IN RE: Penn Central Trans. Co.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

12-12-1995

IN RE: Penn Central Trans. Co.
Precedential or Non-Precedential:

Docket 94-2154

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 IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 94-2154

IN THE MATTER OF:

PENN CENTRAL TRANSPORTATION COMPANY

USX Corporation and Bessemer and
Lake Erie Railroad Company,
Appellants

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil Action No. 70-00347)

Argued July 24, 1995

Before: BECKER, NYGAARD and ALITO, Circuit Judges

(Opinion Filed December 12, 1995)

TIMOTHY W. BERGIN, ESQUIRE
Squire, Sanders & Dempsey
1201 Pennsylvania Avenue, N.W.
P.O. Box 407
Washington, DC 20044
Attorney for Appellants

THOMAS S. KILBANE, ESQUIRE (Argued)
Squire, Sanders & Dempsey
127 Public Square
4900 Society Center
Cleveland, OH 44114-1304
Attorney for Appellants

WILLIAM J. TAYLOR, ESQUIRE
Taylor & Taylor
1801 Market Street
811 Ten Penn Center
Philadelphia, PA 19103
Attorney for Appellants

DAVID A. LYNCH, ESQUIRE
Senior General Attorney

1
USX Corporation
600 Grant Street
Pittsburgh, PA 15129-4776
Attorneys for Appellants
MATTHEW J. SIEMBIEDA, ESQUIRE (Argued)
CARL M. BUCHHOLZ, ESQUIRE
Blank, Rome, Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attorneys for Appellee

KENNETH N. HART, ESQUIRE
JAMES J. CAPRA, ESQUIRE
Donovan, Leisure, Newton & Irvine
30 Rockefeller Plaza
New York, NY 10112
Attorneys for Appellee

ARLIN M. ADAMS, ESQUIRE
Schnader, Harrison, Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Attorneys for Appellee

ROBERT W. OLSON, ESQUIRE
MICHAEL L. CIOFFI, ESQUIRE
American Premier Underwriters, Inc.
One East Fourth Street
Cincinnati, OH 45202
Attorneys for Appellee

OPINION OF THE COURT

NYGAARD, Circuit Judge.

Appellants, USX Corporation and the Bessemer and Lake

Erie Railroad Company, sued the reorganized Penn Central

Transportation Company (now known as American Premier

Underwriters, Inc.) for contribution and indemnity based on Penn

Central's participation with them in an antitrust conspiracy.

2
Although appellants were held liable for nearly $600 million in

damages from that conspiracy, see In re Lower Lake Erie Iron Ore

Antitrust Litig., 998 F.2d 1144 (3d Cir. 1993), the courts ruled

that the direct claims against Penn Central were barred by its

reorganization.

In response to the underlying lawsuit for contribution

and indemnity, Penn Central filed a petition in its bankruptcy

case to require the dismissal of the suit, alleging that the 1978

Consummation Order and Final Decree barred it. The district

court granted the petition. In re Penn Central Transp. Co., No.

70-347 (E.D. Pa. Oct. 13, 1994). We will reverse.

I.

The Penn Central bankruptcy proceeding is more than a

quarter-century old; and the facts of the antitrust conspiracy

are even older. Andrew Carnegie built the Bessemer to link his

Pittsburgh-area steel mills to raw materials sources,

specifically iron ore, received from ore ships at Lake Erie

ports. The railroad was a wholly-owned subsidiary of United

States Steel Corporation (now USX Corporation) until 1989, when

it was spun off. USX, however, retained liability for the

antitrust claims at issue under its indemnity agreement with the

Bessemer.

Beginning in 1956, the Bessemer and several other

railroads, including the Penn Central's predecessors, entered

into a joint ratemaking agreement, which was given limited

immunity from antitrust attack under § 5(a) of the Reed-Bulwinkle

Act, ch. 491, 62 Stat. 472 (1948). In 1970, the Penn Central

3
filed a bankruptcy petition under § 77 of the Bankruptcy Act of

1898. This action, and the bankruptcies of several other

regional railroads, motivated Congress to pass the Regional Rail

Reorganization Act of 1973, under which the Penn Central conveyed

its rail assets to Conrail in 1976. In 1978, the district court

entered its Final Decree and Consummation Order, which included a

limitation or bar date for all claims against the debtor. The

Consummation Order transferred the reorganized Penn Central's

railroad property and discharged it from any further claims

predicated upon its pre-consummation acts or conduct. The

district court retained jurisdiction over any claims that might

later be asserted against Penn Central.

