Southern Ry. Co. v. Johnson Bronze Co.
| Decision Date | 02 April 1985 |
| Docket Number | 84-3317 and 84-3318,No. 84-3317,No. 84-3280,Nos. 84-3280,84-3280,84-3317,s. 84-3280 |
| Citation | 758 F.2d 137 |
| Parties | , 12 Collier Bankr.Cas.2d 762, Bankr. L. Rep. P 70,352 SOUTHERN RAILWAY COMPANY v. JOHNSON BRONZE COMPANY, Debtor. South Carolina Department of Health and Environmental Control and Perry Machinery Corporation. Appeal of JOHNSON BRONZE COMPANY,Appeal of PERRY MACHINERY CORPORATION,In re JOHNSON BRONZE COMPANY, Debtor, Southern Railway Company, Plaintiff. JOHNSON BRONZE COMPANY, South Carolina Department of Health and Environmental Control, Perry Machinery Company, Defendants, v. The COMMITTEE OF UNSECURED CREDITORS, Intervenor. Appeal of The COMMITTEE OF UNSECURED CREDITORS OF the JOHNSON BRONZE COMPANY. |
| Court | U.S. Court of Appeals — Third Circuit |
Burt DeRieux, Eileen M. Crowley (argued), David M. Holliday, Greene, Buckley, DeRieux & Jones, Atlanta, Ga., for Southern Ry. Co.
Robert G. Sable (argued), F. Scott Gray, Lampl, Sable & Makoroff, Pittsburgh, Pa., for Johnson Bronze Co.
William H. Schorling, James A. Bollenbacher, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pa., for the Committee of Unsecured Creditors.
Jay G. Ochroch, Leonard P. Goldberger (argued) Fox, Rothschild, O'Brien & Frankel, Philadelphia, Pa., for Perry Machinery Corp.
Before GIBBONS, Circuit Judge, and FULLAM and SCHWARTZ, District Judges *.
This appeal arises out of an adversary proceeding in the bankruptcy court. Southern Railway Company (Southern) commenced that proceeding by seeking a declaratory judgment that the debtor, Johnson Bronze Co., (Johnson) and the debtor's successor in title, Perry Machinery Corp. (Perry) are jointly and severally liable for the cost of cleanup of a drainage ditch on Southern's property containing sludge generated by the debtor's pre-petition manufacturing operations. Perry cross-claimed against the debtor, not only for any liability it might have for the cost of cleanup of the drainage ditch, but also for the cost of removing the sludge from the plant site acquired from the debtor. Perry also filed a claim for administrative priority for the money it expended in cleaning the site. The bankruptcy court held that Southern had a lien against the proceeds of sale of the plant site for the cost of cleaning the ditch on Southern's property; that Perry was not liable to Southern for the cost of cleanup of the ditch, and that Perry had no claim, administrative or otherwise, against the debtor's estate for the cost of cleanup of the plant site. The debtor and the Committee of Unsecured Creditors, an intervenor, appealed to the district court from the order imposing a lien in favor of Southern. Perry appealed to the district court from the order denying its claim. The district court affirmed, and the same parties appealed to this court. We reverse the order imposing a lien in favor of Southern, and affirm the order denying Perry's claim against the debtor's estate.
Johnson, a bearing manufacturer, prior to filing its Chapter 11 petition, operated plants in New Castle, Pennsylvania and Summerville, South Carolina. The Summerville plant was occupied by Johnson as sublessee under a long-term revenue bond lease from Dorchester County, South Carolina to Desley Fabrics, Inc. which assigned its rights under the lease to PRF Corporation, Johnson's sublessor. In order to operate the Summerville plant, Johnson, as assignee from the previous tenant, acquired a license from Southern to dispose of sewage in a drainage ditch on Southern's adjacent right-of-way. That ditch flows downstream to Rumph's Hill Creek, which empties into the Ashley River. Discharge into the river, and hence into the ditch, is governed by the South Carolina Pollution Control Act, S.C.Code Ann. Sec. 44-56-10 et seq. (Law. Co-op 1976), and the South Carolina Hazardous Waste Management Act, id. Sec. 44-56-10 et seq. The license requires that Johnson maintain the ditch, restore it to its original condition, and indemnify Southern for any liability arising from its use.
