Petition for Writ of Certiorari — American Premier Underwriters, Inc. v. USX Corp., 116 S. Ct. 1851 (1996) (No. 95-1547)

No. P } aa me

9515 47 mar 2 6 1996

IN THE ss ,

Supreme Court of the United States

OCTOBER TERM, 1995

>

In the Matter of

Penn Central Transportation Company

AMERICAN PREMIER UNDERWRITERS, INC

USX CORPORATION and BESSEMER and

LAKE ERIE RAILROAD COMPANY,

» J

Responde nis

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Peter M. Fishbein

KAYE, SCHOLER, FIERMAN,

HAYS & HANDLER, LLP

425 Park Avenue

New York, New York 10022

(212) 836-8000

Counsel of Re ( ord for P, frivione?

Dated: March 25, 1996

QUESTIONS PRESENTED

1. Should the conflict among circuits as to when a claim

exists under federal bankruptcy law be resolved by adopting

the holding of the Third Circuit Court of Appeals below that

a claim exists only when it accrues under the vagaries of

varying state statute of limitations principles, or by adopting

holdings of the Fourth, Seventh and Ninth Circuit Courts of

Appeals that a claim exists when uniform federal bankruptcy

principles dictate that the claimant should be required to

assert it so that it can be resolved equitably in relation to

other creditors’ claims and discharged to accomplish the fun-

damental bankruptcy policies of fairness among creditors and

finality and a fresh start for the reorganized company?

2. Whether, as the court below held, claims for indemni-

fication and contribution by a joint tort-feasor against a reor-

ganized company are not discharged in its bankruptcy

proceeding solely because they did not accrue for state statute

of limitations purposes until payment by the joint tort-feasor

to plaintiffs, which occurred after consummation of the

bankruptcy, even though the joint tort-feasor should fairly

have contemplated such possible future claims at the time that

it filed other claims in the bankruptcy proceeding and these

identical claims would have been discharged in the Fourth,

Seventh, and Ninth Circuits?

3. Should the myriad, divergent approaches employed by

those lower federal courts that apply federal bankruptcy prin-

ciples to determine when a claim exists be resolved by adopt-

ing the “conduct test”, the “pre-petition relationship test”, the

“fair contemplation test”, or some other standard?

RULE 29.1 STATEMENT

The Supreme Court Rule 29.1 Statement of Petitioner

American Premier Underwriters, Inc. is contained in

Appendix A. (Pet. App. A)

ill

TABLE OF CONTENTS

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A. Factual and Procedural Background.........

B. The District Court’s Opinion ................

C. The Court of Appeals’ Opinion..............

REASONS FOR GRANTING THE WRIT.............

I. THE COURT OF APPEALS’ DECISION IS

IN CONFLICT WITH DECISIONS OF THE

FOURTH, SEVENTH AND NINTH

CIRCUITS ON THE SAME MATTER............

The Fourth Circuit Is In Conflict With The Third

Ne ee i eweataecen’s

The Seventh Circuit Is In Conflict With The

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10

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The Ninth Circuit Is In Conflict With The Third

Rs Co neh ches deca Reece.

This Case Would Have Been Decided Differently

OD: Tee Ceee COU sax cbuneadeccicunce uxcs

THE COURTS THAT EMPLOY UNIFORM

FEDERAL BANKRUPTCY LAW TO

DETERMINE WHETHER A CLAIM EXISTS

DIVERGE IN THEIR APPROACHES TO THIS

SPE NIU EUNT Ee Seah Akan ewan ssoushss otakeinnian

THIS CASE PRESENTS AN OPPORTUNITY

FOR THE COURT TO RESOLVE A CONFLICT

AMONG CIRCUITS AND CLARIFY AN

IMPORTANT ISSUE OF FEDERAL

PINRO Be tis bak Wh suk es cee Res dcecka

CASE OUAUES i AS 00305ba bie nkin ecka Nacuiae Lucas

PAGE

18

20

TABLE OF AUTHORITIES

Cases PAGE

Butler v. NationsBank, N.A., 58 F.3d 1022 (4th Cir.

POPE vg eacc¥seckned whuis Cab d woe mdhbeenceueel oxeeees 9, 17

In re Chicago, Milwaukee, St. Paul & Pacific

R.R. Co., 974 F.2d 775 (7th Cir. 1992)..... 4, &2, 17, 20

Chicago Teachers Union v. Hudson, 475 U.S. 292

Eh BR Oe rrr PN era ier ae 18

In re Edge, 60 B.R. 690 (Bankr. M.D. Tenn. 1986).... 9

Epstein v. Official Cmte. of Unsecured Creditors

of Estate of Piper Aircraft Corp. (in re Piper

Aircraft Corp.), 58 F.3d 1573 (1ith Cir.

| WEEE TOCTNTELTOR EE TTPTC PTT CT CTT Pree re S, 9, 16, 57

In re Firearms Import and Export Corp., 131 B.R.

fo Fs 5 A Re Oy eee 7

In re Frenville Co., 744 F.2d 332 (3d Cir. 1984),

cert. denied, 469 U.S. 1160 (1985) ............5, 12, 19

Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir.),

cert. dismissed, 487 U.S. 1260 (1988)......... 9, 10, 16

In re Jensen, 995 F.2d 925 (9th Cir. 1993)...... > id, 24, 87

In re Johns-Manville, Corp., 57 B.R. 680 (Bankr.

Dia eas SO aa os hhbrs GG Ch ecatee views donbascn vas. 9, 16

In re National Gypsum Co., 139 B.R. 397

(N.D. Tex. 1992) ...... ab cud e caceceien thibaecaeee 17

vi

PAGE

New York v. Sager, 336 U.S. 328 (1949)............... 9

In re Penn Central Transporation Co., 71 F.3d 1113

CSG Coe, A nde b's Chicas wae en eo eds 1,2

Paoli Yard (In re Penn Central Transport Co.),

944 F.2d 164 (3d Cir. 1991), cert. denied,

POS Wie POO LESOED wcdhanckc écdsexeen deeds os 5, 6

Schweitzer v. Consolidated Rail Corp., 758 F.2d 936

(3d Cir.), cert. denied, 474 U.S. 864 (1985)...... 5,6

United States v. Kimbell Foods, Inc., 440 U.S.

TRS LEOTOR 0d kkkdccckeukihacle eee eee 18

Vanston Bondholders Protective Committee v. Green,

Da Wastes Rave CRD hak i cade ae a ac eh chen 3

Federal Statutes

yi BIE Kom Pt . 0 |G ) eee uae nae) Lh 2

a2 U.BAse Bes Vins cacec aati ee eee 2, 19, 20

11 U.S.C. § 205(b) (repealed 1978).............2, 12, 19, 20

Ba Uda Abc Bee vs cdaccsapncacckieac ties eee 8

Ai Utes Bee chins cdakcccddacceveceen oe 8

BE Ub Gon Be. a (cst tcnk fies tee eee 8

GEIR Roa Eee re ewe Om 8

LE USK, S ORR RUS ods cd bites cal cecws ace 8

SS WE

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

No.

ee

In The Matter of:

Penn Central Transportation Company

AMERICAN PREMIER UNDERWRITERS, INC.,

Petitioner,

—\V —

USX CORPORATION and BESSEMER and

LAKE ERIE RAILROAD COMPANY,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

>

PETITION FOR A WRIT OF CERTIORARI

Petitioner, American Premier Underwriters, Inc. (“Penn

Central”),' requests that a writ of certiorari issue to review the

judgment and opinion of the United States Court of Appeals

for the Third Circuit entered on December 12, 1995.

l

Penn Central Transportation Company petitioned for reorgani-

zation in 1970 and emerged from the reorganization as The Penn Central

Corporation in 1978. In 1994, The Penn Central Corporation changed its

name to American Premier Underwriters, Inc.

