author: ALEXANDER HARVEY, II, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. MYSTIC FUEL, INC., Defendant and Third-Party Plaintiff, v, Richard E. SCHATTMAN, Third-Party Defendant.
    Civ. No. H-84-3854.
    United States District Court, D. Maryland.
    Oct. 10, 1985.
    Peter D. Ward, Asst. U.S. Atty., Baltimore, Md., and J. Christopher Kohn, Director, Commercial Litigation Branch, U.S. Dept, of Justice, Washington, D.C., for plaintiff.
    Michael Gordon, Baltimore, Md., Richard M. Passalacqua, Boston, Mass., for third-party defendant and third-party plaintiff.
   MEMORANDUM AND ORDER

ALEXANDER HARVEY, II, District Judge.

Plaintiff, United States of America, has brought this civil action to enforce certain final decisions of the contracting officer who administered its contract with defendant, Mystic Fuel, Inc. (hereinafter “Mystic”). Pursuant to a disputes clause in the contract between the parties, the contracting officer assessed damages against defendant Mystic in the amount of $139,-852.81 plus interest, because of defects in defendant’s performance of the contract.

Presently before the Court is plaintiff’s motion for summary judgment. Defendant has opposed plaintiff’s motion, and has in turn filed a motion asking this Court to either remand these proceedings to the Armed Services Board of Contract Appeals (hereinafter the “ASBGA”), or to stay these proceedings so that it may apply to the ASBCA to vacate its previous dismissal of defendant’s administrative appeal. Memoranda, affidavits and exhibits in support of and in opposition to these motions have been filed by the parties and carefully reviewed by the Court. No hearing is necessary. See Local Rule 6. For the reasons to be stated herein, this Court concludes that defendant’s motion for a stay or a remand of these proceedings must be denied and that plaintiff’s motion for summary judgment must be granted.

I

The Facts

The material facts are not in dispute. On July 19, 1978, defendant Mystic entered into Contract Number DLA600-78-D-2497 (hereinafter the “Contract”) with the United States through a government agency, the Defense Fuel Supply Center (“DFSC”). Under the terms of the Contract, Mystic was to supply and deliver No. 2 fuel oil and other items to several locations including Fort Belvoir, Fort Myer, Fort Ritchie, Fort Monroe, Fort Lee, Andrews Air Force Base, and Aberdeen Proving Ground. The ordering period was from August 1, 1978 through July 31, 1979. Section L, Clause 12 of the Contract, designated the “Disputes” clause, provides as follows:

(a) Except as otherwise provided in this contract, any dispute concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Contracting Officer, who shall reduce his decision to writing and mail or otherwise furnish a copy thereof to the Contractor. The decision of the Contracting Officer shall be final and conclusive unless, within 30 days from the date of receipt of such copy, the Contractor mails or otherwise furnishes to the Contracting Officer a written appeal addressed to the Secretary. The decision of the Secretary or his duly authorized representative for the determination of such appeals shall be final and conclusive unless determined by a court of competent jurisdiction to have been fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence. In connection with any appeal proceeding under this clause, the Contractor shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute hereunder, the contractor shall proceed diligently with the performance of the contract and in accordance with the Contracting Officer’s decision.
(b) This “Disputes” clause does not preclude consideration of law questions in connection with decisions provided for in paragraph (a) above: Provided, That nothing in this contract shall be construed as making final the decision of any administrative official, representative, or board on a question of law.

After the parties had entered into the Contract, and defendant had undertaken to perform thereunder, the government claimed that the defendant had failed to properly perform its obligations. The government sent cure notices to Mystic, but according to the government, the defendant failed to cure the defects in its performance. The United States accordingly terminated several items in the Contract for default and assessed damages with respect to other Contract items. In connection with these default terminations and damages assessments, the contracting officer issued seven final decisions pursuant to the “Disputes” clause. He assessed reprocurement, repurchase, and oil spill costs against Mystic totaling $229,732.15. The United States offset against this sum $89,879.34 in monies otherwise owed by it to Mystic, thus reducing the principal amount owed by Mystic to $139,852.81. Interest has continued to accrue on this amount at varying rates, as set forth in each of the contracting officer’s decisions.

On or about September 25,1979, Edward A. Cincotta, Treasurer of Mystic, retained an attorney who was reportedly experienced in ABSCA proceedings to represent the company with regard to the Contract with DFSC. On September 10, 1981, Mystic’s attorney filed a consolidated appeal of all of the contracting officer’s decisions with the ABSCA. Defendant, through its officers, maintained contact with its attorney in an attempt to ensure that its interests were being protected before the ABS-CA. Mr. Cincotta furnished and reviewed documents, attended depositions, and answered interrogatories forwarded to him by the company’s attorney. The attorney repeatedly told Cincotta that the appeal was proceeding normally, and even reported to him more than once that settlement was imminent.

It is apparent from the record, however, that Mystic’s attorney did little work on the appeal after it had been filed. On January 3, 1983, the ABSCA dismissed the appeal for failure to prosecute. Cincotta did not learn of the dismissal until July 5, 1984, when he received a copy of the decision from Mystic’s attorney without a cover letter or explanation. When Cincotta telephoned the attorney, the attorney told him that the appeal had been lost “after a hearing before the ABSCA.”

II

Discussion

A motion for summary judgment filed pursuant to Rule 56, F.R.Civ.P. should be granted “forthwith” if the pleadings, discovery and affidavits filed in the case show that there, is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Rule 56(c). One of the purposes of Rule 56 is to require a plaintiff, in advance of trial and after a motion for summary judgment has been filed and supported, to come forward with some minimal facts to show that a defendant may be liable under the claims alleged. See Rule 56(e). In the absence of such a minimal showing, a defendant should not be required to undergo the considerable expense of preparing for and participating in the trial of those issues addressed in a motion for summary judgment. If there is no genuine dispute as to any material fact, summary judgment should be granted to conserve judicial time and energy by avoiding an unnecessary trial and by providing a speedy and efficient summary disposition. Bland v. Norfolk and Southern Railroad Company, 406 F.2d 863, 866 (4th Cir.1969).

The “Disputes” clause contained in the Contract between Mystic and the government is clearly in accord with statutory law relating to such contracts. The Wunderlich Act, 41 U.S.C. § 321, provides that no contract provision relating to the finality of a decision of a government representative shall be pleaded as limiting judicial review where fraud is alleged, “Provided, however, That any such decision shall be final and conclusive unless the same is fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence.”

Applicable case law indicates that, because defendant Mystic failed to prosecute its appeal before the ABSCA, it is foreclosed from defending on the merits the government’s enforcement action. In United States v. Holpuch, 328 U.S. 234, 66 S.Ct. 1000, 90 L.Ed. 1192 (1946), the Court considered the question whether a contractor’s failure to exhaust the administrative appeal provisions of a government construction contract barred him from bringing suit in the Court of Claims to recover damages. In Holpuch, the contracting officer had issued a decision adverse to the contractor pursuant to a disputes clause similar to the one involved here. Instead of filing an administrative appeal as specified in the clause, the contractor filed an action in the Court of Claims to recover damages. The Supreme Court held that when the contractor chose without due cause to ignore provisions of the disputes clause, he destroyed his right to sue for damages in the Court of Claims. The Court stated that the disputes clause “is something more than a dead letter to be revived only at the convenience or discretion of the contractor. It is a clear, unambiguous provision applicable at all times and binding on all parties to the contract.” Id. at 239, 66 S.Ct. at 1003. The Court of Claims was “obliged to outlaw [the contractor’s] claims, whatever may be their equity. To do otherwise is to rewrite the contract.” Id. at 240, 66 S.Ct. at 1003.

Although Holpuch involved a contractor in an offensive posture rather than in a defensive posture as in this case, Judge (now Justice) Blackmun in United States v. Ulvedal, 372 F.2d 31 (8th Cir.1967) stated that the rationale of cases such as Holpuch “seems equally applicable when the contractor is sued as when he is the one who sues.” Id. at 34. Ulvedal involved a government construction contract in which the contracting officer, pursuant to the disputes clause, assessed liquidated damages against the contractor. When the contractor took no administrative appeal and also failed to pay the damages assessed, the government sued in federal court. The Eighth Circuit held that by failing to avail itself of the administrative appeal process, the defendant had abandoned his opportunity to make his record before the agency head and to establish there, if he could, that the decision was one which qualified for judicial waiver. Id. at 34.

