In re Chateaugay Corp.

• Decision Date: 19 July 1991
• Docket Number: No. 90 Civ. 5623 (RWS).,90 Civ. 5623 (RWS).
• Citation: 130 BR 162
• Parties: In re CHATEAUGAY CORPORATION, Reomar, Inc., the LTV Corporation, et al., Debtors. SOUTH CHICAGO DISPOSAL, INC., Appellant, v. LTV STEEL COMPANY, INC., Appellee.
• Court: U.S. District Court — Southern District of New York

130 B.R. 162 (1991)

In re CHATEAUGAY CORPORATION, Reomar, Inc., the LTV Corporation, et al., Debtors.

SOUTH CHICAGO DISPOSAL, INC., Appellant, v. LTV STEEL COMPANY, INC., Appellee.

No. 90 Civ. 5623 (RWS).

United States District Court, S.D. New York.

July 19, 1991.

Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C., Chicago, Ill. (Sharon Swarsensky Bilow, of counsel), for appellant.

Kay, Scholer, Fierman, Hays & Handler (Michael J. Crames, Edmund M. Emrich, of counsel), Davis Polk & Wardwell, New York City, for appellee.

OPINION

SWEET, District Judge.

This is an appeal filed by South Chicago Disposal, Inc. ("South Chicago") from an order dated July 9, 1990 (the "Order") issued by the Honorable Burton R. Lifland, Chief Judge of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") denying a motion of South Chicago to compel LTV Steel Company, Inc. ("LTV Steel") to assume as an executory contract under § 365 of the Bankruptcy Code (the "Code") the contract between LTV Steel and South Chicago for the removal, transport and disposal of hazardous and non-hazardous waste (the "Motion"). The Order is affirmed.

Background

In 1983 the United States Environmental Protection Agency issues a clean-up order requiring LTV Steel to remove electric arc furnace dust from the land surrounding LTV Steel's Chicago plant. This dust, which is composed of lead oxide, and is a hazardous waste, had been generated by LTV Steel.

In order to comply with the EPA's clean-up order, LTV Steel, having inspected certain landfill facilities, in early 1986 awarded a contract to South Chicago to transport and dispose of the waste material by way of certain purchase orders (the "Purchase Orders"), an example of which is attached as an Appendix to this opinion. The only contracts between LTV Steel and South Chicago or the landfill owners are the Purchase Orders.

South Chicago performed the services called for under the Purchase Orders and delivered LTV Steel's waste to the two landfills, paying all charges in that connection. For all of its services under the contract with LTV Steel, South Chicago is owed $514,468.44.

This court has jurisdiction of the appeal pursuant to 28 U.S.C. § 158(a) which provides that the "district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees. . . ."

Proceedings Below

South Chicago filed its Motion with the Bankruptcy Court in May 1988, and after a hearing had been adjourned from time to time on consent of both parties, argument was heard on June 25, 1990. On July 9, the Bankruptcy Court issued the Order denying the Motion, holding, inter alia, that:

(i) the Purchase Orders are not storage contracts, but rather are contracts solely for the removal, transport and disposal of hazardous and non-hazardous waste (Order at ¶ 1; Tr. at 30, 31);

(ii) with the exception of LTV Steel\'s monetary obligation to pay South Chicago sums due pre-petition under the Purchase Orders, there are no material performance obligations remaining on the part of South Chicago or LTV Steel under the Purchase Orders (Order at ¶ 2; Tr. at 31);

(iii) the Purchase Orders are not executory contracts which can be assumed or rejected under § 365 of the Code (Order at ¶ 3; Tr. at 31);

(iv) even if the Purchase Orders were executory contracts, their assumption or rejection under § 365 of the Code would have no bearing whatsoever on the environmental liability or cleanup obligations of LTV Steel or South Chicago. Rather, such assumption or rejection would impact only the claim priority status of South Chicago in LTV Steel\'s chapter 11 case, i.e., whether South Chicago holds a pre-petition general unsecured claim which is to be paid under a plan of reorganization or a post-petition administrative priority claim which is to be paid in full at the present time (Order at ¶ 4; Tr. at 31, 32);

(v) even if the Purchase Orders were executory contracts, there is no legal basis upon which LTV Steel could be compelled to assume them under § 365(a) of the Code (Order at ¶ 6; Tr. at 32);

(vi) even if the Purchase Orders were executory contracts, the assumption or rejection thereof would be governed by the business judgment standard (Tr. at 31-32; see Tr. at 26-27); and

(vii) even if the Purchase Orders were executory contracts, it would not be in the best interests of LTV Steel\'s estate to assume them under § 365(a) of the Code (Order at ¶ 5; Tr. at 31).

This appeal was filed on July 11, 1990 and heard by agreement of the parties on April 5, 1991.