OPINIONS BELOW

The panel opinion of the Court of Appeals (Pet. App. B) is

reported at 71 F.3d 1113 (3d Cir. 1995). The denial of a peti-

tion for rehearing and suggestion for rehearing en banc (Pet.

App. C) is unreported. The Memorandum and Order of the

District Court (Pet. App. D) is unreported.

GROUNDS FOR JURISDICTION

The judgment of the Court of Appeals was entered on

December 12, 1995. The order of the Court of Appeals deny-

ing rehearing and suggestion for rehearing en banc was

entered on February 16, 1996. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

United States Code, Title 11, § 205(b) (repealed in 1978):

“The term ‘claims’ includes debts, whether liquidated or

unliquidated, securities. . . liens, or other interests of

whatever character.”

United States Code, Title 11, § 101(5):2

“claim” means—(A) right to payment, whether or not

such right is reduced to judgment, liquidated, unliqui-

dated, fixed, contingent, matured, unmatured, disputed,

undisputed, legal, equitable, secured, or unsecured; . .

. 11 U.S.C. § 101 was amended in 1994 which changed the num-

ber of subsection (4) to subsection (5). The amendment did not change

the language defining “claim” in those subsections. Petitioner will refer

to the old subsection (4) where a decision was rendered thereunder.

—————————

wtietteAy’s

STATEMENT OF THE CASE

The Third Circuit below—in direct conflict with three other

circuits that have considered the same issue—determined that,

with rare exceptions, a claim exists for federal bankruptcy

purposes only when it has accrued so as to begin the running

of the statute of limitations under the state or federal sub-

Stantive law creating the claim. Since most bankruptcy claims

arise under substantive state law, see Vanston Bondholders

Protective Comm. vy. Green, 329 U.S. 156, 170-71 (1946)

(Frankfurter, J., concurring), this means that such funda-

mental questions in bankruptcy as whether a claim can be

resolved in a pending reorganization proceeding, whether a

claimant is stayed from asserting it outside the proceeding,

and whether it is discharged upon confirmation of the plan of

reorganization, all turn on the vagaries of the statute of lim-

itations principles of whichever state law applies. Under the

Third Circuit rationale, identical claims could receive incon-

sistent treatment—one being discharged and the other sur-

viving bankruptcy to be asserted against the reorganized

company—simply because they arose in different states with

different rules as to when a claim accrues.

By contrast, the Fourth, Seventh, and Ninth Circuits have

held that whether such a claim exists is governed by uniform

federal bankruptcy law, not varying state limitations stan-

dards. These courts have held that accrual principles of state

law are irrelevant and inappropriate standards for determin-

ing when a claim exists under federal bankruptcy law. Unfor-

tunately, these and other circuit courts which apply uniform

national bankruptcy law have adopted differing rules to deter-

mine when a claim exists under that law. Thus, it is important

for this Court to resolve two issues presented by this case:

whether varying state statute of limitations laws or a uniform

federal bankruptcy law applies to determine whether a claim

exists and, if the latter, what that uniform bankruptcy rule

should be. If this Court determines, as petitioner urges, that

a uniform federal bankruptcy law applies and requires asser-

tion of a contingent claim in a bankruptcy proceeding if the

claimant has a reasonable basis to anticipate that such claim

may arise in the future, then the decision below must be

reversed.

A. Factual and Procedural Background

In 1970, Penn Central filed a petition for reorganization

under Section 77 of the Bankruptcy Act. A Consummation

Order was entered, effective October 24, 1978, which trans-

ferred the debtor's assets to the reorganized Penn Central

“free and clear” of all claims, “discharged and released” the

debtor from all liabilities and claims, and permanently

enjoined claims against the reorganized company based upon

the acts or conduct of the debtor.

Various antitrust actions were brought in the 1980's against

respondent Bessemer & Lake Erie Railroad Company

(“B&LE”), Penn Central and otier railroad companies for

violation of the Sherman Act and the similar Ohio Valentine

Act alleging that defendants conspired .> -sstrain trade in the

dock handling, storage and land transportation of iron ore

along lower Lake Erie. Penn Central was dismissed from

these actions because the claims were based on pre-petition

conduct and were discharged by Penn Central’s Consumma-

tion Order.

In 1989, a jury found B&LE liable for its participation in

the alleged conspiracy, and respondent USX Corporation

(“USX”"), its former parent, paid approximately $600 million

to plaintiffs. Thereafter, USX and B&LE sued Penn Central in

the United States District Court for the Western District of

Pennsylvania and the Court of Common Pleas of Cuyahoga

County, Ohio, for contribution and indemnification in the

same amount. Penn Central then petitioned the bankruptcy

court to require dismissal of the actions on the ground that the

contribution and indemnity claims were based on pre-petition

conduct and were discharged, just as the plaintiffs’ underly-

ing claims were discharged, by Penn Central's Consummation

Order. The bankruptcy court granted the petition, but the

Third Circuit reversed and denied Penn Central’s petition for

rehearing and suggestion for rehearing en banc. Penn Central

now petitions this Court for a writ of certiorari to the Third

Circuit.

B. The District Court’s Opinion

In granting Penn Central's petition, the District Court nev-

ertheless noted that B&LE “makes a strong argument” that a

trilogy of Third Circuit cases “mandate denial.” Those

cases—/n re Frenville Co., 744 F.2d 332 (3d Cir. 1984), cert.

denied, 469 U.S. 1160 (1985); Schweitzer v. Consolidated

Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 474 U.S. 864

(1985); and Paoli Yard (in re Penn Central Transp. Co.), 944

F.2d 164 (3d Cir. 1991), cert. denied, 503 U.S. 906 (1992)—

were decided under Section 205(b) of the Bankruptcy Act,

which defines a claim for purposes of a Section 77 railroad

reorganization, and its successor Section 101(4), which

defines a claim under the Bankruptcy Code. In this trilogy of

cases, the Third Circuit recognizes no difference between

reorganization under Section 77 of the Act or the Code as to

the existence of a claim. A claim does not exist in the Third

Circuit under both statutes until it has accrued for statute of

limitations purposes under the applicable substantive law on

which the claim ts based.

For example, in Frenville the Third Circuit reasoned that a

joint tort-feasor’s claim for contribution and indemnity

against the debtor arose under New York law, that it “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,” 744 F.2d at 337, and since that payment did not

occur until post-petition, the claim did not exist within the

meaning of Section 101(4) of the Code at the time the

bankruptcy petition was filed and was hence not subject to the

automatic stay provisions of Section 362 of the Code. /d.

Similarly, in Schweitzer the Third Circuit held that the tort

claims of employees against a bankrupt railroad for asbestos-

related personal injury did not accrue under the F.E.L.A. until

the injury was manifest, and since that did not occur until

after the date of discharge, the claim did not exist within the

meaning of Section 205(b) of the Act, was not discharged in

the bankruptcy proceeding, and could be asserted against the

reorganized company. 758 F.2d at 944.

Although the present case involves claims for indemnity

and contribution as in Frenville, and arose under Section 77

of the Act as in Schweitzer, the District Court refused to fol-

low those cases on a number of grounds, “most importantly,”

that “there is considerable tension between the Frenville,

Schweitzer and Paoli Yard line of cases and firmly established

policies and principles underlying the law of bankruptcy.”

