Court Opinion

ID: 3036900
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:55:13.808904+00
Date Added: 2024-06-11T15:41:33.452743
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

In re: CONSOLIDATED FREIGHTWAYS     
CORPORATION,
                          Debtor,

NORFOLK SOUTHERN RAILWAY                   No. 04-55717
COMPANY,
                       Appellant,           D.C. No.
                                         CV-03-00962-JFW
               v.
                                            OPINION
CONSOLIDATED FREIGHTWAYS
CORPORATION; CONSOLIDATED
FREIGHTWAYS CORPORATION OF
DELAWARE,
                       Appellees.
                                    
       Appeal from the United States District Court
          for the Central District of California
        John F. Walter, District Judge, Presiding

                Argued and Submitted
         December 7, 2005—Pasadena, California

                  Filed April 10, 2006

      Before: Harry Pregerson, John T. Noonan, and
           Sidney R. Thomas, Circuit Judges.

                Opinion by Judge Thomas

                          3955
           IN RE: CONSOLIDATED FREIGHTWAYS CORP.      3957

                       COUNSEL

Paul D. Keenan and Jonathan F. Ball, Janssen Keenan &
Ciardi P.C., Philadelphia, Pennsylvania, for the plaintiff-
appellant.
3958          IN RE: CONSOLIDATED FREIGHTWAYS CORP.
Robert A. Klyman and Kimberly A. Posin, Latham & Wat-
kins LLP, Los Angeles, California, for the defendants-
appellees.

                              OPINION

THOMAS, Circuit Judge:

   In this appeal we consider whether, as a matter of federal
common law, to recognize the interline trust doctrine and
apply it in a federal bankruptcy proceeding. We decline to
recognize the doctrine, and affirm the judgment of the district
court.

                                    I

   Before filing a voluntary petition in bankruptcy in 2002,
Consolidated Freightways Corporation (“Consolidated
Freightways”), an interstate motor carrier, as defined under
the Interstate Transportation Act, 49 U.S.C.A. § 13902, oper-
ated one of the largest “less than truckload” long haul freight
transportation companies in North America. Norfolk Southern
Railway Company (“Norfolk”) is a Class I interline freight rail-
road,1 the product of hundreds of railroad company mergers
over the past century. In providing freight transportation ser-
vices, Consolidated Freightways commonly engaged in a cus-
tom known as “interlining” with other transportation
providers, including Norfolk. Interlining is a common practice
in the freight transportation industry in which a shipment of
freight is moved pursuant to a single bill of lading although
more than one company actually transports the goods. Under
such an arrangement, either the first or last carrier collects
  1
   Class I railroads are the largest railroads, classified by revenue, as
defined by the Surface Transportation Board. See 49 C.F.R. § 1201.1- 1(a)
(2005).
            IN RE: CONSOLIDATED FREIGHTWAYS CORP.         3959
payment from the shipper and forwards the appropriate pay-
ment to each of the carriers involved.

   Norfolk has not been paid for rail transportation of freight
pursuant to bills of lading issued by Consolidated Freightways
between October 10, 2001, and October 31, 2002. The portion
of freight charges received by Consolidated Freightways for
rail services provided by Norfolk between those dates is
$1,457,954.02. After Consolidated Freightways filed its bank-
ruptcy petition, Norfolk filed a complaint in the bankruptcy
court, claiming that Consolidated Freightways held the money
in trust for Norfolk under the “interline trust doctrine.” Nor-
folk further asserted that because Consolidated Freightways
was holding the money in trust for Norfolk, the money was
not part of the bankruptcy estate for purposes of bankruptcy
proceedings and should therefore be paid to Norfolk immedi-
ately.

   Consolidated Freightways filed a motion to dismiss Nor-
folk’s complaint pursuant to Bankruptcy Rule 7012(b) and
Federal Rule of Civil Procedure 12(b)(6) for failure to state a
claim. Consolidated Freightways asserted that the interline
trust doctrine does not exist and that therefore Norfolk’s com-
plaint failed to assert a legally cognizable cause of action.

   The bankruptcy court granted the motion to dismiss. Nor-
folk timely appealed that decision to the district court. The
district court entered a minute order affirming the bankruptcy
court’s grant of Consolidated Freightways’s motion to dis-
miss. This timely appeal followed. We review a dismissal for
failure to state a claim pursuant to Federal Rule of Civil Pro-
cedure 12(b)(6) de novo. See Decker v. Advantage Fund, Ltd.,
362 F.3d 593, 595-96 (9th Cir. 2004).

                              II

  We decline to adopt the interline trust doctrine as a matter
of federal common law. While federal common law is most
3960        IN RE: CONSOLIDATED FREIGHTWAYS CORP.
commonly applied in cases where the United States is a party
or the interests of the federal government are directly at inter-
est, there are situations where the application of federal com-
mon law is appropriate in cases between private parties. See
Miree v. DeKalb County, 433 U.S. 25, 29 (1977) (“[F]ederal
common law may govern even in diversity cases where a uni-
form national rule is necessary to further the interests of the
Federal Government.”).