Standard of Review

The standard of review for a district court in an appeal of a bankruptcy court decision is set forth in Bankruptcy Rule 8013, which provides that the Bankruptcy Court's findings of fact should not be set aside unless they are found to be "clearly erroneous." In re Beker Industries Corp., 89 B.R. 336, 342 n. 5 (S.D.N.Y.1988); In re Allied Artists Pictures Corp., 71 B.R. 445, 448 (S.D.N.Y.1987); In re Johns-Manville Corp., 68 B.R. 155, 157-58 (S.D.N.Y.1986). Conclusions of law, however, are to be reviewed de novo. In re Beker Industries Corp., 89 B.R. at 342 n. 5; In re Allied Artists Pictures Corp., 71 B.R. at 448. The Contracts Between LTV Steel And South Chicago Are Not Executory

Section 365 authorizes a debtor in possession to assume or reject executory contracts or unexpired leases subject to court approval. The legislative history of this section states that "though there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 347 (1977), reprinted in, 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6303; accord, NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n. 6, 104 S.Ct. 1188, 1194 n. 6, 79 L.Ed.2d 482 (1984). One authority has commented that an executory contract is

a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.

Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973). A number of circuits have applied this definition. See, e.g., Counties Contracting & Construction Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1060 (3d Cir.1988); In re Speck, 798 F.2d 279, 279-80 (8th Cir.1986); In re Pacific Express, Inc., 780 F.2d 1482, 1487 (9th Cir. 1986); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, 756 F.2d 1043, 1045 (4th Cir.1985), cert. denied, 475 U.S. 1057, 106 S.Ct. 1285, 89 L.Ed.2d 592 (1986); In re Select-A-Seat Corp., 625 F.2d 290, 292 (9th Cir.1980); In re Jolly, 574 F.2d 349, 351 (6th Cir.), cert. denied, 439 U.S. 929, 99 S.Ct. 316, 58 L.Ed.2d 322 (1978) (applying "functional definition" of executory contract based upon underlying purpose of § 365 of enhancing debtor's estate).

Relying upon the continuing nature of the duties arising out of the disposition of waste materials, South Chicago has characterized the Purchase Orders as executory contracts for removal of the wastes and their storage, under which LTV Steel has retained title to the wastes, rather than as a contract for services which have been performed. In support of this argument, South Chicago cites 40 C.F.R. § 264.117, which provides for a continuing liability for thirty years after each hazardous management unit in the landfill is closed, and 40 C.F.R. § 264.73, which insures that the landfill owners can locate and identify the material disposed of by LTV Steel. It has analogized the Purchase Orders to a warehouse lease in which a landlord agrees to store the property of a debtor. It asserts that the Purchase Orders constitute a contract for the storage of the waste. Alternatively, it argues that there is at least a contract implied in fact. Therefore, the Purchase Orders are executory contracts and may be payable under § 365.

South Chicago has maintained that by paying the landfill storage charges it became subrogated to the rights of the landfills. Subrogation is said to apply because (1) the original claim or debt gave rise to an enforceable right by the subrogor i.e., the landfills); (2) the debt was paid in full by the subrogee (i.e., South Chicago); (3) the subrogee paid the debt for which a third party (i.e., LTV Steel) is primarily liable; (4) the subrogee is seeking to enforce the right which the subrogor has against the third party, citing American National Bank and Trust Company of Chicago v. Weyerhauser Co., 692 F.2d 455 (7th Cir. 1982); Medigroup, Inc. v. Schildknecht, 463 F.2d 525 (7th Cir.1972).

Whatever LTV Steel's statutory obligations and potential liability may be under applicable environmental laws, South Chicago has failed to establish that LTV Steel intended to bind itself to an ongoing hazardous waste storage agreement with either South Chicago or the landfill owners. In the absence of the requisite intent to be bound, there can be no finding of an implied-in-fact contract. Midcoast Aviation, Inc. v. General Electric Credit Corp., 907 F.2d 732, 743 (7th Cir.1990); see Overseas Development Disc Corp. v. Sangamo Construction Co., 840 F.2d 1319, 1330 (7th Cir.1988).

There is no contract between LTV Steel and the landfill owners, and thus South Chicago cannot be subrogated to the alleged waste storage obligations of the landfill owners.

It is axiomatic that for a right of subrogation to exist, the subrogor must possess a right which he could enforce against a third party. The subrogee can have no greater rights than the subrogor and can enforce only such rights as the subrogor could enforce against the third party.

Continental Casualty Co. v. Polk Brothers, Inc., 457 N.E.2d 1271, 120 Ill.App.3d 395, 75 Ill.Dec. 712 (1983). The sole contractual agreements between the parties are the Purchase Orders.

South...