Applying the principles of those cases here, it is apparent that defendant Mystic, in failing to prosecute its appeal before the ABSCA, has given up its right to have its case reviewed on the merits by this Court. Under the “Disputes” clause contained in the Contract, Mystic agreed to an exclusive procedure by which, in the event of a dispute, the parties would present the issue to the contracting officer. The government followed this procedure and obtained seven final judgments in its favor. Mystic properly appealed those decisions to the ABS-CA, but its appeal was dismissed some 15 months later for failure to prosecute. The appeal procedure has accordingly been concluded. Since Mystic failed to create an administrative record which could serve as a basis for review by this Court, it has given up its right to defend this action here.

Indeed, in its brief in opposition to plaintiff’s motion for summary judgment, defendant has offered no rebuttal on the merits to the government’s motion. Rather, Mystic claims that it lost its right to present the merits of its objections to the contracting officer’s determination entirely through the default of its former counsel, despite its own diligence. Accordingly, Mystic has moved this Court to either remand these proceedings to the ABSCA, or alternatively to stay these proceedings so that Mystic may apply to the ABSCA to vacate the dismissal. Mystic argues that where parties to other cases have suffered similar abuse at the hands of their counsel, some courts have granted relief from judgment pursuant to the equitable provisions of Rules 55(c) and 60(b), F.R.Civ.P.

The Supreme Court , faced a similar dismissal of a petitioner’s claim because of his attorney’s default in Link v. Wabash Railroad Co., 370 U.S. 626, 82 S.Ct. 1386, 8 L.Ed.2d 734 (1962). In that case, the Court stated:

There is certainly no merit to the contention that dismissal of petitioner’s claim because of his counsel’s unexcused conduct imposes an unjust penalty on the client. Petitioner voluntarily chose this attorney as his representative in the action, and he cannot now avoid the consequences of the acts or omissions of this freely selected agent. Any other notion would be wholly inconsistent with our system of representative litigation, in which each party is deemed bound by the acts of his lawyer-agent and is considered to have “notice of all facts, notice of which can be charged upon the attorney.” Smith v. Ayer, 11 Otto 320, 326, 101 U.S. 320, 326, 25 L.Ed. 955.

Link, supra at 633-34, 82 S.Ct. at 1390-91. The court reasoned that “keeping this suit alive merely because plaintiff should not be penalized for the omissions of his own attorney would be visiting the sins of plaintiff’s lawyer upon the defendant.” Id. at 634, n. 10, 82 S.Ct. at 1390, n. 10.

In Universal Film Exchanges, Inc. v. Lust, 479 F.2d 573 (4th Cir.1973), the Fourth Circuit relied upon the Link case in denying a Rule 60(b)(1) motion to vacate a summary judgment. Furthermore, this Court relied on both Link and Universal Film Exchanges, Inc. to deny Rule 60(b) relief from dismissal in Brown v. E.W. Bliss Co., 72 F.R.D. 198 (D.Md.1976). In light of these authorities, this Court cannot accept defendant’s argument that it should be relieved from the ABSCA’s dismissal of its appeal because of the deficient representation of its former attorney. Defendant is bound by its attorney’s acts. Furthermore, a stay or a remand would severely prejudice plaintiff’s interests. The relevant decisions of the contracting officer are now between four and six years old, and witnesses may very well be difficult to locate, or may have forgotten pertinent facts even if they are found.

While Mystic is unable to defend itself on the merits against the government’s enforcement action, it is certainly not without recourse. Mystic has already sought to enforce a claim against its former attorney by filing a third-party complaint against him in this action. In Link, the Supreme Court said that “if an attorney’s conduct falls substantially below what is reasonable under the circumstances, the client’s remedy is against the attorney in a suit for malpractice.” Link, supra at 634, n. 10, 82 S.Ct. at 1390, n. 10. See also, Universal Film Exchanges, Inc., supra at 577. In Brown, this Court wrote (72 F.R.D. at 200):

The time has come for lawyers to be responsible for their mistakes and their lack of attention to their professional responsibilities. Doctors are held responsible for their mistakes in malpractice suits. Engineers and architects are regularly sued for errors which cost their clients money. Yet few are the attorney malpractice suits which are brought. And few will be brought if trial judges look the other way in the face of clear incompetence and regularly give attorneys another chance where they have disregarded schedules reasonably set for the disposition of litigation.

In this particular case, defendant Mystic has asserted such a malpractice claim against its attorney.

For all these reasons, this Court concludes that, as a matter of law, plaintiff’s motion for summary judgment must be granted, and that defendant’s motion for a stay or a remand of these proceedings must be denied. Judgment will accordingly be entered in favor of the plaintiff in the amount of $139,852.81 plus prejudgment interest and costs.

Accordingly, it is this 10th day of October, 1985, by the United States District Court for the District of Maryland,

ORDERED:

1. That plaintiff’s motion for summary judgment be and the same is hereby granted;
2. That defendant’s motion for a stay or a remand of these proceedings be and the same is hereby denied; and
3. That judgment is hereby entered in favor of plaintiff against defendant Mystic Fuel, Inc. in the amount of $139,-852.81 plus prejudgment interest at the rate set forth in each of the seven decisions by the contracting officer, such interest to accrue from the date of each decision to the date of this judgment.

      . The Contract Disputes Act, 41 U.S.C. § 601 et seq., is not applicable here.

      . A third party complaint alleging negligence on the part of its attorney has been filed by Mystic in this action.

      . Although this action was filed almost one year ago, it does not appear that Mystic has as yet applied to the ABSCA to vacate this dismissal.


source: Caselaw Access Project

author: ATKINS, District Judge.

license: Public Domain

text:
    HOTEL EMPLOYEES-HOTEL ASSOCIATION PENSION FUND, a/k/a Hotel Industry Pension Fund, Plaintiff, v. Buck TIMPERIO, Armando Yasquez, and Rafael Sanchez, Individually, Defendants.
    No. 83-1892-Civ.
    United States District Court, S.D. Florida.
    Oct. 15, 1985.
    Bobbye D. Spears, William H. Berger, Atlanta, Ga., for U.S. Dept, of Labor.
    Gary B. Sack, Miami, Fla., for defendants.
    Allan M. Elster, Miami, Fla., for plaintiff.
   MEMORANDUM IN SUPPORT OF ORDER GRANTING MOTION OF WITHERS AND TRIMAS TO QUASH SUBPOENAS

ATKINS, District Judge.

A. Statement of the Case

On January 6, 1984, plaintiff caused trial subpoenas duces tecum and ad testificandum to be served upon B.R. Withers, Jr., Area Administrator, Labor-Management Services Administration, Untied States Department of Labor, Miami, Florida, and Donald Trimas, Investigator in that office. They direct Mr. Withers and Mr. Trimas to produce “work records and reports prepared by the Department of Labor with respect to its audit of the Pension Fund’s records concerning expense allowance procedures.” In addition, the subpoenas seek testimony from Mr. Withers and Mr. Trimas on behalf of plaintiff because, the latter “has no independent means of verifying your investigative findings without the Department of Labor’s cooperation/’ See letter from Allan M. Elster to Jesse Day, dated January 9, 1984 (see Exhibit A attached to defendant’s memorandum).

It is also understood that plaintiff seeks the aforementioned testimony for purposes of admitting the requested records into evidence. A certified copy of all non-privileged portions of the investigative file has been provided to plaintiff.

B. Mr. Withers and Mr. Trimas are Prohibited from Testifying in this Case by Virtue of Labor Department Regulations Set Forth at 29 CFR §§ 2.20 et seq.