(Pet. App. D at Sd)

C. The Court of Appeals’ Opinion

Despite the District Court’s reservations, the Third Circuit

applied the bankruptcy jurisprudence it had developed in

Frenville, Schweitzer and Paoli Yard, reiterating that whether

a claim exists turns not on uniform policies of federal

bankruptcy law, but rather on accrual of a cause of action

under statute of limitations principles. Explicitly following

Frenville, the Third Circuit “look[ed] to nonbankruptcy law

to determine when these claims accrued,” 71 F.3d at 1114, and

concluded that the Ohio law under which the claims arose in

this case was similar to the New York law under which the

claims arose in Frenville, namely that a cause of action for

contribution and indemnification does not accrue for statute

of limitation purposes until a joint tort-feasor actually pays a

disproportionately large judgment or settlement to the plain-

tiffs. Reasoning that “[t]hat conclusion frames the issue,” id.

at 1115, the Third Circuit held that since the claims here had

not accrued under Ohio law at the time of Penn Central’s

TROPA AE DO APL POLO Dd BIS Ser A at rion Re BPR A A heat hd AP Cet Mi

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Consummation Order, they did not exist, were not barred and

could be asserted against the reorganized company. /d. at

1115-18.

In response to Penn Central's argv ment that this analysis

has been explicitly rejected by other Courts of Appeals, and

that Frenville has been severely criticized by many courts,

the panel opinion cited the Third Circuit's rule that prior

panel decisions can be overruled only en banc:

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.

Id. at 1117 n. 5. Finally, recognizing that this case was gov

erned by Section 77 of the Bankruptcy Act, whereas Frenville

arose under the Bankruptcy Code, the panel noted that this “is

a distinction without a difference” because the definition of

claim under the two statutes is not materially different and

Third Circuit jurisprudence of looking to state statute of lim-

itations law, rather than uniform federal bankruptcy policy, to

determine whether a claim exists applies equally under both

statutes. /d. at 1117.

REASONS FOR GRANTING THE WRIT

At what time a claim exists not only raises the same issue

under Section 205(b) of the Bankruptcy Act and Section

101(5) of the Bankruptcy Code,‘ but it is also a central and

. The Frenville analysis adopted by the Third Circuit in this case

has been aptly described as “one of the most criticized and least followed

precedents decided under the Bankruptcy Code.” /n re Firearms Import

and Export Corp., 131 B.R. 1009, 1015 (Bankr. S.D. Fla. 1991)

" In addition to the Third Circuit reaching this conclusion in this

case, see 71 F.3d at 1117, the Seventh Circuit has also observed the iden

tical nature of these two provisions, see Jn re Chicago, Milwaukee, St

Paul & Pacific R.R. Co., 974 F.2d 775, 781 (7th Cir. 1992)

critically important issue in virtually every complex

bankruptcy reorganization. When a claim exists controls such

important determinations as whether the bankruptcy court has

jurisdiction over it at all and can thus compromise it equitably

in relation to other creditors’ claims, see Epstein v. Official

Cmte. of Unsecured Creditors of Estate of Piper Aircraft

Corp. (In re Piper Aircraft Corp.), 58 F.3d 1573, 1576 (11th

Cir. 1995) (citing 11 U.S.C. §§ 101(10), 501, 502), whether

attempts to assert it in other courts are prohibited by the auto-

matic stay provisions, see 11 U.S.C. § 362, whether it is dis-

charged on confirmation of a plan of reorganization or can be

subsequently asserted against the reorganized company, see

11 U.S.C. § 1411(d), and whether it should receive a priority

classification as an administrative expense, see 11 U.S.C.

§ 503(b).

Federal courts throughout the country constantly grapple

with this issue in determining whether a contingent claim

which may or may not be known to the potential claimant or

may or may not ultimately arise exists so that it can and must

be asserted in a reorganization proceeding or be forever

barred. They have recognized that a rule requiring contingent

claims to be filed at an early stage furthers important

bankruptcy policies of allowing the bankruptcy court to

resolve it equitably in relation to other creditors’ claims and

discharge it so as to give the reorganized company finality

and a fresh start which, in turn, encourages creditors and new

investors to take equity positions in the reorganized company

thereby greatly enhancing the chances for a successful reor-

ganization. On the other hand, the courts have also recognized

that it would be unfair to require potential claimants who

have no way of knowing that they may have a future claim to

assert it in a pending reorganization proceeding or be barred

from asserting it subsequently.

The tension between these competing considerations con-

tinuously arises in bankruptcy proceedings involving such

disparate contingent claims as environmental clean-up costs,

mass torts which manifest injury years after exposure, neg-

ligence claims where injury occurs post-petition, and indem-

nity and contribution claims. See, e.g., Grady v. A.H. Robins

Co., 839 F.2d 198 (4th Cir.), cert. dismissed, 487 U.S. 1260

(1988) (woman injured by debtor’s interuterine device held to

have pre-petition claim despite fact that injury manifested

post-petition); In re Jensen, 995 F.2d 925 (9th Cir. 1993)

(cause of action under CERCLA held to be pre-petition claim

where conduct occurred pre-petition and claimant had notice

before bar date); Jn re Piper Aircraft Corp., 58 F.3d 1573

(11th Cir. 1995) (class of potential future tort victims who

might have causes of action against debtor for negligent

design and manufacture of aircraft did not have pre-petition

claim because they had no pre-petition relationship with

debtor); Jn re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991)

(EPA cause of action for response costs under CERCLA was

pre-petition claim where EPA had pre-petition relationship

with debtor and damage resulted from pre-petition conduct);

In re Edge, 60 B.R. 690 (Bankr. M.D. Tenn. 1986) (cause of

action for negligence was pre-petition claim where acts con-

stituting negligence occurred pre-petition even though injury

manifested post-petition); Jn re Johns-Manville, Corp., 57

B.R. 680 (Bankr. S.D.N.Y. 1986) (asbestos victims had pre-

petition claims where debtor’s conduct giving rise to products

liability cause of action occurred pre-petition even though

injuries manifested post-petition).

Obviously, uniformity throughout the country in the admin-

istration of the federal bankruptcy laws is of the utmost

importance. Indeed, Congress’ decision to pre-empt the area

of bankruptcy law is a manifestation of this policy. Thus this

Court has recognized that granting a petition for certiorari is

warranted to resolve a “matter. . . of considerable practical

importance in the administration of the Bankruptcy Act.” See

New York v. Sager, 336 U.S. 328, 329 (1949). However, the

lower federal courts have badly split on the issue of when a

claim arises in complex reorganization proceedings. These

10

courts need guidance now to determine where the line should

be drawn between the reorganization advantages of holding

that a claim exists and the unfairness which would arise from

discharging contingent claims that the claimants did not real-

ize they might have and therefore did not assert in the reor-

ganization proceeding. Because this issue arises frequently,

and because it is of such critical importance in many complex

reorganizations, it is particularly important that this Court

resolve the conflict among circuits and define a uniform

national bankruptcy policy.

{. THE COURT OF APPEALS’ DECISION IS IN

CONFLICT WITH DECISIONS OF THE FOURTH,

SEVENTH AND NINTH CIRCUITS ON THE SAME

MATTER.

The Fourth Circuit Is In Conflict With The Third Circuit

In Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir. 1988),

Robins manufactured the Dalkon Shield, an interuterine con-

traceptive device. After Robins filed a bankruptcy petition

under Chapter 11 of the Bankruptcy Code, and while the

Robins reorganization proceeding was pending, Rebecca

Grady sought to sue Robins in another court for injuries

which became apparent post-petition, which were allegedly

attributable to her pre-petition use of the Dalkon Shield. The

issue before the Fourth Circuit was whether Mrs. Grady’s

cause of action was an existing claim at the time Robins filed

its petition and thus was subject to the automatic stay provi-

sion of § 362(a)(1) of the Bankruptcy Code.

The Fourth Circuit explained in its opinion that “Mrs.

Grady primarily relies upon Matter of M. Frenville Co.,

supra, to support her contention that her claim falls outside

the jurisdiction of the automatic stay.” 839 F.2d at 200. Her

argument was that even though she used the Dalkon Shield

prior to Robins’ bankruptcy filing, her injury was not mani-

fest until afterward; under governing California law her cause

ll

of action did not accrue until that manifestation; and the

Fourth Circuit should follow the Third Circuit and hold that

the claim did not exist for bankruptcy law purposes until her

cause of action accrued under the applicable state statute of

limitations law. Since Mrs. Grady’s claim did not accrue

under California law until after the bankruptcy filing, she

argued that she did not have a pre-petition claim which was

subject to the automatic stay.