In 1980, Pinney Dock and Litton filed antitrust

complaints against the Bessemer, Penn Central and other

railroads. The claims against Penn Central were held barred by

the discharge. In re Penn Central Transp. Co. ("Pinney Dock"),

42 B.R. 657, 676 (E.D. Pa. 1984), aff'd, 771 F.2d 762 (3d Cir.),

cert. denied, 474 U.S. 1033, 106 S. Ct. 596 (1985). Between 1982

and 1984, several plaintiffs filed suits under federal and Ohio

antitrust law against the signatories to the § 5(a) agreement,

including Penn Central and the Bessemer. These claims were

consolidated as the "MDL 587" litigation. The district court

dismissed Penn Central as a defendant, concluding that because

the claims arose pre-consummation they were discharged. All

remaining defendants except the Bessemer settled with plaintiffs.

The Bessemer went to trial and lost. Judgment was entered

against it in excess of $592 million, and paid by USX. The

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Bessemer and USX then filed complaints in federal and Ohio courts

seeking indemnity and contribution from Penn Central, as the

instigator, enforcer and primary beneficiary of the conspiracy.

II.

The predicate conduct of appellants' antitrust

liability began before Penn Central filed its bankruptcy

petition. Thus, Penn Central asserts that appellants' claims

against it have been discharged by the Consummation Order and

Final Decree. Appellants argue, however, that their claims

seeking contribution and indemnity could not possibly have been

filed before the 1978 bar date, because they were not sued until

later; and, hence should be treated as post-consummation claims,

i.e., neither discharged nor barred.

A.

We look to nonbankruptcy law to determine when these

claims accrued. See Schweitzer v. Consolidated Rail Corp., 758

F.2d 936, 941 (3d Cir.), cert. denied, 474 U.S. 864, 106 S. Ct.

183 (1985); In re M. Frenville Co., 744 F.2d 332, 335 (3d Cir.

1984), cert. denied, 469 U.S. 1160, 105 S. Ct. 911 (1985). We

agree with appellants that their claims for contribution and

indemnity could not accrue until the MDL 587 complaints were

filed against them between 1982 and 1984. In Frenville, applying
New York law, we opined that:
For both separate actions and
third-party complaints, a claim for
contribution or indemnification does not
accrue at the time of the commission of the
underlying act, but rather at the time of the
payment of the judgment flowing from the act.

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744 F.2d at 337. The MDL 587 claims arose under federal and Ohio

law. That law, for our purposes at least, is consistent with the

law applied in Frenville. For example, the Ohio Supreme Court

has stated that
the right to contribution is inchoate from
the time of the creation of the relationship
giving rise to the common burden until the
payment by a co-obligor of more than his
proportional share, and . . . the right
becomes complete and enforceable only upon a
payment by the claimant extinguishing the
whole of the common obligation.

National Mut. Ins. Co. v. Whitmer, 435 N.E.2d 1121, 1123 (Ohio
1982); see Ross v. Spiegel, Inc., 373 N.E.2d 1288, 1295 (Ohio

App. 1977) (similar rule for indemnity). Applying federal

admiralty law, we reached a similar conclusion. See Sea-Land

Serv., Inc. v. United States, 874 F.2d 169, 171 (3d Cir. 1989).

B.

That conclusion frames the issue that was before the

district court and is now before us: whether a claim that arose

after the 1978 Consummation Order was nevertheless discharged by
that order. We have already answered that question in the

negative, at least in the context of the § 77 reorganization

presented by this case.1

1
Indeed, our holding today was foreshadowed two decades ago in
the § 77 case of In re Reading Co., 404 F. Supp. 1249 (E.D. Pa.
1975), which involved similar facts. There, the court held that
claims for contribution and indemnity asserted against a bankrupt
railroad were not prepetition in nature--even though the facts
giving rise to primary liability occurred before the railroad
declared bankruptcy--because the railroad settled with the
plaintiff post-bankruptcy and only then did the cause of action
for contribution and indemnity accrue. Id. at 1251.

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 In Schweitzer,2 plaintiffs were exposed to asbestos

during their employment with the Reading Railroad and the Central

Railroad of New Jersey. Later, but before plaintiffs' injuries

manifested themselves, these railroads consummated a

reorganization under § 77. When plaintiffs discovered their

injuries, they filed FELA actions against Conrail, which had

succeeded to the former railroads' rail assets.

