White v. Murtha

• Decision Date: 30 April 1965
• Docket Number: No. 20985.,20985.
• Citation: 343 F.2d 831
• Parties: James H. WHITE, Trustee in Bankruptcy for Las Olas Inn Corporation, Bankrupt, Appellant, v. Francis J. MURTHA et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

343 F.2d 831 (1965)

James H. WHITE, Trustee in Bankruptcy for Las Olas Inn Corporation, Bankrupt, Appellant, v. Francis J. MURTHA et al., Appellees.

No. 20985.

United States Court of Appeals Fifth Circuit.

April 5, 1965.

Rehearing Denied April 30, 1965.

J. Edward Worton, Miami, Fla., for appellant.

Robert C. Ward, Miami, Fla., for appellees.

Before TUTTLE, Chief Judge, and JONES and GEWIN, Circuit Judges.

JONES, Circuit Judge.

Vaughan Connelly was the owner of the Everglades Hotel in Miami, Florida. It was leased to Las Olas Inn Corporation, which was controlled by Connelly. Connelly gave a mortgage to the Trustees of a Teamsters Union Pension Fund, of which Francis J. Murtha is a Trustee. There was a default in the meeting of the mortgage payments and the mortgagee instituted a foreclosure suit in the United States District Court for the Southern District of Florida. While the foreclosure suit was pending, a petition was filed in the District Court under Chapter XI of the Bankruptcy Act by Connelly, Las Olas Inn Corporation and another corporation. The court approved the petition and continued Connelly in possession of the hotel property as well as his own assets and those of the other corporation. The mortgagee was permitted to proceed with the foreclosure and a final decree was entered directing a sale of the mortgaged property by a special master. At the foreclosure sale the mortgagee was the high bidder. On December 12, 1960, the court entered an order confirming the sale and directing that possession be delivered to the Pension Fund as purchaser of the property.

A few weeks after the foreclosure sale, Las Olas Inn Corporation was adjudicated a bankrupt and James H. White was elected and confirmed as its Trustee. The Bankruptcy Trustee filed a petition in the bankruptcy proceeding for an order directing the Pension Fund Trustees to turn over property claimed for the bankrupt estate which, the Bankruptcy Trustee claimed was appropriated by the Pension Fund Trustees when they took over the property purchased under the foreclosure sale. A hearing was had and the Referee determined that he had summary jurisdiction and directed that the Pension Fund Trustees turn over to the Bankruptcy Trustee the sum of $8,452.55 for food and beverage inventory on the date of transfer of possession, $3,622.05 representing cash on hand, $1,666.00 as the pro rata value of beverage licenses, $47,744.91 for accounts receivable accrued before but collected after the transfer of possession, and $10,333.46 representing the value of hotel furniture sold from the hotel premises by the Pension Fund Trustees subsequent to the transfer. The petition also sought to require the Pension Fund Trustees to turn over the unsold furniture and furnishings of the hotel or to pay the value thereof which was alleged to be $38,228.48.

The Referee ruled with the Bankruptcy Trustee. On review, the district court sustained the Referee in his determination that there was summary jurisdiction, and in his holding that the value of the food and beverage inventories, cash, and the proceeds of receivables were not acquired under the foreclosure sale and were a part of the bankrupt estate. The court decided that the Pension Fund Trustees could set-off against the sums found owing by them any amounts which the Pension Fund had paid, after taking possession of the hotel, in discharging obligations incurred by Connelly while he was debtor in possession during the pendency of the Chapter XI pro-proceeding. The district court reversed that part of the Referee's ruling which held that the hotel furniture and furnishings were not acquired by the Pension Fund at the foreclosure sale. The order of the district court also determined that the foreclosure decree and order of confirmation were res judicata as to the inclusion of the furniture and furnishings in the forecolsure. From this order the Bankruptcy Trustee has appealed, and on appeal contends that the district court erred in its rulings (a) that the amount of the Connelly obligations could be set-off, (b) that the furniture and furnishings were included in the foreclosure, and (c) that the foreclosure is res judicata as to the furniture and furnishings.

