Old Bankruptcy Cases Never Die They Merely Move on to Higher Courts

Old Bankruptcy Cases Never Die They Merely Move on to Higher Courts

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Do not throw away your old law journal articles and treatises concerning the Bankruptcy Act and early Bankruptcy Code just yet, loyal readers, as this month's Toxins-Are-Us column will address issues relating to the discharge of environmental claims in two Bankruptcy Act cases, as well as the early Code case of In re Manville Forest Products Corp. This column will also provide you with an update of an earlier Toxins-Are-Us column "A Tale of Two Cities: Recent Decisions as to When a CERCLA Claim Arises and How an Environmental Claim May be Disallowed Under §502(e)(1)(B)," published in the May 1999 issue of the ABI Journal.

Back to the Future Part II—Duplan and Manville Forest Products

On May 15, 2000, the Second Circuit Court of Appeals entered its decision in the case of In re Duplan Corp., 212 F.3d 144 (2d Cir. 2000). Although the procedural history of the environmental litigation at issue in this case is torturous and complex, the underlying substantive facts are fairly straightforward. On Aug. 31, 1976, Duplan filed a proceeding under the Bankruptcy Act that was ultimately converted to a chapter X case. A bar date for the filing of claims was established as July 10, 1979. On Dec. 11, 1980, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) became effective. In June 1981, the debtor's chapter X plan was confirmed. In 1983, a final decree closing the bankruptcy case and providing for a general discharge of Duplan's liabilities was entered. However, Duplan remained liable for administrative expenses that arose during its chapter X proceedings. The final decree also enjoined all parties from attempting to collect "claims" they had against the pre-petition debtor and the reorganized debtor.

In 1989, various property owners in the Virgin Islands commenced a lawsuit for the cleanup of a contaminated aquifer. Chemicals from one of the debtor's Virgin Island plants caused part of the contamination of the aquifer. Ultimately, some of the defendants (the primary distributes of the reorganized debtor's assets, hereinafter "defendants") in this lawsuit filed an action in the U.S. District Court for the Southern District of New York to enjoin the parties (CERCLA creditors) asserting common law and statutory CERCLA and RCRA claims (collectively, "environmental claims") from proceeding against the defendants because the environmental claims had been discharged by the final decree issued in Duplan's chapter X bankruptcy. This matter was referred to the bankruptcy court.

The bankruptcy court found that the final decree entered in the Duplan chapter X case discharged only claims that arose prior to the filing of the petition, and that the environmental claims asserted against the defendants arose at the earliest on Dec. 11, 1980, some four years after Duplan initially filed its bankruptcy. Therefore, the environmental claims did not constitute a pre-petition claim and were not discharged by the final decree. The bankruptcy court also held that the CERCLA creditor's common-law and RCRA claims were not discharged by the final decree or its accompanying permanent injunction. See In re Duplan Corp., 209 B.R. 324 (Bankr. S.D.N.Y. 1997). The defendants appealed and the bankruptcy court's order was affirmed by the district court. In re Duplan Corp., 229 B.R. 609, 611 (S.D.N.Y. 1999).

In its decision, the Second Circuit agreed with the bankruptcy court's conclusion that the earliest date the CERCLA claims arose for bankruptcy purposes was Dec. 11, 1980, the date when CERCLA became effective.1 The Second Circuit reaffirmed its decision of LTV Steel Co. v. Shalala, 53 F.3d 478 (2d Cir. 1995) (Chateaugay II), and held that claims arising out of statutes that create a "new and unique obligation arising out of previous conduct" arise, for purposes of bankruptcy law, at the earliest on their effective date and not when the actual conduct, which may provide the basis of claim, originally occurred. See 212 F.3d at 152.