Conrail argued that the consummation order discharged

any claims asserted by the injured workers, but we disagreed,

noting first "that plaintiffs' rights only could have been

affected by the discharge of all 'claims' against their employer

if they had 'claims' within the meaning of section 77 prior to

the consummation date of their employer's reorganization." Id.

at 941. We concluded "that if plaintiffs had causes of action

that existed under FELA prior to the relevant consummation dates

they had 'claims.'"Id. We then analyzed plaintiffs' claims under

FELA and concluded that no cause of action accrued until the

manifestation of plaintiffs' injuries. Id. at 942.

This case is analogous to Schweitzer. Like the

subclinical injuries there, appellants here had no cause of

action against Penn Central pre-consummation. Because they could

not have filed this action during the Penn Central bankruptcy,

2
See also In re Central R.R. Co., 950 F.2d 887, 892 (3d Cir.
1991) (following Schweitzer), cert. denied, 503 U.S. 971, 112 S.
Ct. 1586 (1992); Zulkowski v. Consolidated Rail Corp., 852 F.2d
73, 74 (3d Cir.) (same), cert. denied, 488 U.S. 994, 109 S. Ct.
559 (1988).

7
Schweitzer's lesson is that their claims could not have been

discharged.

Penn Central argues that appellants had pre-

consummation, contingent, and dischargeable claims. It relies on

our discussion in Schweitzer of the early § 77B case of In re

Radio-Keith-Orpheum Corp. ("RKO"), 106 F.2d 22 (2d Cir.), cert.

denied, 308 U.S. 622, 60 S. Ct. 377 (1939). We find that case to

be inapposite.

In RKO, landlords leased property to a corporation's

subsidiary, on condition that the parent corporation guarantee

rent payments. When the parent went bankrupt, the subsidiary was

still paying rent. The landlords did not file a claim against

the bankrupt's estate. But after the debtor's reorganization

when the subsidiary defaulted, they asserted that their claim on

the guarantee was not discharged. The Court of Appeals

disagreed:
The appellants . . . were not as [a] matter
of law entitled to stand aloof and obtain a
continuance of the guaranties unaffected by
reorganization, the equivalent of a
preference for them over unsecured creditors
with accrued or determinable claims. What
they were entitled to was treatment as nearly
like that accorded to ordinary unsecured
creditors as the circumstances permitted[.]

Id. at 26-27.
Penn Central maintains that appellants here stand in

the same position as the landlords in RKO. Schweitzer, however,

counsels otherwise;
The reasoning in Radio-Keith-Orpheum is
not controlling here, however, because we do
not believe plaintiffs had "interests" of any

8
 character before injury manifested itself. In
our view, before one can have an "interest"
which is cognizable as a contingent claim
under section 77, one must have a legal
relationship relevant to the purported
interest from which that interest may flow.

In Radio-Keith-Orpheum, although there
had been no breach of the lease agreement and
thus there was no present cause of action
pursuant to the guaranties, there was a
guarantor-guarantee legal relationship from
which an interest in the guaranty could
flow.3 There is no legal relationship,
however, between a tortfeasor and a tort
victim until a tort actually has occurred. .
. .

758 F.2d at 943 (citation omitted).

Undaunted, Penn Central asserts that the § 5(a)

agreement to which the Bessemer was a party takes this case out

of the ambit of Schweitzer and places it squarely within the

holding of RKO. We cannot agree. The key to Schweitzer's

treatment of RKO was that the RKO landlords had explicitly

bargained to look to the unreorganized debtor for their security.

Here, however, the § 5(a) agreement confers no right of

indemnification. That agreement, although the source of

appellants' primary liability to the MDL 587 plaintiffs, simply

does not evidence an intent to look to the pre-reorganized Penn

Central for contribution or indemnity claims. Put simply,
3
Accord Frenville, 744 F.2d at 336 ("The present case is
different from one involving an indemnity or surety contract.
When parties agree in advance that one party will indemnify the
other party in the event of a certain occurrence, there exists a
right to payment, albeit contingent, Such a surety relationship
is the classic case of a contingent right to payment under the
Code--the right to payment exists as of the signing of the
agreement, but it is dependent on the occurrence of a future
event." (Citations omitted.)).

9
although there was a legal relationship between the Bessemer and

the Penn Central's predecessors, there was no legal relationship

from which a prepetition interest in contribution or indemnity

could flow. See id. at 943.

This conclusion is supported by the § 77 case of In re

Penn Central Transp. Co. ("Paoli Yard"), 944 F.2d 164 (3d Cir.

1991). Penn Central and its predecessors operated a railroad

yard on an electrified portion of its line. The land became

contaminated from PCBs common in the electrical transformers of

the period. As part of the Penn Central reorganization, the

Paoli Yard was conveyed to Conrail, and later to SEPTA. Two

years post-consummation, however, Congress imposed retroactive

liability on former owners of toxic waste sites. The United

States sued both SEPTA and Conrail, and Conrail sought

contribution and indemnity from the reorganized Penn Central. Id.

at 165-66.

