In re IJ Knight Realty Corp., 15507.

• Citation: 370 F.2d 624
• Decision Date: 06 January 1967
• Docket Number: No. 15507.,15507.
• Parties: In the Matter of I. J. KNIGHT REALTY CORP., Bankrupt. Reading Company, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

370 F.2d 624 (1967)

In the Matter of I. J. KNIGHT REALTY CORP., Bankrupt.

Reading Company, Appellant.

No. 15507.

United States Court of Appeals Third Circuit.

Argued May 5, 1966.

Reargued December 8, 1966.

Decided January 6, 1967.

Thomas Raeburn White, Jr., Philadelphia, Pa. (Michael H. Malin, S. Laurence Shaiman, White & Williams, Philadelphia, Pa., on the brief), for appellant.

Edward L. Rogers, Atty., Dept. of Justice, Tax Div., Washington, D. C. (Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Attys., Dept. of Justice, Drew J. T. O'Keefe, U. S. Atty., Washington, D. C., on the brief), for appellee United States.

Owen B. Rhoads, Philadelphia, Pa. (Samuel Marx, Arthur E. Newbold, III, William J. Sharkey, Dechert, Price & Rhoads, Philadelphia, Pa., on the brief), for appellee trustee.

Before STALEY, Chief Judge and McLAUGHLIN, KALODNER, HASTIE, SMITH, FREEDMAN and SEITZ, Circuit Judges.

OPINION OF THE COURT

KALODNER, Circuit Judge.

The issue presented on this appeal is whether appellant's claim, if proved, is entitled to the priority status accorded to costs of administration by Section 64, sub. a(1) of the Bankruptcy Act.¹

The facts are not in dispute, and have been stipulated. In substance, they are as follows:

On November 16, 1962, I. J. Knight Realty Corp. filed a petition for arrangement under Chapter XI of the Bankruptcy Act. On the same day, the District Court appointed a Receiver and authorized him to operate the debtor's business, which consisted principally in the leasing of the debtor's eight-story industrial building in Philadelphia. On January 1, 1963, this building was destroyed by a fire which spread to adjoining premises and caused damage to real and personal property of The Reading Company, appellant herein, and of others.

On April 3, 1963, appellant filed a claim for damages in the amount of $559,730.83, alleging that the receiver was negligent in permitting the fire to start and "to spread far beyond its normal confines." The claim specifically recited that it was "for administrative expenses due to the negligence of the Receiver in operation of business of the debtor." Other claimants have filed 146 additional claims, similarly grounded and similarly seeking priority status as administration expenses, totalling in excess of $3,500,000. Those claims are held in abeyance by the Referee pending the ultimate disposition of the claim now on appeal.

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).

We are of the opinion that the Order of the District Court should be affirmed.

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).

We recently expressly ruled that expenses which "are unrelated to development, preservation or distribution of the bankrupt's assets" cannot be considered "costs and expenses of administration" within the meaning of Section 64 sub. a (1) as amended in 1962. In the Matter of Connecticut Motor Lines, Inc., 3 Cir., 336 F.2d 96 (1964).

We there said at pages 101-102:

"Our view of the boundaries of Section 64, sub. a(1) of the Bankruptcy Act is reinforced by the latest amendment to that Section in 1962. Prior to the 1962 amendment, Section 64, sub. a(1) set forth a number of individual first priority expense items under no explicit generic label. `Costs and expenses of administration\' was one of a number of particular items enumerated in Section 64, sub. a(1). In such a posture, the Section did lend itself to a broad construction. The amendment altered the language of the Section to read as follows:

"`(a) The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the costs and expenses of administration, including the actual and necessary costs and expenses of preserving the estate subsequent to filing the petition; * * *.

"The impact of the amendment was to clarify the fact that Congress had considered all expenses laid out in Section 64, sub. a(1) costs and expenses of administration. The legislative history makes it clear that Congress, through the amendment, wanted to underline this factor. * * *

* * * * * *

"Though those enumerated costs and expenses of administration were never meant to be all inclusive, the 1962 amendment does indicate a concern that a meaningful view be had as to what is to be considered a cost and expense of administration. By explicitly structuring Section 64, sub. a (1) the Congress indicated both that all items in Section 64, sub. a(1) were costs and expenses of administration, and that the expression `costs and expenses of administration\' was not a catchall within the first priority. With such a Congressional intent apparent, it is preferable to isolate from Section 64, sub. a(1), 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."

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).

The purposeful statutory restriction, earlier, discussed, cannot be amended by judicial legislation to accomplish the result which the minority advocates.

As we said in American Dredging at page 850:

"Courts have inherent power to construe legislation and to fashion remedies to effectuate the legislative design but they do not have power to legislate, directly or indirectly, nor can they amend legislation to extend its clearly defined limits under the shelter of their power to fashion remedies.

"The Constitution of the United States has reserved to the Congress the power to legislate. Article I, section 1 provides that `All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives\'.

"Not even the Supreme Court of the United States can usurp the legislative power reserved to the Congress by the Constitution. The Supreme Court itself has time and again paid homage to the doctrine of the separation of powers decreed by the Constitution and declared that judicial legislation is abhorrent to, and in violation of, the Constitutional scheme."

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.

This construction adequately answers the question as to whether the...