Court Opinion

ID: 2994291
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:13:52.348822+00
Date Added: 2024-06-11T15:02:45.232713
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-4328

Maytag Corporation,

Applicant-Appellee,

v.

Navistar International Transportation Corp., et
al.,

Respondents-Appellants.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern
Division.
No. 75 B 2697--Charles P. Kocoras, Judge.

Argued June 5, 2000--Decided June 27, 2000

  Before Easterbrook, Diane P. Wood, and
Evans, Circuit Judges.

  Easterbrook, Circuit Judge. Twenty years
ago the storied Rock Island Line, losing
about $40 million annually, abandoned its
railroad operations as part of a
bankruptcy under sec.77 of the Bankruptcy
Act of 1898. See Chicago, Rock Island &
Pacific R.R., 363 I.C.C. 150 (1980). Free
of its cash sinkhole, the Rock Island
retired its debts and emerged from
bankruptcy in 1984 as the Chicago Pacific
Corporation, a holding company with more
than $350 million in liquid assets,
substantial operating loss carryovers,
and a portfolio of miscellaneous business
ventures. In January 1989 Chicago Pacific
merged into Maytag Corporation,
manufacturer of refrigerators, ranges,
and other appliances.

  One of Chicago Pacific’s assets when the
bankruptcy wrapped up was the Iowa
Transfer Railway, which owned a railyard
in Rock Island, Illinois, near the Sylvan
Slough, a tributary of the Mississippi
River. Four months out of bankruptcy,
Chicago Pacific sold the Iowa Transfer to
Heartland Rail Corporation, which leased
the yard and other operating assets to
Iowa Interstate Railroad. Iowa Interstate
has operated that business ever since. In
1993 the Coast Guard concluded that
petroleum is leaking from the railyard
into the Sylvan Slough. Heartland and
Iowa Interstate are cleaning up the
premises and adjacent land, an expensive
endeavor. Two of their neighbors,
Navistar International Transportation
Corp. and the Burlington Northern & Santa
Fe Railway, blame Heartland and Iowa
Interstate for pollution. They have sued
under the Oil Pollution Act of 1990, 33
U.S.C. sec.sec. 2701-52, in the Central
District of Illinois, demanding that
Heartland and Iowa Interstate contribute
toward their own cleanup costs.
Heartland, Iowa Interstate, Navistar, and
Burlington Northern all believe that much
of the oil seeped into the land while the
Rock Island Line was operating the yard.
All four have added Maytag (as Chicago
Pacific’s successor) as a third-party
defendant in the Central District action,
seeking contribution under Illinois law,
740 ILCS 100/2, and perhaps federal law
as well (though both the complaint and
the parties’ briefs in this court are
silent on the legal theory underlying the
demand for contribution from Maytag).

  Maytag asked the Northern District of
Illinois, where the Rock Island
bankruptcy had been administered, to
enjoin prosecution of the claim for
contribution. It offered two theories:
first that a request for recovery on
account of pollutants deposited before
1984 is a claim in bankruptcy barred by
the injunction issued when the bankruptcy
was closed, and second that because the
Rock Island was "liquidated" rather than
"reorganized" Maytag did not inherit any
of the Rock Island’s debts. See In re
Erie Lackawanna Ry., 803 F.2d 881 (6th
Cir. 1986). The second point concerns the
general law of corporate obligations.
Debts do not pass to those who buy assets
(unless contracts provide for this
transfer), though shareholders may be
liable up to the amount of a net
distribution when a corporation
dissolves, see Model Business Corporation
Act sec.14.07(d)(2), and federal law does
not displace the norm that corporate
liability ends with the corporation’s
existence. Section 113(a)(1) of the
Comprehensive Environmental Response,
Compensation, and Liability Act (cercla),
42 U.S.C. sec.9613(a)(1), permits a
person who has paid for a cleanup to
obtain contribution "from any other
person who is liable or potentially
liable under section 107(a)";
sec.107(a)(2) in turn allows recovery
from "any person who at the time of
disposal of any hazardous substance owned
or operated any facility at which such
hazardous substances were disposed of"
(emphasis added)./* A buyer or
distributee of a polluter’s assets does
not qualify under this language. Citizens
Electric Corp. v. Bituminous Fire &
Marine Insurance Co., 68 F.3d 1016, 1021-
22 (7th Cir. 1995). Cf. United States v.
Bestfoods, 524 U.S. 51 (1998) (corporate
form must be respected in litigation
under cercla). Even when state law makes
the buyer of assets that constitute an
ongoing business liable as a successor,
it does not impose liability on firms
that purchase assets unrelated to those
that created the deferred liability. But
this point has nothing to do with
bankruptcy law in general or the Rock
Island reorganization in particular. If
as Maytag insists it is a stranger to
Rock Island’s corporate obligations and
therefore is not a "person who at the
time of disposal of any hazardous
substance owned or operated any facility
at which such hazardous substances were
disposed of", it is equally a stranger to
Rock Island’s bankruptcy and is not
entitled to relief from the Northern
District. If, on the other hand, Maytag
is the Rock Island’s successor, and
therefore entitled to take advantage of
the terminating injunction, it is
properly in the Northern District, but
cannot prevail on its second line of
argument.

