Court Opinion

ID: 9423728
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:08:56.083133+00
Date Added: 2024-06-11T17:22:45.771208
License: Public Domain

Mr. Chief Justice Warren,
with whom Mr. Justice Douglas joins,
dissenting.
In my opinion, the Court has misinterpreted the term “costs and expenses of administration” as intended by *486§ 64a (1) of the Bankruptcy Act and, by deviating from the natural meaning of those words, has given the administrative cost priority an unwarranted application. The effect of the holding in this case is that the negligence of a workman may completely wipe out the claims of all other classes of public and private creditors. I do not believe Congress intended to accord tort claimants such a preference. Accordingly, I would affirm the judgment below.
On other occasions, this Court has observed that “[t]he theme of the Bankruptcy Act is ‘equality of distribution’ . . . ; and if one claimant is to be preferred over others, the purpose should be clear from the statute.” Nathanson v. NLRB, 344 U. S. 25, 29 (1952); see Sampsell v. Imperial Paper Corp., 313 U. S. 215, 219 (1941). More particularly, the Act expressly directs that eligible negligence claims are to share equally with the unsecured claims in a pro rata distribution of the debtor’s nonexempt assets. Bankruptcy Act §§ 63a (7), 65a, 11 U. S. C. §§103 (a)(7), 105(a). Departing from this statutory scheme, the Court today singles out one class of tort claims for special treatment. After today’s decision, the status of a tort claimant depends entirely upon whether he is fortunate enough to have been injured after rather than before a receiver has been appointed. And if the claimant is in the select class, he may be permitted to exhaust the estate to the exclusion of the general creditors as well as of the wage claims and government tax claims for which Congress has shown an unmistakable preference.1 In my view, this result frustrates rather *487than serves the underlying purposes of a Chapter XI proceeding, and I would not reach it without a clear indication that Congress so intended.
Congress enacted Chapter XI as an alternative to straight bankruptcy for individuals and small businesses which might be successfully rehabilitated instead of being subjected to economically wasteful liquidation. The success of a Chapter XI proceeding depends largely on two factors: first, whether creditors will take the chance of permitting an arrangement; second, whether other businesses will continue to deal with the distressed business. With respect to the first of these considerations, today’s decision will undoubtedly discourage creditors from permitting arrangements, because it subjects them to unpredictable and probably uninsurable tort liability. I do not believe the statutory language requires such an interpretation. I would construe § 64a (1) with reference to the second consideration mentioned above. In my opinion, the Court would reach a result more in line with congressional intent and the Bankruptcy Act generally by regarding as administrative costs only those costs required for a smooth and successful arrangement. Accordingly, the administrative cost priority should be viewed as a guaranty to the receiver and those who deal with or are employed by him that they will be paid for their goods and services. Any broader interpretation will discourage creditors from permitting use of the rehabilitative machinery of Chapter XI and tend to force distressed businesses into straight bankruptcy.
It is equitable, the Court believes, that the general creditors (and wage and tax claimants) bear the loss in this case because they have “thrust” an insolvent business upon petitioner for their own benefit. I respectfully submit that this is a most unfair characterization of arrangements. An economically distressed businessman seeks an arrangement for his own and not for his cred*488itors’ benefit.2 Of course the creditors will benefit if the arrangement is successful, just as they would have benefited if the businessman had been successful without resorting to an arrangement. But a business in arrangement is no more thrust on the public than is any other business enterprise which is conducted for the mutual prosperity of the owners, the wage earners and the creditors. Realistically, the only difference is that a business administered under Chapter XI has not been prosperous. If the arrangement is successful, the owners, wage earners and creditors will all benefit; if it is not, they will all be injured. Thus, I would not distinguish in this case between petitioner and the other general creditors, none of whom was responsible for the catastrophe for which all of them must sustain some loss. Instead, in deciding this case, I would adhere to the Act’s basic theme of equality of distribution.
The Court states that its decision will encourage Chapter XI receivers to obtain “adequate” insurance. The Court fairly well concedes, however, that in this case “adequate” insurance “probably could not have been obtained and in any event would have been foolish.” In other words, so far as this Court knows, the insurance taken out by the receiver in this case was in fact “adequate,” in the sense that no reasonable receiver could or should obtain fire insurance in the amount of $3,500,000 on the assumption that his workman might accidentally cause a fire of the proportions which occurred here. Moreover, quite apart from the case at bar, there is absolutely no indication that today’s decision is needed to encourage receivers to obtain insurance.3 I see no *489basis in the Act or in sound policy for a ruling that the creditors of an estate under a Chapter XI arrangement become involuntary insurers against a liability which probably would not and should not be insurable by more traditional means.
The Court also relies, in my opinion mistakenly, upon analogies to equity receiverships. In reorganizations under Chapter X4 and § 77,5 Congress has directed the courts to apply the rules of priority developed in equity.6 However, arrangements under Chapter XI are governed strictly by the statutory priorities fixed by § 64a. These statutory priorities differ in many respects from those applicable to equity receiverships,7 and they have been amended repeatedly to narrow the class of claimants which may participate ahead of the general creditors.8 Furthermore, even in the case of § 77 reorganizations where the priorities developed in equity are controlling, Congress has specifically provided for one exception to the rule that tort claimants are to be' treated as general creditors. Bankruptcy Act § 77 (n), 11 U. S. C. § 205 (n). *490That exception is in favor of a narrowly defined class of claimants. Congress has not expressly provided a similar exception to cover petitioner’s tort claim, and I would not infer one.
Finally, the Court concludes, for two reasons, that it is “linguistically more comfortable” to treat petitioner’s claim as an administrative cost rather than as a negligence claim which could have been proven under § 63a (7). First, § 63a refers to provable claims against the debtor and not against his estate. Second, §§ 63a (7) and 302 require that an action be commenced on the claim before the filing of the arrangement petition, and allowing claims like petitioner’s would in effect toll the time limitation imposed by these sections. With respect to the first of the Court’s reasons, I find no statutory or practical basis for distinguishing between the debtor and his estate in this case. Had the arrangement been successful, the debtor would have been liable for any damages occasioned during the administration under the line of cases relied upon by the Court. Texas & Pacific R. Co. v. Bloom, 164 U. S. 636 (1897). The suggested distinction between “debtor” and “estate” would be meaningful only if the two words pointed to different sources of liability. Here, petitioner’s negligence claim, if allowed, would diminish the debtor’s estate irrespective of whether it were treated as an administrative cost under § 64a or as an ordinary negligence claim under § 63a (7). With respect to the Court’s second argument, Chapter XI provides that the straight bankruptcy provisions, including § 63a (7), 'are applicable to arrangement proceedings only “so far as possible.” Bankruptcy Act § 378 (2), 11 17. S. C. § 778 (2). I have no difficulty in concluding that, where the claim does not arise until after the arrangement petition is filed, it is manifestly impossible for a lawsuit on that claim to precede the filing of the petition. Further, I know *491of no more complete wa.y to “read the time limitation out of § 63a (7) of the Act” than by treating certain negligence claims as administrative costs as the Court does in this case.
I see no basis in equity or in the statutory language or purpose for subjecting every class of creditors except petitioner’s to a loss caused by the negligence of a workman. Consequently, I would construe “actual and necessary costs” as limited to those costs actually and necessarily incurred in preserving the debtor’s estate and administering it for the benefit of the creditors. I would not include ordinary negligence claims within this class.