Labor Department regulations set forth at 29 CFR §§ 2.20-2.25, 46 Fed.Reg. 49542 (October 6, 1981) prohibit Labor Department employees from furnishing any information in response to a subpoena without the authorization of the Deputy Solicitor of Labor. The instant subpoenas have been brought to the Deputy Solicitor’s attention and he has instructed Mr. Withers and Mr. Trimas, inter alia, not to testify in response to the subpoenas. See letter to B.R. Withers and Donald Trimas from Richard T. Galgay dated February 1, 1984 (see Exhibit B attached to defendant’s memorandum). As noted in the letter, in view of the fact (a) that a certified copy of all non-privileged portions of the investigative file has been disclosed, and (b) the limited agency resources available to carry out the agency’s congressionally mandated duties, the overall public interest would be served in this case by refraining from becoming involved in private litigation, and instead tending to the public business of enforcing pension laws. See also affidavit of Ronald G. Whiting, Deputy Solicitor of Labor (see Exhibit C attached to defendant’s memorandum).

The validity of the Labor Department’s regulation and the Deputy Solicitor’s application of it has recently been upheld by three courts. See Reynolds Metal Company v. Crowtker, 572 F.Supp. 288 (D.Mass.1982); Smith v. C.R.C. Builders Company, Inc., (D.Colo., Civil Action, No. 82-F-2120, decided Mar. 3, 1983); and Brochard v. Burg, (S.D.Fla. Civil Action No. 83-8208-Civ-ALH decided Oct. 25, 1983).

In Reynolds Metals, the court, relying on United States ex rel. Touhy v. Ragen, 340 U.S. 462, 474-73, 71 S.Ct. 416, 421-22, 95 L.Ed. 417 (1951), upheld the Department of Labor’s refusal to allow an investigator with the Occupational Safety and Health Administration to testify in a private civil suit. In so ruling, the court recognized that “[t]he policy behind prohibition of testimony is to conserve governmental resources where the United States is not a party to a suit, and to minimize governmental involvement in controversial matters unrelated to official business.” 572 F.Supp. at 290. As the court said:

Despite these restrictions on testimony by its employees, the Department’s policy is to make all non-privileged portions of the Investigative file available, provided there is no ongoing enforcement action. Thus, the Department affords substantial accommodation in practice to the interests of private litigants, within limits consistent with the need for internal regulation of its affairs. Id.

The Court in Smith, again relying on Touhy, ruled that an employee of the Department of Labor'could not be required to testify in a private civil suit without the approval of the Deputy Solicitor of Labor. And in Brochará, Judge Hastings of this Court followed Touhy in a similar context. As was held:

The Supreme Court has specifically recognized the authority of agency heads to restrict the testimony of their subordinates through this type of regulation, [citing Touhy ]

Accordingly, for the reasons expressed by the Supreme Court in Touchy, and the line of cases following that decision, the subpoenas to Mr. Withers and Mr. Trimas should be quashed and vacated insofar as they required testimony at trial.

C. The Testimony of Mr. Withers and Mr. Trimas for Purposes of Admitting Official Department of Labor Documents Into Evidence

Rule 808(8), Federal Rules of Evidence, provides that even though a declarant may be available as a witness, public records and reports are not excluded by the hearsay evidence rule and consequently are admissible. The rule defines public records and reports as follows:

(8) Public records and reports. Records, reports, statements, or data compilations, in any form, of public offices or agencies, setting forth (A) the activities of the office or agency, or (B) matters observed pursuant to duty imposed by law as to which matters there was a duty to report, ... or (C) in civil actions and proceedings and against the Government in criminal cases, factual findings resulting from an investigation made pursuant to authority granted by law, unless the sources of information or other circumstances indicate lack of trustworthiness.

These same types of records are addressed in 28 U.S.C. § 1732 and include memorandums, writings, entries, prints, representations or combinations théreof, of any act, transactions, occurrence or event in the regular course of business. Records generated and compiled in the regular course of federal agency law enforcement investigations have repeatedly been held to be admissible and entitled to weight under these hearsay exceptions in private litigation. See, Smith v. Universal Services, Inc., 454 F.2d 154 (5th Cir.1972) (report prepared by Equal Employment Opportunity Commission); Bell v. Birmingham Linen Service, 715 F.2d 1552, 1554 n. 4 (11th Cir.1983); Local U. No. 59, Intern. Broth. v. Namco Elec., 653 F.2d 143, 145 (5th Cir.1981) (findings of National Labor Relations Board); Flacon v. General Tel. Co. of Southwest, 626 F.2d 369, 382-83 (5th Cir.1980) (report prepared by Department of Housing and Urban Development); Hodge v. Seiler, 558 F.2d 284, 288-89 (5th Cir.1977) (investigative report prepared by Department of Housing and Urban Development; Abdel v. United States, 670 F.2d 73 (7th Cir.1982) (reports prepared by Department of Agriculture.

More particularly, reports generated and compiled in the regular course of Labor Department law enforcement investigations have been held to be admissible in private cases. See, e.g., Taylor v. Baltimore and Ohio Railroad Company, 344 F.2d 281, 285-87 (2nd Cir.1965) (records compiled in connection with a Longshoremen’s and Harbor Workers’ Compensation Act investigation.

It is thus clear that the certified copy of the investigative record made available in response to the subpoena is admissible by virtue of Rule 803(8), Federal Rules of Evidence, and 28 U.S.C. § 1732. Accordingly, to the extent the subpoenaed testimony is sought for purposes of admitting the investigative file into evidence, it is totally unnecessary.

      . A Department of Justice regulation similar to the one relied on here by the Department of Labor was recently upheld by the Eleventh Circuit in United States v. Bizzard, 674 F.2d 1382, 1387 (11th Cir.1982). See also, United States Steel Corp. v. Mattingly, 663 F.2d 68 (10th Cir.1980).

        . In a letter dated January 27, 1983 from Mr. Withers to the Board of Trustees of plaintiff fund (See exhibit D attached to defendant's memorandum), he stated that while the Department of Labor did not intend to take legal action against those trustees who had failed to reimburse the fund, he was "authorized to provide relevant information concerning the findings and supporting documentation of our investigations to any interested party.” This has been done. Nowhere has any representation been made that the Department of Labor would provide witnesses in any lawsuit which might be filed.


author: LAFFITTE, District Judge.

text:
    CASTLE & COOKE, INC., Plaintiff, v. ETOILE SHIPPING CO., LTD., et al., Defendants.
    Civ. No. 83-2689 HL.
    United States District Court, D. Puerto Rico.
    Oct. 16, 1985.
    Antonio M. Bird, Bird & Bird, San Juan, Puerto Rico, for plaintiff.
    Gustavo Gelpi, San Juan, Puerto Rico, for defendants Rederiaktiebolaget Gustaf Erikson and British Marine Mut. Ins. Assn. Ltd.
   OPINION AND ORDER

LAFFITTE, District Judge.

Plaintiff, Castle & Cooke, Inc., the parent corporation of Bumble Bee Seafoods and Bumble Bee Puerto Rico, brought this admiralty action for monetary damages against defendants, M.V. Reefer Insel (“Insel”), Etoile Shipping Co., Ltd. (“Etoile”), the owner of the Insel, Rederiaktiebolaget Gustaf Erikson (“Erikson”), the time-charter owner of the Insel, and British Marine Mutual Insurance Assoc., Ltd. (“BMMI”), the assurer of the owners and charterer. The action is based on the partial loss of a cargo of frozen tuna. Plaintiff filed claims against Etoile and Erickson for negligence and breach of duty as common carriers under the terms of the bills of lading, and a claim against Erikson alone for breach of duty under the charter party. Defendant Erikson filed a cross-claim against Etoile for indemnification if liability is found.

Before the Court are defendants’ Motion to submit plaintiff’s claims to arbitration and a Motion to stay the proceedings pending arbitration. The Court grants defendants’ Motion and compels plaintiff to arbitrate its claims against all defendants in London, England. Since no claim remains before us, the action is dismissed without prejudice under Fed.R.Civ.P. 41.

