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In re In re Chicago, Milwaukee, St. Paul & Pac. R.R.

ELR Citation: 23 ELR 20009
Nos. No. 91-2172, 974 F.2d 775/35 ERC 1377/(7th Cir., 08/18/1992) consumation order bars cost recovery claim

The court holds that a district court properly ruled that the Washington State Department of Transportation's (WSDOT's) Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) claim for response costs against the successor of a bankrupt railroad four years after the close of bankruptcy is barred by the bankruptcy court's consummation order. The railroad petitioned for reorganization under §77 of the Bankruptcy Act of 1898 in December 1977, prior to major revisions to the Bankruptcy Code in 1978. The bankruptcy court set September 10, 1985, as the first bar date for all postpetition claims that arose during the period of reorganization, and entered a consummation order in November 1985, which set forth a new bar date of December 26, 1985, for claims that arose between the September 1985 bar date and November 1985 consummation date. The consummation order barred and forever discharged all untimely claims against the trustee, the railroad, and the railroad's successors and assigns. The WSDOT subsequently incurred cleanup costs on property purchased from the bankrupt railroad's trustee in 1984. Although the WSDOT was informed of the contamination problem and that a train derailment had likely caused the contamination, neither the agency nor the state filed a proof of claim with the bankruptcy court until August 1989.

The court first notes that resolution in this case turns on when the CERCLA claim or contingent claim arose for purposes of Bankruptcy Code §77, so that it may be determined whether the WSDOT had a claim or contingent claim before the close of the railroad's bankruptcy. The court next declines to adopt a standard found in related case law involving whether parties have a sufficient prepetition claim, because those cases can be distinguished and the standard has the potential of cutting off similar claims of future creditors that had no reason to know about the release or threatened release of a hazardous substance. The court observes that determining when a CERCLA claim arises in a §77 bankruptcy is problematic, because although response costs are necessary for an actual claim to accrue under CERCLA, such costs are not necessary for a contingent CERCLA claim to accrue under §77. The court holds that when a potential CERCLA claimant can tie the bankruptcy debtor to a known release of a hazardous substance that the potential claimant knows will lead to CERCLA response costs, and when this potential claimant has, in fact, conducted tests with regard to this contamination problem, the potential claimant has a contingent CERCLA claim for purposes of §77 of the 1898 Bankruptcy Code.

The court holds that the WSDOT had a claim or contingent claim before the entry of the November 1985 consummation order. The WSDOT became aware of the contamination prior to November 1985, when a Washington State Department of Ecology agent informed a WSDOT engineer of the problem by telephone, and later by letter. Moreover, the WSDOT began sampling soil from the contaminated site, although the laboratory results were not returned until the day after the close of bankruptcy. To hold that these facts do not give rise to a claim or contingent claim would frustrate the bankruptcy court's interest in having all claims before it, and would frustrate CERCLA's goal of providing a speedy cleanup of hazardous sites. Moreover, the court finds it significant that the WSDOT failed to file a motion under Rule 60(b) of the Federal Rules of Civil Procedure for relief from the consummation order within a reasonable time after the December 1985 bar date, or that the WSDOT failed to make a motion in bankruptcy court for leave to file a late claim within a reasonable time after the bankruptcy.

The court next holds that the WSDOT was not a known creditor deserving actual service of notice of the bankruptcy proceeding, and therefore publication of the bankruptcy proceedings in a national newspaper constituted sufficient notice. The record indicates that neither the railroad nor the bankruptcy trustee had information before the close of bankruptcy to the effect that the earlier derailment led to contamination that would require cleanup. The court declines to hold that a party becomes a known creditor on the mere release or threatened release of a hazardous substance. Thus, the railroad's knowledge of the pre-CERCLA train derailment, alone, was insufficient to make the WSDOT a known creditor. Finally, the court holds that the WSDOT's motion to change venue from Illinois to Washington was properly denied, because it was within the district court's discretion to determine that the reorganization court in Illinois was in a better position than the district court in Washington to interpret and apply the terms of the consummation order, and was uniquely familiar with the history of the prior bankruptcy proceedings.

Counsel for Appellee
Barry Sullivan
Jenner & Block
330 N. Wabash St., Chicago IL 60611
(312) 222-9350

Counsel for Appellant
Deborah Cade, Ass't Attorney General
Attorney General's Office
Transportation Division, P.O. Box 40113, Olympia WA 98504
(206) 753-4964

Before BAUER, Chief Judge, KANNE, Circuit Judge, and WOOD, JR., Senior Circuit Judge.