The Fourth Circuit explicitly refused to follow the Third

Circuit’s “limiting definition of claim” in Frenville (“with

respect, we decline to follow it” 839 F.2d at 202), explaining:

“We have found no Court outside the Third Circuit which has

followed the reasoning and holding of Frenville.” 839 F.2d at

201. Instead, the Fourth Circuit held that Mrs. Grady had an

existing, although contingent, claim prior to Robins’ petition

even though her cause of action may not have accrued under

California law at that time, because the broad definition of

claim and the policies underlying bankruptcy law dictate that

a person such as Mrs. Grady who knew that she had used a

Dalkon Shield and might manifest injury in the future had an

existing claim for bankruptcy law purposes. /d. at 202-03.

The Fourth Circuit reasoned that the essential nature of a

“contingent” claim is that (like the claim of Mrs. Grady or

B&LE in our case) it may or may not accrue depending on

future events, and the Third Circuit’s rationale effectively

removes that category of claims from bankruptcy law. /d.

Seven years after Grady, the Fourth Circuit reiterated its

explicit rejection of the Third Circuit's Frenville rationale and

adhered to its conclusion that federal bankruptcy policy, and

not state statute of limitations law, determines when a claim

exists under the Bankruptcy Code. In Butler v. NationsBank,

N.A., 58 F.3d 1022 (4th Cir. 1995), James Harper forged an

endorsement on a check and deposited it in NationsBank on

July 24, 1989. He filed a bankruptcy petition in December

1989. NationsBank was not informed that the endorsement

was a forgery until February 27, 1990.

12

The issue before the Fourth Circuit was whether a claim

existed under the Code at the time the check was deposited,

which would have extinguished the claim in Harper’s

bankruptcy because that occurred before he filed his petition,

or whether it did not exist until NationsBank was notified of

the forgery, which would not have extinguished the claim

because that occurred after he filed his petition. The Fourth

Circuit held that the claim existed at the time of the deposit

even though, under governing North Carolina law, the bank’s

cause of action did not accrue until it learned of the forgery.

58 F.3d at 1029. Explicitly rejecting the “reasoning of

Frenville,” the Court held that “to determine when a claim

arises for bankruptcy purposes, reference is to be made to fed-

eral bankruptcy law rather than to state law.” Jd.

The Seventh Circuit Is In Conflict With The Third Circuit

In Jn re Chicago, Milwaukee, St. Paul & Pacific R.R. Co..,

974 F.2d 775 (7th Cir. 1992), the State of Washington sought

environmental clean-up costs from the successor company to

a reorganized railroad from which it had purchased property.

As in the present case, the railroad petitioned for reorgani-

zation pursuant to Section 77 of the Bankruptcy Act, and the

reorganization court established a final bar date for asserting

claims of December 26, 1985. Soil samples taken in June or

July of 1985 indicated contamination as the result of a derail-

ment of one of the railroad’s train cars. Washington filed a

complaint against the reorganized company in 1989 for recov-

ery of clean-up costs and damages under CERCLA resulting

from the contaminated property.

The issue before the Seventh Circuit was whether Wash-

ington’s causes of action under CERCLA were existing con-

tingent claims in December 1985 and hence discharged by the

railroad’s bankruptcy consummation order. The court held

that they were discharged because, at the bar date, such poten-

tial causes of action were contingent claims within the mean-

ing of Section 205(b) of the Bankruptcy Act. The Seventh

13

Circuit rejected Washington’s argument that it did not have a

contingent claim in December, 1985 because no cause of

action accrued under CERCLA until it actually incurred

response costs much later. In direct conflict with the Third

Circuit’s holding in this case, the Seventh Circuit held: “the

fact that response costs are necessary for an actual claim to

accrue under CERCLA does not necessarily mean that such

costs are necessary for a contingent CERCLA claim to accrue

under Section 77.” 974 F.2d at 785. The Seventh Circuit

applied bankruptcy law and policy, not statute of limitations

principles, and held a claim exists and must be asserted in a

pending reorganization proceeding at least as of the time

when the claimant knows there has been a release of a haz-

ardous substance which may lead to CERCLA response costs.

Id.

Since the Third Circuit’s holding below would require a

decision that Washington’s potential future claim did not exist

under Section 205(b) of the Bankruptcy Act prior to the bar

date because it had not accrued for statute of limitations pur-

poses under CERCLA, it is squarely in conflict with the Sev-

enth Circuit.

The Ninth Circuit Is In Conflict With The Third Circuit

In In re Jensen, 995 F.2d 925 (9th Cir. 1993), the State of

California sought clean-up costs under CERCLA from Mr.

and Mrs. Jensen for environmental damage caused by leakage

from a tank located on their property. On January 25, 1984, a

California inspector visited the site and noticed a cinder block

tank containing lumber fungicide and expressed his concerns

that leakage from the tank could cause environmental damage.

On February 13, 1984, Mr. and Mrs. Jensen filed a personal

bankruptcy petition under Chapter 7 of the Code. California

subsequently incurred costs in cleaning up the site, and

asserted a claim against the Jensens as responsible parties in

1987.

14

The issue before the Ninth Circuit was whether California’s

CERCLA cause of action was a pre-petition claim discharged

in the Jensens’ bankruptcy. Recognizing that California’s

cause of action did not accrue under CERCLA for statute of

limitations purposes until it incurred response costs subse-

quent to the Jensens’ bankruptcy proceeding, the Ninth Cir-

cuit nevertheless held that California had an existing

contingent claim for these future response costs prior to the

time the Jensens filed their petition which was thus dis-

charged because California did not assert it. Rejecting the

Third Circuit’s rationale “because it would appear to excise

‘contingent’ and ‘unmatured’ claims from § 101(5)(A)’s

list’,” 995 F.2d at 930, the Ninth Circuit held that “the State

had sufficient knowledge of the Jensens’ potential liability to

give rise to a contingent claim for cleanup costs before the

Jensens filed their personal bankruptcy petition.” 995 F.2d at

931.

Thus, the Ninth Circuit looked to federal bankruptcy law

and policy to hold that a claim exists and must be asserted in

a bankruptcy proceeding when a potential claimant has suf-

ficient knowledge to know that it may mature in the future

regardless of whether a cause of action has accrued under the

pertinent statute of limitations law—a holding directly in con-

flict with the Third Circuit’s holding in the present case.

This Case Would Have Been Decided Differently

In The Other Circuits

It is hardly disputable that the present case would have

been decided differently in the Fourth, Seventh and Ninth Cir-

cuits. In those courts, the fact that B&LE’s cause of action for

indemnity and contribution had not accrued under Ohio’s

statute of limitations law at the time of the Penn Central bar

date would have been irrelevant, although it was dispositive

in the Third Circuit. These circuits would have explicitly

rejected what the Third Circuit relied on—the state law

accrual date which begins the statute of limitations running.

<=

15

They would have held that B&LE’s claims did exist as con-

tingent claims and were discharged in the Penn Central

bankruptcy because they were based on pre-petition conduct

and B&LE and the debtor had a relationship as co-conspira-

tors which put B&LE on notice that it might have indemnity

and contribution claims in the future if victims of its antitrust

conspiracy sued. B&LE was at least as aware of its potential

claim for contribution and indemnification as of the Penn

Central bar date as was Mrs. Grady of her negligence claim

and the States of Washington and California of their CERCLA

claims at the pertinent times in those cases.

