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Southern Railway Co. v. Johnson Bronze Co.

April 2, 1985

SOUTHERN RAILWAY COMPANY
v.
JOHNSON BRONZE COMPANY, DEBTOR, SOUTH CAROLINA DEPARTMENT OF HEALTH AND ENVIRONMENTAL CONTROL AND PERRY MACHINERY CORPORATION. JOHNSON BRONZE COMPANY, APPELLANT IN NO. 84-3280. PERRY MACHINERY CORPORATION, APPELLANT IN NO. 84-3317 (D.C. CIVIL NOS. 84-1053 AND 84-0118); 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. THE COMMITTEE OF UNSECURED CREDITORS OF THE JOHNSON BRONZE COMPANY, APPELLANT



(D.C. Civil No. 84-221) On Appeal from the United States District Court for the Western District of Pennsylvania.

Gibbons, Circuit Judge, and Fullam*fn* and Schwartz,*fn** District Judges.

Author: Gibbons

Opinion OF THE COURT

GIBBONS, Circuit Judge:

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.

I.

Factual Background

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 Caroline 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. § 44-56-10 et seq. (Law. Co-op 1976), and the South Carolina Hazardous Waste Management Act. id. § 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 effected 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 ...


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