U.S. Financial, Inc., Matter of, 77-2257

• Decision Date: 09 April 1979
• Docket Number: No. 77-2257,77-2257
• Citation: 594 F.2d 1275
• Parties: , Bankr. L. Rep. P 67,158 In the Matter of U. S. FINANCIAL, INCORPORATED, a Delaware Corporation, and Affiliates, Debtors. Herbert J. SOLOMON, Reorganization Trustee, Plaintiff-Appellee, v. The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1275

594 F.2d 1275

5 Bankr.Ct.Dec. 147, Bankr. L. Rep. P 67,158

In the Matter of U. S. FINANCIAL, INCORPORATED, a Delaware Corporation, and Affiliates, Debtors Herbert J. SOLOMON, Reorganization Trustee, Plaintiff-Appellee, v. The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Defendant-Appellant.

No. 77-2257.

United States Court of Appeals Ninth Circuit.

April 9, 1979.

Robert L. Bachman, San Diego, Cal., for defendant-appellant.

William G. Wilson, Rifkind, Sterling & Lockwood, Beverly Hills, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California.

Before WRIGHT and WALLACE, Circuit Judges, and TEMPLAR, District Judge. ^*

TEMPLAR, District Judge.

This case raises an important issue concerning the constitutionality of Cal.P.U.C. 36-T, Rule 23(B) which permits a telephone company to obtain as a condition of continued service the payment of a debt incurred prior to the filing of a petition under Chapter XI of the Bankruptcy Act. Both courts below held that the Rule created a state priority which contravened the purpose and operation of the Bankruptcy Act and that the Rule was, therefore, invalid under the Supremacy Clause of the United States Constitution.

FACTS

U. S. Financial, Inc. (USF) was a holding company whose affiliates and subsidiaries engaged in a wide variety of activities ranging from insurance to architecture. In late December of 1972, USF entered into a contract with appellant Pacific Telephone and Telegraph Company (PT&T) for telephone service pursuant to which PT&T supplied USF with a CENTREX II TELEPHONE SYSTEM.

On July 23, 1973, USF filed its petition for an arrangement under the provisions of Chapter XI of the Bankruptcy Act. At the time of filing the petition, USF and its affiliates (also referred to herein as debtors) owed the appellant $56,128.90 for telephone services rendered in May, June and July of 1973. Sometime between July 23, 1973 and November 9, 1973, the appellant threatened to discontinue telephone service to the debtors. The alternatives open to the debtors at the time were (1) to apply for new telephone service with the appellant and pay a "basic termination charge" in the amount of $21,124.00, (2) to retain the existing telephone service by tendering payment in full of the unpaid charges for services rendered on or before July 23, 1973, or (3) to pay the $21,124.00 "basic termination charge" and seek telephone service from another company. The debtors investigated the first and third alternatives and concluded that they would not be in the best interest of the estate. Accordingly, the debtors negotiated an agreement with appellant concerning the second alternative and submitted the agreement to the bankruptcy court for approval.

The bankruptcy court approved the agreement subject to the terms and conditions set forth therein and authorized the disbursement of $56,128.90 to PT&T as full On September 23, 1975, the Chapter XI arrangement was converted into a proceeding under Chapter X of the Bankruptcy Act and appellee Herbert J. Solomon was duly qualified and appointed to act as reorganization trustee. On February 4, 1976, he exercised the right reserved under the bankruptcy court order and filed a complaint seeking to recover the $56,128.90 paid to PT&T. PT&T filed its answer on March 5, 1976 in which it admitted all of the allegations in the complaint except for the allegation in paragraph six pertaining to a decision of the California Public Utilities Commission which the trustee contended made the agreement unconstitutional. PT&T denied that the decision had any application to the agreement between it and the debtors and, on March 8, 1976, it submitted a memorandum to the court explaining why.

payment for telephone services utilized on or before July 23, 1973. The order further stated that the payment was made "under protest and with reservation of the right to seek recovery of this amount in a court of competent jurisdiction." Pursuant to such authorization, USF drew a check on the estate account and paid appellant the sum of $56,128.90.

The trustee responded by filing a motion for judgment on the pleadings and supporting memorandum on June 23, 1976. In an opinion and order filed on June 28, 1976 and June 30, 1976, the bankruptcy judge found for the trustee and entered judgment on the pleadings. PT&T appealed the decision to the district court which affirmed. This appeal followed.

DISCUSSION

I.

