Source: https://law.justia.com/cases/federal/appellate-courts/F2/370/624/234959/
Timestamp: 2020-01-20 06:00:09
Document Index: 774690574

Matched Legal Cases: ['§ 162', '§ 64', '§ 2', '§ 11', '§ 959', '§ 62', '§ 64', '§ 63', '§ 103', '§ 64', '§ 64', '§ 64', '§ 63', '§ 103']

In the Matter of I. J. Knight Realty Corp., Bankrupt.reading Company, Appellant, 370 F.2d 624 (3d Cir. 1967) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Third Circuit › 1967 › In the Matter of I. J. Knight Realty Corp., Bankrupt.reading Company, Appellant
In the Matter of I. J. Knight Realty Corp., Bankrupt.reading Company, Appellant, 370 F.2d 624 (3d Cir. 1967)
US Court of Appeals for the Third Circuit - 370 F.2d 624 (3d Cir. 1967) Argued May 5, 1966
Reargued December 8, 1966
On May 14, 1963, the debtor was voluntarily adjudicated a bankrupt. A Trustee was elected, and he moved to expunge appellant's claim on the ground that it was not an administration expense under Section 64, sub. a(1) of the Bankruptcy Act.2 The Referee expunged the claim. On petition for review, the District Court concluded that the claim was not entitled to priority as an administration expense under Section 64, sub. a(1).3 242 F. Supp. 337 (E.D. Pa. 1965).
The right of a claim to priority status in a Chapter XI proceeding is controlled exclusively by Section 64 of the Bankruptcy Act by virtue of the provisions of Section 302 of the Act.4 In the matter of Chicago Express, Incorporated, 332 F.2d 276, 278 (2 Cir. 1964), cert. den. 379 U.S. 879, 85 S. Ct. 146, 13 L. Ed. 2d 86; American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2 Cir. 1960). Manifestly, the right to priority depends upon the ability of the appellant to bring its claim within the language of the preferential classification sought. Goldie v. Cox, 130 F.2d 690 (8 Cir. 1942).
This touchstone guide to the direction of Section 64 sub. a(1) finds support not only in the legislative history, as shown by the Court's opinion, but also in existing authority. See, American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., supra, 280 F.2d at 124-126; Saper v. John Viviane & Son, Inc., 258 F.2d 826 (2 Cir. 1958); Guerin v. Weil, Gotshal & Manges, 205 F.2d 302 (2 Cir. 1953). As these cases indicate, it is not every post-petition event giving rise to a cost, expense or liability which qualifies the cost, expense or liability for priority status under Section 64 sub. a(1).
This is the standard applied by the court below. We agree with it, and with its conclusion that appellant's tort claim does not fall within the restrictive language of Section 64 sub. a(1) as an expense so related to the development, preservation or distribution of estate assets as to be deemed to have been incurred in connection therewith. Existing judicial interpretation and application of Section 64 sub. a(1) does not indicate any other result. Indeed, it is evident that the Congress knows how to assure the priorities it desires. See, In the Matter of Hudson & Manhattan Railroad Company, 178 F. Supp. 103 (S.D.N.Y. 1959), aff'd sub nom. Augus v. Stichman, 273 F.2d 707 (2 Cir. 1960); Senate Report No. 1954, accompanying the amending legislation, H.R. 5393, 1962 U.S.Code Congressional and Administrative News, pp. 2603, 2608.
Appellant seeks an application of Section 64 sub. a(1) founded upon principles, according to the authorities it cites, utilized in equity receivership proceedings. But we find no compelling persuasion in such authorities here, where we have to deal with a purposeful statutory restriction. Cf. In the Matter of the Pusey and Jones Corporation, 295 F.2d 479 (3 Cir. 1961); In the Matter of Chicago Express, Incorporated, supra; American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., supra.
Federal courts cannot extend the reach or sweep of a federal statute beyond its clearly defined provisions as we recently explicitly ruled in American Dredging Company v. Local 25, Marine Division, International Union of Operating Engineers, 3 Cir., 338 F.2d 837 (1964), cert. den. 380 U.S. 935, 85 S. Ct. 941, 13 L. Ed. 2d 822 (1965).
Section 64 provides that "actual and necessary expenses of preserving the estate" are entitled to a priority. The words "actual and necessary" require that the expenses be proximately related to the preservation of the estate and that they must be reasonably anticipated as a cost of operating the business. Cf. Jopek v. New York Central R. R., 353 F.2d 778 (C.A. 3, 1965). The word "necessary" in § 162(a) of the Internal Revenue Code of 1954 has been similarly construed.