Il. THE COURTS THAT EMPLOY UNIFORM

FEDERAL BANKRUPTCY LAW TO DETERMINE

WHETHER A CLAIM EXISTS DIVERGE IN THEIR

APPROACHES TO THIS IMPORTANT ISSUE.

As explained supra, the Federal courts are regularly called

upon to determine, in many different contexts, whether a

potential future claim which has not accrued under the gov-

erning statute of limitations is nevertheless an existing con-

tingent claim under the Bankruptcy Act or Code. The results

of this determination are critical to potential claimants and to

the disposition and chance of success of the reorganization

proceeding. In the absence of guidance from this Court, the

lower federal courts have developed materially divergent

approaches to this complex and difficult issue. Therefore, this

Court should settle the issue by adopting a rationale to be

applied throughout the United States, since that would sub-

stantially contribute to certainty and uniformity in the admin-

istration of the federal bankruptcy laws.

Some courts primarily emphasize when the conduct on

which a future cause of action is based actually occurred.

Applying what is referred to in the cases as the “conduct

test,” these courts hold that a contingent claim exists when

the debtor’s acts giving rise to the ultimate cause of action

occurred. Thus, if the acts occurred pre-petition they consti-

16

tute existing contingent claims in the bankruptcy proceeding

even though the potential claimant was not in fact impacted,

and may not even have been aware that he had a potential

claim, during the bankruptcy proceeding. As articulated in Jn

re Johns-Manville Corp., 57 B.R. 680 (Bankr. S.D.N.Y.

1986), holding that potential claimants exposed to asbestos

prior to the Manville bankruptcy had contingent claims even

though no injury was manifest, “the focus should be on the

time when the acts giving rise to the alleged liability were

performed.” /d. at 690. See also Grady v. A.H. Robins Ce.

supra.

Other courts have concluded that the time that the conduct

occurred is not an appropriate criteria for determining

whether a claim exists, essentially because it is unfair to

potential claimants who could not be expected to realize that

they may have a claim in the future and assert it in the

bankruptcy proceeding. These courts emphasize that there

must be a pre-petition relationship between the potential

claimant and the debtor which would put the claimant on

notice he might have a claim in order for a contingent claim

to exist. Referred to as the “pre-petition relationship test,”

this rationale requires that the potential claimant have had a

relationship with the debtor prior to the bankruptcy pro-

ceeding in order to have an existing contingent claim at the

time of the petition. As described by the Eleventh Circuit in

Piper:

The prepetition relationship test, as adopted by the

bankruptcy court and district court, requires “some pre-

petition relationship, such as contact, exposure, impact,

or privity, between the debtor’s prepetition conduct and

the claimant” in order for the claimant to hold a § 101(5)

claim.

58 F.3d at 1577 (citations omitted). Emphasizing this require-

ment, the Eleventh Circuit held in Piper that a class of persons

who might be claimants because as a statistical matter some of

17

them would be injured in the future by the pre-petition negli-

gent design or manufacture of aircraft by Piper did not have

contingent claims since they had no preprtition relationship

with Piper. Jd. at 1577-78.

Still other courts have focused on whether a potential

claimant had a reasonable basis to expect that he may have a

claim in the future in determining whether that claim exists so

that it must be asserted in a bankruptcy proceeding. Referred

to as the “fair contemplation test,” this holds that future

causes of action based on prepetition conduct are existing

contingent claims only if they “can be fairly contemplated by

the parties at the time of [dJebtor’s bankruptcy.” Jn re Jensen,

995 F.2d at 930 (quoting Jn re National Gypsum Co., 139 B.R.

397, 409 (N.D. Tex. 1992)). Applying this approach, the Sev-

enth circuit in Chicago, Milwaukee, St. Paul and Pacific R.R.

Co. and the Ninth Circuit in Jensen held that CERCLA

response costs were existing contingent claims during reor-

ganization proceedings because the potential claimants knew

that the property in question had been contaminated and thus

should have reasonably contemplated that their CERCLA

claim might accrue in the future. See 974 F.2d at 786: 995

F.2d at 931.

Finally, after reviewing these various tests, the Eleventh

Circuit recently adopted what it called the “Piper test” which

appears to be a hybrid of some of the others. See Epstein v.

Official Cmte. of Unsecured Creditors of Estate of Piper Air-

craft Corp. (In re Piper Aircraft Corp.), 58 F.3d 1573, 1577

(11th Cir. 1995).

Under these various tests, the same facts will obviously

result in materially different determinations as to whether a

claim exists. Particularly in the increasingly numerous reor-

ganization proceedings where potential future claims are large

or numerous, that determination will have a profound effect

on the course and potential success of the reorganization pro-

ceeding. See In re Chateaugay, 944 F.2d at 1005 (“one may

a —

nee —

|

18

well speculate whether, if unincurred CERCLA response costs

are not claims, some corporations facing substantial envi-

ronmental claims will be able to reorganize at all”).

In sum, the lower federal courts have clearly adopted

“divergent approaches” necessitating a writ of certiorari to

allow this Court to articulate a single, uniform national stan-

dard. See Chicago Teachers Union v. Hudson, 475 U.S. 292,

300 (1986) (“The importance of the case, and the divergent

approaches of other courts to the issue, led us to grant

certiorari.”); United States v. Kimbell Foods, Inc., 440

U.S. 715, 725 n.16 (1979) (Court granted writ of certiorari!

where “[o]ther Courts of Appeals have adopted divergent

approaches”).

Ill. THIS CASE PRESENTS AN OPPORTUNITY FOR

THE COURT TO RESOLVE A CONFLICT AMONG

CIRCUITS AND CLARIFY AN IMPORTANT ISSUE

OF FEDERAL BANKRUPTCY LAW.

As this petition demonstrates, the lower federal courts are

in conflict, confusion and disarray over the rationale to be

applied in determining whether a claim exists at any partic-

ular time under federal bankruptcy law, and this is an issue of

real importance in the successful administration of reorga-

nization proceedings and in maintaining national uniformity.

The fact that the Third Circuit decision below resolved this

issue under Section 77 of the Bankruptcy Act which was

repealed in 1978 does not make this case an unsuitable vehi-

cle for this Court to bring badly needed clarity and uniformity

to the lower federal courts; because the meaning of claim in

that section is essentially the same as in the Bankruptcy Code

which superseded it and is in effect today.* Thus adjudication

; Whereas the Bankruptcy Code contains a single definition of

claim, in Section 101(5), which applies throughout the statute, the

Bankruptcy Act contained different definitions of claim in different sec-

tions governing different types of bankruptcy proceedings. The meaning

+ LA DI SNARES: A GIES of #0

19

of this case will govern the interpretation of claim under both

Section 77 of the Bankruptcy Act and the Bankruptcy Code

and will control resolution of this issue in the multitude of

reorganization proceedings where it will arise in the future.

The Third Circuit has made crystal clear that it applies the

standard of looking to state statute of limitations law to deter-

mine when a claim exists equally under Section 77 of the Act

and the Code, and that it would have decided this case pre-

cisely the same whether it arose under the Act or the Code.

Indeed, the panel opinion below relied on both Act and Code

cases and explicitly concluded that whether this issue is

resolved under the Act or Code is a “distinction without a dif-

ference.” 71 F.3d at 1117. Focusing on the minor differences

in language between Section 205(b) of the Act and Section

101(4) of the Code, the panel concluded:

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 different result here

than in Frenville.

Id.

Similarly, other federal courts dealing with this issue,

including the courts of appeals that are in direct conflict with

the Third Circuit, have cited precedents under the Act and the

Code interchangeably. None of these cases has suggested a

different analysis or a different result depending on whether

Section 77 or the Code definitions of claim are applicable.

To the contrary, the Seventh Circuit decision squarely in con-

of claim under Section 77, governing railroad reorganizations, and Chap-

ter 10, governing reorganization of publicly held companies, is essen-

tially the same as in the Bankruptcy Code. But other chapters of the Act,

primarily governing individual and non-public bankruptcy proceedings,

contained a more restrictive definition of claim, requiring “provability”

in order for a claim to exist. Those sections are not involved in this case.