However, the Second Circuit rejected both the bankruptcy and district courts' interpretation of the extent of discharge provided by the Duplan final decree. Unlike the lower courts, the Second Circuit found that this discharge of indebtedness set forth in the final decree entered in the Duplan case "terminated all of the debtor's debts and liabilities except as provided for in the final decree or in the plan." Id. at 153. The Second Circuit held that the Duplan chapter X plan's limitation of claims to obligations arising pre-petition did not limit the scope of the Duplan chapter X final decree and discharge. In making this decision, the Second Circuit reaffirmed its long-standing case law that discharges in chapter X cases must be given a broad construction with respect to claims and creditors in order to dispose of all liabilities of the debtor in reorganization. See Matter of Sterling Homex Corp., 579 F.2d 206, 212 (2d. Cir. 1978). Therefore, the mere fact that the CERCLA claims did not arise pre-petition did not automatically prevent them from being discharged by the final decree entered in the Duplan chapter X case.

However, the Second Circuit did find that the lower courts correctly determined that the final decree and chapter X plan specifically excepted, from the scope of the discharge and permanent injunction, all administrative claims that arose during the chapter X case and that Duplan was still liable for any administrative claims from its chapter X case. The Second Circuit held that since the CERCLA claims arose post-petition, they constituted administrative claims for purposes of both the Bankruptcy Act and the Bankruptcy Code. See, generally, United States v. LTV Corp., 944 F.2d 997 (2d. Cir. 1991) (Chateaugay I).

The Second Circuit did reverse the lower courts' rulings concerning the RCRA claims, asserted by the CERCLA creditors. The Second Circuit held that the CERCLA creditors were barred from bringing the RCRA claims as a matter of law. 212 F.3d at 155-156. The court also remanded this case to the bankruptcy court for a factual review of whether certain common-law claims related to the contamination had been discharged by the debtor's chapter X bankruptcy proceeding. Id. at 156-157. The court ruled that an environmental claim under the Bankruptcy Code arises when there has been a release or threatened release of hazardous substances, that release has caused injury in the form of contamination and the contamination is capable of detection. See, generally, Texaco Inc. v. Sanders, 182 B.R. 937, 951 (Bankr. S.D.N.Y. 1995).

The Second Circuit's Duplan decision is important for two core reasons: (1) it gives clear guidance as to when CERCLA claims and common-law environmental claims arise for purposes of both the Bankruptcy Act and Code, and (2) its holding that the scope of a discharge in a chapter X Bankruptcy Act case may include claims that had not arisen pre-petition in that case, and could breathe new life into some specific environmental lawsuits. The circuit's ruling may make it possible to discharge some CERCLA claims in certain chapter X cases depending on the discharge language of the final decree relating to administrative claims. While it is unlikely that the drafters of these chapter X plans could have ever envisioned that the administrative claims portion of these plans could be used to bring large environmental claims against the reorganized debtors, the exact wording of these provisions will be important in future environmental litigation.

Shortly before Duplan was decided, the Second Circuit resolved the appeal of a second case discussed in the "Tale of Two Cities" article: In re Manville Forest Products Corp., 209 F.3d 125 (2d. Cir. 2000). The facts underlying the Manville decision show how even the best legal drafting can turn out to be a disadvantage. In early 1967, Olin Corp. transferred its forest-products division to an entity known as Olinkraft Inc. (Sub). As part of this transaction, Sub granted Olin a broadly worded indemnification agreement concerning liability related to any asset that Olin transferred to Sub. These assets included a piece of real estate known as Plant 94, which was contaminated by a variety of toxic substances. In May 1974, Sub became an independent public company but reaffirmed its broad indemnification agreement with Olin. In January 1979, Sub merged into JM Capital, a subsidiary of the Johns-Manville Corp., and subsequently changed its name to Manville Forest Products Corp. (MFPC).

In 1982, MFPC filed its chapter 11 petition along with other Johns-Manville entities. The claims bar date in the MFPC chapter 11 was set for Dec. 29, 1983. Olin filed a proof of claim for certain taxes that it was owed by MFPC, but did not file a proof of claim under any of the indemnification agreements it had with Sub and that had been assumed by MFPC.