In the course of its manufacturing operation, Johnson generated hazardous industrial wastes, some of which were separated from its waste stream in a settlement pond, and stored on the leasehold premises. Some of the waste was discharged into Southern's drainage ditch. In April, 1980 the South Carolina Department of Health and Environmental Control (SCDHEC) held a show cause conference with Johnson, which led to a consent order for the cleanup of Johnson's environmental violations. Before that order was complied with, however, Johnson ceased operations at the Summerville plant, and on August 19, 1980 filed a voluntary Chapter 11 petition.
On January 13, 1981 Johnson, as debtor in possession, sought the bankruptcy court's permission to sell its interest in the Summerville plant and equipment, as well as certain equipment in Pennsylvania, in a private sale to Perry, a company engaged in the business of liquidating industrial plants. Notice of the sale was given to secured creditors and to the Committee of Unsecured Creditors. No notice was given to PRF Corporation, Southern, or SCDHEC. Johnson apparently did not inform the bankruptcy court of the environmental violations or of SCDHEC's interest in abating them.
Before Perry made its offer to purchase the Summerville plant, a Perry representative, James Strickler, inspected the site. He was allowed unlimited access to the entire facility. At the time of his inspection there were green and white sludge piles measuring 6 feet by 20 feet on the leasehold, and the settlement pond was green and white in color from the waste.
The sale to Perry for almost $2,000,000 was confirmed by order dated January 21, 1981. Perry was to obtain an assignment of Johnson's sublease. When PRF, the sublessor, learned of the proposed assignment, it sought to have the transaction set aside as it was affected without the sublessor's approval. As a result of negotiations, it was agreed that Perry would assume all the rights and liabilities of Johnson under the revenue bond lease, and that Perry would cause the waste material stored on the leasehold to be removed at no cost to PRF. No reference was made in this agreement to the waste in Southern's ditch. The court approved the PRF-Johnson-Perry arrangement on June 16, 1981. Meanwhile, on February 21, 1981, Joel Cooper, the President of Johnson, wrote to Perry that Johnson would assume full responsibility for the cost of removing the sludge. This letter was sent without approval of the bankruptcy court, and no such undertaking was included in the arrangement approved by that court on June 16, 1981. The assignment of the sublease was executed on March 17, 1981.
By the time of the June 16, 1981 approval of the PRF-Johnson-Perry arrangement SCDHEC had commenced administrative enforcement proceedings against Perry and Southern. Perry removed the sludge from the leasehold premises at a cost of $129,444.08. Southern filed in the bankruptcy court the petition for a declaratory judgment which resulted in these appeals. 1
It is not disputed that Johnson undertook, in the license agreement which permitted it to use the ditch, to indemnify Southern, and thus that Southern is at least a general unsecured creditor for the cost of the cleanup. Southern seeks, however, to impose the cost of cleanup of its drainage ditch either upon Perry, or by way of an administrative priority, upon Johnson.
While Johnson, in the course of the sale to Perry, assigned the sublease from PRF Corporation to Perry, it did not assign the drainage license, and Perry, therefore, assumed no obligations with respect to that license. The bankruptcy court credited the testimony of Perry's agent that when he visited the site he did not see any evidence of the ditch. Thus, there is no basis on which any express or implied contractual obligation running from Perry to Southern could be found. Perry's interest in the leasehold might be subject to a lien securing the indemnity agreement had its predecessor so burdened the property, but the indemnity agreement in the license did not so provide. Moreover, Southern has not referred us to any South Carolina law which would impose a lien on the leasehold in its favor. Thus the bankruptcy court properly held that Southern has no claim against Perry.
The bankruptcy court held that despite Southern's unsecured status, it would be granted a lien against the proceeds of the Johnson-Perry sale for the cost of cleaning its ditch. In reaching this result the bankruptcy court relied upon its equity powers under section 105(a) of the Bankruptcy Code, which provides that "[t]he bankruptcy court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. Sec. 105(a) (1982). It found an "equity" in Southern's favor in that Southern had not received notice of the intended sale to Perry, and thus had lost the opportunity to object to that sale prior to its consummation. Rather than set the sale aside, the court took what it regarded as the "less dislocat[ing]" step of imposing a lien on the proceeds. App. 83.
We conclude that the notice which preceded the sale to Perry was legally sufficient. The debtor in possession had the powers of a trustee. 11 U.S.C. Sec. 1107(a) (1982). Thus it, had the power to sell estate property other than in the ordinary course of business after "notice and a hearing". Id. Sec. 363(b). Section 102(1) provides:
(1) "[A]fter notice and a hearing", or a similar phrase--
(A) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances....
Id. Sec. 102(1)(A). Bankruptcy Rule 2002(i) provides that when property is to be sold other than in the ordinary...
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