Court Opinion

ID: 769533
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:01:30+00
Date Added: 2024-06-11T17:55:43.522478
License: Public Domain

219 F.3d 587 (7th Cir. 2000)
Maytag Corporation,    Applicant-Appellee,v.Navistar International Transportation Corp., et  al.,    Respondents-Appellants.
No. 99-4328
In the  United States Court of Appeals  For the Seventh Circuit
Argued June 5, 2000Decided June 27, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern  Division.  No. 75 B 2697--Charles P. Kocoras, Judge.
Before Easterbrook, Diane P. Wood, and  Evans, Circuit Judges.
Easterbrook, Circuit Judge.

1
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.

2
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).

3
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.

4
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 Distict. See Myers v.  County of Lake, 30 F.3d 847 (7th Cir.  1994).) According to the Northern  District,

5
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.

6
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.

7
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).

8
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.

9
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

Notes:

*
  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.