Baker v. SOUTHEASTERN MICH. SHIPPERS CO-OP. ASS'N, SEMCO

• Decision Date: 28 September 1973
• Docket Number: Civ. A. No. 39090.
• Citation: 376 F. Supp. 149
• Parties: George P. BAKER et al., Plaintiffs, v. SOUTHEASTERN MICHIGAN SHIPPERS CO-OPERATIVE ASSOCIATION, a/k/a SEMCO, Inc., a Michigan corporation, Defendant.
• Court: U.S. District Court — Western District of Michigan

376 F. Supp. 149

George P. BAKER et al., Plaintiffs, v. SOUTHEASTERN MICHIGAN SHIPPERS CO-OPERATIVE ASSOCIATION, a/k/a SEMCO, Inc., a Michigan corporation, Defendant.

Civ. A. No. 39090.

United States District Court, E. D. Michigan, S. D.

September 28, 1973.

COPYRIGHT MATERIAL OMITTED

John G. Makris, Detroit, Mich., for plaintiffs.

Edward Sanders, Detroit, Mich., for defendant.

MEMORANDUM OPINION

FEIKENS, District Judge.

Plaintiffs (trustees of the property of Penn Central Transportation Company) sue for freight charges totaling $22,773.19 incurred by defendant (SEMCO, Inc.) between October 10, 1969 and November 11, 1969. Defendant pleads a prior accord and satisfaction and, in the alternative, counterclaims against plaintiffs in the amount of $20,179.80 for damages to cargo sustained on February 21, 1969, and March 3, 1969. It is these damage claims which defendant contends were previously set off against the freight charges now sought by plaintiffs, the difference of $1,852.07 having been tendered and accepted on November 17, 1969.

Accord and Satisfaction

It appears that SEMCO did try to arrange a mutual cancellation of accounts — the railroad's carriage charges against the shipper's claims for damages to cargo. Based on the facts elicited on these cross-motions for summary judgment, however, it is unclear whether these efforts came to a legally effective fruition.¹ There are genuine and material issues of fact yet to be decided on this question, and if there were no other factors involved, this case would be inappropriate for summary disposition. This result is complicated and somewhat altered by two additional facts: (1) the freight charges involved here are covered by the Interstate Commerce Act² and (2) since these claims accrued the railroad has entered into reorganization under the Bankruptcy Act.³

First, plaintiffs argue that whether or not the facts make out an accord and satisfaction is in the end irrelevant, for Section 6(7) of the Interstate Commerce Act⁴ absolutely prohibits and nullifies such arrangements. That section, prompted by a congressional purpose to eliminate secret preferences and kickbacks to shippers,⁵ mandates strict adherence to published tariffs.⁶ In applying this provision, the Supreme Court has held that a carrier may be compensated for its services only by payment in cash⁷ or by check⁸ or by way of judicial set-off against judgments due the shipper.⁹ Any form of payment containing the potential for departure from the exact letter of the tariffs (such as the supplying of goods and services in exchange for carriage)¹⁰ is prohibited.

Defendant argues that the exception for judicial set-offs, enunciated by the Court in Chicago & N. W. Ry. Co. v. Lindell, 281 U.S. 14, 50 S.Ct. 200, 74 L.Ed. 670 (1930), should be extended to a prior set-off of accounts (rather than judgments) concluded informally between the parties. Defendant cites no cases supporting this position. Burlington Northern Inc. v. United States, 462 F.2d 526 (Ct.Cl.1972), falls squarely within the Lindell exception. "According to plaintiff's reading, there can be no deduction of a damage claim against transportation charges except by adjudication of a court. But that is exactly the situation we have here." 462 F.2d at 529. The same is true of Yale Express System, Inc. v. Nogg, 362 F.2d 111 (2nd Cir. 1966), and Southern Pacific Co. v. Miller Abattoir Co., 454 F.2d 357 (3rd Cir. 1972).

On the other hand, at least two courts have squarely faced the issue of whether non-judicial set-offs are permissible under the Interstate Commerce Act, and have determined that they are not.

"Another group of shippers contend that, prior to bankruptcy, there was an agreed settlement of mutual accounts between the Debtor and the shipper, with the result that the Debtor either owes money to the shippers, or is owed much less than is now being claimed by the Trustees. . . . To the extent that the Debtor's claims against these companies were based on freight charges, it is clear under the principles set forth previously that they were incapable of being discharged either by unilateral set-offs or by mutual agreement." In re Penn Central Transportation Co., 339 F.Supp. 603, 607 (E.D.Pa.1972).

