In re Quaker City Uniform Co.
| Decision Date | 31 October 1956 |
| Docket Number | No. 11793.,11793. |
| Parties | In the Matter of QUAKER CITY UNIFORM CO., Inc., Bankrupt. Daniel P. Veloric, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Joseph Weiner, Philadelphia, Pa. (Freedman, Landy & Lorry, Philadelphia, Pa., on the brief), for appellant.
Jerome L. Markovitz, Philadelphia, Pa. (Markovitz, Stern & Shusterman, Philadelphia, Pa., on the brief), for Delsea Corp., appellee.
David Goldberg, Philadelphia, Pa. (Verlin & Goldberg, Philadelphia, Pa., on the brief), for wage claimants.
Harry Fischer, Philadelphia, Pa., for trustee.
William R. Klaus, William M. Keenan, James Alan Montgomery, Jr., Pepper, Bodine, Frick, Scheetz & Hamilton, Philadelphia, Pa., on the brief for Fidelity-Philadelphia Trust Co., amicus curiae.
John E. Mulder, Philadelphia, Pa., on the brief amicus curiae.
Milton P. Kupfer, New York City, on the brief for National Commercial Finance Conference, Inc.
Carl W. Funk, Drinker, Biddle & Reath, Philadelphia, Pa., on the brief for Banks.
Before GOODRICH, KALODNER and STALEY, Circuit Judges.
This appeal involves the distribution of certain funds in the hands of the trustee in bankruptcy for the Quaker City Uniform Co., Inc., of Philadelphia, Pennsylvania, which was adjudged a bankrupt on July 2, 1953, by the District Court for the Eastern District of Pennsylvania. Specifically, we are asked to determine the relative order of distribution among (1) chattel mortgage holders prior in time to any claimants, (2) the landlord of the bankrupt who had made a distraint for rent but who had not sold any property, (3) various wage claimants, and (4) administration expenses.
The facts are stipulated. The bankrupt leased premises for its business from the Delsea Corporation, the landlord. The bankrupt gave a chattel mortgage to one Veloric on August 30, 1951, and a second chattel mortgage to Fidelity-Philadelphia Trust Company on August 19, 1952. Both mortgages were duly recorded on their respective days of delivery. Non-payment of rent prompted the Delsea Corporation to issue a landlord's warrant on May 12, 1953. The constable levied on all the goods on the bankrupt's premises, including the goods securing both chattel mortgages. The sale of the goods under the distraint was stayed by execution issued by the sheriff. On June 16, 1953, an involuntary petition in bankruptcy was filed. The following claims were asserted against the fund of $9,896.77 in the hands of the trustee:1
1. Administration expenses $ 676.00
2. Philadelphia Joint Board
Amalgamated Clothing
Workers of America, valid
wage claims 2,543.53
3. College Hall Fashions, assignees
of valid wage claims 1,517.00
4. Synthetic Specialists, Inc
assignees of valid wage
claims 7,001.60
5. Delsea Corporation, landlord
gross rent in arrears 3,641.07
6. Veloric, chattel mortgagee 3,480.00
7. Fidelity-Philadelphia Trust
Company, chattel mortgagee 2,612.80
Section 64 of the Bankruptcy Act, 11 U.S.C.A. § 104, provides priorities among certain unsecured creditors. This section does not purport to dictate priorities among holders of valid liens. In fact, it is only after valid liens are satisfied that Section 64 becomes operative.
The Chandler Act of 1938 introduced Section 67, sub. c, 11 U.S.C.A. § 107, sub. c:
Thus expenses of administration and wage claims, while normally merely unsecured claims given first and second priority as such under Section 64, sub. a, become payable under the specific language of Section 67, sub. c, before the lien of the landlord.