On September 10, 1982, Bumble Bee Sea-foods entered into a voyage charter party with Erikson, the time charter owner of the Insel, to ship 800-900 metric tons of frozen tuna from Mayaguez to Palermo. Pursuant to the charter party Erikson was responsible for loss or damage to the cargo resulting from a lack of care in assuring that the vessel was properly manned, equipped, supplied and is, in all respects seaworthy and suitable for carriage of frozen tuna. The charter party includes an arbitration clause. Clause 26 states:

“Any dispute between Owners and Charterers under this Charter Party shall be submitted to arbitration in London, according to the laws of England.”

On September 27, 1982, Bumble Bee Seafood and Bumble Bee Puerto Rico delivered 850 metric tons of frozen tuna to the Insel at the Port of Mayaguez, Puerto Rico, to be shipped to Palermo and Trieste, Italy. In consideration for the freight of tuna, the Master of the Insel issued Bumble Bee Puerto Rico three bills of lading for carriage of the cargo. Each bill of lading stated expressly that it is to be used with the charter party. The bill of lading Conditions of Carriage Clause (1) reads:

All terms and conditions, liberties and exceptions of the Charter Party, dated as overleaf, are herewith incorporated.

The applicable charter party dated on the overleaf is the September 10, 1982 agreement between Bumble Bee Seafood and Erikson.

Plaintiff claims that the cargo of tuna arrived in Italy partially damaged due to an inadequate refrigeration. Plaintiff admits that the claim against Erikson for breach of the charter party must be submitted to arbitration in accordance with clause 26 of the agreement. Defendants contend that plaintiff is bound to arbitrate all claims against all defendants. Defendants’ motion to submit this action to arbitration raises the issues whether the arbitration clause in the voyage charter party between plaintiff and Erikson is incorporated in the bills of lading and, if so, whether plaintiff’s claim against Etoile and BMMI can be submitted to arbitration even though they are not signatories to the charter party.

It is well settled that where “the terms of the charter party are ... expressly incorporated into the bills of lading they are part of the contract of carriage and are binding upon those making a claim for damages for breach of the contract...” Son Shipping Co. v. DeFosse & Tanghe, 199 F.2d 687, 688 (2nd Cir.1952); see also, Bunge Corp. v. Stalt Hippo, 1980 AMC 2611, 2614 (S.D.N.Y.1980); Midland Tar Distillers, Inc. v. M/T Lotos, 1973 A.M.C. 1924 (S.D.N.Y.1973); Mitsubishi Shoji Kaisha Ltd. v. M/S Galini, 323 F.Supp. 79, 82 (S.D.Tex.1971); Michael v. S.S. Thanasis, 311 F.Supp. 170, 173 (N.D.Calif.1970); Lowry & Co. v. LeMoyne D’Iberville, 253 F.Supp. 396, 398 (S.D.N.Y.1966). To compel arbitration pursuant to a clause in a charter party it is not necessary for the claimant to be a party to the charter agreement. Bunge, supra, at 2614. It is enough that the clause was unequivocally incorporated in the bill of lading and the shipper was aware of the incorporation. SS Thanasis, supra, at 173.

The bills of lading here explicitly incorporate all “terms and conditions, liberties and exceptions of the Charter Party” dated September 10, 1982. The bills of lading are neither long nor abstruse and the incorporation clause is conspicuously placed as Clause (1) under Conditions of Carriage. Most importantly, plaintiff in the present action is both a party to the charter party and holder of the bills of lading. Plaintiff, therefore, had either actual or constructive knowledge that the terms of the charter party were incorporated in the terms of carriage of the bills of lading.

Plaintiff relies on two cases to support its claim that the bills of lading represent a separate contract with Etoile and Erikson and do not incorporate the terms of the charter party: Tropical Gas Co. v. M/T Mundogas Caribe, 388 F.Supp. 647 (D.P.R.1974) and Commercial Metals Co. v. Star Int’l., 1984 A.M.C. 75 (S.D.N.Y.1982). These cases can be distinguished from the present case. In Tropical Gas the bill of lading left a blank space where the date of the charter party and the identity of the parties to the agreement were to be provided. The court decided that absent identification of the agreement, the parties were without notice as to “what, if any, charter party was intended to be incorporated.” Id. at 649. In the present case, the charter party is specifically identified and plaintiff had notice of its incorporation.

In Commercial Metals, the court held that a charter party arbitration provision, even though incorporated into a bill of lading, is only applicable to the signatories to the charter party if it is expressly “restricted to the immediate parties or limited to disputes ‘between the ... Owners and the Charterers’.” 1984 A.M.C. at 78, [citing Lowry & Co. v. S.S. LeMoyne D’Iberville, 253 F.Supp. 396 (S.D.N.Y.1966) ]. The court indicates that this decision may have been influenced by the facts of the case: that plaintiff’s dispute with the third party defendants were different from the arbitrable dispute under the charter party and that discovery had been completed and the case was ready for trial.

The facts of the present case are distinguishable from Commercial Metals. Here there exists only one dispute — the alleged damage to the tuna fish. The claim against each defendant arises out of the same core of operative facts. The claims also arise from the same legal basis which is the charter party as incorporated by the bills of lading. No discovery has commenced by either party. It would lead to a duplication of effort and potentially conflicting results if plaintiff proceeded to arbitrate its claims against Erikson in London, which he must, while trial proceeded on the identical claim against Etoile. The illogic of allowing litigation to proceed in this Court is compounded by the fact that Erikson has cross-claimed against Etoile claiming that he is entitled to indemnification if it is found that the damage was caused by the Master or other servant of Etoile.

The Court finds that the September 10, 1982 charter party between plaintiff and Erikson was specifically incorporated in the bills of lading by clause 1 of the Contract of Carriage. Since the bills of lading are the only documents which regulate the relationship between Etoile and plaintiff, plaintiff’s claims against Etoile are subject to the terms of the charter party, including the arbitration clause. For these reasons, the Court grants defendants’ motion to compel plaintiff to submit all claims against all defendants to arbitration. (

As there remains no claim before this Court, the complaint is dismissed without prejudice.

The Clerk shall enter judgment dismissing the complaint without prejudice.

IT IS SO ORDERED.

      . Bumble Bee Seafoods and Bumble Bee Puerto Rico have assigned their claims in this action to Castle & Cooke.

      . This decision is in the minority. The majority of courts have applied incorporated charter party provisions to nonsignatories without discussing whether the charter party limits arbitration. Supra, see cases at p. 610. This Court follows the decisions of the majority.


author: PLUNKETT, District Judge.

text:
    Philip O’CONNOR, Director of Insurance for the State of Illinois as Liquidator of Reserve Insurance Company, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, et al., Defendants.
    No. 81 C 4690.
    United States District Court, N.D. Illinois, E.D.
    Oct. 21, 1985.

      Ronald A. Jacks, David M. Spector, Loraine P. Eber, Isham, Lincoln & Beale, Chicago, 111., for Bind Inc., Dominion Ins. Co. of America, Employers Reinsurance Corp., Excess & Gas. Reinsurance Ass’n, Gerling Global Reinsurance Corp. (U.S. Branch), Hamburg Intern. Reinsurance Co., Ins. Co. of North America, INA Underwriters Ins. Co., Lumbermens Mut. Ins. Co., Monarch Ins. Co. of Ohio, Montgomery and Collins, Inc. of Texas, Petroleum Ins. Inc., Puritan Ins. Co., Rochdale Ins. Co., Scor Reinsurance Co., Societe Commerciale de Reassurance.
    Peter M. Sfikas, Clay H. Philips, Peterson, Ross, Schloerb & Seidel, Chicago, 111., for New England Reinsurance Corp., Prudential Reinsurance Co., Munich American Reinsurance Co., Munich Reinsurance Co. (U.S. Branch).
    Arent J. Jacobson, Chicago, 111., for Cent. Nat. Ins. Co. of Omaha.

