Court Opinion

ID: 9449843
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:25:02.600802+00
Date Added: 2024-06-11T17:32:00.985811
License: Public Domain

SWYGERT, Circuit Judge
(dissenting).
Is the debtor-creditor mutuality requirement of Section 68 of the Bankruptcy Act satisfied in a parent-subsidiary corporate situation where a debtor of the parent company agrees that the latter may rely upon a setoff arrangement with its subsidiary? This is the legal question presented.
A factual question also exists: Did Sidney L. Berger, president of Berger Steel Company, agree that Inland Steel Company could rely in extending credit *407to Berger Steel upon the setoff provision contained in the purchase orders Joseph T. Ryerson & Son, Inc. issued to Berger
The referee ruled that since Inland and Ryerson were separate corporate entities, no equitable setoff arose “because Inland knew at all material times that Berger Steel Company, Inc. was financ-all its accounts receivable with James Talcott, Inc.” Thus, the referee made no finding whether there was or was not an agreement between Berger Steel, Inland, and Ryerson that Inland could rely on the Ryerson purchase order provision as a setoff.
On review, the district judge disposed of this failure by observing that, “While it is true that the referee did not find the ■existence of a specific agreement [that Inland could rely upon the setoff provi•sion], * * * this Court cannot say that the absence of such finding was clearly erroneous.” In a preceding paragraph in his order affirming the referee’s ruling, the district judge stated, Assuming arguendo the legal validity of the proposition for which petitioner contends, it is clear that petitioner can not .avail itself of it m the instant case, since the evidence presented to the Referee ■shows overwhelmingly that petitioner did not in fact rely upon the setoff provisions ■of the Ryerson purchase orders or the alleged representations of respondent’s president.”
In my opinion the evidence on this issue admits of only one finding-that Berger Steel, Ryerson, and Inland at all times understood that the setoff provision in the purchase orders was applicable to the Berger Steel account with Inland and that Inland relied upon the understanding. To demonstrate that this was the understanding between all three parties, it is sufficient merely to refer to an admission made by Sidney L. Berger during the course of the hearing before the referee. Sherman B. Hoyt, an assistant credit manager of Inland, had a telephone conversation with Berger on November 9,1961. A memorandum of the conversation made by Hoyt was shown to Berger, The memorandum reads:
Berger ’phoned.
Ryerson agreement is that they will place orders with Berger for any jobs on which Berger joists are applicable.
Advised Sid this could mean increased tonnage from Inland and a resulting credit exposure beyond that which we are willing to go.
He stated that this should not present a problem since Ryerson’s orders state that any monies due them by Ryerson can be applied against the Inland account. Told him I was familiar with this set-off provision and we wordcl use this security ^or our account.
Berger stated Container Corp. job in Carol Stream will total about-$119,000.00 in billings to Ryerson.
js g^jjj looking for some financing to help his working capital situation, Ther Berger testified as follows:
__ _ , , Mr- B®rger’ d°es that re’ fresh your recollection about the conjersation with Mr. Hoyt on Novem-Vipt* fho Qfh 2 e
“A. Yes.
,¡Q Ig thLg substantiaiiy • true ?
* believe that Mr. Hoyt could have interpreted the conversation in that manner.
This evidence shows not only that Ber' ger agreed that Ryerson could set off its df^s to Berger Steel against amounts which Berger Steel owed Inland but that he Inland and Ryerson would re*y 011 arransement.
Although Berger further testified that he did not intend to have Hoyt inteipret the conversation “in the manner that would mean that Inland would have the absolute right of set off, since at that time I knew all accounts still had to be assigned to James Talcott, and Inland knew this and Ryerson knew this,” it is axiomatic that undisclosed intentions that are contrary to the express words *408upon which reliance is placed will not affect such reliance.
On January 2, 1962, James F. Mar-zano, an employee in Inland’s credit department, told Berger, who had called and asked for a delay in his payments to Inland, that Berger Steel was not entitled to credit and that Inland “would have to offset future shipments through contra against his account of the monies due him from Ryerson.”
On February 19, 1962, Marzano made 'the following contemporaneous memorandum of the conversation with Ryerson and Berger:
Phoned Ryerson to determine if the amount in billings was the figure which Berger had given us during our visit of Feb. 16.
It was determined that Berger’s statement was incorrect. Ryerson was working on this and would inform us of the exact amount.
Phoned Berger to reiterate our decision of Nov. 9, which was reaffirmed on our visit of Feb. 16. We would contra the Ryerson account when it becomes available.
The final conversation between Berger and Marzano on March 6, 1962, was recorded by Marzano as follows:
Sid Berger phoned.
He stated he needed more rounds shipped.
He could not mail any payments against his account. He understood that we are to set off the Ryerson account, of which there was approximately $100,000 billed.
I indicated we could do this and hold any amounts available against the account, that we were only going to ship material to Berger based on the amount of contra security that was available.
Berger again indicated he understood this and was delivering 4 truckloads to Ryerson covering material against the Container job.
I agreed to release two trucks of rounds against this arrangement.
It is clear from the foregoing evidence* that the district judge erred when he* found that Inland did not rely on the-setoff provision of the Ryerson purchase orders or on Berger’s representations.
In my opinion the facts in the instant, case are analogous to those in Piedmont Print Works v. Receivers of People’s. State Bank, 68 F.2d 110 (4th Cir. 1934),. and Bromfield v. Trinidad Nat’l Inv. Co., 36 F.2d 646 (10th Cir. 1929). In both cases it was held that an equitable setoff' was permissible because of a tripartite agreement between the bank (Peoples-State Bank in Piedmont and Drovers Bank in Bromfield), the parent company, and its subsidiary, which agreement in-effect treated the parent and the subsidiary as one entity. Although these were receivership rather than bankruptcy cases, the doctrine of equitable setoff' there enunciated has been incorporated', within the meaning of Section 68 of the-Bankruptcy Act. Accordingly, the law as stated by the Fourth and Tenth Circuits should be applied to the facts of this. case.
Inland extended credit to Berger Steel on the understanding that the Ryerson purchase order setoff provision could be-put into effect. Berger Steel agreed. It. is my view that this was sufficient compliance with the mutuality requirement of section 68.
It would seem that the majority decision is based in part on the fact that Berger had assigned its accounts receivable to James Talcott, Inc. It is my opinion that the assignment is wholly immaterial to the issue presented.
First, Talcott had constructive, if not actual, notice of the setoff provision contained in the Ryerson purchase orders. Second, and more important, the right of setoff is not qualified by the rights of other creditors, whatever their stature. Consideration of the interests of other creditors in determining whether there-is a permissible setoff would read Section 68 out of the Bankruptcy Act.
I would reverse the order of the district court.