  Disregarding our conclusion in In re
Chicago, Rock Island & Pacific R.R., 794
F.2d 1182 (7th Cir. 1986), an earlier
episode in this case, that bankruptcy
courts do not have perpetual authority to
grant protection to persons who acquire a
debtor’s assets, see also Zerand-Bernal
Group, Inc. v. Cox, 23 F.3d 159 (7th Cir.
1994); Pettibone Corp. v. Easley, 935
F.2d 120 (7th Cir. 1991), the Northern
District addressed the second of Maytag’s
arguments, concluded that the Rock Island
Line had been liquidated rather than
reorganized, and enjoined prosecution of
the Central District action against
Maytag. 1999 U.S. Dist. Lexis 19455 (N.D.
Ill. Dec. 2, 1999). (The Northern
District’s subject-matter jurisdiction is
not in question, given Maytag’s
invocation of the injunction, and as the
parties do not contest the court’s
apparent resort to the supplemental
jurisdiction to consider Maytag’s second
theory, we do not pursue the question
whether this would have been better left
to the Central District. See Myers v.
County of Lake, 30 F.3d 847 (7th Cir.
1994).) According to the Northern
District,

the Rock Island abandoned and liquidated
its rail business more than three years
prior to the consummation order. The only
assets it retained were non-rail related,
and which were used to create [Chicago
Pacific] in an effort to maximize the
ability to satisfy the claims of the Rock
Island’s creditors. ... Therefore, we ...
[hold] that the Rock Island was
liquidated, eliminating any entity which
might be sued, regardless of when the
claim arose.

The underpinning of this passage, and of
the district court’s conclusion, is that
abandonment of the rail business is the
same thing as corporate liquidation. But
that is untenable. Corporations change
lines of business frequently without
liquidating. If Maytag tomorrow were to
abjure the washing-machine business to
concentrate on refrigerators and
microwave ovens, it would not have
"liquidated" and would remain liable for
debts (including deferred environmental
liabilities) associated with its whole
line of appliances.

  Just so with the Rock Island. During
bankruptcy the Rock Island quit the
railroad business but retained
substantial assets. The corporate entity
was renamed "Chicago Pacific Corporation"
at the close of the bankruptcy, and
Chicago Pacific avowedly was a
continuation of the original firm, rather
than (say) the buyer or distributee of
the Rock Island’s assets. How else could
Chicago Pacific have retained the Rock
Island’s substantial operating loss
carryforwards? Tax attributes cannot be
sold or given away; only the company that
generated the losses may use them. When
the bankruptcy wrapped up, accumulated
tax losses were a major asset of the
estate. It would have been folly to throw
them away, as a liquidation would have
done. And there is substantial reason to
doubt that sec.77 of the old Bankruptcy
Act even allowed liquidations; certainly
they could not be accomplished under that
name. See Julie A. Veach, On Considering
the Public Interest in Bankruptcy:
Looking to the Railroads for Answers, 72
Ind. L.J. 1211, 1221 (1997).