   [1] However, the Supreme Court has instructed that the cre-
ation of federal common law is disfavored except where
explicitly authorized by Congress. In O’Melveny & Myers v.
FDIC, 512 U.S. 79 (1994), the Court noted that the “cases in
which judicial creation of a special federal rule would be jus-
tified . . . are few and restricted, limited to situations where
there is a significant conflict between some federal policy or
interest and the use of state law.” Id. at 87.

   [2] In determining whether such a conflict exists, the Court
has looked to three factors, the need for uniformity of law
across the nation, “whether application of state law would
frustrate specific objectives of the federal programs,” and “the
extent to which application of a federal rule would disrupt
commercial relationships predicated on state law.” United
States v. Kimbell Foods, Inc., 440 U.S. 715, 728-29 (1979).

   [3] There are two federal interests involved: federal bank-
ruptcy law and the laws pertaining to interstate transportation.
Application of federal bankruptcy law does not justify the cre-
ation of a new federal common law rule. Rather, under Butner
v. United States, 440 U.S. 48 (1979), “[p]roperty interests are
created and defined by state law” and “[u]nless some federal
interest requires a different result, there is no reason why such
interests should be analyzed differently simply because an
interested party is involved in a bankruptcy proceeding.” Id.
at 55. Nothing in the Bankruptcy Code creates a special status
for interline balances, although the issue was discussed spe-
cifically by Congress during consideration of the legislation
              IN RE: CONSOLIDATED FREIGHTWAYS CORP.                   3961
that eventually formed the 1978 Bankruptcy Code. See Union
Pac. R.R. Co. v. Moritz (In re Iowa Railroad Co.), 840 F.2d
535, 538 (7th Cir. 1988). Indeed, a provision mandating pay-
ment of interline balances passed the Senate; however, “[t]he
Code as enacted does not so much as mention interline bal-
ances.” Id. No other interstate industry enjoys special protec-
tion in federal bankruptcy proceedings. Thus, one cannot say
that the underlying principles of federal bankruptcy law auger
for the recognition of a federal common law rule.

   [4] Thus, the question becomes whether federal regulation
of interstate transportation requires the creation of a new fed-
eral common law rule. “That the dispute involves the inter-
state transportation network is not enough.” Id. at 540 (citing
Miree v. DeKalb Co., 433 U.S. 25 (1977)). Nor does the fact
that the interstate transportation is heavily regulated control;
because “[e]xtensive regulation is no substitute for a conflict.”
Id. Indeed, the most recent comprehensive Congressional
action concerning interstate transportation, the enactment of
the Interstate Transportation Act (“Transportation Act”) in
1996, 49 U.S.C. §§ 10101-16106, reduced the federal regula-
tory role.2 The Transportation Act added as a policy objective
the need to “to minimize the need for Federal regulatory con-
trol over the rail transportation system,” 49 U.S.C. § 10101,
a provision that did not exist under the Interstate Commerce
Act in the late 1970s. See Interstate Commerce Act, Pub. L.
No. 95-473, 92 Stat. 1337 (1978) (codified at 49 U.S.C.
§§ 10101-11915). The Transportation Act itself contemplates
a system of private, not federally created, relationships. For
example, the Transportation Act provides that rail carriers

