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In re Penn Central Transportation Co.

decided: April 27, 1973.

IN THE MATTER OF PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR BETHLEHEM STEEL CORPORATION, A DELAWARE CORPORATION APPELLANT IN NO. 72-1292 REPUBLIC STEEL CORPORATION, CLEVELAND, OHIO APPELLANT IN NO. 72-1293 BLUEBIRD FOOD PRODUCTS COMPANY, APPELLANT IN NO. 72-1294 HARRY R. DEFLER CORPORATION APPELLANT IN NO. 72-1305 UNITED STATES STEEL CORPORATION, APPELLANT IN NO. 72-1306 THOMAS J. HOLT CO., INC., APPELLANT IN NO. 72-1307 MILLER LUMBER CO., INC., MONTROSS, VIRGINIA APPELLANT IN NO. 72-1308


(D.C. No. B-70-347 In Bankruptcy). APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Seitz, Chief Judge, Aldisert, Circuit Judge and Lacey, District Judge.

Author: Seitz

Opinion OF THE COURT

SEITZ, Chief Judge.

The basic issue presented on this appeal is whether a reorganization court in a Chapter § 77 proceeding has summary jurisdiction to enjoin a non-judicial set-off of claims for goods, services, and shipping losses and damages against freight charges, where such set-offs were effected prior to the Debtor's filing for reorganization.

The dispute arises out of a petition filed by the railroad trustees. The petition requested the court to issue an order directing certain shippers, including appellants, to pay bills still outstanding for pre-reorganization freight services, i.e., for charges incurred prior to June 21, 1970. Appellants filed answers and briefs asserting the right of set-off against these charges; these set-offs involved claims on charges for supplies and freight loss and damage claims arising during the period prior to the commencement of the reorganization proceedings.*fn1 Appellants contend that the amount of these set-offs exceeded the amounts owed for freight charges.

Although an affidavit was filed by the trustees alleging the amounts due them, the hearing below focused relatively little upon the validity of these amounts. Rather, it consisted almost entirely of oral argument on whether the reorganization court's summary jurisdiction as to these claims was defeated by the presence of appellant shippers' competing claims. After hearing argument on this latter point, the court determined it had summary jurisdiction and entered an order enjoining any set-off by appellants against monies owed by them for pre-reorganization freight charges. However, it deferred ruling on the amount of those charges still outstanding. This appeal followed.

Two conclusions were basic to the court's determination that it had summary jurisdiction over this controversy. First, it concluded that a regulated carrier's freight charges constitute a chose in action. Secondly, it concluded that under §§ 3(1) and 6(7) of the Interstate Commerce Act [49 U.S.C. §§ 3(1) & 6(7) (1971)], a shipper's claims against the carrier are not a defense to the carrier's claim for freight charges due. Therefore, since appellant shippers did not assert colorable adverse claims to the Debtor's choses in action, the court determined that it had the right to exercise summary jurisdiction with respect to the carrier's claims for freight charges.

The court's determination was based upon the holding of this circuit in Matter of Penn Central Transportation Company, 453 F.2d 520 (1972).*fn2 There we held that where there is no bona fide dispute concerning the Debtor's right in a chose in action at the time reorganization proceedings are instituted, the reorganization court can exercise summary jurisdiction under the statute with respect to the enforcement of that chose. Therefore, assuming the freight charges owed can be conclusively established on remand, the issue for our resolution becomes whether the pre-reorganization set-offs effected by appellants in settlement of their claims created a bona fide dispute as to the Debtor's legal entitlement to the freight charges previous to the filing of the reorganization petition.*fn3

Under the Interstate Commerce Act, freight charges incurred pursuant to a filed tariff are accorded a legally superior status: that of a law. The only defense which can be raised to a carrier's suit for these legal charges is that the services have been paid for, that the services were not rendered, that the services were charged under an inapplicable tariff schedule, or that the rates were unreasonable.

The purpose of this limitation on defenses to an action by a carrier was to prevent secret kickbacks and preferences between large shippers and carriers. Thus, a set-off for damages incurred in shipment is not considered a defense since the potential for effecting preferences under such a guise seemed manifest. Similarly, a shipper and carrier cannot make provision for the supplying of goods and/or services in exchange for carriage. See, e.g., Northeast Airlines v. CAB, 345 F.2d 662 (1st Cir. 1965). Complementing this statutory scheme was a provision mandating that freight was not to be delivered until paid for in order to prevent the giving of preferences through the extension of credit. 49 U.S.C. § 2 (1971). Present Interstate Commerce Commission regulations in fact require a carrier to institute suit promptly if payment for freight charges is not made within ten days. Therefore, freight tariffs are accorded a special legal status which make inapplicable analogy to normal rules of commercial law.

Appellants rely principally upon the Supreme Court's opinion in Chicago & N.W. Ry. v. Lindell, 281 U.S. 14, 74 L. Ed. 670, 50 S. Ct. 200 (1930). There, as here, a carrier sued to collect freight charges; the shipper counterclaimed, asserting a loss due to the carrier's failure to perform under the shipping contract. The Court allowed the counterclaim to be asserted against the carrier in the same action, stating:

The adjudication in one suit of the respective claims of plaintiff and defendant is the practical equivalent of charging a judgment obtained in one action against that secured in another. Neither is to be distinguished from payment in money.

281 U.S. at 17. The Court justified its position as not being in contravention of the Interstate Commerce Act by concluding that it would be a matter of judicial economy to allow the suit: having both parties before the court, it would be most economical to have the court adjudicate the various controversies between those parties in one proceeding. The court would serve to ensure that in fact such suits were ...


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