      William H. Luking, Ross & Hardies, Chicago, 111., for American Reserve Ins. Brokers/Intemational, Inc.
    Jesse R. Pierce, Porter & Clements, Houston, Tex., David 0. Toolan, Jeremiah Marsh, Michael Schneiderman, John L. Rogers, III, John N. Gavin, Rebecca R. Pallmeyer, Hopkins & Sutter, Chicago, 111., for James A. Schacht, Acting Director of Ins.
    Erwin I. Katz, Alvin L. Kruse, Hoffman & Davis, P.C., Chicago, 111., for Independent Refining Corp.
    Alan John Rein, Rein, Mound & Cotton, New York City, for Gerling Global Reinsurance Corp. (U.S. Branch), Hamburg Intern. Reinsurance Co., Monarch Ins. Co. of Ohio, Puritan Ins. Co., Rochdale Ins. Co.
    John W. Dondanville, Evan B. Karnes, II, Baker & McKenzie, Chicago, 111., for General Reinsurance Corp., North American Reinsurance Corp.
   MEMORANDUM OPINION AND ORDER

PLUNKETT, District Judge.

Plaintiff, Philip R. O’Connor (the “Liquidator”), brings this diversity action on behalf of Reserve Insurance Company (“Reserve”). Reserve has been found insolvent, pursuant to the provisions of the Illinois Insurance Code (“Insurance Code”) and the Final Order of Liquidation entered by the Circuit Court of Cook County in People ex rel. Mathias v. Reserve Insurance Co., 79 Ch 2828. Defendants include twenty-six insurance companies which acted as reinsurers of Reserve’s liability under various reinsurance contracts (sometimes referred to as the “Reinsurers”); American Reserve Insurance Brokers International, Inc. (“ARIB”), which served as the manager under the contracts prior to Reserve’s liquidation and shortly thereafter; Montgomery and Collins, Inc. of Texas (“Montgomery”), which purchased ARIB's rights as manager of the contracts after entry of Reserve’s order of liquidation; and Petroleum Insurance, Inc. (“Petroleum”), an affiliate of Montgomery, which obtained from Montgomery the right to serve as manager under the contracts.

Presently before the court are the parties’ cross-motions for partial summary judgment. For purposes of their motions, all Defendants have adopted, pursuant to the court’s request, the argument set forth in the memorandum and the statement of facts and exhibits filed by the Insurance Company of North America, and certain other Defendants.

The court will grant a motion for summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. Rule 56(c). For the reasons stated below, Defendants’ motions for partial summary judgment are granted, and, accordingly, the Liquidator’s cross-motion is denied.

Factual Background

The relevant facts as we understand them, although complex, do not appear to be in dispute. On May 29, 1979, an order of liquidation was entered by the Circuit Court of Cook County, naming the Director of Insurance of the State of Illinois the Liquidator of Reserve. The Liquidator has title to Reserve’s property and is authorized to deal with the property and business of the company.

For several years prior to the entry of the liquidation order, Reserve was a party to several reinsurance contracts which shared insured property risks in the petroleum and petrochemical industries. In June 1975, Reserve entered into a “Quota Share Contract of Reinsurance” (the “3100 Treaty”) with certain reinsurers whereby a portion of the risk on petroleum and petrochemical insurance policies written by Reserve would be carried by the reinsurers. In July 1976, Reserve entered into a “First Surplus Reinsurance Agreement” (the “3200 Treaty”) which established a reinsurance arrangement for risks written above a certain dollar amount under the 3100 Treaty. ARIB acted as the manager under both the 3100 and the 8200 treaties.

Effective January 1, 1979, the 3100 and 3200 reinsurance contracts were replaced by a new contract of reinsurance between various reinsurers, with ARIB as the manager (the “3400 pool”). Reserve was a party to the 3400 pool both as a reinsurer of risks undertaken by other insurance companies and as a reinsured on its own risks. By an agreement dated June 25, 1979, Montgomery purchased ARIB’s interest as manager under the reinsurance contracts, and thereafter Petroleum became the new manager under the agreements. (The Liquidator refers to the three companies collectively as the “Manager”).

While a participant in the reinsurance pool, Reserve wrote many insurance policies covering property risks in the petroleum and petrochemical industries and ceded to the reinsurers under the 3100, 3200, and 3400 treaties their share of the risk insured by such policies. Reserve also accepted reinsurance risks on policies written by other insurance companies which were members of the pool. The reinsurance pool was governed by a written contract and operated as follows. ARIB collected the insurance premium from the policyholder. ARIB then used approximately 30% of the premium to pay commissions to the producing agent or broker and the ceding company. ARIB retained the remaining 70% which was credited to the ceding company and the reinsurers in proportion to their assumption of the risk. As losses were incurred, ARIB paid the loss payments to claimants out of those retained funds.

Each quarter ARIB provided the reinsurers with an accounting of net written premiums, losses, loss adjustment expenses, salvage, etc. If the net written premiums plus salvage recovered exceeded losses and expenses, ARIB paid out the net amount to the pool participants. If losses and expenses exceeded the net written premiums and salvage recoveries, the participants paid the difference to ARIB as manager. Defendants claim, and the Liquidator does not dispute, that from January 1, 1979 to the date of Reserve’s insolvency the losses exceeded the net premiums in the pool and Reserve failed to make the necessary payments during that period.

Sometime after January 1, 1979, ARIB ceased issuing Reserve policies. The Liquidator contends that in April and May 1979, ARIB cancelled a large number of Reserve’s policies because ARIB was concerned about Reserve’s failing financial condition. During that time, ARIB issued new policies in the name of one of the other ceding companies. The Liquidator asserts that this cancellation and rewriting of policies, prior to Reserve’s insolvency, was unauthorized and unlawful.

On the basis of the foregoing facts, the Liquidator alleges that he is entitled to recover, among other things, (1) certain reinsurance proceeds for losses incurred by Reserve’s policyholders prior to liquidation but not paid as of the date of the liquidation order (Count I); (2) certain monies which the reinsurers and the manager owe Reserve for claims of policyholders which ARIB paid with Reserve’s funds prior to liquidation (Count II); (3) Reserve’s proportionate share of premiums written (less losses and other expenses) which Reserve earned under the 3400 reinsurance agreement (Count III); (4) the unearned premiums which the Manager or the reinsurers are holding and which relate to Reserve policies which were cancelled on May 30, 1979 as a result of Reserve’s insolvency (Count IV); (5) the unearned premiums on Reserve policies to which the Liquidator would have been entitled had the Manager not cancelled such polices during the months prior to the liquidation order (Count V); and (6) the unearned commissions on policies cancelled by the liquidation order and cancelled by ARIB, allegedly without authority, during the months prior to the liquidation order (Count VI).

Defendants’ motions for partial summary judgment request, pursuant to Fed.R.Civ.P. Rules 12(b)(6) and 56: (1) a declaration that the amounts, if any, that the Liquidator may ultimately be entitled to receive under Counts I-IV are to be reduced by the debts of Reserve to the Reinsurers and other Defendants, to the extent the amount of those debts may ultimately be proven; and (2) an order dismissing Count V of the complaint (and Count VI to the extent it seeks unearned ceding commissions on insurance policies claimed to have been wrongfully cancelled pursuant to the theory of Count V) for failure to state a claim upon which relief can be granted.

The Liquidator’s cross-motion moves the court, pursuant to Fed.R.Civ.P. Rule 56, for partial summary judgment: (1) adjudging and declaring that the amounts the Liquidator is entitled to recover from Defendants may not be reduced by Reserve’s debts, or, in the alternative, adjudging and declaring that the amounts the Liquidator is entitled to recover under Counts I, IV, V, VI, and VIII of the complaint may not be reduced by Reserve’s debts; (2) adjudging and declaring that Defendants’ “mass cancellations” of Reserve policies prior to May 29, 1979 were unauthorized and wrongful or resulted in a voidable preference; and (3) adjudging and declaring that the Liquidator is entitled to recover from Defendants under Counts V and VI of the complaint. We address each of the issues in turn.

I. Set-Offs

Defendants contend that they are entitled to reduce the amount of any debt they may owe the Liquidator by debts Reserve owes to Defendants under the reinsurance agreements. The Liquidator opposes Defendant’s motions, arguing (1) that Defendants may not assert their set-off claim in this forum, but only in the liquidation court pursuant to provisions of the Insurance Code and the liquidation order, and (2) that even if Defendants’ set-off claims may be considered by this court, certain of those claims do not meet the requirements set out in the statute. See Ill.Rev.Stat. ch. 73, § 818 (1983).

