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

• Decision Date: 01 February 1990
• Docket Number: No. 88-2979,88-2979
• Parties: 133 L.R.R.M. (BNA) 2126, 19 Bankr.Ct.Dec. 1787 In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, Debtor. Appeal of CMC REAL ESTATE CORPORATION.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 159

891 F.2d 159

133 L.R.R.M. (BNA) 2126, 19 Bankr.Ct.Dec. 1787

In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC

RAILROAD COMPANY, Debtor.

Appeal of CMC REAL ESTATE CORPORATION.

No. 88-2979.

United States Court of Appeals, Seventh Circuit.

Argued April 20, 1989.

Decided Dec. 7, 1989.

Rehearing and Rehearing En Banc Denied Feb. 1, 1990.

Daniel R. Murray, Jerold S. Solovy, and Barry Sullivan (argued), Jenner & Block, Chicago, Ill., for appellant.

Edward R. Gower, Keck, Mahin & Cate, Marvin F. Metge, Gorham, Metge, Bowman & Hourigan, Chicago, Ill., Charles Stark, I.C.C., William G. Mahoney, Elizabeth Nadeau (argued), Highsaw, Mahoney & Clarke, Washington, D.C., Milton H. Gray, Altheimer & Gray, Terry F. Moritz, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Robin B. Katz, Freeman, Freeman & Salzman, Chicago, Ill., Carlton G. Salmons, Austin & Gaudineer, Des Moines, Iowa, J.S. Thiel, Dept. of Transp., Madison, Wis., Patrick J. McPartland, Minneapolis, Minn., and Peter J. Kilchenmann, Chicago, Ill., for debtor-appellee.

Before CUDAHY, FLAUM and KANNE, Circuit Judges.

KANNE, Circuit Judge.

This case arises out of the reorganization of the Chicago, Milwaukee, St. Paul and Pacific Railroad Company ("Milwaukee Railroad"). The Railroad Labor Executives' Association ("RLEA") filed a motion for summary judgment asserting it was entitled to interest on its claims for the period between the order of the district court requiring that Milwaukee Railroad's rail assets be sold and the date on which the claim became liquidated. The district court granted the motion and held that, as a matter of equity, pre-liquidation interest should be paid. The successor company from the reorganization, CMC Real Estate Corporation ("CMC"), appeals. We reverse.

I. BACKGROUND

On December 19, 1977, the Milwaukee Railroad filed a petition for reorganization under Section 77 of the Bankruptcy Act of 1898, 11 U.S.C. § 205 (1976) (repealed by Bankruptcy Reform Act of 1978, § 403(a), Pub.L. No. 95-598, 92 Stat. 2549, 2683). ¹ The district court, acting as reorganization court, ordered that rail service be continued in the public interest. The continuation of rail service resulted in losses which required the trustee to raise finances.

One step taken to raise finances was the negotiation of a Wage Reduction Agreement ("WRA" or "Agreement") with Milwaukee Railroad employees through their representative, RLEA. The Agreement, approved by the district court on January 29, 1982, embodied a seven percent reduction in wages which was capable of being partially or fully refunded, depending upon the final sale price of the rail assets. The exact sale price had to be known before the amount to be paid to the employees could be calculated under the formula in the WRA. Despite a request by the RLEA to include a provision in the Agreement for the payment of interest on any amount that might be refunded to the employees, the Agreement included no such provision. Subsequently, on February 19, 1985, the district court awarded the sale of Milwaukee Railroad's core rail assets to the Soo Line despite a much higher final bid by another railroad. This was done, at least in part, to benefit Milwaukee Railroad's employees. ² The approved Asset Purchase Agreement ("APA") did not contain a definite sale price, but provided that the cash purchase price would be estimated by utilizing available data and information. A 180-day period, subject to being extended by the court, was provided in which to resolve adjustments to the cash purchase price. Based on the estimated sale price in the APA, 84% of the reduced wages of the employees would be refunded. Milwaukee Railroad and the Soo Line experienced difficulties in finalizing the sale price--mainly because the Soo Line sought a large reduction in the purchase price.

The trustee filed his proposed plan of reorganization on May 1, 1985. After numerous objections and three days of hearings, the district court approved and confirmed the modified plan on July 12, 1985. The confirmation of the plan was appealed by the RLEA, but the confirmation was affirmed by this court. ³ Under the confirmed plan, the employees' claims for reduced wages were to have interest paid at the rate of eight and a half percent for the period from the liquidation date to the date of payment. The "liquidation date" was defined as the date upon which the principal amount of the claim could be ascertained from the trustee's records. On November 12, 1985, the district court entered an order of consummation and final decree. Subsequently, the parties continued to negotiate the final sale price of the rail assets. Upon request by the trustee, the Soo Line set a $50 million ceiling with respect to its claimed adjustments. The trustee then determined that the undisputed portion of the sale price was sufficient to refund 66% of the reduced wages under the WRA. This refund was distributed in October, 1985.

