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In re Roll Form Products Inc.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT


October 16, 1981

IN RE: ROLL FORM PRODUCTS, INC., DEBTOR ; ROLL FORM PRODUCTS, INC., PLAINTIFF-APPELLANT ,
v.
ALL STATE TRUCKING COMPANY, NEWMAN BROS. TRUCKING COMPANY, BALTIMORE & OHIO RAILROAD COMPANY, DAVID GRAHAM COMPANY, HALL'S MOTOR TRANSIT CO., MAWSON & MAWSON, INC., AND YOUNGSTOWN CARTAGE COMPANY, DEFENDANTS-APPELLEES .

Appeal from an order of the United States Bankruptcy Court for the Southern District of New York, Lewittes, J., denying plaintiff's motion for a preliminary injunction and dismissing plaintiff's adversary suit which sought a permanent injunction to enjoin defendants' collection of various freight charges and to recover charges already collected. Reversed and remanded.

Author: Meskill

Before: OAKES and MESKILL, Circuit Judges, and BLUMENFELD, District Judge .*fn*

MESKILL, Circuit Judge :

Roll Form Products, Inc., a Chapter XI debtor, appeals from an order of the United States Bankruptcy Court for the Southern District of New York, Lewittes, J.,*fn1 denying its motion for preliminary relief and dismissing its suit to enjoin defendants, interstate carriers, from collecting shipping charges from Roll Form's customers and to compel repayment of charges already collected. The bankruptcy court's decision was premised upon the applicability of the Interstate Commerce Act to this case. Because we conclude that the Act has no bearing upon the issues presented, we reverse and remand .

Background

The present case arises from Roll Form's activities as a manufacturer of fabricated steel products. As a business procedure, Roll Form would bill its customer-consignees in advance for freight costs and in turn contract with carriers to transport the purchased goods. All shipping orders and bills of lading introduced into evidence were accordingly marked "prepaid" as to shipping charges. Furthermore, as part of this arrangement, the carriers extended credit to Roll Form for the freight charges, allowing monthly payment. The record does not indicate whether this arrangement was established contractually or informally for the convenience of the parties, and the issue was never determined by the bankruptcy court. However, since we are reviewing a dismissal on the pleadings, we must accept as true the material facts alleged by Roll Form. Hospital Building Co. v. Trustees of Rex Hospital, 425 U.S. 738, 740 (1976). We therefore proceed upon the assumption that all parties to this action were contractually bound to an arrangement which provided for the customer-consignees to pay freight charges exclusively to Roll Form, and for the carriers to look solely to Roll Form for payment.

Roll Form was beset by financial difficulties in the late 1970s and filed a petition for reorganization under Chapter XI of the former Bankruptcy Act, 11 U.S.C. §§ 701 et seq ., on August 1, 1979.*fn2 At that time, Roll Form owed over $48,000 of freight charges. Soon thereafter, most of the defendants, carriers hich had delivered goods to Roll Form's customers, filed claims for unpaid freight charges with the bankruptcy court. Unsatisfied with the prospects for full recovery from those proceedings, however, the carriers attempted to, and in many instances did, recover charges directly from the customers. As a result freight charges were withheld from Roll Form's estate.

Roll Form, believing that the carriers were depriving the bankruptcy estate of the freight charges, and fearing that the collection activities would have a devastating effect upon future business relations with the badgered customers, commenced the present proceeding by order to show cause on December 11, 1980. Roll Form secured a temporary restraining order to enjoin further collections by the defendants pending a hearing on its motion for a preliminary injunction, and filed a complaint in an adversary suit seeking a permanent injunction as well as recovery of amounts already collected by defendants.*fn3

The 1980s, however, fared no better for Roll Form. The bankruptcy judge not only denied the preliminary injunction, but also determined that Roll Form's complaint was "so clearly insufficient" that he consolidated the adversary suit with the motion for preliminary relief, dismissing the entire proceeding without prior notice or hearing. 8 B.R. 479, 485 (S.D.N.Y. 1981) (Bankruptcy Court).

In considering Roll Form's request for preliminary relief, Judge Lewittes found that neither irreparable harm had been shown nor a substantive claim alleged. Roll Form had argued that defendants' "harassment" of its customers for payment of freight charges would impair future business relationships. Judge Lewittes held, however, that the evidence at the preliminary hearing had shown that only two customer-consignees had threatened to sever business dealings with Roll Form as a result of defendants' collection activities. He therefore concluded that the claims of irreparable injury were "speculative." 8 B.R. at 482.

In considering the substance of the complaint, Judge Lewittes found even less merit, holding that defendants' activities were simply not, as Roll Form contended, unlawful. Roll Form's entire action was premised upon the assumption that, by contract, the freight charges being pursued by defendants were exclusively owed to Roll Form's estate and were thus protected by the automatic stay provisions of the Bankruptcy Act.*fn4 Judge Lewittes concluded, however, that section 10744 of the Interstate Commerce Act, 49 U.S.C. § 10744 (Supp. III 1979), renders a consignee independently liable to a carrier for freight charges upon his acceptance of the delivery of goods and that Roll Form's property was therefore not implicated in the collection activities. 8 B.R. at 483.

Since Judge Lewittes' legal analysis precluded any possibility of relief for Roll Form, he consolidated the underlying adversary suit with the preliminary hearing, dismissing the entire proceeding without availing the parties of either notice or an opportunity for further hearing. In dismissing the adversary suit, Judge Lewittes observed that such a sua sponte consolidation would constitute reversible error "unless the affected party fails to demonstrate surprise or prejudice occasioned by the consolidation." 8 B.R. at 485 (footnote omitted). However, he concluded,

Here, although no notice of consolidation has been ordered, because the instant complaint is, as noted above, so clearly insufficient and "entirely destitute of equity", dismissal, on the merits, of the underlying adversary proceeding is proper.