1. The jurisdiction issue

The heart of the Liquidator’s argument is that the Insurance Code provides an exclusive procedure for the filing and determination of claims against an insolvent insurer, and that this procedure encompasses the assertion of set-offs. Furthermore, it is the Liquidator’s position that the injunctions contained in the liquidation order pursuant to Ill.Rev.Stat. ch. 73, § 801 (1983) present a bar to Defendants’ set-offs in this forum. Thus, the Liquidator argues, Defendants’ set-offs must be brought in the liquidation proceedings. Defendants argue that the Insurance Code’s provision regarding set-offs mandates that they be entitled to assert set-offs in this proceeding.

To resolve the issue we must examine Ill.Rev.Stat. ch. 73, § 818 (1983) which provides, in relevant part:

In all cases of mutual debts or mutual credits between the company and another person, such credits and debts shall be set off or counterclaimed and the balance only shall be allowed or paid. ...

Although the statutory language appears to be mandatory, it has been held that the right of set-off is permissive, not mandatory, and that its application lies within the discretion of the trial court, which exercises such discretion under the general principles of equity. See 4 Collier On Bankruptcy ¶ 68.02[1] (14th ed.1978). Even if the statute is not mandatory, however, there can be little question that Defendants are entitled to assert their set-off claims in this proceeding. It is true, as the Liquidator urges, that the liquidation order in sweeping terms bars the assertion of “claims” against the Liquidator or Reserve, except in the liquidation proceedings; however, the Liquidator’s argument that the term “claim” in that order is broad enough to encompass set-offs is unavailing. Such an interpretation of the liquidation court’s order would mean that the set-off provision under Illinois law had been effectively overridden by the liquidation order.

The distinction between a “claim” and a “set-off” was clearly described by the court in Schenck v. Coordinated Coverage Corp., 50 A.D.2d 50, 376 N.Y.S.2d 131 (1975), in which the court interpreted the New York Insurance Code’s set-off section. That section, unlike the current Illinois Section, did not expressly permit the assertion of counterclaims. The plaintiff, as liquidator of a New York insurance company, brought an action against one of the company’s agents to recover $1,400,000 allegedly representing certain commissions improperly paid to the agent. The agent denied that the monies were improperly paid as they did not represent commissions but were, rather, expenses to which it was entitled under the parties’ agreement. The agent claimed it not only had a right to retain the $1,400,000, but also claimed that its total expenses and fees amounted to $1,654,274. Therefore, the agent asserted a counterclaim for the difference of $254,-274. 376 N.Y.S.2d at 132. The plaintiff moved to dismiss the counterclaim, urging that a stay contained in the liquidation order barred the agent from asserting the counterclaim. The trial court concluded that the counterclaim was not barred and denied the motion to dismiss. See id. 376 N.Y.S.2d at 132-33.

The Court of Appeals reversed. Distinguishing between the assertion of a set-off and that of a counterclaim, the court stated:

A counterclaim “is broader and more comprehensive than, recoupment and set-off. ...” While a defendant who has asserted a counterclaim is entitled to an affirmative judgment, in the absence of a statute so providing “a defendant who has pleaded set-off is not entitled to recover the excess of his claim over the plaintiff’s demand.”

Id. 376 N.Y.S.2d at 134 (citations omitted). Specifically rejecting the trial court’s determination that the counterclaim came within the New York Insurance Code’s provision permitting offsets against a liquidator, the court concluded that the section:

permits only the assertion of a set-off and not a counterclaim. ... [Defendant seeks to obtain affirmative relief — by way of a money judgment — beyond that which can be obtained through the assertion of a set-off. ... However, both the statute and the cases indicate that where affirmative relief is sought — beyond a mere set-off up to the amount claimed by the liquidator — such relief is barred by the injunctive provision in a liquidation order and the action or counterclaim seeking the affirmative relief must be dismissed, the claimant being relegated to filing a claim in the liquidation proceeding____ The relief sought herein is clearly in the nature of a counterclaim and may not be asserted pursuant to Insurance Law § 538 but is rather, barred by the aforementioned injunction.

Id. 376 N.Y.S.2d at 133, 134 (emphasis added).

Defendants do not seek affirmative relief in this proceeding against assets held by the liquidation court, even though they claim that the set-offs asserted in this proceeding may exceed the amounts owed to the Liquidator, and even though the language of the Illinois statute expressly permitting “counterclaims” might be construed to permit the assertion of claims for affirmative relief. Defendants concede that they must file with the liquidation court their affirmative claims for amounts exceeding that which the Liquidator seeks in this action. All Defendants attempt to do in this action is to show that the Liquidator has no claim or a lesser claim against them. The plain language of the statute gives Defendants that right.

The Schenck court’s interpretation of the set-off provision is supported by courts and commentators. Cf. Baker v. Gold Seal Liquors, 417 U.S. 467, 470 n. 2, 94 S.Ct. 2504, 2506 n. 2, 41 L.Ed.2d 243 (1974) (“If the trustee in ordinary bankruptcy [as opposed to reorganization bankruptcy] goes into a court that has jurisdiction and asserts a claim, the debtor of the bankrupt may raise as a setoff any claim he has against the bankrupt and the court ordinarily issues only one judgment for the difference”); 4 Collier On Bankruptcy ¶ 68.05[2] (14th ed. 1978) (“[a] debtor of the bankruptcy estate who also has a claim against the estate may, if he chooses, assert the claim as a set-off in the forum in which his obligation to the estate is to be enforced”).

The Liquidator cites to Thacher v. H.C. Baldwin Agency, Inc., 283 F.2d 857 (7th Cir.1960) as support for his position that set-offs may be asserted only in the liquidation proceeding. The Seventh Circuit affirmed, without much discussion, the decision of the district court judge to refuse to permit the defendant to assert his set-offs and counterclaims against the liquidator of an insolvent New York insurance company. The court construed the district court’s reasoning as being that the liquidation order barred the assertion of claims against the liquidator except in the liquidation proceedings; 283 F.2d at 862. On its face, therefore, the Seventh Circuit’s opinion appears to conflict with our holding today. In fact, however, the trial judge refused to allow the set-offs, not because of an injunction in the liquidation order, but because the debts to be set off were not “mutual” and thus did not meet the statutory requirement. See Holz v. H. C. Baldwin, 140 F.Supp. 860 (S.D.Ind.1956). In addition, the court’s interpretation of what it believed to be New York law is irreconcilable with the subsequent New York state court decision in Schenck v. Coordinated Coverage Corp., 50 A.D.2d 50, 376 N.Y.S.2d 131 (1975). For these reasons, we respectfully decline to consider ourselves bound by the Thacher decision.

2. The set-off requirements

The Insurance Code states that “mutual debts ... between the company and another person ... shall be set off or counterclaimed and the balance only shall be allowed or paid.” Ill.Rev.Stat. ch. 73, § 818 (1983). The concept of “mutuality” refers to the idea that:

claims owed by or to the bankrupt prior to bankruptcy cannot be set off against claims owed by or to the bankrupt’s estate (as represented by the receiver or trustee) and arising after bankruptcy. This is because the element of mutuality of obligation is lacking.

4 Collier On Bankruptcy ¶ 68.10[1] (14th ed. 1978) (analyzing the Bankruptcy Act’s similar set-off provision). Essentially this means that “pre-liquidation” debts owed by Reserve can only be set-off against “preliquidation” debts owed to Reserve, and similarly that “post-liquidation” debts owed by Reserve can only be set-off against “post-liquidation” debts owed to Reserve. The parties do not dispute that mutuality must exist before a set-off can be asserted; however, they disagree as to what constitutes a “pre-liquidation” rather than a “post-liquidation” debt.

