Yurika Foods Corp., In re

• Decision Date: 23 October 1989
• Docket Number: No. 88-1692,88-1692
• Citation: 19 Bankr.Ct.Dec. 1644,888 F.2d 42
• Parties: , 21 Collier Bankr.Cas.2d 1232, 19 Bankr.Ct.Dec. 1644, Bankr. L. Rep. P 73,109 In re YURIKA FOODS CORP., Debtor and Debtor-in-Possession. YURIKA FOODS CORPORATION, Plaintiff-Appellee, v. UNITED PARCEL SERVICE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 42

888 F.2d 42

58 USLW 2326, 21 Collier Bankr.Cas.2d 1232,

19 Bankr.Ct.Dec. 1644, Bankr. L. Rep. P 73,109

In re YURIKA FOODS CORP., Debtor and Debtor-in-Possession.

YURIKA FOODS CORPORATION, Plaintiff-Appellee, v. UNITED PARCEL SERVICE, Defendant-Appellant.

No. 88-1692.

United States Court of Appeals, Sixth Circuit.

Argued April 13, 1989.

Decided Oct. 23, 1989.

Todd M. Halbert, John G. Colucci (argued), Asher Rabinowitz, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for Yurika Foods Corp.

James M. Wienner, Butzel, Long, Gust, Klein & Van Zile, Birmingham, Mich., Irving R. Segal (argued), David G. Battis, Carl A. Solano, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for United Parcel Service.

Before JONES, WELLFORD and GUY, Circuit Judges.

NATHANIEL R. JONES, Circuit Judge.

Defendant, United Parcel Service ("UPS"), appeals the judgment of the district court, which decided for plaintiff Yurika Foods Corporation ("Yurika"). For the following reasons, we reverse.

I.

Yurika is engaged in the distribution, marketing and selling of food products. UPS is a common carrier of freight regulated by the Interstate Commerce Commission ("ICC"). Since its inception in 1982, Yurika used UPS and other carriers to distribute its products. Until December 1984, UPS experienced no problems with the Yurika account. However, in December 1984, Yurika suffered major financial difficulties and severe cash flow shortages. As a result of Yurika's financial problems, the company fell behind on its payments.

UPS tariffs, drafted in light of ICC regulations, extend credit to shippers for seven days (excluding Saturdays, Sundays, and legal holidays) after mailing of a bill by UPS. Credit is important to shippers because it allows them to receive uninterrupted service from UPS without paying for every shipment independently. In light of Yurika's late payments, UPS obtained two deposits from Yurika in early 1985. Despite receipt of the deposits, during the early months of 1985 UPS suspended credit to Yurika's accounts on several occasions when Yurika falled to pay its bills. Credit was restored when Yurika made payments.

On August 9, 1985, Yurika filed a voluntary petition in bankruptcy under Chapter 11 in the United States Bankuptcy Court for the Eastern District of Michigan. The 90-day preference period preceding Yurika's voluntary petition in bankruptcy ran from May 11 through August 8, 1985. During this period, Yurika made eighteen payments to UPS. These payments were in response to 59 bills dispatched to Yurika from February 2 through July 20, 1985, plus $1,211.02 not related to a specific bill. The aggregate amount of the eighteen payments was $82,458.85. However, the parties have stipulated that the amount at issue is $40,000.00.

On July 22, 1986, Yurika initiated an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Michigan, seeking return of the eighteen payments it made to UPS within the ninety days before it filed its voluntary petition in bankruptcy under Chapter 11. On December 17, 1987, the bankruptcy court decided that Yurika was entitled to a return of the payments from UPS. On January 27, 1988, UPS filed an appeal to the district court, which affirmed and adopted the bankruptcy court's opinion on June 14, 1988.

II.

On appeal, UPS claims that section 547 of the Bankruptcy Code does not require it to return Yurika's payments. Specifically, UPS attacks the district court's ruling, which stated that because UPS credit terms violated ICC regulations, transfers during the preference period could not as a matter of law be within the "ordinary course of business" exception.

Under section 547, preferential transfers made in the 90 days preceding the petition for bankruptcy may be avoided and returned to the transferor. Section 547(c)(2) contains an exception for debts incurred in the ordinary course of business between the debtor and creditor. Normally, if late payments were the standard course of dealing between the parties, they shall be considered as within the ordinary course of business under section 547(c)(2). In re Fulghum Construction Corp., 872 F.2d 739, 743 (6th Cir.1989). Despite the fact that Yurika ordinarily did make late payments to UPS, the district court in the instant case held that late payments to motor carriers like UPS can never be made in the ordinary course of business because the payment due dates for carriers were "made mandatory by the [ICC] statute and regulations and the parties were not free to alter those terms." J.App. at 15-16.

The district court specifically found that Yurika's payments to UPS were illegal because they violated ICC regulations. As a common carrier, UPS is subject to regulation by the ICC, pursuant to 49 U.S.C. Sec. 10101, et seq. (1982). UPS may extend credit only in accordance with 49 U.S.C. Sec. 10743, which authorizes the ICC to promulgate regulations. The applicable regulations at 49 C.F.R. 1320.2 provide in pertinent part that:

(b) When the credit period begins. The credit period shall begin on the day following presentation of the freight bill.

(c) Length of credit period. Unless a different credit period has been established by the tariff publication pursuant to paragraph (d) of this section, the credit period is 15 days. It includes Saturdays, Sundays, and legal holidays.

(d) Carriers may establish different credit periods in tariff rules. Carriers may publish tariff rules establishing credit periods different from those in paragraph (c) of this section. Such credit periods shall not be longer than 30 calendar days.

The court determined that it was unlawful for UPS to collect amounts due on bills that were outstanding for more than seven days (the time stated in the UPS Tariffs) or 15/30 days (the time stated in the ICC regulations).

UPS contends that the payments were not unlawful and relies on Southern Pacific Transportation Co. v. Commercial Metals Co., 456 U.S. 336, 102 S.Ct. 1815, 72 L.Ed.2d 114 (1982). In Southern Pacific, the Supreme Court held that a carrier's violation of ICC credit regulations does not provide an affirmative defense to shippers. Furthermore, the Southern Pacific Court stated that even if collections are made beyond the time specified in the ICC regulations, "a carrier has not only the right but also the duty to recover its proper charges for services performed." Id. at 343, 102 S.Ct. at 1821. After canvassing the statutes and ICC regulations governing extensions of credit by carriers, the Court concluded that allowing a shipper to rely on the regulations as a defense to collection would be contrary to public policy because the "consequence would be to discourage [carriers] from extending credit where the operation of this rather difficult statute is in doubt." Id. at 349, 102 S.Ct. at 1823 (citation omitted). Because the Southern Pacific Court did not consider such late collections illegal, we find that UPS' collection of late payments for freight charges is not unauthorized or unlawful under the ICC regulating scheme, and as such is not per se outside of the ordinary course of business...