I dissent from the majority's conclusion that § 64a(1) requires the virtual immunization from tort liability of a business which is conducted by a receiver in a Chapter XI proceeding. Congress has not given us a blueprint which yields an immediate and unequivocal answer to the question and I would therefore approach it as would men of practical business experience. I believe the conclusion to which this points is in harmony with the applicable law and accords with the equitable role of the Bankruptcy Court (§ 2 of the Bankruptcy Act, 11 U.S.C. § 11(a); see, e. g., Bank of Marin v. England, 87 S. Ct. 274, 17 L. Ed. 2d 197 (1966); In re Laskin, 316 F.2d 70, 73 (3 Cir. 1963)), which applies in Chapter XI proceedings as elsewhere. See SEC v. United States Realty & Improvement Co., 310 U.S. 434, 455-458, 60 S. Ct. 1044, 84 L. Ed. 1293 (1940).
The fundamental purpose of a Chapter XI proceeding, unlike a straight bankruptcy, is the ultimate rehabilitation of the debtor. Nicholas v. United States, 384 U.S. 678, 684-685, 86 S. Ct. 1674, 16 L. Ed. 2d 853 (1966); SEC v. American Trailer Rentals Co., 379 U.S. 594, 603-607, 85 S. Ct. 513, 13 L. Ed. 2d 510 (1965). The inevitable consequence of this is the continued operation of the business of the debtor and an on-going situation decisively different from the frozen rigidity of a straight bankruptcy liquidation. The reorganization court therefore applies its equitable powers to carry out this wider, business purpose.1 Both from equitable considerations and because Congress has specifically provided that a receiver who operates the business of a debtor shall do so subject to the same requirements of law and in the same manner as if he were the debtor (28 U.S.C. § 959(b)),2 the courts have recognized that during the pendency of a Chapter XI proceeding the receiver's operation of a business should involve the risks and liabilities which normally would flow from a business operation. Such expenses therefore are entitled to payment as administrative expenses before the pre-bankruptcy claims of creditors, for whom the business is being operated as if they were stockholders. 3 Collier on Bankruptcy (14th ed. 1966), § 62.15, p. 1540. Thus, taxes incurred during a receivership which is established, not to wind up the business, but to foster it, have been given priority as an expense of administration. So it has been held in an equity receivership,3 in the operation of a business in bankruptcy liquidation,4 and in a Chapter XI proceeding.5 These decisions have the utmost significance. They accord priority under § 64a(1) to taxes, which are not specifically listed in that section, even though the automatic accrual of such liabilities leaves no room for the rationale that priority is granted to encourage the extension of credit to the debtor.
There is no equitable reason why the claim for a tort committed by the receiver after the filing of the petition should not have the same priority which is given to a tax claim or even a contractual obligation6 incurred after the filing of the petition. Like the operation of motor vehicles by the receiver or his employees, the shutting off of water pipes, which led to the fire, is part of an activity which may involve much profit to the estate and help to preserve the assets. It should also incur the well-known price or cost of such activities, i.e., the cost of liability insurance premiums or, absent insurance, direct responsibility for negligence as a cost and expense of preserving and managing the estate. The argument of the government that the risk of such liability would make suppliers unwilling to extend credit and secured creditors reluctant to accept an arrangement, ignores the ability to provide against that risk by insurance. To refuse to recognize claims resulting from the operation of the business is to create a substantial immunity from liability, ironically enough, at a time when it is being generally recognized that tort immunity has little justification. See, e. g., United States v. Muniz, 374 U.S. 150, 165-166, 83 S. Ct. 1850, 10 L. Ed. 2d 805 (1963). For it is clear that a tort claim based on post-petition activities cannot be proven as an ordinary claim. (See § 63 of the Bankruptcy Act, 11 U.S.C. § 103.) Today's decision, therefore, will discourage receivers and creditors of the debtor from approving expenditures for premiums for public liability insurance. It will not be much alleviated by the menace of surcharge for premiums which the majority now directs against receivers for misjudging the treacherous ground of "reasonable" insurance, or "reasonable anticipation of liability," or "excessive" premiums. Once again, it seems to me, contractual claims are unjustifiably exalted and the risks to which the public is exposed by torts which experience shows are an inevitable result of the operation of a business are treated as outcast. And what should a receiver do if in his wise judgment it is advantageous to the estate to continue to operate the business by following its former policy of acting as a self insurer rather than to begin to pay large premiums?