The Liquidator contends that even if Defendants’ set-offs may be heard by this court, the debts owed to the Liquidator under Counts I, IV, V, VI and VIII, involving reinsurance proceeds and unearned premiums as a result of the cancellation of the policies upon insolvency, may not be set off because those debts are post-liquidation debts while the debts owed by Reserve to Defendants are pre-liquidation debts. The Liquidator’s position is that since the reinsurance proceeds will not be due until the policyholders’ loss claims are allowed or liquidated by the liquidation court, this claim is a post-liquidation claim. Similarly, since unearned premiums do not become due until the cancellation of the policies, there was no obligation to refund those amounts before Reserve’s insolvency, and these, too, are post-liquidation debts. Therefore, the Liquidator argues, mutuality does not exist as between these debts and Reserve’s pre-liquidation debts, and no set-off may be permitted. Defendants argue that the debts described in Counts I, IV, V, VI, and VIII arise because of provisions in the reinsurance contracts, and that since the contracts had been executed and performed prior to the time of insolvency, the debts in question are all pre-liquidation debts. Mutuality thus exists and set-offs are permitted under the statute.

We agree with Defendants. Even if the Liquidator is correct in his assertion that the debts for reinsurance proceeds and unearned premiums were not due at the time of liquidation, that fact has no bearing on whether Defendants may use these debts for set-off purposes. “The right of set-off may be asserted in the bankruptcy proceedings even though at the time the petition is filed one of the debts involved is absolutely owing but not presently due, or where a definite liability has accrued but is as yet unliquidated.” 4 Collier On Bankruptcy ¶ 68.10[2] (14th ed. 1978). Defendants and Reserve entered into a reinsurance contract which defined all of the parties’ rights and obligations. Any liability Defendants may incur to pay reinsurance proceeds or return unearned premiums or ceding commissions arises as a result of provisions in the previously executed reinsurance agreement that require them to make these payments. In Cunningham v. Commissioner of Banks, 249 Mass. 401, 144 N.E. 447, 459 (1924), the court stated, “[p]rovable debts under the Bankruptcy Act include all liabilities of the bankrupt founded on contract express or implied which existed at the time of the bankruptcy and either were fixed in amount or susceptible of liquidation.” In this case, the reinsurance contract was in existence at the time of Reserve’s insolvency. With respect to the reinsurance proceeds, all the claims giving rise to Defendants’ liability were filed prior to Reserve’s insolvency. Therefore, although the claims were not paid prior to Reserve’s insolvency, they were susceptible of liquidation. The unearned premiums on policies still in existence on the date of insolvency became payable on that date, and the amounts were fixed. Accordingly, we find that Defendants’ debts are pre-liquidation debts; therefore, mutuality of obligation exists and a set-off is permitted.

The Liquidator directs our attention to Melco System v. Receivers of Trans-america Ins. Co., 268 Ala. 152, 105 So.2d 43, 53 (1958), in which the Supreme Court of Alabama held that the reinsurer incurred no debt to the reinsured until the reinsured had actually paid the losses. The court noted that it felt to allow the offset would give a preference to the reinsurer over other creditors because the reinsurer would be receiving full payment on its claim while other creditors would receive only fractional payment. 105 So.2d at 53. It is true that the reinsurer would be paid in full if a set-off is permitted, but, of course, that is the case anytime a set-off is permitted. The whole point of the statutory set-off section is to make clear that such actions are permissible, even though one creditor may be getting paid more than other creditors. Professor Collier explains:

The object of the statute is to permit a statement of the account between the bankrupt and its creditors with a view to the application of the doctrine of set-off between mutual debts and credits. And it has been pointed out that while the operation of this privilege of set-off has the effect to pay one creditor more than another, it is a provision based upon the generally recognized right of mutual debtors, which has been enacted as part of the Bankruptcy Act. Without such enactment, it could be argued that any attempt to off set mutual debts or credits between the estate and a creditor would amount to a preference ... and would, therefore, be invalid. But the Act, instead, has recognized the possible injustice which would thus result and which would, for example, compel a creditor to prove his claim in full and accept possible dividends thereon and at the same time pay in full his indebtedness to the estate.

4 Collier on Bankruptcy ¶ 68.02[1] (14th ed. 1978). Thus, we respectfully decline to follow the Melco court’s reasoning in that it seems to ignore the established policy in an area of bankruptcy law quite analogous to the situation with which we are faced. Defendants’ debts are pre-liquidation debts, mutuality exists, and a set-off is permissible.

II. Counts V and VI

Defendants’ motions request that the court dismiss Count V and, to the extent it incorporates Count V, Count VI for failure to state a claim upon which relief can be granted. The Liquidator’s cross-motion seeks summary judgment on these counts. Count V alleges that in April and May 1979, the Manager of the reinsurance contracts cancelled a large number of Reserve’s policies and further alleges that had the policies not been cancelled, the Manager or the Reinsurers would have been liable to him upon entry of the liquidation order for the unearned portion of premiums paid by the policyholders on such policies. In support of his argument that he is entitled to an accounting and a judgment for the amount of the unearned premiums, the Liquidator advances two arguments: (1) that the cancellations were unauthorized and wrongful; and (2) that the cancellations resulted in a voidable preference to certain policyholders.

1. Authorization

Defendants point to Article V of the 3400 reinsurance agreement and maintain that it provides the manager with express authority to cancel contracts under the agreement. The article provides, in relevant part:

The Manager shall ... have the authority at its sole discretion, to replace at any time the policy of one Ceding Company with the policy of another by novation, reinsurance or assumption.

In light of the unambiguous language of the contract, the intent of the parties can hardly be questioned. As the court in Gulf Insurance Co. v. Riddle, 199 S.W.2d 1000, 1001 (Tex.Civ.App.1947) stated:

In the absence of fraud, mutual mistake, and such matters, the policy of insurance is the contract between the parties. Courts will not undertake to make contracts for parties but will interpret and enforce those made by them. If the provisions of a policy contract are ambiguous, they will be construed in the light most favorable to the insured; if not ambiguous they will be construed and applied as agreed upon between the parties. An unequivocal agreement contained in the contract, whereby either party may cancel and end the contract, is binding between the parties and a strict compliance with the terms contained in the contract will end its binding effect.

The Liquidator’s cases on this point are inapposite. The issue in each was whether an agent who cancelled a large number of the company’s policies had the authority to do so. The courts held that the agent had no authority because none was granted in the agency agreement. See Hershey v. Kennedy & Ely Insurance, Inc., 294 F.Supp. 554 (S.D.Fla.1967) aff'd per curiam, 405 F.2d 888 (5th Cir.1968); Clay v. Independence Mutual Insurance Co., 359 S.W.2d 679 (Mo.1962). This case presents no question of authorization — it was expressly granted to the manager by the contract terms, and there is no allegation of fraud, duress, mistake or the like. Accordingly, we find that the cancellation of the policies was authorized.

The Liquidator argues that even if the contract provided the manager with the authority to cancel the policies, such cancellations were wrongful as a matter of common law. Again, however, the Liquidator’s cases do not support his argument. For example, the court in Hershey found that the agent’s actions constituted a “mass cancellation” in violation of Florida law. However, there is no indication that the actions taken by ARIB as manager of the reinsurance pool were wrongful as a matter of Illinois law. Similarly, the court in Clay found that “[the agent’s] purported cancellations on May 12 and its transfer of the risks to Guaranty were in excess of its authority as agent of the company, and wrongful, not having been done at the request of the insureds, or at the request of Independence, but to serve the personal interests of the [agents] in preserving the goodwill of [its] policyholders. ...” 359 S.W.2d at 683. However, we do not read Clay as holding that the cancellations were wrongful per se. Rather, we read the case as finding that the agent’s self-serving conduct was wrongful because it was unauthorized. Consequently, we reject the Liquidator’s argument.

