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In re Shulman Transport Enterprises Inc.

September 18, 1984


Pan American World Airways, Inc. appeals from an order of the United States District Court for the Southern District of New York, (Duffy, J.), affirming an order of the bankruptcy court which dismissed appellant's action for a judgment declaring that certain accounts receivable of defendant-debtors, Shulman Transport Enterprises, Inc. and Shulman Air Freight, Inc., were the property of the appellant and other air carriers similarly situated and were not included in a security interest in the debtors' assets granted to defendant-appellee, Continental Bank.

Oakes, Van Graafeiland and Pierce, Circuit Judges.

Author: Van Graafeiland


Pan American World Airways, Inc. (Pan Am) appeals from an order of the United States District Court for the Southern District of New York (Duffy, J.) affirming a bankruptcy court order which rejected Pan Am's claim of an interest superior to that of Continental Bank in monies collected by Shulman Transport Enterprises, Inc. for air freight transportation. For the reasons that follow, we affirm.

Shulman Air Freight, Inc. is a subsidiary of Shulman Transport Enterprises, Inc. of Cherry Hill, New Jersey. On August 2, 1978, both companies (hereinafter "Shulman") filed petitions for a chapter 11 bankruptcy arrangement. Shulman was an international freight forwarder, receiving freight from its customers and arranging shipment with air carriers such as Pan Am. Shulman either consolidated small shipments and forwarded them under its own name or arranged for shipment under the customer's name when consolidation proved unfeasible. In cases of unconsolidated shipments, Shulman prepared the paperwork, including air waybills, and arranged for transportation by various air carriers, all of whom were members of a trade association, International Air Transport Association (IATA). In return for its services, Shulman received a commission out of the carrier rate that it charged the shipper. The debts that are the subject of this dispute relate to the unconsolidated shipments that Shulman arranged through Pan Am.

Defendant-appellee, Continental Bank, had financed Shulman's pre-petition operations, in connection with which it was given a security interest in all of Shulman's assets. On August 2 and 16, 1978, the bankruptcy court issued orders authorizing Shulman, as debtor-in-possession, to continue to borrow from Continental and to give the bank a security interest in Shulman's assets, including the accounts receivable for unconsolidated freight forwarding services. Appropriate filings were made pursuant to the Uniform Commercial Code.

On August 23, 1978, Pan Am, on behalf of itself and other IATA members who had provided air freight services to Shulman, initiated the proceeding giving rise to this appeal. Pan Am argues that, under the agreement between IATA and Shulman, all monies received by Shulman from the sale of air cargo freight services were the carriers' property and therefore could not be included in the security interests that Shulman conveyed to Continental. The airline also moved for an order certifying the proceeding against Shulman as a class action. After issue was joined, Pan Am moved for summary judgment, claiming that no triable issue of fact was raised by the answers of the opposing parties.

The bankruptcy court denied Pan Am's motions for class certification and summary judgment, directing instead that summary judgment be granted in favor of Continental. The district court affirmed, and this appeal followed.

Pan Am contends that the IATA agreement created an agency relationship between Shulman and IATA members and that, under established law and the express terms of the agreement, all monies collected by Shulman for the transportation it sold became the property of the transporting carrier. The "Cargo Agency Agreement" under which Shulman operated did indeed describe Shulman as the agent of the IATA members. However, the district court was not bound by that terminology. Even though a person is termed an agent, he may, in fact, act as such in some matters but not in others. Patrick v. Miss New Mexico-USA Universe Pageant, 490 F. Supp. 833, 839 (W.D. Tex. 1980).

Moreover, where the public interests or the rights of third parties are involved, the relationship between contracting parties must be determined by its real character rather than by the form and color that the parties have given it. Quackenbos v. Sayer, 62 N.Y. 344, 346 (1875). A usurious loan is not made lawful by falsely terming it a sale, id., or a corporate obligation, Topping v. Trade Bank of New York, 86 F.2d 116, 117-18 (2d Cir. 1936). An investment in a partnership is not transformed into a loan by a disclaimer that a partnership relationship exists. Rubenstein v. Small, 273 A.D. 102, 104, 75 N.Y.S.2d 483 (1st Dept. 1947). An employee does not become an independent contractor simply because a contract describes him as such. Northern v. McGraw-Edison Co., 542 F.2d 1336, 1343 n.7 (8th Cir. 1976), cert. denied, 429 U.S. 1097, 51 L. Ed. 2d 544, 97 S. Ct. 1115 (1977). A debtor does not become the agent of his creditor simply because he is called an agent. Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346, 354, 66 L. Ed. 653, 42 S. Ct. 360 (1922).

Where the relative rights of a bankrupt's creditors are at issue, it is particularly important that substance not give way to form. Pepper v. Litton, 308 U.S. 295, 304-05, 84 L. Ed. 281, 60 S. Ct. 238 (1939); In re Morales Travel Agency, 667 F.2d 1069, 1072 (1st Cir. 1981). The district court, therefore, correctly examined into the substance of the relationship between Shulman and the carriers to ascertain whether the money that Shulman collected was held by it in the fiduciary capacity of an agent. Furthermore, the district court did not err in holding that the money was not so held.

"Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." Restatement (Second) of Agency § 1(1)(1958); Nelson v. Serwold, 687 F.2d 278, 282 (9th Cir. 1982). An essential characteristic of an agency relationship is that the agent acts subject to the principal's direction and control. Restatement (Second) of Agency, supra, § 1(1) comment b, § 14. Absent the critical element of control by Pan Am over Shulman's collection and handling of funds, Shulman cannot be said to have acted as Pan Am's agent for receipt of transportation charges.*fn1 See Farrell Lines Inc. v. Titan Industrial Corp., 306 F. Supp. 1348, 1350 (S.D.N.Y.), aff'd on opinion below, 419 F.2d 835 (2d Cir. 1969), cert. denied, 397 U.S. 1042 , 90 S. Ct. 1365, 25 L. Ed. 2d 653 ( 1970); In re Morales, supra, 667 F.2d at 1071.

There was no provision in the IATA agreement requiring Shulman to segregate from its general funds monies collected for the carriers' services or restricting the use of those monies. Shulman apparently was free to use the funds for its own benefit rather than that of the carriers. Although the absence of a segregation provision and even the actual commingling of funds are not conclusive indications that the relationship between Shulman and Pan Am was that of a debtor and creditor, see In re Warner-Quinlan Co., 86 F.2d 103, 104 (2d Cir. 1936), the apparent lack of concern on the part of the carriers about how Shulman handled the monies it collected indicates that, in this respect at least, Shulman was not subject to the carriers' direction and control.

Similarly, Pan Am's admitted lack of knowledge and apparent unconcern about whether and on what terms Shulman extended credit to shippers indicate that Pan Am did not intent that, as to those matters, Shulman be subject to its direction and control. Ordinarily, an agent who sells goods or services on behalf of his principal cannot extend credit without the principal's authorization, nor can that agent initiate legal action to collect a debt owed its principal unless authorized to do so. See Restatement (Second) of Agency § 65(1), § 424 comment c, § 426 comment c. The IATA agreement did not give Shulman permission to do either of these things. Yet, ...

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