Bratton v. Shiffrin, s. 77-2037

• Decision Date: 18 September 1978
• Docket Number: Nos. 77-2037,77-2023,s. 77-2037
• Citation: 585 F.2d 223
• Parties: Earl BRATTON et al., Plaintiffs-Appellants, v. Joel SHIFFRIN et al., Defendants-Appellees. Roger CHAPMAN and Jeanne Chapman, Individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. FIRST NATIONAL BANK OF HIGHLAND PARK, a National Banking Association, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 223

585 F.2d 223

Earl BRATTON et al., Plaintiffs-Appellants, v. Joel SHIFFRIN et al., Defendants-Appellees.

Roger CHAPMAN and Jeanne Chapman, Individually and on behalf

of all others similarly situated, Plaintiffs-Appellants, v. FIRST NATIONAL BANK OF HIGHLAND PARK, a National Banking

Association, Defendant-Appellee.

Nos. 77-2037, 77-2023.

United States Court of Appeals Seventh Circuit.

Argued April 19, 1978.

Decided Sept. 18, 1978.

Christopher A. Bloom, Thomas R. Meites, Chicago, Ill., for plaintiffs-appellants.

Martin W. Salzman, Chicago, Ill., for defendants-appellees.

Before SWYGERT, Circuit Judge, MOORE, Senior Circuit Judge, ^* and BAUER, Circuit Judge.

MOORE, Circuit Judge.

This appeal presents the question whether a private cause of action exists, either express or implied, under the Federal Aviation Act (FAA), 49 U.S.C. § 1301 Et seq., against a bank that allegedly violated regulations of the Civil Aeronautics Board (CAB) governing charter tour deposits, and the officer of the bank who was to personally handle deposited funds. Contrary to the district court, 440 F.Supp. 1257 (N.D.Ill.1977) (Grady, J.), we conclude that plaintiff-travelers, who have allegedly lost their prepayments for charter tours which, due to the insolvency of their organizer, never occurred, impliedly have a remedy for damages under section 1371(n)(2) of the FAA, 49 U.S.C. § 1371(n)(2).

I.

The two actions now before us were commenced by a group of persons ¹ consisting of individual travelers (and, in Bratton, some retail travel agencies) who made deposits and/or prepayments to reserve places on numerous charter tours to foreign and domestic locations. These tours were organized and marketed by Tour Travel Enterprises, Inc. (TTE), a wholesale tour operator, through, Inter alia, its affiliated retail travel agencies, Sunshine Travel Agency, Inc., and Sunshine Travel of Nevada, Inc., all of whom are defendants. The other defendants are Gerald Mann and Richard Tauber, owners and officers of the three travel companies. The defendant-appellees are First National Bank of Highland Park ( FNB ), a depository which, pursuant to CAB regulations, had agreed with TTE to hold travelers' prepayments in special escrow accounts and to act as surety for TTE tours, and Joel Shiffrin, vice-president of FNB, who personally handled the tour funds.

Charter tour operators such as TTE have been the subject of recent congressional concern. Since its enactment in 1958, the FFA was twice amended by provisions designed to afford greater protection against financially irresponsible charter organizers who too often had left travelers stranded and helpless. In 1962, Congress added section 1371(n)(2), Pub.L. No. 87-528, which, in order to effectuate its announced aim of "protect(ing) travelers", directed the CAB to promulgate regulations requiring supplemental air carriers engaged in charter tours to make appropriate security arrangements for the purposes of providing adequate compensation should the tours not proceed as scheduled. ² Pursuant to its statutory authority, the CAB did, in fact, carry out its duties by prescribing an extensive regulatory scheme for the conduct of the charter tour industry. See Special Charter Regulations, 14 C.F.R. Part 378 (1977). In order to better elucidate our reasons for concluding that plaintiffs are properly before the federal courts to enforce these regulations, we set forth a summary of the rules designed by the CAB to implement Congress' directive to assure proper financial management of charter tour monies, See House Committee Report, H.R. 1639, 1968 U.S.Code Cong. & Admin.News, pp. 3594, 3597; 30 Fed.Reg. 281, 282 (1965), the interpretation of which will be involved in the resolution of this dispute.

To qualify as a "tour operator" permitted to make charter arrangements, the CAB has required the fulfillment of certain filing prerequisites: One must file a prospectus, a surety bond, and a depository agreement executed by a federally insured bank. 14 C.F.R. §§ 378.10, 378.13 (1977). In this case, TTE "qualified" by filing the required prospectus and depository agreement between it and FNB as escrowee; TTE was permitted to file, and did file, a trust agreement, with FNB as trustee, in the amount of $200,000, in lieu of the surety bond.