On March 26, 1984, MFPC's reorganization plan was confirmed. The order of confirmation provided that MFPC was discharged from any and all unsecured debts that arose prior to the confirmation of the plan. Approximately three months after MFPC's chapter 11 was confirmed, the state of Louisiana enacted the Louisiana Environmental Quality Act (LEQA), which proved a comprehensive plan for the remediation of environmental contamination. As with most state environmental acts, it imposed liability for environmental cleanup costs on current and former owners of polluted property.

In May 1996, the state of Louisiana sent demand letters to Olin to pay the cleanup costs for Plant 94. Olin demanded indemnification from MFPC (n/k/a Riverwood International Corp.) for the costs, and the matter was ultimately brought before the MFPC bankruptcy court.

The bankruptcy court found that Olin's claim for indemnification against MFPC for the Plant 94 contamination arose not under the LEQA, but under its pre-petition indemnification agreements. Therefore, the bankruptcy court rejected Olin's argument that its claim was a post-petition claim arising upon the enactment of the LEQA and found that the order of confirmation in the MFPC chapter 11 case barred Olin's claim against MFPC. See, generally, In re Manville Forest Products Corp., 225 B.R. 862 (Bankr. S.D.N.Y. 1998). Olin appealed the bankruptcy court's decision, which was affirmed by the district court on April 23, 1999, and Olin pursued its appeal to the Second Circuit.

In Manville, the Second Circuit held that there were two requirements for a party to have a valid pre-petition claim under the Bankruptcy Code. First, a claimant must possess a right to payment. Second, that right to payment must have arisen prior to the filing of the bankruptcy petition. 209 F.3d at 128. See, also, Chateaugay II, 53 F.3d at 497. In discussing the nature of Olin's claim, the court found that, under contract law, a right to payment arises under a written indemnification contract at the time the indemnification agreement is executed. Id. at 129. The Second Circuit found that the indemnification agreement in favor of Olin was so broad that it encompassed all types of future liability, including possible environmental liability arising from statues that might be enacted in the future. Id. The court rejected Olin's argument that its liability should not be deemed to arise until the statute which gave it liability, the LEQA, was enacted into law, stating:

Olin's liability here is triggered by LEQA, but it flows from the indemnification agreements, which allocate risk from a category of anticipated losses without reference or limitation to particular causes of action and particular statutes. In short, Olin brought a contract cause of action based upon a pre-petition contract, not a statutory claim for indemnification under a statute enacted after confirmation.
Id. at 130.

The Manville case highlights a rather strange trap that parties could fall into when wording claims for reimbursement for environmental liabilities in cases involving long-discharged debtors. Basing claims on contractual indemnity provisions in the non-bankruptcy world is generally a better method of seeking indemnification than proceeding under the complex indemnity and contribution requirements of CERLA and other state and environmental laws. However, as is clearly highlighted by the Second Circuit in its Manville decision, reliance on certain and well-drafted contractual indemnity provisions may destroy any chance for a creditor to assert a claim against a former debtor as the indemnification provisions could be deemed to be pre-petition claims, while statutory causes of action arising from CERLA will be deemed to be post-petition claims that survive the discharge.

The Rock Island Line Was a Mighty Dirty Road

The final case in our review of older bankruptcy proceedings is the Maytag Corp. v. Navistar International Transfer Corp., ___ F.3d ____, 2000 W.L. 823452 (7th Cir. June 27, 2000). In 1975, the Chicago Rock Island and Pacific Railroad Co. filed for reorganization under §77 of the Bankruptcy Act. Approximately five years later, in 1980, Rock Island was allowed to abandon its railroad operations. Four years after the abandonment of its railroad operations, Rock Island successfully confirmed a plan and emerged from bankruptcy as the Chicago Pacific Corp. In January 1989, Chicago Pacific Corp. merged with Maytag Corp.