Negotiations on a final sale price continued for several months. On July 31, 1986, the parties agreed on a final sale price. The district court approved this settlement on September 12, 1986. Soon thereafter the remaining portion of the refund to the employees was distributed.

The RLEA subsequently asserted that the employees were entitled to interest on the reduced wages for the period from the date the district court ordered the assets sold to the Soo Line to the date the refund payments were made. CMC filed a motion to dismiss or for summary judgment with respect to these claims arguing that both the WRA and the confirmed and consummated plan did not provide for payment of such interest. The RLEA filed a response and a cross-motion for summary judgment arguing the district court should exercise its equitable powers to deem the liquidation date to be the date on which the estimated sale price was established in the order to sell the assets to the Soo Line. On September 17, 1988, the district court granted summary judgment in favor of the RLEA. However, the court held the attempt to manipulate the liquidation date was foreclosed by the definition of that term in the plan. Instead, the court's decision was based on its belief that equity "demands" the employees receive interest.

II. DISCUSSION

We begin our analysis with an examination of the (now repealed) Bankruptcy Act of 1898, and more specifically Section 77 thereof which is the governing statute for this railroad reorganization. 11 U.S.C. § 205 (1976). The statute enumerates the required procedures for the confirmation and consummation of a plan of reorganization. These procedures provide various safeguards to ensure that holders of claims are accorded fair and equitable treatment. Such procedures include: (i) approval of the plan by the Interstate Commerce Commission; (ii) approval by the reorganization judge after hearing objections; (iii) acceptance by stockholders and creditors; (iv) confirmation of the plan by the judge; and, (v) an opportunity to appeal. 11 U.S.C. § 205; see Collier on Bankruptcy, § 77, p 77.13 (14th. ed. 1978). Indeed, a judge can approve and confirm a plan only if satisfied that it is fair and equitable. 11 U.S.C. § 205(e).

When the order of confirmation is entered, it binds the debtor and all creditors to the terms of the plan of reorganization. Id. § 205(f). The consummation order discharges the debtor from all liabilities. Congress set forth these provisions as important steps in the achievement of the central bankruptcy tenets of equal treatment of creditors and rehabilitation of the debtor. See In re Boston and Maine Corp., 468 F.Supp. 996, 1000 (D.Mass.1979), aff'd in part, rev'd in part, 634 F.2d 1359 (1st Cir.1980), cert. denied, 450 U.S. 982, 101 S.Ct. 1518, 67 L.Ed.2d 817 (1981); cf. New Haven Inclusion Cases, 399 U.S. 392, 420, 90 S.Ct. 2054, 2073, 26 L.Ed.2d 691 (1970). Before these orders are entered, the claimants, the debtor and the trustee negotiate the various claims to arrive at a plan of reorganization. After the orders of confirmation and consummation have been entered, finality becomes paramount. See In re Corona Radio & Television Corp., 102 F.2d 959, 963 (7th Cir.1939); In re Higbee Co., 164 F.2d 426, 428 (6th Cir.1947), cert. denied, 333 U.S. 863, 68 S.Ct. 745, 92 L.Ed. 1142 (1948); cf. Stoll v. Gottlieb, 305 U.S. 165, 170-71, 59 S.Ct. 134, 137, 83 L.Ed. 104 (1938); In re Union League Club of Chicago, 203 F.2d 381, 386 (7th Cir.1953). The reorganized entity must be able to go forward with operations and third parties must be able to rely on the orders to assess the financial condition of the reorganized entity.

A. Retention-of-Jurisdiction

The RLEA claims that the finality and other consequences of the orders do not apply here because the reorganization court specifically retained jurisdiction by a provision in the consummation order. ⁴ The statute provides an exception to the general rule of finality after the entry of orders of confirmation and consummation. The property dealt with by the plan is free from claims "except such as may consistently with the provisions of the plan be reserved in the order confirming the plan...." 11 U.S.C. § 205(f).

The specific provision in the consummation order that the RLEA cites for its argument states that jurisdiction is retained over any matter to which the plan reserved jurisdiction in the reorganization court. A section in the plan provides that jurisdiction is retained "for the purposes of determining any Claims against the debtor...." The RLEA relies upon these provisions for this argument.

Obviously, provisions in a plan and order cannot contravene the statute. The statutory exception expressly states that retention of jurisdiction must be consistent with the provisions of the plan. Here, a provision in the plan provides for interest to begin to accrue on the "liquidation date." This term is specifically defined in the plan. Thus, to find that interest began to accrue before the...