Covington Grain Co., Inc., Matter of

• Decision Date: 13 March 1981
• Docket Number: No. 79-3726,79-3726
• Citation: 638 F.2d 1357
• Parties: In the Matter of COVINGTON GRAIN COMPANY, INC., a Corporation, Bankrupt. COLLATERAL CONTROL CORPORATION, Plaintiff-Appellant, v. Wiley DEAL, Trustee et al., Defendants-Appellees. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1357

638 F.2d 1357

7 Bankr.Ct.Dec. 816

In the Matter of COVINGTON GRAIN COMPANY, INC., a

Corporation, Bankrupt.

COLLATERAL CONTROL CORPORATION, Plaintiff-Appellant, v. Wiley DEAL, Trustee et al., Defendants-Appellees.

No. 79-3726.

United States Court of Appeals, Fifth Circuit.

Unit B

March 13, 1981.

Ball, Ball, Duke & Matthews, Clyde C. Owen, Jr., John R. Matthews, Jr., Montgomery, Ala., for plaintiff-appellant.

Merrill & Harrison, G. M. Harrison, Dothan, Ala., for Wiley Deal.

Balch, Bingham, Baker, Hawthorne, Williams & Ward, Edward S. Allen, Birmingham, Ala., for Louis Dreyfus Corp.

Hobbs, Copeland, Franco & Screws, Albert W. Copeland, Montgomery, Ala., for Merrill Lynch et al.

Cook & Cook, Andalusia, Ala., for Quinton S. Bass et al.

Powell & Powell, Abner R. Powell, III, Andalusia, Ala., for Lester Brooks et al.

Appeal from the United States District Court for the Middle District of Alabama.

Before MORGAN, FAY and FRANK M. JOHNSON, Jr., Circuit Judges.

FAY, Circuit Judge:

Appellant Collateral Control Corporation appeals the denial of its petition to be substituted in bankruptcy proceedings for the claims of farmers who recovered judgments from it in a state court action. We hold that the order denying substitution is an appealable order and affirm the denial of the petition.

In 1972, appellant Collateral Control Corporation, formerly New York Terminal Warehouse Company (NYTCO), entered into a field warehousing lease agreement with Covington Grain Company Incorporated, now bankrupt. Under the agreement, NYTCO leased a bagged goods warehouse containing an office and several outside bins from Covington at Andalusia, Alabama. NYTCO had placed on the grounds about twelve signs bearing NYTCO's name and stating that property in the warehouses was covered by warehouse receipts issued in accordance with the laws of Alabama.

During the 1974 soybean harvesting season, some ninety farmers deposited soybeans or corn in the Covington facilities under an arrangement which allowed the farmers to sell their grain at a later date and pay a storage fee to Covington. Transactions with the farmers were handled by either Morris Rabren, President of Covington Grain, or Mary Wishum, bookkeeper at Covington. Under the lease agreement between NYTCO and Covington, NYTCO paid Wishum's salary and Covington reimbursed NYTCO. Wishum had full control of all grain going into and out of the storage facilities.

Grain delivered by the farmers was accepted by Covington, and Covington issued weight tickets to the farmers. The grain was stored in NYTCO's leased warehouses, and some of it was shipped immediately in an unpriced condition. Morris Rabren, president of Covington, testified that he had been "hedging" on board of trade contracts, that is, dealing in the soybean futures market, and that most of the farmers knew this. When the market rose, Rabren was unable to honor his commitments to sell and still repurchase grain sufficient to meet demands of the soybean and corn farmers who held weight tickets or warehouse receipts from him. The loss from "hedging" and the enforced sale of grains which he had already shipped, caused a deficiency resulting in the bankruptcy of Covington Grain.

Covington Grain filed a Chapter XI proceeding in the Bankruptcy Court in the Middle District of Alabama on January 29, 1975, and when the plan was not approved, it was adjudicated a bankrupt on March 4, 1975. The first meeting of creditors was held on March 19, 1975. The soybean and corn farmers filed timely proofs of claim in the bankruptcy proceedings.

The farmers also filed suit against NYTCO, Rabren, and Wishum in the Circuit Court of Covington County, Alabama, alleging breach of contract, conversion, fraud, negligence, and wantonness for the loss of their deliveries. NYTCO filed a third party complaint against J. E. McDonald, a principal of Covington and against Rabren, under an indemnity agreement attached to the NYTCO-Covington warehousing agreement. Covington Grain was not allowed to be brought into the proceeding as it was in bankruptcy. The trial resulted in a jury verdict for the farmers against NYTCO in the ultimate amount of $1,169,509.71. The trial court directed a verdict against McDonald and Rabren for the same amount in favor of NYTCO. NYTCO had not sought to collect from McDonald and Rabren as of the time of argument on this appeal. The case was affirmed by the Supreme Court of Alabama in NYTCO Services, Inc. v. Wilson, 351 So.2d 875 (Ala.1977). The Alabama Supreme Court determined that the transactions with the farmers were bailments. It held that although Rabren and Wishum did not have express authority to act on the behalf of NYTCO, they were agents of NYTCO by estoppel, and NYTCO was liable for their acts. The court found that the soybean and corn farmers had reasonable cause to believe that Rabren and Wishum had authority to accept their grains on behalf of NYTCO.