One of the assets the Chicago Pacific Corp. had when its bankruptcy proceeding ended was a railyard in Rock Island, Ill. This railyard was sold after the completion of the Rock Island bankruptcy to Hartland Rail Corp., which leased it to another entity. In 1993, it was determined that petroleum was leaking from the railyard into a tributary of the Mississippi River. Two property owners adjacent to the railyard sued Hartland and operators of the railyard under the Oil Pollution Act of 1990 (OPA) in the Central District of Illinois, demanding contribution for cleanup costs (OPA lawsuit). All parties to the OPA lawsuit filed claims against Maytag, as a third party defendant seeking contribution under Illinois and federal law for the costs of the cleanup of the railyard site.

In response to the OPA lawsuit, Maytag moved in the U.S. District Court for the Northern District of Illinois, where the Rock Island bankruptcy had been administered, to enjoin the prosecution of the OPA lawsuit. The Northern District of Illinois granted Maytag's request for an injunction, and the other parties to the OPA lawsuit appealed.

In considering the appeal, the Seventh Circuit addressed two primary issues. First, Maytag argued that the request for contribution for the cleanup costs relating to pollutants placed in the ground before the 1984 sale of the railyard was a claim that was barred by the injunction issued when the Rock Island bankruptcy was closed. The 7th Circuit declined to address the injunction issue, remanding the case to the district court for a review of the terms of the Bankruptcy Act injunction, which arose in the Rock Island bankruptcy case.

The second argument raised by Maytag in support of the injunction was that, under general corporate law, it was not liable for Rock Island's debts because Rock Island was "liquidated" under its §77 Bankruptcy Act proceeding rather than reorganized. The district court accepted this argument as the basis for its injunction. The Seventh Circuit rejected this argument, noting that while a true liquidation could shield a subsequent purchaser of a debtor's assets from liability, in this particular case, no liquidation occurred. The Seventh Circuit rejected the district courts' finding that Rock Island liquidated its operations, and instead found that Rock Island ultimately reorganized its business affairs as the Chicago Pacific Corp., and therefore could be held liable for any Rock Island debts that were not discharged under the terms of its bankruptcy.

The Rock Island case once again highlights the importance of the precise terms of old Bankruptcy Act case injunctions and discharges as they relate to environmental claims. In this case, the important issue was whether the debtor liquidated or reorganized in its §77 Bankruptcy Act proceedings. Reviewing the same plans, the district court found that the Rock Island bankruptcy was a liquidation, due primarily to the fact that the debtor abandoned its railroad operations, including its operation of the railyard in question. The Seventh Circuit reviewed the plan and it found that since the debtor emerged from bankruptcy as the Chicago Pacific Corp., its bankruptcy was a reorganization as opposed to a liquidation. This article will keep you updated on the fate of the Maytag litigation should it return to the Seventh Circuit in the future.


An ancient saying goes that those who do not understand history are doomed to repeat it. This statement rings especially true in the toxic tort area of bankruptcy proceedings. It is impossible to imagine that the bankruptcy attorneys who worked on the railroad reorganizations and in chapter X and chapter XI proceedings more than 20 and 30 years ago would ever consider that the way they drafted a particular discharge order or resulting injunction would impact the liability of a successor corporation for causes of action that had not yet even been discussed by Congress, much less enacted into law. It therefore appears that scholarship relating to the Bankruptcy Act is not yet dead but, so long as toxic waste pits continue to be discovered, will necessarily continue, much to the chagrin of a host of environmental lawyers and federal judges' law clerks.


1 The Second Circuit specifically noted that for purposes of this case, it was assuming that the CERCLA claims arose on the date that CERCLA became effective. The court specifically stated that "nothing in this opinion precludes a finding that the CERCLA claims actually arose after the date of enactment and after the close of the Duplan bankruptcy proceeding." 212 F.3d at 155 at N.10. Return to article

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Friday, September 1, 2000