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MNC Commercial Corp. v. Ryerson

decided: July 11, 1989.


Appeal from a decision of the United States District Court for the Western District of New York (John T. Elfvin, Judge). Plaintiff is the holder of a security interest in the accounts receivable of Ramco, Inc., a corporation now in liquidation pursuant to the Bankruptcy Code. Defendant, a debtor of Ramco, claims a setoff right by virtue of monies owed by Ramco to its parent corporation. The district court granted summary judgment to plaintiff. Because a perfected security interest has priority over a subsequently arising setoff under New York law, we affirm.

Newman, Cardamone and Winter, Circuit Judges.

Author: Winter


WINTER, Circuit Judge:

This is a diversity action brought after the lifting of the automatic stay provided by the Bankruptcy Code, 11 U.S.C. § 362 (1982) ("the Code"). The bankrupt entity is Ramco, Inc. ("Ramco"), a steel processing concern which first filed for reorganization under Chapter 11 of the Code and thereafter moved to convert to a Chapter 7 liquidation. The plaintiff-appellee is MNC Commercial Corporation ("MNC"), which holds a perfected security interest in the inventory and accounts receivable of Ramco. The defendant-appellant is Joseph T. Ryerson & Son, Incorporated ("Ryerson"), which owes over $300,000 to Ramco. Ryerson is a wholly-owned subsidiary of Inland Steel Co. ("Inland").

After the automatic stay was lifted, MNC, as the assignee of Ramco's accounts receivable, sued Ryerson in the Western District of New York to recover the amount owed by Ryerson to Ramco. Ryerson claimed in response the right to set off against its obligations monies owed by Ramco to Inland. Ryerson also claimed that MNC improperly disposed of Ramco's inventory after foreclosure. Judge Elfvin granted summary judgment to MNC on the basis of both state law and bankruptcy law. Although we fail to see the relevance of federal bankruptcy law to this diversity proceeding, we affirm.


This case involves a triangular commercial relationship in the steel industry during the period 1984-85. Inland, a domestic integrated steel producer, supplied Ramco, a steel processor, with hot rolled bar steel products. Ramco processed these into cold drawn steel products, which it then sold to Inland's wholly-owned subsidiary Ryerson. During the 1984-85 period, Inland's sales to Ramco amounted to about $5 million annually, and Ramco's sales to Ryerson amounted to several hundred thousand dollars monthly.

Ramco and Ryerson never executed a comprehensive contract to govern their ongoing commercial relationship. Instead, they negotiated a standing price from time to time. Ryerson would transmit individual orders either by telephone or by sending an order form. Ramco, for its part, acknowledged Ryerson's orders by sending its own order acknowledgment form. The terms of the order forms of the two parties varied. Under a heading entitled "SET-OFF," Ryerson's order forms reserved "the right to apply any monies to become due [Ramco] . . . toward the payment of any sums which [Ramco] . . . may now or hereafter owe to us or to our parent company, Inland Steel Company . . . ." Ramco's order acknowledgment forms, by contrast, made no reference to any setoff and declared that acceptance of its products was "expressly conditioned on . . . assent to the terms and conditions of sale" specified on Ramco's form. Neither party signed the other party's forms. Moreover, in a large number of transactions at issue in this case, order forms from one or both parties were not preserved.

In May 1984, Ramco was in need of funds and entered into a revolving financing arrangement with MNC. MNC provided Ramco with a revolving loan of approximately $7 million, secured by Ramco's inventory and accounts receivable. MNC duly perfected its security interest by filing financing statements with the New York Secretary of State and the Erie County Clerk. Ramco thereafter encountered further financial difficulties, and in June 1985 Inland placed Ramco's account on a cash basis. On July 15, 1985, Ryerson ceased paying its obligations to Ramco, and Inland's credit manager notified Ramco that Ryerson's obligations to Ramco would be held as an offset or "contra" to the over $1.2 million that Ramco now owed Inland. Ramco nevertheless continued to ship steel to Ryerson. On October 11, 1985, Ramco filed for reorganization under Chapter 11. This filing triggered the Code's automatic stay of the enforcement of creditors' rights against Ramco. 11 U.S.C. § 362.

On October 30, Ryerson issued a check, payable to Ramco, in the amount of $304,497.29, the amount owed on unpaid invoices. Ryerson did not send the check to Ramco, however, but instead stamped it "cancelled" and paid the sum in question to Inland. Ryerson did not move for relief from the stay imposed by Section 362(a)(7) of the Code. That stay prevents the retention of funds as a "setoff of any debt owing to the debtor that arose before the commencement of the case" without leave of the bankruptcy court.

On November 14, 1985, on motion of the debtor, the bankruptcy court converted the case into a Chapter 7 liquidation proceeding. On December 26, 1985, the bankruptcy court lifted Section 362's automatic stay of the enforcement of creditors' rights against the bankrupt. The lifting of the stay was at the request of creditors, including MNC, on the grounds that the creditors were not adequately protected. The lifting was, however, subject to the creditors' accounting to the trustee for monies collected.

MNC then pursued two remedies. First, it seized and liquidated Ramco's inventory. Second, MNC pursued its security interest in Ramco's receivables and initiated the instant suit against Ryerson in the Western District of New York for $333,640.33 that it claimed was owed by Ryerson to Ramco. Jurisdiction was based on diversity of citizenship. The trustee in liquidation attempted to intervene, but Judge Elfvin declined to allow him to do so.

Ryerson responded with a number of counterclaims and affirmative defenses, asserting, inter alia, that the sum at issue had been properly set off against Ramco's debt to Inland and that MNC had not liquidated Ramco's inventory in a commercially reasonable manner. Both parties moved for summary judgment. For purposes of the motions, MNC agreed to limit its claim to $307,377.21, of which ...

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