Thus, while some definitions of claim in the Act were different than the

one that is applicable throughout the Code, the definition of claim under

Section 77, contained in Section 205(b), is essentially the same as the one

in Section 101(5) of the Code.

20

flict with the Third Circuit—Jn re Chicago, Milwaukee, St.

Paul & Pacific R.R. Co.—arose under Section 77 of the Act,

just as the decision below did, yet relied on Code precedents.

The Seventh Circuit explained:

Just as Section 77 of the 1898 Act broadly defines

claims, the new Bankruptcy Code also broadly defines

claims. Compare 11 U.S.C. § 205(b) (repealed 1978) and

11 U.S.C. § 101(4)(A) and (B) (enacted 1978).

974 F.2d at 781. Since the issue of when a claim exists is the

same under Section 77 of the Act and the Code, as has been

universally recognized by the numerous lower federal court

cases dealing with this issue, a decision by this Court in this

case will fully apply to cases arising under both statutes and

will control literally thousands of reorganization proceedings

in which this issue will inevitably arise in the future.

CONCLUSION

For the foregoing reasons, we respectfully request that a

writ of certiorari be granted.

Dated: March 25, 1996

New York, New York

Respectfully submitted,

Peter M. Fishbein

KAYE, SCHOLER, FIERMAN,

HAYS & HANDLER, LLP

425 Park Avenue

New York, New York 10022

(212) 836-8000

Counsel of Record for Petitioner

ES

APPENDIX A

ter

la

RULE 29.1 STATEMENT

AMERICAN PREMIER UNDERWRITERS, INC.

Insurance and related subsidiaries

AMERICAN FINANCIAL GROUP, INC.

__American Premier Underwriters, Inc.

__. Pennsylvania Company

__. Atlanta Casualty Company

American Premier Insurance Company

Atlanta Speciality Insurance Company

__ Mr. Agency of Georgia, Inc.

ci Atlanta Casualty General Agency, Inc.

Atlanta Insurance Brokers, Inc.

__ Treaty House, Ltd. (d/b/a Mr. Budget)

___ Infinity Insurance Company

__ Infinity Agency of Texas, Inc.

__. The Infinity Group, Inc.

| _ Infinity Select Insurance Company

\__ Infinity Southern Insurance Corporation

_ Leader National Insurance Company

if Budget Insurance Premiums, Inc.

® Leader National Agency, Inc.

i Leader National Agency of Texas, Inc.

___ Leader National Insurance Agency of Arizona

__ Leader Preferred Insurance Company

___ Leader Speciality Insurance Company

2a

AMERICAN PREMIER UNDERWRITERS, INC.

Insurance and related subsidiaries

AMERICAN FINANCIAL GROUP, INC.

__ American Premier Underwriters, Inc.

___Pennsylvania Company

_Republic Indemnity Company of America

! |_Republic Indemnity Company of California

Windsor Insurance Company

iain

__American Deposit Insurance Company

___Granite Finance Co., Inc.

|_Coventry Insurance Company

| _El Aguila Compaiiia de Seguros, S.A. de C.V.

'_ Moore Group Inc.

1

\__Casualty Underwriters, Inc.

!

i

___Dudley L. Moore Insurance, Inc.

__Hallmark General Insurance Agency, Inc.

___ Middle Tennessee Underwriters, Inc.

___Insurance Finance Company

I

' Windsor Group, Inc.

___Regal Insurance Company

‘Texas Windsor Group, Inc.

3a

AMERICAN PREMIER UNDERWRITERS, INC.

Non-Insurance subsidiaries

AMERICAN FINANCIAL GROUP, INC.

|_American Premier Underwriters, Inc.

__Pennsylvania Company

| fe Insurance and related subsidiaries (supra)

_ PCC Hotel, Inc.

__ PCC-N26LB, Inc.

| | BSC, Inc.

___Marathon Manufacturing Companies, Inc.

|_ PCC Real Estate, Inc.

| | PCC Billboard Realty Corp.

| rec Chicago Realty Corp.

__ PCC Fordham Realty Corp.

___ PCC Gun Hill Realty Corp.

___ PCC Irvington Realty Corp.

'_ PCC Michigan Realty Corp.

__ PCC Scarsdale Realty Corp.

| PCC Tuckahoe Realty Corp.

__ Penn Central Energy Management Company

4a

AMERICAN PREMIER UNDERWRITERS, INC.

Non-Insurance subsidiaries

AMERICAN FINANCIAL GROUP, INC.

\_ American Premier Underwriters, Inc.

___The Ann Arbor Railroad Company

'__The Associates of the Jersey Company

'__Delbay Corporation

'__ Detroit Manufacturers Railroad Company

___ The Indianapolis Union Railway Company

| _Lehigh Valley Railroad Company

___ The Michigan Central Railroad Company

___The New York And Harlem Railroad Company

___ The Owasco River Railway, Inc.

__ Penn Central Properties, Inc.

__Pennsylvania-Reading Seashore Lines

__ Penn Towers, Inc.

|_ Pittsburgh and Cross Creek Railroad Company

'|__ Terminal Realty Penn Co.

' | Union Railroad Corp.

' Waynesburg Southern Railroad Company

APPENDIX B

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UNITED STATES COURT OF APPEALS

THIRD CIRCUIT

In the Matter of

PENN CENTRAL TRANSPORTATION COMPANY

USX Corporation and Bessemer

and Lake Erie Railroad Company,

Appellants

No. 94-2154

Argued July 24, 1995

Decided Dec. 12, 1995

Timothy W. Bergin, Squire, Sanders & Dempsey, Wash-

ington, DC, Thomas S. Kilbane, Squire, Sanders & Dempsey,

Cleveland, OH, William J. Taylor, Taylor & Taylor, Philadel-

phia, PA, David A. Lynch, Senior General Attorney, USX

Corporation, Pittsburgh, PA, for Appellants.

Matthew J. Siembieda, (argued), Carl M. Buchholz, Blank,

Rome, Comisky & McCauley, Philadelphia, PA, Kenneth N

Hart, James J. Capra, Donovan, Leisure, Newton & Irvine,

New York City, Arlin M. Adams, Schnader, Harrison, Segal &

Lewis, Philadelphia, PA, Robert W. Olson, Michael L. Cioffi,

American Premier Underwriters, Inc., Cincinnati, OH, for

Appellee.

2b

Before:

BECKER, NYGAARD and ALITO,

Circuit Judges

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 con-

spiracy. Although appellants were held liable for nearly $600

million in damages from that conspiracy, see Jn 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. Jn re Penn Central Transp. Co.,

No. 70-347 (E.D. Pa. Oct. 13, 1994). We will reverse.

l.

The Penn Central bankruptcy proceeding is more than a

quarter-century old; 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, specifi-

cally 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

3b

claims at issue under its indemnity agreement with the Besse-

mer.

Beginning in 1956, the Bessemer and several other rail-

roads, including the Penn Central's predecessors, entered into

a joint ratemaking agreement, which was given iimited immu-

nity from antitrust attack under § 5a of the Reed-Bulwinkle

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

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 Cen-

tral 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-consum-

mation acts or conduct. The district court retained jurisdic-

tion 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 dis-

charge. Jn 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, 88 L. Ed. 2d 576

(1985). Between 1982 and 1984, several plaintiffs filed suits

under federal and Ohio antitrust law against the signatories to

the § Sa 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, con-

cluding that because the claims arose pre-consummation they

were discharged. All remaining defendants except the Besse-

mer settled with plaintiffs. The Bessemer went to trial and

lost. Judgment was entered against it in excess of $592 mil-

lion, and paid by USX. The Bessemer and USX then filed

complaints in federal and Ohio courts seeking indemnity and

4b

contribution from Penn Central, as the instigator, enforcer and

primary beneficiary of the conspiracy.

