Cuyahoga Equipment Corp., In re

Citation980 F.2d 110
Decision Date12 November 1992
Docket NumberNo. 1559,D,1559
Parties, 61 USLW 2333, Bankr. L. Rep. P 75,020, 23 Envtl. L. Rep. 20,308 In re CUYAHOGA EQUIPMENT CORPORATION, Debtor. PUBLICKER INDUSTRIES INC., Appellant, v. UNITED STATES of America; the Pennsylvania Department of Environmental Resources; Resolution Trust Corporation, as Receiver of Freedom Savings and Loan Association; Chester B. Salomon, as Chapter 11 Trustee, Appellees. ocket 92-5010.
CourtU.S. Court of Appeals — Second Circuit

Duane A. Siler, Washington, D.C. (Timothy A. Vanderver, Jr., Patton, Boggs & Blow, Washington, D.C.; Alan A. D'Ambrosio, Schnader, Harrison, Segal & Lewis, New York City, of counsel), for appellant.

Vicki L. Plaut, Environment and Natural Resources Div., Washington, D.C. (Charles Openchowski, John Averback, Patricia Mott, Brian Nishitani, E.P.A., Barry M. Hartman, Acting Asst. Atty. Gen., Environmental and Natural Resources Div., Otto B. Obermaier, U.S. Atty., S.D.N.Y., Edward A. Smith, Asst. U.S. Atty., S.D.N.Y., Dirk D. Snel, Philip E. Karmel, Attorneys, Environment and Natural Resources Div., Washington, D.C., of counsel), for appellee U.S.

Alec P. Ostrow, New York City (Salomon Green & Ostrow, P.C., G.S. Peter Bergen, LeBoeuf, Lamb, Leiby & MacRae, of counsel), for appellee Chester B. Salomon, as Chapter 11 Trustee.

Edward M. Fox, New York City (James Gadsden, Carter, Ledyard & Milburn, of counsel), for appellee Resolution Trust Corp., as Receiver of Freedom Sav. and Loan Ass'n.

Before: CARDAMONE, PIERCE and MAHONEY, Circuit Judges.

CARDAMONE, Circuit Judge:

For 73 years Publicker Industries, a publicly-held small liquor distillery, produced whiskey, industrial alcohol and chemical solvents on a 38-acre parcel of land on Delaware Avenue in Philadelphia, Pennsylvania. From this location, in an industrial section of the city, alongside the Delaware River and under the Walt Whitman Bridge, with over 1,000 employees, Publicker distilled products that enjoyed public acceptance into the 1970s. But in the 1980s the distillery fell on hard times. It ceased operations in February 1986 and sold its 38-acre site to Overland Corporation. At the time there stood on the property several buildings, a power plant, warehouses and deep production wells together with over 400 large storage tanks and several thousand drums, many of which were later discovered to contain hazardous substances. In going out of business and selling a site that contained a large residue of hazardous wastes, Publicker set the stage for the appeal presently before us. The purchaser, Overland, went bankrupt, prompting bankruptcy litigation in one venue and environmental cleanup litigation against Publicker and its successors in another. We are asked to decide which forum takes precedence in disposing of litigation when bankruptcy and environmental cleanup litigation pending in two different courts, one in New York and the other in Pennsylvania, appear to be on a collision course.

Publicker appeals from an order entered on December 23, 1991 in the United States District Court for the Southern District of New York (Freeh, J.), approving a settlement agreement that resolved those competing bankruptcy and environmental claims. The bankruptcy claims arose in a consolidated proceeding commenced in the Southern District of New York, when in January 1987 Overland, not having any better luck at this site than Publicker, filed a Chapter 11 petition, later consolidated with a Chapter 11 proceeding already pending involving its parent company, Cuyahoga Wrecking Corporation. The environmental claims arose out of a cost recovery action brought in December 1990 under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9607 (1988), by the Environmental Protection Agency (EPA) in the United States District Court for the Eastern District of Pennsylvania against Publicker, Cuyahoga and Overland. The EPA sought to recover past and future response costs expended in cleaning up the hazardous substances at Publicker's former Philadelphia site now owned by Overland.

