In re Bennett

• Decision Date: 12 March 1907
• Docket Number: 1,603.
• Parties: In re BENNETT.
• Court: U.S. Court of Appeals — Sixth Circuit

153 F. 673

In re BENNETT.

No. 1,603.

United States Court of Appeals, Sixth Circuit.

March 12, 1907

O. T Wimberly and A. R. Burnam, Jr., for petitioner.

John B Baskin, for respondent.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

LURTON Circuit Judge.

The question is whether the claims of the appellees against the bankrupt's estate were properly allowed priority of payment as debts which by the law of the state are entitled to priority under section 64b(5) of the bankrupt act. Act July 1, 1898, c. 541, 30 Stat. 563 (U.S. Comp. St. 1901, p 3448). The bankrupt is a manufacturing corporation organized under the law of Kentucky, and doing business in that state. The claims are for materials supplied to and used in the business of the bankrupt corporation. Priority is claimed by virtue of section 2487, Ky. St. 1903. The trustee admitted the debt, but denied priority. The bankrupt court held that the debt was one entitled to priority under the statute referred to. From this judgment allowing the debt as a prior claim, the trustee has appealed, and also filed a petition for review.

If under section 2487, Ky. St. 1903, a priority is accorded to claims of creditors of such companies as the bankrupt corporation for materials and supplies furnished to carry on the business of the bankrupt, is that right of priority lost by reason of the operation of the bankrupt law? It is not a question as to whether the bankrupt law is a law superior within its field to a state law in the same field, but a question whether a priority given is preserved by the bankrupt law. This is answered by section 64b(5) of the bankrupt act. That provides that 'debts owing to any person who by the laws of the state or of the United States is entitled to priority' shall be entitled to priority in the distribution of a bankrupt's general estate. Counsel for the trustee say that the Kentucky statute referred to above 'applies only to the distribution of insolvent estates in the courts of Kentucky, and has no application to the distribution of estates under the national bankrupt law. ' It is idle to consider whether a state law can of its own force determine priorities under a national bankrupt law. No such contention is made or could be sustained. But it is another thing when the national bankrupt law prescribes that effect shall be given to state laws which do give priority to certain debts. The Congress might have dictated a single and uniform rule of distribution. If it had, that would have been the absolute law, notwithstanding state laws prescribing a different rule. But Congress has elected to prescribe as one rule of distribution that debts entitled to priority under any state law or law of the United States shall be accorded a like priority in the distribution of a bankrupt's estate. The law which we administer is thus the national bankrupt law; that is, the preference in bankruptcy, thus accorded, is a preference prescribed by the bankrupt law which for this purpose adopts the law of the state as the applicable federal law. This is the view which has been taken by many careful judges and accords with our own view.

In re Wright (D.C.) 95 F. 807, is a decision by Judge Lowell which was affirmed by the Circuit Court of Appeals in a case reported under the style of In re Worcester County, 102 F. 808, 815, 42 C.C.A. 637. In that case there was involved a priority given to the county under the insolvent laws of Massachusetts. It was held that this priority was preserved by section 64b(5) of the bankrupt act.

In the case styled In re Crow (D.C.) 116 F. 110, 112, a question arose as to whether a debt due by a bankrupt guardian to his ward was entitled to priority by reason of a Kentucky statute, which provided that, in the distribution of an insolvent's estate, debts due as guardian should be preferred. Judge Evans very tersely sustained the right of priority, saying that:

'The bankrupt law does not in such cases supersede or mean to supersede the operation of the state law. On the contrary, the bankrupt act expressly recognizes the existence of the state statute, and makes that statute the basis for allowing priority of payment to certain classes of claims against the debtor. Its effect is, in the most manifest way, to keep alive such provisions of the state law as give priority of payment, and while the bankrupt law, speaking generally, does by its operations supersede the force of any state laws which conflict with it the case before us presents an exception to the general rule, whereby the applicable provisions of the state law are expressly enforced through the bankruptcy act itself.'