The first and most important issue in this case concerns the validity of an agreement between a telephone company and a debtor under Chapter XI of the Bankruptcy Act which permits the utility company to receive payment during the pendency of the proceeding for services rendered prior to the filing of the Chapter XI petition. Appellant contends that Supersedure Tariff Schedule Cal.P.U.C. 36-T, 3d Revised Sheet, 72, Rule 23(B) expressly permitted its conditioning future telephone service on the payment of pre-filing indebtedness and that the estate, having accepted the benefits of the agreement, should be required to accept its burden as well.

Tariff Rule 23(B) provided at all times relevant to this litigation as follows:

"An applicant who otherwise qualifies for the immediate establishment of service under Section (A) of this rule May supersede the service of a subscriber discontinuing that service when the applicant is to take service on the premises where that service is being rendered and a written notice to that effect from both the subscriber and applicant is presented to the company and where An arrangement acceptable to the company is made to pay all unpaid charges and to assume all obligations of the outgoing subscriber in connection with the service existing on the date of supersedure . . . ." (Emphasis added.)

In support of its argument that this Rule permits the payment of pre-filing indebtedness, appellant cites the decision of this Court in the case of In re Best Re-Manufacturing Co., 453 F.2d 848 (9th Cir. 1971), Cert. denied sub nom. Rothman v. Pacific Telephone and Telegraph Co., 406 U.S. 919, 92 S.Ct. 1771, 32 L.Ed.2d 118 (1972). In Best, the issue before the Court was whether a debtor's old telephone number constituted a property interest sufficient to give the bankruptcy court summary jurisdiction to enjoin the telephone company from cutting off service. We held that it did not and, therefore, never reached the issue of whether the telephone company could require the debtor to pay pre-filing debts as a condition of future service.

Appellant contends that in at least two decisions lower courts have allowed the telephone company to recover pre-filing indebtedness. In re Boles-Aero, Inc., No. 133,531-WB (S.D.Cal. November 28, 1961); In re Idaho Maryland Industries, Inc., No. 137,024-WB (S.D.Cal. May 14, 1962). The Court has examined both decisions and found that they do not explain the basis for their holdings. Other courts faced with similar requests have uniformly denied relief. In the case of In re Kassuba, 396 F.Supp. 324, 326 (N.D.Ill.1975), the bankruptcy judge found that "allowing Bell (the telephone company) to recover its pre-filing charges, an unsecured claim, would be tantamount to a preference or priority and unfair to other unsecured creditors." The district court agreed and affirmed the refusal to allow payment of telephone charges incurred prior to the filing of the Chapter XI petition. An analogous situation existed in the Penn Central litigation where the court, upon finding that the debtor was paying its current bills, denied Consolidated Edison's request for immediate payment of pre-bankruptcy indebtedness for electrical service. In re Penn Central Transportation Co., 328 F.Supp. 1276 (E.D.Pa.1971), aff'd 467 F.2d 100 (3rd Cir. 1972).

Probably the best statement of why a utility's request for payment of pre-filing indebtedness should be denied appears in a Fifth Circuit opinion, ¹ where the Court of Appeals observed:

"(T)ariffs and related laws are no different from any state law granting a party a right against a debtor. If a debtor becomes delinquent on a loan payment, for example, the creditor is entitled, under state law, to recover a judgment on the debt. If the creditor has not done so by the time a bankruptcy petition is filed by the debtor, however, his state law right is subordinated to the federal bankruptcy laws (assuming of course that the creditor does not hold a security interest in any of the debtor's property). The telephone company has offered no cogent reason why it should be treated differently. Before the filing of the petition, it had certain rights under state law. After the filing of the petition, the demands of the bankruptcy laws take precedence. If a creditor, like the telephone company, could continue to enforce his state law rights after the initiation of bankruptcy proceedings, the bankruptcy laws would be meaningless. Their very purpose is to suspend the normal operation of rights and obligations between the debtor and his creditors."

After careful consideration of the matter, we agree with the analysis of the Fifth Circuit Court of Appeals and with the courts below that, insofar as Tariff Rule 23(B) permits a utility company to obtain payment of pre-filing indebtedness during the pendency of proceedings, it contravenes the purpose and operation of Chapter XI of the Bankruptcy Act. Chapter XI allows the court to grant a stay against enforcements and adjudications of obligations of the estate. Sections 314, 325, 11 U.S.C. §§ 714, 725. The procedure has the objective of allowing troubled debtors to pay their bills and remain in business. In re Stockman Development Co., 447 F.2d 387, 390 (9th Cir. 1971), Cert. denied sub nom. Security Savings & Loan Ass'n v. Westinghouse Credit Corp., 405 U.S. 923, 92 S.Ct. 962, 30 L.Ed.2d 794 (1972). To the extent Rule 23(B) can be applied to force or coerce a debtor into preferring the telephone company...