2.

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.

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, 88 L. Ed. 2d 152 (1985); In re M. Frenville Co.,

744 F.2d 332, 335 (3d Cir. 1984), cert. denied, 469 U.S. 1160,

105 S. Ct. 911, 83 L. Ed. 2d 925 (1985). We agree with appel-

lants 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.

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

Sb

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 com-

plete and enforceable only upon a payment by the

claimant extinguishing the whole of the common obli-

gation.

National Mut. Ins. Co. v. Whitmer, 70 Ohio St. 2d 149, 24

0.0.3d 248, 435 N.E.2d 1121, 1123 (1982); see Ross v.

Spiegel, Inc., 53 Ohio App. 2d 297, 7 0.0 3d 385, 373 N.E.2d

1288, 1295 (1977) (similar rule for indemnity). Applying fed-

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

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

1989).

il.

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 pre-

sented by this case.'

In Schweitzer,’ plaintiffs were exposed to asbestos during

their employment with the Reading Railroad and the Central

l

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 con-

tribution and indemnity asserted against a bankrupt railroad were not

prepetition in nature—even though the facts giving rise to primary lia-

bility occurred before the railroad declared bankreptcy—because the rail-

road settled with the plaintiff post-bankruptcy and only then did the cause

of action for contribution and indemnity accrue. /d. at 1251.

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, 118 L. Ed. 2d 305 (1992); Zulkowski v. Consolidated Rail Corp.,

852 F.2d 73, 74 (3d Cir.) (same), cert. denied, 488 U.S. 994, 109 S. Ct.

559, 102 L. Ed. 2d 585 (1988).

6b

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

manifested themselves, these railroads consummated a reor-

ganization 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, not-

ing 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.” /d. at

941. We concluded “that if plaintiffs had causes of action that

existed under FELA prior to the relevant consummation dates

they had ‘claims.’ ” Jd. We then analyzed plaintiffs’ claims

under FELA and concluded that no cause of action accrued

until the manifestation of plaintiffs’ injuries. Jd. 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,

Schweitzer’s lesson is that their claims could not have been

discharged.

Penn Central argues that appellants had preconsummation,

contingent, 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, 84 L. Ed. 519 (1939). We find

that case to be inapposite.

In RKO, landlords leased property to a corporation’s sub-

sidiary, 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 reorga-

nization when the subsidiary defaulted, they asserted that

their claim on the guarantee was not discharged. The Court of

Appeals disagreed:

7b

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 pref-

erence for them over unsecured creditors with accrued or

determinable claims. What they were entitled to was

treatment as nearly like that accorded to ordinary unse-

cured 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 control-

ling here, however, because we do not believe plaintiffs

had “interests” of any 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 pre-

sent cause of action pursuant to the guaranties, there was

a guarantor-guarantee legal relationship from which an

interest in the guaranty could flow.’ 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 § 5a agreement to

which the Bessemer was a party takes this case out of the

> Accord Frenville, 744 F.2d at 336 (“The present case is differ-

ent 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 con-

tingent. 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 sign-

ing of the agreement, but it is dependent on the occurrence of a future

event.” (Citations omitted.)).

8b

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 § 5a agreement confers no right of indemnifi-

cation. 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, 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 trans-

formers of the period. As part of the Penn Central reorgani-

zation, 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 reorga-

nized Penn Central. /d. at 165-66.

The district court construing Schweitzer narrowly, held that

the Consummation Order barred the claims against the reor-

ganized Penn Central. /d. at 166. We reversed, noting first

that at the moment of the bankruptcy discharge and the incep-

tion of the injunction, CERCLA had not yet been passed by

Congress. Indeed CERCLA was not enacted until 1980. Con-

sequently, 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 brought claims

under CERCLA prior to the Consummation Date.

9b

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

tingent, 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 rela-

tionship 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 petition-

ers’ 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, Con-

rail became primarily liable for the toxic waste cleanup. Sec-

ond, 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.*

Although not necessary to our holding, Frenville also sup-

ports our conclusion that appellants’ claims against the reor-

ganized Penn Central were not discharged. In that case, banks

sued an accounting firm for negligently preparing the debtor’s

% 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 somehow agreed to look only to the debtors’

estates for compensation.

|

10b

financial statements. The firm sought relief from the auto-

matic stay to claim contribution and indemnity from the

debtor. 744 F.2d at 333-34. We held that, because that 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. Jd. 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 pay-

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

Congress to be interpreted broadly. See id. at 336. Penn cen-

tral 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 dif-

ference should lead us to a different result here than in

Frenville.°

Our holding makes for sound policy. Appellants could not

have been expected to file a contingent claim pre-consum-

mation 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 pre-

decessors 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 unwork-

able. Indeed, we find the Schweitzer analysis of when

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.

11lb

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 man-

ifest 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 compensa-

tion for those who do.

758 F.2d at 942.

ill.

As a final ground for affirmance, Penn Central argues that,

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

nity or contribution. This argument, however, goes to the mer-

its of appellants’ indemnity and contribution claims currently

pending in other courts, which will proceed there once our

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

a

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.

APPENDIX C

- ”

le eee -

“a STR a ee

————

le

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

SUR PETITION FOR REHEARING

Present: SLOVITER, Chief Judge, BECKER, STAPLETON,

MANSMANN, GREENBERG, SCIRICA, COWEN,

NYGAARD, ALITO, ROTH, LEWIS, MCKEE and

SAROKIN Circuit Judges

2c

The petition for rehearing filed by appellee American Pre-

mier Underwriters, Inc. in the above-entitled case having been

submitted to the judges who participated in the decision of

this court and to all the other available circuit judges of the

circuit in regular active service, and no judge who concurred

in the decision having asked for rehearing, and a majority of

the circuit judges of the circuit in regular active service not

having voted for rehearing by the court in banc, the petition

for hearing is denied.

By the Court,

Dated: FEB 16, 1996

s/

Circuit Judge

APPENDIX D

ld

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

In Proceedings for the Reorganization of a Railroad

Bkcy. No. 70-347

In the matter of

PENN CENTRAL TRANSPORTATION COMPANY,

Debtor.

MEMORANDUM AND ORDER NO. 4344

Re: Indemnification and Contribution—MDL 587 Judg-

ments

FULLAM, Sr. J. OCTOBER 13, 1994

Beginning in the mid-1950’s, a group of railroads—the

Bessemer & Lake Erie Railroad Company (B&LE) among

them—conspired to monopolize dock handling, storage and

land transportation of iron ore along lower Lake Erie. The

railroads’ actions led to their indictment on criminal antitrust

charges' and, ultimately, to ten private antitrust actions

brought by various steel, trucking and dock companies, which

were consolidated in this Court. See Jn re Lower Lake Erie

Iron Ore Antitrust Litigation, 759 F. Supp. 219 (E.D. Pa.

1991) (“MDL 587”), aff’d in part, 998 F.2d 1144 (3d Cir.

~ l‘See United States v. Baltimore & O.R.R., 538 F. Supp. 200

(D.D.C. 1982), aff’d sub nom. United States v. Bessemer & L.E.R.R., 717

F.2d 593 (D.C. Cir. 1983).

2d

1993), cert. denied, 114 S. Ct. 921 (1994). The claims against

the Penn Central and all other defendant railroads except the

B&LE were dismissed or settled prior to or during trial.

After a bifurcated jury trial, judgments totalling more than

six hundred million dollars were entered against the B&LE.

These judgments have now been satisfied, and the B&LE has

filed suit in both the United States District Court for the

Western District of Pennsylvania and the Court of Common

Pleas of Cuyahoga County, Ohio, seeking indemnity and/or

contribution from the reorganized successor of its alleged (but

unindicted) coconspirator, the Penn Central Corporation

(PCC).?