The Trustee challenges the allowance by the district court of a set-off against the Pension Fund's liability to the Bankruptcy Trustee for amounts paid by the Pension Fund in satisfaction of operating expenses incurred by Connelly as debtor in possession under the Bankruptcy. Such expenses would normally be entitled to a first-priority status as expenses of administration of the bankrupt estate. Ingels v. Boteler, 9th Cir. 1938, 100 F.2d 915, aff'd., 308 U.S. 57, 60 S.Ct. 29, 84 L.Ed. 78, rehearing denied 308 U.S. 521, 60 S.Ct. 29, 84 L.Ed. 442.

The district court determined that the Referee had failed to allow the Pension Fund to set-off the expenditures against its liability to the Trustee, and in his order reversing the Referee, directed that he should:

"A. Give full, direct set-off against the amount of the liquor inventory for any liquor bills paid by the Petitioners, which were incurred by Vaughan B. Connelly debtor in possession; and because such payment was required under beverage Laws of State of Florida.

"B. Determine whether other amounts paid by Petitioners would fall into the classification of expenses of administration, as defined in the Bankruptcy Act, and if same are expenses of administration, then allow a direct setoff for said amount against the total amount due the Trustee in Bankruptcy; and

"C. Any sums paid which do not fall within the category of expenses of administration would then become a general claim against the estate of the Bankrupt, Las Olas Inn Corporation."

The liabilities incurred by the debtor in possession for liquor were no different in character from many of the other liabilities, such as accrued wages. The Florida beverage law to which the district court referred is contained in Section 561.42 of the Florida Statutes, F.S. A. which provides that if a vendor does not remit payment for liquor by the tenth day succeeding the calendar week in which such liquor was purchased, the beverage department, after notice and hearing, shall prohibit further sales of liquor to the vendor. Thus, the satisfaction of outstanding liquor bills was necessary if the Pension Fund desired to continue operating the hotel, just as the satisfaction of employees' demands for back wages was necessary.¹

The Bankruptcy Trustee objects to the allowance of the set-off on the basis that Connelly, as debtor in possession, did not obtain specific authorization from the court before incurring the various liabilities. Although it is true that such authority was not specifically granted, we do not think it was necessary with respect to such ordinary operating expenses as liquor inventory, fire insurance and wages. The debtor in possession was authorized to operate the business, and such operation is under the control of the court, and the debtor in possession limited in his use of the property. 8 Collier on Bankruptcy § 6.304. However, as has been many times said, bankruptcy is equitable, and it would be contrary to equitable doctrines to so construe the stated principle as to require that a debtor in possession must petition the court for authorization for every expense incident to the operation of the business.

The Bankruptcy Trustee next contends that the Pension Fund is a volunteer, and that since it did not seek authorization before satisfying the obligations of the bankrupt estate, it cannot now obtain a right of a set-off for those amounts. Perhaps a better procedure would have been to petition to the district court before payment of the claims, but under these circumstances, and in the absence of prejudice, we do not think that the practice followed was such as to preclude the reimbursement of the Pension Fund. The cases of In Re American Cooler Co., Inc., 2nd Cir. 1942, 125 F.2d 496, and In Re Avorn Dress Co., Inc., 2nd Cir. 1935, 79 F.2d 337, are factually dissimilar and are not here persuasive. Both of those cases were concerned with unauthorized loans by the debtor in possession during the operation of the business, and not with ordinary operating expenses.

The Bankruptcy Trustee correctly states the proposition that the basic purpose of the Bankruptcy Act is to insure the ratable distribution of the assets among all the creditors. This purpose will in no way be defeated by the allowance of a set-off to the Pension Fund for amounts that are properly classified as expenses of administration.

The Pension Fund has argued that the question of the allowance of a set-off is prematurely brought, since the Referee did not determine any specific amounts to be set off against the Pension Fund's liability to the Trustee. The issue we resolve, however, is whether such set-offs for liabilities necessary for the...