledge is a prerequisite for discharge of an accrued claim (and under Schweitzer it is not), we would still hold that the claim was discharged. The question of knowledge is a question of fact, subject to review only for clear error. See Riehl v. Travelers Ins. Co., 772 F.2d 19, 24 (3d Cir. 1985) (describing knowledge of toxic dumping as an issue of fact); see also Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1383 (3d Cir. 1993) (reviewing finding of constructive knowledge of breach of trust for clear error); Brock v. Claridge Hotel & Casino, 846 F.2d 180, 188 (3d Cir. 1988) (reviewing finding of knowledge of legal violation for clear error). The district court made factualfindings that the United States had knowledge of its claim prior to the bankruptcy discharge: the United States knew the Douglassville site was an environmental trouble spot and Reading Railroad was connected to it; by October 31, 1980, the EPA had identified the site as potential hazardous waste site; federal officials had twice responded to cleanup needs at the site; EPA knew Reading Railroad had operated a rail line to the site; in 1972 EPA had ordered Reading Railroad to haul waste from the site; and ICC tariffs, available as part of the bankruptcy proceedings, showed that Reading transported hazardous materials to the site. In re Reading Co., 900 F.Supp. at 745-46. In making these findings, the district court also relied on the length of the 26 Reading Railroad's bankruptcy, the government's substantial participation in it, and the large amount of publicity that surrounded CERCLA's passage, along with EPA's advocacy of the statute. Id. The court's finding of knowledge merits deference. With ample support in the record, we cannot say its holding was clearly erroneous. Because of this finding, the United States would lose on the knowledge issue even if we were to conclude that knowledge was necessary. We hold therefore that under our decisions in Schweitzer and Paoli Yard, the United States' CERCLA claim against Reading for environmental clean-up at the Douglassville site was discharged in the § 77 reorganization. Reading is not liable to the United States under § 107(a)(4)(A), and Reading is therefore not a person who is liable or potentially liable under [§ 107(a)] of this title, 42 U.S.C. § 9613(f)(1). Conrail's claim for contribution under § 113(f) fails as a matter of law. At oral argument, Conrail mentioned for the first time that it had spent over $1 million on remedial measures at the Douglassville site. Because of the lateness of Conrail's assertion of any such direct expense, we will not analyze the nature of Conrail's claims to ascertain if Conrail is in fact asserting a claim that is more than one for contribution. See, e.g., United States v. Voigt, 89 F.3d 1050, 1064 n.4 (3d Cir. 1996) (holding that failure to raise an issue until it is brought up at oral argument constitutes a waiver). For that reason, we do not need to consider whether, under the guidelines we have set out in New Castle County v. Halliburton NUS Corp., Conrail can maintain a direct claim under § 107(a)(4)(B) in addition to a claim for contribution.