In Re Falls City Shirt Manufacturing Co. (D.C.) 98 F. 592, Judge Evans gave priority for a claim for rent because, under section 2317, Ky. St., such a claim was a lien upon the property of the renter upon the premises. He also sustained a claim under 2487, the provisions here involved.

In Re Daniels (D.C.) 110 F. 745, costs, incurred in an action against the bankrupt prior to the adjudication, which would constitute a preferred claim under the insolvency statutes of Rhode Island, were held entitled to priority under section 64b(5).

In Re Byrne (D.C.) 97 F. 762, a preference given by a statute of Iowa to labor claims was given a priority over a landlord's lien, because that was held to be the order of priority under the Iowa statute preserved by section 64b(5).

In Re Goldberg Bros. (D.C.) 144 F. 566, priority was given to costs incurred by an attaching creditor, because under the insolvent statutes of Maine priority was given to such costs 'if the suit was commenced in good faith for the benefit of all the creditors.'

In the case styled In re Laird, 109 F. 550, 554, 48 C.C.A. 538, the question was whether certain claims for labor were a prior charge upon the funds in a bankrupt trustee's hands. The result depended upon the construction of section 3206a, Rev. St. Ohio 1906. The applicable part was in these words:

'And in all cases where property of an employer is placed in the hands of an assignee, receiver or trustee, claims due for labor performed within the period of three months prior to the time such assignee, receiver or trustee, is appointed shall be first paid out of the trust fund in preference to all other claims against such employer, except claims for taxes and costs of administering the trust.'

Judge Day, now Justice Day, for this court, said:

'It is not specifically stated in this connection that the claim in favor of the laborer thus to be preferred shall be a lien upon the debtor's property, but it is provided that, in the event property of an employer is placed in the hands of an assignee, receiver, or trustee, such claim shall be first paid out of the trust funds in preference to all other claims, excepting only taxes and costs of administering the trust. As the statute reads claims of all classes are to be postponed to the labor claims accruing within the period mentioned whether the same have theretofore constituted liens upon the property or not. It is the manifest purpose of this statute to give this class of claims a preference over all other demands whatsoever, with the exception of taxes and costs of administration.' The decision was, however, rested upon the proposition that the property came into the trustee's possession charged with the prior payment of the labor claims which was held to be, in legal effect and force, a lien created by the statute of the state, and thus not avoided by the bankrupt law. The learned and industrious counsel for the appellant have with modest earnestness contended that the cases cited, which sustain preferences given by state statutes, are not sound. They cite to support their view Randolph v. Scruggs, 190 U.S. 533, 23 Sup.Ct. 710, 47 L.Ed. 1165, In re Allen (D.C.) 96 F. 512, In re Young (D.C.) 96 F. 606, and In re Beaver Coal Co. (D.C.) 107 F. 98. The claim for a lien for professional services denied in Randolph v. Scruggs was for services in preparing a deed of general assignment, which, having been made within four months of bankruptcy, was avoided as a consequence of the adjudication of bankruptcy. This deed of assignment provided that the fees of Randolph et al. should be first paid by the trustee thereunder; but the court said that the effect of avoiding the deed of assignment was to avoid it as a whole, and that the 'appellants can assert no preference by way of lien under the deed. ' There was no claim of any preference under any state statute given to counsel preparing such an assignment. The assignment was valid under the law of that state, but when it was avoided the security provided by the deed for the professional services stood upon no better footing than the security provided by the same instrument for every other debt of the assignor. The case is not in point at all. In Re Allen the claim to a preference was for the costs of an attachment proceeding against the bankrupt, before bankruptcy, which was avoided as a consequence of an adjudication in bankruptcy. The only claim to a right to a preference grew out of the lien secured for the debt and costs by the attachment proceeding; but, as that lien was avoided by the bankruptcy, the lien for the costs of the action went the same way. There was no statute of the state of California making the costs in such a proceeding a preferential claim in the distribution of the insolvent's estate, as was the fact under the law of Rhode Island and the law of Maine as applied in the cases touching costs, cited above, of In re Daniel and In re Goldberg Bros. The same criticism applies to In re Young. In re Beaver Coal Company is in conflict with the cases giving priorities to costs of proceedings against an insolvent set aside as an

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