  Liquidation in or out of bankruptcy
means the end of a corporation’s
existence. Liquidation may occur without
closing down a line of business: a firm
may sell its assets as a going concern,
then distribute the proceeds to its
creditors (and, if a surplus remains, to
its equity holders) and dissolve. See
Douglas G. Baird, The Elements of
Bankruptcy 15-16, 255-56 (rev. ed. 1993).
Likewise abandonment may occur without
liquidation. Many a firm in bankruptcy
has a positive cash flow from current
operations but is unable to meet its
debts--perhaps because it has made
promises to creditors that prove
excessive in retrospect, perhaps because
one line of business has gone sour. Such
debtors withdraw from the losing line of
business (by selling it en bloc, selling
it piecemeal, or abandoning it utterly)
and restructure their debt, emerging with
bright prospects in their remaining
endeavors. That classic reorganization is
exactly what Rock Island the corporation
did, retaining its profitable activities
and transmuting into Chicago Pacific
Corporation (and then Maytag), even
though the Rock Island Line is defunct.
See In re Penn Central Transportation
Co., 944 F.2d 164 (3d Cir. 1991). To the
extent Erie Lackawanna may hold that
getting out of the railroad business is
the same thing as "liquidation" for
purposes of corporate liability, it would
be incompatible not only with Penn
Central but also with the normal
understanding of corporate liquidation.
But that would not be the best
interpretation of Erie Lackawanna, which
rests on a special liquidation provision
in 45 U.S.C. sec.791(b)(4), not on sec.77
of the Bankruptcy Act. See Lemelle v.
Universal Mfg. Corp., 18 F.3d 1268, 1273
n.3 (5th Cir. 1994). The Rock
Islandbankruptcy did not entail use of
sec.791(b)(4). Earlier appellate
proceedings arising from the Rock Island
bankruptcy say, or assume, that Chicago
Pacific is the same corporation as the
debtor, and that a reorganization
occurred. See In re Chicago, Rock Island
& Pacific R.R., 788 F.2d 1280, 1281-82
(7th Cir. 1986); Chicago Pacific Corp. v.
Canada Life Assurance Co., 850 F.2d 334,
335 (7th Cir. 1988). What was an
assumption in 1986 and 1988 now becomes a
holding.

  On remand the district court must
consider whether Maytag, as the
continuation of the Rock Island, is
entitled to protection under the
injunction issued in 1984. It is
difficult to see why the injunction
matters to either Heartland or Iowa
Interstate; their recovery depends on the
terms of the sale, which occurred after
the end of the bankruptcy. Lines of
business may be spun off with or without
the possibility of deferred liability for
cleanup expenses. See PMC, Inc. v.
Sherwin-Williams Co., 151 F.3d 610, 613
(7th Cir. 1998); Truck Components Inc. v.
Beatrice Co., 143 F.3d 1057 (7th Cir.
1998). If Heartland and derivatively Iowa
Interstate obtained a better price
because they agreed to bear any costs of
cleanup themselves, they must live with
that deal; they cannot have both the low
price and contribution too. Similarly if
Chicago Pacific promised indemnity or
contribution, it may not appeal to the
earlier injunction to escape its bargain.
But Navistar and Burlington Northern are
strangers to that arrangement and thus
unaffected by it. They are entitled to
proceed under sec.113(f)(2) because
Chicago Pacific is the "person who at the
time of disposal of any hazardous
substance owned or operated [the]
facility at which [the] hazardous
substances were disposed of", and Maytag
as the surviving corporation in a merger
bears all of Chicago Pacific’s
liabilities. Thus for Navistar and
Burlington Northern the terms of the 1984
injunction may make all the difference--
though even without the injunction Maytag
may invoke the principle that bankruptcy
effectively cleaves the debtor in two,
preventing the reorganized firm from
being saddled with debts attributable to
pre-bankruptcy activities. See Boston &
Maine Corp. v. Chicago Pacific Corp., 785
F.2d 562 (7th Cir. 1986); In re CMC
Heartland Partners, 966 F.2d 1143 (7th
Cir. 1992). We have resisted the
temptation to examine the terms of the
1984 injunction, because the parties
agree that the district judge should
consider these in the first instance, and
that agreement ensured that the subject
was not fully briefed in this court.

Reversed and Remanded

/* We refer to cercla in this opinion with
diffidence, because the plaintiffs in the Central
District action are being coy about their legal
theory. cercla is the normal basis for
contribution in environmental-cleanup cases, but
the Central District complaint does not mention
it, relying instead on the Oil Pollution Act of
1990, which like cercla contains a contribution
provision. 33 U.S.C. sec.2709. But contribution
under the Oil Pollution Act is available only
from a person liable under some other provision
of the Oil Pollution Act or another statute. If
the other statute turns out to be cercla, then
sec.2709 adds nothing. If instead the plaintiffs
argue that Maytag is liable under the Oil
Pollution Act itself, then they must establish
that Maytag is a "responsible party" under
sec.2701(32)(B), a definition that appears to be
more restrictive than cercla’s. To simplify
exposition, we assume that the demand for
contribution ultimately will depend on cercla--
but without locking the litigants into that
statute or resolving any issue about the
potential scope of recovery under the Oil
Pollution Act or any other federal environmental
statute, such as the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Ch. 82.