The regulations also require a prescribed contract between the tour operator and the tour participants; this contract requires prepayment into an escrow account for transportation and ground accommodations, See 14 C.F.R. § 378.17. The tour operator must give notice to the participants of how to make checks payable to the depository bank and how to make claims against the surety should a tour be cancelled. See 14 C.F.R. §§ 378.16(b)(2)(iv), 378.17(b).

The depository agreement must conform with the regulations governing their form and content. Under the agreement, which creates a contractual relationship between the bank (here FNB), the tour operator (here TTE), and an air carrier, the bank is to establish and maintain separate accounts for each tour, See 14 C.F.R. §§ 378.16(b)(2)(vii), 378a.31(b)(2)(vii), into which, presumably, the tour operator is to deposit prepayments. (The depository agreement between TTE and FNB is appended to Bratton's First Amended Complaint as Exhibit A.) Under the same regulations, a tour participant who deals with the tour operator is to make his payment directly to the bank's escrow account; on sales made by retail travel agents, the agent may deduct his commission from the prepayment offered by the customer, and then is to remit the balance to the designated depository bank. Pursuant to 14 C.F.R. §§ 378.18 and 378a.32, the bank is prohibited from "mak(ing) disbursements or payments from deposits except in accordance with the (other) provisions of this part". Thus, to greatly simplify matters, the bank may only pay the direct air carrier, hotels, sightseeing operators, and other surface accommodations up to a fixed percent of the total deposits received by the bank for the particular tour, and only at fixed times. See 14 C.F.R. §§ 378.16(b)(2), 378a.31(b)(2). Furthermore, the rules provide that, if the bank is notified of a tour cancellation, "the bank shall make applicable refunds directly to tour participants". 14 C.F.R. §§ 378.16(b)(2)(iv), 378a.31(b)(2)(iv).

In the case at bar, FNB assumed the duties not only as escrowee, but also as trustee. (The Trust Agreement between FNB and TTE is appended to Bratton's First Amended Complaint as Exhibit B.) The trust, according to the bonding regulations, is to inure to the benefit of tour participants, and is to "continue in effect until completion of the tour". 14 C.F.R. §§ 378.16(b) (1), 378a.31(b)(1).

Against the backdrop of this rather complex regulatory scheme established "to protect travelers", 49 U.S.C. § 1371(n)(2), unfolds the story of the plaintiffs in this case. Although all of the Chapman and Bratton plaintiffs allegedly prepaid for the TTE-organized charter tours scheduled to depart after October 15, 1976, none was successful in obtaining a refund after the tours were cancelled. Shortly before the scheduled departure dates it became apparent to their creditors that TTE and its affiliated retail travel agencies were hopelessly insolvent, and, after an involuntary bankruptcy petition was filed, bankruptcy adjudications followed. ³ Plaintiffs allegedly requested that FNB return the prepayments which, plaintiff thought, would be available from the escrow accounts. FNB failed to refund any of the monies claimed by the plaintiffs; though over $740,000 was claimed by plaintiffs, the total in the escrow accounts for TTE tours is only about $391,000. ⁴

These lawsuits ensued. In one cause of action, plaintiffs alleged that FNB and its officer, Shiffrin, violated the FAA and the Special Charter Regulations thereunder by having mismanaged the funds. ⁵ Specifically, plaintiffs allege that FNB acted out of self-interest to help TTE avoid its impending bankruptcy so that outstanding loans made by the bank to TTE would be repaid and so that the surety obligations would not be triggered. Further, plaintiffs aver that FNB made payments out of the escrow accounts pursuant to TTE's wrongful instructions, while fully cognizant that the regulations permitted only designated payments. The complaints also allege that the bank Qua trustee violated its duties under the FAA. Finally, aside from the federal claims, plaintiffs also interposed pendent claims of fraud, breach of contract, and breach of fiduciary duty.

Under the circumstances, and for the reasons that follow, we reverse the order of the district court, and we hold that plaintiffs have stated a claim for relief under the FAA. ⁶

II.

Although we believe that plaintiffs are properly before the court, we agree with the district court that no Explicit cause of action was provided by Congress to remedy violations of the nature here alleged. Plaintiffs' argument was that section 1007(a) of the FAA, 49 U.S.C. § 1487(a) (hereinafter "section 1487(a)"), could be read to provide express authorization for a remedy in their case. That section provides for injunctive relief as follows:

"If any person violates any provision of this chapter, or any rule, regulation, requirement, or order thereunder, . . . the (CAB) . . ., or, in the case of a violation of section 1371(a) of this title, any party in interest, may apply to the district court . . . for the enforcement of such provision . . .; and such court shall have jurisdiction to enforce obedience thereto by a writ of injunction or other process, mandatory or otherwise, restraining such person . . . from further violation . . . and requiring their obedience . . . ."

Although plaintiffs argue that they are "parties in interest" and that their losses were caused by defendants' conduct which, allegedly, violates section 1371(a), we must disagree with their unduly strained reading of section 1487(a). Although...