In re IJ Knight Realty Corporation

• Decision Date: 09 June 1965
• Docket Number: No. 27540.,27540.
• Citation: 242 F. Supp. 337
• Parties: In the Matter of I. J. KNIGHT REALTY CORPORATION, Bankrupt.
• Court: U.S. District Court — Eastern District of Pennsylvania

242 F. Supp. 337

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

No. 27540.

United States District Court E. D. Pennsylvania.

June 9, 1965.

Thomas Raeburn White, Jr., and Michael H. Malin, Philadelphia, Pa., for petitioner, The Reading Co.

Owen B. Rhoads and Samuel Marx, Philadelphia, Pa., for trustee in bankruptcy.

Drew J. T. O'Keefe, U. S. Atty., Sidney Salkin, Asst. U. S. Atty., Arnold Miller, Atty., Dept. of Justice, Washington, D. C., for the Government.

VAN DUSEN, District Judge.

This case is before the court upon the petition of the Reading Company to review an order of the Referee in Bankruptcy, expunging a claim filed by the Reading Company asking for damages allegedly caused by the negligence of the Receiver in carrying on the business of the bankrupt (pp. 34 and 35 of Document 8). Petitioner seeks to have its claim, based on losses suffered in a fire which started on the bankrupt's property, allowed as a priority claim for administrative expenses under § 64, sub. a (1) of the Bankruptcy Act, 11 U.S.C. § 104. Petitioner is but one of over a hundred claimants who have filed proofs, but it has been agreed that the instant case is a test case which will decide the right of all claimants to prove their claims as administrative expenses.

The CASE STATED, as filed with the Referee and signed by counsel for the Trustee and counsel for the claimant, is as follows:

"On November 16, 1962, I. J. Knight Realty Corp. (hereafter Knight Realty) filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. On the same day, Judge Van Dusen appointed Francis Shunk Brown, 3rd, Esquire, as receiver and authorized him to operate the business of Knight Realty.

"The only significant asset of Knight Realty was an eight-story industrial structure known as the Fretz Building, located at 10th & Diamond Streets, Philadelphia, Pennsylvania. The business of Knight Realty consisted of leasing space in the Fretz Building and operating the building for the benefit of its tenants.

"On January 1, 1963, the Fretz Building was totally destroyed by a fire of unusual intensity. The conflagration spread to adjoining premises, damaging or destroying real and personal property of the Reading Company and others.

"On April 3, 1963, the Reading Company filed a claim for $559,730.83 which it styled as a claim `for administrative expenses due to the negligence of the Receiver' in operating the business of Knight Realty. In essence, the Reading Company's claim alleges that the receiver, Francis Shunk Brown, 3rd, was negligent in permitting the fire to start and `spread beyond its normal confines.' Thereafter, other fire loss claimants filed 146 additional claims for administration expenses based on the alleged negligence of the receiver in operating the business of Knight Realty. The total of all such claims exceeds $3,500,000. All of the well pleaded allegations of fact in the Reading Company's Statement of Claim are to be deemed true for the purposes of the Trustee's Motion to Dismiss or Expunge the Claim of the Reading Co.¹

"On May 14, 1963, Knight Realty was adjudicated a bankrupt pursuant to a voluntary consent to adjudication filed on its behalf. Francis Shunk Brown, 3rd, was subsequently elected Trustee in Bankruptcy of Knight Realty.

"The Trustee, Mr. Brown, has petitioned this Court to expunge the Reading Company's claim on the ground that it is not an administration expense within the meaning of the Bankruptcy Act. This Court's ruling on the Reading Company's claim for administration expenses will establish the law of case with respect to all other claims for administration expenses based on the alleged negligence of the receiver.

"Other claims filed in this matter consist of federal tax claims of $244,953.91, and other tax claims of $70,823.19. Various other claims are as follows: secured, $230,619.04; unsecured, $76,905.47; and wages, $860.00. The Trustee, according to present estimates, will have between $630,000 and about $845,000 depending on the outcome of certain litigation against fire insurance companies presently pending."

There are two questions presented by the facts of the case at bar:

(A) The principal question is whether the Reading Company's claim comes within "the costs and expenses of administration" of § 64, sub. a(1) of the Bankruptcy Act.