Freedom Savings and Loan Association (Freedom Savings or the bank), a creditor of Overland, and the United States, among other parties, sought the New York bankruptcy court's approval of a settlement agreement resolving their competing claims to the proceeds arising from the sale by Overland of the Publicker site. The settlement agreement included a covenant by the United States not to sue Freedom

                Savings and a contribution protection provision, which together released Freedom Savings and the Resolution Trust Corporation from further liability in the Pennsylvania environmental litigation.   When the settlement agreement was presented to the district court, it approved the settlement

Publicker sold the subject site to Overland for $3 million. Freedom Savings took a first mortgage on the real property in the amount of $2.7 million, and in return for an additional $4 million, the Bank took a first priority security interest in inventory and personal property. From February 13, 1987 to early 1988 Freedom Savings had access to and control over the Publicker property in order to protect and secure its collateral.

After the January 1987 consolidation of the Overland and Cuyahoga bankruptcy proceedings and the appointment of a trustee, a large fire occurred at the site in June 1987 that brought the EPA to the facility. The EPA's inspection revealed more than 1 million gallons of waste material, 3,000 waste-filled storage drums, and 7,000 gallons of unused chemicals in production process lines. Pursuant to a plea bargain in which Publicker pleaded guilty to one count of unlawfully storing hazardous waste, the EPA ordered it to implement certain measures to stabilize these volatile and dangerous conditions. Publicker's actions proved inadequate.

Because severe risks to human health and the environment remained, the EPA undertook its own emergency response action in December 1987. The site was placed on the National Priority List of hazardous waste sites most in need of cleanup in 1989. It currently ranks 44th on that list, 40 C.F.R. pt. 300 App. B (1991). The EPA has expended more than $14 million in response costs to date. As noted, in December 1990, the agency commenced the currently ongoing cost recovery action under CERCLA in the Eastern District of Pennsylvania against Publicker, Overland and Cuyahoga. United States v. Publicker Indus., Inc., Civ. No. 90-7984 (E.D.Pa.).

Meanwhile, in the Southern District of New York bankruptcy proceeding, the trustee had been actively disposing of certain assets of the debtors, including the troubled Publicker site. On February 23, 1988 the bankruptcy court for the Southern District of New York permitted Freedom Savings to relinquish control of this real property. On May 27, 1988 the trustee entered a contract for the sale of the property with Delaware Avenue Enterprises, Inc. that contained an option permitting the buyer to defer taking ownership of the facility for up to 15 years thereby avoiding potential CERCLA liability.

The bankruptcy court approved this agreement in July 1988, but declined to approve an initial agreement between the bank and the trustee allocating approximately 80 percent of the proceeds from the option sale to the bank and 20 percent to the trustee. The United States objected to this arrangement because it had a competing claim to the sale proceeds under § 506(c) of the Bankruptcy Code, 11 U.S.C. § 506(c) (1988), as an administrative claimant preserving the value of collateral in which secured creditors had an interest.

Negotiations to resolve the conflicting claims began between the trustee, Freedom Savings, the United States and the Pennsylvania Department of Environmental Resources. The bank, experiencing the kind of misfortune that all of the parties associated with this real property albatross had suffered, went into receivership in July 1987. The Resolution Trust Corporation became Freedom Saving's conservator in February 1989 and became its receiver when the bank was declared insolvent on October 13, 1989. Resolution Trust, standing in the bank's shoes, then joined in the negotiations regarding the option sale proceeds.

In August 1990 the parties reached a settlement agreement that the district court eventually approved. The agreement apportions the option sale proceeds as follows: (1) the United States is to receive $693,000 on behalf of the EPA in exchange for a covenant that it will not sue Freedom Bank and the various banking agencies The settlement agreement further protects the bank and its federal regulatory agencies against contribution claims that may be brought by potentially liable defendants in the CERCLA cost recovery action. The parties expressly conditioned the covenant not to sue on the truthfulness of certain representations made by the bank and regulatory agency regarding the extent of the bank's activities while it was in control of the site, particularly its representation that it did not manage the site and took only limited actions in monitoring and safeguarding it.

including Resolution Trust, under CERCLA § 9607(a)(2) for cleanup costs incurred at the Publicker site and will mark "settled" its § 506(c) claim; (2) Freedom Savings will receive $693,000, settling its claim under 11 U.S.C. § 502 (1988) concerning its secured interest and mortgage with Overland; (3) the Pennsylvania Department of Environmental Resources will receive $40,000 for costs it incurred at the Publicker site cleanup; (4) the National Oceanographic and Atmospheric Administration and the Department of the Interior will collectively receive $40,000 and agree to release Freedom Savings and its receiver from liability for natural resource damages; (5) the trustee will receive $110,000 covering the bankrupt estate's § 506(c) claim and other administrative costs; and ...

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