The trend of the decisions supports the view that the present claim is entitled to priority. Priority as an administrative expense has been accorded tort claims in straight bankruptcy cases.7 It has been similarly granted in equity and statutory receiverships,8 and although it is true that equity receiverships are not governed by § 64a(1), nevertheless, with respect to administration of an estate, such receiverships are fundamentally similar to Chapter XI proceedings, a similarity which the Supreme Court has recognized in determining the scope of § 64a(1). See Nicholas v. United States, 384 U.S. 678, 684, 86 S. Ct. 1674, 16 L. Ed. 2d 853 n. 12 (1966). There is no reason why we should not do the same.
The three cases cited by the majority in support of its refusal to apply the equity rule, In re Pusey & Jones Corp., 295 F.2d 479 (3 Cir. 1961), In re Chicago Express, Inc., 332 F.2d 276 (2 Cir. 1960), cert. denied, 379 U.S. 879, 85 S. Ct. 146, 13 L. Ed. 2d 86 (1965), and American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2 Cir. 1960), differ significantly from this case. None of them involved tort claims, and in each of them the claimant admittedly was entitled to share with the general creditors. Moreover, neither Pusey & Jones nor Chicago Express involved claims of priority under § 64a(1) and both dealt with the application to Chapter XI proceedings of a special rule that had come to be applied in reorganizations of "public corporations" but was not a general doctrine of equity receiverships; indeed the conclusion in both cases was based on equitable considerations. American Anthracite dealt with the special problem of the assumption of existing contracts by the debtor in possession for which there was a history of special statutory provisions in bankruptcy.
The stipulation of the parties, entitled "Case Stated", is set out at 242 F. Supp. at 338-339. It appears therefrom that the Trustee will have for distribution between $630,000 and $845,000, depending on the outcome of pending litigation against fire insurance companies. The status of the instant claim becomes important particularly to the United States, which has a substantial priority claim under Section 64, sub. a(4)
The District Court also concluded, as did the Referee, that appellant's claim was not provable as a general claim. 242 F. Supp. at 342. On this appeal, appellant "agrees that the claim here asserted is not provable as a general claim under § 63a(7) [11 U.S.C.A. § 103a(7) (1953 Supp.1964)] of the Act. * * *." Appellant's Brief, p. 20
People of State of Michigan by Haggerty v. Michigan Trust Co., 286 U.S. 334, 52 S. Ct. 512, 76 L. Ed. 1136 (1932), Cardozo, J., involving state corporate franchise taxes
Boteler v. Ingels, 308 U.S. 57, 60 S. Ct. 29, 84 L. Ed. 78 (1939), involving automobile license fees and penalties
Nicholas v. United States, 384 U.S. 678, 86 S. Ct. 1674, 16 L. Ed. 2d 853 (1966), where it was said that federal income taxes and interest thereon were an administrative expense
Vass v. Conron Bros. Co., 59 F.2d 969 (2 Cir. 1932); In re Progress Lektro Shave Corp., 35 F. Supp. 915 (D. Conn. 1940); In re Michigan Motor Specialties Co., 288 F. 377 (E.D. Mich. 1923)
E. g., Texas & Pacific Railway Co. v. Bloom's Adm'r., 164 U.S. 636, 642-643, 17 S. Ct. 216, 41 L. Ed. 580 (1897); Barton v. Barbour, 104 U.S. 126, 130, 26 L. Ed. 672 (1881); Bereth v. Sparks, 51 F.2d 441, 80 A.L.R. 909 (7 Cir. 1931) citing numerous cases; Anderson v. Condict, 93 F. 349, 354 (7 Cir. 1899); see also Valdes v. Feliciano, 267 F.2d 91, 95 (1 Cir. 1959)
Guerin v. Weil, Gotshal & Manges, 205 F.2d 302 (2 Cir. 1953), cited by the majority, does not govern here, and in any event, its disallowance of the expenses of petitioning creditors for the service of attorneys and accountants was overturned by Congress in 1962, Pub. L. 87-681. See S.Rep. No. 1954, 87th Cong., 2d Sess. (1962), 1962-2 U.S.Code, Cong. & Adm.News, pp. 2603, 2608