NYTCO paid the judgments in full and, except in the case of two corn farmers, took no assignments of any of the claims filed in the bankruptcy proceedings. On December 1, 1978, it filed a petition in bankruptcy court seeking to have itself substituted as a party claimant as the owner of the claims of the farmers under Section 2(a)(6) of the Bankruptcy Act (former 11 U.S.C. § 11(a) (6) (1976)). The decision of the bankruptcy judge was to deny substitution. The District Court for the Middle District of Alabama affirmed the denial.

Appealability

Appellee asserts that an order denying a petition for substitution is not an appealable order. Our decision in Virginia Land Company v. Miami Shipbuilding Corp., 201 F.2d 506 (5th Cir. 1953) has been read as holding that an order denying substitution is not appealable. See 3B Moore's Federal Practice P 25.03(2) (2d Ed.). In the Virginia Land case, however, the issue before the court was the timeliness of the appeal under Fed.R.Civ.P. 73(a) (abrogated Dec. 4, 1967 and superseded by Fed.R.App.P. 4(a)). In that case, the appealing party, Virginia Land Company, had failed to file an appeal within the thirty days allowed and had filed an untimely motion for rehearing as well. The court held that the untimely motion for rehearing did not toll the running of the time for appeal. In dicta, the court said that the order was not one for dismissal and thus was not final under 28 U.S.C. § 1291. The court said:

It was merely one entered under Rule 25(c), denying substitution of parties, an order which rested in the sound discretion of the district court, and which was not appealable. (emphasis added)

201 F.2d at 508.

We hold that in the case before us, the order denying the petition for substitution is one having the operative finality which makes it reviewable under the collateral order doctrine of Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). We recently reviewed the requirements of the collateral order doctrine in Bennett v. Behring Corp., 629 F.2d 393 (5th Cir. 1980) and In re Grand Jury Proceedings: In Camera, 636 F.2d 81 (5th Cir. 1981).

In order to be reviewable under the collateral order doctrine, an order must 1) be independent and easily separable from the substance of the other claims in the action; 2) present a need to secure prompt review in order to protect important interests of any party; 3) be examined in the light of practical, rather than narrowly technical, considerations. In re Nissan Motor Corporation Antitrust Litigation, 552 F.2d 1088 (5th Cir. 1977); Bennett v. Behring Corp., 629 F.2d 393 (5th Cir. 1980).

Under the facts before us, the order denying substitution is a matter easily separable from the bankruptcy proceedings. ¹ Because NYTCO was barred from impleading the bankrupt in the state court proceedings, and because it failed to file claims in the bankruptcy proceedings, the denial of the petition for substitution will mean a total bar to recovery. The issue is of practical, substantive importance to NYTCO and the other creditors in the bankruptcy proceeding. If not appealable, it would be beyond review. Cohen was intended to cover just such a situation.

Abuse of Discretion

Bankruptcy Rule 725 adopts Fed.R.Civ.P. 25 as the procedure for substitution. Rule 25 provides that in case of any "transfer of interest," the action may be continued by or against the original party unless the court on motion directs the person to whom the interest is transferred to be substituted. The granting of the petition for substitution is, therefore, at the discretion of the trial court and will be reviewed under the abuse of discretion standard. We hold that in the case before us, neither the bankruptcy court, nor the district court abused its discretion in not allowing the substitution.

In denying the petition, the bankruptcy court and the district court accepted and felt bound by the findings of the Alabama Supreme Court in NYTCO Services, Inc. v. Wilson, 351 So.2d 875 (Ala.1977), that Rabren and Wishum were agents by estoppel of NYTCO. Appellant urges that the case of Brown v. Felson, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) stands for the proposition that the bankruptcy court can look behind the findings of the state court. ² In Brown, the issue was whether a bankruptcy court may consider evidence extrinsic to the judgment and record of a prior state court collection suit when determining whether a debt was dischargeable. The Supreme Court allowed the extrinsic evidence bearing on the dischargeability issue because it was obvious that the creditor was not attacking the judgment itself but seeking to rely on it. The question of dischargeability under section 17 of the Bankruptcy Act (11 U.S.C. § 35 (1976)) would involve material irrelevant in the ordinary collection proceeding. If a state court could expressly rule on section 17 dischargeability questions, then giving finality to the state court rulings would undercut Congress' intention to commit...