This conclusion was specifically approved by the Third Circuit:

"One of the appellants contends that under applicable Pennsylvania law, it extinguished its debt to the railroad by the nonjudicial set-off of a debt owed to it by the carrier . . . . Even assuming the validity of appellant's contention under Pennsylvania law, such a set-off would have been in express contravention of the Interstate Commerce Act. Indeed, the Act was so designed to prevent the kind of secret kickbacks which this type of practice could lead to." In re Penn Central Transportation Co., 477 F.2d 841, 845 (3rd Cir. 1973).

The reason for distinguishing between judicial and non-judicial set-offs is obvious. In the former case, there is no adjustment until the exact value of each party's claim has been authoritatively determined; in the latter instance, there is no guarantee that the debt off-set against the freight charges is worth the amount allowed. When the set-off is judicially supervised, there is little opportunity for collusion; when it is privately arranged, there is no such assurance. In short, it is the policy of the Act to permit payment of freight charges only in a manner offering little or no opportunity for evasion of the tariff. Judicial set-offs satisfy this requirement while private arrangements do not.

As a result, the accord and satisfaction pleaded by defendant, even if convincingly established, is inadequate to resist the trustees' cause of action. Because defendant interposes no other defenses,¹¹ plaintiffs are entitled to summary judgment for the undisputed portion of their claim — $22,039.89 — minus the $1,852.07 previously paid. There is a genuine dispute of fact as to waybills 223588 and 228460, totaling $733.32, which must be resolved at trial.

The Counterclaim

The railroad's reorganization raises a second question, namely whether the defendant may nevertheless recover in this court on its counterclaim. Initially, it should be noted that its claim is contested, both as to liability and damages. There has been presented no evidence from which this court can decide the issues raised, and therefore the defendant's cross-motion for summary judgment must be denied in any event.

Under Lindell, this court would ordinarily be authorized to proceed to judgment on the counterclaim and off-set any recovery thereunder against plaintiff's recovery. The problem is to determine what effect the intervening reorganization may have on the defendant's cause of action. Two issues must be considered: (1) whether the action may be maintained in this court and (2) if so, whether this court is empowered to set off any recovery against that of plaintiff (i. e., in effect to execute upon the judgment).

1. Set-off. Taking the second point first, this court is immediately confronted with 11 U.S.C. § 205(a), which gives the bankruptcy court in a railroad reorganization "exclusive jurisdiction of the debtor and its property wherever located . . . ." "Property" in the bankruptcy setting includes a cause of action such as that asserted by the trustees in this case¹² and any recovery granted thereunder.¹³ "Exclusive jurisdiction" is generally given a literal interpretation.¹⁴ It follows that this court can exercise jurisdiction over the bankrupt's property, including a judgment or cause of action, only to the extent permitted by the bankruptcy court.¹⁵

That court, by its order of June 21, 1970, has authorized the trustees to institute and prosecute in any court suits for the recovery or protection of its property or rights,¹⁶ and to settle or defend claims against the debtor,¹⁷ including, in their discretion, "claims for loss, damage or delay to freight and baggage . . . ."¹⁸

"But no payment shall, without further order of this Court, be made by the Debtor in respect of any such actions, proceedings or suits on claims accruing prior to the date of this order except such claims as may be permitted to be paid by this order or by other general orders hereafter entered herein, and such as constitute preferred claims under the Acts of Congress relating to bankruptcy; and no action taken by the Debtor in defense or settlement of such claims, actions, proceedings, or suits shall have the effect of establishing any claim upon, or right in, the property or funds in the possession of the Debtor that otherwise would not exist."¹⁹

Thus, it appears that this court is empowered to adjudicate the plaintiffs' claim, but that it has no authority to dispose of any recovery upon that claim, whether by way of set-off or otherwise. Even if this court may also hear defendant's counterclaim (a matter yet to be decided), it may not satisfy that judgment out of any of the debtor's property, including its judgment in this suit. Once "the claim is reduced to judgment it may then be presented to the bankruptcy court for proof and allowance." Thompson v. Texas Mexican Ry. Co., 328 U.S. 134, 141, 66 S.Ct. 937, 90 L.Ed. 1132 (1946).

2. Authority to Entertain Counterclaim. The bankruptcy court has exclusive jurisdiction over not only the debtor's property, but over "any rights that may be asserted against it. These rights may be altered in any way thought necessary to achieve sound financial and operating conditions for the reorganized company, subject to the requirements of the Act." Callaway v. Benton, 336 U.S. 132, 147, 69 S.Ct. 435, 444, 93 L.Ed. 553 (1949). In a railroad reorganization the class of claims included within the scope of this power is very great. "The term `claims' includes debts, whether liquidated or unliquidated, securities (other than stock and option warrants to subscribe to stock), liens, or other interests of whatever character." 11 U.S.C. § 205(b).²⁰

In essence, the...