(B) If the answer to (A) is in the negative, does the Reading Company still have a "provable" claim so that the Referee should not have expunged it.

A. "Costs and expenses of administration" (§ 64, sub. a(1) of the Bankruptcy Act, as amended — 11 U.S.C. § 104, sub. a(1)).

The claim of the Reading Company does not fall within the above-quoted language of § 64, sub. a(1) of the Bankruptcy Act, as amended to December 1962, for these reasons:

1. The claim does not fall within the language of the Act, strictly construed

Section 64 of the Bankruptcy Act, as amended in 1962, provides in pertinent part as follows:

"§ 64. Debts Which Have Priority. (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; * * *."

Where statutes involving priorities are in issue, a strict construction must be placed thereon and the burden falls upon those asserting the priority to establish that their claim falls within the class of those intended to be preferred. In re American Anthracite and Bituminous Coal Corp., 171 F.Supp. 377, 381-382 (S.D.N.Y.1959), aff'd. 280 F.2d 119 (2nd Cir. 1960).

Since this claim is not "an actual and necessary cost and expense of preserving the estate," there is no specific authority for paying this claim. Where no explicit authority exists in the Bankruptcy Act for allowance of expenses out of the bankrupt's estate, such an allowance is appropriate only in exceptional cases. In re Friedman, 232 F.2d 151 (2nd Cir. 1956); Guerin v. Weil, Gotshal & Manges, 205 F.2d 302 (2nd Cir. 1953).

2. The legislative history of the Bankruptcy Act requires that § 64, sub. a(1) may not be construed to apply to this claim.

(a) Since Congress has shown by its inclusion of the following language in § 77, sub. n (11 U.S.C. § 205, sub. n) of the Bankruptcy Act in 1933² that it

uses specific language where it intends to prefer negligence claims and have them paid as operating expenses and, by its failure to include such language in § 62 or 64 of the Bankruptcy Act in any of the several revisions of these sections since 1933, that there is a Congressional intent not to treat such tort claims as operating expenses and not to give them a preference, § 64, sub. a(1) does not cover this claim by Reading Company:

"In proceedings under this section, and in equity receiverships of railroad corporations now or hereafter pending in any court of the United States, claims for personal injuries to employees of a railroad corporation, claims of personal representatives of deceased employees * * * brought against such railroad corporation * * * shall be preferred and paid out of the assets of such railroad corporation as operating expenses of such railroad."

Authorities have recognized generally the significance of the special provision in § 77, sub. n applying to railroads. In 5 Collier on Bankruptcy, § 77.21, at page 568, the following statement appears:

"It is extremely doubtful, however, if § 64, governing priorities in ordinary bankruptcy, can be considered generally applicable. The classification of priorities there set forth is not adaptable to railroad reorganization, * * *."

See, also, In Re Hudson & Manhattan Railroad Company, 178 F.Supp. 103 (S.D.N.Y.1955); aff'd. Augus v. Stichman, 273 F.2d 707 (2nd Cir. 1960).³

(b) The legislative changes to § 64, sub. a(1) require its limitation to the type of expenses specified in that section and to claims for expenses of preserving the bankrupt's estate.

In the 1952 Congressional Reports concerning the part of § 64, sub. a(1) relating to priorities to be given to administration expenses in ensuing bankruptcies, Congress made clear that administration expenses to be given priorities were those that would prevent "a breakdown of administration."⁴ A similar Congressional Report in 1962 accompanying the bill which adopted § 64, sub. a(1), as quoted at page 4 above, makes clear that the enumerated expenses in the section as worded in 1962 are the type of "costs and expenses of administration" contemplated.⁵ The United States Court of Appeals for the Third Circuit has emphasized that the legislative history of this section requires that these "costs and expenses" must be related to "development, preservation or distribution of the bankrupt's assets," using this language in In Re Connecticut Motor Lines, Inc., 336 F.2d 96, 102 (3rd Cir. 1964):

"* * * 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." (Emphasis supplied.)

Allowance of claims such as petitioner's will not "develop, preserve or distribute this estate" but in cases such as this would decimate it with $3,500,000. of claims. The undersigned agrees that the repairing of these pipes in the Fretz Building is an activity related to the preservation of the bankrupt's assets and the cost of such activity would be an expense of administration. However, damage caused by any fire resulting from the negligent...