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

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Sep 2000

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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.

<h3>Back to the Future Part II—Duplan and Manville Forest Products</h3>

On May 15, 2000, the Second Circuit Court of Appeals entered its decision in the case of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Duplan
Corp., 212 F.3d 144 (2d Cir. 2000)</a>. 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Duplan Corp.,

209 B.R. 324 (Bankr. S.D.N.Y. 1997)</a>. The defendants appealed and the bankruptcy court's order was
affirmed by the district court. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Duplan Corp., 229 B.R. 609, 611 (S.D.N.Y. 1999)</a>.

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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Steel Co. v. Shalala, 53 F.3d 478 (2d Cir.
1995)</a> (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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d
at 152</a>.

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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 153</a>. 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Sterling Homex Corp., 579 F.2d 206, 212 (2d. Cir. 1978)</a>. 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States v. LTV Corp., 944 F.2d 997 (2d. Cir. 1991)</a> (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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 155-156</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 156-157</a>. 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Inc. v. Sanders,</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 182 B.R. 937, 951 (Bankr. S.D.N.Y. 1995)</a>.

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: <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Manville Forest Products Corp., 209 F.3d 125 (2d. Cir. 2000)</a>.
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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Manville Forest Products Corp., 225 B.R. 862 (Bankr.
S.D.N.Y. 1998)</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 128</a>. See,
also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… II, 53 F.3d at 497</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 129</a>. 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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 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:

<blockquote>
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.
</blockquote>
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 130</a>.

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.

<h3>The Rock Island Line Was a Mighty Dirty Road</h3>

The final case in our review of older bankruptcy proceedings is the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Corp. v. Navistar
International Transfer Corp., ___ F.3d ____, 2000 W.L. 823452 (7th Cir. June 27, 2000)</a>. 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.

<h3>Conclusion</h3>

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.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> 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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 155</a> at N.10. <a href="#1a">Return to article</a>

Journal Authors

C. R. Bowles

Journal Date

Friday, September 1, 2000 - 12:00