Chicago, Milwaukee, St. Paul & Pacific R. Co., Matter of

• Decision Date: 20 September 1993
• Docket Number: No. 92-2060,92-2060
• Citation: 6 F.3d 1184
• Parties: Bankr. L. Rep. P 75,481 In the Matter of CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC RAILROAD COMPANY, Debtor. Appeal of CMC HEARTLAND PARTNERS.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1184

6 F.3d 1184

Bankr. L. Rep. P 75,481

In the Matter of CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC RAILROAD COMPANY, Debtor Appeal of CMC HEARTLAND PARTNERS.

No. 92-2060.

United States Court of Appeals Seventh Circuit.

Argued Feb. 18, 1993.

Decided Sept. 20, 1993.

Daniel R. Murray, Randall E. Mehrberg, Michael T. Brody (argued), Jerold S. Solovy, Barry Sullivan, and Diane I. Bonina, Jenner & Block, Chicago, IL, for appellant.

Jerome B. Meites, McDermott, Will & Emery, Chicago, IL, Timothy R. Thornton (argued), and Janel E.P. LaBoda, Briggs & Moran, Minneapolis, MN, for appellee.

Leonard Gesas, and James M. Amend, Kirkland & Ellis, Chicago, IL, for debtor.

Before COFFEY and ROVNER, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

ILANA DIAMOND ROVNER, Circuit Judge.

This is another in the long line of appeals relating to the reorganization of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company (the "Milwaukee Road"). Today we are presented with the perplexing question of when a federal court should exercise its discretion to abstain in deference to a state proceeding under 28 U.S.C. Sec. 1334(c)(1). Milwaukee Road's successor, CMC Heartland Partners ("CMC"), asked the district court to enjoin a Minnesota state proceeding initiated by MT Properties, Inc. ("MT"), contending that it violated the terms of the consummation order entered at the close of the Milwaukee Road reorganization. The court abstained from considering CMC's petition until the Minnesota court could decide an issue of state law that the lower court deemed vital to resolution of the petition. Yet, because the district court can decide as a matter of federal bankruptcy law whether the Minnesota litigation violates the consummation order without the need to decide any issue of state law, we find that the court abused its discretion in abstaining. We therefore reverse and remand for further proceedings.

I. BACKGROUND

This complicated story began in 1977, when the Milwaukee Road petitioned for reorganization under section 77 of the Bankruptcy Act of 1898, formerly 11 U.S.C. Sec. 205. ¹ The United States District Court for the Northern District of Illinois (the "reorganization court") presided over the reorganization proceedings. It approved Milwaukee Road's plan of reorganization on July 12, 1985, and established a bar date of September 10, 1985 for the filing of any claims, including contingent claims, that may have arisen against Milwaukee Road, its bankruptcy estate, or the bankruptcy trustee during the reorganization. On July 22, 1985, notice of this bar date was mailed to all of Milwaukee Road's known creditors and was published in the national edition of The Wall Street Journal for the benefit of potential or unknown creditors.

The reorganization court entered a consummation order on November 12, 1985, that barred and forever discharged all contingent and non-contingent claims for which no timely filing had been made. (R. 3 p 7.) The consummation order included an injunction against the pursuit of any action relating to such a claim. (Id. at p 13.) The reorganization court relinquished jurisdiction over the reorganization as of the consummation date, but expressly retained exclusive jurisdiction over certain matters, including the consideration of any claims or contingent claims against the debtor or the trustee. (Id. at p 9.) ² When the consummation order became effective on November 25, 1985, title to Milwaukee Road's assets vested in its successor CMC Real Estate Corporation. ³

This appeal arises from MT's attempt to recover depreciation expenses purportedly owed by CMC. The genesis of this alleged obligation involves a predecessor to MT--the Minnesota Transfer Railway Company ("Minnesota Transfer"), a terminal railroad company that owned and operated a rail corridor and switch yard in Minneapolis and St. Paul. Minnesota Transfer's "terminal" served as a connecting point or switching station for eastern and western railroads. During the relevant time period, Minnesota Transfer was jointly owned and operated by five railroads, including the Milwaukee Road. These railroads operated Minnesota Transfer pursuant to a joint facility agreement, which provided that the owners would share expenses based on either their ownership shares or their use of the joint facility.

A federal tax law allows a terminal railroad company such as Minnesota Transfer to pass its tax benefits and liabilities through to its owner/shareholders. See 26 U.S.C. Sec. 281. Before 1981, the tax code included a special depreciation rule that required railroads to depreciate their investments in track structure when a structure was retired or replaced, rather than over the life of the structure, as with most capital investments. This provided railroads a 100 percent depreciation expense when a section of track was retired or replaced but no depreciation expense over the life of the track. At any given time, a railroad might therefore have significant capital outlays for which no depreciation expense had yet been allowed (its "frozen base").

