In re North Atlantic and Gulf Steamship Co., Inc.

• Decision Date: 02 January 1962
• Citation: 200 F. Supp. 818
• Parties: In the Matters of NORTH ATLANTIC AND GULF STEAMSHIP COMPANY, INCORPORATED, Nortropic Shipping Company, Incorporated, Debtors.
• Court: U.S. District Court — Southern District of New York

200 F. Supp. 818

In the Matters of NORTH ATLANTIC AND GULF STEAMSHIP COMPANY, INCORPORATED, Nortropic Shipping Company, Incorporated, Debtors.

United States District Court S. D. New York.

January 2, 1962.

Bergerman & Hourwich, New York City, Milton M. Bergerman, Albert F. Reisman, New York City, of counsel, for trustee.

Abberley, Kooiman, Amon & Marcellino, New York City, D. C. Johnson, New York City, of counsel, for McRoberts Protective Agency, Inc.

John M. Keegan, New York City, Samuel Levine, New York City, of counsel, for Consolidated Edison Co. of New York, Inc.

Foley & Martin, New York City, James S. Reardon, New York City, of counsel, for McAllister Brothers, Inc.

Murray E. Gottesman, New York City, for Desk Transp. Co., Inc.

FREDERICK van PELT BRYAN, District Judge.

The trustee petitions for an order directing repayment of sums paid by the debtor North Atlantic and Gulf Steamship Company, Incorporated, to four creditors during the interim period between the filing of the petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. on May 23, 1958, and the approval of the petition and the appointment of the trustee on June 19, 1958.

The four creditors, McRoberts Protective Agency, Inc., Desk Transportation Company, Inc., McAllister Brothers, Inc., and Consolidated Edison Company of New York, Inc., deny the trustee's right to recover the sums paid them, and McRoberts cross-petitions for leave to amend the general claim which it filed on April 30, 1959 so as to assert a priority for a balance due it.

McRoberts is a detective agency which supplies uniformed cargo guards, roundsmen, gatemen, supervisors and other security personnel to various individuals and corporations located in and about the New York metropolitan area. It supplied such services for the debtor at debtor's Pier 51, North River, pursuant to an oral agreement, billing debtor weekly for the reasonable value of the services. By May 28, 1958, there was due and owing to McRoberts $7,668.16 for services performed from March 17, 1958 to May 23, 1958, the date when the petition was filed. The debtor remained in possession until the petition was approved and the trustee appointed on June 19, 1958. On May 28, 1958 McRoberts received a check from debtor in the sum of $1,136.27, and on the next day one in the sum of $1,061.60, a total of $2,197.87. The trustee seeks to recover the amount so paid from McRoberts, and McRoberts seeks leave to assert a priority claim in the sum of $5,470.29 for the unpaid balance of its account.

On May 15, 1958 Desk Transportation performed services in moving the debtor into smaller quarters. Desk Transportation maintains that the work was done with the understanding that it was to be paid for immediately. On May 29, 1958, some two weeks later, and after the petition had been filed, it received a check from the debtor in the amount of $200. The trustee seeks to recover this payment.

McAllister Brothers is a corporation engaged in the business of towing oceangoing vessels. It performed towing services for debtor from April 11 to May 26, 1958, in connection with vessels which debtor had time-chartered, and received payments therefor on June 9 and June 12, 1958, totaling $4,059.05 which trustee seeks to recover.

Consolidated Edison Company received a check for $532.67 from the debtor on June 10, 1958 in payment for electric service supplied from March 14, 1958 to April 14, 1958. There is still due and owing to Consolidated $577.40 for service from April 14, 1958 to May 23, 1958, and $216.43 for service from May 23, 1958 to June 19, 1958. The latter amount has been allowed as a priority claim (see In re North Atlantic & Gulf Steamship Co., D. C., 192 F.Supp. 107, 109) but remains unpaid.

McRoberts and Desk Transportation both assert first, that the payments made to them come within the purview of § 70, sub. d(1) of the Bankruptcy Act (11 U.S.C.A., § 110, sub. d(1)),¹ and second, that if § 70, sub. d(1) is not applicable their claims are entitled to priority under the so-called "six months priority rule" for operating expenses deemed necessary to the continued operation of the business of the debtor. McRoberts' cross-petition for priority on the balance of debtor's obligation to it is also based on the six months rule.

I.

Under § 70 sub. d(1) transfers made between the filing of the petition and adjudication of bankruptcy are valid only if there is "good faith" and "present fair equivalent value" (or "present consideration"). The Court of Appeals for this Circuit has recently interpreted "present * * * value" as used in this section so as to exclude such transactions as are involved here. Kass v. Doyle, 275 F.2d 258 (2 Cir.1960).

The court there said (pp. 261, 262):

"Whether the transfer of value to the bankrupt precedes or follows the receipt of consideration from him, or the two occur simultaneously, does not affect the fulfillment of the statutory purpose, so long as the consideration upon both sides passes during the pendency of the petition. * * * It is clear from the purposes of § 70, sub. d that it does not afford protection to the payment of an antecedent debt by the bankrupt, since validation of such payments would not increase the ability of the bankrupt to carry on every day business transactions during the pendency of the petition, see In re Scranton Knitting Mills, Inc., D.C.M.D. Pa., 1937, 21 F.Supp. 227, and would deplete the assets of the estate available for other creditors." (Emphasis added.)

The payments made by debtor to both McRoberts and Desk Transportation were for debts antecedent to the filing of petition and the consideration did not pass while the petition was pending. There was no present value or consideration.

In view of this conclusion I do not reach the "good faith" requirement of § 70, sub. d(1), though it may be noted that this question was raised by the trustee who submitted evidence that the initial checks made out to both McRoberts and Desk Transportation were not cleared by the bank and that the payments to them were made by second checks replacing the unpaid first ones.

II.

McRoberts and Desk Transportation also urge that the payments made to them were for services essential to the continued operation of the debtor's business rendered within six months prior to the filing of the petition and that they are therefore entitled to priority of payment. The so-called six months priority rule originated in railroad receivership cases in the federal courts (see Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339 (1878)) and was eventually extended to other public and quasi-public corporations. In cases where it is applicable it

"gives to those unsecured creditors whose claims arose a reasonably short time before the receivership, and which were incurred as operating expenses (without the extension of long-time credit), a priority over both secured and unsecured creditors as to the debtor's current income and also a priority over secured and unsecured creditors as to the corpus of the debtor's property, where * * * the claims involved arose from services, materials furnished, or the like, which were deemed necessary to the business of the debtor."

6 Collier on Bankruptcy (14th ed.), pp. 2852-2853.

The rule is said to be grounded both on considerations of public policy and equity and good conscience. See Collier, supra, pp. 2853-2854. However, it "is an invasion of the established contract rights of lienholders. As an invasion the rule should be strictly contained within narrow confines and limited to the purposes which brought it into being." Johnson Fare Box Co. v. Doyle, 250 F.2d 656 (2 Cir.1958). The rule was incorporated in former § 77B of the Bankruptcy Act but it was omitted from Chapter X because of doubts as to whether it could constitutionally be extended to private corporations and because of apprehension that its application might raise problems not present in equity receiverships. However, deletion of the rule from Chapter X is not of controlling significance and it may be applied by the court in appropriate Chapter X proceedings in the exercise of its equitable discretion.

With rare exceptions the rule has been confined to cases involving public or quasi-public corporate debtors where there is a public interest in the continued operation of the business and a necessity...