PCC has petitioned this Court for an order directing the

B&LE and its former owner, USX Corporation (USX), to

show cause why they should not be (1) directed to dismiss the

actions now pending against PCC, and (2) held in contempt

for violating § 7.02 of the Consummation Order.’ A hearing

was held on July 12, 1994.

The B&LE makes a strong argument that a trilogy of Third

Circuit cases—In re M. Frenville Co., 744 F.2d 332 (3d Cir.

1984), cert. denied, 469 U.S. 1160 (1985), Schweitzer v. Con-

soiidated Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 474

U.S. 864 (1985), and Jn re Penn Central Transportation Co.,

944 F.2d 164 (3d Cir. 1991) (“Paoli Yard”), cert. denied, 112

S. Ct. 1262 (1992)—mandate denial of PCC’s petition.

In Frenville, an accounting firm was sued in a New York

State court by a group of banks for negligently preparing the

financial statements of a Chapter 7 bankrupt. The accountants

a PCC, which for clarity’s sake is how I will continue to refer to

it, is now known as American Premier Underwriters, Inc.

, PCC also makes a number of arguments that go to the merits of

the actions. As I have stated before, “[t]his court’s retention of juris-

diction under §§ 7.02 and 7.04 of the Consummation Order did not

include jurisdiction to decide the merits of proposed lawsuits, but only

whether the Consummation Order precludes their assertion.” Jn re Penn

Central Transportation Corp., Memorandum and Order No. 4331 (E.D.

Pa. Aug. 8, 1990), rev’d on other grounds, 944 F.2d 164 (3d Cir. 1991),

cert. denied, 112 S. Ct. 1262 (1992).

3d

filed a complaint in Bankruptcy Court, and sought relief from

the automatic stay in order to bring the debtors (the company

and its principals) into the New York action as third party

defendants, so as to obtain indemnification or contribution.

The Bankruptcy Judge refused to grant relief from the auto-

matic stay, holding that the debtors’ liability, if any, resulted

from prepetition acts. The District Court affirmed. A panel of

the Third Circuit reversed and held that since under New York

law, the accounting firm’s claim for indemnity or contribution

did not arise until it was sued by the banks, the claim was

postpetition and the automatic stay was inapplicable—regard-

less of the fact that the acts of the debtors upon which the

claim was predicated all occurred prepetition.*

Schweitzer, unlike Frenville, was decided under § 77 of the

Bankruptcy Act, which is the statutory provision applicable

here. In Schweitzer, former railroad workers of two bankrupt

railroads brought suits under the FELA seeking to recover

from the reorganized (non-rail) entities for asbestos-related

personal injuries. The Consolidated Rail Corporation (or Con-

rail, to which the bankrupts’ rail assets had been transferred

on April 1, 1976) was a co-defendant in some actions and an

intervenor in others. The Court of Appeals held that asbestos-

related injuries did not exist before the injuries manifested

themselves (in this case, post-petition), and therefore were not

dischargeable claims.

In Paoli Yard, a panel of the Third Circuit expanded the

holding of Schweitzer and held that the United States, the

Southeastern Pennsylvania Transportation Authority (SEPTA)

and Conrail were entitled to bring claims under the Compre-

hensive Environmental Response, Compensation and Liabil-

ity Act (CERCLA) against PCC for the cleanup of the Paoli

Rail Yard. The Court held that the CERCLA claims could not

I recognize that Frenville has been roundly criticized, see, e.g.

Mabey & Jarvis, Jn re Frenville: A Critique by the National Bankruptcy

Conference's Committee on Claims and Distributions, 42 Bus. Law. 697

(1987). This, of course, does not make the case any less binding on this

Court.

4d

have been discharged by the Consummation Order because

CERCLA (and thus, CERCLA claims) did not then exist, and

distinguished its holding in /n re Penn Central Transportation

Co., 771 F.2d 762 (3d Cir.) (“Pinney Dock”), cert. denied, 474

U.S. 1033 (1985), on the grounds that “all of the factual and

legal elements” of the antitrust claims of the Pinney Dock

plaintiffs existed prior to the Consummation Date, even

though the plaintiffs were unaware of them. In Paoli Yard, on

the other hand, the cause of action itself did not exist until

after the Consummation Date.

Applying Frenville, Schweitzer and Paoli Yard to the pre-

sent controversy, it is argued, is a simple matter. As the

B&LE urges, any cause of action for indemnification and con-

tribution did not exist as a matter of law until 1982-84 at the

earliest, when the antitrust plaintiffs filed their complaints.

Therefore, the argument goes, the B&LE’s claim could not

have been discharged by the Consummation Order on October

24, 1978. There are factors present here, however, that mili-

tate against a mechanical application of precedent.

First, the B&LE, unlike the Schweitzer plaintiffs, is hardly

an innocent victim, but a willing member of a criminal con-

spiracy. In addition to this illegal relationship, the Penn Cen-

tral and the B&LE had a preexisting legal relationship as

signatories to the 1948 “Agreement of Eastern Railroads

Under Section Sa of the Interstate Commerce Act.” Both were

members of the Eastern Railroads’ Coal, Coke and Iron Ore

Committee (CCIOC), which was established by the § 5a

Agreement and served as the forum for the conspiracy.

The B&LE, therefore, arguably had an “interest” cognizable

as a contingent claim flowing from this relationship. See

Schweitzer, 758 F.2d at 943.

Second, the claims against PCC of the MDL 587 plaintiffs

themselves were dismissed as barred by the Consummation

Order. See MDL 587, Pretrial Order No. 12a (E.D. Pa. Mar.

27, 1987) (pre-consummation claims). Moreover, the claims

of plaintiffs in a related case, arising from the identical

conduct, were held to have been discharged. See Jn re Penn

5d

Central Transportation Co., 42 B.R. 657 (E.D. Pa. 1984)

(Memorandum and Order No. 4243), aff'd, 771 F.2d 762 (3d

Cir.), cert. denied, 474 U.S. 1033 (1985). It would be strange

indeed to permit a member of an unlawful conspiracy to assert

indemnification and contribution claims for damages that

were discharged insofar as the innocent victims of that con-

spiracy were concerned. A conspirator ought to be at least

equally subject to the risk of bankruptcy of a potential indem-

nitor.

Finally—and perhaps most importantly—there is consid-

erable tension between the Frenville-Schweitzer-Paoli Yard

line of cases and firmly established policies and principles

underlying the law of bankruptcy. Accordingly, I am of the

view that these cases should be narrowly construed, and

absent specific guidance from the Court of Appeals, I decline

to do otherwise. The B&LE may not pursue its pending liti-

gation. Its asserted legal position, however, is not so unrea-

sonable as to warrant the imposition of contempt sanctions.

An Order follows:

Sa i

6d

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

In Proceedings for the Reorganization of a Railroad

Bkcy. No. 70-347

In the matter of

PENN CENTRAL TRANSPORTATION COMPANY,

Debtor.

ORDER NO. 4344

AND NOw, this 13th day of October, 1994, it is ORDERED:

|. The Bessemer & Lake Erie Railroad (B&LE) and USX

Corporation (USX) are restrained and enjoined from assert-

ing Or prosecuting, or attempting to assert or prosecute, their

claims in USX Corporation v. The Penn Central Corporation, |

No. 94-877 (W.D. Pa.), and USX Corporation v. The Penn |

Central Corporation, No. 94-271191 (C.P. Cuyahoga County, H

Ohio).

]

2. The application for contempt sanctions is DENIED. f

3. American Premier Underwriters, Inc. (formerly the Penn

Central Corporation) is directed to serve copies of this Order

by overnight mail service to counsel of record for USX and |

the B&LE. |

/s/

Br. 3.