   2
     The Interstate Commerce Commission Termination Act of 1995, Pub.
L. No. 104-88, 109 Stat. 803 (Dec. 29, 1995), substituted the Transporta-
tion Act for the Interstate Commerce Act, both located at Subtitle IV of
Title 49 of the United States Code. The majority of the provisions of the
Interstate Commerce Act were reenacted in the Transportation Act.
Although Norfolk refers to the Interstate Commerce Act in its briefing, the
debt at issue in this case was incurred after the enactment of the Transpor-
tation Act. Therefore we base our decision on the Transportation Act.
3962        IN RE: CONSOLIDATED FREIGHTWAYS CORP.
     shall establish through routes (including physical
     connections) with each other and with water carriers
     . . . [,] shall establish rates and classifications appli-
     cable to those routes, and shall establish rules for
     their operation and provide—
           (1) reasonable facilities for operating the
           through route; and
           (2) reasonable compensation to persons
           entitled to compensation for services
           related to the through route.
49 U.S.C. § 10703. The Transportation Act does not create a
federally-guaranteed system of payment of interline balances.
In short, the current statutory interstate transportation scheme
does not provide significant support for the notion that there
is a strong federal policy that warrants the creation of federal
common law recognizing a trust relationship among shippers.
   Norfolk points to three statutory provisions to demonstrate
that there is a general federal policy to “foster sound eco-
nomic conditions in transportation and to ensure effective . . .
coordination between rail carriers and other modes[.]” 49
U.S.C. § 10101(5); see also 49 U.S.C. § 13101(a)(2)(K) (It is
the policy of the United States in its regulation of motor carri-
ers to “promote competitive and efficient transportation ser-
vices in order to . . . promote intermodal transportation.”). In
addition to these general policy statements, Norfolk highlights
§ 10705, entitled “Authority: through routes, joint classifica-
tions, rates, and divisions prescribed by Board.” 49 U.S.C.
§ 10705. That section states:
     (a)(1) The [Surface Transportation] Board may, and
     shall when it considers it desirable in the public
     interest, prescribe through routes, joint classifica-
     tions, joint rates, the division of joint rates, and the
     conditions under which those routes must be oper-
     ated, for a rail carrier providing transportation sub-
     ject to the jurisdiction of the Board under this part.
     ...
            IN RE: CONSOLIDATED FREIGHTWAYS CORP.             3963
    (b) The Board shall prescribe the division of joint
    rates to be received by a rail carrier providing trans-
    portation subject to its jurisdiction under this part
    when it decides that a division of joint rates estab-
    lished by the participating carriers under section
    10703 of this title, or under a decision of the Board
    under subsection (a) of this section, does or will vio-
    late section 10701 of this title.
Id.
   Norfolk argues that the general policy supporting effective
and efficient intermodal transportation, together with the use
of the phrase “to be received” in describing “the division of
joint rates” in 49 U.S.C. § 10705, demonstrates that the
United States’ policy is “that a carrier participating in an
interline movement not only be entitled to a division of the
freight charge, but that the carrier actually receive its earned
division.” However, this argument is unconvincing. While the
general argument that the use of the term “to be received”
implies the need for a trust relationship is itself questionable,
the section where the words appear only apply in circum-
stances where the Board determines that the existing division
of joint rates “does or will violate section 10701.” 49 U.S.C.
§ 10705. In such a situation it makes sense that the Board is
determining how much the carrier will actually receive,
because it has already held that the existing division violates
public policy. The implementing authority for this section
does not mention the relationship between interline carriers.
Rather, it focuses on the procedure for requesting the pre-
scription of a through route or rate before the Surface Trans-
portation Board and the procedure for the Board to prescribe
a through route or rate on its own. See 49 C.F.R. §§ 1144.1-
1144.3.
   Further, Norfolk’s argument that federal common law is
justified based on the general policy underlying the Transpor-
tation Act is further undermined by the concurrent policy of
the regulation “to allow, to the maximum extent possible,
competition and the demand for services to establish reason-
3964           IN RE: CONSOLIDATED FREIGHTWAYS CORP.
able rates for transportation by rail” and “to minimize the
need for Federal regulatory control over the rail transportation
system.” 49 U.S.C. § 10101(1), (2). These two policy goals
are more supportive of a system in which rail carriers are free
to contract with other transportation providers in providing
through service rather than strictly determining that all inter-
line accounts are held in trust for other carriers.
   Moreover, unlike other statutes, the Transportation Act
does not contain any provisions encouraging the development
of federal common law by the courts.3
   [5] In sum, the policies underlying federal bankruptcy and
interstate transportation law do not conflict significantly with
the use of state law in determining the payment of interline
balances. Therefore, the creation of a new federal common
law rule imposing a constructive trust for the payment of
interline balances in bankruptcy is not justified.4
   AFFIRMED.

  3
     For example, and in contrast, under ERISA, Congress has authorized
the courts “to formulate a nationally uniform federal common law to sup-
plement the explicit provisions and general policies set out in [the Act].”
Peterson v. Am. Life & Health Ins. Co., 48 F.3d 404, 411 (9th Cir. 1995)
(internal quotation omitted).
   4
     Although the Seventh Circuit has reached a similar conclusion, Union
Pac. R.R. Co., 840 F.2d at 545, we recognize that the Third and the Sixth
Circuits have held that the interline trust doctrine exists as a matter of fed-
eral common law. See Parker Motor Freight, Inc. v. Fifth Third Bank, 116
F.3d 1137 (6th Cir. 1997); Ann Arbor R.R. Co. v. Comm. of Interline R.R.
(In re: Ann Arbor R.R. Co.), 623 F.2d 480 (6th Cir. 1980); In re: Penn
Central Trans. Co., 486 F.2d 519 (3d Cir. 1973). In re: Ann Arbor Rail-
road and In re: Penn Central Transportation were decided on the basis of
pre-Bankruptcy Code and pre-Transportation Act law. To the extent that
the cases apply the doctrine under the Bankruptcy Code and Transporta-
tion Act, we disagree and join the Seventh Circuit in rejecting the applica-
tion of the interline trust doctrine in bankruptcy.