Except in situations where federal law has spoken, priority among liens is determined by the law of the state. Seymour v. Wildgen, 10 Cir., 1943, 137 F.2d 160, 161; 4 Collier on Bankruptcy 296, 1347 (14th ed.). By settled Pennsylvania law, the landlord's lien by way of distraint takes precedence over a chattel mortgage, and this notwithstanding the fact that the landlord's levy was subsequent in time to the recordation of the mortgage. Commercial Credit Plan v. Mahoney, 1948, 67 Pa. Dist. & Co.R. 577; see also Reinhart v. Gerhardt, 1943, 152 Pa.Super. 229, 31 A.2d 737; National Cash Register Co. v. Ansell, 1937, 125 Pa. Super. 309, 189 A. 738. The wage claim assignees are not lien-holders, and their claims must be predicated upon their status as unsecured creditors entitled to second priority under Section 64, sub. a, of the Bankruptcy Act.2 Applicable Pennsylvania lien law would thus give the landlord's lien priority over the lien of the chattel mortgage; the claim for wages would come last. And such would be the order of distribution for these items if Section 67, sub. c, were inapplicable. The state lien law applies, of course, only where federal law has not supplanted it.
As we have seen, Section 67, sub. c, expressly subordinated the lien of the landlord to the payment of administrative expenses and wage claims, the first and second priorities under Section 64, sub. a. The referee took the position that since the landlord's lien was subordinated under Section 67, sub. c, and the liens of the chattel mortgages were not so postponed expressly by the section, these latter liens were to be satisfied first; then administrative expenses and wage claims were to be paid, and finally the landlord's lien. Such also was the position taken by the chattel mortgagees. The district court agreed with the referee that the chattel mortgagees were entitled to payment ahead of administration costs and wage claims but ordered that the landlord be paid out of the amount awarded to the chattel mortgagees because, under the law of Pennsylvania, interests of the chattel mortgagees were subjected to the landlord's lien. In the Matter of Quaker City Uniform Co., Inc., D.C., E.D.Pa. 1955, 134 F.Supp. 596.
The intent of Congress in the passage of Section 67, sub. c, as stated in 4 Collier on Bankruptcy 288 (14th ed.), was "to provide a measure of much-needed protection, (1) for administrative costs and expenses in the interest of bankruptcy administration, and (2) for wage claims in the interest of protecting a weak but deserving economic class, against the ravages of certain accumulated liens on the bankrupt's property." Again, the purpose of subordination of liens was expressed in a Committee Report Analysis of H.R. 12889, 74th Cong., 2d Sess. (1936) 212, n. 1:
3
We are in agreement with the opinion of the district court that Congress did not intend by Section 67, sub. c, to disturb the priority of liens established by state law. Its sole concern was apparently to insure payment of administrative expenses and small wage claims. See California State Dept. of Employment v. United States, 9 Cir., 1954, 210 F.2d 242, 244. However, we are unable to agree with the reasoning of the district court which would save the landlord's lien from subordination because of the existence of a chattel mortgage.
It is not necessary to decide whether or not a Pennsylvania chattel mortgage is a "statutory lien" within the meaning of Section 67, sub. c, and thus subordinated by that section to administration expenses and wage claims.4 For the purposes of this opinion, however, we shall assume that it is not a "statutory lien" within the purview of Section 67.5 Thus the determinative issue may be stated in this manner: Where a landlord's lien which is subordinated by Section 67, sub. c, is superior under applicable lien law to the lien of a chattel mortgage not within the express terms of Section 67, sub. c, is this latter lien also subordinated by necessary implication?6 We are of the opinion that it is.
There are a few cases which suggest solutions to this problem. In City of New Orleans v. Harrell, 5 Cir., 1943, 134 F.2d 399, involving a dispute between a chattel mortgagee and the City which claimed a superior tax lien, the court held the tax lien ineffectual because it had not been properly perfected. There is, however, in that opinion dictum to the effect that even if the tax lien had been perfected, the chattel mortgage would be paid first because its lien is unaffected by bankruptcy, whereas Section 67, sub. c, expressly subordinates tax liens to the priorities of administration expenses and wage claims.
This was the position of the referee in the case at bar. It must be noted, however, that such an interpretation would ascribe...
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