Court Opinion

ID: 9452392
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:39:29.07835+00
Date Added: 2024-06-11T17:33:12.040841
License: Public Domain

FREEDMAN, Circuit Judge
(dissenting).
I dissent from the majority’s conclusion that § 64a(l) 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 re*629ceiver 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 prebankruptcy 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(l) 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 obligation 6 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 *630“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(l), 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(l). 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 receiver-ships ; 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 majority relies heavily on In the Matter of Connecticut Motor Lines, 336 F.2d 96 (3 Cir. 1964). We there held that tax expenses arising out of activities which occurred prior to the filing of the petition were properly allocable to the pre-petition period and therefore not entitled to be treated as administrative expenses, but were included in § 64a(4). The opinion of the court stated that “it is preferable to isolate from Section 64, sub. a(l), as falling without a meaningful view of costs and expenses of administration, those expenses which, though they can be considered post-bankruptcy items, are unrelated to development, preservation or distribution of the bankrupt’s assets.” (p. 102) But that statement must be read in the light of the critical point, which the court emphasized, that priority would have been accorded the taxes if they had accrued after the filing of the petition, because in such case they would have been a “cost of protecting the fund”, (p. 100) A tort claim similarly is entitled to priority; it is as much an ex*631pense of management or “development” of the estate as is a tax claim.9
Finding no expression in the statute to the contrary, but rather sufficient authority in its language to include the present claim, I would not recoil from doing so because it is based on a tort. I would follow the terse and specific dictum of Judge Learned Hand that “the liquidation of the lessee’s resulting damages [from the trustee’s negligence] was as much a part of the usual administration in bankruptcy, as that of the pay of accountants, custodians or other assistants, employed by the trustee.” Vass v. Conron Bros. Co., 59 F.2d 969, 971 (2 Cir. 1932).
WILLIAM F. SMITH and SEITZ, Circuit Judges, concur in this dissent.

. See Matter of South Jersey Land Corp., 361 F.2d 610, 614-615 (3 Cir. 1966); Matter of Fleetwood Motel Corp., 335 F.2d 857, 862 (3 Cir. 1964), both Chapter X proceedings, which, despite their differences from Chapter XI, are fundamentally similar in looking to continuation of the business rather than liquidation. See SEC v. American Trailer Rentals Co., supra.

. Section 959(b) reads:
“A trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.”

. 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.

. Compare In re Delaware Hosiery Mills, Inc., 202 F.2d 951 (3 Cir. 1953), and In re Arbycraft Co., 288 F.2d 553, 557 (3 Cir. 1961), where we treated claims as administration expenses under § 64a (1), although there was no express authorization in the statute.

. 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.