Id . (footnote omitted). From that dismissal, Roll Form appeals.

Discussion

On this appeal, Roll Form seeks reversal on several grounds. First, Roll Form asserts that Judge Lewittes erred in finding that the customer-consignees were independently liable to the carriers for freight charges under the Interstate Commerce Act. Roll Form also contends that the carriers, in view of their participation in the prepayment procedure, should be estopped from collecting freight charges directly from the customer-consignees. Finally, Roll Form argues that Judge Lewittes' consolidation of the motion for a preliminary injunction with the adversary suit without notice or an opportunity for hearing constituted a denial of due process. Since we agree with Roll Form's first contention, we find it unnecessary to resolve the latter considerations.

Judge Lewittes based his holding that the customer-consignees owed an independent liability for freight charges to the carriers upon section 10744 of the Interstate Commerce Act, supra . That section, and the prior sections which it codifies,*fn5 were designed to insure that uniform rates would apply to all interstate shipments of like character. To that end, the section as a general rule renders "the consignee... prima facie liable for the payment of the freight charges when he accepts the goods from the carrier." Pittsburgh, Cincinnati, Chicago & St. Louis Railway Co. v. Fink, 250 U.S. 577, 581 (1919). Judge Lewittes found that this statutory basis for liability is independent of any debts which the customer-consignees may owe the consignor and therefore that the carriers were pursuing charges owed directly to themselves. As a result, Judge Lewittes concluded that Roll Form's property had not been implicated in the collection activities.

The principal purpose of section 10744 as well as the entire Interstate Commerce Act unquestionably was to eliminate all forms of rate discrimination on interstate shipments. Id.; Southern Pacific Transportation Co. v. Campbell Soup Co ., 455 F.2d 1219, 1220 (8th Cir. 1972). The Act, in our view, was not intended to "fashion a sword" to insure collection by carriers of freight charges. Nor do we think the Act was intended to impose an absolute liability upon consignees for freight charges. Its sole purpose was "to secure equality of rates to all and to destroy favoritism." In Re Penn-Dixie Steel Corp ., 6 B.R. 817, 820 (S.D.N.Y. 1980) (Bankruptcy Court), aff'd, 10 B.R. 878 (S.D.N.Y. 1981).Accordingly, in the absence of discriminatory practices, we agree with the Seventh Circuit that "Congress left the initial determination of a party's liability for freight charges to express contractual agreement or implication of law." Consolidated Freightways Corp. v. Admiral Corp ., 442 F.2d 56, 62 (7th Cir. 1971). Of course, where parties fail to agree, or where discriminatory practices are present, the Interstate Commerce Act will bind the consignee to pay freight charges to the carrier on goods he accepts, this obligation being independent of the consignor's own obligations.

We find no evidence in the record, nor has there been any allegation that the procedures employed in this case for payment of freight charges were discriminatory. Prepayment by Roll Form of shipping charges was a perfectly acceptable means of conducting business under the Interstate Commerce Act. Moreover, the extension of credit by the carriers to Roll Form for payment of these charges is expressly sanctioned by 49 C.F.R. § 1320 (1980).

That Roll Form has subsequently sought Chapter XI relief, we think, does not in itself activate the provisions of the Interstate Commerce Act. As the bankruptcy court recently stated in Penn-Dixie, a case which similarly involved a carrier's collection of "prepaid" freight charges from consignees,

The fact that Penn-Dixie is now in a Chapter 11 reorganization changes nothing.As pointed out earlier, the ICA does not insure collection in every instance. The possibility that under the scheme of bankruptcy reorganization, Penn-Dixie may be able to satisfy its indebtedness to [the carrier] by paying a lesser amount is simply not violative of the ICA's policy and purpose.Surely, any deficiency incurred by [the carrier] because of the bankruptcy law's important and cornerstone policy of equality of distribution... is not discriminatory in any sense of the word as used in, and comprehended by, the ICA. "The rights and duties created by the Interstate Commerce Act are for the protection of the public against secret rebates and discriminations rather than for the enrichment of the carrier." 13 C.J.S. Carriers § 393.

6 B.R. at 821-22.*fn6 In affirming Penn-Dixie, the United States District Court for the Southern District of New York observed, "[a]pplying hindsight, the credit to Penn-Dixie proved a poor choice given the unanticipated intervening insolvency proceeding." 10 B.R. at 879. Similarly, the carriers in this case gambled that Roll Form's credit would remain unimpaired. We do not believe that the carriers, having lost this gamble, should now be permitted to avail themselves of the Interstate Commerce Act, which seeks only to insure uniform tariffs for all shipments of like character, see Fink, 250 U.S. at 581, as a collection device.*fn7

We therefore hold that, in the absence of discriminatory practices, the parties in this action were free to allocate freight charges by contract as they wished unaffected by section 10744 of the Interstate Commerce Act. In view of the bankruptcy court's interpretation of the legal issues in this case it never reached the question of whether the prepayment arrangement had been established informally for the convenience of the parties or by definitive contract. Neither is the answer clear to us from the record. We therefore remand to the bankruptcy court for a determination of the parties' contractual obligations concerning the freight charges.*fn8

Reversed and remanded.

OAKES, Circuit Judge (concurring).

I concur in the result.


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