In 1981, however, Congress changed this depreciation rule to permit railroads to depreciate their capital investments over the life of track structures. The 1981 amendment also provided railroads a one-time opportunity to depreciate their "frozen base" over a period of at least five years, so that Minnesota Transfer could depreciate its entire existing track structure over a five-year period. This tax benefit would in turn be passed on to Minnesota Transfer's shareholders in accordance with the joint facility agreement. At the same time, because each shareholder was obligated to pay its share of Minnesota Transfer's expenses, including depreciation expenses, on a monthly basis, the new rules also would lead to substantial shareholder debts to Minnesota Transfer.

In response to the 1981 amendments, Minnesota Transfer's Board of Directors resolved to depreciate the terminal railroad's frozen base and decided that the corresponding expense would be

... paid by the Company's stockholders in proportion to their stock ownership, the amounts thereof to be payable upon demand by unanimous vote of the entire Board of Directors and ... to be carried as a deferred asset on the books of the Company.

(the "1982 Board Resolution" (R. 10, Ex. D, at p 4.).) This arrangement allowed the shareholders, including the Milwaukee Road, to benefit from the depreciation expense without having to pay the expense until some undefined future point. Until its shareholders unanimously agreed that the depreciation expense should be paid, Minnesota Transfer would carry the shareholder debt as a deferred asset. Although the 1982 Board Resolution predated the consummation order, Minnesota Transfer did not assert a claim for this deferred depreciation in the Milwaukee Road reorganization.

On February 17, 1987, Minnesota Transfer merged into the St. Paul Union Depot Company ("SPUD"), and the surviving corporation was MT. CMC dissented from the merger, and under the Minnesota Dissenters' Rights Statute, it became entitled to the "fair value" of its Minnesota Transfer shares. MT acquired CMC's interest in Minnesota Transfer in accordance with the statute by the end of February 1987, but the parties only recently settled the "fair value" issue after years of litigation. See MT Properties, Inc. v. CMC Real Estate Corp., 481 N.W.2d 383 (Minn.Ct.App.1992).

On November 17, 1988, MT's Board unanimously voted, pursuant to Minnesota Transfer's 1982 Board Resolution, to require the former Minnesota Transfer shareholders to repay their deferred depreciation expenses (the "1988 Board Resolution"). ⁴ Pursuant to that resolution, MT demanded that CMC pay a $177,361.44 share. CMC refused to pay on the ground that its obligation to repay deferred depreciation was released when MT purchased CMC's Minnesota Transfer stock in 1987.

In April 1990, MT sued CMC in Minnesota state court. See MT Properties, Inc. v. CMC Real Estate Corp., No. C2-90-5679. CMC moved for summary judgment, arguing that the stock transfer preceded the 1988 Board Resolution and that CMC's obligation to repay the depreciation expense passed with the Minnesota Transfer stock. MT responded that the 1982 Board Resolution was in the nature of a contract between Minnesota Transfer and its shareholders and that the obligation to repay therefore stayed with the contracting entities rather than passing with the shares. On October 18, 1991, the Minnesota court denied CMC's motion for summary judgment without stating its reasons.

On November 27, 1991, CMC petitioned the reorganization court for injunctive relief. Invoking the court's continuing jurisdiction to enforce the consummation order, CMC argued that MT's claim in the Minnesota action arose, if at all, on September 7, 1982, when Minnesota Transfer's Board passed the 1982 Resolution. Because under that view the claim arose prior to the September 10, 1985 bar date, Minnesota Transfer should have filed its claim in the reorganization, and its failure to do so discharged the claim. MT argued that its claim was not barred and also asked the reorganization court to abstain from hearing the petition pursuant to 28 U.S.C. Sec. 1334(c)(1). ⁵

On April 7, 1992, the reorganization court denied CMC's motion for an injunction and determined to abstain. CMC then requested an injunction pending this appeal, but the court denied that motion as well without articulating its reasons. When CMC renewed its motion here, we ordered a limited remand, asking the reorganization court to provide its reasons for denying an injunction pending appeal. See Fed.R.App.P. 8(a). We also noted that the reorganization court had not explained its decision to abstain but had merely adopted "the reasons set forth in MT Properties' memorandum." (R. 19.) We reiterated that such an order was inadequate (see DiLeo v. Ernst & Young, 901 F.2d 624, 626 (7th Cir.1990), cert. denied, ...