The district court, construing Schweitzer narrowly,

held that the Consummation Order barred the claims against the

reorganized Penn Central. Id. at 166. We reversed, noting first

that
at the moment of the bankruptcy discharge and
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 [Penn
Central] 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

10
 brought claims under CERCLA prior to the
Consummation Date.

Id. at 167. We then went on to reject the theory that a

contingent, dischargeable claim existed pre-consummation:
Under the facts now before us in this appeal,
it was not until the passage of CERCLA that a
legal relationship was created between the
petitioners and [Penn Central] 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 [Penn
Central]. 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 167-68 (emphasis added).
In Paoli Yard, we made explicit what was implicit in

Schweitzer: it is not sufficient for dischargeability purposes

that there was some pre-consummation legal relationship between

the debtor and the party seeking now to assert a claim; rather,

that relationship must be relevant to the claimant's cause of

action. When CERCLA was enacted, two fundamental changes

occurred in that relationship: first, Conrail became primarily

liable for the toxic waste cleanup. Second, and more importantly

for our purposes, CERCLA made Penn Central potentially liable to

Conrail for contribution and indemnity. Only then did a legal

relationship relevant to the cause of action arise.4
4
Likewise, in Schweitzer, there was undoubtedly an employer-
employee contractual relationship between the railroads and the
injured workers. That relationship, by itself, was not
sufficiently relevant to their tort claims that the workers

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 Although not necessary to our holding, Frenville also

supports our conclusion that appellants' claims against the

reorganized Penn Central were not discharged. In that case,

banks sued an accounting firm for negligently preparing the

debtor's financial statements. The firm sought relief from the

automatic stay to claim contribution and indemnity from the

debtor. 744 F.2d at 333-34. We held that, because the firm's

claims for contribution and indemnity could not accrue until the

banks sued the firm, the firm's claims arose post-petition and

were nondischargeable; hence, the automatic stay was

inapplicable. Id. at 337.

Frenville, of course, arose under the Bankruptcy Code,

not § 77 of the 1898 Bankruptcy Act. Key to our analysis in

Frenville was the definition of "claim" as a "right to payment"

in 11 U.S.C. § 101(4), which we held was intended by Congress to

be interpreted broadly. See id. at 336. Penn Central seizes on

this distinction and urges us not to apply Frenville to this § 77

case. This, however, is a distinction without a difference.

Section 77(b) of the 1898 Act defined "claims" as "debts" or

"other interests of whatever character." In neither brief nor

argument could counsel for Penn Central explain how these two

definitions differ and why that difference should lead us to a
5
different result here than in Frenville.

somehow agreed to look only to the debtors' estates for
compensation.
5
In response to Penn Central's argument that Frenville was
wrongly decided and has not been well received by courts outside
the Third Circuit, we direct its attention to Third Circuit
Internal Operating Procedure 9.1.

12
 Our holding makes for sound policy. Appellants could

not have been expected to file a contingent claim pre-

consummation based on the speculative possibility that their

conduct, which began in the 1950s, might have extended beyond the

bounds of its statutory antitrust immunity and that they might

successfully be sued years later. If the Bessemer were required

to act with such clairvoyance, then countless other entities that

did business with the Penn Central and its predecessors, would

also have been required to file contingent claims. Affixing

value to these claims, both individually and in the aggregate,

would be impossible, and the uncertainty thus created would

render any reorganization plan unworkable. Indeed, we find the

Schweitzer analysis of when asbestos-caused disease claims accrue

both analogous and persuasive:
If mere exposure to asbestos were sufficient
to give rise to a F.E.L.A. cause of action,
countless seemingly healthy railroad workers,
workers who might never manifest injury,
would have tort claims cognizable in federal
court. It is obvious that proof of damages
in such cases would be highly speculative,
likely resulting in windfalls for those who
never take ill and insufficient compensation
for those who do.

758 F.2d at 942.

C.

As a final ground for affirmance, Penn Central argues

that, as a matter of law, appellants have no valid claims for

indemnity or contribution. This argument, however, goes to the

merits of appellants' indemnity and contribution claims currently

13
pending in other courts, which will proceed there once our

mandate issues. Hence, we do not reach the issue.

III.

Because appellants' claims against Penn Central arose

post-consummation and were not discharged, we will reverse and

remand the cause for the district court to deny Penn Central's

petition.

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