 Certain wage claims and government taxes obtain second and fourth priorities respectively under the second and fourth subdivisions of § 64a, 11 U. S. C. §§104 (a) (2), 104(a)(4). The government tax claims in this case, nearly all of which will be excluded from sharing in the estate under today’s decision, amount to approximately $245,000.

 Unlike straight bankruptcy, only the debtor himself may file a petition for an arrangement under Chapter XI. Bankruptcy Act §§ 321, 322, 11 U. S. C. §§ 721, 722; 8 Collier, Bankruptcy ¶ 4.02 [1],

 In fact, the absence of any other adjudicated case on the question here presented is a strong indication that the receiver’s insurance is usually perfectly adequate.

 11 U. S. C. §§ 501-676.

 11 U. S. C. § 205.

 Bankruptcy Act §§77b, 115, 11 U. S. C. §§ 205 (b), 515; see In re Chicago Express, Inc., 332 F. 2d 276, 278 (C. A. 2d Cir. 1964). Section 102 of the Act (11 U. S. C. §502), which is applicable to corporate reorganizations, specifically provides that § 64 “shall not apply in such proceedings unless an order shall be entered directing that bankruptcy be proceeded with ...”

 To take but two examples, government tax claims obtain a higher priority in equity receiverships and under Chapter X than they do under § 64a, see Bankruptcy Act § 199, 11 II. S. C. § 599; 6A Collier, Bankruptcy ¶ 9.13 [2]; and the “six-months rule” applied to equity receiverships has no analogue under § 64a. See Dudley v. Mealey, 147 F. 2d 268 (C. A. 2d Cir. 1945).

 E. g., compare Act of July 1, 1898, c. 541, § 64a, 30 Stat. 563, with Act of May 27, 1926, c. 406, § 15 [64a], 44 Stat. 666; compare 80 Stat. 270, 11 U. S. C. §§35, 104(a)(4) (1964 ed., Supp. II), with Act of June 22, 1938, c. 575, amending §§ 17a (1), 64a (4), 52 Stat. 851,874.