2. Voidable Preference

Ill.Rev.Stat. ch. 73, § 816 (1983), regarding prohibited and voidable transfers and liens, provides, in relevant part, as follows:

(2) Any transfer of, or lien upon, any property of any company made or created within four months prior to the filing of a complaint under this article, which gives to any creditor or policyholder or enables him to obtain a greater percentage of his debt than any other creditor or policyholder in the same class, which is accepted by a creditor or policyholder having reasonable cause to believe that such a preference will occur, shall be voidable. ...
(3) Every director, officer, employee, stockholder, member, or any other person, acting on behalf of such company, who, within two years prior to the filing of a complaint against such company under this article, shall knowingly participate in the making of any transfer or the creation of any lien prohibited by subsection (1) and every person receiving any property of, or cash surrender from, such company or the benefit thereof, as a result of a transaction voidable under subsection (2) shall be jointly and severally liable therefor and shall be bound to account to the Director as ... Liquidator____

On the basis of the statutory language, the Liquidator’s summary judgment motion must be denied. The statute requires that the transfer must be “accepted by a ... policyholder having reasonable cause to believe that such a preference will occur.” Whether the policyholders of Reserve whose policies were cancelled before liquidation had reasonable cause to believe that a preference would occur raises a genuine issue as to a material fact. We accordingly deny the Liquidator’s motion.

That leaves only the question whether the Liquidator has alleged facts sufficient to state a claim under Counts V and VI. In deciding a motion to dismiss, all well-pleaded factual allegations of the complaint are taken as true, and all reasonable inferences are drawn in the plaintiff’s favor. See Wolfolk v. Rivera, 729 F.2d 1114, 1116 (7th Cir.1984).

The Liquidator alleges that the cancellation of Reserve’s policies prior to liquidation allowed those policyholders to obtain a refund in full of their unearned premiums, while those policyholders whose policies were cancelled by the liquidation order will have to file a claim for their refunds as general creditors in the liquidation proceeding. The Liquidator argues that this action constitutes a voidable preference. He places liability on the Reinsurers under two separate theories. First, the Liquidator alleges that, in many cases, the Manager cancelled the Reserve policy and immediately issued the policyholder a new policy written on one of the other members of the 3400 pool. Thus, the Liquidator argues, in at least some instances, the money never left the pool at all, and all of the Reinsurers, collectively, were participating in the cancellation of the policies. Secondly, at the very least, the Liquidator argues, the Reinsurers benefited from the cancellations, thus rendering them liable under subsection (3).

Defendants argue that the Liquidator cannot state a claim because there was no transfer “on account of an antecedent debt.” First, the fact that policyholders paid their premiums in advance does not mean that the insurance company became “indebted” to the policyholder for the unearned amount. Furthermore, the refund of the unearned premiums upon cancellation of the policies was contemporaneous with the policyholder’s releasing Reserve from any liability. Therefore, the transfer did not “enable [any policyholder] to obtain a greater percentage of his debt than any other ... policyholder” because Reserve had no “debt” with respect to the policyholders. In addition, Defendants argue that even if this action does constitute a preference, it was the ARIB who cancelled the policies, not the Reinsurers and not Montgomery or Petroleum, who became managers subsequent to Reserve’s insolvency.

The arguments present a difficult case. The cancellation of the policies shortly before Reserve’s insolvency had the effect of taking assets out of Reserve’s estate that would otherwise have been available for the general creditors. Such action, taken with the knowledge of impending financial difficulties, is the kind of behavior that preference laws are designed to thwart and several courts have so noted. See, e.g., Hershey v. Kennedy & Ely Insurance, Inc., 294 F.Supp. 554 (S.D.Fla.1967), aff'd per curiam, 405 F,2d 888 (5th Cir.1968); Clay v. Independence Mutual Insurance Co., 359 S.W.2d 679 (Mo.1962); Bohlinger v. Ward & Co., 20 N.J. 331, 120 A.2d 1 (1956).

Nevertheless, none of the above-cited cases interpreted the Insurance Code’s preference section, the provision now before us, and the provision under which our decision is limited. The statute requires that the transfer of the company’s property, made within four months of the filing of the complaint, enable a policyholder to obtain “a greater percentage of his debt than any other creditor or policyholder in the same class. ...” The language clearly implies that a past debt must exist, which is reduced when the unearned premium is transferred to the policyholder. We simply do not see how this transaction can be construed as payment of a past debt owed to the policyholder. If any debt arises at all, it arises when the policy is cancelled. If, at that time, the portion of unearned premium is returned to the policyholder, that is a contemporaneous transfer — the policyholder cancelled the policy and released Reserve from any further liability, and Reserve paid over the money it had collected in advance but did not earn because of the early cancellation — not a transfer on account of an antecedent debt. Therefore, although Defendants clearly took advantage of their opportunity to protect themselves in the face of Reserve’s insolvency, this transfer simply does not come within the statutory preference section, and is not voidable by the Liquidator. Thus, Defendants’ motion to dismiss Counts V and VI is granted.

Conclusion

For all the reasons stated above, Defendants’ motions for partial summary judgment are granted. The Liquidator’s cross-motion for partial summary judgment is denied.

      . These debts are described in paragraphs 3(a)-(f) and (h) of the affirmative defenses set forth in Defendants’ Answer.

        . Defendants contend that this court should allow a reduction of their amounts owed under the common law doctrine of recoupment. However, the Illinois Insurance Code provides a comprehensive scheme by which insurance companies are to be liquidated, and no provision in the Insurance Code permits a reduction in debt under the recoupment doctrine. Indeed, the careful limitations set forth in the statute would be completely subsumed by the more expansive reach of the recoupment doctrine. While the concept of recoupment makes sense in the context of ordinary contract disputes, it is not applicable in the context of an insolvency, where we must consider the concerns of persons who are not necessarily parties to a contract, but who nonetheless also have claims against assets of the insolvent’s estate. We therefore decline Defendants’ invitation to base our decision on common law principles and instead rely on the statutory set-off provision of the Insurance Code, Ill.Rev.Stat. ch. 73, § 818 (1983).

      . The applicable provisions of the liquidation order provide as follows:
      G. That ... all ... persons be and are hereby enjoined and restrained from bringing or further prosecuting any action at law or in equity or other proceeding against said RESERVE INSURANCE COMPANY or the Director of Insurance of the State of Illinois, or from interfering in any way with the Director’s conduct of the business of RESERVE INSURANCE COMPANY, or from obtaining preferences, judgments, attachments, or liens in the making of any levy against said Company or its property and assets while in possession and control of the Director, or from in any way interfering with the Director of Insurance in his possession or control of or in his title, right and interest to the property, books, records and all other assets of the said RESERVE INSURANCE COMPANY.
      H. That all persons be and are hereby enjoined and restrained from asserting any claim against the Liquidator or RESERVE INSURANCE COMPANY except insofar as such claims arise in the liquidation proceedings of RESERVE INSURANCE COMPANY. I. That all persons, including policyholders of RESERVE INSURANCE COMPANY and all persons asserting claims against such policyholders, be and are hereby enjoined from instituting or pursuing any action or proceeding in any court ... which seeks in any way, directly or indirectly to contest or interfere with the Liquidator’s exclusive right, title and interest to funds, recoverable under treaties and agreements of reinsurance heretofore entered into by RESERVE INSURANCE COMPANY as the ceding insurer, or otherwise.

      . The scope of the liquidation court’s jurisdiction under the Insurance Code is similar to that granted the bankruptcy courts under the former Bankruptcy Act. See People ex rel. Gerber v. Central Casualty Co., 37 Ill.2d 392, 397, 226 N.E.2d 862 (1967). Accordingly, we refer to bankruptcy cases interpreting the former Act. Similarly, we refer to Collier’s 14th edition, which analyzes the former Act, rather than the more recent 15th edition, which analyzes the new Bankruptcy Code.

      . The applicable New York Code Section provides, in part:
      1. In all cases of mutual debts or mutual credits between the insurer and another person in connection with any action or proceeding under this article, such credits and debts shall be set off and the balance only shall be allowed or paid. ...

        See Schenck, 376 N.Y.S.2d at 134.

      . Because Defendants seek only a set-off and not an affirmative counterclaim, we need not decide whether the language permitting counterclaims actually allows Defendants to assert a claim for affirmative relief.

      . We further note Thacher was decided twenty-five years ago, and has not been reconsidered in light of the reasoning of more recent courts and commentators.

      . All parties agree that the debts owed by Reserve under the contracts are pre-liquidation debts.